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FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-11987
PROSPECTUS
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
14% SENIOR SECURED DISCOUNT NOTES DUE 2001
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
14% SENIOR SECURED DISCOUNT NOTES DUE 2001
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 20, 1996, UNLESS EXTENDED.
----------------
International Wireless Communications Holdings, Inc., a Delaware corporation
(the "Company"), hereby offers to exchange (the "Exchange Offer") its new 14%
Senior Secured Discount Notes due 2001 (the "Exchange Notes") for its
outstanding 14% Senior Secured Discount Notes due 2001 (the "Old Notes"and,
together with the Exchange Notes, the "Notes") that were issued and sold in a
transaction exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"). The Old Notes have an aggregate principal
amount of approximately $196.7 million and, based upon the allocation of the
purchase price between the Old Notes and the Warrants (as defined) in the Unit
Offering (as defined), were initially offered and sold to certain
institutional and accredited investors at a price of 35.43% of the principal
amount thereof.
The terms of the Exchange Notes are substantially identical (including
principal amount, interest rate, maturity, security and ranking) to the terms
of the Old Notes for which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes (i) are freely transferable by holders
thereof (except as provided below) and (ii) are not entitled to certain
registration rights and certain additional interest provisions which are
applicable to the Old Notes under the Registration Rights Agreement (as
defined). The Exchange Notes will be issued under the Indenture governing the
Old Notes (the "Indenture"). See "Risk Factors--Financing Risks--Ability to
Realize on Collateral; No Assurance as to Value of Assets." The Exchange Notes
will be, and the Old Notes are, senior secured obligations of the Company,
secured by a pledge of the capital stock and Intercompany Notes (as defined)
of International Wireless Communications, Inc. ("IWC"), a wholly owned
subsidiary through which the Company holds all of its existing assets. Lenders
under a Permitted Bank Facility (as defined) will have the right to share on a
pari passu basis in any proceeds from the sale of the collateral securing the
Notes. The Exchange Notes will rank, and the Old Notes rank, pari passu in
right of payment with all senior Indebtedness (as defined) of the Company and
will rank, and the Old Notes rank, senior in right of payment to all future
Subordinated Indebtedness (as defined) of the Company. The Exchange Notes will
be, and the Old Notes are, effectively subordinated to other liabilities
(including accounts payable and trade debt) of the Company. The Exchange Notes
will be, and the Old Notes are, effectively subordinated to all Indebtedness
and other liabilities (including accounts payable and trade debt) of the
Company's subsidiaries and affiliated companies. As of June 30, 1996, the
Company's subsidiaries and operating affiliates had indebtedness for borrowed
money of approximately $117.2 million. As of September 30, 1996, the Company
had no Indebtedness other than the Notes and IWC had outstanding Indebtedness
of approximately $4.0 million which has been subsequently repaid. Subject to
certain exceptions, the Indenture limits the ability of the Company and its
Restricted Subsidiaries (as defined) and Restricted Affiliates (as defined) to
incur additional Indebtedness but does not limit the ability of Unrestricted
Subsidiaries (as defined) of the Company or its Unrestricted Affiliates (as
defined) to incur Non-Recourse Debt (as defined). In certain circumstances,
the Indenture permits the Company to create Indebtedness that is senior to, or
pari passu with, the Exchange Notes, including Indebtedness permitted under
the Permited Bank Facility. For a complete description of the terms of the
Exchange Notes, see "Description of Exchange Notes." There will be no cash
proceeds to the Company from the Exchange Offer.
(Continued on Next Page)
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HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH IN
"RISK FACTORS" COMMENCING ON PAGE 22 OF THIS PROSPECTUS PRIOR TO MAKING AN
INVESTMENT DECISION WITH RESPECT TO THE EXCHANGE OFFER.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 21, 1996.
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(Cover Page Continued)
Certain defined terms used herein are set forth in "Description of Exchange
Notes--Certain Definitions" commencing on page 122 of this Prospectus.
The Exchange Notes will accrete at a rate of 14%, compounded semi-annually.
There will be no scheduled interest payments on the Exchange Notes and there
is no requirement that the Company make any sinking fund payments with respect
to the principal of or the interest on the Exchange Notes.
The Notes are not redeemable at the option of the Company prior to maturity.
Upon a Change of Control (as defined), the Company will be required to make an
offer to repurchase the Exchange Notes at a price equal to 101% of the
Accreted Value (as defined) thereof to the date of repurchase. In addition,
subject to certain conditions, the Company will be obligated to make an offer
to repurchase the Exchange Notes at 100% of the Accreted Value thereof to the
date of repurchase with the net cash proceeds of certain Asset Sales (as
defined). See "Description of Exchange Notes--Repurchase at the Option of
Holders."
The Old Notes were originally issued and sold on August 15, 1996 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act and Rule 144A
promulgated under the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. Based upon its
view of interpretations provided by the staff of the Securities and Exchange
Commission (the "Commission"), the Company believes that Exchange Notes will
be freely transferable by holders thereof other than affiliates of the Company
after the Exchange Offer without further registration under the Securities Act
if the holder of the Exchange Notes represents that it is acquiring the
Exchange Notes in the ordinary course of business, that it has no arrangement
or understanding with any person to participate in the distribution of the
Exchange Notes and that it is not an affiliate of the Company, as such terms
are interpreted by the Commission; provided that Participating Broker-Dealers
(as defined) receiving Exchange Notes in the Exchange Offer will have a
prospectus delivery requirement with respect to resales of the Exchange Notes.
The Commission has taken the position that the Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to the
Exchange Notes (other than a resale of an unsold allotment from the original
sale of the Old Notes) with this Prospectus. The Letter of Transmittal that is
filed as an exhibit to the Registration Statement of which this Prospectus is
a part (the "Letter of Transmittal") states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. Broker-dealers
who acquired Old Notes, as a result of market making or other trading
activities, may use this Prospectus, as supplemented or amended, in connection
with resales of the Exchange Notes. The Company has agreed that, for a period
of 180 days after this Registration Statement is declared effective by the
Commission, it will make this Prospectus available to any broker-dealer and
other persons, if any, with similar prospectus delivery requirements for use
in connection with any such resale. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
and any other holder that cannot rely upon such interpretations must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction.
The Old Notes were issued in the form of a single global note that was
deposited with the Depositary Trust Company, as depository ("DTC"), and
registered in the name of a nominee of DTC. The Exchange Notes exchanged for
Old Notes represented by the global note will be issued in the form of a
single global Exchange Note that will be deposited with DTC and registered in
the name of a nominee of DTC. Exchange Notes issued in exchange for Old Notes
held by Non-Global Purchasers (as defined) will be issued certificated notes
registered in the name of DTC or its nominee and deposited with or on behalf
of DTC. See "Book-Entry; Delivery and Form."
The Old Notes and the Exchange Notes constitute new issues of securities
with no established public trading market. Any Old Notes not tendered and
accepted in the Exchange Offer will remain outstanding. To the extent
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that Old Notes are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered Old Notes could be adversely affected. Following
consummation of the Exchange Offer, the holder of any remaining Old Notes will
continue to be subject to the existing restrictions on transfer thereof and
the Company will have no further obligation to such holders to provide for the
registration under the Securities Act of the Old Notes except under certain
limited circumstances. See "Old Notes Registration Rights" and "Old Notes
Transfer Restrictions." No assurance can be given as to the liquidity of the
trading market for either the Old Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on December 20, 1996, unless extended
(the "Expiration Date"). The date of acceptance for exchange of the Old Notes
(the "Exchange Date") will be the fourth business day following the Expiration
Date, upon surrender of the Old Notes. Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements
thereto, the "Registration Statement") under the Securities Act with respect
to the Exchange Notes being offered hereby. This Prospectus, which forms a
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement, certain items of which are omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Exchange Notes, reference is
hereby made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, where such contract or other document is an exhibit
to the Registration Statement, each such statement is qualified in all
respects by the provisions in such exhibit, to which reference is hereby made.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon the
effectiveness of the Registration Statement or, if earlier, the Shelf
Registration Statement (as defined), the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file all reports and other information required by the Commission. The
Registration Statement as well as periodic reports, proxy statements and other
information filed by the Company with the Commission may be inspected at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located
at 5670 Wilshire Blvd., 11th Floor, Los Angeles, California, 90036-3648 and
Seven World Trade Center, Suite 1300, New York, New York 10048. In addition,
registration statements and certain other documents filed with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system
are publicly available through the Commission's site on the Internet's World
Wide Web, located at http://www.sec.gov. The Registration Statement, including
all exhibits thereto and amendments thereof, has been filed with the
Commission through EDGAR. Copies of the Registration Statement, periodic
reports, proxy statements and other information also can be obtained
from the Company upon request. Any such request should be addressed to the
Company's principal office at 400 South El Camino Real, Suite 1275, San Mateo,
California, 94402 Attention: Secretary (telephone number (415) 548-0808).
The Company's obligation to file periodic reports with the Commission
pursuant to the Exchange Act may be suspended if the Notes are held of record
by fewer than 300 holders at the beginning of any fiscal year of the Company,
other than the fiscal year in which the Registration Statement or the Shelf
Registration Statement becomes effective. However, the Company has agreed,
pursuant to the Indenture that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any Notes remain
outstanding, it will furnish to the holders of such securities and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms,
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including for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's independent certified
public accountants and (ii) all current reports that would be required to be
filed on Form 8-K if the Company were required to file such reports. In
addition, for as long as any of the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Notes or
beneficial owner of any such securities, in connection with any sale thereof,
the information required by Rule 144A(d)(4) under the Securities Act.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER MADE BY
THIS PROSPECTUS TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER TO SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
UNTIL FEBRUARY 19, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. As used herein, the term the "Company"
refers to International Wireless Communications Holdings, Inc. ("IWC Holdings")
and its subsidiaries, including International Wireless Communications, Inc.
("IWC"), unless the context otherwise requires or unless otherwise expressly
stated. An operating company refers to a wireless communications company in
which the Company has invested that commenced providing wireless communications
service on a commercial basis. A developmental stage project refers to a
wireless communications company or project in which the Company has made or
proposes to make an investment, but which has not commenced providing service
or with respect to which the Company's current participation is both limited in
scope and in its initial stages. Reference to "dollars" and "$" refer to United
States dollars, unless otherwise expressly stated. Certain of the demographic
and statistical data appearing in this Prospectus have been derived from the
sources set forth under "Business--Background--Demand For Communications
Services In Developing Countries." Certain defined terms used herein are set
forth in "Description of Exchange Notes--Certain Definitions" commencing on
page 121 of this Prospectus.
THE COMPANY
The Company is a leading developer, owner and operator of wireless
communications companies and projects in emerging markets in Asia and Latin
America. These companies and projects provide or are developing a variety of
wireless communications services, including cellular telephone, wireless local
loop ("WLL"), enhanced capacity trunked radio ("ECTR"), paging and wireless
cable television. The Company currently has interests in seven operating
companies in Brazil, Indonesia, Malaysia, Mexico, New Zealand and the
Philippines. In addition, the Company has interests in six developmental stage
projects in China, India, Indonesia, Mexico, Pakistan, Peru, Taiwan and
Thailand and is actively pursuing other development and acquisition
opportunities. As of September 30, 1996, the Company's operating companies had
licenses covering an estimated 370 million people ("POPs") which, based on the
Company's equity interests in these operating companies, represented an
estimated 90 million equity POPs. As of September 30, 1996, the Company's
operating companies, which are generally in the early stages of operating and
expanding their networks, served approximately 50,000 subscribers.
The Company operates primarily in countries in Asia and Latin America where
there exists substantial unmet demand for communications services, attractive
license opportunities and political and regulatory environments which encourage
foreign investment in private communications companies. These markets are
generally characterized by substantial populations, growing economies and
inadequate local land-line telephone service. According to industry data, in
many of the countries where the Company has established operating companies or
is pursuing developmental stage projects, there were less than 10 telephone
lines per 100 POPs in 1994 (compared to 59 telephone lines per 100 POPs in the
United States) and significant waiting times for installation of land-line
telephone service. The Company believes that existing and emerging wireless
technologies generally offer comparable functionality to, and lower
construction costs and more rapid deployment than, land-line technologies. As a
result, the Company believes that wireless communications services will
frequently be used in these markets as a substitute for traditional land-line
telephone service.
A large and growing number of wireless technologies are available to address
communications needs in the Company's target markets. The Company's operating
companies and developmental stage projects provide or are developing the
following services: cellular telephone, using both analog and digital
technologies; WLL, which provides wireless cellular-like transmission from the
home or business into the local telephone network; ECTR, which combines the
attributes of cellular and dispatch radio; paging; and wireless cable
television, which uses multi-point, multi-channel distribution system ("MMDS")
technology. Once the Company enters a market with a wireless communications
service, it generally seeks to develop additional wireless communications
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services. This strategy is expected to allow the Company to build on its
expertise in the host country as well as to achieve cost savings and operating
efficiencies through the sharing of cell sites, microwave transmission networks
and marketing and administrative functions.
OWNERSHIP AND MANAGEMENT
Vanguard Cellular Systems, Inc. (together with its wholly owned operating
company, "Vanguard"), one of the largest independent cellular operators in the
United States, is the Company's principal strategic partner as well as its
largest stockholder. As of September 30, 1996, Vanguard beneficially owned
approximately 39% of the Company's equity on an as-converted basis. Vanguard
has provided and continues to provide a number of services relating to the
formation, development and operation of the Company's wireless communications
businesses, including identification and evaluation of wireless communications
opportunities, review of business and technical plans, and assistance in
training operating company personnel. Haynes G. Griffin, Chairman of the Board
of Directors of the Company, is President, Chief Executive Officer and a
director of Vanguard. In addition, as of September 30, 1996, the seven senior
executive officers of the Company beneficially owned approximately 12.5% of the
Company's equity, on an as-converted basis.
The Company's senior management has extensive experience in developing and
operating wireless communications networks and managing international
operations. Collectively, the seven members of the Company's senior management
have over 83 years of experience in the wireless communications industry and
over 65 years of experience conducting business in the Company's existing
markets.
RECENT OPERATING DEVELOPMENTS
Since June 30, 1996, the Company has initiated five of its seven
developmental stage projects, including the Taiwan National ECTR project, the
India, Indonesia, Taiwan and Thailand paging projects, the China Regional
Cellular project, the Pakistan National ECTR project and the Mexico National
WLL project. In July 1996, the Company acquired the 50% interest in TeamTalk
Limited ("TeamTalk"), its New Zealand national ECTR operating company, that it
did not already own for a purchase price of approximately $3.2 million.
In July 1996, the Malaysian government announced that it did not intend to
proceed with its previously announced program of consolidating the Malaysian
telecommunications industry. As a result, the Malaysian government ceased
efforts to cause the sale of the Company's Malaysia national WLL operating
company to another Malaysian telecommunications company. See "Risk Factors--
Project Level Risks--Risks Inherent in Foreign Investment." Further, in October
1996, a consortium led by Rosli Bin Man, the former president of Cellular
Communications Network SDN BHD ("Celcom"), the largest cellular operator in
Malaysia, acquired a controlling interest in Shubila Holding SDN BHD, the
Company's principal strategic partner in STW. Also in October 1996, the Board
of Directors of STW appointed a management team consisting of Rosli Bin Man and
other former members of the management of Celcom to be the senior management
team of STW. In November 1996, the Company notified Laranda SDN BHD
("Laranda"), the Company's other partner in STW, of the Company's intent to
exercise its option to purchase 50% of Laranda for a purchase price of $7.2
million, thereby increasing its aggregate direct and indirect interest in STW
to 35%. The Company is currently in the process of conducting its financial and
legal due diligence and applying for certain governmental approvals with
respect to such proposed purchase.
In August 1996, the Company funded a 70% interest in Star Telecom Overseas
(Cayman Islands) Limited ("STOL"), which holds minority equity interests in
paging projects in India and Taiwan and which is currently pursuing additional
paging opportunities in Indonesia and Thailand, for an aggregate purchase price
of $13.5 million. The Company's partner in STOL is Star Telecom Holding Limited
("STHL"), a company that owns one of the largest paging operators in Hong Kong
and one of the largest internet service providers in Hong Kong.
In November 1996, the Company acquired a 40% equity interest in Star Digitel
Limited ("SDL"), a wholly owned subsidiary of STHL, the Company's partner in
STOL, for an aggregate purchase price of $20 million. SDL is engaged in various
cellular projects in China.
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BUSINESS STRATEGY
The Company's principal business objective is to become a pre-eminent
provider of wireless communications services in selected developing countries.
Key elements of the Company's strategy for achieving this objective include:
Develop Long-Term Relationships With Strong Local Partners. The Company seeks
to develop long-term relationships with financially strong and strategically
well-positioned local partners. These partners often own or have access to an
existing telecommunications asset base (such as cell sites and microwave/fiber
optic transmission networks) that can be used by the Company's operating
companies to reduce capital expenditures, operating costs and deployment time.
Local partners frequently play an active role in securing licenses and
obtaining necessary regulatory approvals, assisting in arranging and providing
local financing and identifying opportunities for additional wireless projects.
Obtain Licenses With Broad Frequency Ranges and Substantial Geographic
Coverage. The Company seeks to obtain licenses with broad frequency ranges,
substantial geographic coverage and flexible operating terms. The Company
believes that continuing advances in wireless technologies will allow numerous
technologies to provide services with similar functionality. As a result, the
Company believes that market opportunities for such services will be determined
predominantly by license terms rather than by technological factors. Licenses
with broad frequency allocation and flexible operating terms also enable the
Company to provide additional services and facilitate the adoption of new
technologies. In addition, the ability to provide service over a broad
geographic area is frequently an important selling point for users of services
such as cellular telephone and ECTR.
Offer Multiple Wireless Services in Existing Markets. The Company seeks to
expand by developing multiple wireless services in those countries where it has
existing operations. This strategy is intended to allow the Company to build on
its expertise in the host country as well as to achieve cost savings and
operating efficiencies through the sharing of cell sites, microwave
transmission networks and marketing and administrative functions. For example,
in Indonesia and Mexico, the Company initially established a national or large
regional ECTR business that is providing opportunities for developing
additional services, such as cellular, WLL and/or wireless cable television
services.
Remain Technology and Vendor Independent. The Company seeks to obtain
licenses that do not stipulate the type of technology to be used in the
provision of a particular communications service. This flexibility allows the
Company to match appropriate technology to a given business opportunity on the
basis of cost, capacity, reliability, functionality and availability. It also
allows operating companies to migrate to superior technologies as they develop.
Where possible, the operating companies use non-proprietary or open-standard
technologies with multiple vendor sources, thereby reducing their dependence on
any single supplier.
Pursue Low Cost Structure. The Company pursues strategies designed to allow
its operating companies to reduce capital expenditures and operating costs.
First, it seeks to form partnerships with local partners that have existing
telecommunications assets, including licenses, that can be used to reduce the
costs of developing and operating its wireless networks. Second, where
appropriate, the Company seeks to obtain initial or additional licenses through
private negotiation, rather than competitive bidding. Third, the Company seeks
to provide multiple wireless services within an existing market to generate
economies of scale. Fourth, when a common technology is selected for multiple
operating companies, the Company seeks to secure global purchasing discounts
with selected vendors.
Actively Manage Operating Companies. The Company typically plays an active
role in the development and management of its operating companies. Its local
country managers and corporate staff provide technical, financial and
administrative support to most of these companies, including serving as senior
executives of
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operating companies and/or serving on the boards of directors of these
companies. Moreover, shareholder agreements often provide the Company with the
right to approve key decisions at the operating company level, including
approval of operating budgets, business plans and major corporate transactions,
even though the Company may own less than 50% of the equity of the operating
company.
Promote Flexible Management Structure. The Company relies heavily on local
country managers to develop existing operating companies and identify new
wireless communications opportunities. These managers are often natives of the
local country with significant managerial and operating experience. Although
Company employees, they typically serve as senior executives of operating
companies. They are supported by a corporate staff located primarily in the
United States with extensive experience in wireless communications and
international operations. The Company believes that the use of local country
managers, supported by the Company's experienced corporate staff, allows it to
rapidly and effectively respond to operational matters, develop and maintain
close working relationships with local partners and capitalize on wireless
communications opportunities.
FINANCING STRATEGY AND HISTORY
The Company generally seeks to finance its operating companies and
developmental stage projects at the project level. Initial funding is typically
provided by equity contributions from the Company and its project partners.
During the initial construction and expansion of the wireless network, debt
financing may be provided by equipment vendors, commercial banks and other
third parties. Such financing may be guaranteed by the Company and its local
partners. Once the project becomes operational, the Company seeks to obtain
long-term project financing with limited or no recourse to the Company or its
partners. In addition, shareholder agreements for many of the Company's
projects provide for raising public equity at the operating company level,
subject to market conditions and the status of the project.
As of September 30, 1996, the Company had directly raised an aggregate of
approximately $132.5 million in equity capital through private placements,
including approximately $250,000 in March 1992, $780,000 in May 1993, $3.9
million in January and February 1994, $14.6 million in September and October
1994, $7.5 million in July 1995 and $50.2 million in December 1995. This amount
also includes approximately $25.0 million of value which the Company has
allocated to assets contributed by an affiliate of Vanguard in connection with
the Vanguard Exchange (as defined) in December 1995 and approximately $30.3
million that the Company has allocated to the issuance of Warrants (as defined)
in August 1996 included in the Unit Offering (as defined).
