-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F04Cog5s2DVK/zKoSTyz7LcKMeHWC7pKHb0IZL9htnvSEYGQtrKeJreqN3e/UbGg 7cEyzNqEZTLNPtWj2mHcOg== 0000936392-99-000722.txt : 19990618 0000936392-99-000722.hdr.sgml : 19990618 ACCESSION NUMBER: 0000936392-99-000722 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19990617 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEAP WIRELESS INTERNATIONAL INC CENTRAL INDEX KEY: 0001065049 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 330811062 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-29752 FILM NUMBER: 99648240 BUSINESS ADDRESS: STREET 1: 10307 PACIFIC CENTER COURT CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 8779775327 MAIL ADDRESS: STREET 1: 10307 PACIFIC CENTER COURT CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: QUALCOMM SPINCO INC DATE OF NAME CHANGE: 19980626 10-K405/A 1 AMENDMENT #2 TO FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K/A (AMENDMENT NO. 2) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1998 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 (Address of Principal Executive Offices) (Zip Code) (619) 882-6000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value (Title of Class) Preferred Stock Purchase Rights (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of November 10, 1998, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was approximately $104,817,000, based on the closing price of the Company's Common Stock on the Nasdaq National Market on November 10, 1998 of $6.03 per share. As of November 10, 1998, 17,684,367 shares of registrant's Common Stock, $.0001 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III is incorporated by reference to specified portions of the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of the registrant, which was filed not later than 120 days after the registrant's fiscal year ended August 31, 1998. 2 This Amendment No. 2 to the registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1998 is being filed to amend Item 14(a) to add the audited financial statements of Orrengrove Investments Ltd. and Pegaso Telecomunicaciones, S.A. de C.V. in accordance with Rule 3-09 of Regulation S-X. In addition, a discussion of subsequent events is being added to Note 10 of the Company's combined financial statements and to Note 14 of the Chilesat Telefonia Personal S.A. financial statements. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1), (2) Financial Statements and Schedules. See index on Page F-1. (3) Exhibits:
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1(1) Form of Amended and Restated Certificate of Incorporation of the Registrant 3.2(1) Form of Amended and Restated Bylaws of the Registrant 3.3(2) Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant 4.1(1) Form of Common Stock Certificate 4.2(3) Warrant, dated as of September 23, 1998, issued to QUALCOMM Incorporated ("QUALCOMM") 4.3(2) Rights Agreement, dated as of September 14, 1998, between the Registrant and Harris Trust Company of California 10.1(3) Separation and Distribution Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.2(3) Credit Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.3(3) Tax Matters Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.4(3) Interim Services Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.5(3) Master Agreement Regarding Equipment Procurement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.6(3) Employee Benefits Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.7(3) Conversion Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.8(3) Assignment and Assumption Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.9(1) Form of Registrant's 1998 Stock Option Plan (the "Option Plan") 10.10(1) Form of non-qualified/incentive stock option under the Option Plan 10.11(1) Form of non-qualified stock option under the Option Plan to be granted to QUALCOMM option holders in connection with the Distribution
2 3
EXHIBIT NO. DESCRIPTION ------- ----------- 10.12(1) Form of Registrant's 1998 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") 10.13(1) Form of non-qualified stock option under the Directors' Plan 10.14(1) Form of Registrant's Employee Stock Purchase Plan 10.15(1) Assignment and Assumption of Lease dated August 11, 1998 between QUALCOMM and Vaxa International, Inc. 10.16(1) Form of Indemnity Agreement to be entered into between the Registrant and its directors and officers 10.17(4) Loan Agreement, dated as of September 28, 1998, between Pegaso Comunicaciones y Servicios, S.A. de C.V. and the Registrant 10.18(4) Promissory Note, executed September 25, 1998, by Pegaso Comunicaciones y Servicios, S.A. de C.V. in favor of the Registrant 10.19(4) Pledge Agreement, dated as of September 28, 1998, by and between Pegaso Comunicaciones y Servicios, S.A. de C.V., the Registrant and the other parties thereto 21.1(1) Subsidiaries of the Registrant 23.1(5) Consent of Independent Accountants relating to report dated November 19, 1998 (Leap Wireless International, Inc.) 23.2(5) Consent of Independent Accountants relating to report dated February 25, 1999 except as to Note 14 b) which is as of March 16, 1999 (Chilesat Telefonia Personal S.A.) 23.3 (5) Consent of Independent Accountants relating to report dated April 30, 1999 (Orrengrove Investments Ltd.) 23.4 (5) Consent of Independent Accountants relating to report dated February 15, 1999 (Pegaso Telecomunicaciones, S.A. de C.V.) 27.1(4) Financial Data Schedule
- ----------------- (1) Filed as an exhibit to the Company's Registration Statement on Form 10, as amended (File No. 0-29752), and incorporated herein by reference. (2) Filed as an exhibit to the Company's Current Report on Form 8-K dated September 14, 1998, and incorporated herein by reference. (3) Filed as an exhibit to the Company's Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-64459) dated October 13, 1998, and incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998. (5) Filed with this Amendment No. 2. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K under Item 5 thereof on September 18, 1998, relating to the adoption of the Company's Stockholders Rights Plan and the execution of a definitive Rights Agreement, dated as of September 14, 1998, between the Company and Harris Trust Company of California. 3 4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of June, 1999. Leap Wireless International, Inc. By: /s/ Thomas D. Willardson ------------------------------------ Thomas D. Willardson Senior Vice President and Treasurer 4 5 LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY) INDEX TO FINANCIAL STATEMENTS
PAGE ---- LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY) Combined Financial Statements: Report of Independent Accountants................................................................... F-2 Combined Balance Sheets at August 31, 1998 and 1997................................................. F-3 Combined Statements of Operations for the fiscal years ended August 31, 1998, 1997 and 1996 and for the period from September 1, 1995 (inception) to August 31, 1998.................... F-4 Combined Statements of Cash Flows for the fiscal years ended August 31, 1998, 1997 and 1996 and for the period from September 1, 1995 (inception) to August 31, 1998.................... F-5 Combined Statements of Stockholder's Equity for each of the fiscal years in the period from September 1, 1995 (inception) to August 31, 1998..................................... F-6 Notes to Combined Financial Statements.............................................................. F-7 CHILESAT TELEFONIA PERSONAL S.A. (COMPANY IN THE DEVELOPMENT STAGE) Financial Statements: Report of Independent Accountants........................................................................ F-22 Balance Sheet at December 31, 1998 and 1997.............................................................. F-23 Statement of Income and Comprehensive Income for the year ended December 31, 1998 F-24 and for the period from inception (March 3, 1997) to December 31, 1997 and 1998....................... Statement of Cash Flows for the year ended December 31, 1998 and for the period from F-25 Inception (March 3, 1997) to December 31, 1997 and 1998............................................... Statement of Shareholders' Equity for the period from inception (March 3, 1997) to F-27 December 31, 1998..................................................................................... Notes to the Financial Statements........................................................................ F-28 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (COMPANY IN THE DEVELOPMENT STAGE) Consolidated Financial Statements: Report of Independent Accountants........................................................................ F-43 Consolidated Balance Sheet at December 31, 1998.......................................................... F-44 Consolidated Statement of Operations for the period from July 27, 1998 (inception) to December 31, 1998..................................................................................... F-45 Consolidated Statement of Cash Flows for the period from July 27, 1998 (inception) to December 31, 1998..................................................................................... F-46 Consolidated Statement of Stockholders' Deficit for the period from July 27, 1998 (inception) to December 31, 1998...................................................................... F-47 Notes to Consolidated Financial Statements............................................................... F-48 PEGASO TELECOMUNICACIONES, S.A. DE C.V. (COMPANY IN THE DEVELOPMENT STAGE) Consolidated Financial Statements: Report of Independent Accountants........................................................................ F-59 Consolidated Balance Sheet at December 31, 1998.......................................................... F-60 Consolidated Statement of Income for the period from June 24, 1998 (date of incorporation) to December 31, 1998..................................................................................... F-61 Consolidated Statement of Cash Flows for the period from June 24, 1998 (date of incorporation) to December 31, 1998..................................................................................... F-62 Statement of Stockholders' Equity for the period from June 24, 1998 (date of incorporation) to December 31, 1998..................................................................................... F-63 Notes to Consolidated Financial Statements............................................................... F-64
F-1 6 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Leap Wireless International, Inc. In our opinion, the accompanying combined balance sheets and the related combined statements of operations, of cash flows and of stockholder's equity present fairly, in all material respects, the financial position of Leap Wireless International, Inc. (a development stage company) at August 31, 1998 and 1997, and the results of its operations and its cash flows for the fiscal years ended August 31, 1998, 1997 and 1996 and for the period from September 1, 1995 (inception) through August 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP San Diego, California November 19, 1998 F-2 7 LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY) COMBINED BALANCE SHEETS (IN THOUSANDS) ASSETS
AUGUST 31, -------------------------- 1998 1997 --------- --------- Current assets .................................................... $ -- $ -- Investments in unconsolidated wireless operating companies ....................................................... 101,719 46,267 Loans receivable from unconsolidated wireless Operating companies ............................................. 65,303 -- Other assets ...................................................... 6,838 -- --------- --------- Total assets .................................................. $ 173,860 $ 46,267 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable and accrued liabilities .......................... $ 5,789 $ 279 Loan payable to bank .............................................. 9,000 -- --------- --------- Total liabilities ............................................. 14,789 279 --------- --------- Commitments (Note 7) Stockholder's equity: Parent's investment ............................................. 197,598 47,478 Deficit accumulated during the development stage ................ (36,175) (1,550) Cumulative translation adjustment ............................... (2,352) 60 --------- --------- Total stockholder's equity .................................... 159,071 45,988 --------- --------- Total liabilities and stockholder's equity .................... $ 173,860 $ 46,267 ========= =========
See accompanying notes. F-3 8 LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY) COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED FOR THE PERIOD AUGUST 31, FROM SEPTEMBER 1, 1995 ---------------------------------------- (INCEPTION) TO 1998 1997 1996 AUGUST 31, 1998 -------- -------- -------- ---------------------- Equity in net income (loss) of unconsolidated Wireless operating companies .............. $(11,580) $ 207 $ -- $(11,373) General and administrative expenses ......... (23,888) (1,361) (396) (25,645) Interest income ............................. 843 -- -- 843 -------- -------- -------- -------- Loss before income taxes ................ (34,625) (1,154) (396) (36,175) Income tax expense .......................... -- -- -- -- -------- -------- -------- -------- Net loss ................................ $(34,625) $ (1,154) $ (396) $(36,175) ======== ======== ======== ======== Unaudited pro forma basic and diluted net loss per common share (Note 1) ........ $ (1.96) ========
See accompanying notes. F-4 9 LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY) COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED FOR THE PERIOD AUGUST 31, FROM SEPTEMBER 1, 1995 ------------------------------------------- (INCEPTION) TO 1998 1997 1996 AUGUST 31, 1998 --------- --------- --------- ---------------------- Operating activities: Net loss ....................................... $ (34,625) $ (1,154) $ (396) $ (36,175) Adjustments to reconcile net loss to net cash used by operating activities: Equity in net loss (income) of unconsolidated wireless operating companies .................................. 11,580 (207) -- 11,373 Earned interest accrued to loans receivable... (843) -- -- (843) Change in accounts payable and accrued liabilities ................................ 5,510 168 111 5,789 --------- --------- --------- --------- Net cash used in operating activities ............ (18,378) (1,193) (285) (19,856) --------- --------- --------- --------- Investing activities: Investments in unconsolidated wireless operating companies .......................... (69,444) (46,000) -- (115,444) Issuance of loans to unconsolidated wireless operating companies ................. (64,460) -- -- (64,460) Cash paid on acquisition of consolidated wireless operating company ................... (564) -- -- (564) Purchase of wireless communication licenses ..................................... (6,274) -- -- (6,274) --------- --------- --------- --------- Net cash used in investing activities ............ (140,742) (46,000) -- (186,742) --------- --------- --------- Financing activities: Proceeds from bank loan ........................ 9,000 -- -- 9,000 Parent's investment ............................ 150,120 47,193 285 197,598 --------- --------- --------- --------- Net cash provided by financing activities ........ 159,120 47,193 285 206,598 --------- --------- --------- --------- Net change in cash and cash equivalents .......... -- -- -- -- Cash and cash equivalents at beginning of period ...................................... -- -- -- -- --------- --------- --------- --------- Cash and cash equivalents at end of period ....... $ -- $ -- $ -- $ -- ========= ========= ========= =========
See accompanying notes. F-5 10 LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY) COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS)
CUMULATIVE PARENT'S ACCUMULATED TRANSLATION INVESTMENT DEFICIT ADJUSTMENT TOTAL --------- --------- --------- --------- Balance at September 1, 1995 (inception)... $ -- $ -- $ -- $ -- Transfers from Parent ................... 285 -- -- 285 Net loss ................................ -- (396) -- (396) --------- --------- --------- --------- Balance at August 31, 1996 ................ 285 (396) -- (111) Transfers from 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 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 ========= ========= ========= =========
See accompanying notes. F-6 11 LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO COMBINED FINANCIAL STATEMENTS 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 stockholder 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. 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. Following the Distribution, QUALCOMM and the Company are operating as independent companies. QUALCOMM and the Company, however, continue to have a relationship as a result of the various agreements entered into in connection with the Distribution. The Distribution In connection with the Distribution, QUALCOMM transferred to the Company its joint venture and 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. The aggregate net tangible book value of the assets transferred by QUALCOMM to the Company in connection with the Distribution was approximately $258 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, including approximately $75 million of funding obligations to such operating companies, as well as certain miscellaneous liabilities. QUALCOMM will continue to be a supplier of CDMA equipment and is expected to provide F-7 12 significant vendor financing to the Company's wireless telecommunications businesses and ventures. The Company entered into a secured credit facility with QUALCOMM (the "Credit Facility"). 