1/14/00 - Management's Discussions: 10-Q, LEAP WIRELESS INTERNATIONAL INC 2 of 2
Qualcomm Credit Agreement. The credit agreement consists of two sub-facilities. We may use the working capital sub-facility to
borrow up to $35.2 million to fund the corporate operating expenses of Leap at the parent level. The investment capital sub-facility
enables us to borrow up to $229.8 million to make identified portfolio investments. As of November 30, 1999, Leap had $114.7 million
available to it under the credit agreement, with $20.2 million available under the working capital sub-facility and $94.5 million available
under the investment sub-facility. Amounts available under the investment sub-facility are allocated to specific projects and may not be
reallocated to other projects without Qualcomm's written consent. As a condition to the FCC's recognition of Leap's qualification to hold
C-Block and F-Block licenses, we must take steps so that by January 2001, Qualcomm holds no more than 50% of our outstanding
debt obligations. We expect that we will have borrowed substantially all of the funds available to us under our credit agreement with
Qualcomm by the end of calendar year 2000. Leap may not be able to reduce its debt to Qualcomm to 50% or less of its outstanding
debt obligations.
Amounts borrowed under the credit agreement are due and payable in September 2006, unless the maturity of the loans is accelerated
pursuant to the provisions of the credit agreement. Qualcomm has a security interest in substantially all of the assets of Leap, other
than the stock of special purpose subsidiaries formed to hold wireless licenses, for so long as any amounts are outstanding under the
credit agreement. Amounts borrowed under the credit agreement bear interest at a variable rate equal to the prime rate plus 4.25% per
annum or LIBOR plus 5.25% per annum. Interest is payable quarterly beginning September 30, 2001. Before this time, accrued interest
is added to the principal amount outstanding. If Qualcomm assigns more than 10% of the total funding commitments to other lenders,
we must pay a commitment fee of 0.5% to the lenders on unused balances under the credit agreement.
Lucent Equipment Financing. Cricket Communications has agreed to purchase $330 million of infrastructure products and services from
Lucent Technologies. The agreement is subject to early termination at Cricket Communications's convenience subject to payments for
equipment purchased. Lucent agreed to finance these purchases plus additional working capital under a credit facility. The credit
facility permits up to $641 million in total borrowings by Cricket Communications with borrowing availability based on total amounts of
equipment purchased, subject to various covenants and conditions typical for a loan of this type, including minimum levels of
customers and covered potential customers which must increase over time, limits on annual capital expenditures and dividend
restrictions and other financial ratio tests. Borrowings under the Lucent credit facility accrue at an interest rate equal to LIBOR plus
3.5% to 4.25% or a bank base rate plus 2.5% to 3.25%, in each case with the specific rate based on the ratio of total indebtedness to
EBITDA. Cricket Communications must pay a commitment fee equal to 1.25% per annum of the commitments under the credit facility
until the aggregate principal amount of borrowings equals $175 million, at which time the rate decreases to 1.0% until the aggregate
principal amount equals $350 million, at which time the rate further decreases to 0.75%. Principal payments are scheduled to begin
after three years with a final maturity after eight years. Repayment is weighted to the later years of the repayment schedule. The
obligations under the Lucent credit agreement are secured by all of the stock of Cricket Communications and its subsidiaries, all of
their respective assets, the assets of Cricket Communications Holdings, Inc. and the stock of each special purpose subsidiary of Leap
formed to hold wireless licenses.
Ericsson Equipment Financing. Cricket Communications also has agreed to purchase $330 million of next-generation infrastructure
products which are currently in development and related services from Ericsson. Purchases from Ericsson will be on substantially
similar terms to the Lucent agreement, including a credit facility providing for borrowings up to $495.0 million with borrowing availability
based on a ratio of total amounts of equipment purchased. The commitment of funds by Ericsson is subject to the development of the
next generation equipment, the negotiation of definitive documentation and the approval of Ericsson's board of directors.