On August 15, 1996, the Company completed the offer and sale (the "Unit
Offering") of 196,720 Units (the "Units") consisting of $196,720,000 aggregate
principal amount of 14% Senior Secured Discount Notes due 2001 (the "Old
Notes") and 196,720 Warrants (the "Warrants") to purchase in the aggregate
2,289,428 shares of the Company's Common Stock, par value $0.01 per share (the
"Common Stock"), representing the right to purchase approximately 10% of the
Common Stock outstanding on August 15, 1996 on a fully diluted basis. The
exercise price of the warrants is $.01 per share of Common Stock. On or after
the occurrence of an Exercise Event (as defined), each Warrant entitles the
holder thereof to purchase 11.638 shares of Common Stock. In the event that a
Threshold Initial Public Offering (as defined) or a Qualified Reorganization
(as defined) has not occurred on or prior to the IPO Contingency Date (as
defined), each unexercised Warrant will entitle the holder thereof to purchase,
on or after the occurrence of an Exercise Event, 14.283 shares of Common Stock,
which will represent the right to purchase (assuming no Warrants have been
previously exercised) in the aggregate 2,809,752 shares of Common Stock, or
approximately 12% of the Common Stock outstanding on August 15, 1996 on a fully
diluted basis.
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THE EXCHANGE OFFER
The Exchange Offer............ The Company is offering to exchange up to
$196,720,000 aggregate principal amount of Ex-
change Notes for up to $196,720,000 aggregate
principal amount of the Old Notes. The Old
Notes were initially offered and sold by BT Se-
curities Corporation, Toronto Dominion and Sal-
omon Brothers Inc as the initial purchasers of
the Old Notes (the "Initial Purchasers"), to
certain "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act)
and institutional accredited investors at a
price of 35.43% of the principal amount there-
of, based upon the allocation of the purchase
price for the Units between the Old Notes and
the Warrants. The form and terms of the Ex-
change Notes are substantially identical (in-
cluding principal amount, interest rate, matu-
rity, security and ranking) to the form and
terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, ex-
cept that the Exchange Notes are freely trans-
ferable by holders thereof except as provided
herein (see "The Exchange Offer--Terms of the
Exchange" and "Terms and Conditions of the Let-
ter of Transmittal") and are not entitled to
certain registration rights and certain addi-
tional interest provisions which are applicable
to the Old Notes under a registration rights
agreement dated as of August 15, 1996 (the
"Registration Rights Agreement") between the
Company and the Initial Purchasers. See "Old
Notes Registration Rights."
Based upon its view of interpretations provided
by the staff of the Commission, the Company be-
lieves that Exchange Notes will be freely
transferable by holders thereof other than af-
filiates of the Company after the Exchange Of-
fer without further registration under the Se-
curities Act if the holder of the Exchange
Notes represents that it is acquiring the Ex-
change Notes in the ordinary course of busi-
ness, that it has no arrangement or understand-
ing with any person to participate in the dis-
tribution of the Exchange Notes and that is its
not an affiliate of the Company, as such terms
are interpreted by the Commission; provided
that Participating Broker-Dealers receiving Ex-
change Notes in the Exchange Offer will have a
prospectus delivery requirement with respect to
resales of the Exchange Notes. See "The Ex-
change Offer--Terms of the Exchange."
Minimum Condition............. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
Expiration Date............... The Exchange Offer will expire at 5:00 p.m, New
York City time, on December 20, 1996, unless
extended.
Exchange Date.................
The first date of acceptance for exchange for
the Old Notes will be the business day follow-
ing the Expiration Date.
9
<PAGE>
Conditions to the Exchange
Offer........................ The obligation of the Company to consummate the
Exchange Offer is subject to certain condi-
tions. See "The Exchange Offer--Conditions to
the Exchange Offer." The Company reserves the
right to terminate or amend the Exchange Offer
at any time prior to the Expiration Date upon
the occurrence of any such condition.
Withdrawal Rights............. Tenders of Old Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to the
Expiration Date. Any Old Notes not accepted for
any reason will be returned without expense to
the tendering holders thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Procedures for Tendering Old See "The Exchange Offer--How to Tender."
Notes........................
Federal Income Tax The exchange of Old Notes for Exchange Notes by
Consequences................. tendering holders will not be a taxable ex-
change for federal income tax purposes, and
such holders should not recognize any taxable
gain or loss as a result of such exchange. See
"Certain Income Tax Considerations."
Use of Proceeds...............
There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange Of-
fer.
Effect on Holders of Old As a result of the making of this Exchange Of-
Notes........................ fer, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the
terms of this Exchange Offer, the Company will
have fulfilled a covenant contained in the
terms of the Old Notes and the Registration
Rights Agreement, and accordingly, the holders
of the Old Notes will have no further registra-
tion or other rights under the Registration
Rights Agreement, except under certain limited
circumstances. See "Old Note Registration
Rights." Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer
will continue to hold such Old Notes and will
be entitled to all the rights and limitations
applicable thereto under the Indenture. All
untendered, and tendered but unaccepted, Old
Notes will continue to be subject to the re-
strictions on transfer provided for in the Old
Notes and the Indenture. See "Old Note Transfer
Restrictions." To the extent that Old Notes are
tendered and accepted in the Exchange Offer,
the trading market, if any, for the Old Notes
not so tendered could be adversely affected.
See "Risk Factors--Financing Risks--Conse-
quences of Failure to Exchange Old Notes."
TERMS OF THE EXCHANGE NOTES
Securities Offered............ $196,720,000 aggregate principal amount of 14%
Senior Secured Discount Notes due 2001.
Issuer........................ International Wireless Communications Holdings,
Inc.
10
<PAGE>
Maturity Date................. August 15, 2001.
Accretion and Interest
Payments..................... The Exchange Notes will accrete at a rate of
14%, compounded semi-annually. There will be no
scheduled cash interest payments on the Ex-
change Notes.
Ranking....................... The Exchange Notes will be senior secured obli-
gations of the Company and will rank pari passu
in right of payment with all existing and fu-
ture senior Indebtedness of the Company and se-
nior to all subordinated Indebtedness of the
Company. The Exchange Notes will be effectively
subordinated to all Indebtedness and other lia-
bilities (including trade payables) of the
Company's subsidiaries and affiliated compa-
nies. As of June 30, 1996 the Company's subsid-
iaries and operating affiliates had Indebted-
ness for borrowed money of approximately $117.2
million. See "Risk Factors--Financing Risks--
Holding Company Structure; Limitations on Ac-
cess to Cash Flow of Operating Companies."
Security...................... The collateral securing the Exchange Notes will
consist of a pledge of all of the capital stock
and Intercompany Notes of IWC, a wholly owned
subsidiary through which the Company holds all
of its existing assets. The Indenture will pro-
hibit the Company from making any Investment
(as defined) other than through IWC. The Inden-
ture provides that lenders under a Permitted
Bank Facility will have the right to share on a
pari passu basis in any proceeds from the sale
of the collateral securing the Notes.
Sinking Fund.................. None.
Change of Control............. Upon the occurrence of a Change of Control,
each holder of the Exchange Notes will have the
option to require the Company to repurchase all
or a portion of such holder's Exchange Notes at
101% of the Accreted Value thereof to the date
of repurchase. There can be no assurance that
the Company will have the financial resources
necessary to repurchase the Exchange Notes upon
a Change of Control. See "Description of Ex-
change Notes--Repurchase at the Option of Hold-
ers."
Certain Covenants............. The Indenture contains certain covenants that,
among other things, will limit the ability of
the Company, its Restricted Subsidiaries and
its Restricted Affiliates to incur additional
Indebtedness; limit the ability of the Company
to merge, consolidate or sell all or
substantially all of its assets; and limit the
ability of the Company and its Restricted
Subsidiaries to make Investments. In addition,
the Indenture prohibits the Company and its
Restricted Subsidiaries from making any
Restricted Payments (as defined) and from
creating certain Liens (as defined). Under
certain circumstances, the Company will be
required to offer to purchase the Exchange
Notes at a price equal to 100% of the Accreted
Value thereof to the date of
11
<PAGE>
repurchase with the proceeds of certain Asset
Sales. As of September 30, 1996, only IWC,
TeamTalk and New Zealand Wireless Limited
constituted Restricted Subsidiaries or
Restricted Affiliates. Accordingly, none of the
Company's remaining operations are conducted
through entities that are subject to the
covenants contained in the Indenture. See
"Description of Senior Notes--Certain
Covenants."
Original Issue Discount....... For federal income tax purposes, Exchange Notes
will be treated as having been issued with
"original issue discount" equal to the differ-
ence between the issue price of the Old Notes
and the stated redemption price of the Exchange
Notes at maturity. Each holder of an Exchange
Note will be required to include in gross in-
come for federal income tax purposes a portion
of such original issue discount for each day
during the accrual period in which a Note is
held in advance of receipt of cash payments on
the Notes to which income is attributable, even
though no cash payments will be received until
maturity. See "Risk Factors--Financing Risks--
Classification of Exchange Notes as Debt; Orig-
inal Issue Discount" and "Certain Income Tax
Considerations."
RISK FACTORS
Holders of Old Notes should consider carefully the specific factors set forth
under "Risk Factors," as well as the other information set forth in this
Prospectus, before making an investment decision with respect to the Exchange
Offer.
12
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data as of and for the years
ended December 31, 1993, 1994 and 1995 have been derived from the Company's
consolidated financial statements which have been audited by KPMG Peat Marwick
LLP, independent public accountants, whose report indicated a reliance on other
auditors relative to certain amounts relating to the Company's investment in PT
Rajasa Hazanah Perkasa ("RHP") as of and for the year ended December 31, 1995.
The audited financial statements of RHP as of and for the year ended December
31, 1995, together with the independent auditors' reports thereon, are included
elsewhere in this Prospectus. The summary consolidated financial data as of and
for the year ended December 31, 1992 were derived from financial statements
which have been audited by other auditors. The Company was incorporated in
January 1992. The following summary consolidated financial data as of September
30, 1996 and for the nine-month periods ended September 30, 1995 and 1996 have
been derived from unaudited financial statements that, in the opinion of
management of the Company, reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial data for such
periods and as of such date. The unaudited pro forma consolidated financial
data for the year ended December 31, 1995 and for the nine months ended
September 30, 1996, give effect to the Unit Offering and the acquisitions and
mergers as described in "Unaudited Pro Forma Consolidated Condensed Financial
Statements" included elsewhere in this Prospectus as if such transactions had
occurred on January 1, 1995 for purposes of the statement of operations data
and as of September 30, 1996 for purposes of the balance sheet data. The
unaudited pro forma financial data do not purport to represent what the
Company's results of operations would have been if the Unit Offering had in
fact occurred as of the beginning of the period or on the date indicated, as
applicable, or to project the Company's financial position or results of
operations for any future date or period. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the entire year. The data set forth below are qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Prospectus and also
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- --------------------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1995 1995(1) 1995 1996 1996(1)
----- ----- ------- -------- ----------- --------- ---------- ---------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ -- $ -- $ -- $ 369 $ -- $ 532 $ 814
Cost of sales........... -- -- -- -- 785 -- 541 879
----- ----- ------- -------- -------- --------- ---------- ----------
Gross margin............ -- -- -- -- (416) -- (9) (65)
General and
administrative
expenses............... 169 809 2,481 6,365 8,698 3,565 10,610 11,369
Equity in losses of
affiliates............. -- -- -- 3,756 4,201 1,171 5,507 9,232
----- ----- ------- -------- -------- --------- ---------- ----------
Loss from operations.... (169) (809) (2,481) (10,121) (13,315) (4,736) (16,126) (20,666)
----- ----- ------- -------- -------- --------- ---------- ----------
Interest income......... 5 2 106 232 232 130 937 937
Interest expense........ -- (33) (115) (1,354) (18,397) (785) (2,663) (15,961)
Other expense........... -- (1) (13) (28) (28) (10) 1 1
----- ----- ------- -------- -------- --------- ---------- ----------
Net loss................ $(164) $(841) $(2,503) $(11,271) $(31,508) $(5,401) $(17,851) $ (35,689)
===== ===== ======= ======== ======== ========= ========== ==========
Ratio of earnings to
fixed charges(2)....... -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER
AS OF DECEMBER 31, 30,
-------------------------------- -----------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
---- ------- ------- -------- ----------- -----------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $536 $ 2,640 $18,424 $ 95,643 $183,475 $183,475
Long-term debt, net..... -- -- -- -- 71,623 71,623
Redeemable convertible
preferred stock........ -- -- 19,578 98,845 102,519 102,519
Total stockholders'
equity (deficit)....... 486 425 (3,154) (14,759) (3,563) (3,563)
Working capital......... (46) (1,514) 10,580 15,294 79,272 51,516
</TABLE>
- -------
(1) Pro forma financial data for the year ended December 31, 1995 and for the
nine months ended September 30, 1996 give effect to the Unit Offering and
the acquisitions and mergers as described in "Unaudited Pro Forma
Consolidated Condensed Financial Statements" included elsewhere in this
Prospectus, as if such transactions had occurred on January 1, 1995 for
purposes of the statement of operations data and as of September 30, 1996
for purposes of the balance sheet data. Pro forma adjustments to statement
of operations data for the year ended December 31, 1995 and for the nine
months ended September 30, 1996 include (i) adjustments to interest expense
reflecting the addition of interest expense associated with the Unit
Offering; (ii) amortization of debt issuance costs associated with the Unit
Offering, (iii) the consolidation of Teamtalk, (iv) the amortization of
licenses and other intangibles for consolidated subsidiaries, (v) the
amortization of the excess of the cost of the Company's investments over
its proportionate interest in the net assets in entities accounted for by
the equity method, and (vi) the additional equity in net losses of STW and
RHP assuming the Company's investments for ownership interest of 35% and
29.2%, respectively, had been made on January 1, 1995. Pro forma
adjustments to balance sheet data as of September 30, 1996 include (i)
reductions in cash and deposits, (ii) increases in investments in
affiliates for the Company's investments in RHP, SDL and STW which occurred
or are expected to occur after September 30, 1996.
(2) In calculating the ratio of earnings to fixed charges, earnings consist of
(i) net loss before income tax expense and fixed charges plus (ii) the
losses recognized in an entity of which less than 50% is owned by the
Company and is accounted for under the equity method when there is no
guarantee, directly or indirectly, to service the debt of such entities.
Fixed charges consist of interest expense, including such portion of rental
expense that is attributed to interest. The ratio of earnings to fixed
charges was less than 1.0 to 1.0 for each of the Company's last four fiscal
years and for the nine months ended September 30, 1995 and 1996. Earnings
available for fixed charges were thus inadequate to cover fixed charges.
The coverage deficiency for the years ended December 31, 1992, 1993, 1994
and 1995 was $164,000, $841,000, $2,503,000 and $11,128,000 respectively.
The coverage deficiency for the nine months ended September 30, 1995 and
1996 was $5,033,000 and $19,620,000, respectively. The coverage deficiency
for the December 31, 1995 and September 30, 1996 pro forma periods are
$48,408,000 and $50,757,000, respectively.
13
<PAGE>
OPERATING COMPANIES AND DEVELOPMENTAL STAGE PROJECTS
As of September 30, 1996, the Company had direct or indirect interests in
seven operating companies and six developmental stage projects in eight
countries in Asia, three countries in Latin America and in New Zealand. The
following table indicates the country, project type and the Company's actual or
proposed equity interest in these operating companies and developmental stage
projects. The information set forth below is qualified by reference to and
should be read in conjunction with the more complete descriptions of the
operating companies and developmental stage projects set forth under
"Business--Operating Companies" and "--Developmental Stage Projects."
<TABLE>
<CAPTION>
ACTUAL
EQUITY
OPERATING COMPANY INTEREST
----------------- --------
<S> <C>
Malaysia National WLL (STW)....................................... 30.0%(1)
Indonesia National Cellular (Mobisel)............................. 17.5%(2)
Indonesia National ECTR (Mobilkom)................................ 15.0%
Philippines Regional ECTR (UTS)................................... 20.3%(3)
New Zealand National ECTR (TeamTalk).............................. 100%(4)
Brazil Regional ECTR (Via 1)...................................... 65.1%(5)
Mexico Regional ECTR (Mobilcom Mexico)............................ 2.23%(6)
</TABLE>
- --------
(1) Does not give effect to an option held by a bank syndicate that has
provided project financing to STW and an option acquired by the Company in
October 1996 to purchase 50% of Laranda SDN BHD, one of the Company's
local partners in STW that currently holds a 10% interest in STW. If both
such options are exercised in their entirety, the Company's interest in
STW would be 32.4%.
(2) Does not reflect the acquisition by the Company in October 1996 of an
additional 4.2% of PT Rajasa Hazanah Perkasa, the company that holds a 70%
interest in Mobisel, thereby increasing the Company's indirect equity
interest in Mobisel to 20.4%.
(3) Assumes the completion of certain technical formalities in connection with
the Company's acquisition of approximately 6% of the UTS stock, and
excludes an additional 3.0% of UTS' stock which will vest upon completion
of certain performance milestones.
(4) Effective April 30, 1996, the Company acquired the remaining 50% of
TeamTalk. See "--Recent Operating Developments".
(5) Reflects the Company's anticipated equity interest in Via 1, a joint
venture to be formed. Does not give effect to exercise of options
presently being negotiated with the Company's local partners that, if
exercised in their entirety, would reduce the Company's interest in Via 1
below 50%.
(6) Subject to receipt of certain governmental approvals, Mobilcom Mexico
anticipates selling additional shares to an existing stockholder, thereby
diluting the Company's interest in Mobilcom Mexico to 1.84%.
<TABLE>
<CAPTION>
PROPOSED
DEVELOPMENTAL EQUITY
STAGE PROJECT INTEREST(7)
------------- -----------
<S> <C>
Taiwan National ECTR.......................................... 20.0%
India (Regional), Indonesia (National), Taiwan (National) and
Thailand Paging.............................................. 70.0%(8)
China Regional Cellular....................................... 40.0%(9)
Pakistan National ECTR........................................ 90.0%(10)
Mexico WLL.................................................... 40.0%(11)
Peru National ECTR............................................ 98.0%
</TABLE>
- --------
(7) The developmental stage projects are typically governed by memoranda of
understanding ("MOUs") rather than definitive agreements and are generally
subject to ongoing negotiations, compliance with local law, receipt of
necessary governmental licenses and approvals and receipt of necessary
corporate and other
14
<PAGE>
third party approvals. Accordingly, the Company's proposed equity interest
and investment in the developmental stage projects, as well as the nature
and scope of the projects themselves, are subject to change. Likewise,
there can be no assurance that necessary licenses and other approvals will
be received for these developmental stage projects, and the Company
otherwise may elect not to pursue one or more of these developmental stage
projects.
(8) Represents the Company's equity interest in this developmental stage
project, which in turn owns or proposes to own a 10%, 25%, 20% and 25%
interest in paging businesses in India, Indonesia, Taiwan and Thailand,
respectively. Pursuant to an agreement with its local partner, the
Company's interest in this developmental stage project may be reduced to
approximately 57.1%. See "Business--Developmental Stage Projects." In
addition, the Company also holds a separate 10% economic interest in the
paging business in Taiwan through certain contractual arrangements with
an existing partner in such business.
(9) In November 1996, the Company acquired a 40% equity interest in this
project for an aggregate purchase price of $20 million.
(10) Reflects the anticipated sale of a 10% interest in this developmental
stage project to the Company's local partner.
(11) Under the terms of an MOU, the Company's proposed equity interest in this
developmental stage project may be increased to 49%.
15
<PAGE>
SUMMARY OF OPERATING COMPANIES
The Company has ownership interests in seven operating companies. The
following briefly describes these operating companies and sets forth the amount
of the Company's investment and its equity interest in the operating companies
as of September 30, 1996, and its anticipated additional investment in the
operating companies through December 31, 1997. See "Use of Proceeds." The
aggregate amount of the Company's investment in the following operating
companies includes Preferred Stock with an aggregate liquidation preference of
$19.1 million that was issued by the Company to acquire equity interests in
such operating companies pursuant to the Vanguard Exchange (as defined). See
"Certain Transactions--The Vanguard Exchange." This summary is qualified by
reference to, and should be read in conjunction with, the more complete
descriptions of the operating companies set forth below in "Business--Operating
Companies." The actual additional amount invested by the Company may vary
significantly from the anticipated amount indicated below. See "Risk Factors--
Project Level Risks."
<TABLE>
<CAPTION>
ANTICIPATED
ADDITIONAL
COMPANY COMPANY
INVESTMENT INVESTMENT
AS OF THROUGH
OPERATING SEPTEMBER 30, DECEMBER 31, DESCRIPTION OF
COMPANY 1996 1997 OPERATING COMPANY
- --------- ------------- ------------ --------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Syarikat Telefon $22.2 $12.0 The Company holds a 30% equity
Wireless (M) SDN interest in STW, a provider of WLL
BHD ("STW") communications services in Malaysia.