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 portfolio investments. Amounts borrowed under the Credit Facility 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. Amounts borrowed under the Credit Facility will 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. Basis of Presentation The combined financial statements reflect the financial position, results of operations, cash flows and changes in stockholder's equity of the business that was transferred to the Company from QUALCOMM as if: (i) the Company were a separate entity for all periods presented, and (ii) the historical investments in the Leap Operating Wireless Operating Companies as of August 31, 1998 and significant agreements entered into with such companies prior to the Distribution were owned or entered into by the Company. However, for the periods covered by the financial statements, such investments were directly or indirectly legally owned by QUALCOMM. Additionally, the results of the Company's unconsolidated Leap Wireless Operating Companies have been included as of and for the twelve months ended July 31, a one month lag. The financial statements have been presented as if the Company were a development stage company with an inception date of September 1, 1995. The financial statements have been prepared using the historical basis in the assets and liabilities and historical results of operations related to the Company's business. The businesses attributed to the Company did not engage in any significant activity prior to fiscal 1996 and, as of August 31, 1998, neither the Company nor the businesses in which it was deemed to own an equity investment had generated any revenues from their planned principal operations. The Company had no cash balances as of August 31, 1998 and 1997 as no specific cash accounts had been designated by QUALCOMM for the Company. When Company liabilities were paid or investments made, it is assumed that the cash used by the Company was funded by a stockholder cash contribution. Changes in stockholder's equity represent QUALCOMM's contribution after giving effect to the net operating cash used by the Company and amounts necessary to finance the acquisition of ownership interests in the Leap Wireless Operating Companies. The Company had no employees nor were any QUALCOMM employees wholly dedicated to its business during the fiscal periods presented. QUALCOMM departmental labor and other direct costs have been allocated to the Company based on estimates of incremental efforts expended and incremental costs incurred related to the Company's business. General corporate overhead related to QUALCOMM's corporate headquarters and common support divisions have been allocated to the Company generally based on the proportion of the Company's costs and expenses to QUALCOMM's costs and expenses. F-8 13 Management believes these allocations reasonably approximate costs incurred by QUALCOMM on behalf of the Company's operations. However, the costs as allocated to the Company are not necessarily indicative of the costs that would have been incurred if the Company had performed these functions as a stand-alone entity. Following the Distribution, the Company hired its own staff to perform necessary functions using its own resources or purchased resources and is responsible for the costs and expenses associated with the management of a public corporation. The financial information included herein may not necessarily reflect the financial position, results of operations, cash flows and changes in stockholder's equity of the Company in the future or what they would have been had it been a separate, stand-alone entity during the periods presented. Developmental Stage Activities and Additional Capital Needs The Company has only operated as an independent public company since the Distribution and is at an early stage of development. As such, the Company is subject to the risks inherent in the establishment of a new business enterprise and its prospects must be considered in light of the risks, expenses and difficulties encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets and companies experiencing rapid growth. To date, the Company has generated no revenue from its ownership interests in or management roles with the Leap Wireless Operating Companies. The Company's ability to generate revenues will be dependent on a number of factors, including the future operations and profitability of its operating companies. The Leap Wireless Operating Companies are expected to incur substantial losses for the foreseeable future and are subject to substantial risks. The Company will be required to recognize a share of these companies' start-up operating losses as a result of the Company's ownership interests in these companies. The industry in which the operating companies operate is highly competitive and is subject to a number of significant project, market, political, credit and exchange risks, among others. The Company may be required to provide substantial funding to these entities to finance completion of their wireless operating systems. The build-out of the operating companies' wireless systems may take a number of years to complete. There can be no assurance that any of the existing operating companies or any other companies in which the Company may acquire a joint venture or equity interest will be able to obtain sufficient financing to build-out their systems, meet their payment obligations to the Company or others, including the Federal Communications Commission ("FCC") and other regulatory agencies, or become profitable. The failure of these companies to build-out their systems, meet their payment obligations or become profitable would adversely affect the value of the Company's assets and its future profitability. The time required for the Company to reach or sustain profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve or maintain profitability. Moreover, if profitability is achieved, the level of such profitability cannot be predicted and may vary significantly from quarter to quarter. The Company expects to have significant future capital requirements relating to funding of the Leap Wireless Operating Companies and other operating companies in which the Company may acquire joint venture or equity interests and to general working capital needs and other cash requirements. The magnitude of these capital requirements will depend on a number of factors, including the specific capital needs of the Leap Wireless Operating Companies, additional capital needed to acquire or maintain other joint venture or equity interests, competing technological and market developments and changes in existing and future relationships. The Company expects to obtain much of its required near term financing through borrowings under the Credit Facility. The Company expects, however, that it will reach its borrowing limit under both sub-facilities of the Credit Facility on or about the end of fiscal 1999. The Company had no other agreements for working capital or financing. In addition, the Company is subject to restrictive covenants and other obligations under the Credit Facility. There can be no assurance that the Company will have continued access to borrowings under the Credit Facility when required. F-9 14 There can be no assurance that the Company will be able to obtain additional required financing on favorable terms or at all. The terms of the Credit Facility include security interests in favor of QUALCOMM and other restrictive covenants, and may significantly limit or prevent the Company from obtaining additional debt financing. If additional funds are raised through equity financings, dilution to the Company's existing stockholders would result. To the extent that such additional financing is raised by the sale or other transfer of any of the Company's equity interests in the Leap Wireless Operating Companies, the Company will be diluted or relinquish ownership of such interests. As fiscal 1999 progresses if management comes to believe that it will be unable to obtain working capital or financing in addition to the Credit Facility, management expects to reduce the Company's capital requirements by slowly 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 portions of its interests in one or more of the Leap Wireless Operating Companies. The failure to obtain adequate additional financing may have a material adverse effect on the Company's business, results of operations, liquidity and financial position. As a result of its capital requirements, including expected borrowings under the Credit Facility, the Company expects that it will 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 experienced net losses for the years ended August 31, 1998, 1997 and 1996 of $34.6 million, $1.2 million and $396,000, respectively. Following the Distribution, the Company is responsible for the additional costs associated with being an independent public company, including costs related to corporate governance, listed and registered securities and investor relations issues. Further, the Leap Wireless Operating Companies are in the early stages of developing and deploying their respective telecommunications systems. Such systems require significant expenditures, a substantial portion of which are incurred before corresponding revenues are generated. In addition, the degree to which the Company and its operating companies are expected to be leveraged will lead to significant interest expense and principal repayment obligations with respect to outstanding indebtedness. The Company therefore expects to incur significant expenses in advance of generating revenues, and as a result, to incur substantial additional losses in the foreseeable future. There can be no assurance that the Company or any of the Leap Wireless Operating Companies will achieve or sustain profitability in the near term or at all. International Risks The Company is subject to numerous risks as a result of its international activities. The Leap Wireless Operating Companies are dependent, in large part, on the economies of the markets in which they have operations. Those markets and other markets in which the Company may operate are in countries with economies in various stages of development or structural reform, some of which are subject to rapid fluctuations in currency exchange rates, consumer prices, inflation, employment levels and gross domestic product. The Company and the Leap Wireless Operating Companies are exposed to market risk from changes in foreign currency exchange rates and interest F-10 15 rates, and are subject to other currency, economic and political risks, which could impact their results of operations and financial condition. Financial Statement Preparation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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 and for ownership interests in partnerships. Under the equity method, the investment is originally recorded at cost and adjusted to recognize the Company's share of net earnings or losses of the investee, limited to the extent of the Company's investment in, advances to and financial guarantees for the investee. Such earnings or losses of the Company's investees are adjusted to reflect the amortization of any differences between the carrying value of the investment and the Company's equity in the net assets of the investee. To accommodate the reporting of the unconsolidated Leap Wireless Operating Companies, the Company has adopted a one-month lag for the recognition of the Company's share of net earnings or losses of such investments. Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Foreign Currency Results of operations for international investments are translated using average exchange rates during the period, while assets and liabilities are translated using end-of-period rates. The resulting exchange gains or losses are accumulated in the "cumulative translation adjustment" account, a component of stockholder's equity. The functional currency of the Company's foreign investees that operate in highly inflationary economies is the U.S. Dollar. The monetary assets and liabilities of these foreign investees are translated into U.S. Dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains and losses are translated at the average exchange rate for the period, and non-monetary assets and liabilities are translated at historical rates. Resulting remeasurement gains or losses of these foreign investees are recognized in the combined results of operations. The effects of translating the financial position and results of operations of local currency operations have not been significant to the Company's financial statements. Gains and losses resulting from the Company's foreign currency transactions have not been significant in relation to its operations. Income Taxes Historically, the Company's operations have been included in the consolidated income tax returns filed by QUALCOMM. Income tax expense in the Company's financial statements has been calculated on a separate tax return basis. F-11 16 Current income tax benefit is the amount expected to be receivable for the current year. A deferred tax asset and/or liability is computed for both the expected future impact of differences between the financial statement and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be "more likely than not" realized in future tax returns. Tax rate changes are reflected in income in the period such changes are enacted. Unaudited Pro Forma 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 unaudited pro forma net loss per common share ("EPS") amount for fiscal 1998. The Company had no shares of common stock outstanding during fiscal 1998. The unaudited pro forma net loss per common share was calculated by dividing the 1998 net loss of $34.6 million by the 17,647,685 shares of Common Stock the Company issued at Distribution. Stock options for 5,542,740 shares issued subsequent to the Distribution Date, the conversion of QUALCOMM's Trust Convertible Preferred Securities which are convertible into shares of QUALCOMM Common Stock and 2,271,060 shares of the Company's Common Stock, and the exercise of a warrant to be issued to QUALCOMM for approximately 5,500,000 shares of common stock have not been considered in calculating the unaudited pro forma net loss per common share because their effect would be anti-dilutive. As a result, the Company's unaudited pro forma basic and diluted net loss per common share are the same. Future Accounting Requirements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," which the Company will be required to adopt for fiscal year 1999. This statement will require the Company to report in the financial statements, in addition to net income, comprehensive income and its components including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption, the Company will also be required to reclassify financial statements for earlier periods provided for comparative purposes. The Company currently expects that the effect of adoption of FAS 130 may be primarily from foreign currency translation adjustments and has not yet determined the manner in which comprehensive income will be displayed. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information," which the Company will be required to adopt for fiscal year 1999. This statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under FAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company has not determined the impact of the adoption of this new accounting standard on its financial statement disclosures. F-12 17 In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which the Company will be required to adopt for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial position or results of operations. F-13 18 NOTE 2. INVESTMENTS AND LOANS TO UNCONSOLIDATED LEAP WIRELESS OPERATING COMPANIES The Company and its consolidated subsidiaries have joint venture and 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):
AUGUST 31, ------------------------- 1998 1997 -------- -------- Investments at equity ...... $ 97,719 $ 42,267 Investment at cost ......... 4,000 4,000 -------- -------- $101,719 $ 46,267 ======== ========
PERCENTAGE OF OWNERSHIP AUGUST 31, ------------------------ 1998 1997 ---- ---- COST INVESTMENT Chase Telecommunications, Inc (U.S.) ................ 7.2% 7.2% EQUITY INVESTMENTS Chilesat Telefonia Personal S.A. (Chile) ............ 50% 50% Pegaso Telecomunicaciones, S.A. de C.V. (Mexico)..... 49% -- Metrosvyaz Limited (Russia) ......................... 50% -- Orrengrove Investments Limited (Russia) ............. 50% --
Condensed financial information for the Leap Wireless Operating Company during the period under which the Company accounted for the investment under the equity method is summarized as follows (in thousands):
AUGUST 31, -------------------------- 1998 1997 --------- --------- Current assets ...................................... $ 73,250 $ 37,565 Non-current assets .................................. 170,660 15,058 Current liabilities ................................. (93,064) (665) Non-current liabilities ............................. (61,055) (7,461) --------- --------- Total partners' and stockholders' capital ......... 89,791 44,497 Other partners' and stockholders' share of capital... 40,663 22,249 --------- --------- Company's share of capital .......................... 49,128 22,248 Goodwill and other intangible items ................. 48,591 20,019 --------- --------- Equity investments in unconsolidated wireless Operating companies ............................. $ 97,719 $ 42,267 ========= =========
YEARS ENDED AUGUST 31, ------------------------ 1998 1997 -------- -------- Operating expenses ............................................ $(15,803) $ (274) Other income (expense), net ................................... (1,380) 688 -------- -------- Net income .................................................. (17,183) 414 Other partners' and stockholders' share of net income (loss)... (5,603) 207 -------- -------- Company's share of net income (loss) .......................... (11,580) 207 Amortization of goodwill and other intangible items ........... -- -- -------- -------- Equity in net income (loss) of unconsolidated Wireless operating companies .............................. $(11,580) $ 207 ======== ========
F-14 19 As of August 31, 1998, the Leap Wireless Operating Companies had not commenced commercial revenue generating operations. Any income derived resulted principally from earnings on investments and cash. Chase Telecommunications, Inc. In December 1996, the Company purchased $4 million of Chase Telecommunications, Inc. ("Chase"), a development stage company, Class B Common Stock, representing 7.2% of the outstanding capital stock of Chase. The Company is accounting for its investment under the cost method of accounting. It is not practicable to estimate the fair value of the investment as Chase is a closely held domestic corporation and is not publicly traded. 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 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 August 31, 1998, borrowings under the facility totaled $12.1 million, including $307,000 of accrued interest. The Company has committed, subject to certain conditions and exceptions, to convert the facility into $25 million of redeemable preferred stock in Chase. The Company received warrants, in connection with this financing, to acquire up to an additional 8.5% of the currently outstanding Chase equity. Although Chase has commenced limited commercial operations, it is a development stage company that will require significant financing to expand its Personal Communications Services ("PCS") network build-out and to meet its payment obligations relating to the purchase of PCS licenses covering the Tennessee region from the FCC. Chase's failure to obtain sufficient financing or to meet its obligations to the FCC could adversely affect the value of the Company's investment in Chase. There can be no assurance that Chase will be successful in obtaining sufficient financing for its network build-out or in meeting its payment obligations to the FCC. Chilesat Telefonia Personal, S.A. In February 1997, the Company entered into a subscription and shareholders agreement to purchase $42 million of voting preferred shares representing 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 QUALCOMM Chile, S.A. ("Inversiones QUALCOMM"), which held no other assets and had no liabilities as of August 31, 1998. 