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 May 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to________
Commission file number: 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121-2779
(Address of Principal Executive Offices) (Zip Code)
(858) 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
----- -----
The number of shares of registrant's common stock outstanding on July 9,
1999 was 18,232,103.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MAY 31, 1999 AUGUST 31, 1998
(UNAUDITED) (RESTATED)
--------- ---------
ASSETS
Cash and cash equivalents $ 23,527 $ --
Accounts receivable - net 1,523 --
Inventories 1,421 --
Recoverable taxes 3,308 --
Other current assets 1,770 --
--------- ---------
Total current assets 31,549 --
--------- ---------
Property, plant and equipment - net 125,761 --
Investments in unconsolidated wireless operating companies 123,254 97,719
Loans receivable from unconsolidated wireless
operating company -- 27,968
Other loans receivable 7,768 25,227
Intangible assets 66,621 6,838
Deposits and other assets 11,151 --
--------- ---------
Total assets $ 366,104 $ 157,752
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 10,270 $ 5,789
Loans payable to banks 16,657 9,000
Current portion of long-term debt 33,727 --
--------- ---------
Total current liabilities 60,654 14,789
--------- ---------
Long-term debt 152,306 --
Other liabilities 9,207 --
--------- ---------
Total liabilities 222,167 14,789
--------- ---------
Commitments (Note 8)
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, 18,098,984 shares issued
and outstanding 2 --
Additional paid-in capital 288,953 --
Former parent company's investment -- 197,598
Deficit accumulated during the development stage (142,302) (52,283)
Accumulated other comprehensive loss (2,716) (2,352)
--------- ---------
Total stockholders' equity 143,937 142,963
--------- ---------
Total liabilities and stockholders' equity $ 366,104 $ 157,752
========= =========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED FOR THE PERIOD
MAY 31, MAY 31, SEPTEMBER 1, 1995
----------------------- ----------------------- (INCEPTION) TO
1999 1998 1999 1998 May 31, 1999
-------- -------- -------- -------- -----------------
(Restated) (Restated) (Restated)
Equity in net loss of unconsolidated
wireless operating companies $(40,657) $ (7,672) $(78,917) $(11,132) $(106,398)
General and administrative expenses (6,216) (3,408) (14,765) (5,577) (40,410)
Interest income 2,522 -- 7,901 -- 8,744
Interest expense (2,326) -- (4,238) -- (4,238)
-------- -------- -------- -------- ---------
Net loss (46,677) (11,080) (90,019) (16,709) (142,302)
Other comprehensive loss:
Cumulative translation adjustment (202) (695) (364) (1,858) (2,716)
-------- -------- -------- -------- ---------
Comprehensive loss $(46,879) $(11,775) $(90,383) $(18,567) $(145,018)
======== ======== ======== ======== =========
Basic and diluted net loss
per common share (Note 2) $ (2.60) $ (0.63) $ (5.06) $ (0.95) $ (8.05)
======== ======== ======== ======== =========
Shares used to calculate
basic and diluted net loss
per common share (Note 2) 17,952 17,648 17,794 17,648 17,677
======== ======== ======== ======== =========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED FOR THE PERIOD
MAY 31, SEPTEMBER 1, 1995
------------------------ (INCEPTION) TO
1999 1998 May 31, 1999
--------- -------- -----------------
(RESTATED) (RESTATED)
Operating activities:
Net loss $ (90,019) $(16,709) $(142,302)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 408 -- 408
Equity in net loss of unconsolidated wireless
operating companies 78,917 11,132 106,398
Interest accrued to loans receivable and payable - net (3,083) -- (3,926)
Changes in assets and liabilities, net of effects from acquisition:
Deposits and other assets (9,452) -- (9,452)
Accounts payable and accrued liabilities 1,151 -- 6,940
Other liabilities (1,712) 2,897 (1,712)
--------- -------- ---------
Net cash used in operating activities (23,790) (2,680) (43,646)
--------- -------- ---------
Investing activities:
Purchase of property, plant and equipment (3,060) -- (3,060)
Investments in unconsolidated wireless
operating companies (78,984) (14,703) (194,428)
Loans to unconsolidated wireless
operating companies (28,625) (11,633) (93,085)
Loan receivable to related party (17,500) -- (17,500)
Repayment of loan receivable from related party 17,500 -- 17,500
Acquisitions, net of cash acquired (26,942) (564) (27,506)
Purchase of wireless telecommunications licenses (689) -- (6,963)
--------- -------- ---------
Net cash used in investing activities (138,300) (26,900) (325,042)
--------- -------- ---------
Financing activities:
Proceeds from loans payable to banks 6,720 -- 15,720
Borrowings under credit agreement 99,721 -- 99,721
Repayment of borrowings under credit agreement (17,500) -- (17,500)
Issuance of common stock 1,408 -- 1,408
Former parent company's investment 95,268 29,580 292,866
--------- -------- ---------
Net cash provided by financing activities 185,617 29,580 392,215
--------- -------- ---------
Net increase in cash and cash equivalents 23,527 -- 23,527
Cash and cash equivalents at beginning of period -- -- --
--------- -------- ---------
Cash and cash equivalents at end of period $ 23,527 $ -- $ 23,527
========= ======== =========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED FOR THE PERIOD
MAY 31, SEPTEMBER 1, 1995
------------------- (INCEPTION) TO
1999 1998 May 31, 1999
-------- ---- --------
(RESTATED) (RESTATED)
Supplemental disclosure of non-cash investing and financing activities:
Loans to unconsolidated wireless operating
companies converted to equity investment $ 50,196 $ -- $ 50,196
Deferred charge for credit agreement fee due on long-term debt $ 5,300 $ -- $ 5,300
Repurchase of stock purchase warrant $ 5,355 $ -- $ 5,355
Supplemental disclosure of cash used for acquisitions:
Total purchase value $ 43,699 $564 $ 44,263
Note payable issued at present value (15,699) -- (15,699)
Cash acquired (1,058) -- (1,058)
-------- ---- --------
Cash used for acquisitions $ 26,942 $564 $ 27,506
======== ==== ========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
DEFICIT
COMMON FORMER ACCUMULATED ACCUMULATED
STOCK ADDITIONAL PARENT DURING THE OTHER
------------------- PAID-IN COMPANY'S DEVELOPMENT COMPREHENSIVE
SHARES AMOUNT CAPITAL INVESTMENT STAGE INCOME (LOSS) 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 (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
September 1, 1998 to May 31, 1999
(Unaudited): --
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 451,299 -- 1,444 -- -- -- 1,444
Net loss -- -- -- -- (90,019) -- (90,019)
Foreign currency translation adjustment -- -- -- -- -- (364) (364)
---------- ---- --------- --------- --------- ------- ---------
Balance at May 31, 1999 (Unaudited): 18,098,984 $ 2 $ 288,953 $ -- $(142,302) $(2,716) $ 143,937
========== ==== ========= ========= ========= ======= =========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. THE COMPANY
The Company
Leap Wireless International, Inc. (the "Company" or "Leap Wireless"), a
Delaware corporation, 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 the
Company's 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 Company's business strategy is to manage, support, operate and
otherwise participate in Code Division Multiple Access ("CDMA") based wireless
telecommunications businesses and ventures in emerging international markets and
in the United States.