Obligations to the FCC. We will assume debt obligations to the FCC in the aggregate principal amount of approximately $93.1 million
as part of the purchase price for the pending acquisitions of Chase Telecommunications Holdings and wireless licenses from AirGate,
PCS Devco and Radiophone. For a discussion of the terms of these debt obligations to the FCC, see "Pending Acquisitions."
Smartcom Deferred Payment Agreement. Smartcom has entered into a Deferred Payment Agreement with Qualcomm related to
Smartcom's purchase of equipment, software and services from Qualcomm. The obligations under the Deferred Payment Agreement
are secured by all of the assets of Smartcom. A Leap subsidiary has also pledged its shares in Smartcom as collateral for its
guarantee of Smartcom's obligations to Qualcomm under the agreement. The Deferred Payment Agreement requires Smartcom to
meet certain financial and operating covenants, including a debt to equity ratio and restrictions on Smartcom's ability to pay dividends
and to distribute assets. As a result, substantially all the net assets of Smartcom are restricted from distribution to Leap. Under the
terms of the agreement, Qualcomm agreed to defer collection of principal amounts up to a maximum of $84.5 million. The agreement
was amended in October 1999 to capitalize interest payments as part of Smartcom's capital restructuring. As of that date, the deferred
payment balance was approximately $90.7 million and the capitalized interest commitment was $14.6 million. The deferred payments
bear interest at either a prime or LIBOR rate, plus an applicable margin. At November 30, 1999, the weighted average effective rate of
interest was 12.6%. Accrued interest may be added to the outstanding principal amount of the applicable borrowing until October 2001.
Amounts deferred under the agreement must be repaid by September 2006. Leap and Qualcomm have entered into a binding letter
agreement under which Qualcomm has agreed to provide to Smartcom an additional $30 million in infrastructure equipment financing
and $10 million in handset financing. The parties are currently negotiating definitive agreements.
PEGASO FINANCING
Qualcomm and another equipment vendor have agreed to provide approximately $580 million of secured equipment financing to Pegaso,
a portion of which has already been advanced to the venture.
In addition, in May 1999, Pegaso entered into a $100 million loan agreement with several banks with credit support from Qualcomm.
We guaranteed 33% of Pegaso's obligations under that agreement. In July 1999, several existing investors contributed $50 million to
Pegaso as previously planned. In addition, Pegaso recently announced that it has signed a non-binding memorandum of understanding
with Sprint PCS under which Sprint PCS would invest up to $250 million by purchasing shares from Pegaso and shareholders other
than Leap. Pegaso expects to fund a large portion of its development and operating activities in fiscal 2000 with cash from operations,
proceeds of the $50 million investment and the pending investment from Sprint PCS, and borrowings under the $100 million loan
agreement. Several other existing investors are committed to contribute $50 million in additional equity capital to Pegaso by August
2000. In addition, Pegaso is seeking additional debt and equity financing, including additional vendor financing.
OPERATING ACTIVITIES
We used $17.9 million in cash for operating activities during the three month period ended November 30, 1999 compared to $10.1
million in the corresponding period of the prior fiscal year. The increase is primarily attributable to the full consolidation of Smartcom.
We expect that cash used in operating activities will increase substantially in the future as a result of our pending acquisitions and
other activities related to the launch of our U.S. network.
INVESTING ACTIVITIES
Cash used in investing activities was $3.5 million during the three month period ended November 30, 1999 compared to $100.4 million
in the corresponding period of the prior fiscal year. Investments during the three month period ended November 30, 1999 consisted of
loans to Chase Telecommunications of $5.5 million and capital expenditures, primarily by Smartcom, of $5.0 million offset by $7.0
million of proceeds received from the liquidation of the Transworld Companies. We expect to receive an additional $4.5 million of
liquidation proceeds during the remainder of the fiscal year. Investments in the corresponding period of the prior fiscal year consisted
primarily of a $60.7 million capital contribution to Pegaso, loans and advances of $26.1 million to our operating companies and a $17.5
million loan, net of repayments of $7.5 million, provided to a related party. In the remainder of fiscal 2000, Leap and its subsidiaries
expect to make significant investments in capital assets, including network equipment and wireless communications licenses.