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 preferred shares are entitled to a liquidation preference equal to the original purchase price per share if Chilesat PCS is liquidated by April 2003. The Company accounts for its investment under the equity method of accounting. As of August 31, 1998, Chilesat PCS had completed its initial network build-out, but operational activity was not significant. The Company recorded $3.1 million in equity losses resulting from this investment during fiscal 1998 and $207,000 in equity income during fiscal 1997 During June 1998, the Company and Inversiones QUALCOMM 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 QUALCOMM would hold voting shares of approximately 65% of Chilesat PCS. This conversion is available to the Company and Inversiones QUALCOMM only if the loans are not repaid on or before January 31, 1999. Chilesat PCS currently contemplates that it will issue a $35 million capital call by January 1999 which may be used to repay the convertible loan or to provide for additional operating expenses. If Telex-Chile makes at least a $17.5 million cash contribution before January 31, 1999 pursuant to such capital call, the Company and Inversiones QUALCOMM have committed to F-15 20 convert $17.5 million of the short-term loans to equity. At August 31, 1998, borrowings under the loan totaled $25.2 million. Telex-Chile has been unable to make principal repayments on its outstanding loans and is under standstill agreements with many of its significant lenders. However, Telex-Chile has informed the Company that it has the intention to, and will have the ability to, fund its $17.5 million portion of the capital call prior to January 31, 1999. Under its licensing agreement with the Chilean government, Chilesat PCS is obligated to meet certain network build-out milestones by December 1998 and has provided a $58 million letter of credit to support the payment of government fines if the build-out milestones are not met. The Company has guaranteed reimbursement to the issuing bank of the Company's proportional share, based on its ownership interest, of any government fines paid under the letter of credit. Additionally, the Company has pledged its shares in Chilesat PCS to the issuing bank as collateral for the letter of credit facility. In the event the failure to meet the network build-out milestones are the direct result of QUALCOMM's failure to supply and install equipment under its existing supply contract, QUALCOMM may be required to reimburse the Company its portion of the fine. Pegaso Telecomunicaciones, S.A. de C.V. In April 1998, the Company, through a wholly-owned subsidiary, QUALCOMM PCS Mexico, Inc., entered into a joint venture agreement pursuant to which it obtained a 49% ownership interest in a newly formed development stage company, Pegaso Telecomunicaciones, S.A. de C.V. ("PEGASO"), a Mexico corporation. In May of 1998, PEGASO obtained the right to acquire PCS licenses throughout Mexico. During 1998, the Company advanced a portion of PEGASO's start-up working capital requirements, including expenses incurred during the PCS spectrum auction. At August 31, 1998, advances totaled $11.1 million. As a result of start-up expenses incurred by PEGASO, the Company reported $2.4 million in equity losses during fiscal 1998. In addition to the advances of working capital, in June 1998, the Company 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 will accrue at a rate of 10% and has been added to the principal amount of the loan outstanding. The Company converted the advances and the loan including accrued interest into common stock in September 1998 (see Note 8). QUALCOMM Telecommunications Ltd., Cayman Islands During October 1997, the Company became a 70% common owner in a start-up joint venture, QUALCOMM Telecommunications Ltd. ("QUALCOMMTel Cayman"), a Cayman Islands corporation. Upon its formation, QUALCOMMTel Cayman had no significant assets or liabilities. The 30% minority interest is held by Tiller International Limited ("Tiller"), a private investment company. In the event that QUALCOMMTel Cayman makes a capital call on its stockholders to provide equity contributions, at the request of Tiller, the Company is required to fund 100% of Tiller's share of the equity contributions. Such advances by the Company for Tiller are collateralized by Tiller's shares in QUALCOMMTel Cayman and carry an interest rate of LIBOR plus 3% with principal and interest to be repayable from 80% of future net earnings of QUALCOMMTel Cayman. QUALCOMMTel Cayman is intended to be an intermediate holding company to facilitate the Company's business prospects for wireless local loop (fixed) telephone service in the Russian Federation. In August 1998, QUALCOMMTel Cayman became a 50% owner and partner in Metrosvyaz Limited ("Metrosvyaz"), a newly-formed joint venture with Teletal Limited ("Teletal"). As of the F-16 21 formation, Metrosvyaz had no assets or liabilities and no historical operating activity. Concurrent with the formation of Metrosvyaz, QUALCOMM 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. The $175 million facility is related to a $500 million financing commitment entered into by QUALCOMM in February 1998. As of the Distribution Date, QUALCOMMTel Cayman has assumed $72.4 million of the $175 million financing obligation from QUALCOMM. Furthermore, of the original $500 million commitment, the Company expects that $150 million of financing will be provided by QUALCOMMTel Cayman, with the remaining $350 million to be provided by QUALCOMM as vendor financing. The $175 million facility carries a 13% interest rate and borrowings are generally repayable approximately four 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 1998, QUALCOMMTel Cayman 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. Because the loan facility from QUALCOMMTel Cayman is the only source of working capital for Metrosvyaz at this time, and because the equity of QUALCOMMTel Cayman is 100% funded by the Company, the Company will fully consolidate the net earnings and losses of Metrosvyaz until such time the Company recoups its investment. Accordingly, and as a direct result of these start-up costs, the Company recorded $6.1 million in equity losses resulting from its investment during fiscal 1998. QUALCOMM Telecommunications Ltd., Isle of Man In August 1998, the Company became a 70% common owner in a start-up joint venture, 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"). The 30% minority interest of QUALCOMMTel Isle of Man not owned by the Company is held by Tiller and the 50% of Orrengrove not held by QUALCOMMTel Isle of Man is held by Teletal. In August 1998, Orrengrove purchased 60% of the common stock of Transworld Telecommunications, Inc., Transworld Communications Services, Inc., and Transworld Communications (Bermuda), Ltd. (the "Transworld Companies") for an aggregate purchase price of $51.8 million. The Transworld Companies together are telecommunications companies in the development stage formed in part to help create a modern telecommunications infrastructure for the Russian Federation and the countries of the former East Bloc. The Transworld Companies have developed and are completing the installation of a satellite-based communications system for long-distance voice, video and data services using their exclusive rights to Russian Loutch II satellite capacity. Orrengrove will account for the acquisition under the purchase method of accounting. Because the Company funded the acquisition of the Transworld Companies in the form of a promissory note with Orrengrove, and because the equity of QUALCOMMTel Isle of Man is 100% funded by the Company, the Company will fully consolidate the net earnings and losses of Orrengrove until such time the Company recoups its investment. NOTE 3. OTHER ASSETS In June 1998, the Company purchased all the shares of OzPhone Pty Limited ("OzPhone"), an Australian company, for $564,000. OzPhone then acquired several wireless communication licenses to provide digital mobile and wireless local loop services in Australia. The total cost of the licenses was approximately $6.2 million. F-17 22 NOTE 4. EMPLOYEE BENEFIT PLANS Prior to August 31, 1998, the Company did not have any employees dedicated solely to its affairs. QUALCOMM employees who expended efforts on behalf of the Company participated in QUALCOMM employee benefit plans. The Company has formed employee benefit plans including an equity incentive plan which will provide for the grant of various types of equity-based compensation to employees of the Company, an incentive stock option plan, a non-qualified stock option plan and a non-employee directors' stock option plan to provide for the grant of options to purchase shares of the Company's Common Stock to non-employee directors of the Company (See Note 9). NOTE 5. INCOME TAXES The Company has not recorded provisions for federal and state income taxes for fiscal 1998, 1997 and 1996 due to net operating losses ("NOL") during those years. The Company will not be able to utilize NOL carryforwards generated prior to the Distribution, as such NOLs will remain with QUALCOMM. At August 31, 1998, 1997 and 1996, the Company had total deferred tax assets of approximately $14.5 million, $0.6 million and $0.2 million, respectively, which consisted of NOL carryforwards. Due to the uncertainty surrounding the ultimate realization of such deferred tax assets, the Company has provided a valuation allowance for the entire balance. At August 31, 1998, the Company had NOL carryforwards available to offset future income for federal income tax reporting purposes of approximately $10.7 million, $0.4 million and $0.1 million, which expire in years 2017, 2011 and 2010, respectively. State NOL carryforwards of approximately $3.2 million and $0.1 million at August 31, 1998 expire in years 2002 and 2001, respectively. NOTE 6. LOAN PAYABLE TO BANK In July 1998, Inversiones QUALCOMM borrowed $9.0 million under a note payable to a bank in Chile. The note bears interest at a rate of 8.56% per annum and all amounts borrowed are due to be repaid by February 1999. NOTE 7. 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 August 31, 1998, these commitments totaled approximately $150.3 million. Prior to the Distribution, these commitments were funded by QUALCOMM. Upon Distribution, the Company expects to fund its commitments with borrowings under the Credit Facility. The Company has entered into an agreement to lease its facility and certain equipment under non-cancelable operating leases, with terms ranging from five to seven years. Future minimum lease payments in each of the next five years from fiscal 1999 through 2003 are approximately $700,000 each year, and $1.3 million cumulative thereafter. F-18 23 NOTE 8. SUBSEQUENT EVENTS, PRIOR TO THE DISTRIBUTION In September 1998, Inversiones QUALCOMM funded an additional $3.4 million under its loan agreement with Chilesat PCS utilizing additional bank debt. As of the Distribution Date, the Company and Inversiones QUALCOMM had loans totaling $28.6 million to Chilesat PCS, with remaining commitments to fund $6.4 million. 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 has been diluted from 49% to 33%. 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 bears interest at the rate of 13% per annum. The first principal installment of $7.5 million, plus accrued interest, was repaid on October 29, 1998 as scheduled, and the second principal installment of $10 million, plus accrued interest, is due on or before December 31, 1998. The purpose of the Pegaso 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, 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. The Pegaso Loan is guaranteed by Mr. Burillo and is secured by a pledge of all of the shares of Pegaso Comunicaciones y Servicios, S.A. de C.V. and Mr. Burillo's interest in an unrelated joint venture with QUALCOMM to operate a satellite tracking, management and two-way communications systems for the trucking industry in Mexico. In September 1998, QUALCOMTel Cayman invested $3.1 million of equity in Metrosvyaz. In addition, the Company made an additional loan of $10.7 million under its loan facility with Metrosvyaz. As of the Distribution Date, QUALCOMMTel Cayman had loans totaling $17.3 million to Metrosvyaz, with a remaining commitment of $55.1 million. NOTE 9. SUBSEQUENT EVENTS, POST DISTRIBUTION During October and November 1998, Chase borrowed an additional $8.6 million under the working capital facility it has with the Company. Borrowings by Chase to date total $20.4 million, with a remaining loan commitment of $4.6 million. In November 1998, Inversiones QUALCOMM funded the remaining $3.3 million under its loan agreement with Chilesat PCS utilizing additional bank debt. The Company has a remaining commitment of $3.1 million under its loan agreement with Chilesat PCS. The Company has made borrowings under the Credit Facility with QUALCOMM subsequent to the Distribution Date. In September 1998, the Company borrowed $5.3 million under the working capital sub-facility to pay QUALCOMM the 2% fee on the $265 million facility. The Company also borrowed a net total of $15.8 million under the investment capital sub-facility to make further investment and loans to certain of the Leap Wireless Operating Companies. F-19 24 Adoption of Employee Benefit Plans Employee Savings and Retirement Plan. In September 1998, the Company adopted a 401(k) plan that allows eligible employees to contribute up to 15% of their salary, subject to annual limits. The Company matches a portion of the employee contributions and may, at its discretion, make additional contributions based upon earnings. Stock Option Plans. In September 1998, the Company adopted the 1998 Stock Option Plan ("the Plan") that allows the Board of Directors to grant options to selected employees, directors and consultants to the Company to purchase shares of the Company's common stock. The Plan provides for the grant of both incentive and non-qualified stock options. Incentive stock options are exercisable at a price not less than 100% of the fair market value of the common stock on the date of grant. Non-qualified stock options are exercisable at a price not less than 85% of the fair market value of the common stock on the date of grant. Generally, options vest over a five year period and are exercisable for up to ten years from the grant date. The Company also adopted a Non-Employee Directors Stock Option Plan, under which options to purchase common stock are granted to non-employee directors on an annual basis. The options are exercisable at a price equal to the fair market value of the common stock on the date of grant, vest over a five year period and are exercisable for up to ten years from the grant date. Employee Stock Purchase Plan. In September 1998, the Company adopted an employee stock purchase plan for all eligible employees to purchase shares of common stock at 85% of the lower of the fair market value of such stock on the first or the last day of each offering period. Employees may authorize the Company to withhold up to 15% of their compensation during any offering period, subject to certain limitations. Executive Retirement Plan. In September 1998, the Company adopted a voluntary retirement plan that allows eligible executives to defer up to 100% of their income on a pretax basis. On a quarterly basis, participants receive up to a 10% match of their deferral in the form of the Company's common stock based on the then current market price, to be issued to the participant upon eligible retirement. The income deferred and the Company match are unsecured and subject to the claims of general creditors of the Company. Note 10. Subsequent Events (unaudited) Chase Telecommunications, Inc. 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. Chilesat Telefonia Personal, S.A. On April 19, 1999, a wholly-owned subsidiary of the Company acquired all of the shares of Chilesat PCS that it did not already own from Telex-Chile. Prior to the acquisition, the Company's wholly-owned subsidiary, Inversiones Leap Wireless Chile S.A., formerly named Inversiones QUALCOMM Chile, S.A. ("Leap Chile") owned 50% of the shares of Chilesat PCS. The remaining 50% of the shares of Chilesat PCS were owned by Telex-Chile. F-20 25 Leap Chile acquired the shares from Telex-Chile for (1) a cash payment of $28 million, and (2) the issuance of a $22 million, non-interest bearing note payable to Telex-Chile on April 19, 2002. The Company obtained $28 million for the cash payment to Telex-Chile through a loan under the Company's $265 million revolving credit agreement with QUALCOMM. The Company intends that Chilesat PCS continue to operate its wireless telephone system in Chile and work to expand its network capacity and increase its business. Orrengrove Investments Ltd. On April 5, 1999, the Transworld Companies, partially owned subsidiaries of Orrengrove, were notified by Mercury, provider of the satellite signal transmission capacity, that there was an operational failure of all transponders on the Loutch II satellite. Mercury's prognosis indicates that the transponders' operational status will not be restored. Although Mercury has guaranteed the satellite signal transmission capacity, the outcome at this time remains uncertain. The Transworld Companies have already identified and put into operation a short-term terrestrial transmission solution by leasing fiber capacity from a third party. Long-term alternative transmission sources are being explored, including the use of expanded terrestrial fiber capacity and/or satellite signal transmission capacity. Orrengrove would experience a material adverse effect on its financial position, results of operations, and cash flows if the satellite signal transmission capacity is not replaced by Mercury and if the Transworld Companies are not able to implement a long-term alternative transmission source. Should a long term terrestrial transmission source be employed, certain satellite related assets may be impaired. F-21 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Chilesat Telefonia Personal S.A. (Company in the development stage) In our opinion, the accompanying balance sheets and the related statements of income and comprehensive income, of cash flows and of changes in shareholders' equity present fairly, in all material respects, the financial position of Chilesat Telefonia Personal S.A. (Company in the development stage) at December 31, 1998 and 1997, and the results of its operations and cash flows for year ended December 31, 1998 and for the period from inception (March 3, 1997) to December 31, 1997, in conformity with generally accepted accounting principles of the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards of the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. At December 31, 1998, the Company had negative working capital of US$ 49.7 million. At that date, US$ 36.6 million of the current liabilities relate to debt payable to related parties who have the option to convert such debt into shares should Chilesat Telefonia Personal S.A. be unable to meet its obligations. As a result of its negative working capital, the Company has not complied with certain financial conditions of the credit agreement described in Note 8. PRICE WATERHOUSE Santiago, Chile, February 25, 1999 except as to Note 14 b) which is as of March 16, 1999 F-22 27 CHILESAT TELEFONIA PERSONAL S.A. (Company in the development stage) BALANCE SHEET Expressed in thousands of US Dollars
As of December 31, 1998 1997 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 942 $ 24,875 Accounts receivable - trade 1,017 -- Accounts receivable from related company -- 10 Other accounts receivable 134 133 Recoverable taxes 6,480 6,228 Inventories 4,419 -- Other current assets 779 695 --------- --------- Total current assets 13,771 31,941 PROPERTY, PLANT AND EQUIPMENT, NET 124,800 40,093 OTHER ASSETS 712 4 --------- --------- Total assets $ 139,283 $ 72,038 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Interest payable to related companies $ 6,957 $ 543 Accounts payable 1,804 380 Accounts and notes payable to related companies 52,572 247 Accrued liabilities and withholdings 2,160 960 --------- --------- Total current liabilities 63,493 2,130 --------- --------- LONG - TERM LIABILITIES Note payable to related company 49,807 23,655 Other long-term liabilities 8,496 4,579 --------- --------- Total long-term liabilities 58,303 28,234 --------- --------- COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Preferred stock (8,400,000 shares authorized, issued and outstanding, with no par value; liquidation preference up to stated value) 42,000 42,000 Common stock (8,400,000 shares authorized, issued and outstanding, with no par value) 1,964 1,964 Other capital contributions 493 -- (Deficit) surplus accumulated during the development stage (21,943) 55 Accumulated other comprehensive losses (5,027) (2,345) --------- --------- Total shareholders' equity 17,487 41,674 --------- --------- Total liabilities and shareholders' equity $ 139,283 $ 72,038 ========= =========
The accompanying Notes 1 to 14 form an integral part of these financial statements. F-23 28 CHILESAT TELEFONIA PERSONAL S.A. (Company in the development stage) STATEMENT OF INCOME AND COMPREHENSIVE INCOME Expressed in thousands of US Dollars