(Malaysia National The Company's partners, Shubila
WLL) Holding SDN BHD and Laranda SDN BHD
("Laranda"), own 60% and 10% of STW,
respectively. The Company's
Anticipated Additional Investment in
STW through December 31, 1997,
includes $1 million paid by the
Company in October 1996 to acquire an
option to purchase 50% of Laranda and
$7.2 million which constitutes the
exercise price of such option. In
November 1996, the Company notified
Laranda of its intent to exercise such
option, which, upon exercise, would
increase the Company's direct and
indirect equity interest in STW to
35%. STW holds a national license to
provide telephone services in
Malaysia. STW commenced operations in
Northern Malaysia in late 1993 and, as
of September 30, 1996, served
approximately 2,200 subscribers.
PT Mobile Selular $25.5 $ 8.6 Mobisel is a provider of cellular
Indonesia services in Indonesia. In October
("Mobisel") 1996, the Company increased its
(Indonesia National indirect equity interest in Mobisel
Cellular) from 17.5% to 20.4% by purchasing an
additional 4.2% equity interest in PT
Rajasa Hazanah Perkasa ("RHP"), a 70%
shareholder of Mobisel. The $8.6
million purchase price for such
additional equity interest is included
in the Company's Additional
Anticipated Investment
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
ANTICIPATED
ADDITIONAL
COMPANY COMPANY
INVESTMENT INVESTMENT
AS OF THROUGH
OPERATING SEPTEMBER 30, DECEMBER 31, DESCRIPTION OF
COMPANY 1996 1997(1) OPERATING COMPANY
- --------- ------------- ------------ --------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
in Mobisel through December 31, 1997.
RHP was formed in 1985 to provide cel-
lular services in Indonesia and, in
1995, RHP contributed its cellular op-
erations to Mobisel in return for a
70% interest in Mobisel. The Company's
partners in Mobisel include
PT (Persero) Telekomunikasi Indonesia
("Telkom Indonesia"), the state-owned
telecommunications company. Mobisel
holds a provisional license covering
all of Indonesia, one of the most pop-
ulous countries in the world. As of
September 30, 1996, Mobisel served ap-
proximately 17,000 subscribers.
PT Mobilkom Telekomindo $1.5 $ 0.8 The Company indirectly owns a 15%
("Mobilkom") equity interest in Mobilkom, a
(Indonesia National provider of ECTR services in
ECTR) Indonesia. The Company's partners in
Mobilkom include PT Telekomindo Prima
Bhakti, the investment subsidiary of
Telkom Indonesia, PT Inka Forindo
Jaya, an Indonesian telecommunications
and engineering company, and Jasmine
International Public Company Limited,
a Thai telecommunications company with
operations throughout Asia. Mobilkom's
five-year license covers all of
Indonesia and its ECTR system is
operational in the three largest
cities of Java, including Jakarta.
Mobilkom commenced operations in
September 1995 and, as of September
30, 1996, had over 3,500 subscribers.
Universal $1.9 $ 1.8 The Company owns a 20.3% beneficial
Telecommunications interest in UTS, a provider of ECTR
Service, Inc. ("UTS") services in the Philippines. The
(Philippines Regional Company's partners in UTS include
ECTR) Marsman-Drysdale Corporation, a large
Philippine company in the
agribusiness, food processing, tourism
and communications businesses, and
Filinvest Development Corporation, a
large Philippine real estate
investment company. UTS operates under
a provisional license permitting it to
provide ECTR services in the Visayas
and Mindanao regions of the country
and has applied for the authority to
extend its provisional license and
expand service into other parts of the
country,including metropolitan Manila.
UTS
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
ANTICIPATED
ADDITIONAL
COMPANY COMPANY
INVESTMENT INVESTMENT
AS OF THROUGH
OPERATING SEPTEMBER 30, DECEMBER 31, DESCRIPTION OF
COMPANY 1996 1997(1) OPERATING COMPANY
- --------- ------------- ------------ --------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
commenced its operations in July 1996
and as of September 30, 1996 had over
40 subscribers.
TeamTalk Limited $ 8.3 $ 1.3 The Company provides ECTR services in
(New Zealand New Zealand through its wholly owned
National ECTR) subsidiary, TeamTalk. The licenses
under which TeamTalk operates permit
ECTR coverage in the major population
centers throughout the North Island of
New Zealand as well as in the city of
Christchurch, the largest city on the
South Island. TeamTalk commenced
operations in the North Island of New
Zealand in 1994 and, as of September
30, 1996, served approximately 4,500
subscribers.
Via 1 $14.8 $ 1.7 The Company has the right to acquire a
(Brazil Regional ECTR) 65.1% equity interest in Via 1, a
joint venture to be formed to hold and
develop certain existing ECTR
operations in Brazil. The Company's
primary partner is Rede Brasil Sul
("RBS"), one of Brazil's largest media
companies, with operations in
television and radio broadcasting and
newspaper publishing. The licenses
under which Via 1 will operate cover
major cities in Southern and Central
Brazil, including Rio de Janeiro,
Curitiba and Sao Paulo. In October
1996, in anticipation of the formation
of Via 1, SRC Servicos de Rario
Comunicacoes Ltda, the Company's
wholly owned Brazilian subsidiary
entered into a contract with Nokia
whereby Nokia will provide equipment
for the project. Via 1 commenced
operations in July of 1996 and, as of
September 30, 1996, served
approximately 190 subscribers.
Corporacion Mobilcom, $ 2.1 $ 0 The Company owns a 2.23% equity
S.A. de C.V. ("Mobilcom interest in Mobilcom Mexico, a
Mexico") provider of ECTR services in Mexico.
(Mexico Regional ECTR) The Company's partners in Mobilcom
Mexico include Grupo Comunicaciones
San Luis S.A. de C.V. and NEXTEL
Communications, Inc. ("NEXTEL"), one
of the largest ECTR operators in the
world. Mobilcom Mexico operates under
licenses covering the major cities in
Northern Mexico and Central Mexico,
including Mexico City. Mobilcom Mexico
commenced commercial service in 1993
and, as of September 30, 1996, served
approximately 22,000 subscribers.
</TABLE>
18
<PAGE>
SUMMARY OF DEVELOPMENTAL STAGE PROJECTS
The Company is currently involved in six developmental stage projects. The
following summarizes the status of these projects, the Company's proposed
equity interest as of September 30, 1996 and the amount of the Company's
proposed investment in these projects through December 31, 1997. This summary
is qualified by reference to, and should be read in conjunction with, the more
complete descriptions of the developmental stage projects set forth below in
"Business--Developmental Stage Projects." The Company's developmental stage
projects are typically governed by MOUs rather than definitive agreements and
are generally subject to ongoing negotiations, compliance with local law,
receipt of necessary licenses and governmental approvals and receipt of
necessary corporate and other third party approvals. Accordingly, the Company's
proposed equity interest and investment in the developmental stage projects, as
well as the nature and scope of the projects themselves, are subject to change.
Likewise, there can be no assurance that necessary licenses and other approvals
will be received for these developmental stage projects and the Company
otherwise may elect not to pursue one or more of these developmental stage
projects.
<TABLE>
<CAPTION>
PROPOSED
COMPANY
INVESTMENT PROPOSED
THROUGH COMPANY
DECEMBER 31, EQUITY
PROJECT 1997 INTEREST STATUS OF DEVELOPMENTAL STAGE PROJECT
- ------- ------------- -------- -------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Taiwan National ECTR.... $ 3.0(1) 20.0%(2) The Company and its Taiwanese partner are
preparing a joint application for a variety
of voice and data licenses to provide
national ECTR services in Taiwan. License
awards are expected to be announced in the
first quarter of 1997. Based on its
experience in providing ECTR services, the
Company believes that it is well-positioned
to receive a number of these licenses,
although there can be no assurance in this
regard. Taiwan's 1995 GDP per capita of
approximately $12,485 is one of the highest
in Southeast Asia.
India (Regional),
Indonesia (National),
Taiwan (National) and
Thailand Paging........ $13.5(3) 70.0%(4) In August 1996, the Company funded a 70%
interest in Star Telecom Overseas (Cayman
Islands) Limited ("STOL"). STOL has developed
and is pursuing projects with strategic
partners throughout Asia, including in India,
Indonesia, Taiwan and Thailand. As of
September 30, 1996, the India regional paging
project provided service to approximately
30,000 subscribers. In Indonesia, STOL has
entered into an MOU with an Indonesian
company which has obtained a license to
provide national paging services in
Indonesia. In Taiwan and Thailand, STOL,
together with its local partners, is pursuing
additional paging licenses. The Company
believes that its investment in STOL will
provide it with an attractive opportunity to
build a transnational paging business.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PROPOSED
COMPANY
INVESTMENT PROPOSED
THROUGH COMPANY
DECEMBER 31, EQUITY
PROJECT 1997 INTEREST STATUS OF DEVELOPMENTAL STAGE PROJECT
- ------- ------------- -------- -------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
China Regional $20.0(5) 40.0% In November 1996, the Company acquired a 40%
Cellular............... equity interest in Star Digitel Limited
("SDL"), a Hong Kong corporation engaged in
various cellular projects in China. Given
that foreign ownership of telecommunications
ventures is prohibited in China, SDL has
entered into agreements with various business
entities affiliated with the People's
Liberation Army to provide equipment and
certain services relating to the development
and operation of a cellular network in
several major provinces of China, covering
over 200 million POPS.
Pakistan National ECTR.. $12.8(6) 90.0% The Company's subsidiary, Mobilcom (Private)
Limited ("Mobilcom Pakistan"), has been
awarded a national license to provide ECTR
services in Pakistan. The Company intends to
build regional networks covering most of the
major population centers of the country,
including Karachi, Lahore and Islamabad.
Pakistan has a population of approximately
130 million.
Mexico WLL.............. $18.5 40.0% The Company has entered into an MOU with a
prominent Mexican businessperson (the
"Mexican Partner") to provide national WLL
services in Mexico. It is the parties' intent
to operate the WLL business in alliance with
an existing telecommunications business of
the Mexican Partner, whereby the Company
believes it will be able to realize
operational and marketing advantages.
Peru National ECTR...... $17.6 98.0% The Company currently owns a 98% equity
interest in PeruTel S.A. ("PeruTel"), which
has been awarded a national license to
provide ECTR services in Peru. With a
population of approximately 24 million, real
GDP growth of 6.6% during the year ended
December 31, 1995 (according to industry
data) and one of the least developed
telephone networks in Latin America, the
Company believes there exists a significant
opportunity to provide ECTR services in Peru.
</TABLE>
- --------
(1) As part of the application process and in accordance with applicable
regulations, the Company has deposited its proposed investment in a
Taiwanese bank account as a license deposit to support the joint
application discussed above.
(2) In order to comply with foreign ownership restrictions on Taiwanese
telecommunications ventures, the Company's interest in the Taiwan National
ECTR project is anticipated to be structured in part as a direct equity
investment and in part through contractual agreements that, taken as a
whole, will give the Company a 20% aggregate interest in the project.
20
<PAGE>
(3) Represents $13.5 million paid by the Company to fund its 70% interest in
STOL in August, 1996.
(4) Represents the Company's current equity interest in STOL which in turn owns
or proposes to own a 10%, 25%, 20% and 25% interest in paging businesses in
India, Indonesia, Taiwan and Thailand, respectively. Pursuant to an
agreement with its local partner, the Company's interest in STOL may be
reduced to approximately 57.1% upon the exercise, in their entirety, of
certain options held by the Company's local partner and certain options
that may in the future be granted to members of the senior management of
STOL. In addition, the Company also holds a separate 10% economic interest
in the Taiwan paging business in which STOL has invested through certain
contractual arrangements with an existing partner in such business.
(5) Represents $20 million paid by the Company to acquire its 40% interest in
SDL in November 1996.
(6) Includes Preferred Stock with an aggregate liquidation preference of $5.4
million that was issued by the Company to acquire its interest in this
developmental stage project pursuant to the Vanguard Exchange. See "Certain
Transactions--The Vanguard Exchange."
OTHER
IWC was incorporated in Delaware in January 1992. In July 1996, IWC Holdings
was formed as a holding company with no business operations of its own. Its
primary assets consist of all of the outstanding capital stock of IWC, its
wholly owned subsidiary, and an intercompany note executed by IWC in a
principal amount equal to the net proceeds of the Unit Offering. The Company's
principal executive offices are located at 400 South El Camino Real, Suite
1275, San Mateo, California 94402. Its telephone number at this address is
(415) 548-0808. The Company also has offices in Sao Paulo, Brazil; Jakarta,
Indonesia; Kuala Lumpur, Malaysia; Singapore and Hong Kong.
All information contained in this Prospectus about the number of issued and
outstanding shares and share prices gives effect to the conversion of each
share of IWC capital stock into forty (40) shares of the corresponding class
and series of IWC Holdings capital stock in August 1996.
21
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Old Notes for the Exchange Notes offered hereby, holders of
Old Notes should consider carefully the following factors, which may be
generally applicable to the Old Notes as well as to the Exchange Notes:
PROJECT LEVEL RISKS
Early Stage of Development of Wireless Projects
Most of the Company's wireless projects are in the early stages of
development. Only the seven operating companies, Mobilcom Mexico, Mobilkom and
Mobisel in Indonesia, STW in Malaysia, TeamTalk in New Zealand, UTS in the
Philippines and Via 1 in Brazil, currently provide wireless communications
services on a commercial basis, and most of these operating companies have
only recently initiated providing such commercial service and generally have a
limited number of subscribers. Although memoranda of understanding ("MOUs")
have been signed with strategic partners in most of the operating companies
and developmental stage projects, in many cases definitive joint venture and
shareholder agreements have not been prepared or signed, definitive legal
entities have not been formed and/or required equity and debt financing has
not been secured. Even where an MOU or definitive joint venture or shareholder
agreement has been signed, there can be no assurance that the terms of the
Company's participation in an operating company or developmental stage project
will not be modified in a manner that is materially adverse to the Company,
particularly because the Company usually holds a minority interest. The
successful development and commercialization of these projects will depend on
a number of significant financial, logistical, technical, marketing, legal and
other factors, the outcome of which cannot be predicted. Virtually all of the
operating companies are, and in the future will be, newly-formed entities that
have a limited operating history and that operate at a loss for a substantial
period of time. These operating companies will require significant amounts of
additional financing to fund capital expenditures, working capital
requirements and other cash needs, including the costs of obtaining additional
licenses. In addition, there can be no assurance that these projects will not
encounter engineering, design or other operational problems. For example, STW,
the Company's Malaysian WLL operating company, has experienced significant
delays in network deployment and its marketing plans primarily as a result of
adverse effects on STW of the Malaysian government's recent attempt to
consolidate the Malaysian telecommunications industry and its related adverse
effects. See "--Risks Inherent in Foreign Investment." As a result, IWC and
its principal strategic partner in STW have recently undertaken an extensive
review of STW's business plan and strategy, which is expected to be completed
by the end of 1996. There can be no assurance that the Company can
successfully develop any of its existing or planned developmental stage
projects or that any of these projects or any of its operating companies will
achieve commercial success. Further, the Company's current and anticipated
ownership interests in the operating companies and developmental stage
projects are subject to modification and may even be eliminated completely due
to the occurrence of certain events such as the re-negotiation of existing
MOUs and/or agreements, changes in foreign laws or regulations affecting
foreign ownership, government expropriation, financing contingencies and other
factors. Likewise, the Company may voluntarily withdraw from one or more
operating companies or developmental stage projects.
Risks Inherent in Foreign Investment
The Company has invested substantial resources outside of the United States
and plans to continue to do so in the future. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. For example, foreign ownership of
telecommunications ventures is prohibited in China. In addition, in some
cases, the government owns or controls companies that are or may in the future
become competitors of the Company or companies (such as national telephone
companies) upon which the operating companies and developmental stage projects
may depend for required interconnections to land-line telephone networks and
other services. Accordingly, government actions in the future could have a
significant effect on economic conditions in a developing country and
otherwise have a material adverse effect on the Company and its operating
companies and developmental stage projects. Expropriation, confiscatory
22
<PAGE>
taxation, nationalization, political, economic or social instability or other
developments could materially adversely affect the Company's interest in
operating companies and developmental stage projects in particular developing
countries.
For example, in early 1996 the Malaysian government announced a program
designed to consolidate the Malaysian telecommunications industry which, if
completed, would have forced the sale of STW, the Company's Malaysian operating
company, to one of a limited number of surviving telecommunications companies.
Although the Malaysian government announced in July 1996 that it did not intend
to proceed with this program, the activities of the Malaysian government in
connection with such program resulted in significant delays in STW's network
deployment and marketing plans and contributed to a 37% decrease in subscribers
experienced by STW during the quarter ended September 30, 1996. There can be no
assurance that the Malaysian government will not initiate similar programs in
the future. There can also be no assurance that the Malaysian national
telephone company will not otherwise impose restrictions on STW, including
restrictions on the ability of STW to interconnect its wireless network with
the national telephone company's system, which could have a material adverse
effect on the Company. See "Business--Operating Companies--Malaysia National
WLL." Moreover, there can be no assurance that other countries where the
Company has operating companies or developmental stage projects will not
initiate similar programs or impose other restrictions, which could have a
material adverse effect on the Company.
The Company also may be adversely affected by political or social unrest or
instability in foreign countries. There can be no assurance that unrest or
instability resulting from political, economic, social or other conditions in
foreign countries would not have a material adverse effect on the Company.
The Company does not have political risk insurance in the countries in which
it currently conducts business. Moreover, applicable agreements relating to the
Company's interests in its operating companies are frequently governed by
foreign law. As a result, in the event of a dispute, it may be difficult for
the Company to enforce its rights. Accordingly, the Company may have little or
no recourse upon the occurrence of any of these developments or if any of its
partners seek to re-negotiate existing or future MOUs and/or other agreements.
To the extent that any of the operating companies seeks to make a dividend or
other distribution to the Company, or to the extent that the Company seeks to
liquidate its investment in an operating company or developmental stage project
and repatriate monies from a relevant country, local taxes, foreign exchange
controls or other restrictions may effectively prevent the transfer of funds to
the Company or the exchange of local currency for U.S. dollars.
Technological Risk; Risk of Obsolescence
The Company's operating companies and developmental stage projects generally
use new and emerging technologies. For example, in the Company's China Regional
Cellular developmental stage project, the Chinese government requires the
migration to CDMA, a technology that is not widely deployed on a commercial
basis at the present time. Additionally, the MPT 1327 technology selected by a
number of the Company's ECTR operating companies is currently operational in
many countries but has had limited deployment for public use in developing
countries. Although many of the technologies currently in use and to be used in
the future by the Company have been developed by international
telecommunications companies such as Nokia, Philips, Motorola, Ericsson, Lucent
Technologies and Nortel, most are generally advanced technologies which have
only recently been developed and commercially introduced. There can be no
assurance that the operating companies and developmental stage projects will
not experience technical problems in the commercial deployment of these
technologies, particularly because they are being introduced in developing
countries. In addition, the technology used in wireless communications is
evolving rapidly and one or more of the technologies currently utilized or
planned by the Company may not be preferred by its customers or may become
obsolete, which in either case would likely have a material adverse effect on
the Company. There can be no assurance that the Company will be able to keep
pace with ongoing technological changes in the wireless telecommunications
industry.
23
<PAGE>
Risk of Modification or Loss of Licenses; Uncertainty as to the Availability,
Cost and Terms of Licenses; Restrictions on Licenses
The Company's ability to retain and exploit its existing telecommunications
licenses and to renew them when they expire, and to obtain new licenses in the
future, is essential to the Company's operations. However, these licenses are
typically granted by governmental agencies in developing countries, and there
can be no assurance that these governmental agencies will not seek to
unilaterally limit, revoke or otherwise adversely modify the terms of these
licenses in the future, any of which could have a material adverse effect on
the Company, and the Company may have limited or no legal recourse if any of
these events were to occur. In addition, there can be no assurance that
renewals to these licenses will be granted or, if renewed, that the renewal
terms will not be substantially less favorable to the Company than the
original license terms, any of which could have a material adverse effect on
the Company. Likewise, many of the Company's operating companies and
developmental stage projects have not yet obtained all of the licenses
necessary for their proposed operations, and no assurance can be given that
any such licenses will be obtained. The failure to obtain such licenses would
have a material adverse effect on such operating companies and developmental
stage projects.
The Company believes that the opportunity to acquire substantial new
wireless licenses in developing countries will exist only for a limited time.
Further, although the Company's operating companies and developmental stage
projects have, to date, obtained many of their operating licenses through
private negotiations without having to participate in competitive bidding
processes, the Company anticipates that governments of developing countries
will increasingly discover the value of new wireless technologies and may
require bidding for licenses, which would likely increase the cost of these
licenses, perhaps substantially. In addition, the operating companies and
developmental stage projects may be required to purchase licenses from other
license holders in certain circumstances, including, for example, to gain
network capacity or to increase geographic coverage. Furthermore, relevant
governmental authorities may grant telecommunications licenses covering the
same geographical areas as the operating companies' and developmental stage
projects' licenses and otherwise grant licenses which allow other companies to
compete directly with such operating companies and developmental stage
projects for wireless subscribers. Although the availability of only limited
frequency ranges may provide some protection against the issuance of competing
licenses, there can be no assurance that such competitive licenses will not be
granted or that they will not have a material adverse effect on the Company.