The Distribution
In connection with the Distribution, QUALCOMM transferred to the Company
its equity interests in the following domestic and international emerging
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
Holdings, Inc. (United States), OzPhone Pty. Ltd. (Australia), and certain other
development stage businesses (collectively, the "Leap Wireless Operating
Companies"). The Company and QUALCOMM 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. To date, these
conditions have not been satisfied. 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 approximately $236 million.
In May 1999, QUALCOMM sold its CDMA wireless infrastructure division to
Telefonaktiebolaget LM Ericsson (pbl) ("Ericsson"). As a result, Ericsson and
its subsidiaries will become primary suppliers of network infrastructure
equipment to Leap Wireless and its operating companies. In connection with the
sale, Ericsson assumed most of QUALCOMM's obligations to Leap Wireless and its
operating companies under existing infrastructure supply agreements.
Basis of Presentation
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, as restated. Certain prior period amounts have been
reclassified to conform to the current period presentation. In the second
quarter of 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.
Restatement
The Company adopted the equity method of accounting for its investment in
Chase Telecommunications Holdings, Inc., a development stage company, in the
third quarter of fiscal 1999.
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Accordingly, all prior periods presented in these financial statements have been
adjusted retroactively in accordance with generally accepted accounting
principles to give effect to the equity method of accounting. See Note 4.
Interim Financial Statements
The accompanying interim consolidated financial statements have been
prepared by Leap Wireless 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
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 on Form 10-K for the fiscal year ended
August 31, 1998, as amended. Operating results for interim periods are not
necessarily indicative of operating results for an entire fiscal year. 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The cost of these
investments approximates fair value.
Accounts Receivable
The Company records an allowance for uncollectable accounts receivable with
respect to those amounts estimated not to be recoverable.
Inventories
Inventories are 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.
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 buildout of its wireless telecommunications
networks are recovered in cash from customers as service is provided.
Property, plant and equipment
Property, plant and equipment are recorded at acquisition 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 once the assets are placed
in service, ranging from two to ten years. 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.
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Intangible Assets
Intangible assets, primarily telecommunications licenses and rights to
telecommunications 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.
Basic and Diluted Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share",
which the Company has adopted to compute the basic and diluted net loss per
common share amount for the three and nine months ended May 31, 1999 and 1998,
respectively.
The basic and diluted net loss per common share for the three and nine
months ended May 31, 1999 was calculated by dividing the net loss for each of
the periods by the weighted average number of common shares outstanding for each
of the periods of 17,952,373 and 17,794,358, 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 5,926,945 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
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.
Reporting Comprehensive Income (Loss)
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.
Prior period financial statements have been adjusted to conform to the
requirements of FAS 130.
NOTE 3. ACQUISITION OF CHILESAT TELEFONIA PERSONAL, S.A.
On April 19, 1999, a wholly owned subsidiary of Leap Wireless acquired all
of the shares of Chilesat Telefonia Personal, S.A. ("Chilesat") that it did not
already own from Telex-Chile S.A. and its operating affiliate, Chilesat S.A.
(collectively "Telex-Chile"). Chilesat, 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 Chilesat.
Inversiones acquired the remaining 50% of the shares of Chilesat from
Telex-Chile for $28 million in cash and a $22 million, non-interest bearing note
payable to Telex-Chile due on May 11, 2002. The present value of the $22 million
non-interest bearing note payable to Telex-Chile is approximately $15.7 million.
Therefore, the total estimated fair value of the acquisition was $43.7 million,
of which approximately $41 million has been allocated to intangible assets,
primarily telecommunications licenses and rights to telecommunications network
systems. The Company obtained $28 million for the cash payment to Telex-Chile
through additional borrowings under its credit agreement with QUALCOMM.
The Company consolidated the balance sheet of Chilesat as of May 31, 1999
due to its acquisition of the remaining 50% of the shares of Chilesat in April
1999. The Company has adopted a two-month lag for the recognition of the
Company's share of net earnings and losses of Chilesat. As such, the Company
will fully consolidate Chilesat's results of operations commencing July 1, 1999.
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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):
NINE MONTHS ENDED MAY 31,
-----------------------------
1999 1998
--------- ----------
Revenues $ 3,670 $ --
========= ==========
Net loss $(109,001) $ (22,229)
========= ==========
Pro forma basic and diluted
net loss per common share $ (6.13) $ (1.26)
========= ==========
These unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future.