For the period For the period from inception from inception For the year ended (March 3, 1997) (March 3, 1997) December 31, to December 31, to December 31, 1998 1997 1998 ------------------ --------------- ---------------- OPERATING RESULTS Sales $ 1,284 $ -- $ 1,284 Cost of sales (1,570) -- (1,570) -------- -------- -------- Gross margin (286) -- (286) -------- -------- -------- Remunerations and other staff costs (3,916) -- (3,916) Sales commissions (882) -- (882) Marketing expenses (3,619) -- (3,619) General and administrative expenses (2,736) (659) (3,395) Depreciation and amortization (3,743) (4) (3,747) -------- -------- -------- Net operating loss (15,182) (663) (15,845) -------- -------- -------- NON-OPERATING RESULTS Interest income 1,058 2,022 3,080 Interest expense (3,295) -- (3,295) Currency exchange losses (4,186) (1,280) (5,466) Other expenses (393) (24) (417) -------- -------- -------- Non-operating (loss) income (6,816) 718 (6,098) -------- -------- -------- Net (loss) income (21,998) 55 (21,943) OTHER COMPREHENSIVE INCOME Currency translation adjustment (2,682) (2,345) (5,027) -------- -------- -------- Comprehensive loss $(24,680) $ (2,290) $(26,970) ======== ======== ========
The accompanying Notes 1 to 14 form an integral part of these financial statements. F-24 29 CHILESAT TELEFONIA PERSONAL S.A. (Company in the development stage) STATEMENT OF CASH FLOWS Expressed in thousands of US Dollars
For the period For the period For the from inception from inception year ended (March 3, 1997) (March 3, 1997) December 31, to December 31, to December 31, 1998 1997 1998 ------------ --------------- --------------- CASH FLOW FROM OPERATING ACTIVITIES Net (loss) income $(21,998) $ 55 $(21,943) Adjustments to reconcile to net cash used in operating activities: Depreciation and amortization 3,743 4 3,747 Use of the network and signal distribution services 493 -- 493 Changes in working capital: Accounts receivable - trade (1,017) -- (1,017) Accounts receivable from related companies 10 (10) -- Other accounts receivable (1) (133) (134) Recoverable taxes (252) (6,171) (6,423) Other current assets (118) (695) (813) Accounts payable 1,424 380 1,804 Accrued interest and accounts payable to related companies 7,168 511 7,679 Accrued liabilities and withholdings 1,200 957 2,157 -------- -------- -------- Cash flow used in operating activities (9,348) (5,102) (14,450) -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment (37,766) (14,383) (52,149) Other (708) (4) (712) -------- -------- -------- Cash flow used in investing activities (38,474) (14,387) (52,861) -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Notes payable to related companies 20,271 -- 20,271 Capital increase -- 42,000 42,000 Other long-term liabilities 3,917 4,579 8,496 -------- -------- -------- Cash flow provided by financing activities 24,188 46,579 70,767 -------- -------- -------- Net (decrease) increase in cash (23,634) 27,090 3,456 Effect of exchange rate changes on cash (299) (2,215) (2,514) -------- -------- -------- (Decrease) increase in cash and cash equivalents (23,933) 24,875 942 Cash and cash equivalents at the beginning of the period 24,875 -- -- -------- -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 942 $ 24,875 $ 942 ======== ======== ========
The accompanying Notes 1 to 14 form an integral part of these financial statements. F-25 30 CHILESAT TELEFONIA PERSONAL S.A. (Company in the development stage) STATEMENT OF CASH FLOWS Expressed in thousands of US Dollars SUPPLEMENTAL CASH FLOW INFORMATION Interest paid 695 923 1,618 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
The following non-cash transactions occurred during the periods presented:
For the period from For the year ended inception (March 3, 1997) December 31, to December 31, 1998 1997 ------------------ ------------------------ Long--term financing received from related company to purchase fixed assets and inventories $ 14,745 $ 23,655 Short--term financing received from related company to purchase fixed assets and inventories 42,707 -- Purchase of fixed assets from party providing financing (53,067) (23,655) Purchase of inventories from party providing financing (4,385) -- $ -- $ -- ======== ========
As indicated in Note 1, Chilesat S.A. contributed non-cash assets and liabilities to the joint venture on March 3, 1997. The net assets contributed at that date are summarized as follows: Current assets $ 57 Property, plant and equipment 2,189 Current liabilities (282) ------- Net assets contributed $ 1,964 =======
The accompanying Notes 1 to 14 form an integral part of these financial statements. F-26 31 CHILESAT TELEFONIA PERSONAL S.A. (Company in the development stage) STATEMENT OF SHAREHOLDERS' EQUITY Expressed in thousands of US Dollars
(Deficit) surplus accumulated Accumulated Number of Number of Other during the other preferred common Preferred Common capital development comprehensive shares shares stock stock contributions stage losses Total --------- --------- --------- --------- ------------- ----------- ------------- --------- Capital increase at inception on March 3, 1997 8,400,000 8,400,000 $ 42,000 $ 1,964 -- -- -- $ 43,964 Share subscriptions receivable -- -- (42,000) -- -- -- -- (42,000) Payment of share subscriptions receivable -- -- 42,000 -- -- -- -- 42,000 Net income for the period -- -- -- -- -- $ 55 -- 55 Currency translation adjustment -- -- -- -- -- -- $ (2,345) (2,345) --------- --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 8,400,000 8,400,000 $ 42,000 $ 1,964 -- $ 55 $ (2,345) $ 41,674 ========= ========= ========= ========= ========= ========= ========= ========= Balance at January 1, 1998 8,400,000 8,400,000 $ 42,000 $ 1,964 -- $ 55 $ (2,345) $ 41,674 Other contributed capital -- -- -- -- $ 493 -- -- 493 Net loss for the period -- -- -- -- -- (21,998) -- (21,998) Currency translation adjustment -- -- -- -- -- -- (2,682) (2,682) --------- --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1998 8,400,000 8,400,000 $ 42,000 $ 1,964 $ 493 $ (21,943) $ (5,027) $ 17,487 ========= ========= ========= ========= ========= ========= ========= =========
The accompanying Notes 1 to 14 form an integral part of these financial statements. F-27 32 CHILESAT TELEFONIA PERSONAL S.A. (Company in the development stage) NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1. THE COMPANY Chilesat Telefonia Personal S.A. (the "Company") is a joint venture created on March 3, 1997 by Telex-Chile S.A. and its subsidiary Chilesat S.A. (together "Chilesat") and Inversiones Leap Wireless Chile S.A. ("Inversiones", formerly Inversiones Qualcomm S.A.) for the purpose of building and operating a mobile PCS telephone system (personal communication system) in Chile. Inversiones is a wholly-owned subsidiary of Leap Wireless International, Inc. Pursuant to the terms of the Subscription and Shareholders' Agreement ("Shareholders' Agreement"), Chilesat and Inversiones hold all of the outstanding common and preferred shares of the Company, respectively. Each partner has a 50% ownership in the joint venture. Each partner has the right to elect two representatives to the Board of Directors and a fifth independent director is elected by a vote of at least 75% of the shareholders. Approval of 4/5 of the directors is required for a number of significant operating and management decisions. The common directors are entitled to nominate the general manager, and the preferred directors are entitled to nominate the CFO. However, approval of the nominations requires approval by 4/5 of the directors. During 1998, an amendment was made to the Shareholders' Agreement and Qualcomm Incorporated transferred and assigned its interest in Inversiones to Leap Wireless International, Inc. All terms and conditions of the shareholders agreement are now binding on Leap Wireless International Inc. Because Chilesat's contributions to the joint venture were non-cash assets and liabilities whose fair values were not readily determinable, the non-cash assets and liabilities contributed were recorded at their predecessor basis. As one of the non-cash assets contributed, Chilesat provided a contract entitling the Company to the right to use a part of Chilesat's network for a period of 11.5 years and the right to receive signal distribution services for the same period. The contract is for the Company's sole and exclusive use of signal transmissions. Chilesat is responsible for meeting the Company's transmission requirements as well as the supervision, control, maintenance and repair of the network. Chilesat also contributed the already existing entity Chilesat Telefonia Personal S.A., among whose assets was the PCS license to operate in Chile. The Company is the holder of one of three national licenses to provide PCS services in Chile. These services were required to be ready for operations under the conditions of the license by June 23, 1998 in the case of the geographical area covered by Chile's Fourth to Tenth regions and by December 23, 1998 for the remainder of the country. The Company completed construction of its mobile PCS telephone system infrastructure by the required dates. The Company entered into a System Equipment Purchase Agreement with Qualcomm Incorporated whereby Qualcomm Incorporated will provide manufacturing, engineering, equipping, integrating, installing, testing and technical assistance for the mobile PCS telephone system. Under the terms of the Shareholders' Agreement, the Company will purchase from Qualcomm Incorporated all network hardware and software marketed by Qualcomm Incorporated and at least F-28 33 50% of all mobile and fixed handsets purchased by the Company for a period expiring in September 2000. Similarly, until the later of five years following the formation of the joint venture or the date on which Inversiones ceases to hold preferred shares representing more than 24% of the capital stock of the Company, the Shareholders agree to cause the Company to use only IS95 CDMA technology. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) General Chilesat Telefonia Personal S.A. is a development stage company as defined in accordance with Statement of Financial Accounting Standards No. 7 due to the fact that the Company has not yet generated significant revenues from commercial operations. As indicated in Note 1, the Company has completed the construction of its mobile PCS telephone system infrastructure and testing of the installations between Chile's Fourth and Tenth regions with friendly users commenced in July, 1998. The mobile PCS telephone system began operations in September, 1998. The infrastructure necessary to cover the remainder of Chile was operational in December 1998. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP"). The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. b) Period of financial statements The financial statements for the Company are presented for the year ended December 31, 1998 with comparative amounts for the period from the date of formation of the joint venture on March 3, 1997 through December 31, 1997. c) Translation of the Chilean peso financial statements The financial statements give effect to the translation of the Chilean peso financial statements of the Company (not submitted herewith) to United States dollars. All asset and liability accounts have been translated (after eliminating the effects of accounting for inflation in Chile) at the Observed Exchange Rates determined by the Central Bank of Chile at December 31, 1998 and 1997 of Ch$ 472.41 and Ch$ 439.18 per US$ 1, respectively. Capital stock has been translated at historic Observed Exchange Rates. Income and expense accounts have been translated at average monthly Observed Exchange Rates. The net effects of translation are recorded in the cumulative translation adjustment account as a component of Accumulated other comprehensive losses in the Company's equity. d) Monetary assets and liabilities in other currencies Monetary assets and liabilities denominated in foreign currency have been translated at year-end exchange rates. The effects of such translation have been recorded as exchange gains or losses in the statement of income. Certain assets and liabilities are denominated in UFs (Unidades de Fomento). The UF is a Chilean inflation-indexed, peso-denominated monetary unit which is set daily in advance based on changes in the Consumer Price Index. The adjustment to the closing value of UF-denominated assets and liabilities have also been recorded as part of Currency exchange losses in the statement of income. F-29 34 e) Revenue recognition Revenue has been accrued at year end for the portion of fixed charge services earned to date. The Company also recognizes revenues for traffic in excess of the amounts attributable to the fixed charge contracts in the month such revenues are billed. The effects of the unbilled revenues at period end not recognized are not significant. f) Uncollectable accounts The Company records an allowance for uncollectable accounts receivable with respect to those amounts estimated not to be recoverable. g) Inventory Inventory is comprised of handsets and accessories not yet placed into service which are stated at the lower of historical cost, determined under a first-in, first-out unit flow assumption, or market. h) Property, plant and equipment Property, plant and equipment are recorded at acquisition cost plus capitalized interest and direct costs incurred during the construction phase of the mobile PCS telephone system. Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service. Depreciation with respect to the infrastructure of the mobile PCS telephone system was applied beginning in September 1998. i) Advertising It is the Company's policy to record the cost of advertising as it is incurred. For the year ended December 31, 1998, the Company recorded US$ 3,619,000 (US$ 338,000 in 1997) as advertising expense. j) Income taxes Income taxes have been recorded in accordance with Statement of Financial Accounting Standards No. 109 (FAS 109). Income taxes payable for the current year are recorded in current liabilities, if applicable. Future taxes arising from differences between the amounts shown for assets and liabilities in the balance sheet and the tax basis of those assets and liabilities at the balance sheet date have been recorded as deferred income taxes. Deferred income tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. k) Long-lived assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. F-30 35 l) Network use and signal distribution services It is the Company's policy to systematically recognize expense for the use of the network and signal distribution services provided by a related party as per an independent valuation on a straight-line basis over the remaining life of the contract as other capital contributions (Note 11 c). m) Cash equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents, including securities purchased under resale agreements. Securities purchased under agreements to resell include investments in instruments issued by the Central Bank of Chile acquired under resale agreements, and are stated at cost plus accrued interest. Cash and cash equivalents are summarized as follows:
AS OF DECEMBER 31, 1998 1997 ------- ------- Cash and bank deposits $ 452 $ 899 Time deposits 490 10,195 Securities purchased under agreements to resell (Note 3) -- 13,736 Other -- 45 ------- ------- $ 942 $24,875 ======= =======
n) Recent accounting pronouncements Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities, is effective for fiscal years beginning after June 15, 2000. This standard establishes accounting and reporting standards for derivatives instruments, and for hedging activities. It requires that an entity recognize all derivatives on the balance sheet at fair value. Generally, changes in the fair value of derivatives must be recognized in income when they occur, the only exception being derivatives that qualify as hedges in accordance with the Standards. If a derivative qualifies as a hedge, a company can elect to use "hedge accounting" to eliminate or reduce the income-statement volatility that would arise from reporting changes in a derivative's fair value in income. The type of accounting to be applied varies depending on the nature of the exposure that is being hedged. In some cases, income-statement volatility is avoided by an entity's recording changes in the fair value of the derivative directly in shareholders' equity. In other cases, changes in the fair value of the derivative continue to be reported in earnings as they occur, but the impact is counterbalanced by the entity adjusting the carrying value of the asset or liability that is being hedged. This standard is not expected to have an effect on the reporting of the Company for the year ended December 31, 1998 and period ended December 31, 1997 as it did not hold derivative instruments during such periods. The effects of FAS 133 in future periods will depend upon whether the Company enters into transactions in such periods involving derivative instruments. F-31 36 NOTE 3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL At December 31, 1998, the Company held no securities purchased under agreements to resell. Securities purchased under agreements to resell at December 31, 1997 are summarized as follows:
UNDERLYING FINANCIAL INSTITUTION FINANCIAL INSTRUMENT AMOUNT MATURITY DATE - --------------------- -------------------- ------ ----------------- Banco de A. Edwards Central Bank of Chile Debentures $ 6,417 February 10, 1998 Banco de A. Edwards Central Bank of Chile Debentures 6,491 February 12, 1998 Banco de A. Edwards Central Bank of Chile Debentures 828 February 19, 1998 -------- Total $ 13,736 ========
At December 31, 1997, the underlying financial instruments were in the custody of the counter party to the agreements. Central Bank of Chile Debentures are generally considered to be low-risk securities and are generally not subject to significant market volatility. NOTE 4. RECOVERABLE TAXES Recoverable taxes at December 31, 1998 relate to value added taxes (VAT) of US$ 6,480,000 (US$ 6,228,000 in 1997), incurred on the purchases of property, plant and equipment required for the Company's mobile PCS telephone system and goods and services. VAT relating to the purchases of capital goods may be recovered in cash by the Company in accordance with Chilean law. Other VAT is recovered by offset against VAT raised on services rendered. NOTE 5. INVENTORY Inventory as of December 31, 1998 is summarized as follows: Handsets $3,137 Accessories 1,282 ------ $4,419 ======
F-32 37 NOTE 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows:
AS OF DECEMBER 31, ---------------------------- 1998 1997 --------- --------- Land $ 340 $ 140 Buildings and infrastructure 114,926 39,771 Machinery and equipment 1,555 88 Handsets 8,583 -- Other 3,100 98 Less: Accumulated depreciation (3,704) (4) -------- ------- Total net $124,800 $40,093 ======== =======
Estimated useful lives of assets are:
YEARS ----- Machinery and equipment 10 Handsets 2 Other 5-10
For the year ended December 31, 1998, the Company capitalized US$ 4,830,000 (US$ 1,508,000 in 1997) of interest as part of the cost of construction of the mobile PCS Telephone System. NOTE 7. ACCRUED LIABILITIES AND WITHHOLDINGS Accrued liabilities and withholdings are summarized as follows:
AS OF DECEMBER 31, 1998 1997 ------ ---- Construction in progress $1,365 $597 Advertising and marketing expenses 321 278 Employee vacations 203 33 Other 271 52 ------ ---- Total $2,160 $960 ====== ====
F-33 38 NOTE 8. RELATED COMPANY TRANSACTIONS a) Balances with related companies and Qualcomm Incorporated
COMPANY RELATIONSHIP 1998 1997 ------- ------------ ------- -------- Accounts receivable from related company: Chilesat Servicios Empresariales S.A Affiliate $ -- $ 10 ======== ======== Interest payable to related companies: Qualcomm Incorporated(1) -- $ (5,326) $ (543) Leap Wireless International, Inc. Affiliate (528) -- Inversiones Leap Wireless Chile S.A Shareholder (1,103) -- -------- -------- $ (6,957) $ (543) ======== ======== Accounts and notes payable to related companies: Chilesat Servicios Empresariales S.A Affiliate $ (134) $ -- Chilesat S.A Shareholder (733) (196) Qualcomm Incorporated(1) -- (16,555) -- Leap Wireless International, Inc. Affiliate (14,745) -- Inversiones Leap Wireless Chile S.A Shareholder (20,271) -- Telex-Chile S.A Shareholder (29) (12) Telsys S.A Affiliate (105) (39) -------- -------- $(52,572) $ (247) ======== ======== Note payable to related company - long-term: Qualcomm Incorporated(1) -- $(49,807) $(23,655) ======== ========