FINANCING ACTIVITIES
Cash provided by financing activities during the three month period ended November 30, 1999, primarily from borrowings under the
credit agreement with Qualcomm, was $33.2 million. Cash provided by financing activities in the corresponding period of the prior fiscal
year was $117.9 million, representing $95.3 million of funding from Qualcomm for our operating and investing activities prior to the
distribution of our common stock to Qualcomm's stockholders in September 1998, and $22.6 million of net borrowings under the credit
agreement and from banks.
CURRENCY FLUCTUATION RISKS
We report our financial statements in U.S. dollars. Our international operating companies report their results in local currencies.
Consequently, fluctuations in currency exchange rates between the U.S. dollar and the applicable local currency will affect our results
of operations as well as the value of our ownership interests in its operating companies.
Generally, our international operating companies generate revenues which are paid in their local currency. However, many of these
operating companies' major contracts, including financing agreements and contracts with equipment suppliers, are denominated in U.S.
dollars. As a result, a significant change in the value of the U.S. dollar against the national currency of an operating company could
result in a significant increase in the operating company's expenses and could have a material adverse effect on the operating company
and on us. In some emerging markets, including Mexico, significant devaluations of the local currency have occurred and may occur
again in the future.
We do not currently hedge against foreign currency exchange rate or interest rate risks.
INFLATION
Inflation has had and may continue to have negative effects on the economies and securities markets of emerging market countries and
could have negative effects on our operating companies and any new start-up project in those countries, including their ability to obtain
financing. Chile and Mexico, for example, have periodically experienced relatively high rates of inflation. The operating companies,
where permitted and subject to competitive pressures, intend to increase their tariffs to account for the effects of inflation. However, in
those jurisdictions where tariff rates are regulated or specified in the license, the operating companies may not successfully mitigate
the impact of inflation on their operations.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that many computer software programs use two digits rather than four to represent a specific
year. Any computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing disruptions of operations including a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Leap and its operating companies have recently begun their respective businesses and have designed and built their wireless
communications networks and support systems with the Year 2000 issue in mind. The recent acquisition of network equipment and
software does not guarantee, however, that such equipment and software are Year 2000 compliant.
Leap and each of its operating companies conducted an inventory to identify its critical systems that may have been subject to Year
2000 problems. Each of our operating companies worked with their primary telecommunications and business software systems
vendors on Year 2000 readiness issues. Those vendors had informed Leap and its operating companies that their products would be
Year 2000 ready. To date, Leap has not incurred any material costs in support of the Year 2000 issue.
As of the date of this report, January 14, 2000, the systems of Leap and its operating companies have operated without any apparent
Year 2000 related problems and appear to be Year 2000 compliant. We are not aware that any of our primary vendors or systems
maintained by third parties (such as landline, long-distance and power systems) have experienced significant Year 2000 compliance
problems. However, while no such problem has been discovered as of the date of this filing, Year 2000 issues may not become
apparent immediately and therefore, there is no assurance that Leap and its operating companies will not be affected in the future. We
will continue to monitor the issue and work to remediate any Year 2000 issues that may arise.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which Leap must adopt for fiscal year 2001. This statement establishes a new model for accounting for derivatives
and hedging activities. Under SFAS No. 133, all derivatives must be recognized as assets and liabilities and measured at fair value.
Leap does not expect that the adoption of this new accounting standard will have a material impact on its consolidated financial
position or results of operations.
(c) 1995-1999 Cybernet Data Systems, Inc. All Rights Reserved.
Received by Edgar Online: Jan. 14, 2000
CIK Code: 0001065049
SEC Accession Number: 0000936392-00-000022
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