In addition, licenses may be subject to significant operating restrictions or
conditions, including restrictions on interconnection to the public telephone
system or requirements that the operating companies or developmental stage
projects complete construction or commence commercial operation of the
networks by specified deadlines, which conditions, if not satisfied, may
result in loss or revocation of the license. Accordingly, there can be no
assurance that even if an operating company or developmental stage project is
able to obtain a required license, such operating conditions will be satisfied
and, as a result, that such license will not be lost or revoked or that the
restrictions imposed upon such license will permit the commercial exploitation
of such license, which could have a material adverse effect on the Company.
Dependence on Other Telecommunications Providers
The success of the Company's wireless systems will in many cases depend upon
services provided by other telecommunications providers, some of which are
competitors of the Company, the operating companies and/or the developmental
stage projects. For example, the Company's operating companies and
developmental stage projects generally require interconnection agreements with
national or regional telephone companies in order for its wireless systems to
connect with land-line telephone systems, and may require the use of other
microwave or fiber optic networks to link its wireless systems. Although a
number of operating companies have entered into required interconnection
agreements or have interconnection arrangements in place, the revocation, loss
or modification of any of these existing agreements or arrangements or the
failure to obtain necessary agreements and/or arrangements in the future could
have a material adverse effect on the Company.
24
<PAGE>
Dependence on Partners
The Company will generally continue to depend on its local partners to
obtain required licenses in all of its wireless projects. In addition, the
Company is often dependent on strategic partners with resources beyond those
of the Company to pursue, among other things, WLL and MMDS projects. In WLL
projects, the Company may require the participation of a larger
telecommunications company possessing the substantial capital and operating
resources required to finance and deploy a WLL system. In MMDS television
projects, the Company requires the participation of a television programming
company capable of providing the television content required for wireless
cable television. The failure of the Company to identify and enter into
relationships with strong partners, or the failure of those partners to
provide these resources, would have a material adverse effect on the Company.
Construction Risks
The operating companies and developmental stage projects in which the
Company invests typically require substantial construction of new wireless
networks and additions to existing wireless networks. Construction activity
will require the operating companies and developmental stage projects to
obtain qualified subcontractors and necessary equipment on a timely basis, the
availability of which varies significantly from country to country.
Construction projects are subject to cost overruns and delays not within the
control of the operating company or the developmental stage project or its
subcontractors, such as those caused by acts of governmental entities,
financing delays and catastrophic occurrences. Delays also can arise from
design changes and material or equipment shortages or delays in delivery.
Accordingly, there can be no assurance that the operating companies or
developmental stage projects will be able to complete current or future
construction projects for the amount budgeted or within the time periods
projected, or at all. Failure to complete construction for the amount budgeted
or on a timely basis could jeopardize subscriber contracts, franchises or
licenses and could have a material adverse effect on the Company. In
particular, telecommunications licenses often are granted on the condition
that network construction be completed or commercial operations be commenced
by a specified date. Failure to comply with these deadlines could result in
the loss or revocation of the licenses. In that regard, certain operating
companies have failed to meet such deadlines in the past. Specifically, UTS,
which provides ECTR services in the Visayas and Minandao regions of the
Philippines, failed to comply with the service date requirement contained in
its provisional authority and is currently in the process of applying for a
second extension of such service date deadline. Similarly, in the Via 1
Project, because the Company and its proposed partners were unable to comply
with operations commencement deadlines with respect to their licenses, they
had to apply for and received extensions of such deadlines. Although such
failures have not to date led to the loss of any licenses to date, there can
be no assurance that the relevant governmental authorities will not seek to
revoke licenses as a result of these past defaults or refuse to grant deadline
extensions or that similar defaults will not occur in the future, which could
have a material adverse effect on the Company.
Operating Losses and Negative Cash Flow; Dependence on Additional
Financing/Capital
Most of the existing operating companies have generated operating losses and
negative cash flow from operations, and the Company expects that most of its
operating companies will continue to generate operating losses and negative
cash flow from operations for the foreseeable future. The business of the
operating companies and developmental stage projects, particularly WLL
projects, is capital intensive and, in light of such anticipated negative cash
flow from operations, will require continuing sources of outside financing to
fund working capital needs, capital expenditures and other cash requirements.
The Company's strategy is for such additional financing to be obtained by the
operating companies primarily from third parties and not from the Company or
its strategic partners. However, there can be no assurance that the operating
companies and developmental stage projects will be able to obtain the
financing required to make planned capital expenditures, provide working
capital or meet other cash needs. Failure to obtain such financing could have
a material adverse effect on the Company and, among other things, could result
in the loss or revocation of licenses held by the operating companies or
developmental stage projects or require that certain planned projects be
delayed or abandoned. In particular, at September 30, 1996 a significant
portion of the Company's investments had been made in two operating
25
<PAGE>
companies (namely STW, which is developing a national WLL system in Malaysia;
and Mobisel, which is developing a national cellular system in Indonesia), and
both of these operating companies will be required to obtain substantial
additional financing in order to complete planned capital expenditures.
Moreover, as noted above, the Company and its principal strategic partners in
STW have recently undertaken an extensive review of STW's business plan and
strategy. There can be no assurance that STW's business plan will not be
revised to require capital expenditures that are significantly higher than
those contemplated by STW's current business plan.
In most cases, under agreements with its local partners, the Company and its
partners may be required to make additional equity investments in operating
companies or developmental stage projects, and the Company's or such partners'
inability or unwillingness to do so could result in the dilution of such
party's equity interest or a significant impairment or loss of the value of
the Company's investment. Moreover, the Company and its other strategic
partners have in the past been required, and in the future likely will be
required, to guarantee and/or pledge their respective equity interests to
secure certain indebtedness of the operating companies and developmental stage
projects and otherwise to provide certain assurances to their lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources." The Indenture contains certain
restrictions on the ability of the Company to make investments in, or
guarantee the indebtedness of, the operating companies and developmental stage
projects that are designated as Unrestricted Subsidiaries or Unrestricted
Affiliates. See "Description of Exchange Notes--Certain Covenants."
In addition, there can be no assurance that the operating companies or
developmental stage projects will be able to pay their indebtedness or other
liabilities when due. Any failure to pay such indebtedness or other
liabilities when due could have a material adverse effect on the Company. See
"--Company Level Risks--Negative Operating Cash Flow; Dependence on Additional
Financing; No Commitments For Additional Financing" below.
To date, most of the debt financing obtained by the operating companies has
been secured by assets of the respective operating companies, and it is likely
that any debt financing the operating companies or developmental stage
projects obtain in the foreseeable future will also be secured. The pledge of
assets to secure debt financing may limit the operations of the operating
companies and make it substantially more difficult to obtain additional
financing from other sources.
Substantial Leverage
As discussed above, the business of the operating companies and
developmental stage projects will require continuing sources of additional
financing. Certain of the operating companies have substantial indebtedness
and, to the extent that additional debt financing is available, other
operating companies or developmental stage projects may in the future incur
substantial indebtedness, in relation to their respective equity capital. To
the extent that any of the operating companies or developmental stage projects
now has or in the future incurs a high level of indebtedness, such
indebtedness will have important consequences to holders of the Exchange
Notes, including that (i) such entity's ability to pay dividends or make other
distributions to the Company may be restricted, (ii) such entity's ability to
obtain additional debt financing may be limited and (iii) such entity's
ability to react to changes in the industry and economic conditions generally
may be impaired.
Competition
Although the implementation of advanced wireless technologies is in the
early stages of deployment in most developing countries, the Company believes
that its business will become increasingly competitive, particularly as
businesses and foreign governments realize the market potential of these
wireless technologies. A number of large American, Japanese and European
companies, including U.S.-based regional Bell operating companies ("RBOCs")
and large international telecommunications companies, are actively engaged in
programs to develop and commercialize wireless technologies in developing
countries. In many cases, the Company will also compete against land-line
carriers, including government-owned telephone companies. Most of these
companies have
26
<PAGE>
substantially greater financial and other resources, research and development
staffs and technical and marketing capabilities than the Company. The Company
anticipates that there will be increasing competition for additional licenses
and increased competition to the extent such licenses are obtained by others.
Although the Company intends to employ relatively new technologies, there will
be a continuing competitive threat from even newer technologies which may
render the technologies employed by the Company obsolete.
Regulation
The wireless services of the Company's operating companies and developmental
stage projects are subject to governmental regulation, which may change from
time to time. There can be no assurance that material and adverse changes in
the regulation of the Company's existing or future operating companies or
developmental stage projects will not occur in the future. To date, certain
operating companies and developmental stage projects have been subject to
service requirements, restrictions on interconnection of wireless systems to
government-owned or private telephone networks, subscriber rate-setting,
technology and construction requirements, among others. These regulations may
be difficult to comply with, particularly given demographic, geographic or
other issues in a particular market. Further, changes in the regulatory
framework may limit the ability to add subscribers to developing systems. An
operating company's or developmental stage project's failure to comply with
applicable governmental regulations or operating requirements could result in
the loss of licenses or otherwise could have a material adverse effect on the
Company.
Inflation; Currency Devaluations and Fluctuations
Many developing countries have experienced substantial, and in some periods
extremely high, rates of inflation and resulting high interest rates for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain developing countries and could have an adverse effect on the operating
companies and developmental stage projects in those countries, including an
adverse effect on their ability to obtain financing.
The value of the Company's investment in an operating company or
developmental stage project is partially a function of the currency exchange
rate between the dollar and the applicable local currency. In addition, the
operating companies will report their results of operations in the local
currency and, accordingly, the Company's results of operations will be
affected by changes in currency exchange rates between those currencies and
U.S. dollars. In general, the Company does not hedge against foreign currency
exchange rate risks. As a result, the Company may experience economic loss
with respect to its investments and fluctuations in its results of operations
solely as a result of currency exchange rate fluctuations. For example, the
Company experienced a significant decline in the value of its investment in
Mobilcom Mexico, its ECTR operating company in Mexico, as a result of the 1994
devaluation of the Mexican peso and the resulting economic instability in
Mexico. Many of the currencies of developing countries have experienced steady
devaluations relative to the U.S. dollar, and major adjustments have been made
in the past and may again occur in the future, any of which could have a
material adverse effect on the Company.
To the extent that the operating companies commence or have commenced
commercial operations, any revenues they generate will generally be paid to
the operating companies in the local currency. By contrast, many significant
liabilities of the operating companies (such as liabilities for the financing
of telecommunications equipment) may be payable in U.S. dollars or in
currencies other than the local currency. As a result, any devaluation in the
local currency relative to the currencies in which such liabilities are
payable could have a material adverse effect on the Company.
Foreign Corrupt Practices Act
The Company is subject to the Foreign Corrupt Practices Act ("FCPA"), which
generally prohibits U.S. companies and their intermediaries from bribing
foreign officials for the purpose of obtaining or keeping business or licenses
or otherwise obtaining favorable treatment. Although the Company has taken
precautions to comply
27
<PAGE>
with the FCPA, there can be no assurance that such precautions will protect
the Company against liability under the FCPA, particularly as a result of
actions which may in the past have been taken or which may be taken in the
future by agents and other intermediaries for whose actions the Company may be
held liable under the FCPA. In particular, the Company may be held responsible
for actions taken by its strategic or local partners even though such
strategic or local partners are themselves typically foreign companies which
are not subject to the FCPA; and the Company has no ability to control such
strategic or local partners. Any determination that the Company has violated
the FCPA could have a material adverse effect on the Company.
International Tax Risks
Distributions of earnings and other payments received from the Company's
operating subsidiaries and affiliates are likely to be subject to withholding
taxes imposed by the jurisdictions in which such entities are formed or
operating. In general, a United States corporation may claim a foreign tax
credit against its federal income tax expense for such foreign withholding
taxes and foreign taxes paid directly by corporate entities in which the
Company owns 10% or more of the voting stock. The ability to claim such
foreign tax credits and to utilize net foreign losses is, however, subject to
numerous limitations, and the Company may incur incremental tax costs as a
result of these limitations or because the Company is not in a tax paying
position in the United States.
Special U.S. tax rules apply to U.S. taxpayers that own stock in a "passive
foreign investment company" (a "PFIC") that could also increase the Company's
effective rate of taxation. In general, a non-U.S. corporation will be treated
as a PFIC if at least 75 percent of its income is "passive income" or if at
least 50 percent of its assets are held for the production of "passive
income." A non-U.S. corporation that owns 25 percent or more of the stock of a
non-U.S. subsidiary is treated as receiving a proportionate share of the
income of, and as owning a proportionate share of the assets of, such
subsidiary.
It is possible that certain operating companies in which the Company owns an
equity interest are PFICs. Generally, except to the extent the Company makes
an election to treat a PFIC in which it owns stock as a "qualified electing
fund" (a "QEF") in the first taxable year in which the Company owns the PFIC's
stock, (i) the Company would be required to allocate gain recognized upon the
disposition of stock in the PFIC and income recognized upon receiving certain
dividends ratably over the Company's holding period for the stock in the PFIC,
(ii) the amount allocated to each year other than the year of the disposition
or dividend payment would be taxable at the highest U.S. tax rate applicable
to corporations, and an interest charge for the deemed deferral benefit would
be imposed with respect to the tax attributable to each year, and (iii) gain
recognized upon disposition of PFIC shares would be taxable as ordinary
income.
If the Company were to make the QEF election, as described above, the
Company would be required in each year that the PFIC qualification tests are
met to include its pro rata share of the QEF's earnings as ordinary income and
its pro rata share of the QEF's net capital gain as long-term capital gain,
whether or not such amounts are actually distributed. The Company has not made
any QEF election with respect to any non-U.S. corporation in which it holds
stock.
The Company may also be required to include in its income for U.S. income
tax purposes its proportionate share of the earnings of those foreign
corporate subsidiaries that are classified as "controlled" foreign
corporations without regard to whether distributions have been received from
such companies.
Reporting Standards; Financial Statements of Operating Companies; Timely
Compliance with Informational and Filing Requirements
Companies in developing countries are subject to accounting, auditing and
financial standards and requirements that differ, in some cases significantly,
from those applicable to U.S. companies. In addition, there may be
substantially less publicly available information about companies in a
developing country than there is about U.S. companies. The Company's ability
to comply with the informational and filing requirements of the
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<PAGE>
Indenture and the Exchange Act to which it is or will be subject will depend
on the timely receipt of accurate and complete financial and other information
from the Company's operating companies and developmental stage projects. The
failure to receive such information on a timely basis could have a material
adverse effect on the Company, including preventing it from satisfying the
informational and filing requirements of the Indenture and the Exchange Act.
COMPANY LEVEL RISKS
Limited Operating History; Continuing Losses
The Company has a limited operating history. Since its inception in January
1992, the Company's activities have been concentrated primarily on the early
stage development of its wireless projects, including the selection of local
partners, the formation of operating companies and the pursuit of operating
licenses. The Company has incurred net losses since its inception and had an
accumulated stockholders' deficit of approximately $34.8 million at September
30, 1996. The Company anticipates that its net losses will increase
significantly in the foreseeable future, and there can be no assurance as to
whether or when the Company's operations will become profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Negative Operating Cash Flow; Dependence on Additional Financing; No
Commitments for Additional Financing
The Company has generated negative cash flow from operations of $7.4 million
for the nine months ended September 30, 1996 and $2.0 million for the year
ended December 31, 1995, and expects such negative cash flows to continue and
likely increase in the foreseeable future. Because of such negative cash flow
and the capital intensive nature of the Company's business, the Company will
require continuing sources of outside debt and equity financing to fund its
working capital needs, investments and other cash requirements.
Moreover, although the Company anticipates that its cash balance is
sufficient to meet its cash requirements for approximately 12 months, there
can be no assurance that the Company will not require additional financing
prior to such time. In addition, the Company intends to pursue aggressively
additional investment opportunities for wireless projects and anticipates that
it will require additional sources of financing in order to pursue those
investments. However, the Company has no commitments or arrangements for
additional financing, and there can be no assurance that any additional debt
or equity financing will be available to the Company on acceptable terms when
required by the Company or at all. If adequate sources of additional financing
are not available, the Company will be forced to delay, scale back or
eliminate one or more of its projects or to liquidate one or more of its
investments, may be unable to repay the Exchange Notes or other liabilities as
they become due, and may be unable to meet its working capital and other cash
requirements. Accordingly, the Company's inability to obtain such additional
financing would have a material adverse effect on the Company.
Restrictions on Transfer of Ownership Interests
The Company's ability to sell or transfer its ownership interests in its
operating companies and developmental stage projects is generally subject to
(i) limitations contained in the agreements between the Company and its local
partners including, in certain cases, complete prohibitions on sales or
transfers for a period of years, co-sale rights and/or rights of first refusal
and (ii) provisions in local operating licenses and local governmental
regulations that, in certain cases, prohibit or restrict the transfer of the
Company's ownership interests in such operating companies and developmental
stage projects. Moreover, the Company and its local partners have in the past
been required to pledge their capital stock in certain operating companies to
secure credit facilities obtained by those operating companies, and the
Company may be prohibited from transferring or otherwise disposing of such
capital stock so long as it is pledged as collateral for those credit
facilities. In addition, none of the operating companies or developmental
stage projects currently has any publicly traded securities and there can be
no assurance that there will in the future be either a public or private
market for the securities of the Company's operating companies or
developmental stage projects. As a result, the Company's
29
<PAGE>
ability to liquidate any or all of its investments may be substantially
limited and there can be no assurance that the Company will be able to do so
in a timely manner or at all in the event of an acceleration of the Exchange
Notes prior to their maturity or in order to satisfy its obligations in
respect of such securities in the event of a Change of Control or to repay the
Exchange Notes upon their maturity. Moreover, even if any sales are completed,
the prices realized on those sales could be less than the Company's
investment, and there may be substantial local taxes imposed on the Company in
the case of any such sales and, in any event, there can be no assurance that
there will not be substantial taxes or other restrictions on the ability of
the Company to repatriate any amounts realized upon the sale of any such
investments. In addition, certain of the operating companies and developmental
stage projects are or may be parties to credit agreements that restrict their
ability to pay dividends or make other distributions to their equity
investors, and the Company's local partners, by virtue of their majority
ownership interest in the operating companies and developmental stage
projects, generally have the right to determine the timing and amount of any
such dividends or distributions.
Lack of Control of Operating Companies and Developmental Stage Projects
The Company anticipates that it will often have a minority interest in its
operating companies and developmental stage projects, in part because
applicable laws often limit foreign investors to minority equity positions.
Although the Company is actively involved in the management of most of the
operating companies and developmental stage projects in which it has an
ownership interest and intends to invest in the future in operating companies
and developmental stage projects in which it can participate in management,
its minority voting positions may preclude it from controlling such entities
and implementing strategies that it favors, including strategies involving the
expansion or development of projects or the pursuit of certain financing
alternatives. In addition, the Company may be unable to access the cash flow,
if any, of its operating companies. See "--Financing Risks--Holding Company
Structure; Limitations on Access to Cash Flow of Operating Companies."
Risks Inherent in Growth Strategy
The Company has grown rapidly since inception, and as of September 30, 1996
had operating companies or developmental stage projects in 12 foreign
countries. Subject to the availability of additional financing, the Company
anticipates that it will make additional investments in wireless projects in
other foreign countries and is actively seeking and evaluating new investment
opportunities in foreign countries where it currently has operating companies
or developmental stage projects. The growth strategy presents the risks
inherent in assessing the value, strengths and weaknesses of development
opportunities, in evaluating the costs and uncertain returns of building and
expanding the facilities for operating systems and in integrating and managing
the operations of additional operating systems. The Company's growth strategy
will place significant demands on the Company's operational, financial and
marketing resources. Any failure to manage the Company in an efficient manner
would have a material adverse effect on the Company.
Risk of Registration Under Investment Company Act of 1940
Because the Company often acquires minority ownership positions in operating
companies and development stage projects, there is a risk that these ownership
positions could be deemed to be investment securities and that the Company
could be characterized as an investment company under the Investment Company
Act of 1940 (the "Investment Company Act"). Due to the Company's active role
in developing and managing the operating companies, the Company believes that
a substantial majority of its interests in the operating companies are the
equivalent of joint venture interests rather than investment securities.
Therefore, the Company believes that it is not an investment company and
intends to continue its business and conduct its operations so as not to
become subject to the Investment Company Act. If the Commission or its staff
were to take the position, or if it were otherwise asserted, that the Company
is an investment company, the Company could be required either (i) to
liquidate its investments in one or more operating companies or developmental
stage projects and change the manner in which it conducts its operations to
avoid being required to register as an investment company or (ii) to register
as an investment company. If the Company were required to register under the
Investment Company Act,
30
<PAGE>
it would be subject to substantive regulations with respect to capital
structure, operations, transactions with affiliates and other matters. In
addition, a determination that the Company is subject to the Investment
Company Act would constitute an event of default under the Indenture and
permit acceleration of the Notes. If the Company were found to be an
investment company but was not registered under the Investment Company Act,
the Company would be prohibited from, among other things, conducting public
offerings in the United States or engaging in interstate commerce in the
United States, would be subject to monetary penalties and injunctive relief in
an action brought by the Commission, and might render contracts to which the
Company is a party (including the Indenture and the Notes) unenforceable or
subject to rescission by either party thereto. As a result, any determination
that the Company is an investment company would have a material adverse effect
on the Company.