- --------------------- (1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998. F-34 39 b) Related company transactions
AMOUNT OF TRANSACTIONS ------------------------- COMPANY RELATIONSHIP TRANSACTION 1998 1997 ------- ------------ ----------- ---- ---- Chilesat Servicios Empresariales S.A. Affiliate Reimbursement of costs incurred on their behalf $ -- $ 47 Reimbursement of costs incurred in connection with construction 130 -- Chilesat S.A. Shareholder Reimbursement of costs incurred in connection with construction 586 589 Rental of office space 171 30 Leap Wireless International, Inc. Affiliate Financing of purchases from Qualcomm Inc. 14,745 -- Accrued interest on note payable 528 -- Inversiones Leap Wireless Chile S.A. Shareholder Financing 20,271 -- Accrued interest on note payable 1,103 -- Telex-Chile S.A. Shareholder Reimbursement of costs incurred in connection with construction 29 49 Telsys S.A. Affiliate Computer services 965 39 c) Transactions with Qualcomm Incorporated Qualcomm Incorporated(1) Purchase of equipment and inventory $57,452 $23,655 Financing of purchases 42,707 23,655 Accrued interest on note payable 4,783 543
- --------------- (1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998. F-35 40 d) Notes payable to Qualcomm Incorporated and related companies As a means of financing the purchase of infrastructure equipment from Qualcomm Incorporated, the Company entered into a Deferred Payment Agreement whereby Qualcomm Incorporated defers collection for the equipment subject to the terms and conditions set forth in the Agreement. The assets of the Company collateralize the obligation. The shares of the Company have also been pledged by Telex-Chile and Chilesat in guaranty of the note payable to Qualcomm Incorporated. Under the terms of the agreement, Qualcomm Incorporated will make loans for the equipment, software and services it provides to the Company up to a maximum of US$59.5 million. The original Deferred Payment Agreement was amended on June 24, 1998 to allow for an additional commitment of US$14.7 million of principal as a means of financing of goods and services relating to the PCS system and US$ 25.0 million of principal as a means of financing the acquisition of subscriber equipment. The rest of the terms and conditions outlined in the original Deferred Payment Agreement remain unchanged. Loans bear interest based either upon a LIBOR or Base Rate or the Eurodollar. The obligation to repay these loans and interest is evidenced by promissory notes. Interest accrues on the principal but remains unpaid, with accrued interest added monthly to the outstanding principal amount of the applicable loan until the first principal payment, at which time interest is payable on the same dates as the principal payments. Principal and interest on the US$14.7 million is due in full on January 31, 1999. In addition, a conversion right, discussed below, was added to the agreement relating to this amount. This commitment was subsequently transferred by Qualcomm Incorporated, as allowed by the Deferred Payment Agreement, to Leap Wireless International, Inc. In addition, a Working Capital Loan agreement was entered into on June 24, 1998 with Inversiones for US$20.3 million of principal for the purpose of financing the final phase of construction, working capital requirements and operating expenses during the start-up and early operation phase of the PCS system. Principal and accrued interest is due in full on January 31, 1999 (Note 14). Interest rates and other terms and conditions of this agreement match those of the Deferred Payment Agreement, including the conversion right described below. In the event that the Company fails to pay the outstanding principal balance plus any accrued interest thereon, or Chilesat fails to contribute to the Company an aggregate amount of not less than fifty percent of the aggregate outstanding balance of the additional commitment and the Working Capital Loan on or before January 31, 1999 pursuant to a capital call by the Company, then, at any time after January 31, 1999 and on or before July 31, 1999, at Leap Wireless International, Inc.'s sole option in the case of the additional commitment and Inversiones' sole option in the case of the Working Capital Loan, the outstanding balance shall be convertible into shares of the Company's common stock (Note 14). This option expires in the event that the outstanding balance is paid in full prior to the conversion date. F-36 41 The notes payable at December 31, 1998 are comprised of LIBOR loans and bear interest at LIBOR + 3%. The scheduled principal repayments, are as follows:
DEFERRED PAYMENT ADDITIONAL WORKING CAPITAL AGREEMENT COMMITMENT LOAN 1998 ---------------- ---------- --------------- -------- 1999 $ 16,555 $ 14,745 $ 20,271 $ 51,571 2000 18,361 -- -- 18,361 2001 16,646 -- -- 16,646 2002 14,199 -- -- 14,199 2003 601 -- -- 601 -------- -------- -------- -------- Total $ 66,362 $ 14,745 $ 20,271 $101,378 ======== ======== ======== ========
The terms of the financing arrangements with Qualcomm Incorporated, Inversiones and Leap Wireless International, Inc. include certain positive and negative covenants, the most significant of which are as follows: The Company shall not i) Incur any additional encumbrances or liens ii) Create any indebtedness other than indebtedness incurred for the purposes of partial or full repayment of the notes payable. iii) Incur operating lease obligations greater than one year and exceeding US$ 1 million for any twelve month period. iv) Consolidate or merge with another entity. v) Guarantee any indebtedness. vi) Acquire stock or the assets of any other person. vii) Advance funds. viii) Become liable for a capital lease obligation exceeding US$1 million. ix) Enter into transactions with affiliates, except arm's length transactions in the ordinary course of business. x) Invest in other than investment grade instruments. xi) Declare or pay cash dividends or make distributions in excess of 30% of excess cash flows during the third and fourth annual periods of operations of the Company, increasing to 50% after period 4. xii) Maintain funded debt to total capitalization greater than 0.65, 0.71 and 0.75 in annual periods 1, 2 and 3 and thereafter, respectively. xiii) Permit Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to be less than US$ 1. xiv) Permit funded debt to EBITDA to exceed 23.91, 4.74, 3.32 and 2.4 in annual periods 2, 3, 4 and 5, respectively. xv) Permit EBITDA to interest expense to be less than 0.47, 2.38, 3.00 and 3.00 in annual periods 2, 3, 4 and 5, respectively. xvi) Incur capital expenditures greater than US$ 116 million until the Company has more than 50,000 subscribers, at which time the threshold increases. The Company is not in compliance with some of these covenants (Note 14). F-37 42 NOTE 9. OTHER LONG-TERM LIABILITIES This balance is mainly comprised of deferred customs duties of US$ 8.4 million at December 31, 1998 (US$ 4.6 million at December 31, 1997). Under Chilean law, the payment of customs duties levied on machinery and equipment can be deferred over a period of up to seven years. The balance at December 31, 1998 represents amounts owing at maturity including accrued interest. The scheduled repayments are as follows: 2000 $1,337 2001 1,081 2002 1,555 2003 1,266 2004 and thereafter 3,206 ------ Total 8,445 Other 51 ------ Total other long-term liabilities $8,496 ======
NOTE 10. INCOME TAXES The Company has not made a provision for current income taxes payable as it incurred tax losses for the year ended December 31, 1998. At December 31, 1998, income tax loss carryforwards of approximately US$24.3 million (US$5.2 million at December 31, 1997), were available to apply against income tax liabilities in future years. Under Chilean law, such income tax loss carryforwards never expire. Deferred income taxes are summarized as follows:
AS OF DECEMBER 31, ------------------------- Assets: 1998 1997 ------- ----- Provisions $ 71 $ -- Tax loss carryforwards 3,649 785 Allowance for income tax loss carryforwards (3,720) (655) ------- ----- Deferred income tax assets -- 130 ------- ----- Liabilities: Other -- (130) ------- ----- Deferred income tax liabilities -- (130) ------- ----- Net deferred income taxes $ -- $ -- ======= =====
F-38 43 Because the Company has only recently begun commercial operations and has no history of generating taxable income against which tax loss carryforwards would be applied, an allowance was recorded at December 31, 1998 with respect to those tax loss carryforwards which, based on the weight of available evidence, are not likely be realized. NOTE 11. SHAREHOLDERS' EQUITY a) Authorized capital Authorized capital stock of the Company is comprised of 8,400,000 Series A preferred shares and 8,400,000 Series B ordinary shares. Inversiones holds all the outstanding preferred shares whereas Chilesat holds all the ordinary shares. The preference with respect to the preferred shares consists of the right to be paid before any other series of shares in the event of liquidation of the Company up to the amount of the stated value of the preferred shares. The preference has a duration of 6 years as from April 10, 1997, after which all shareholders shall have equal rights with respect to the liquidation of the Company. b) Dividends Chilean law permits the payment of dividends only in Chilean pesos and these are limited to the retained earnings balances in the Company's statutory financial statements at each calendar year end. As the Company has an accumulated deficit at December 31, 1998 and 1997 in its statutory financial statements, it is prohibited from declaring and paying dividends until such time that it generates sufficient retained earnings. c) Capital increase Pursuant to the terms of the Shareholders' Agreement, Inversiones agreed to subscribe for 8,400,000 Series A preferred shares in exchange for its cash contribution of US$ 42 million and Chilesat agreed to subscribe for 8,400,000 Series B ordinary shares for its contribution of a contract for the right to use a part of Chilesat's network and signal distribution services, the PCS license and certain net assets. Inversiones contributed the funds into an escrow account on March 3, 1997 and a receivable balance for share subscriptions was recorded. With the exception of US$ 1.5 million of funds made available to the Company, the funds were not to be distributed to it until official publication of the awarding of the PCS license. The awarding of the PCS license was published and the Company received the funds in June, 1997, at which time the share subscription receivable was settled. An independent valuation of the contract for the right to use a part of Chilesat's network and signal distribution services was undertaken and the appraised valued is being systematically recognized as capital contributions on a straight-line basis over the remaining life of the contract commencing on September 20, 1998, the date operations began. Other capital contributions in 1998 amounted to US$493,000 (none in 1997). At the Extraordinary Meeting held on June 24, 1998, the shareholders agreed to an increase in the Company's capital from Ch$26.638 million (US$56.4 million) divided into 8,400,000 Series A preferred shares and 8,400,000 Series B common shares, to Ch$44.498 million (US$94.2 million) divided into 8,400,000 Series A preferred shares and 16,000,000 Series B common shares, with no par value, which will be offered to existing shareholders in proportion to their shareholdings, and which must be totally subscribed and paid within a period of three years from the date of the meeting. Should Telex-Chile S.A. and Chilesat S.A. not subscribe their proportion of the new issue, they will cede their subscription rights to Inversiones. F-39 44 At their Extraordinary meeting held on December 30, 1998, the shareholders agreed to increase the company's capital by the equivalent in Chilean pesos of US$254 million by the issue of 32,987,013 Series B common shares to be subscribed and paid, within a maximum period of three years, at a price equivalent to US$7.70 per share on the date of payment . On agreeing to issue the shares, the Board of Directors must set the price for their subscription and payment at an amount equivalent to the US$7.70 per share mentioned previously plus a restatement of 10% per annum, or 5% per quarter, for the period elapsed between this date and the date of payment. The excess over the US$7.70 per share is to be credited to the "Share Premium Account". d) Call and put options As part of an amendment to the Shareholders' Agreement, Chilesat and Inversiones, each have an option to require the issuance by the Company of shares of common stock at the Exercise Price to be subscribed by Chilesat and Inversiones in proportion to their holdings in the capital stock of the Company. This option may be exercised for common stock with an aggregate value at the Exercise Price of up to US$35 million. The Exercise Price shall be determined as of the exercise date and shall be the sum of (i) $5.00 per share plus (ii) 10% per annum plus an increasing premium on the original $5.00 price thereof equal to 5% additional for each quarter after the calendar quarter ending June 30, 1997. The option expires upon the exercise of the conversion rights (Note 8 c). If either Chilesat or Inversiones do not subscribe the shares of stock to which it is entitled as a result of the exercise of the capital call option, it shall be subject to dilution. Such shares of common stock as are not exercised by Chilesat or Inversiones shall be subject to subscription at the Exercise Price by the other party (or such third party investor as a party may propose), subject to the non-subscribing party's written consent, which may not be unreasonably withheld and which may not be withheld with the purpose of preventing the capital increase. If Chilesat answers such capital call by making a cash capital contribution to the Company of not less than fifty percent of the balance due on the convertible loans on or before January 31, 1999, Inversiones will make its portion of the capital call by converting fifty percent of the balance due on the convertible loans into capital equity of the Company at the same price as paid by Chilesat for equity in the capital call. Inversiones has an option to sell its preferred shares to Chilesat in the event that the Company is no longer using Qualcomm technology in its mobile PCS telephone system NOTE 12. FAIR VALUE The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 1998 and 1997, when the estimate of such value is practicable: - - Cash and cash equivalents, recoverable taxes and accrued liabilities and withholdings have been stated at carrying value which is equivalent to fair value. - - The fair values of the note payable to related company and other long-term liabilities were based on interest rates currently available to the Company for debt with similar terms and remaining maturities. The carrying value of the note payable to related company approximates fair value because the terms of the loan agreement require that the stated rate of interest be periodically adjusted to the market rate. F-40 45 The estimated fair value of the Company's financial instruments are summarized as follows:
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997 --------------------------- ---------------------------- CARRYING CARRYING AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE -------- ---------- -------- ---------- Assets: Cash and cash equivalents $ 942 $ 942 $24,875 $24,875 Recoverable taxes 6,480 6,480 6,228 6,228 ------- ------- ------- ------- Total assets $ 7,422 $ 7,422 $31,103 $31,103 ======= ======= ======= ======= Liabilities: Accrued liabilities and withholdings $ 2,160 $ 2,160 $ 960 $ 960 Note payable to related company 49,807 49,807 23,655 23,655 Other long-term liabilities 8,496 6,013 4,579 3,117 ------- ------- ------- ------- Total liabilities $60,463 $57,980 $29,194 $27,732 ======= ======= ======= =======
NOTE 13. COMMITMENTS AND CONTINGENCIES a) Operating leases At December 31, 1998, the Company had entered into operating leases relating to the rental of sites for towers and antennas required for the operation of its mobile PCS telephone system. The following is a schedule by year of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1998: 1999 $1,068 2000 1,066 2001 1,082 2002 1,063 2003 1,040 2004 to 2008 3,457 2009 526 ------ Total $9,302 ======
Rental expense for the year ended December 31, 1998 was US$ 602,000 (US$ 91,000 in 1997). b) Security for debt The Company has pledged it PCS license as security against the notes payable to Qualcomm Incorporated. Telex-Chile S.A. and Chilesat S.A. have pledged 83,920 and 8,316,080 Series B common shares of the Company, respectively, as security for 50% of the notes payable to Qualcomm Incorporated. F-41 46 NOTE 14. SUBSEQUENT EVENTS a) On February 15, 1999, Inversiones communicated to the Company that it had incurred an Event of Default as a result of its failure to repay a US$20.3 million short-term Working Capital Loan plus interest accrued thereon granted on June 24, 1998 (Note 8) and noncompliance with certain loan covenants. At the time of granting the loan, Inversiones subscribed to a capital increase and reserved its right to capitalize the loan, an option that, in addition to other potential actions to obtain repayment, is still open. Similarly, on February 15, 1999, Leap Wireless International, Inc. informed both the Company and Telex-Chile S.A. that the former has incurred an Event of Default with respect to the Deferred Payment Agreement, as a result of which the amount of US$14.7 million plus interest accrued thereon is due and payable. Telex-Chile S.A. is guarantor of 50% of this amount. As in the previous case, the creditor has an option to capitalize this debt or to pursue payment through other means. b) Subsequently on March 2, 1999, Leap Wireless International, Inc. and Inversiones indicated their withdrawal of the above-mentioned communications reserving the right to notify the defaults again in the future. On March 16, 1999, Leap Wireless International, Inc. and Inversiones communicated defaults on the short-term Working Capital Loan of US$20.3 million plus interest accrued thereon and the Deferred Payment Agreement of US$14.7 million plus interest accrued thereon on the same terms as expressed above. c) (Unaudited) On April 12, 1999, an agreement was entered into between the shareholders whereby Chilesat sold its ownership interest in the Company for US$28 million in cash and US$22 million, three year, non-interest bearing debt. On April 19, 1999, the Company agreed to pay Inversiones' obligation to Chilesat S.A. and in return, the Company was relieved of the obligation to pay certain amounts to Inversiones. F-42 47 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Orrengrove Investments Ltd. In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations, of cash flows and of stockholders' deficit present fairly, in all material respects, the financial position of Orrengrove Investments Ltd. and its subsidiaries (the Company) (a development stage company) at December 31, 1998, and the results of their operations and their cash flows for the period from July 27, 1998 (inception) to December 31, 1998, in conformity with generally accepted accounting principles in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As explained in Note 10 to the consolidated financial statements, the Company has been notified of an operational failure of certain third party equipment used to provide satellite transmission capacity to its customers. If the Company is not able to replace the satellite transmission capacity or implement a long-term alternative, this operational failure may have a material adverse effect on the Company's financial position, results of operations, and cash flows. PRICEWATERHOUSECOOPERS LLP McLean, Virginia April 30, 1999 F-43 48 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