NOTE 4. INVESTMENTS AND LOANS TO LEAP WIRELESS OPERATING COMPANIES
The Company and its consolidated subsidiaries have equity interests in
companies that directly or indirectly hold wireless telephone licenses. Its
participation in each company differs and, except for Chilesat, 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 lenders and the other
participants, over which the Company has no control. The Company and its
consolidated subsidiaries have investments in the Leap Wireless Operating
Companies consisting of the following:
PERCENTAGE OF OWNERSHIP
-----------------------
MAY 31, AUGUST 31,
1999 1998
------- ----------
EQUITY INVESTEE
Chase Telecommunications Holdings, Inc. (U.S.) 7.2% 7.2%
Chilesat Telefonia Personal, S.A. (Chile) 100% 50%
Pegaso Telecomunicaciones, S.A. de C.V. (Mexico) 33% 49%
Metrosvyaz Limited (Russia) 50% 50%
Orrengrove Investments Limited (Russia) 50% 50%
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Condensed financial information for the Leap Wireless Operating Companies
accounted for under the equity method is summarized as follows (in thousands):
MAY 31, 1999
-----------------------------------------------------
U.S. MEXICO RUSSIA TOTAL
--------- --------- -------- ---------
Current assets $ 6,020 $ 26,526 $ 39,857 $ 72,403
Non-current assets 79,770 387,379 33,077 500,226
Current liabilities (6,630) (67,448) (8,601) (82,679)
Non-current liabilities (135,583) (96,752) (23,512) (255,847)
--------- --------- -------- ---------
Total stockholders' capital (56,423) 249,705 40,821 234,103
Other stockholders' share of capital (56,423) 167,222 50 110,849
--------- --------- -------- ---------
Company's share of capital -- 82,483 40,771 123,254
Excess cost of investment -- -- -- --
--------- --------- -------- ---------
Equity investments in unconsolidated
wireless operating companies $ -- $ 82,483 $ 40,771 $ 123,254
========= ========= ======== =========
AUGUST 31, 1998
-------------------------------------------------------------------
U.S. MEXICO CHILE RUSSIA TOTAL
--------- -------- --------- -------- ---------
Current assets $ 7,776 $ 9,783 $ 24,140 $ 40,876 $ 82,575
Non-current assets 81,215 63,526 100,474 18,328 263,543
Current liabilities (6,070) (57,142) (30,180) (5,742) (99,134)
Non-current liabilities (117,436) -- (61,055) -- (178,491)
--------- -------- --------- -------- ---------
Total stockholders' capital (34,515) 16,167 33,379 53,462 68,493
Other stockholders' share of capital (34,515) 7,455 16,690 1,162 (9,208)
--------- -------- --------- -------- ---------
Company's share of capital -- 8,712 16,689 52,300 77,701
Excess cost of investment -- -- 20,018 -- 20,018
--------- -------- --------- -------- ---------
Equity investments in unconsolidated
wireless operating companies $ -- $ 8,712 $ 36,707 $ 52,300 $ 97,719
========= ======== ========= ======== =========
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THREE MONTHS ENDED MAY 31, 1999
---------------------------------------------------------------
U.S. MEXICO CHILE RUSSIA TOTAL
------- -------- -------- -------- --------
Revenues $ 1,093 $ 514 $ 2,386 $ 22 $ 4,015
======= ======== ======== ======== ========
Operating expenses (5,335) (20,513) (8,829) (23,197) (57,874)
Other income (expense), net (3,755) (211) (2,566) (523) (7,055)
Foreign currency transaction loss -- 1,243 (2,649) -- (1,406)
------- -------- -------- -------- --------
Net loss (7,997) (18,967) (11,658) (23,698) (62,320)
Other stockholders' share of net loss (3,499) (12,645) (5,829) -- (21,973)
------- -------- -------- -------- --------
Company's share of net loss (4,498) (6,322) (5,829) (23,698) (40,347)
Amortization of excess cost of investment -- -- (310) -- (310)
------- -------- -------- -------- --------
Equity in net loss of unconsolidated
wireless operating companies $(4,498) $ (6,322) $ (6,139) $(23,698) $(40,657)
======= ======== ======== ======== ========
THREE MONTHS ENDED MAY 31, 1998
-------------------------------------------------------------
U.S. MEXICO CHILE RUSSIA TOTAL
-------- ------- ------- ------- --------
Revenues $ -- $ -- $ -- $ -- $ --
======== ======= ======= ======= ========
Operating expenses (1,932) (2,266) (1,223) (1,792) (7,213)
Other income (expense), net (8,463) -- 384 -- (8,079)
Foreign currency transaction loss -- -- (2,337) -- (2,337)
-------- ------- ------- ------- --------
Net loss (10,395) (2,266) (3,176) (1,792) (17,629)
Other stockholders' share of net loss (7,213) (1,156) (1,588) -- (9,957)
-------- ------- ------- ------- --------
Company's share of net loss (3,182) (1,110) (1,588) (1,792) (7,672)
Amortization of excess cost of investment -- -- -- -- --
-------- ------- ------- ------- --------
Equity in net loss of unconsolidated
wireless operating companies $ (3,182) $(1,110) $(1,588) $(1,792) $ (7,672)
======== ======= ======= ======= ========
NINE MONTHS ENDED MAY 31, 1999
-----------------------------------------------------------------
U.S. MEXICO CHILE RUSSIA TOTAL
-------- -------- -------- -------- ---------
Revenues $ 1,917 $ 514 $ 3,670 $ 22 $ 6,123
======== ======== ======== ======== =========
Operating expenses (12,686) (45,331) (21,304) (33,095) (112,416)
Other income (expense), net (6,518) 545 (5,864) 706 (11,131)
Foreign currency transaction loss -- (1,231) (4,199) -- (5,430)
-------- -------- -------- -------- ---------
Net loss (17,287) (45,503) (27,697) (32,367) (122,854)
Other stockholders' share of net loss (374) (30,345) (13,848) -- (44,567)
-------- -------- -------- -------- ---------
Company's share of net loss (16,913) (15,158) (13,849) (32,367) (78,287)
Amortization of excess cost of investment -- -- (630) -- (630)
-------- -------- -------- -------- ---------
Equity in net loss of unconsolidated
wireless operating companies $(16,913) $(15,158) $(14,479) $(32,367) $ (78,917)
======== ======== ======== ======== =========
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NINE MONTHS ENDED MAY 31, 1998
-------------------------------------------------------------
U.S. MEXICO CHILE RUSSIA TOTAL
-------- ------- ------- ------- --------
Revenues $ -- $ -- $ -- $ -- $ --
======== ======= ======= ======= ========
Operating expenses (3,865) (4,700) (2,724) (3,632) (14,921)
Other income (expense), net (18,869) -- 1,991 -- (16,878)
Foreign currency transaction loss -- -- (2,337) -- (2,337)
-------- ------- ------- ------- --------
Net loss (22,734) (4,700) (3,070) (3,632) (34,136)
Other stockholders' share of net loss (19,072) (2,397) (1,535) -- (23,004)
-------- ------- ------- ------- --------
Company's share of net loss (3,662) (2,303) (1,535) (3,632) (11,132)
Amortization of excess cost of investment -- -- -- -- --
-------- ------- ------- ------- --------
Equity in net loss of unconsolidated
wireless operating companies $ (3,662) $(2,303) $(1,535) $(3,632) $(11,132)
======== ======= ======= ======= ========
As of May 31, 1999, the Leap Wireless Operating Companies had not commenced
significant commercial revenue generating operations.
Chase Telecommunications Holdings, Inc.