Control of the Company
At September 30, 1996, Vanguard beneficially owned approximately 39% of the
Company's equity on an as converted basis. Vanguard has provided and continues
to provide a number of services to the Company relating to the formation,
development and operation of wireless communications services, including
identification and evaluation of wireless communications opportunities, review
of business and technical plans and assistance in training operating company
personnel. Vanguard has the right to elect three directors to the Company's
Board of Directors and has three representatives on such Board, including
Haynes G. Griffin, Chairman of the Board of Directors. As a result, Vanguard
may have the ability to effectively control the Company and direct its
business and affairs. See "Management--Arrangements Concerning Election of
Directors."
Conflicts of Interest
Vanguard is not precluded from competing with the Company by itself or
through affiliates by developing, owning and/or operating international
wireless communications businesses, including businesses that use the same or
similar technologies or provide the same services as the Company's existing
and future operating companies. This is true even though the Company acquired
substantially all of Vanguard's interests in certain of its international
wireless projects in December 1995. Although the directors designated by
Vanguard have fiduciary duties to the Company in their capacity as such and
may abstain from voting on matters in which the interests of the Company and
Vanguard are in conflict, they are not obligated to do so, and the Company has
not adopted any formal policies or procedures designed to prevent actual
conflicts of interest from occurring. As a result, the presence of potential
or actual conflicts could affect the process or outcome of Board
deliberations. There can be no assurance that such conflicts of interest will
not materially adversely affect the Company. See "Business--Strategic
Relationships," "Certain Transactions--Private Placement Transactions--The
Series F Financing," "Certain Transactions--The Vanguard Exchange" and
"Description of Capital Stock."
Dependence on Key Personnel
The success of the Company and its growth strategy depends in large part on
the ability of the Company to attract and retain key management, marketing and
operating personnel, both at the Company and operating company and
developmental stage project levels. There can be no assurance the Company will
continue to attract and retain the qualified personnel needed for its
business, particularly because of the amount of international travel required
of the Company's managers and because experienced local managers are often
unavailable. In addition, the loss of the services of one or more members of
its senior management team, particularly John D. Lockton or Hugh B. L.
McClung, could have a material adverse effect on the Company.
FINANCING RISKS
Consequences of Failure to Exchange Old Notes
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not
31
<PAGE>
subject to, the registration requirements of the Securities Act and applicable
state securities laws. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act and applicable state securities
laws, or pursuant to an exemption therefrom. Except under certain limited
circumstances, the Company does not intend to register the Old Notes under the
Securities Act. In addition, any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if
so, will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
To the extent Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Old Notes not so tendered could be adversely
affected. See "The Exchange Offer," "Old Notes Registration Rights" and "Old
Notes Transfer Restrictions."
Holding Company Structure; Limitations on Access to Cash Flow of Operating
Companies
The Exchange Notes will be the exclusive obligation of the Company, which is
a holding company with no business operations of its own. All of the
operations of the Company are conducted through its subsidiaries and
affiliated companies, which are separate and distinct legal entities and have
no obligation, contingent or otherwise, to pay any amounts due pursuant to the
Exchange Notes or to make any funds available to the Company to enable it to
make payments on the Exchange Notes or make investments in operating companies
or developmental stage projects, meet working capital needs or other
liabilities of the Company, or for any other reason. In addition, most of the
operating companies have generated negative cash flow from operations, and the
Company expects that most operating companies will continue to generate
negative cash flow from operations in the foreseeable future. Further, to the
extent that any of the operating companies generates positive cash flow, the
Company may be unable to access such cash flow because (i) its owns 50% or
less of the equity of most of such entities and, therefore, does not have the
requisite control to cause such entities to pay dividends to their equity
holders; (ii) certain of such entities are currently or may become parties to
credit or other borrowing agreements that restrict or prohibit the payment of
dividends, and such entities are likely to continue to be subject to such
restrictions and prohibitions for the foreseeable future; (iii) the Company
expects that its operating companies will generally reinvest all of their cash
flow in development opportunities for the foreseeable future; and (iv) some of
the countries in which such entities conduct business tax the payment and
repatriation of dividends or otherwise restrict the repatriation of funds. As
a result, the Company does not expect that it will be able to generate any
significant cash through dividends or other distributions from the operating
companies in the foreseeable future, and there can be no assurance that the
Company will be able to generate any significant cash flow from the operating
companies at any time in the future.
Effective Subordination
The Company's assets consist primarily of its ownership interests in its
operating companies. The Exchange Notes will be effectively subordinated to
all existing and future indebtedness and other liabilities of the Company's
subsidiaries and affiliated companies because the Company's right to receive
the assets of any such entities upon their liquidation or reorganization will
be effectively subordinated to the claims of such entities' creditors
(including trade creditors), except to the extent that the Company is itself
recognized as a creditor of any such entity, in which case the claims of the
Company would still be subordinated to any indebtedness of such entity that is
senior in right of payment to the Company's claim or that is secured by the
assets of any such entity. The operating companies have substantial
indebtedness and other liabilities.
Restrictive Covenants
The covenants set forth in the Indenture governing the Exchange Notes impose
restrictions affecting, among other things, the ability of the Company and its
Restricted Subsidiaries, Restricted Affiliates and Restricted Subsidiaries or
Restricted Affiliates to incur additional indebtedness, create liens on
assets, make loans or other investments and effect other corporate actions.
However, the covenants set forth in the Indenture are not generally be
applicable to most of the operating companies because such entities will not
be deemed to be "Restricted Subsidiaries" or "Restricted Affiliates" for
purposes of the Indenture. As a result, the ability of
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<PAGE>
such operating companies to incur additional indebtedness, to impose
restrictions on their ability to pay dividends to the Company, to sell assets
or to engage in other transactions that may be detrimental to the interests of
creditors of the Company, including the holders of Exchange Notes, is not
restricted. In addition, under certain limited circumstances, the Company will
be entitled to designate certain of its Restricted Subsidiaries and Restricted
Affiliates as Unrestricted Subsidiaries and Unrestricted Affiliates,
respectively, which are not subject to many of the restrictions set forth in
the Indenture. However, the Company's ability to make future Investments in
Unrestricted Subsidiaries and Unrestricted Affiliates are limited by the
Indenture. See "Description of Exchange Notes--Certain Covenants."
Substantial Leverage; Inability to Cover Fixed Charges
The Company is highly leveraged and has indebtedness that is substantial in
relation to its stockholders' equity. In addition, the Indenture permits the
Company to incur additional indebtedness in the future, including indebtedness
to which the Exchange Notes will be effectively subordinated and indebtedness
ranking pari passu with the Exchange Notes. The high level of the Company's
indebtedness will have important consequences to holders of the Exchange
Notes, including (i) the Company's ability to obtain additional debt financing
in the future may be limited, and (ii) the Company's level of indebtedness
could limit its flexibility in reacting to changes in the industry and
economic conditions generally. In addition, most of the existing operating
companies and developmental stage projects will not be subject to any
limitations under the Indenture on the incurrence of additional indebtedness,
and, to the extent that the Company is successful in its strategy of obtaining
additional financing at the operating company or developmental stage project
level, the amount of such indebtedness could increase substantially, which
will have consequences similar to those described in clauses (i) and (ii)
above with respect to the Company.
For the year ended December 31, 1995 and the nine months ended September 30,
1996, the Company's earnings were insufficient to cover fixed charges by $11.1
million and $19.6 million, respectively (computed as described in note 2 to
"Prospectus Summary--Summary Historical and Unaudited Pro Forma Consolidated
Financial Data"). The Company anticipates that its earnings will continue to
be insufficient to cover fixed charges for the foreseeable future. See "--
Company Level Risks--Limited Operating History; Continuing Losses."
No Assurance of Repayment of Exchange Notes at Maturity
For each of the three years ended December 31, 1995 and the nine months
ended September 30, 1996, the Company had net losses and did not generate
positive cash flow from operations and, as discussed above under "Holding
Company Structure; Limitations on Access to Cash Flow of Operating Companies,"
the Company does not expect that it will generate positive cash flow from
operations for the foreseeable future. Accordingly, the Company's ability to
repay the Exchange Notes at maturity will be dependent on developing one or
more sources of cash prior to the maturity of the Exchange Notes. The Company
may, among other things, (i) seek to refinance all or a portion of the
Exchange Notes at maturity through sales of additional debt or equity
securities of the Company, (ii) seek to sell all or a portion of its interests
in one or more of its operating companies or developmental stage projects
(subject to the restrictions described above under "--Company Level Risks--
Restrictions on Transfer of Ownership Interests") or (iii) negotiate with its
financial and strategic partners to permit the cash, if any, produced by the
operating companies to be distributed to equity holders. There can be no
assurance that (i) there will be a market for the debt or equity securities of
the Company in the future, (ii) the Company will be able to sell assets in a
timely manner or on commercially acceptable terms or in an amount that will be
sufficient to repay the Exchange Notes when due, (iii) the Company will be
able to obtain the consents and approvals required in order to sell its
interests in its operating companies or developmental stage projects or (iv)
that the operating companies will in fact generate positive cash flow or that
any such cash flow will be distributed to equity holders (particularly since
the Company expects that its operating companies will generally reinvest all
of their cash flow in development opportunities for the foreseeable future).
In addition, default under the Exchange Notes could in turn permit lenders
under STW's $36.4 million credit facility, and possibly under other debt
instruments of the operating companies, to declare borrowings outstanding
thereunder to be due and payable pursuant to cross-default clauses, permitting
the lenders under such debt instruments to
33
<PAGE>
proceed against any collateral pledged as security therefor. See "Operating
Companies--Malaysia National WLL--Investment and Budgeted Capital
Expenditures." Any failure by the Company to repay the Exchange Notes when due
would have a material adverse effect on the Company.
Ability to Realize on Collateral; No Assurance as to Value of Assets
The collateral securing the Exchange Notes will consist solely of all of the
issued and outstanding capital stock of IWC, which owns equity interests in
the Company's operating subsidiaries and affiliates, and any Intercompany
Notes of IWC. The ability of the holders of the Exchange Notes to realize upon
such collateral may be limited and subject to substantial delays. In certain
instances, the foreclosure by the Collateral Agent (as defined) on its
security interest in the capital stock of IWC may require the prior approval
of local government regulatory authorities and agreements to which the
Company, IWC or the operating companies are parties. For example, a
foreclosure could implicate transfer restrictions contained in agreements
between IWC or the Company and its operating company partners. See "--Company
Level Risks--Restrictions on Transfer of Ownership Interests." In addition,
under many of the credit and other agreements of the operating companies, the
foreclosure by the Collateral Agent on its security interest in capital stock
of IWC, would cause such operating companies to be in default of such credit
agreements. If any event of default occurs with respect to the Exchange Notes,
there can be no assurance that the liquidation of the Collateral securing the
Exchange Notes would produce proceeds in an amount sufficient to pay the
Accreted Value of the Exchange Notes. In addition, the Indenture provides that
the lenders under a Permitted Bank Facility will be entitled to share, on a
pari passu basis, in any proceeds from any foreclosure upon the Collateral
securing the Exchange Notes. See "Description of Exchange Notes--Certain
Covenants."
Certain Bankruptcy Considerations
The right of the Collateral Agent, as agent for the holders of the Exchange
Notes, to repossess and dispose of the collateral securing the Exchange Notes
(the "Collateral") upon the occurrence of an Event of Default is likely to be
significantly impaired by the Bankruptcy Code (as defined) if a bankruptcy
proceeding were to be commenced by or against the Company prior to the
Collateral Agent's having disposed of the Collateral. Under the Bankruptcy
Code, a secured creditor, such as the Collateral Agent, is prohibited from
disposing of security repossessed from a debtor in a bankruptcy case without
bankruptcy court approval. Moreover, bankruptcy law prohibits a secured
creditor from disposing of collateral even though the debtor is in default
under the applicable debt instruments if the secured creditor is given
"adequate protection." The meaning of the term "adequate protection" may vary
according to circumstances, but this concept is intended in general to protect
the value of the secured creditor's interest in the collateral and this term
may include cash payments or the granting of additional security, if and at
such times as the court in its discretion determines, to compensate for any
diminution in the value of the collateral as a result of the stay of
disposition during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how
long payments under the Exchange Notes could be delayed following commencement
of a bankruptcy case, whether or when the Collateral Agent could dispose of
the Collateral or whether or to what extent holders of Exchange Notes would be
compensated for any delay in payment or loss of value of the Collateral
through the requirement of "adequate protection." See "Description of Exchange
Notes--Ranking and Security." Furthermore, in the event a bankruptcy court
determines that the value of the Collateral is not sufficient to repay all
amounts due on the Exchange Notes, the holders of the Exchange Notes would
hold "undersecured claims." Applicable bankruptcy laws do not permit the
payment and/or accrual of interest, costs and attorneys' fees for
"undersecured claims" during the debtor's bankruptcy case.
Risk of Inability to Finance a Change of Control Offer
Upon the occurrence of a Change of Control, the Company will be required to
make an offer to purchase all of the outstanding Exchange Notes at a price
equal to 101% of the Accreted Value to the date of repurchase. The Company's
failure to purchase the Exchange Notes would result in a default under the
Indenture. In the
34
<PAGE>
event of a Change of Control, there can be no assurance that the Company would
have sufficient assets to satisfy all of its obligations under the Indenture.
Future debt of the Company may also contain prohibitions of certain events or
transactions which would constitute a Change of Control or require the
obligations thereunder to be retired upon a Change of Control. See
"Description of Exchange Notes--Repurchase at the Option of Holders--Change of
Control."
Classification of Exchange Notes as Debt; Original Issue Discount
Although the Company intends to treat the Exchange Notes as debt for all
purposes, there can be no assurance that the Internal Revenue Service will
agree that the Exchange Notes qualify as debt for federal income tax purposes.
If the Exchange Notes are not respected as debt for such purposes, they would
likely be recharacterized as an equity interest in the Company and the
interest that accretes on the Exchange Notes would not be deductible by the
Company when accrued or paid. Loss of such interest deductions would increase
income taxes ultimately payable by the Company, and thus, reduce cash flow
otherwise available to repay the Exchange Notes, which would have a material
adverse effect on the Company. Recharacterization of the Exchange Notes as
equity could also adversely affect non-corporate holders as well as non-United
States holders (as that term is defined in "Certain Income Tax
Considerations") of the Exchange Notes.
Assuming the Exchange Notes are respected as debt for federal income tax
purposes, they will be subject to the original issue discount provisions of
the Code because they will have been issued at a non-de minimis discount from
their principal amount. Consequently, the holders of the Exchange Notes
generally will be required to include amounts in gross income for federal
income tax purposes in advance of receipt of the cash payments to which the
income is attributable. For more detailed discussion of the federal income tax
consequences of the exchange of Old Notes pursuant to the Exchange Offer and
ownership and disposition of the Exchange Notes, see "Certain Income Tax
Considerations."
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code after the issuance of the Exchange Notes, the claim of
a holder of any of the Exchange Notes with respect to the principal amount
thereof may be limited to an amount equal to the sum of (i) the initial
offering price allocable to the Exchange Notes and (ii) that portion of the
original issue discount which is not deemed to constitute "unmatured interest"
for purposes of the Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest."
Absence of Public Market for Exchange Notes
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in August 1996 to a small number of
institutional investors and are eligible for trading in the Private Offerings,
Resale and Trading through Automatic Linkages (PORTAL) Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the
Exchange Notes and there can be no assurance as to the liquidity of markets
that may develop for the Exchange Notes, the ability of the holders of the
Exchange Notes to sell their Exchange Notes or the price at which such holders
would be able to sell their Exchange Notes. If such markets were to exist, the
Exchange Notes could trade at prices that may be lower than the initial market
values thereof depending on many factors, including prevailing interest rates,
the markets for similar securities, and the financial performance of the
Company and its subsidiaries. Although there is currently no market for the
Exchange Notes, the Initial Purchasers have advised the Company that they
currently intend to make a market in the Exchange Notes. However, the Initial
Purchasers are not obligated to do so, and any such market making with respect
to the Exchange Notes may be discontinued at any time without notice. In
addition, such market-making activities will be subject to the limits imposed
by the Securities Act and the Exchange Act and may be limited during the
Exchange Offer or the pendency of an applicable Shelf Registration Statement
(as defined).
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading market
independent of the financial performance of, and prospects for, the Company.
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<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to the Company resulting from the Exchange
Offer. The net proceeds from the Unit Offering were approximately $94.2
million after deduction of placement agent fees and offering expenses. As of
September 30, 1996, the Company had used portions of such net proceeds and its
existing cash and cash equivalents (i) to repay in full on August 15, 1996 all
borrowings, interest and fees under the 1996 TD Loan Agreement, which totalled
$7.4 million, (ii) to make investments in its existing operating companies and
developmental stage projects; and (iii) for general corporate purposes. The
remaining balance of the net proceeds from the Unit Offering will be used to
make investments in its existing operating companies and developmental stage
projects and for general corporate purposes that may include investments in
additional development and acquisition opportunities.
The following table summarizes the Company's anticipated remaining
investments in its operating companies and its proposed investments in
developmental stage projects through December 31, 1997, based on its current
estimate of funding requirements of such operating companies and developmental
stage projects as of September 30, 1996. Because of the Company's operating
losses, the proceeds from the Unit Offering plus cash on hand will not be
sufficient to make all of the investments in the full amounts set forth below.
To fully fund its anticipated future investments, the Company will be required
to find additional sources of capital. Although the Company currently
anticipates funding the amounts set forth below, there can be no assurance
that the Company's investments will not vary significantly from the currently
anticipated amounts. In particular, it may be necessary for the Company to
make additional capital contributions to the operating companies and
developmental stage projects. See "Risk Factors--Company Level Risks--Negative
Operating Cash Flow; Dependence on Additional Capital Financing; No
Commitments for Additional Financing." The covenants set forth in the
Indenture will, however, significantly limit the Company's ability to make
investments in operating companies or developmental stage projects that
constitute Unrestricted Subsidiaries or Unrestricted Affiliates, including any
investments made from the net proceeds of the Unit Offering. See "Description
of Exchange Notes--Certain Covenants--Restricted Payments."
<TABLE>
<CAPTION>
REMAINING
ANTICIPATED
ADDITIONAL
TOTAL ANTICIPATED COMPANY
COMPANY COMPANY INVESTMENT
INVESTMENT INVESTMENT THROUGH
THROUGH AS OF DECEMBER 31,
LOCATION TYPE OF PROJECT DECEMBER 31, 1997(1) SEPTEMBER 30, 1996(1) 1997
- -------- --------------- -------------------- --------------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Company:
Malaysia National WLL $ 34.2 $22.2 $12.0
Indonesia National Cellular 34.1 25.5 8.6(2)
Indonesia National ECTR 2.3 1.5 0.8
Philippines Regional ECTR 3.7 1.9 1.8
New Zealand National ECTR 9.6 8.3 1.3
Brazil Regional ECTR 16.5 14.8 1.7
Mexico Regional ECTR 2.1 2.1 0.0
Developmental Stage
Project:
Taiwan National ECTR 3.0 3.0 0.0
India (Regional)
Indonesia (National)
Star Telecom Overseas Taiwan (National)
(Paging) Thailand 13.5 13.5 0.0
China Regional Cellular 20.0 9.0(3) 11.0(3)
Pakistan National ECTR 12.8 5.4 7.4
Mexico WLL 18.5 0.0 18.5
Peru National ECTR 17.6 0.2 17.4
------ ------ -----
Total........... $187.9 $107.4 $80.5
====== ====== =====
</TABLE>
- -------
(1) Includes Preferred Stock with aggregate liquidation preferences of $19.1
million and $5.4 million that was issued by the Company to acquire
interests in certain operating companies and one developmental stage
project, respectively, pursuant to the Vanguard Exchange. See "Certain
Transactions--The Vanguard Exchange."
(2) Represents $4.3 million that was expended to repay outstanding
indebtedness including accrued interest to Bell Atlantic Indonesia, Inc.
and $8.6 million expended to purchase an additional interest of 2.9% in
this project in October 1996, thereby increasing the Company's aggregate
indirect interest in this project to 20.4%.
(3) In September 1996, the Company placed $9 million in escrow pending the
closing of the Company's proposed purchase of a 40% equity interest in
this project. The Company's Investment as of September 30, 1996 represents
this escrowed amount. In November 1996, in connection with the closing of
such purchase, the escrowed funds were released, and the Company funded an
additional $11 million to purchase its 40% interest in SDL. The Company's
Remaining Anticipated Additional Investment through December 31, 1997
represents this additional $11 million.
36
<PAGE>
Pending use of the net proceeds from the Unit Offering as described above,
the Company intends to hold such proceeds in short-term investments.
The business of the Company and its operating companies and developmental
stage projects is capital intensive and will require continuing sources of
outside financing. There can be no assurance that the Company or the operating
companies or developmental stage projects will be able to obtain any such
additional financing on acceptable terms or at all. See "Risk Factors--Project
Level Risks--Operating Losses and Negative Cash Flow; Dependence on Additional
Financing/Capital" and "--Company Level Risks--Negative Operating Cash Flow;
Dependence on Additional Financing; No Commitments for Additional Financing."