December 31, 1998 -------- ASSETS Current assets: Cash and cash equivalents $ 35,659 Other current assets 202 -------- Total current assets 35,861 Property and equipment, net 5,279 Intangible assets, net 14,402 Other assets 8 -------- Total assets $ 55,550 ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 5,389 -------- Total current liabilities 5,389 Note payable to related party 54,758 -------- Total liabilities 60,147 -------- Commitments and contingencies (Notes 9 and 10) Minority interest 679 -------- Stockholders' deficit: Common stock, no par value per share; authorized, issued and outstanding 1,000 shares 2 Deficit accumulated during the development stage (5,278) -------- Total stockholders' deficit (5,276) -------- Total liabilities and stockholders' deficit $ 55,550 ========
F-44 49 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS) -------
PERIOD FROM JULY 27, 1998 (INCEPTION) TO DECEMBER 31, 1998 -------------- Loss on investment in joint venture $ (670) General and administrative expenses (3,624) Interest expense (2,958) Interest income 791 ------- Loss before minority interest (6,461) Minority interest (1,183) ======= Net loss $(5,278) =======
F-45 50 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) -------
PERIOD FROM JULY 27, 1998 (INCEPTION) TO DECEMBER 31, 1998 -------------- Cash flows from development activities: Net loss $ (5,278) Adjustments to reconcile net loss to net cash used in development activities: Depreciation and amortization 1,145 Minority interest (1,183) Loss on investment in joint venture 670 Changes in assets and liabilities: Increase in current and other assets (228) Decrease in accounts payable and accrued liabilities (2,483) Increase in accrued interest - note payable to related party 2,958 -------- Net cash used in development activities (4,399) -------- Cash flow from investing activities: Purchases of property and equipment (2,741) Acquisition of Transworld Companies, net of cash acquired 5,997 -------- Net cash provided by investing activities 3,256 -------- Cash flows from financing activities: Issuance of note payable to related party 36,800 Issuance of common stock 2 -------- Net cash provided by financing activities 36,802 -------- Net increase in cash and cash equivalents 35,659 Cash and cash equivalents, beginning of period -- -------- Cash and cash equivalents, end of period $ 35,659 ======== Supplemental disclosure of non-cash investing and financing activities: Issuance of note payable to related party to convert short-term note payable converted upon acquisition of Transworld Companies $ 15,000 ========
F-46 51 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT JULY 27, 1998 (INCEPTION) TO DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA) -------
DEFICIT ACCUMULATED COMMON STOCK DURING THE --------------------------- DEVELOPMENT SHARES AMOUNT STAGE TOTALS ------- ------- ------------ ------- Balance at July 27, 1998 (inception) -- $ -- $ -- $ -- Issuance of common stock for cash 1,000 2 2 Net loss (5,278) (5,278) ======= ======= ======= ======= Balance at December 31, 1998 1,000 $ 2 $(5,278) $(5,276) ======= ======= ======= =======
F-47 52 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) 1. THE COMPANY Orrengrove Investments Ltd. ("Orrengrove"), was incorporated in the Republic of Cyprus on July 27, 1998 as a wholly owned subsidiary of QUALCOMM Telecommunications Ltd. ("QUALCOMMTel"), an Isle of Man company. In August 1998, Orrengrove acquired a 60% interest in Transworld Telecommunications, Inc., Transworld Communications Services, Inc. and Transworld Communications (Bermuda), Ltd. (collectively the "Transworld Companies"). The Transworld Companies were created to build and operate a modern long distance telecommunications business that provides domestic long distance, backhaul, and broadband services such as high speed internet access to the Commonwealth of Independent States ("CIS"), formerly known as the Soviet Union. In October 1998, QUALCOMMTel, a majority owned subsidiary of Leap Wireless International, Inc. ("Leap Wireless") entered into an agreement with Teletal Limited, a company affiliated with ITAR-TASS, the Russian government's prime news agency and a party with certain rights granted to it by the Russian government to assist in the privatization and expansion of telecommunications in Russia. QUALCOMMTel transferred to Teletal Limited a 50% ownership in Orrengrove under the terms of the agreement to the joint venture in exchange for Teletal Limited's commitment to assist in the development of the Transworld Companies long distance telecommunications business. Orrengrove and its majority owned subsidiaries (the "Company") operates in emerging economies, which by nature have an uncertain economic, political and regulatory environment. The general risks of conducting business in the Russian Federation and other CIS developing countries include the possibility for rapid changes in government policies and regulations, economic conditions, the tax regime and foreign currency regulations. The Company is the holder of certain licenses to provide telecommunication services in 48 regions of the CIS as well as exclusive rights to the signal transmission capacity on each of two Russian Loutch II satellites. The first satellite was launched into orbit in October 1995 to serve an area containing over 85% of the population of the Russia Federation plus major portions of the Baltic States, Ukraine, Byelorussia and other CIS countries (see Note 10 for subsequent event). The Company is currently evaluating whether to exercise its rights to the capacity on the second satellite which will require the Company to share in the cost of its launch. Limited service between Moscow and Perm, a region of 3 million people 1,200 km west of Moscow, began in December 1998. Further expansion plans are being evaluated. 2. DEVELOPMENT STAGE ACTIVITIES AND DEPENDENCY ON ADDITIONAL FINANCING The Company is a development stage enterprise which has incurred operating losses and negative cash flows from network development and operations since inception. To date, F-48 53 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) the Company has focused primarily on the development of its telecommunications network, including the construction of its system hub in Moscow and its earth station network, and the implementation of its sales and marketing strategy. Before the Company can begin significant revenue generating operations, it must first enter into agreements with either long-distance companies, in order to carry some of their long-distance traffic, and/or the local phone companies throughout the CIS. The Company is currently in such negotiations. The extent to which this is or is not accomplished and the terms and timing of executing these contracts may have a significant impact on the business, financial conditions and results of operations. The Company's principal license agreement to provide telecommunication services within the Russian Federation expires in April 2002, and is subject to certain services related obligations standard for the industry. Although no assurance can be given that such license will be renewed beyond its expiration date, the Company believes that such license can be renewed routinely. The Company is dependent on the signal transmission capacity of the Loutch II satellite in orbit and satellite communication earth stations to provide its satellite based communication services. The Company may encounter problems, delays and expenses, many of which may be beyond the Company's control. These may include, but are not limited to, in-orbit failures (see Note 10 for subsequent event), launch delays and launch failures of additional or replacement signal transmission capacity, problems related to technical developments of the system, and regulatory compliance. Any interruption or delays in service caused by any of the foregoing matters would adversely affect the Company. The development of the Company's business and the deployment of its services and systems will require significant additional capital expenditures, a substantial portion of which will need to be incurred before the realization of significant revenues. Together with associated start-up operating expenses, these capital expenditures will result in substantial negative cash flow until an adequate revenue-generating customer base is established. The Company expects to meet its cash requirements for existing operations and network construction through fiscal 1999 from available cash balances. The Company will be seeking additional sources of financing to fund activities after 1999. Alternatives under consideration include additional debt, equity financing or other sources. There can be no assurance that the Company will be successful in raising additional capital in sufficient amounts to fund its strategic objectives, or that such funds, if available, will be available on terms that the Company will consider acceptable. Failure to raise sufficient funds may require the Company to modify, delay or abandon some of its planned future F-49 54 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) expansion or expenditures, which could have a material adverse effect on the Company's business, financial condition and results of operations. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company's consolidated financial statements reflect the financial position, results of operations, cash flows and changes in stockholders' deficit of Orrengrove and its majority-owned subsidiaries prepared in accordance with generally accepted accounting principles in the United States of America. The ownership of the other interest holder is reflected as minority interest. All significant inter-company accounts and transactions have been eliminated. The financial statements of the Company have been presented for the period since its inception on July 27, 1998. FINANCIAL STATEMENT PREPARATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT IN JOINT VENTURE The Company has a 50% equity investment in Tass Loutch Telecom (TLT), a joint venture. The Company uses the equity method to account for investments in corporate entities in which it has voting interest of 20% to 50% or in which it otherwise exercises significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize the Company's share of net earnings or losses of TLT, limited to the extent of the Company's investment in, advances to and financial guarantees for TLT. The Company is the only contributor of assets, and therefore loss on investment in joint venture included in the statement of operations includes 100% of the losses of TLT. To date, TLT has incurred recurring losses which have reduced the Company's investment in TLT to zero. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. F-50 55 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is calculated on a straight-line basis over the lesser of the estimated useful lives, generally ranging from five to ten years for telecommunications equipment and three to seven years for furniture, fixtures and equipment and other property. Construction in process reflects amounts incurred for the configuration and build-out of telecommunications equipment not yet placed in service. INTANGIBLE ASSETS Intangible assets, resulting primarily from the acquisition of the Transworld Companies (see Note 4), comprising of telecommunications licenses of $8,061,000 and rights to satellite signal transmission capacity of $7,327,000, are being amortized on a straight-line basis over their estimated remaining useful lives ranging from three to five years. For the period ended December 31, 1998, amortization expense of $986,000 was recorded on the rights to satellite capacity (see Note 10 for subsequent event). The telecommunications licenses begin amortizing upon commencement of service. LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. No such impairment losses have been recognized to December 31, 1998. INCOME TAXES The Company accounts for income taxes in accordance with the liability method. Deferred income taxes are recognized for tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount expected to be realized. The provision for income taxes consists of the current tax provision and the change during the period in deferred tax assets and liabilities. F-51 56 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) FOREIGN CURRENCY The functional currency of the Company's foreign operations is United States dollars. The Company maintains most of the cash balances in dollar denominated bank accounts and has no significant foreign currency monetary assets and liabilities at December 31, 1998. Gains and losses resulting from the Company's foreign currency transactions are included in the consolidated statement of operations, and to date have been minimal. The Company does not currently hedge against foreign currency fluctuations although the Company may take such steps in the future. Under current practices, the Company's results of operations could be adversely affected by fluctuations in exchange rates. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1998, the carrying amounts of the Company's cash and cash equivalents, accounts payable , and notes payable approximate fair value due to the short-term maturities of these balances. RECENT ACCOUNTING PRONOUNCEMENTS As of December 31, 1998, Statement of Financial Accounting Standards No. 130, ("SFAS 130"), Reporting Comprehensive Income, has been adopted by the Company. SFAS 130 establishes standards for the reporting and display of comprehensive income (loss) and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. "Comprehensive income (loss)" is defined in this statement as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period (including net income (loss)) except those resulting from investments by owners and distributions to owners. The adoption of this new standard did not impact the Company's financial statements because there were no differences between net loss and comprehensive loss. In addition, during 1998, Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) was issued. This statement establishes a new model for accounting for derivatives and hedging activities. Under SFAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial position or results of operations. F-52 57 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) 4. ACQUISITION OF THE TRANSWORLD COMPANIES On August 4, 1998, the Company acquired a 60% common ownership interest in the Transworld Companies for an aggregate purchase price of $51,800,000, consisting of a $36,800,000 cash payment to the Transworld Companies and the conversion to equity of a $15,000,000 short-term loan payable to Leap Wireless, which was previously issued by the former parent of the Transworld Companies. The acquisition was recorded under the purchase method of accounting, and accordingly, the results of operations of the Transworld Companies are included in the consolidated financial statements since the date of acquisition. The sum of the fair values of the identifiable assets acquired, which include telecommunications licenses and rights to satellite capacity, less liabilities assumed, exceeded the cost of the acquisition. The fair values of those identifiable assets acquired were reduced by a proportionate part of the excess to determine their assigned values. The purchase price has been allocated to the assets acquired and the liabilities assumed based upon the fair values on the date of acquisition as follows (in thousands): Current assets, other than cash $ 41 Property and equipment 2,697 Intangible assets 15,388 Other assets 611 Accounts payable and other expenses (7,872) Note payable to related party (15,000) Minority interest (1,862) -------- Net cash received from acquisition $ (5,997) ========
F-53 58 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
December 31, 1998 ------------ Telecommunications equipment $ 1,448 Construction-in-progress 3,524 Leasehold improvements 81 Furniture, fixtures and office equipment 385 ------- 5,438 Accumulated depreciation (159) ------- $ 5,279 =======
The Company's telecommunications equipment and construction-in-progress are primarily maintained in a foreign country. Construction in progress consists of earth stations, not yet completed and operational as of December 31, 1998. See Note 10 for subsequent event. 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following (in thousands):
December 31, 1998 ----------- Accounts payable and other $ 299 Consulting fee-related party (Note 7) 2,500 Consulting fee-third party 2,590 ------ $5,389 ======
F-54 59 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) 7. RELATED PARTY TRANSACTIONS NOTE RECEIVABLE FROM A RELATED PARTY Since inception, the Company has advanced certain amounts to another investor in TLT for the investor's share of TLT's expenses in exchange for a note receivable. The Company has advanced approximately $400,000 to the related party through December 31, 1998. The note receivable was written off prior to December 31, 1998 since the related party was unable to fund it's share of the losses in the joint venture. PAYABLE TO RELATED PARTY The Company was required to pay a consulting fee, bonus, and severance totaling $2,500,000 to the majority shareholder of the former parent of the Transworld Companies. The $2,500,000 was included in the purchase price allocation (See Note 4) and payment was made in March 1999. NOTE PAYABLE TO RELATED PARTY On July 29, 1998, the Company entered into a $51,800,000 collateralized Promissory Note agreement with Leap Wireless, for the purpose of purchasing the Transworld Companies. Terms of the Promissory Note provide for repayment of principal and accrued interest by paying Leap the greater of 1) 70% of the cash or other assets received by the Company from any sources, including the Transworld Companies, 2) 70% of the cash or other assets available for distribution to the Company's stockholders or 3) in the event of a final distribution from the Transworld Companies, 100% of the cash or other assets available for distribution to the Company's stockholders until principal and accrued interest is paid in full. Interest accrues quarterly in arrears at the rate of 13%, per annum, with any unpaid interest being added to the outstanding principal. For the period ended December 31, 1998, interest of $2,958,000 has been accrued, but not paid. This amount is included in note payable to related party on the consolidated balance sheet as of December 31, 1998. The Promissory Note provides for certain restrictions related to dividends, redemptions and merger, and is collateralized by substantially all the assets of the Company. 8. INCOME TAXES The Company has not recorded provisions for income taxes for the period from July 27, 1998 (inception) to December 31, 1998 due to net operating losses during the period. F-55 60 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) The following is a reconciliation from the statutory Cyprus income tax rate to the Company's effective rate of income tax expense for the period ended:
Period from July 27, 1998 (Inception) to December 31, 1998 ----------------- Cyprus tax at statutory rate 25% Minority interest (4)% Net change in valuation allowance (24)% Effect of foreign operations 3% --- Effective tax rate -% ===
The tax effect of temporary differences which gives rise to significant portions of the deferred tax assets as of December 31, 1998, are as follows (in thousands):
December 31, 1998 ------------ Net operating loss carryforwards $ 2,968 Net capitalized start-up costs 717 ------- 3,685 Less: valuation allowance (3,685) ------- $ -- =======