In December 1996, the Company purchased $4 million of Class B Common Stock
of Chase Telecommunications Holdings, Inc., a development stage company
("Chase"), representing 7.2% of the outstanding capital stock of Chase. In June
1998, the Company agreed to provide a $25 million working capital facility to
Chase. Borrowings under the facility are subject to interest at 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 and
are subordinated to Chase's equipment vendor loans from QUALCOMM. The Company
and Chase have agreed in principle to increase the maximum principal amount that
may be drawn under the working capital facility to $45 million. At May 31, 1999,
borrowings under the facility totaled $29.0 million, including $2.2 million of
accrued interest. However, because the working capital facility is the only
source of working capital for Chase, the carrying value of the loans under the
facility have been reduced to zero as Leap Wireless has recognized 100% of the
net losses of Chase to the extent of its investment and loans.
In December 1998, the Company agreed to purchase substantially all the
assets of Chase for $6.3 million; a warrant to purchase 1% of the common stock
in a wholly-owned subsidiary of the Company exercisable at $1.0 million; the
Company's existing stock ownership and warrants to purchase stock in Chase; and
certain contingent earn-outs. This acquisition involves the transfer of wireless
telecommunication licenses, which is subject to approval by the Federal
Communications Commission ("FCC"). The acquisition will not occur unless the FCC
approves the transfer of the licenses.
In March 1999, a subsidiary of Chase launched a flat-rate local area
service which was developed by Leap Wireless. The service was launched under an
agreement that requires Chase's management to control the business until Leap
Wireless' proposed acquisition of Chase receives all necessary governmental
approvals and is complete. As a result of this launch and the satisfaction of
certain contingencies to the parties' obligation under the purchase agreement,
the Company adopted the equity method of accounting for its investment in Chase
in the third quarter of fiscal 1999. Accordingly, all prior periods presented in
these financial statements have been adjusted retroactively in accordance with
generally accepted accounting principles to give effect to the equity method of
accounting. The Company recorded equity losses from this investment of $4.5
million and $16.9 million during the three and nine months ended May 31, 1999,
respectively, and $3.2 million and $3.7 million during the three and nine months
ended May 31, 1998, respectively. Equity losses from this investment totaled $33
million during the period from September 1, 1995 (inception) to May 31, 1999.
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Chilesat Telefonia Personal, S.A.
On April 19, 1999, a wholly-owned subsidiary of the Company acquired all of
the shares of Chilesat that it did not already own from Telex-Chile. See Note 3.
The Company consolidated the balance sheet of Chilesat on May 31, 1999. The
Company has adopted a two-month lag for the recognition of the Company's share
of net earnings and losses of Chilesat. Accordingly, the Company will begin
fully consolidating Chilesat's results of operations commencing July 1, 1999.
The Company recorded equity losses resulting from this investment of $6.1
million and $14.5 million during the three and nine months ended May 31, 1999,
respectively, and $1.6 million and $1.5 million during the three and nine months
ended May 31, 1998, respectively.
Pegaso Telecomunicaciones, S.A. de C.V.
The Company, through a wholly-owned subsidiary, Leap PCS Mexico, Inc.,
formerly named QUALCOMM PCS Mexico, Inc., had a 49% ownership interest in a
development stage company, Pegaso Telecomunicaciones, S.A. de C.V. ("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 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 expenses incurred by Pegaso,
the Company recorded equity losses of $6.3 million and $15.2 million during the
three and nine months ended May 31, 1999, respectively, and $1.1 million and
$2.3 million during the three and nine months ended May 31, 1998, respectively.
See Note 8.
Metrosvyaz Limited
The Company has a 70% interest in QUALCOMM Telecommunications Ltd.
("QUALCOMMTel Cayman"), a Cayman Islands corporation, and QUALCOMMTel Cayman has
a 50% interest in Metrosvyaz Limited ("Metrosvyaz"). The Company has 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 loan facility. Borrowings under the $72.5 million facility are subject to
interest at 13% and are due in August 2007. Interest will be payable
semi-annually beginning August 2000 and, prior to such time, added to the
principal amount outstanding. At May 31, 1999, borrowings under the Company's
loan facility to Metrosvyaz totaled $27.4 million, including $0.8 million of
accrued interest, with a remaining loan commitment of $45.9 million. As a result
of start-up expenses incurred by Metrosvyaz, the Company recorded equity losses
of $5.3 million and $11.5 million during the three and nine months ended May 31,
1999, respectively, and $1.8 million and $3.6 million during the three and nine
months ended May 31, 1998, respectively.
Orrengrove Investments Limited
The Company has a 70% interest in QUALCOMM Telecommunications Ltd.
("QUALCOMMTel Isle of Man"), an Isle of Man corporation, and QUALCOMMTel Isle of
Man holds a 50% investment in Orrengrove Investments Limited ("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").
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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 indicates that the satellite's operational status
will not be restored. The Transworld Companies have already identified and put
into operation a short-term terrestrial transmission solution by leasing fiber
capacity and are exploring long-term alternatives to the lost satellite
transmission capacity. As a result of these events, Orrengrove and the
Transworld Companies have recognized an impairment loss of approximately $16.9
million in the third quarter ending May 31, 1999 to write-off certain satellite
related assets and to write-down to fair value its license to carry
long-distance traffic. The value of the license was determined to have been
impaired in part due to the current financial conditions in Russia.
As a result of start-up expenses incurred by the Transworld Companies,
write-off of the satellite related assets and impairment of the license, the
Company recorded equity losses of $18.4 million and $20.9 million during the
three and nine months ended May 31, 1999, respectively.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows (in thousands):
MAY 31,
1999
-----------
Land $ 332
Buildings and infrastructure 113,849
Machinery and equipment 13,033
Other 6,734
---------
133,948
Accumulated depreciation and amortization (8,187)
---------
$ 125,761
=========
NOTE 6. LOANS PAYABLE TO BANKS
Between July and November 1998, Inversiones borrowed $15.7 million under
notes payable to banks in Chile. In February 1999, Inversiones 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, bear
interest at rates of 8.1% and 8.5% per annum, respectively, and are due to be
repaid in February 2000.
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NOTE 7. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
MAY 31,
1999
-----------
QUALCOMM Credit Agreement $ 93,281
QUALCOMM Deferred Payment Agreement 77,053
Note payable to Telex-Chile at present value 15,699
---------
186,033
Less current portion (33,727)
---------
$ 152,306
=========
QUALCOMM Credit Agreement
The Company entered into a secured credit facility with QUALCOMM (the
"Credit Agreement") on September 23, 1998. The Credit Agreement 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.