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company with respect to the registration of the Old Notes.
The Old Notes were originally issued and sold on August 15, 1996 (the "Issue
Date"). Such sales were not registered under the Securities Act in reliance
upon the exemption provided by Section 4(2) of the Securities Act and Rule
144A promulgated under the Securities Act. In connection with the sale of the
Old Notes, the Company agreed, for the benefit of the holders of the Old
Notes, that it would, at its own cost, (i) within 45 days after the Issue
Date, file a registration statement (the "Exchange Offer Registration
Statement") with the Commission with respect to the Exchange Offer Exchange
Notes which would have terms substantially identical in all material respects
to the Old Notes (except that the Exchange Notes will not contain terms with
respect to transfer restrictions), (ii) use its best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 90 days after the Issue Date, (iii) use its best efforts
to consummate the Exchange Offer within 135 days after the Issue Date, and
(iv) upon the Exchange Offer Registration Statement being declared effective,
offer the Exchange Notes in exchange for surrender of the Old Notes. If
(i) because of any change in law or in currently prevailing interpretations of
the Staff, the Company is not permitted to effect an Exchange Offer, (ii) the
Exchange Offer is not consummated within 135 days of the Issue Date, (iii) any
holder of Private Exchange Notes (as defined) so requests at any time within
one year after the consummation of the Private Exchange, (iv) the holders of
not less than a majority in aggregate principal amount of the Old Notes
reasonably determine that the interests of the holders of Old Notes would be
materially adversely affected by consummation of the Exchange Offer or (v) in
the case of any holder of Old Notes that participates in the Exchange Offer,
such holder of Old Notes does not receive Exchange Notes on the date of the
exchange that may be sold without restriction under state and federal
securities laws (other than due solely to the status of such holder of Old
Notes as an affiliate of the Company) then the Company shall promptly deliver
written notice thereof (the "Shelf Notice") to the Trustee and in the case of
clauses (i), (ii) and (iv), all Holders, in the case of clause (iii), the
holders of the Private Exchange Notes and in the case of clause (v), the
affected Holder, and shall file with the Commission a registration statement
(the "Shelf Registration Statement") to cover resales of the Old Notes. In the
event that (i) the Company fails to file the Registration Statement, (ii) the
Registration Statement or, if applicable, the Shelf Registration Statement, is
not declared effective by the Commission, or (iii) the Exchange Offer is not
consummated or the Shelf Registration Statement ceases to be effective, in
each case within specified time periods, Additional Interest shall accrue and
be paid according to the terms and conditions of the Registration Rights
Agreement. See "Old Notes Registration Rights."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying the
Registration Statement of which this Prospectus is a part (the "Letter of
Transmittal"), $1,000 in principal amount of Exchange Notes for each $1,000 in
principal amount of Old Notes. The terms of the Exchange Notes are
substantially identical to the terms of the Old Notes for which
37
<PAGE>
they may be exchanged pursuant to this Exchange Offer, except that the
Exchange Notes will generally be freely transferable by holders thereof, and
the holders of the Exchange Notes (as well as remaining holders of any Old
Notes) are not entitled to certain registration rights and certain additional
interest provisions which are applicable to the Old Notes under the
Registration Rights Agreement. The Exchange Notes will evidence the same debt
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange. The Company
intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder, including Rule 14e-1, to the extent applicable.
Based on its view of interpretations provided by the staff of the
Commission, the Company believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes will be freely transferable by
holders thereof other than affiliates of the Company after the Exchange Offer
without further registration under the Securities Act if the holder of the
Exchange Notes represents that it is acquiring the Exchange Notes in the
ordinary course of business, that it has no arrangement or understanding with
any person to participate in the distribution of the Exchange Notes and that
it is not an affiliate of the Company, as such terms are interpreted by the
Commission; provided that Participating Broker-Dealers receiving Exchange
Notes in the Exchange Offer will have a prospectus delivery requirement with
respect to resales of the Exchange Notes. Any broker-dealer that resells
Exchange Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging, and by delivering a prospectus, a broker-dealer will not be
deemed to admit that is an "underwriter" within the meaning of the Securities
Act. Broker-dealers who acquired Old Notes as a result of market making or
other trading activities may use this Prospectus, as supplemented or amended,
in connection with resales of the Exchange Notes. The Company has agreed that,
for a period of 180 days after the Registration Statement is declared
effective, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
or any other holder that cannot rely upon such interpretations must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction.
Tendering holders of Old Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on December 20, 1996 unless the
Company in its sole discretion extends the period during which the Exchange
Offer is open, in which event the term "Expiration Date" means the latest time
and date on which the Exchange Offer, as so extended by the Company, expires.
The Company reserves the right to extend the Exchange Offer at any time and
from time to time prior to the Expiration Date by giving written notice to
Bankers Trust Company (the "Exchange Agent") and by timely public announcement
communicated by no later than 5:00 p.m. on the next business day following the
Expiration Date, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Notes previously tendered pursuant to the Exchange
Offer will remain subject to the Exchange Offer.
38
<PAGE>
The initial Exchange Date will be the fourth business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Old Notes for any reason,
including if any of the events set forth below under "Conditions to the
Exchange Offer" shall have occurred and shall not have been waived by the
Company and (ii) amend the terms of the Exchange Offer in any manner, whether
before or after any tender of the Old Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent in writing and
will either issue a press release or give written notice to the holders of the
Old Notes as promptly as practicable. Unless the Company terminates the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date,
the Company will exchange the Exchange Notes for Old Notes on the Exchange
Date.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Old Notes and
will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Old Notes.
HOW TO TENDER
The tender to the Company of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
General Procedures
A holder of an Old Note may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Old Notes being tendered and any required
signature guarantees (or a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") pursuant to the procedure described below), to the
Exchange Agent at its address set forth on the back cover of this Prospectus
on or prior to the Expiration Date or (ii) complying with the guaranteed
delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder, the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed
by the registered holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Old Notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note
register for the Old Notes, the signature on the Letter of Transmittal must be
guaranteed by an Eligible Institution.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender Old Notes should contact such holder promptly and instruct such holder
to tender Old Notes on such beneficial owner's behalf. If such beneficial
owner wishes to tender such Old Notes himself, such beneficial owner must,
prior to completing and executing the Letter of Transmittal and delivering
such Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such beneficial owner's name or follow the procedures
described in the immediately preceding paragraph. The transfer of record
ownership may take considerable time.
39
<PAGE>
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at DTC (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after receipt of this Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with the
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address specified on
the back cover of this Prospectus on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION
DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION
DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds
otherwise payable to a holder pursuant to the Exchange Offer if the holder
does not provide a taxpayer identification number (social security number or
employer identification number, as applicable) and certify that such number is
correct. Each tendering holder should complete and sign the main signature
form and the Substitute Form W-9 included as part of the Letter of
Transmittal, so as to provide the information and certification necessary to
avoid backup withholding, unless an applicable exemption exists and is proved
in a manner satisfactory to the Company and the Exchange Agent.
Guaranteed Delivery Procedures
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date, a tender may be effected if the Exchange Agent has received
as its office listed on the Letter of Transmittal on or prior to the
Expiration Date a letter, telegram or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
principal amount of the Old Notes being tendered, the names in which the Old
Notes are registered and, if possible, the certificate numbers of the Old
Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange trading days after the
date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, the Old Notes, in proper form for transfer, will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Old Notes being tendered by the above-described method (or a timely Book-Entry
Confirmation) are deposited with the Exchange Agent within the time period set
forth above (accompanied or preceded by a properly completed Letter of
Transmittal and any other required documents), the Company may, at its option,
reject the tender. Copies of a Notice of Guaranteed Delivery which may be used
by Eligible Institutions for the purposes described in this paragraph are
available from the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a timely Book-Entry Confirmation) is received
by the Exchange Agent. Issuances of Exchange Notes in exchange for Old Notes
tendered pursuant to a notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Letter of Transmittal
(and any other required documents) and the tendered Old Notes (or a timely
Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding.
40
<PAGE>
The Company reserves the absolute right to reject any or all tenders not in
proper form or the acceptances for exchange of which may, in the opinion of
counsel to the Company, be unlawful. The Company also reserves the absolute
right to waive any of the conditions of the Exchange Offer or any defect or
irregularities in tenders of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders. Neither the
Company, the Exchange Agent nor any other person will be under any duty to
give notification of any defects or irregularities in tenders or shall incur
any liability for failure to give any such notification. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the Letter of Transmittal and the instructions thereto) will be final and
binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Notes to be assigned, transferred and exchanged. The
Transferor represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire Exchange
Notes issuable upon the exchange of such tendered Old Notes, and that, when
the same are accepted for exchange, the Company will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim.
The Transferor also warrants that it will, upon request, execute and deliver
any additional documents deemed by the Company to be necessary or desirable to
complete the exchange, assignment and transfer of tendered Old Notes. All
authority conferred by the Transferor will survive the death or incapacity of
the Transferor and every obligation of the Transferor shall be binding upon
the heirs, legal representatives, successors, assigns, executors and
administrators of such Transferor.
By tendering Old Notes and executing the Letter of Transmittal, the
Transferor certifies that (a) it is not an Affiliate of the Company, that it
is not a broker-dealer that owns Old Notes acquired directly from the Company
or an Affiliate of the Company, that is acquiring the Exchange Notes offered
hereby in the ordinary course of such Transferor's business and that such
Transferor is not engaged in and does not intend to engage in and has no
arrangement with any person to participate in the distribution of such
Exchange Notes, (b) that it is an Affiliate of the Company or of the initial
purchaser of the Old Notes in the Offering and that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extend applicable to it, or (c) that it is a broker dealer which is a
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange
Notes received by such broker dealer in the Exchange Offer (a "Participating
Broker-Dealer") and that it will deliver a prospectus in connection with any
resale of such Exchange Notes. By tendering Old Notes and executing a Letter
of Transmittal, the Transferor further certifies that it is not engaged in and
does not intend to engage in a distribution of the Exchange Notes.
WITHDRAWAL RIGHTS
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth on the back cover of this Prospectus prior to the Expiration Date. Any
such notice of withdrawal must specify the person named in the Letter of
Transmittal as having tendered Old Notes to be withdrawn, the certificate
numbers of Old Notes to be withdrawn, the principal amount of Old Notes to be
withdrawn, a statement that such holder is withdrawing his election to have
such Old Notes exchanged, and the name of the registered holder of such Old
Notes, and must be signed by the holder in the same manner as the original
signature on the Letter of Transmittal (including any required signature
41
<PAGE>
guarantees) or be accompanied by evidence satisfactory to the Company that the
person withdrawing the tender has succeeded to the beneficial ownership of the
Old Notes being withdrawn. The Exchange Agent will return the properly
withdrawn Old Notes promptly following receipt of notice of withdrawal. All
questions as to the validity of notices of withdrawals, including time of
receipt, will be determined by the Company, and such determination will be
final and binding on all parties.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made on the Exchange Date. For the
purposes of the Exchange Offer, the Company shall be deemed to have accepted
for exchange validly tendered Old Notes when, as and if the Company had given
written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old Notes
for the purposes of receiving Exchange Notes from the Company and causing the
Old Notes to be assigned, transferred and exchanged. Upon the terms and
subject to conditions of the Exchange Offer, delivery of Exchange Notes to be
issued in exchange for accepted Old Notes will be made by the Exchange Agent
promptly after acceptance of the tendered Old Notes. Old Notes not accepted
for exchange by the Company will be returned without expense to the tendering
holders (or in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
procedures described above, such non-exchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) promptly
following the Expiration Date or, if the Company terminates the Exchange Offer
prior to the Expiration Date, promptly after the Exchange Offer is so
terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange
Notes in respect of any properly tendered Old Notes not previously accepted
and may terminate the Exchange Offer (by oral or written notice to the
Exchange Agent and by timely public announcement communicated by no later than
5:00 p.m. on the next business day following the Expiration Date, unless
otherwise required by applicable law or regulation, by making a release to the
Dow Jones News Service) or, at its option, modify or otherwise amend the
Exchange Offer, if (a) there shall be threatened, instituted or pending any
action or proceeding before, or any injunction, order or decree shall have
been issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain or
prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, (ii) assessing or seeking any
damages as a result thereof or (iii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of the
Old Notes pursuant to the Exchange Offer; (b) any statute, rule, regulation,
order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the reasonable judgement of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (a)(i) or (ii) above or, in the reasonable judgement of
the Company, might result in the holders of Exchange Notes having obligations
with respect to resales and transfers of Exchange Notes which are greater than
those described in the interpretations of the Staff referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or (c) a material adverse change shall have occurred
in the business, condition (financial or otherwise), operations, or prospects
of the Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in
whole or in part at any time or
42
<PAGE>
from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights will not be deemed a waiver of
any such right, and each right will be deemed an ongoing right which may be
asserted at any time or from time to time. In addition, the Company has
reserved the right, notwithstanding the satisfaction of each of the foregoing
conditions, to terminate or amend the Exchange Offer prior to the Expiration
Date.
Any determination by the Company concerning the fulfillment or
nonfulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes tendered
and no Exchange Notes will be issued in exchange for any such Old Notes, if at
such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
EXCHANGE AGENT
Bankers Trust Company has been appointed as the Exchange Agent for the
Exchange Offer. Letters of Transmittal must be addressed to the Exchange Agent
at:
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight Mail or Courier:
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust and Agency Group Corporate Trust and Agency Group
P.O. Box 292737 Receipt & Delivery Window Reorganization Unit
Nashville, TN 123 Washington St., 1st Floor 648 Grassmere Park Road
37229-2737 New York, NY 10006 Nashville, TN 37211
Confirm: (615) 835-3572
Fax: (615) 835-3701
</TABLE>
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The
Company will, however, pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for reasonable out-of-pocket expenses
in connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and
expenses of the Exchange Agent and printing, accounting, legal fees and
miscellaneous expenses will be paid by the Company and are estimated to be
approximately $235,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Exchange Offer is not being made to
(nor will tenders be accepted from or on behalf of) holders of Old Notes in
any jurisdiction in which the making of the Exchange Offer or the acceptance
thereof would not be in compliance with the laws of such jurisdiction.
However, the Company may, at its discretion, take such action as it may deem
necessary to make the Exchange Offer in any such jurisdiction and extend the
Exchange Offer to holders of Old Notes in such jurisdiction. In any
jurisdiction the securities laws or blue sky
43
<PAGE>
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or
more registered brokers or dealers which are licensed under the laws of such
jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes by tendering holders should not
be a taxable exchange for federal income tax purposes, and such holders should
not recognize any taxable gain or loss as a result of such exchange. See
"Certain Income Tax Considerations."
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled a covenant contained in the terms of the Old Notes
and the Registration Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights, and limitations applicable
thereto, under the Indenture, except for any such rights under the
Registration Rights Agreement which by their terms terminate or cease to have
further effect as a result of the making of this Exchange Offer. See
"Description of Exchange Notes." All untendered Old Notes will continue to be
subject to the restriction on transfer set forth in the Indenture. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for any remaining Old Notes could be adversely
affected. See "Risk Factors--Consequences of Failure to Exchange Old Notes"
and "Old Note Registration Rights."
Subject to the restrictions contained in the Indenture, the Company may in
the future seek to acquire untendered Old Notes in open market or privately
negotiated transactions, through subsequent exchange offers or otherwise. The
Company has no present plan to acquire any Old Notes which are not tendered in
the Exchange Offer.
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<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization as of September
30, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
Long-term debt(1).......................................... $ 71,623
Redeemable convertible preferred stock, $0.01 par value per
share; 21,541,480 shares designated; 15,973,200 shares is-
sued and outstanding; net of note receivable from stock-
holder of $26(2).......................................... $102,519
Stockholders' deficit:
Convertible preferred stock, $0.01 par value per share;
1,200,000 shares designated; 933,200 shares issued and
outstanding............................................. 9
Common stock, $0.01 par value per share; 26,000,000
shares authorized; 615,760 shares issued and outstand-
ing(3).................................................. 6
Additional paid-in capital(1)............................ 31,055
Note receivable from stockholder......................... (152)
Unrealized gain on investments........................... 112
Cumulative translation adjustment........................ 250
Accumulated deficit...................................... (34,843)
--------
Total stockholders' deficit............................ (3,563)
--------
Total capitalization................................. $170,579
========
</TABLE>
- --------
(1) Reflects the allocation of the aggregate purchase price of the Units to
the Old Notes and the Warrants based on their fair value at the time of
issuance, as determined by the Company. Does not reflect any additional
shares of Common Stock that will be issuable in respect of the Warrants in
the event that the Company does not complete a Threshold Public Offering
or Qualified Reorganization on or prior to the IPO Contingency Date. See
"Prospectus Summary--Financing Strategy and History."
(2) Excludes 1,173,280 shares of Preferred Stock issuable upon the exercise of
outstanding warrants. See "Management--Compensation Committee Interlocks
and Insider Participation" and "Certain Transactions--Private Placement
Transactions."
(3) Excludes 1,962,960 shares of Common Stock issuable upon the exercise of
stock options outstanding as of September 30, 1996, pursuant to the
Company's 1994 Stock Option/Stock Issuance Plan (the "Stock Plan").
Subsequent to September 30, 1996, the Company granted options to purchase
an additional 20,000 shares of Common Stock pursuant to the Stock Plan.
Further, in March 1996, the Board of Directors of the Company approved the
automatic grant of options to purchase an aggregate of 80,000 shares of
Common Stock to certain service providers of the Company upon the next
anniversary of their employment with the Company. See "Management--1994
Stock Option/Stock Issuance Plan" and "Certain Transactions--Transactions
with Founders." Also excludes the 2,289,428 shares of Common Stock
initially issuable upon the exercise of the Warrants.
45
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed financial
statements have been prepared by the Company's management from its historical
financial statements included in this Prospectus. The unaudited pro forma
consolidated condensed statements of operations for the year ended December
31, 1995 and the nine months ended September 30, 1996 reflect adjustments as
if the Company had acquired or merged with the entities described in the
accompanying notes as of January 1, 1995. The Unit Offering has been reflected
in the unaudited pro forma consolidated condensed statement of operations as
if it had occurred as of January 1, 1995. Acquisitions or mergers, other than
the increased ownership interests in STW and RHP to 35% and 29.2%,
respectively, and the acquisition of an interest in Star Digitel Limited, have
been fully reflected in the Company's historical balance sheet as of September
30, 1996.
The unaudited pro forma consolidated condensed financial statements should
be read in conjunction with the notes included herewith, the Company's audited
consolidated financial statements and notes thereto as of December 31, 1994
and 1995 and for the three years ended December 31, 1995, the Company's
unaudited consolidated condensed financial statements as of and for the nine
months ended September 30, 1996 ("First Nine Months"), "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial statements of significant 50% or less owned affiliates
included elsewhere in the Prospectus.
The unaudited pro forma consolidated condensed financial statements do not
purport to represent what the Company's results of operations or financial
position would have been had the Unit Offering or acquisitions and mergers
indicated occurred on the dates specified, or to project the Company's results
of operations or financial position for any future period or date. The pro
forma adjustments are based upon available information and certain assumptions
that management believes are reasonable under the circumstances. In the
opinion of management, all adjustments have been made that are necessary to
present fairly the pro forma data. Final amounts could differ from those set
forth below.