Realization of net deferred tax assets is dependent on the Company's ability to generate taxable income, which is uncertain. Accordingly, a full valuation allowance was recorded against these assets as of December 31, 1998. As of December 31, 1998, the Company had net operating loss carryforwards of approximately $8.5 million for income tax purposes that begin to expire in various years between 2003 and 2017. There may be limitations on the annual utilization amount of these net operating losses as a result of certain changes in ownership that have occurred since the Company's inception. F-56 61 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) 9. COMMITMENTS AND CONTINGENCIES TRANSPONDER AGREEMENTS The Company obtained, through a number of agreements, the rights to utilize certain Russian Loutch I and Loutch II satellite capacity. The agreements give the Company rights to the capacity on satellites under the Loutch I and Loutch II programs for up to 20 years. The Company has an agreement with Commercial Company Mercury Ltd. ("Mercury"), the commercial subsidiary of a Russian satellite provider, for the sole and exclusive use of two transponders on each of the first two Loutch II satellites. At December 31, 1998, approximately $5,300,000 had been paid to Mercury to modify the transponders on the first Loutch II satellite for commercial use. A remaining commitment of approximately $1,700,000 due under this contract is contingent upon Mercury completing certain milestones related to the launch of the second satellite. CONSTRUCTION-IN-PROGRESS The Company has ordered the construction of six earth stations, plus certain upgrades and spares, under an agreement with a third party. The agreement established a price guarantee until September 1999 at approximately $1,000,000 per earth station. In accordance with this agreement, approximately $3,500,000 has been paid to December 31, 1998. LEASE COMMITMENTS The Company leases certain office space in the United States and internationally under non-cancelable operating lease agreements. Rent expense for the period July 27, 1998 (inception) to December 31, 1998 was approximately $200,000. Future minimum lease payments under all non-cancelable operating lease arrangements as of December 31, 1998 are as follows: 1999 $ 404,000 2000 414,000 2001 327,000 2002 1,000 2003 -- ---------- Total $1,146,000 ==========
F-57 62 ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) LEGAL MATTERS The Company is a party to various legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company's management, disposition of these matters is not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company. 10. SUBSEQUENT EVENT On April 5, 1999, the Company was notified by Mercury, provider of the satellite signal transmission capacity, that there was an operational failure of all transponders on the Loutch II satellite. Mercury's prognosis indicates that the transponders' operational status will not be restored. Although Mercury has guaranteed the satellite signal transmission capacity, the outcome at this time remains uncertain. The Company has already identified and put into operation a short-term terrestrial transmission solution by leasing fiber capacity from a third party. Long-term alternative transmission sources are being explored, including the use of expanded terrestrial fiber capacity and/or satellite signal transmission capacity. The Company would experience a material adverse effect on its financial position, results of operations, and cash flows if the satellite signal transmission capacity is not replaced by Mercury and the Company is not able to implement a long-term alternative transmission source. Should a long term terrestrial transmission source be employed, certain satellite related assets may be impaired. F-58 63 REPORT OF INDEPENDENT ACCOUNTANTS Mexico City, February 15, 1999 To the Board of Directors and Shareholders of Pegaso Telecomunicaciones, S. A. de C. V. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Pegaso Telecomunicaciones, S. A. de C. V. and its subsidiaries at December 31, 1998 and the results of their operations, their cash flows and the changes in their stockholders' equity for the period from June 24, 1998 (date of incorporation) to December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United Sates of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As stated in Note 1 to the consolidated financial statements, Pegaso Telecomunicaciones, S. A. de C. V. was incorporated on June 24, 1998, and at the date of issuance of this report, was in the development stage. PricewaterhouseCoopers Guillermo Pineda M. F-59 64 PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES (Development stage enterprise) CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 Thousands of U.S. dollars Assets CURRENT ASSETS: Cash and cash equivalents $ 30,313 Recoverable value added tax 9,531 Other accounts receivable 344 Prepaid advertising 6,256 Other current assets 219 Total current assets 46,663 PROPERTY, FURNITURE AND TELECOMMUNICATIONS EQUIPMENT - Net 132,296 PUBLIC TELECOMMUNICATIONS NETWORK CONCESSION 233,530 Total assets $ 412,489 ========= Liabilities and Stockholders' Equity CURRENT LIABILITIES: Trade payables $ 113,209 Notes payable to affiliated company 5,941 Other accounts payable and accrued expenses 5,256 Income tax payable 321 Total current liabilities 124,727 LONG-TERM BANK LOANS 19,090 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Capital stock 300,000 Accumulated deficit incurred in development stage (31,328) 268,672 Total liabilities and stockholders' equity $ 412,489 =========
The accompanying notes are an integral part of these financial statements. F-60 65 PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES (Development stage enterprise) CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD FROM JUNE 24 (DATE OF INCORPORATION) TO DECEMBER 31, 1998 Thousands of U.S. dollars General and administrative expenses $(30,168) Interest income 1,194 Other income 441 Foreign exchange loss on remeasurement of financial statements (2,474) Loss before income tax (31,007) Current income tax (321) Loss for the period $(31,328) ========
The accompanying notes are an integral part of these financial statements. F-61 66 PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES (Development stage enterprise) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JUNE 24 (DATE OF INCORPORATION) TO DECEMBER 31, 1998 Thousands of U.S. dollars Cash flows from operating activities: Loss for the period $ (31,328) --------- Adjustment to reconcile loss to net cash used in operating activities: Not affecting resources: Depreciation and amortization 78 Foreign exchange loss on remeasurement of financial statements 2,474 Recoverable value added tax (9,443) Other accounts receivable (341) Prepaid advertising (67) Other current assets (217) Other accounts payable and accrued expenses 5,432 Income tax payable 321 --------- Total adjustments (1,763) --------- Net cash used in operating activities (33,091) --------- Cash flows from investing activities: Acquisition of property, furniture and telecommunications equipment (77) Public telecommunications network concession (233,530) --------- Net cash used in investing activities (233,607) --------- Cash flows from financing activities: Capital stock issued 300,000 --------- Net cash provided by financing activities 300,000 --------- Effect of exchange rate change on cash (2,989) --------- Cash and cash equivalents at end of period $ 30,313 ========= Supplemental disclosures of cash flow information: Income taxes paid $ -- Interest paid (net of amount capitalized) 14 Prepaid advertising contracted with notes payable 5,941 Property, furniture and telecommunications equipment acquired through financing 132,297
The accompanying notes are an integral part of these financial statements. F-62 67 PEGASO TELECOMUNICACIONES, S. A. DE C. V. (Development stage enterprise) STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JUNE 24 (DATE OF INCORPORATION) TO DECEMBER 31, 1998 Thousands of U.S. dollars
Accumulated deficit incurred Capital in development stock stage Total --------- ---------------- --------- Issuance of stock at inception on June 24, 1998 $ 11 $ 11 Additional capital stock issued on June 30 and September 28, 1998 299,989 299,989 Loss for the period $ (31,328) (31,328) Balances at December 31, 1998 $ 300,000 $ (31,328) $ 268,672 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-63 68 PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES (Development stage enterprise) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (Amounts expressed in thousands of U.S. dollars) NOTE 1 - OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES: Pegaso Telecomunicaciones, S. A. de C. V. (Telecomunicaciones) (a development stage enterprise), a Mexican holding company, was incorporated on June 24, 1998, for a duration of 99 years. At December 31, 1998, the stockholders and their participation in Telecomunicaciones were as follows:
Stockholder Participation (%) ----------- ----------------- Mexican stockholders: Corporativo del Valle de Mexico, S. A. de C. V 10.00 Pegaso Comunicaciones y Servicios, S. A. de C. V 9.66 Alejandro Burillo Azcarraga 5.34 Foreign stockholders: Qualcomm PCS Mexico, Inc. 33.33 International Equity Investments, Inc. 18.33 LAIF X, Ltd. 16.67 NI Media Equity, LLC 6.67 ------ 100.00 ======
Up to September 23, 1998, Qualcomm PCS Mexico, Inc. was a wholly owned subsidiary of Qualcomm Incorporated (Qualcomm). On that date, as a consequence of Qualcomm's spin-off of Leap Wireless International (Leap Wireless), Qualcomm transferred the Qualcomm PCS Mexico, Inc. shares to Leap Wireless. F-64 69 At December 31, 1998, Telecomunicaciones and its subsidiaries (collectively, the "Company") held 100% of the capital stock of the following Mexican subsidiaries:
Company Business ------- -------- Pegaso PCS, S. A. de C. V. (PCS) Scheduled to provide telephone services to the general public. Pegaso Recursos Humanos, S. A. de C. V. Provides administrative services (Recursos Humanos) to affiliated companies. Pegaso Comunicaciones y Sistemas, S. A. de C. V. Holds the concessions and the (Comunicaciones y Sistemas) telecommunications equipment for telephone services to be provided by PCS.
The Company is engaged in providing nationwide telephone services in Mexico, for which Comunicaciones y Sistemas holds the concessions granted by the Ministry of Communications (Secretaria de Comunicaciones y Transportes) (SCT) on October 7, 1998. At the date of issuance of these consolidated financial statements, the Company was in the development stage. Activities during the development stage are primarily developing the telecommunication network and in organizing the administrative structure to provide telephone services. The concession includes the rights to install, operate and exploit a nationwide public telecommunications network for a period of up to 20 years, with an option for the Company to extend the concession at the end of the 20-year period. See Note 5. The Company's development from the date of incorporation has been financed by capital contributions made by the stockholders and through two lines of credit with a limit of $590,000. See Note 6. These lines of credit are collateralized by all Company properties, rights and assets. The recoverability of the Company's investment is dependent upon future events, including, but not limited to, the stability of the Mexican economic environment, obtaining adequate financing for the Company's development program and the achievement of a level of operating revenues that is sufficient to support the Company's cost structure. F-65 70 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accompanying consolidated financial statements include to the adjustment and remeasurement of the Mexican peso consolidated financial statements prepared in conformity with accounting principles generally accepted in Mexico. Such financial statements constitute a suitable basis for adjustment and remeasurement into US Dollars and for purposes of expressing them in conformity with accounting principles generally accepted in the United States of America. Following are the significant accounting policies, as adjusted: a. Consolidation: The accompanying financial statements include the accounts of Telecomunicaciones and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. b. Cash Equivalents: Cash equivalents are recorded at cost, which approximates market value, and include all investments purchased with original maturities of three months or less. c. Property, Furniture and Telecommunications Equipment: Property, furniture and telecommunications equipment are recorded at cost. Depreciation is calculated by the straight-line method, based on the estimated useful lives of said items, ranging from three to ten years. See Note 4. Leasehold improvements are capitalized at cost and the corresponding amortization is calculated by the straight-line method, based on the lease period. d. Public Telecommunications Network Concession: The public telecommunications network concession includes the cost of the radio-electric frequency band concession, and is recorded at cost. F-66 71 e. Income Taxes: Current income tax is the amount of income tax expected to be payable for the current period. A deferred tax asset or liability is computed for both the expected future impact of differences between the financial statement and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax loss carryforwards. A valuation allowance is established for deferred tax assets not expected to be realized. f. Employee Benefits: Seniority premiums, to which employees are entitled upon termination of employment after fifteen years of service, are recognized as expenses of the years in which the services are rendered. Because the Company is in the development stage, this effect is not significant, and therefore no liability has been recognized. Severance obligations to personnel for dismissal or death are charged to income in the period incurred. g. Translation: For the purposes of translating its Mexican peso financial statements to U.S. dollars in accordance with Statement of Financial Accounting Standard No. 52, the Company considers its functional currency to be the U.S. dollar, since substantially all its costs and all its financing are incurred in U.S. dollar. Monetary assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains and losses are translated at the average exchange rate for the period, and non-monetary assets are translated at historical rates. The resulting remeasurement gains or losses are included in the statement of income. As of January 1, 1999, Mexico is no longer considered a hyperinflationary economy. The Company is currently evaluating the functional currency and a possible change from the U.S. dollar to local currency (the Mexican peso). h. Capitalized Interest Cost: Property, furniture and telecommunications equipment, as well as the public telecommunications network concession, include the capitalization of the interest costs related to their acquisition. F-67 72 i. Advertising Costs: Television advertising time purchased in advance is expensed when the advertising time is used. All other advertising costs are expensed as incurred. j. Long-lived Assets: The Company assesses potential impairments of its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net undiscounted cash flows, grouped at the lowest identifiable level where the cash flows are independent of cash flows generated by other groups, is less than the carrying amount of the asset. No such impairment losses have been recorded by the Company. k. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. l. New Accounting Requirements: The Company adopted the provision of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AcSEC). In accordance with this pronouncement, all start-up activities and organization costs incurred in 1998 were expensed and are included within general and administrative expenses in the consolidated statement of income. The Company adopted the provisions of Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) issued by the Financial Accounting Standards Board (FASB). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. For the period ended December 31, 1998, the Company has not generated components of other comprehensive income. The AcSEC issued the Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) in March 1998. The statement is effective for fiscal periods beginning after December 15, 1998, with earlier application encouraged. SOP 98-1 provides authoritative guidance for the capitalization of external direct F-68 73 costs of materials and services, payroll costs for employees devoting time to software projects, and interest costs. The Company does not expect the adoption of SOP 98-1 to significantly impact the financial statements. On June 15, 1998, the FASB issued SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities", (SFAS 133). This statement establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing standards. SFAS 133 is effective for fiscal years beginning after June 15, 1999, but earlier application is permitted as of the beginning of any fiscal quarter subsequent to June 15, 2000. Upon the statement's initial application, all derivatives are required to be recognized in the balance sheet as either assets or liabilities, and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS 133. The Company is not currently involved in derivative or hedging activities. As a result, management does not believe that the adoption of this statement will significantly impact the financial statements of the Company. NOTE 3 - TRANSACTIONS AND BALANCES WITH AFFILIATED COMPANIES AND OTHER RELATED PARTIES: On the next page is a summary of the main transactions and balances with affiliated companies and other related parties for the period ended December 31, 1998. F-69 74
Transactions for the period ended Balance at December 31, 1998 December 31, 1998 ----------------- ----------------- Equipment purchases from Qualcomm $80,100(1) Interest on advances from stockholders 1,697 Professional fees charged by stockholders 586 Advertising services from Grupo Televisa, S. A 6,256 $ 5,941(2) Rent payments to stockholders 40
(1) Qualcomm ceased being an affiliated company on September 23, 1998 (see Note 1). (2) This amount is reflected as notes payable to affiliated company in the consolidated balance sheet. Equal principal amounts are payable on a quarterly basis up to September 15, 1999. These notes are non-interest bearing. NOTE 4 - PROPERTY, FURNITURE AND TELECOMMUNICATIONS EQUIPMENT:
Annual depreciation rate (%) ----------------- Furniture and equipment $ 630 10 Computer equipment 156 30 Transportation equipment 248 25 Leasehold improvements 969 30 --------- 2,003 Accumulated depreciation and amortization (78) --------- 1,925 Land 85 Telecommunications equipment in the process of installation 104,874 Construction in progress 2,234 Advance payments to Alcatel Indetel Industria de Telecomunicaciones, S. A. de C. V. (Alcatel) 11,478 Advance payments to Qualcomm 9,023 Advance payments to other suppliers 2,677 --------- $ 132,296 =========
Telecommunications equipment in the process of installation includes $3,114 of capitalized interest. F-70 75 NOTE 5 - PUBLIC TELECOMMUNICATIONS NETWORK CONCESSION: On October 7, 1998, the Company obtained the concession to frequency bands of the radio-electric spectrum to provide nationwide wireless fixed and mobile access telecommunications services. The cost of the concession shown in the consolidated balance sheet includes $1,278 of capitalized interest. Concessions include the rights to provide the following: - - Fixed or mobile wireless telephone service. - - Transmission or reception of signals, images, voice, sounds or information of any nature through the network, and additional services authorized by the SCT. - - Access to data networks, videos, audio and videoconferences. The concession agreements contain the following financial covenants: a. The minimum capital stock must be $120,000. b. The ratio of total liabilities to stockholders' equity should not exceed 2.78 during the first five years of operations. At December 31, 1998, these covenants were satisfactorily complied with. NOTE 6 - FINANCING CONTRACTS: The Company has entered into certain agreements for the acquisition of telecommunications equipment, services, and installation consultancy. These commitments will be covered through the financing contracts which are summarized on the next page.