At May 31, 1999, the Company had borrowed $8.6 million under the working
capital sub-facility, including $5.3 million to pay QUALCOMM a 2% facility fee.
At May 31, 1999, the Company had borrowed $82.0 million under the investment
capital sub-facility to make further loans to and investments in the Leap
Wireless Operating Companies.
Amounts borrowed under the Credit Agreement are due September 23, 2006.
QUALCOMM has a security 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 May 31, 1999, the rate of
interest was generally 10.25%. 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 May 31, 1999, $2.8 million of capitalized
and accrued interest had been added to the Credit Agreement.
QUALCOMM Deferred Payment Agreement
Chilesat and QUALCOMM are parties to a Deferred Payment Agreement related
to Chilesat's purchase of equipment, software and services from QUALCOMM. The
assets of Chilesat collateralize its obligations under the Deferred Payment
Agreement. The Company has also pledged its shares in Chilesat as guaranty for
Chilesat's obligation to QUALCOMM.
Under the terms of the 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 May 31, 1999, the
rate of interest was generally 9.75%. Accrued interest is added monthly to the
outstanding principal amount of the applicable borrowing until its first due
date, at which time interest is payable with principal. Chilesat is currently in
discussions with QUALCOMM to restructure the terms of the agreement and is
currently delinquent on payments of $10.9 million.
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NOTE 8. COMMITMENTS
The Company has made commitments to invest additional working capital into
certain of the Leap Wireless Operating Companies. As of May 31, 1999, these
commitments totaled approximately $45.9 million. The Company expects to fund its
commitments with borrowings under the Credit Agreement.
In May 1999, Pegaso entered into a $100 million loan agreement. The Company
has agreed to pay 33% of Pegaso's obligations under this loan agreement in the
event of Pegaso's default.
In April 1999, the Company was the successful bidder at $18.7 million on 36
wireless telecommunications licenses in the U.S. government's re-auction of PCS
spectrum, paying a deposit of $3.7 million on these licenses. The purchase of
the licenses is subject to approval of the FCC.
NOTE 9. STOCKHOLDERS' EQUITY
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 May 31, 1999, no shares of Preferred Stock were
outstanding.
Stock Purchase Warrant
In connection with the Distribution, the Company issued to 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 $3.0 million in cash. The Company also recorded $2.4 million
related to a handset purchase commitment. The Company borrowed $3.0 million
under the Credit Agreement to satisfy the cash obligation. This warrant is
currently exercisable and remains exercisable until September 2008.
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NOTE 10. SUBSEQUENT EVENT
Adoption of Cricket Communications Stock Option Plan
In June 1999, the Company's wholly-owned subsidiary, Cricket Communications,
Inc. ("Cricket Communications") adopted the Cricket Communications 1999 Stock
Option Plan ("the Cricket Plan") that allows the Cricket Communications Board of
Directors to grant options to selected employees, directors and consultants to
purchase shares of Cricket Communication's common stock. The 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 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.
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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 financial statements and the notes thereto included in Item 1 of
this Quarterly Report and the audited consolidated 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.
FORWARD-LOOKING STATEMENTS
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 the second quarter
of 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 operating companies from one
month to two months. The effect of this change on previously reported amounts
was not significant.
In March 1999, a subsidiary of Chase launched a flat-rate local area service
which was developed by Leap Wireless. The service was launched under an
agreement that requires Chase's management to control the business until Leap
Wireless' proposed acquisition of Chase receives all necessary governmental
approvals and is complete. As a result of this launch and the satisfaction of
certain contingencies to the parties' obligation under the purchase agreement,
Leap Wireless adopted the equity method of accounting for its investment in
Chase in the third quarter of fiscal 1999. Accordingly, all prior periods
presented in these financial statements have been adjusted retroactively in
accordance with generally accepted accounting principles to give effect to the
equity method of accounting. The Company has recorded equity losses from this
investment of $4.5 million and $16.9 million during the three and nine months
ended May 31, 1999, respectively, and $3.2 million and $3.7 million during the
three and nine months ended May 31, 1998, respectively. Equity losses from this
investment totaled $33 million during the period from September 1, 1995
(inception) to May 31, 1999.
OVERVIEW
Leap Wireless is a wireless communications carrier that owns, operates and
participates in CDMA telecommunications networks in domestic and international
markets with strong growth potential. Through its operating companies, Leap
Wireless has launched all digital wireless networks in Chile, Mexico, Russia and
the United States. A Leap Wireless subsidiary also owns wireless
telecommunications licenses in Australia, which it has not yet developed. Upon
completion of Leap Wireless' pending U.S. asset acquisitions, Leap Wireless will
have interests in existing and planned telecommunications systems covering
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176 million potential customers, of which its equity share will be approximately
72 million potential customers. Leap Wireless also was the high bidder for 36
C-Block licenses in mid-sized markets covering an aggregate of 11.2 million
additional potential customers in the federal government's recent re-auction of
broadband PCS spectrum. The completion of Leap Wireless' pending US asset
acquisitions and its acquisition of the 36 C-Block licenses are subject to the
approval of the Federal Communications Commission.
Domestic and international telecommunications markets are expanding rapidly
as countries seek to increase their number of telephone lines as a percentage of
their population, known as teledensity, 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 Wireless believes that wireless is the cheapest and fastest way to increase
teledensity in regions not yet connected by copper telephone lines, and that it
possesses the expertise to oversee and manage the entry of new wireless
operating companies into these competitive markets.
Leap Wireless' domestic strategy is to offer consumers a wireless service
plan that provides them with unlimited local calls for a low, flat monthly rate.
Aimed at the mass consumer market, the service is marketed under the name
"Cricket"SM and is identified as the "around the town phone" SM and "comfortable
wireless." SM Leap Wireless' international strategy includes identifying and
investing in growth markets with 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 Wireless is actively involved in the
management of the networks, combining its expertise in international markets
with its wireless technical expertise in CDMA. Leap Wireless is committed to
bringing the benefits of reliable, cost-effective and high-quality voice and
data services to its operating companies' customers.
Leap Wireless and its operating companies are in the early stages of
development and face risks inherent in establishing a new business enterprise.
Leap Wireless' 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.
