Qualcomm 2002 Annual Report Download - page 48

PEGASO TELECOMUNICACIONES, S.A. DE C.V.
We have various financing arrangements, including a bridge loan facility, an
equipment loan facility and an interim loan facility, with Pegaso Comunicaciones y
Sistemas S.A. de C.V., a wholly-owned subsidiary of Pegaso Telecomunicaciones, S.A.
de C.V., a CDMA wireless operating company in Mexico (collectively referred to as
Pegaso). On September 10, 2002, Telefónica Móviles (Telefónica) acquired a 65% con-
trolling interest in Pegaso (the Close).
The bridge facility was payable in full on October 31, 2001, was in default and was
subject to a forbearance agreement at September 30, 2002. At September 30, 2002,
$413 million was outstanding under the bridge loan facility, net of deferred interest
and unearned fees. We stopped recognizing interest on the bridge loan facility effec-
tive at the beginning of the fourth fiscal quarter of 2001. Pegaso paid $435 million in
full satisfaction of the bridge loan facility on November 8, 2002 (the Bridge Payment).
The equipment loan facility and related financing were in default and subject to a
forbearance agreement at September 30, 2002. At September 30, 2002, $318 million
was outstanding under the equipment loan facility, net of deferred interest and
unearned fees. The equipment loan facility was payable through December 31, 2007
and bears interest at the London Interbank Offered Rate (LIBOR) plus 4.5% (or LIBOR
plus 6.5% when in default). We stopped recognizing interest on the equipment loan
facility and related financing effective at the beginning of the fourth fiscal quarter of
2001. The terms of the equipment loan facility and related financing were modified,
retroactive to September 10, 2002, upon receipt of the Bridge Payment and the satis-
faction of other conditions. We will be required to use approximately $139 million of
the bridge loan proceeds to purchase outstanding vendor debt owed by Pegaso to
other lenders. Financing related to the equipment loan facility in the amount of
$4 million will be payable in March 2003. The remaining equipment loan facility,
including the acquired vendor debt, will be payable quarterly starting in March 2006
through December 2008 and will bear interest at LIBOR plus 1% for two years, LIBOR
plus 3% for the next three years and LIBOR plus 6% thereafter. We recognized
$0.5 million in interest income on the equipment loan facility during fiscal 2002 from
the Close through fiscal year end at LIBOR plus 1%.
During fiscal 2002, we provided to Pegaso $65 million of interim financing, including
$5 million in capitalized fees, and $65 million of additional interim financing. Prior to
the Close, a Pegaso shareholder purchased $25 million and $23 million participations
in the interim and additional interim finance receivables, respectively, from us, and at
Close, converted those portions of the interim and additional interim financings into
equity in Pegaso. At September 30, 2002, $40 million and $42 million were outstanding
under the interim and additional interim facilities, respectively. The interim and additional
interim financing commitments were cancelled at Close, and the interim and additional
interim finance receivables were repaid in full with interest on October 10, 2002.
Also in connection with the Close, Telefónica paid $9 million to us in consideration
for warrants to acquire equity in Pegaso at Close, and Pegaso paid $12 million to us
in October 2002 related to certain fees and expense reimbursements.
As a result of the Close, we recognized a total of $9 million in interest income in
fiscal 2002. At September 30, 2002, finance and other receivables from Pegaso totaled
$821 million, net of $45 million in deferred interest income that will be amortized over
the remaining term of the equipment loan facility as an adjustment to yield. We
received $90 million of this amount in October 2002 and an additional $295 million
when the Bridge Payment was made in November 2002, excluding the $139 million
portion of the Bridge Payment that will be used to acquire vendor debt. After receipt
of the Bridge Payment, $436 million of the September 30, 2002 finance receivables
remains, net of deferred interest. In the event that Pegaso were to initiate the com-
mercialization of GSM or TDMA services in its spectrum, Pegaso would be obliged to
prepay $285 million of that amount. Telefónica has recently indicated its intention to
deploy GSM in Mexico.
Our aggregate commitments to provide additional long-term financing to Pegaso
under our arrangements with Ericsson were $105 million as of September 30, 2002,
subject to Pegaso meeting certain conditions. Of this amount, $9 million was can-
celled when Pegaso made the Bridge Payment, and the remaining $96 million is no
longer available to Pegaso as a result of a series of events that occurred in November
2002. We also had $4 million in other financing commitments to Pegaso as of
September 30, 2002 that were cancelled when Pegaso made the Bridge Payment.
Pegaso is at an early stage of development and may not be able to compete
successfully. Competitors in Mexico have greater financial resources and more estab-
lished operations than Pegaso. As is normal for early stage wireless operators,
Pegaso is experiencing significant losses and negative cash flows from operations.
Based on current information and available evidence, including the acquisition of
Pegaso by Telefónica, we believe that we will ultimately be able to collect the remaining
long-term financing from Pegaso. Failure to collect our finance receivables could
have a material adverse effect on our operating results and financial condition.
LEAP WIRELESS INTERNATIONAL INC.
In fiscal 2000, we purchased 308,000 units of Leap Wireless International Inc.’s
(Leap Wireless) senior discount notes with detachable warrants for $150 million. The
notes mature in April 2010 and bear interest at 14.5% payable beginning in 2005. In
addition, we hold 489,000 shares of Leap Wireless’ common stock and a warrant to
purchase 3,375,000 shares of common stock issued to us in connection with our spin-
off of Leap Wireless in September 1998. During fiscal 2002, we determined that
declines in the market values of our investments in Leap Wireless were other than
temporary, as the market values of the investments had declined significantly during
our third quarter of fiscal 2002 as a result of unfavorable developments in Leap
MANAGEMENT’S DISCUSSION AND ANALYSIS continued