Equipment supplier Financing agent Maximum amount - ------------------ --------------- -------------- Qualcomm Qualcomm managed by ABN AMRO Bank N. V $310,000(1) Alcatel Syndicated loan managed by Citibank International, Plc 280,000(2) -------- $590,000 ========
F-71 76 (1) This line of credit is to be utilized as follows:
Credit Term Maximum amount ------ ---- -------------- Credit 1 From the date of authorization to December 31, 2000 $200,000 Credit 2 From January 1, 2001 to December 31, 2002 90,000 Additional credit From the date of authorization to December 31, 2002 20,000 -------- $310,000 ========
Advances under credits 1 and 2 are composed of "A" and "B" tranches. Tranche "A", which is for the financing of equipment purchases, is being provided by the Export Import Bank of the United States (EXIM Bank) and is subject to interest at the LIBOR plus 1.5 points. Tranche "B" is for the financing of customs duties (excluding value added taxes) and transportation costs and is subject to interest at the LIBOR plus 4.5 points. Interest is to be paid at various intervals ranging from monthly to biannually, depending upon which credit and tranche the amount has been disbursed from. At December 31, 1998, no advances have been made under this line of credit. The short term trade payables balance shown in the consolidated balance sheet includes liabilities of $72,521 and $32,868 payable to Qualcomm and Qualcomm Wireless Services (Mexico), S. A. de C. V., respectively. These dollar-denominated amounts are expected to be paid through advances on the line-of-credit facilities. (2) This line of credit is to be utilized as follows:
Credit Term Maximum amount ------ ---- -------------- Credit 1 From the date of authorization to December 31, 2000 $170,000 Credit 2 From January 1, 2001 to December 31, 2002 100,000 Additional Credit From the date of authorization to December 31, 2000 10,000 -------- $280,000 ========
F-72 77 These loans are subject to interest at the Eurodollar rate (5.2 % at December 31, 1998) plus 4.5 points, adjusted monthly. The interest is to be paid on a quarterly basis. At December 31,1998, $19,090 was outstanding under this line of credit (Credit 1) and is included in long-term bank loans. This amount will be paid as follows:
December 31, Amount - ------------ ------ 2002 $ 3,818 2003 5,727 2004 9,545 ------- $19,090 =======
Principal payments of "A" and "B" tranches of credit managed by ABM AMRO Bank N. V. will be negotiated in good faith and must be agreed upon by both the parties prior to disbursement. Principal payment for other lines of credit will be made on the dates and in the proportions shown below:
Portion payable on December 31, ------------------------------------------------------------------------------------- Year in which the disbursement was made 2002 2003 2004 2005 2006 2007 - --------------------- ---- ---- ---- ---- ---- ---- 1998 and 1999 20% 30% 50% 2000 20% 30% 50% 2001 20% 30% 50% 2002 20% 30% 50%
In order to collateralize the obligations derived from the financing contracts, the Company has pledged all properties, rights and assets, as described in Note 1. The lines of credit establish the following main obligations and restrictions for the Company: a. Disbursements from the lines of credit should be utilized only for the acquisition of telecommunication equipment from Qualcomm and Alcatel. b. The capital stock should be increased by two contributions of $50,000 each, by July 31, 1999 and on August 30, 2000, respectively. c. Neither dividend payments nor capital distributions should be made during the loan periods. NOTE 7 - STOCKHOLDERS' EQUITY: Telecomunicaciones was incorporated on June 24, 1998, with a contribution of $11 for the subscription of 100,000 common shares, each with a par value of one Mexican peso. F-73 78 On June 30, 1998, the Company exchanged the original 100,000 common shares for 1,000 shares with no par value. On the same date, the Company received from its stockholders $1 in exchange for the issuance of an additional 200 common shares. On September 28, 1998, the Company received $299,988 in exchange for the issuance of 7,499,388 Series "A", Class II shares, 7,199,412 Series "B", Class II shares, and 15,300,000 Series "N" Class II shares. At December 31, 1998, the authorized capital stock is 30,000,000 no-par-value shares, all of which are issued and outstanding, as follows:
Number of shares Description Amount - ---------- ----------- -------- Class I (fixed minimum portion): 612 Series A $ 6 588 Series B 6 Class II (variable portion): 7,499,388 Series A 74,994 7,199,412 Series B 71,994 15,300,000 Series N 153,000 - ---------- -------- 30,000,000 $300,000 ========== ========
Series "N", Class "II" shares have limited voting rights. In the event of a capital stock reduction, the portion of capital stock exceeding contributions made is subject to income tax, payable by the Company, equivalent to 53.85% of such excess. NOTE 8 - INCOME TAX, ASSET TAX AND EMPLOYEES' STATUTORY PROFIT SHARING: For the period ended December 31, 1998, Telecomunicaciones generated a net tax loss of $4,976 and two of its subsidiaries a net tax loss of $8,394. The other subsidiary, Recursos Humanos, had taxable income of $944 and as a result, the Company has recognized a current tax provision of $321 in the consolidated financial statements. The Company has obtained authorization from the Treasury Ministry (Secretaria de Hacienda y Credito Publico) (SHCP) to determine its income tax and asset tax on a consolidated basis starting in 1999. The tax loss carryforwards of $13,370 can be inflation indexed by applying the Mexican National Consumer Price Index from the date on which losses arise through the date of their utilization. Such restated tax loss carryforwards can be offset against future taxable profits, and expire in the year 2008. F-74 79 The tax effect of temporary differences that give rise to deferred tax assets and liabilities are as follows: Interest and consultancy fees capitalized $ (4,978) Preoperating expenses 13,706 Tax loss carryforwards 13,370 -------- $ 22,098 ========
The statutory income tax rate for 1998 was 34%. The following items represent the principal differences between income taxes computed at the statutory tax rate and the Company's provision for income taxes for the period ended December 31, 1998: Tax at statutory rate (34%) Foreign exchange loss on remeasurement of financial statements 3% Permanent items, including inflationary effects 7% Interest and consultancy fees capitalized (5%) Preoperating expenses 15% Valuation allowance 15% --- Effective income tax rate 1% ===
Asset tax is determined by applying the rate of 1.8% to the net amount of certain assets and liabilities, and is payable only when asset tax exceeds income tax due. For the period ended December 31, 1998, the Company was not subject to the payment of asset tax. For the period ended at December 31, 1998, the Company was not subject to the payment of employees' statutory profit sharing. NOTE 9 - COMMITMENTS: As of December 31,1998, the Company is leasing offices and other spaces related to its activity, under operating agreements expiring through 2003. Future minimum lease payments under such leases amount to approximately $8,158, as follows:
Year Amount ---- ------ 1999 $2,490 2000 1,743 2001 1,429 2002 1,407 2003 1,089 ------ $8,158 ======
Lease payments for the period ended December 31,1998 recorded in the Statement of Income amounted to $824. F-75 80 NOTE 10 - FINANCIAL INSTRUMENTS: The fair value of the Company's cash and cash equivalents, recoverable taxes, other accounts receivable, trade payables, income taxes and other accounts payable and accrued expenses approximate the carrying value due to the short-maturity of these instruments. The estimated fair value and carrying value of other financial instruments at December 31, 1998 are as follows:
Carrying Fair value value -------- ------- Notes payable to affiliated company $ 5,941 $ 5,823 Long-term bank loans 19,090 19,090
F-76 81 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NO. DESCRIPTION NUMBERED PAGES ------- ----------- -------------- 3.1(1) Form of Amended and Restated Certificate of Incorporation of the Registrant 3.2(1) Form of Amended and Restated Bylaws of the Registrant 3.3(2) Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant 4.1(1) Form of Common Stock Certificate 4.2(3) Warrant, dated as of September 23, 1998, issued to QUALCOMM Incorporated ("QUALCOMM") 4.3(2) Rights Agreement, dated as of September 14, 1998, between the Registrant and Harris Trust Company of California 10.1(3) Separation and Distribution Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.2(3) Credit Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.3(3) Tax Matters Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.4(3) Interim Services Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.5(3) Master Agreement Regarding Equipment Procurement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.6(3) Employee Benefits Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.7(3) Conversion Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.8(3) Assignment and Assumption Agreement, dated as of September 23, 1998, between QUALCOMM and the Registrant 10.9(1) Form of Registrant's 1998 Stock Option Plan (the "Option Plan") 10.10(1) Form of non-qualified/incentive stock option under the Option Plan 10.11(1) Form of non-qualified stock option under the Option Plan to be granted to QUALCOMM option holders in connection with the Distribution 10.12(1) Form of Registrant's 1998 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") 10.13(1) Form of non-qualified stock option under the Directors' Plan 10.14(1) Form of Registrant's Employee Stock Purchase Plan 10.15(1) Assignment and Assumption of Lease dated August 11, 1998 between QUALCOMM and Vaxa International, Inc. 10.16(1) Form of Indemnity Agreement to be entered into between the Registrant and its directors and officers 10.17(4) Loan Agreement, dated as of September 28, 1998, between Pegaso Comunicaciones y Servicios, S.A. de C.V. and the Registrant
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EXHIBIT SEQUENTIAL NO. DESCRIPTION NUMBERED PAGES ------- ----------- -------------- 10.18(4) Promissory Note, executed September 25, 1998, by Pegaso Comunicaciones y Servicios, S.A. de C.V. in favor of the Registrant 10.19(4) Pledge Agreement, dated as of September 28, 1998, by and between Pegaso Comunicaciones y Servicios, S.A. de C.V., the Registrant and the other parties thereto 21.1(1) Subsidiaries of the Registrant 23.1(5) Consent of Independent Accountants relating to report dated November 19, 1998 (Leap Wireless International, Inc.) 23.2(5) Consent of Independent Accountants relating to report dated February 25, 1999 except as to Note 14 b) which is as of March 16, 1999 (Chilesat Telefonia Personal S.A.) 23.3(5) Consent of Independent Accountants relating to report dated April 30, 1999 (Orrengrove Investments Ltd.) 23.4(5) Consent of Independent Accountants relating to report date February 15, 1999 (Pegaso Telecomunicaciones, S.A. de C.V.) 27.1(4) Financial Data Schedule
- -------------------- (1) Filed as an exhibit to the Company's Registration Statement on Form 10, as amended (File No. 0-29752), and incorporated herein by reference. (2) Filed as an exhibit to the Company's Current Report on Form 8-K dated September 14, 1998, and incorporated herein by reference. (3) Filed as an exhibit to the Company's Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-64459) dated October 13, 1998, and incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998. (5) Filed with this Amendment No. 2. EX-23.1 2 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-63823) of Leap Wireless International, Inc. of our report dated November 19, 1998 appearing on Page F-2 of this Annual Report on Form 10-K/A (Amendment No. 2). PRICEWATERHOUSECOOPERS LLP San Diego, California June 16, 1999 EX-23.2 3 EXHIBIT 23.2 1 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-63823) of Leap Wireless International, Inc. of our report dated February 25, 1999, except as to Note 14 b) which is as of March 16, 1999 appearing on Page F-22 of this Annual Report on Form 10-K/A (Amendment No. 2). PRICE WATERHOUSE Santiago, Chile June 15, 1999 EX-23.3 4 EXHIBIT 23.3 1 Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-63823) of Leap Wireless International, Inc. of our report dated April 30, 1999, appearing on Page F-43 of this Annual Report on Form 10-K/A (Amendment No. 2). PRICEWATERHOUSECOOPERS LLP McLean, Virginia June 16, 1999 EX-23.4 5 EXHIBIT 23.4 1 Exhibit 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-63823) of Leap Wireless International, Inc. of our report dated February 15, 1999, appearing on Page F-59 of this Annual Report on Form 10-K/A (Amendment No. 2). PRICE WATERHOUSE LLP Mexico City, Mexico June 16, 1999 -----END PRIVACY-ENHANCED MESSAGE-----