Start-up wireless telecommunications companies typically require substantial
capital expenditures for the construction of their networks, license fees and
license acquisition costs. These costs are generally capitalized. In addition,
these companies typically incur significant marketing and other expenses as they
begin commercial operations. Accordingly, as Leap Wireless' operating companies
continue to build-out their networks, expand their operations, and amortize
their capitalized costs, their net operating losses and Leap Wireless'
proportionate share of the losses will grow.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED MAY 31, 1998
Leap Wireless' consolidated net loss during the three and nine month periods
ended May 31, 1999 was $46.7 million and $90.0 million, respectively, compared
to a net loss of $11.1 million and $16.7 million in the corresponding periods of
the prior fiscal year. The increases were primarily the result of substantial
start-up costs associated with Leap Wireless' foreign operating companies and a
$16.9 million impairment loss recorded by Orrengrove Investments Limited as
described below.
Equity in net loss of unconsolidated wireless operating companies during the
three and nine month periods ended May 31, 1999 was $40.7 million and $78.9
million, respectively, compared to $7.7 million and $11.1 million in the
corresponding periods of the prior fiscal year. The significant increases in
Leap Wireless' share in the net loss of its unconsolidated wireless operating
companies relate primarily to increased network development by these companies
and the significant expenditures made in preparing to launch their network
services. The impairment loss recorded by Orrengrove in the third quarter of
fiscal
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1999 also increased Leap Wireless' share in the net loss of its unconsolidated
wireless operating companies by $16.9 million.
In April 1999, the Transworld Companies, partially owned subsidiaries of
Orrengrove, learned that third party satellite equipment they used to provide
commercial long distance service in the Russian Federation had failed. Leap
Wireless does not expect that this satellite equipment can be repaired. The
Transworld Companies have begun using fiber lines to provide long distance
service as a short-term alternative to the satellite transmission option they
previously used. The Transworld Companies are exploring long-term alternative
transmission sources for their long distance services. As a result of these
events, Orrengrove and its subsidiaries wrote-off their satellite related assets
and reduced to fair value their license to carry long-distance traffic in
Russia. The asset value of the licenses was impaired because of the loss of the
satellite facilities and the current financial conditions in Russia.
General and administrative expenses were $6.2 million and $14.8 million for
the three and nine month periods ended May 31, 1999, respectively, compared to
$3.4 million and $5.6 million in the corresponding periods of the prior fiscal
year. The increase resulted primarily from increased staffing and business
development activity related to Leap Wireless' creation of a wireless operating
business in the United States. Leap Wireless expects that general and
administrative expenses will continue to increase and that the amounts presented
are not representative of general and administrative expenses it will incur in
future periods due to the expected consolidation of Chilesat Telefonia Personal
in the fourth quarter of fiscal 1999 and the pending acquisition and
consolidation of Chase Telecommunications, Inc. Leap Wireless also expects that
it will continue to add managerial personnel as it expands its involvement in
wireless projects in the United States and various other parts of the world.
Interest income for the three and nine month periods ended May 31, 1999 was
$2.5 million and $7.9 million, respectively, primarily from Leap Wireless' loans
to its operating companies. Interest expense was $2.3 million and $4.2 million
for the three and nine month periods ended May 31, 1999, respectively, due to
borrowings from banks and under Leap Wireless' credit agreement with QUALCOMM.
There was no interest income or expense during the corresponding periods of the
prior fiscal year.
In March 1999, Leap Wireless' concept of providing flat-rate local area
service targeted at the mass consumer market was launched. The service, marketed
under the name "Cricket"SM and identified as the "around the town phone" SM and
"comfortable wireless." SM, was introduced in Chattanooga, Tennessee using the
existing infrastructure of a wholly-owned subsidiary of Chase Telecommunications
Holdings, Inc. Cricket SM provides customers with a simple and affordable
wireless communication option by allowing them to make unlimited local calls for
a flat rate. The expansion of Cricket SM service to Nashville, Tennessee is
currently underway. The service was launched under an agreement that requires
Chase's management to control the business until Leap Wireless' proposed
acquisition of Chase's assets receives all necessary governmental approvals and
is complete.
On February 1, 1999, Chase Telecommunications had approximately 4,900
subscribers who were offered the option of converting to the Cricket service.
Approximately one-half chose to convert. Approximately 8,700 subscribers used
the Cricket service provided by Chase Telecommunications as of May 31, 1999.
Metrosvyaz Limited, a Leap Wireless operating company, develops joint
ventures with local Russian telecommunications operators for the formation,
development, financing and operation of wireless telephone services in the
Russian Federation. Petrosvyaz, a Metrosvyaz joint venture, launched commercial
service in St. Petersburg in April 1999. Metrosvyaz expects to launch commercial
operations in several additional Russian cities through additional joint
ventures in the following months.
As of May 31, 1999, Chilesat had approximately 30,600 subscribers, Chase
Telecommunications had approximately 8,700 subscribers, Pegaso had approximately
2,800 subscribers and Metrosvyaz had approximately 270 subscribers.
In May 1999, QUALCOMM sold its CDMA wireless infrastructure division to
Telefonaktiebolaget LM Ericsson (pbl) ("Ericsson"). As a result, Ericsson and
its subsidiaries will become primary suppliers of
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network infrastructure equipment to Leap Wireless and its operating companies.
In connection with the sale, Ericsson assumed most of QUALCOMM's obligations to
Leap and its operating companies under existing infrastructure supply
agreements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Leap Wireless expects to have significant future capital requirements over
the next several years in relation to corporate operations and the financing of
current development projects and additional new projects. Leap Wireless' sources
of liquidity as of May 31, 1999 are $23.5 million of cash and cash equivalents
and a $265 million credit agreement with QUALCOMM which contains a $35.2 million
sub-facility to fund working capital and operating expenses of Leap Wireless and
a $229.8 million sub-facility to fund specified portfolio investments by Leap
Wireless. As of May 31, 1999, Leap Wireless had $174.5 million available to it
under this credit agreement, with $26.7 million of such amount available under
the working capital sub-facility and $147.8 million available under the
investment sub-facility. Leap Wireless expects to meet its cash requirements for
existing corporate operations and for further investments in its development
projects through early 2000 from available cash balances and borrowings under
its credit agreement.
Leap Wireless is seeking additional debt or equity to fund its activities
in the year 2000 and beyond. There can be no assurances that additional
financing will be available or, if available, that it will be offered to Leap
Wireless on acceptable terms. If Leap Wireless does not obtain additional
working capital or financing by early 2000, 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 Leap Wireless' operating companies.