46
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
--------------------------------------
ACQUISITION
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 82,766 $(11,000)(ci) $ 55,010
(8,200)(di)
(8,556)(ei)
Accounts receivable.................... 276 276
Notes receivable from affiliates....... 853 853
Note receivable........................ 1,385 1,385
Advance to affiliate................... 102 102
Other current assets................... 1,386 1,386
-------- -------- --------
Total current assets................. 86,768 (27,756) 59,012
Property and equipment, net.............. 11,698 11,698
Investments in affiliates................ 46,956 20,000 (cii) 83,712
8,200 (dii)
8,556 (eii)
Telecommunication licenses and other
intangibles, net........................ 17,198 17,198
License and other deposits............... 14,300 (9,000)(ciii) 5,300
Debt issuance costs, net................. 5,891 5,891
Other assets............................. 664 664
-------- -------- --------
Total assets......................... $183,475 $ -- $183,475
======== ======== ========
<CAPTION>
LIABILITIES, MINORITY INTEREST,
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued expenses.. $ 3,496 $ 3,496
Note payable........................... 4,000 4,000
-------- --------
Total current liabilities............ 7,496 7,496
Long-term debt........................... 71,623 71,623
Minority interest........................ 5,400 5,400
Redeemable convertible preferred stock... 102,519 102,519
Stockholders' deficit:
Convertible preferred stock............ 9 9
Common stock........................... 6 6
Additional paid-in capital............. 31,055 31,055
Note receivable from stockholder....... (152) (152)
Unrealized gain on investments......... 112 112
Cumulative translation adjustment...... 250 250
Accumulated deficit.................... (34,843) (34,843)
-------- -------- --------
Total stockholders' deficit.......... (3,563) -- (3,563)
-------- -------- --------
Total liabilities, minority interest,
redeemable convertible preferred
stock and stockholders' deficit..... $183,475 $ -- $183,475
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
47
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------------------------------------- --------------------------------------------------
UNIT OFFERING ACQUISITION UNIT OFFERING ACQUISITION
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ------------- ----------- --------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue....... $ -- $ 369 (f) $ 369 $ 532 $ 282 (f) $ 814
Cost of sales........... -- 785 (f) 785 541 338 (f) 879
-------- -------- ------- -------- -------- -------- ------- --------
Gross margin........... -- (416) (416) (9) (56) (65)
Operating expenses:
General and
administrative
expenses.............. 6,365 1,493 (f) 8,698 10,610 589 (f) 11,369
840 (g) 170 (g)
Equity in (income)
losses of
affiliates............ 3,756 3,453(h) 4,201 5,507 1,734 (h) 9,232
(3,008)(i) 1,991 (i)
-------- -------- ------- -------- -------- -------- ------- --------
Loss from operations... (10,121) (3,194) (13,315) (16,126) (4,540) (20,666)
Other income (expense):
Interest income........ 232 232 937 937
Interest expense....... (1,354) $(16,146)(a) (18,397) (2,663) (12,645)(a) (15,961)
(897)(b) (653)(b)
Other.................. (28) (28) 1 1
-------- -------- ------- -------- -------- -------- ------- --------
Net loss............. $(11,271) $(17,043) $(3,194) $(31,508) $(17,851) $(13,298) $(4,540) $(35,689)
======== ======== ======= ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
48
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THE UNIT OFFERING
The unaudited pro forma consolidated condensed financial statements reflect
adjustments for the Unit Offering, in which the Company sold 196,720 Units,
each consisting of a $1,000 principal amount Old Note and one Warrant
initially entitling the holder to purchase 11.638 shares of Common Stock. The
Unit Offering closed on August 15, 1996, providing total net proceeds of $94
million after deducting placement agent fees and offering expenses. The Unit
Offering has been reflected in the unaudited pro forma consolidated condensed
statements of operations as if the Unit Offering had occurred as of January 1,
1995.
THE ACQUISITIONS
The unaudited pro forma consolidated condensed financial statements reflect
adjustments for the following acquisitions and mergers:
Star Telecom Overseas (Cayman Islands) Limited
In August 1996, the Company funded a 70% interest in Star Telecom Overseas
(Cayman Islands) Limited ("STOL"), for a purchase price of $13,500,000. The
acquisition of STOL has been reflected in the unaudited pro forma consolidated
condensed statements of operations as if STOL had been a consolidated
majority-owned subsidiary since January 1, 1995.
Star Digitel Limited
In September 1996, the Company entered into an agreement to acquire a 40%
interest in Star Digitel Limited ("SDL") for a purchase price of $20,000,000,
of which $9,000,000 is recorded as a deposit as of September 30, 1996 and
$11,000,000 of which was paid upon closing. The acquisition of SDL closed on
November 7, 1996. The acquisition of SDL has been reflected in the unaudited
pro forma consolidated condensed balance sheet as if SDL had been acquired on
September 30, 1996, and the unaudited pro forma consolidated condensed
statements of operations as if the Company had acquired SDL on January 1,
1995, accounting for the investment by the equity method.
TeamTalk Limited
Effective April 30, 1996, the Company acquired the remaining 1,700,000
ordinary shares in TeamTalk from the other TeamTalk shareholder for a purchase
price of approximately $3,198,000. This acquisition resulted in the Company
obtaining 100% ownership in TeamTalk. The acquisition of the remaining 50%
ownership of TeamTalk has been reflected in the unaudited pro forma
consolidated condensed statements of operations as if the TeamTalk acquisition
had occurred on January 1, 1995.
Syarikat Telefon Wireless (M) SDN BHD
At various times during 1995 and 1996, the Company purchased ownership
interests in STW, the Company's WLL operating company in Malaysia, increasing
its ownership percentage from 2% at the beginning of fiscal 1995 to 30% by
December 31, 1995. The Company's interest is expected to increase to 35% in
November 1996 through the purchase of 50% of Laranda SBN BHN (Laranda), a 10%
shareholder of STW, for $8,200,000. The investments have been reflected in the
unaudited pro forma consolidated condensed statements of operations as if the
Company's ownership had been 35% since January 1, 1995, accounting for the
investment by the equity method.
PT Rajasa Hazanah Perkasa
During 1995, the Company acquired ownership interests in RHP through which
the Company owns its interest in its Indonesia national cellular project. The
initial interest acquired was 15% in March 1995, which was then increased to
25% in October 1995. In October 1996, the Company acquired an additional 4.2%
of RHP for a purchase price of $8,556,000. These investments have been
reflected in the unaudited pro forma consolidated condensed statements of
operations as if the Company's ownership had been 29.2% since January 1, 1995,
accounting for the investment by the equity method.
49
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--
(CONTINUED)
Merger with Vanguard International Telecommunications, Inc.
On December 18, 1995, the Company consummated a merger with Vanguard
International Telecommunications, Inc. ("VIT"), a wholly owned subsidiary of
Vanguard, as described in "Certain Transactions--The Vanguard Exchange" and
Note 4 of the Consolidated Financial Statements included elsewhere in this
Prospectus. This merger has been reflected in the unaudited pro forma
consolidated condensed statements of operations as if this merger had been
consummated on January 1, 1995.
PRO FORMA ADJUSTMENTS
Unit Offering Adjustments
The Unaudited Pro Forma Consolidated Condensed Statements of Operations
give effect to the following Unit Offering adjustments:
(a) Represents additional interest expense assuming the Unit Offering
occurred on January 1, 1995 of $16,146,000 and $12,645,000 for the year
ended December 31, 1995 and for the nine months ended September 30,
1996, respectively, calculated using the interest method.
(b) Represents amortization of debt issuance costs assuming the Unit
Offering occurred on January 1, 1995 of $897,000 and $653,000 for the
year ended December 31, 1995 and for the nine months ended
September 30, 1996, respectively, calculated using the interest method.
Acquisition Adjustments
The Unaudited Pro Forma Consolidated Condensed Balance Sheet gives effect to
the following acquisition adjustments:
(c) Represents the Company's 40% acquisition of SDL as if the acquisition
had occurred on September 30, 1996. The adjustments, based on a
purchase price of $20,000,000, reflect:
(i) the reduction of cash for the purchase price of the acquisition
less the $9,000,000 deposit,
(ii) the recording of IWC's equity method investment of SDL for the
purchase price, and
(iii) the reduction of deposit as this amount was released from escrow
upon closing.
(d) Represents the Company's probable acquisition of 50% of Laranda, for a
purchase price of $8,200,000, as if the acquisition had occurred on
September 30, 1996. The adjustments reflect:
(i) the reduction of cash for the purchase price of the acquisition. In
October 1996, the Company paid $1,000,000 for an option to purchase
50% of Laranda for a total purchase price of $8,200,000.
(ii) the recording of IWC's equity method investment in Laranda for the
purchase price.
(e) Represents the Company's acquisition of an additional 4.2% of RHP for a
purchase price of $8,556,000, as if the acquisition had occurred on
September 30, 1996. The adjustments reflect:
(i) the reduction of cash for the purchase price of the acquisition,
and
(ii) the recording of IWC's equity method investment in RHP for the
purchase price.
The Unaudited Pro Forma Consolidated Condensed Statements of Operations
give effect to the following acquisition adjustments:
50
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--
(CONTINUED)
(f) Represents the results of operations of TeamTalk derived from financial
statements of TeamTalk for the following periods (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996(1)
------------------ -------------------------
<S> <C> <C>
Operating revenues........... $ 369 $ 282
Cost of sales................ 785 338
Operating expenses........... 1,493 589
------- -----
Net loss..................... $(1,909) $(645)
======= =====
</TABLE>
--------
(1) Includes the results of operations for the period from January 1,
1996 through April 30, 1996. Results of operations for the period
from May 1, 1996 through September 30, 1996 are reflected in the
historical financial statements for the six months ended September
30, 1996.
(g) Represents amortization of telecommunications licenses and other
intangibles over 20 years for consolidated subsidiaries (SRC Servicos
de Rario Comunicacaoes Ltda ("SRC") and M/S Mobilcom (Pte) Ltd.
("Mobilcom") for periods prior to the date of their acquisition. The
Company acquired its ownership interests in SRC and Mobilcom in
connection with the Vanguard Exchange. In addition to these
subsidiaries, the pro forma financial statements also include TeamTalk
and STOL as pro forma consolidated subsidiaries. The additional
amortization results from the excess of the costs of the Company's
investments in these entities over the Company's proportionate
interests in the net assets of these entities, assuming the
acquisitions had occurred on January 1, 1995. The excess investment
costs are attributed principally to telecommunication licenses.
Adjustments are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL MONTH FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
LICENSES ACQUIRED DECEMBER 31, 1995(2) SEPTEMBER 30, 1996(2)
-------- -------- -------------------- -------------------------
<S> <C> <C> <C> <C>
TeamTalk................ $ 1,658 12/95(1) $ 83 $ 21
STOL.................... 3,971 8/96 198 149
SRC..................... 6,680 12/95 310 --
Mobilcom................ 5,439 12/95 249 --
------- ---- ----
Total................... $17,748 $840 $170
======= ==== ====
</TABLE>
--------
(1) The first allocation of $1,712,000 to telecommunication licenses
for TeamTalk occurred in December 1995 concurrent with the
Vanguard Exchange. When the Company acquired the remaining 50%
ownership of TeamTalk, effective April 30, 1996, an adjustment was
made to this amount reducing telecommunication licenses for
TeamTalk to $1,658,000.
(2) The pro forma adjustments to telecommunication license
amortization were calculated by taking the total amount of
licenses amortized straightline over 20 years and reduced by the
amortization recorded in the historical period.
(h) Represents additional amortization of the excess of the cost of the
Company's investments over its proportionate interests in the net
assets in entities accounted for by the equity method. The excess
investment costs are attributed to principally telecommunication
licenses and other intangibles held by the investees. These entities
include STW, RHP, SDL, HFCL Mobile Radio Limited ("HFCL") and PT
Binamulti Visualindo ("PTBV"); interests in all these investees except
STW and SDL were acquired in connection with the Vanguard Exchange. The
additional amortization results from the assumption that all the
investments in the investees had been made on January 1, 1995. In
addition, an adjustment has been applied to remove TeamTalk's
amortization included in the historical financial statements, as
TeamTalk is accounted for as a consolidated subsidiary effective April
30, 1996. Adjustments are as follows (in thousands):
51
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--
(CONTINUED)
<TABLE>
<CAPTION>
TOTAL MONTH FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
LICENSES ACQUIRED DECEMBER 31, 1995(4) SEPTEMBER 30, 1996(4)
-------- -------- -------------------- -------------------------
<S> <C> <C> <C> <C>
STW..................... $25,420 1/95(1) $ 633 $ 299
RHP..................... 32,236 3/95(2) 1,293 321
SDL..................... 18,162 11/96(3) 1,514 1,135
HFCL.................... 243 12/95 11 --
PTBV.................... 206 12/95 9 --
TeamTalk................ 1,712 12/95 (7) (21)
------- ------ ------
Total................... $77,979 $3,453 $1,734
======= ====== ======
</TABLE>
--------
(1) The Company acquired additional interests in STW at various times
during 1995 and 1996 beginning in January 1995, when the Company's
original interest was 2%. The Company's interest reached 30% in
August 1995 and is expected to increase its interest to 35% in
November 1996 through the purchase of 50% of Laranda. The Company
allocated the appropriate portion of the purchase price to
telecommunication licenses and other intangibles during each of
these incremental acquisitions.
(2) The Company first acquired an interest in RHP in March 1995 and
allocated the appropriate portion of the purchase price to
telecommunication licenses and other intangibles during this
initial acquisition. During 1995 and 1996, the Company acquired
additional ownership interests in RHP and allocated additional
amounts to telecommunication licenses and other intangibles,
including an allocation to RHP from the Vanguard Exchange.
(3) The Company acquired 40% of SDL on November 7, 1996. For purposes
of the pro forma consolidated condensed financial statements,
September 30, 1996 was considered to be the acquisition date and
the historical financial statements of SDL as of and for the
period ended June 30, 1996 were used to calculate the excess of
the cost of the Company's investment over its proportional
interest in the net assets of SDL in order to determine the amount
of the purchase price to be attributed to participation rights and
other intangibles as these were the latest financial statements
available.
(4) The pro forma adjustments to telecommunication license and other
intangible amortization were calculated by taking the total amount
of licenses amortized straightline over 20 years and reduced by
the amortization recorded in the historical period, except for SDL
which was calculated over a life of 12 years, the weighted average
remaining life of the project participation rights. Unlike
telecommunication licenses in the previous projects of the
Company, the participation rights in SDL projects have finite
lives with presently undeterminable renewal probability.
(i) Represents the additional equity in net losses or income of STW, SDL
and RHP assuming the Company's investments for current ownership
interests of 30%, 40% and 25%, respectively, had been made on January
1, 1995. In addition, an adjustment is required to remove the Company's
equity in losses of TeamTalk which is accounted for as a consolidated
investment effective April 30, 1996. Adjustments are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------ -------------------------
<S> <C> <C>
STW.......................... $ 773 $ 382
SDL.......................... (3,851) 1,787
RHP.......................... 578 154
TeamTalk..................... (508) (332)
------- ------
Total........................ $(3,008) $1,991
======= ======
</TABLE>
52
<PAGE>
CONSOLIDATED SELECTED FINANCIAL DATA
The following selected consolidated balance sheet and statement of
operations data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and related notes thereto included elsewhere in this
Prospectus. The consolidated selected financial data as of and for the years
ended December 31, 1993, 1994 and 1995 are derived from, and qualified by
reference to, such financial statements, which have been audited by KPMG Peat
Marwick LLP, independent public accountants, whose report indicated a reliance
on other auditors relative to certain amounts relating to the Company's
investment in RHP as of and for the year ended December 31, 1995. The audited
financial statements of RHP as of and for the year ended December 31, 1995,
together with the independent auditors' report thereon, are included elsewhere
in this Prospectus. The consolidated selected financial data as of and for the
year ended December 31, 1992 were derived from financial statements which have
been audited by other auditors. The Company was incorporated in January 1992.
The consolidated selected financial data as of September 30, 1996 and for the
nine months ended September 30, 1995 and 1996 are derived from unaudited
financial statements prepared by the Company that, in the opinion of
management, reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial data for such periods
and as of such date. Operating results for the nine months ended September 30,
1996 are not necessarily indicative of the results to be expected for the
entire year.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ---------------------
1992 1993 1994 1995 1995 1996
----- ----- ------- -------- --------- ----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenue....... $ -- $ -- $ -- $ -- $ -- $ 532
Cost of sales........... -- -- -- -- -- 541
----- ----- ------- -------- --------- ----------
Gross margin........... -- -- -- -- -- (9)
Operating expenses:
General and
administrative
expenses.............. 169 809 2,481 6,365 3,565 10,610
Equity in losses of
affiliates............ -- -- -- 3,756 1,171 5,507
----- ----- ------- -------- --------- ----------
Loss from
operations.......... (169) (809) (2,481) (10,121) (4,736) (16,126)
Other income (expense):
Interest income........ 5 2 106 232 130 937
Interest expense....... -- (33) (115) (1,354) (785) (2,663)
Other expense.......... -- (1) (13) (28) (10) 1
----- ----- ------- -------- --------- ----------
Net loss............. $(164) $(841) $(2,503) $(11,271) $ (5,401) $ (17,851)
===== ===== ======= ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------
1992 1993 1994 1995 1996
---- ------ ------- -------- -------------
BALANCE SHEET DATA: (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total current assets.............. $ 4 $ 701 $12,580 $ 26,851 $ 86,768
Property and equipment, net....... 10 15 88 4,269 11,698
Investments in affiliates......... 322 1,723 5,427 52,280 46,956
Telecommunication licenses and
other intangibles, net........... -- -- -- 12,106 17,198
License and other deposits........ -- -- -- -- 14,300
Debt issuance costs, net.......... -- -- -- -- 5,891
Other assets...................... 200 201 329 137 664
---- ------ ------- -------- --------
Total assets...................... $536 $2,640 $18,424 $ 95,643 $183,475
==== ====== ======= ======== ========
Total current liabilities......... $ 50 $2,215 $ 2,000 $ 11,557 $ 7,496
Long-term debt, net............... -- -- -- -- 71,623
Minority interest................. -- -- -- -- 5,400
Redeemable convertible preferred
stock............................ -- -- 19,578 98,845 102,519
Total stockholders' equity (defi-
cit)............................. 486 425 (3,154) (14,759) (3,563)
---- ------ ------- -------- --------
Total liabilities, minority inter-
est, redeemable convertible pre-
ferred stock and stockholders'
equity (deficit)................. $536 $2,640 $18,424 $ 95,643 $183,475
==== ====== ======= ======== ========
</TABLE>
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company owns and operates wireless communications projects in various
developing countries, primarily in Asia and Latin America. The Company owns
interests in seven operating companies located in Brazil, Indonesia, Malaysia,
Mexico, New Zealand and the Philippines. These companies offer a variety of
wireless communications services including cellular telephone, WLL and ECTR.
As of September 30, 1996, seven of these projects had commercial operations.
In addition, the Company currently has a number of developmental stage
projects in these and other countries which will, if such projects become
commercial, offer, in addition to the above services, paging and wireless
cable television. The Company has minority ownership positions in many of its
operating companies and developmental stage projects, largely due to
restrictions on the level of foreign ownership under local law and, in some
cases, to historical limitations on the Company's access to capital.
As the Company generally invests in early stage projects, these projects
typically have neither cash flow nor revenue to support operating costs,
working capital and capital expenditures. In addition, to the extent that such
projects generate positive cash flow, the continuing capital investment
required to satisfy the growth requirements often encountered in such wireless
communications companies, as well as increasing operating expenses and working
capital requirements, typically results in little or no excess funds being
available for distribution to stockholders. As a result, the Company does not
expect its operating companies or developmental stage projects to pay any cash
dividends or other cash distributions for the foreseeable future. Therefore,
the ability of the Company to meet its operating expenses, other cash needs
and to make additional investments will be dependent upon its ability to raise
funds through debt financings, the sale of equity securities or the
liquidation of its investments. There can be no assurances that funds will be
available from any of these sources.
The Company has reported net losses for each fiscal year since the date of
its organization. As the Company continues to make investments accounted for
under the equity method or on a consolidated basis, these losses can be
expected to increase significantly.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 and 1995
The Company's net loss increased from $5.4 million for the nine month period
ended September 30, 1995 to $17.9 million for the corresponding period in
1996, an increase of 231%. The increase was due primarily to higher general
and administrative expenses, increase in equity in losses of affiliates and
increases in interest expense, as more fully described below.
The Company recorded no operating revenues and cost of revenues for the nine
month period ended September 30, 1995 compared to $532,000 in operating
revenues, offset by $541,000 in cost of revenues, for the corresponding period
in 1996. The operating revenues and cost of revenues for the nine month period
ended September 30, 1996 resulted from the acquisition, effective April 30,
1996, of the remaining 50% of TeamTalk, which increased the Company's equity
interest in TeamTalk to 100%, and the resulting consolidation of TeamTalk's
operations in the Company's financial statements.
General and administrative expenses increased from $3.6 million for the nine
month period ended September 30, 1995 to $10.6 million for the corresponding
period in 1996, an increase of 198%. The increase was primarily due to
increase in salary and travel expenses and consulting fees that reflect the
overall growth in the Company's business.
General and administrative expenses for the nine month period ended
September 30, 1996 includes (i) $876,000 and $2.2 million of general and
administrative expenses associated with the consolidation of the operations of
TeamTalk and SRC, respectively, in the Company's financial statements and (ii)
$475,000 due to the amortization of telecommunication licenses of the
Company's consolidated subsidiaries. There was no material amortization of
telecommunication licenses for consolidated subsidiaries during the
corresponding nine month period in 1995.
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Equity in losses of affiliates increased from $1.2 million for the nine
month period ended September 30, 1995 to $5.5 million for the corresponding
period in 1996, an increase of 370%. Equity in losses of affiliates for such
period consisted of $647,000 of operating losses and $524,000 of expense
relating to the amortization of telecommunication licenses. For the
corresponding period in 1996, equity in losses of affiliates consisted of $3.6
million of operating losses and $1.9 million of expense relating to
amortization of telecommunication licenses.
The increase in operating losses for the nine month period ended September
30, 1996 compared to the corresponding period in 1995 reflects an increase in
the underlying operating losses of STW and RHP. In 1995 and the first half of
1996, STW had increased operating losses due to the expansion of its
operations. Operating revenues during such period remained minimal, however,
due to the efforts of Malaysian government to nationalize the Malaysian
telecommunication industry. Further, RHP's majority-owned subsidiary, Mobisel,
incurred increased operating losses due primarily to the expansion of its
sales and administrative operations.
The increase in amortization of telecommunication licenses for the nine
month period ended September 30, 1996 compared to the corresponding period in
1995 was primarily due to the amortization of RHP's telecommunication
licenses, which was minimal in 1995 and $1 million for the nine month period
ended September 30, 1996.