OPERATING ACTIVITIES
In the first nine months of fiscal 1999, Leap Wireless used $23.8 million
in cash for operating activities, compared to $2.7 million for the corresponding
period of the prior fiscal year.
Leap Wireless expects that cash used in operating activities will increase
further as Leap Wireless continues to expand its project development efforts on
existing and new project opportunities. In addition, Leap Wireless expects that
cash used in operating activities will increase substantially in the future as a
result of Leap Wireless' acquisition and consolidation of Chilesat, its pending
acquisition of Chase Telecommunications and other Leap Wireless activities
related to its domestic strategy of providing a flat rate wireless local area
telephone service.
INVESTING ACTIVITIES
Cash used in investing activities was $138.3 million in the first nine
months of fiscal 1999, compared to $26.9 million in the same period of fiscal
1998. Significant investments in the first nine months of fiscal 1999 consisted
of a $60.7 million capital contribution to Pegaso which was made before Leap
Wireless began to operate as an independent company, and loans and advances of
$74.9 million to Leap Wireless' operating companies. Leap Wireless and its
wholly owned subsidiaries expect to continue making significant investments and
loans to the Leap Wireless operating companies and to continue investing in
capital assets, including wireless telecommunications licenses and network
equipment. Investment activity in the corresponding period in fiscal 1998
consisted of loans and start-up expenses advanced to Leap Wireless' operating
companies, primarily in Mexico and Chile.
In March 1999, Leap Wireless submitted a $20 million deposit for bidding in
the federal government re-auction of C, D, E and F block broadband PCS spectrum.
Leap Wireless was the winning bidder for 36
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licenses of C-Block spectrum with an aggregate bid of $18.7 million, or $1.66
per POP. The licenses cover 36 mid-sized markets with an aggregate of 11.2
million potential customers. The FCC must approve Leap Wireless' purchase of
these licenses. Upon completion of the bidding in May 1999, the FCC returned
$16.3 million of the deposit to Leap Wireless. The $3.7 million retained by the
FCC represents a 20% deposit on the $18.7 million winning bid price.
In April 1999, Leap Wireless announced that it had increased its ownership
interest in Chilesat from 50% to 100%. Leap Wireless' Chilean subsidiary
purchased the remaining 50% of Chilesat from Telex-Chile, a Chilean
telecommunications company, and an affiliate of Telex-Chile, for $28 million and
a $22 million interest-free note payable in three years. Leap is currently
working to re-energize Chilesat by strengthening its management team and
resuming consumer acquisition and marketing efforts that were temporarily
suspended during the acquisition.
Leap Wireless's pending acquisition of C-Block spectrum licenses in North
and South Carolina from AirGate Wireless, L.L.C., its pending acquisition of
substantially all of the assets of Chase Telecommunications and the C-Block
licenses under which Chase Telecommunications operates, and its pending purchase
of the 36 C-Block licenses it won in the federal government's recent spectrum
re-auction are all subject to Federal Communications Commission approval. Leap
Wireless' application to the FCC to acquire the AirGate Wireless licenses has
been opposed on the grounds that Leap Wireless does not qualify as a designated
entity. Businesses must qualify as designated entities to license C-Block or
F-Block spectrum. Leap Wireless has attended public hearings before the FCC and
answered questions concerning the proposed acquisition from AirGate Wireless and
Leap Wireless' status as a designated entity. Leap Wireless believes that it
qualifies as a designated entity and that it meets all FCC requirements to
obtain approval for the proposed acquisitions, however, the FCC has not yet
rendered a decision regarding these matters. If the FCC ultimately determines
that Leap Wireless is not a designated entity, Leap Wireless does not expect to
complete either of the two pending asset acquisitions nor will it be permitted
to complete the purchase of the 36 C-Block spectrum licenses it would otherwise
be entitled to purchase as a result of the federal government's re-auction of
broadband PCS spectrum licenses.
FINANCING ACTIVITIES
Cash provided by financing activities during the first nine months of
fiscal 1999 was $185.6 million, represented primarily by $95.3 million of
funding from QUALCOMM for Leap Wireless operations and investing activities
prior to the distribution of Leap Wireless common stock to QUALCOMM's
stockholders and $88.9 million of net borrowings. Cash provided by financing
activities during the first nine months of fiscal 1998 was $29.6 million,
representing QUALCOMM's funding of Leap Wireless operations and investing
activities in this period.
In March 1999, QUALCOMM agreed to reduce the number of shares exercisable
under its warrant for Leap Wireless common stock from 5,500,000 to 4,500,000
shares. Leap Wireless valued the buy-back of the warrant shares at $5.4 million,
which included $3.0 million in cash and $2.4 million related to a handset
purchase commitment. Leap Wireless borrowed $3.0 million under its credit
agreement to satisfy the cash obligation. Leap Wireless believes that this
amendment to the warrant will strengthen Leap Wireless' position that it is a
designated entity under FCC regulations by reducing QUALCOMM's potential
ownership interest in Leap Wireless.
LIQUIDITY AND SUBSTANTIAL LEVERAGE OF LEAP WIRELESS' OPERATING COMPANIES
Leap Wireless generally expects that its operating companies will be
financed initially with equity contributions and loans from Leap Wireless and
its partners. Leap Wireless also expects that its operating companies will seek
stand-alone third party financing after their initial stages of development. In
some cases, Leap Wireless and its partners may provide additional equity or
loans to operating companies after their initial contributions.
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Although each of Leap Wireless' operating companies has obtained
substantial equity contributions, they generally are or may become highly
leveraged, which 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 the 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,
Leap Wireless expects that some of its operating companies will be substantially
funded through equipment financing arrangements from vendors. These equipment
financings will be dependent upon meeting planned levels of performance. If the
operating companies fail to meet these performance requirements, the related
equipment financings could be materially restricted or terminated.
Leap Wireless' credit agreement provides it with sufficient liquidity to
contribute the approximately $45.9 million of financing it is contractually
bound to provide to its operating companies as of May 31, 1999. The companies
have business plans, however, which call for substantial additional financing to
build-out and operate their planned networks. These operating companies are
generally seeking new equity and debt from existing investors, equipment vendors
and third parties, and Leap Wireless has been assisting them in their efforts.
At this time, however, capital markets have been constrained because of
uncertain worldwide economic conditions, and development stage companies in
emerging markets find it difficult to raise additional capital. As a result,
Leap Wireless cannot assure that its operating companies will be able to obtain
the required additional financing. Further, if an operating company fails to
gain required new financing, that failure could have a material adverse effect
on that company and, as a result, a material adverse effect on Leap Wireless.
In March 1999, Leap Wireless entered into a substitute loan agreement to
provide $72.5 million of working capital to Metrosvyaz. As previously
contemplated, the amount available to Metrosvyaz under its credit agreement with
QUALCOMM was simultaneously reduced by $72.5 million to $102.5 million, making a
combined total of $175 million available to Metrosvyaz from QUALCOMM and Leap
Wireless. Leap Wireless intends to fund its loan to Metrosvyaz, which is
subordinated to QUALCOMM's loan to Metrosvyaz, through borrowings under Leap
Wireless' $265 million credit agreement with QUALCOMM. Metrosvyaz owed Leap
Wireless $27.4 million under the substitute loan agreement as of May 31, 1999.
Leap Wireless expects that the $175 million available to Metrosvyaz under its
current QUALCOMM credit facility and Leap Wireless credit facility will provide
Metrosvyaz with sufficient liquidity to fund its deployment and operations
through the end of 1999.
In May 1999, Pegaso entered into a $100 million loan agreement. Leap
Wireless has agreed to pay 33% of Pegaso's obligations under this agreement in
the event of Pegaso's default. Leap Wireless expects that the $100 million
facility and approximately $50 million of equity which is committed to be
contributed to Pegaso within the next several months will be sufficient to
finance Pegaso's capital and operating requirements through the end of 1999.
During the third quarter of fiscal 1999, Leap Wireless loaned Chilesat $7.0
million. At May 31, 1999, working capital loans to Chilesat totaled
approximately $23 million. Leap Wireless estimates that, as of May 31, 1999,
Chilesat needed approximately $85 million of additional financing to fund its
activities and to expand its networks and business as currently contemplated
through the end of 1999. As of May 31, 1999, Leap Wireless had approximately $20
million available to loan to Chilesat under its credit agreement with QUALCOMM.
In addition, Leap Wireless is currently in late stage discussions to obtain
additional vendor financing for Chilesat, and Chilesat will seek additional
equity and debt financing to satisfy the balance of its desired financing
through 1999. If Chilesat does not obtain all of the funds it requires to
operate and expand as currently anticipated through the end of 1999, Chilesat
will restrict or terminate its expansion until additional funds are available.
Leap Wireless and Chase Telecommunications are among the parties to a
credit agreement under which Leap Wireless has agreed to provide, at its
discretion, working capital to Chase Telecommunications. The parties have agreed
in principle to increase the maximum principal amount that may be drawn under
the facility to $45 million. At May 31, 1999, principal borrowings under the
working capital facility totaled approximately $26.8 million.
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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 a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
Leap Wireless and each of its operating companies have recently begun their
respective businesses and have designed and built their wireless telephone
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 will be Year 2000 compliant.
Leap Wireless and each of its operating companies are conducting an
inventory to identify its systems that may be subject to Year 2000 problems and
that are critical to its business and operations. At the same time, each of Leap
Wireless' operating companies has been working with its primary
telecommunications systems vendors to confirm that the vendor's products are
Year 2000 ready and, if not, to agree with such vendor on a remediation and test
program to be implemented prior to the Year 2000.
Although Leap Wireless expects that its operating companies' critical
network infrastructure systems will be Year 2000 compliant, Leap Wireless'
operating companies may experience difficulties with systems maintained by third
parties. For example, other telecommunications systems that interconnect with
the operating companies' systems (such as landline, long-distance and power
systems) could malfunction and disrupt their ability to provide wireless
service. Leap Wireless' operating companies are not currently aware of evidence
that a failure is likely to occur in their service areas. However, Leap
Wireless' operating companies continue to evaluate the risk associated with
third party interfaces and Year 2000 issues.
Leap Wireless continues to actively work with its operating companies to
evaluate risk and the development of any required remediation plans. To date,
Leap Wireless has not incurred any material costs in support of the Year 2000
issue. Leap Wireless estimates that it will spend $500,000 or less in fiscal
year 1999 to review and correct any non-compliance as well as to support the
Leap Wireless operating companies and support material third party
relationships. Leap Wireless has not yet developed contingency plans to handle
Year 2000 failures.
We cannot assure you that Leap Wireless and its operating companies will be
able to identify all Year 2000 problems in their systems and third party systems
in advance of the occurrence of those problems. In addition, we may not be able
to remedy any problems that may occur on a timely basis. A material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities, including the provision of wireless service by the Leap
Wireless operating companies. Such a problem could materially and adversely
affect the business and operations of Leap Wireless and its operating companies.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
10.9 1998 Stock Option Plan, as amended through April 13, 1999
10.21.2 Novation and Assumption of Payment Obligation Agreement, dated
May 11, 1999, by and among Chilesat Telefonia Personal S.A.,
Inversiones Leap Wireless Chile S.A. and Chilesat S.A.
(In Spanish and accompanied by a translation in English)
27. Financial Data Schedule (Filed with EDGAR filing only.)
27.1 Restated Financial Data Schedule (Year ended August 31, 1998)
(Filed with EDGAR filing only.)
27.2 Restated Financial Data Schedule (Quarter ended November 30, 1998)
(Filed with EDGAR filing only.)
27.3 Restated Financial Data Schedule (Quarter ended February 28, 1999)
(Filed with EDGAR filing only.)
(b) Reports on Form 8-K.
On May 4, 1999, Leap Wireless filed a Current Report on Form 8-K to report
that it had acquired all of the shares of Chilesat Telefonia Personal that
it did not already own for $28 million in cash and a $22 million
interest-free note payable due in May 2002. The report incorporated by
reference to Leap Wireless' Amendment No. 1 to Annual Report on Form 10-K
for the fiscal year ended August 31, 1998, audited financial statements for
Chilesat at December 31, 1998 and 1997 and for the periods ended December
31, 1998 and 1997. On July 6, 1999, Leap Wireless amended this Current
Report to add Leap Wireless financial statements at February 28, 1999 and
for the periods ended February 28, 1999 and August 31, 1998, each on a pro
forma basis reflecting Leap Wireless acquisition of the shares of Chilesat
that it did not already own.
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: July 15, 1999 By: /s/ HARVEY P. WHITE
-------------------------------------
Harvey P. White
Chief Executive Officer
Date: July 15, 1999 By: /s/ STEPHEN P. DHANENS
-------------------------------------
Stephen P. Dhanens
Corporate Controller
(Chief Accounting Officer)
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