The Company's interest income increased from $130,000 for the first nine
months of 1995 to $937,000 for the corresponding period in 1996, an increase
of 621%. This increase was due primarily to interest earned as a result of the
investment of the proceeds from the sale and issuance of shares of the
Company's Preferred Stock in late 1995 and from the Unit Offering in interest-
bearing government securities.
The Company's interest expense increased from $785,000 for the first nine
months of 1995 to $2.7 million for the corresponding period in 1996, an
increase of 239%. The increase in interest expense was primarily due to
interest expense associated with the Unit Offering, which was consummated in
August 1996.
Years Ended December 31, 1995 and 1994
The Company's net loss increased from $2.5 million for 1994 to $11.3 million
for 1995, an increase of 350%. As the Company did not have any revenues during
either year, the increase was caused by higher general and administrative
expenses, greater debt service costs and an increase in equity in losses of
affiliates.
General and administrative expenses increased from $2.5 million for 1994 to
$6.4 million for 1995, an increase of 157%. This was primarily due to expanded
business development activities with a resultant increase in salary expense
from $661,000 to $1.7 million, an increase of 151%, consultants fees from
$269,000 to $1.2 million, an increase of 351%, and travel and related expenses
from $719,000 to $1.7 million, an increase of 140%. All other general and
administrative costs increased approximately in line with the growth in the
business activities.
Equity in losses of affiliates was $3.8 million for 1995. These losses
represent $2.8 million of operating losses and $966,000 of amortization
expenses relating to the amortization of telecommunication licenses. STW had
expanded its business activities during 1995 and invested substantial
resources in the network asset buildout. Significant increases in general and
administrative and depreciation costs were incurred in 1995. This increased
the equity in losses of affiliates by $1.9 million, represented by operating
losses of $1.3 million and amortization expense of telecommunication licenses
of $638,000. During 1995, RHP experienced a substantial decrease in operating
revenues due to increased competition and changing market forces affecting the
price of handsets. RHP's operating losses were consistent with the prior year,
although the Company had no investment in this entity during 1994. RHP
increased the equity in losses of affiliate by $1.3 million, comprising $1.0
million in operating losses and $319,000 of amortization expense of
telecommunication licenses. During 1994, the Company had no material
investments accounted for under the equity method. For further financial
information, reference to the attached financial statements is recommended.
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Interest income increased from $106,000 to $232,000, an increase of 119%.
This was primarily due to higher average cash balances during the latter part
of the year as a result of the issuance of Preferred Stock.
Interest expense increased from $115,000 to $1.4 million. This is primarily
due to increased financing activity during the year.
Years Ended December 31, 1994 and 1993
The Company's net loss increased from $841,000 for 1993 to $2.5 million for
1994, an increase of 198%. This was primarily due to increases in general and
administrative costs as the Company, as a development stage enterprise, had no
operating revenue during either year.
General and administrative expenses increased from $809,000 for 1993 to $2.5
million for 1994, an increase of 207%. This was primarily due to an increase
in staff from six people at year end 1993 to nine people at year end 1994 and
a concomitant increase in staff costs such as travel and related expenses.
Interest income increased from $2,000 for 1993 to $106,000 for 1994. This
was due to the increase in the Company's average cash balances over the year
as a result of the issuance of $18.5 million of Preferred Stock during 1994.
Interest expense increased from $33,000 for 1993 to $115,000 for 1994, an
increase of 248%, due to an increase in notes payable outstanding during 1994.
IMPACT OF INFLATION AND CURRENCY FLUCTUATION
Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain developing countries and could have an adverse effect on the operating
companies and developmental stage projects in those countries, including an
adverse effect on their ability to obtain financing.
The value of the Company's investment in its operating companies or
developmental stage projects is partially a function of the currency exchange
rate between the dollar and the applicable local currency. The operating
companies will report their results of operations in the local currency,
except those entities that operate in a hyperinflationary economy such as the
Brazilian operating entity. This entity reports its functional currency as
U.S. dollars. The Company's results of operations will be affected by
fluctuations in currency exchange rates between those currencies and U.S.
dollars. In general, the Company does not hedge against foreign currency
exchange rate risks. As a result, the Company may experience economic loss
with respect to its investments and fluctuations in its results of operations
solely as a result of currency exchange rate fluctuations.
To the extent that the operating companies commence or have commenced
commercial operations, any revenues they generate will generally be paid to
the operating companies in the local currency. By contrast, many significant
liabilities of the operating companies (such as liabilities for the financing
of telecommunications equipment) may be payable in U.S. dollars or in
currencies other than the local currency. As a result, any devaluation in the
local currency relative to the currencies in which such liabilities are
payable could have a material adverse effect on the Company. The primary
foreign currency to which the Company is exposed is the Indonesian Rupiah. As
discussed in more detail later, Mobisel, the Company's national cellular
operating company in Indonesia, has incurred U.S. dollar debt through its
credit facility with Nissho Iwai. Further, it is anticipated that substantial
additional U.S. dollar debt will be sought to fund future capital expenditures
of Mobisel. Revenues to repay such U.S. dollar debt will be denominated in the
local Indonesian currency.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its cash requirements primarily using the
net proceeds from a series of Preferred Stock private placements, bridge loans
and the Unit Offering. The bridge loans have generally been converted into
Preferred Stock. The proceeds from these financings were mainly used to fund
the Company's investments in operating companies and developmental stage
projects, to provide working capital and for general corporate purposes,
including the expenses incurred in seeking and evaluating new investment
opportunities. As of December 31, 1995 and September 30, 1996, the Company had
cash balances of $25.4 million and $82.8 million, respectively.
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The Company has generated negative cash flow from operations for each of the
last three fiscal years and for the nine months ended September 30, 1996, and
its operating companies and developmental stage projects are not expected to
provide any cash to the Company for the foreseeable future. As a result, the
Company is and will remain dependent upon raising funds from outside sources
to fund its working capital needs, investments in operating companies and
developmental stage projects and other cash requirements and to repay the
Exchange Notes and any other indebtedness it may incur when it becomes due and
payable.
The Company will require additional financing prior to December 31, 1997 to
meet currently anticipated investments in its operating companies and
developmental stage projects. The Company has no commitments or arrangements
for additional financing, and there can be no assurance that this additional
financing will be available to the Company on acceptable terms when required
by the Company or at all. The Company's inability to obtain such additional
financing on acceptable terms would have a material adverse effect on the
Company. In addition, the Company intends to pursue additional investment
opportunities for wireless communications projects and will require additional
sources of financing in order to pursue those investments. However, there can
be no assurance that such additional financing will be available on favorable
terms or at all. See "Risks Factors--Company Level Risks--Negative Operating
Cash Flow; Dependence on Additional Financing; No Commitments for Additional
Financing."
At the project level, the Company and its partners typically fund initial
project investments using capital contributions either in the form of equity
or shareholder loans. When projects become operational, the Company seeks to
fund ongoing development of the project using third-party financing,
preferably on a non-recourse basis to the Company.
Mobilkom, the Company's national ECTR operating company in Indonesia,
arranged a $50.0 million credit facility through a syndicate of Thai banks.
This facility is secured by all of the assets and capital stock of Mobilkom,
and $25.0 million of the facility has been guaranteed by Jasmine International
Public Company Limited ("Jasmine"), a 56.25% owner of Mobilkom. As of
September 30, 1996, approximately $20.2 million was outstanding under this
facility. The Company anticipates that the current $50.0 million facility will
be sufficient for Mobilkom to meet all of its currently anticipated
expenditures through 1997. Borrowings outstanding under this credit facility
must be repaid in 16 quarterly installments commencing in 2000.
Mobisel, the Company's national cellular operating company in Indonesia in
which the Company holds an indirect 20.4% interest through RHP, has obtained a
$60.0 million credit facility from Nissho Iwai International (Singapore) Pte.,
Ltd. ("Nissho Iwai"). This facility is secured by all of Mobisel's assets and
a pledge of all of the capital stock held by RHP. RHP has also guaranteed the
credit facility. Borrowings under the credit facility with Nissho Iwai are
limited to funds necessary for the implementation and construction of its
network. Mobisel will require substantial additional financing to complete its
planned capital expenditures through 1997 and for other cash needs.
Accordingly, Mobisel has commenced discussions with a number of potential
financing sources in order to obtain additional financing. Borrowings
outstanding under this credit facility must be repaid in six equal semi-annual
installments beginning in late 1998.
STW, the Company's national WLL operating company in Malaysia, has arranged
a Ringgit 91.0 million (approximately $36.3 million as of September 30, 1996)
credit facility through a syndicate of Malaysian banks. This facility is
secured by substantially all of STW's assets and a pledge of all of the
capital stock of STW held by the Company and STW's other shareholders, and has
been guaranteed by Shubila Holding SDN BHD, the 60% owner of STW, and certain
directors of STW (including an officer of the Company). In addition, STW has
agreed to assign to and deposit with the banks all of its cash, including
revenues, loan drawings and shareholder advances. In addition to pledging
their capital stock in STW, the Company and the other STW shareholders have
entered into a "keep well" covenant pursuant to which they have agreed (i) to
insure that STW remains solvent and able to meet its financial liabilities
when due and (ii) to insure the timely completion of its WLL project and to
make additional debt or equity investments in STW necessary to meet any cost
overruns. Accordingly, the Company and the other STW shareholders could be
jointly and severally liable for amounts payable under the credit facility in
the event of a default by STW. Borrowings outstanding under this credit
facility must be repaid
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in eleven semi-annual installments beginning in October 1997. As of
September 30, 1996, this facility was fully drawn and it is the intention of
the Company and its partners to seek additional third party debt financing to
fund continued expansion of STW's network and to refinance outstanding
indebtedness under the credit facility. See "Business--Operating Companies"
and Note 7 of Notes to Consolidated Financial Statements for additional
information regarding the credit facilities of STW, Mobisel and Mobilkom.
The business of the operating companies and developmental stage projects is
capital intensive and will require continuing sources of outside financing to
fund their working capital needs, capital expenditures and other cash
requirements. In particular, STW and Mobisel will require substantial
additional financing in order to complete planned capital expenditures.
However, there can be no assurance that the operating companies and the
developmental stage projects will be able to obtain required additional
financing on acceptable terms or at all, which could have a material adverse
effect on the Company. In addition, there can be no assurance that the
operating companies or developmental stage projects will be able to pay their
indebtedness or other liabilities when due. See "Risk Factors--Project Level
Risks--Operating Losses and Negative Cash Flow; Dependence on Additional
Financing/Capital."
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BUSINESS
BACKGROUND
The Company is a leading developer, owner and operator of wireless
communications companies and projects in emerging markets in Asia and Latin
America. These companies and projects provide or are developing a variety of
wireless communications services, including cellular telephone, wireless local
loop ("WLL"), enhanced capacity trunked radio ("ECTR"), paging and wireless
cable television. The Company currently has interests in seven operating
companies in Brazil, Indonesia, Malaysia, Mexico, New Zealand and the
Philippines. In addition, the Company has interests in six developmental stage
projects in China, India, Indonesia, Mexico, Pakistan, Peru, Taiwan and
Thailand and is actively pursuing other development and acquisition
opportunities. As of September 30, 1996, the Company's operating companies had
licenses covering an estimated 370 million people ("POPs") which, based on the
Company's equity interests in these operating companies, represented an
estimated 90 million equity POPs. As of September 30, 1996, the Company's
operating companies, which are generally in the early stages of operating and
expanding their networks, served approximately 50,000 subscribers.
Demand for Communications Services in Developing Countries
Many countries in Asia and Latin America are experiencing rapid economic
growth, but are hindered by inadequate telecommunications services. The
Company believes that businesses in particular are demanding better services
to improve competitiveness and are seeking cost-effective mobile
communications services to enhance their operations. The following table sets
forth certain information with respect to the countries in which the Company's
operating companies and developmental stage projects are located, together
with comparative information for the United States.
<TABLE>
<CAPTION>
POPULATION REAL GDP WAITING TIME
GROWTH GROWTH FOR INSTALLATION
YEAR ENDED GDP PER YEAR ENDED TELEPHONE OF LAND-LINE CELLULAR
POPULATION DECEMBER 31, CAPITA DECEMBER 31, LINES PER TELEPHONE PENETRATION
(MM)(1) 1995(1) (US$)(1) 1995(1) 100 POPS(2) (YEARS)(3) (% OF POPS)(2)
---------- ------------ -------- ------------ ----------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asia-Pacific
China................... 1,215.4 1.2% $ 541 9.9 % 2.3 0.3 0.30%
India................... 930.8 1.8% 360 5.6 % 1.0 1.9 0.01%
Indonesia............... 195.3 1.6% 1,025 7.3 % 1.2 0.3 0.09%
Malaysia................ 20.0 2.4% 4,261 9.5 % 14.5 0.3 4.77%
New Zealand............. 3.5 1.1% 16,518 2.5 % 48.7 0.0 8.35%
Pakistan................ 130.1 2.9% 484 4.5 % 1.6 1.1 0.04%
Philippines............. 68.6 2.2% 1,080 5.0 % 1.5 5.5 0.52%
Taiwan.................. 21.3 0.9% 12,485 6.1 % 39.5 -- (/4/) 3.63%
Thailand................ 60.2 1.4% 2,751 8.5 % 4.6 4.0 2.26%
Latin America
Brazil.................. 156.9 2.0% $ 4,316 4.2 % 7.4 0.9 0.81%
Mexico.................. 94.8 1.9% 2,634 (6.9)% 9.2 0.2 0.77%
Peru.................... 23.8 2.0% 2,640 6.6 % 3.3 4.3 0.31%
United States........... 263.6 1.0% $27,490 2.0 % 59.4 0.0 12.79%
</TABLE>
- --------
(1) Source: DRI/McGraw-Hill World Markets Executive Overview, Second Quarter
1996. The DRI/McGraw-Hill data are for 1995. "GDP Per Capita" means gross
domestic product per person and "Real GDP Growth" means growth in gross
domestic product after adjustment for inflation during the relevant
measurement period.
(2) Source: MTA-EMCI World Cellular Markets: 1996. Telephone lines per 100
POPs is from 1994 and cellular penetration is from 1995. "Cellular
Penetration" means the number of cellular subscribers as a percentage of
the total population.
(3) Source: MTA-EMCI Wireless Local Loop: Opportunities in the Global
Marketplace (Volume 2), March 1996. Data are from 1994.
(4) Data not available.
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To address the growing demand for communications services and promote
economic growth, governments in many developing countries have begun
deregulating their telecommunications industries. In some developing
countries, the government is beginning to privatize national carriers and
encourage the formation of private communications competitors. As a result,
the Company believes there is a substantial opportunity for privately-owned
companies to provide wireless communications services in these countries.
Similar factors are also creating a market for wireless cable television.
The Company believes that consumers in many developing countries are demanding
access to more and better television broadcasting, and many governments in
these countries are now considering the private delivery of television
programming as an alternative to government-owned broadcast television. The
Company believes that wireless cable television is a fast and cost-effective
way to provide cable television-type services in developing countries.
Role of Wireless Technologies
A number of wireless technologies provide voice, data and video services
that address the communications needs of developing countries. These services
include cellular telephone, WLL, ECTR, paging and wireless cable television.
The Company believes that these existing and emerging wireless technologies
generally offer comparable functionality to, and lower construction costs and
more rapid deployment than, land-line technologies.
Cellular Telephone. In its simplest configuration, a cellular telephone
system consists of a series of cell sites, each with a cellular
transmitter/receiver tower. All sites are linked to a mobile telephone
switching office, which consists of a central computer that controls the
network. Currently, the majority of cellular systems use analog technology;
however, in some high density markets analog systems are reaching their
capacity limits, and are being supplemented with new digital technologies
which offer greater capacity.
Wireless Local Loop. WLL networks provide subscribers with access to the
standard land-line telephone network through wireless transmission from the
land-line switch to the telephone site rather than through conventional land
lines. This is accomplished by placing small transmitter/receivers at the
telephone site. WLL operates in the same way as a regular telephone, with the
added possibility of wide area "cordless telephone" use. WLL networks are
generally quicker to install and less expensive than current land-line
systems.
Enhanced Capacity Trunked Radio. ECTR combines attributes of cellular and
dispatch radio (e.g. emergency dispatch) to provide a cellular-like mobile
service. By permitting both voice and data communications and by combining
dispatch radio, cellular-like calling and paging capabilities in the same
system, ECTR offers a combination of functionality and capacity that is
particularly well suited for business needs in developing countries. The
infrastructure cost per subscriber of a loaded ECTR system is typically less
than that of a loaded analog cellular system. Unlike cellular telephone,
however, ECTR services have not been widely deployed in developing countries
and, as a result, licenses to provide such services have historically been
more readily available than licenses for cellular telephone.
Paging. Paging is a well-established technology, with service widely
available in many countries. A paging system typically consists of a number of
transmitter sites connected to a central messaging center. The messaging
center receives incoming messages from the public telephone network and
prepares batches of messages for transmission to subscribers. Two way paging
systems are now available, allowing message acknowledgment responses and short
data messages to be sent by the paging subscriber. In developing countries
where telephone penetration is low, paging often provides an affordable
alternative to public telephone service.
Wireless Cable Television. MMDS, commonly known as wireless cable
television, transmits video programming through broadcast microwaves rather
than coaxial cable, providing cable television-type service to subscribers.
Various new technologies exist or are emerging to support the provision of
MMDS. The Company believes that MMDS is generally quicker to install and a
more cost-effective means of delivering television
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programming to the home than coaxial cable-based cable television,
particularly in the Company's target markets where traditional cable
infrastructure is underdeveloped or non-existent.
Business Development Model
The Company typically plays an active role in the formation, development,
management and operation of its operating companies and developmental stage
projects. Once a wireless communications opportunity is identified, the
Company typically joins with local and strategic partners to develop the
project. In some cases the Company's local partners have previously been
granted telecommunications licenses. In addition, the Company and its partners
may seek to obtain initial or additional licenses through private negotiations
rather than through competitive bidding. As the cost of competitively awarded
licenses, particularly cellular licenses, has increased, the Company believes
that wireless communications services based on alternative technologies and
privately negotiated licenses generally have a pricing advantage.
The Company provides its operating companies and developmental stage
projects with a range of management services. These services often include:
. Defining license needs, preparing, submitting and monitoring license
applications and negotiating the acquisition of additional licenses.
. Seconding one or more of its own employees to a particular operating
company to provide initial and/or ongoing management support.
. Selecting equipment and negotiating with equipment manufacturers and
suppliers.
. Planning the network for the project, either by a team under the
Company's direction or with the equipment manufacturer for the project.
. Arranging debt and equity financing at the project level.
. Developing and implementing core marketing, customer service and terminal
distribution and support plans.
. Training project personnel, normally at the facilities of one of the
Company's strategic partners such as Vanguard.
Business Strategy
The Company's principal business objective is to become a pre-eminent
provider of wireless communications services in selected developing countries.
Key elements of the Company's strategy for achieving this objective include:
Develop Long-Term Relationships With Strong Local Partners. The Company
seeks to develop long-term relationships with financially strong and
strategically well-positioned local partners. These partners often own or have
access to an existing telecommunications asset base (such as cell sites and
microwave/fiber optic transmission networks) that can be used by the Company's
operating companies to reduce capital expenditures, operating costs and
deployment time. Local partners frequently play an active role in securing
licenses and obtaining necessary regulatory approvals, assisting in arranging
and providing local financing and identifying opportunities for additional
wireless projects.
Obtain Licenses With Broad Frequency Ranges and Substantial Geographic
Coverage. The Company seeks to obtain licenses with broad frequency ranges,
substantial geographic coverage and flexible operating terms. The Company
believes that continuing advances in wireless technologies will allow numerous
technologies to provide services with similar functionality. As a result, the
Company believes that market opportunities for such services will be
determined predominantly by license terms rather than by technological
factors. Licenses with broad frequency allocation and flexible operating terms
also enable the Company to
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provide additional services and facilitate the adoption of new technologies.
In addition, the ability to provide service over a broad geographic area is
frequently an important selling point for users of services such as cellular
telephone and ECTR.
Offer Multiple Wireless Services in Existing Markets. The Company seeks to
expand by developing multiple wireless services in those countries where it
has existing operations. This strategy is intended to allow the Company to
build on its expertise in the host country as well as to achieve cost savings
and operating efficiencies through the sharing of cell sites, microwave
transmission networks and marketing and administrative functions. For example,
in Indonesia and Mexico, the Company initially established a national or large
regional ECTR business that is providing opportunities for developing
additional services, such as cellular, WLL and/or wireless cable television
services.
Remain Technology and Vendor Independent. The Company seeks to obtain
licenses that do not stipulate the type of technology to be used in the
provision of a particular communications service. This flexibility allows the
Company to match appropriate technology to a given business opportunity on the
basis of cost, capacity, reliability, functionality and availability. It also
allows operating companies to migrate to superior technologies as they
develop. Where possible, the operating companies use non-proprietary or open-
standard technologies with multiple vendor sources, thereby reducing their
dependence on any single supplier.
Pursue Low Cost Structure. The Company pursues strategies designed to allow
its operating companies to reduce capital expenditures and operating costs.
First, it seeks to form partnerships with local partners that have existing
telecommunications assets, including licenses, that can be used to reduce the
costs of developing and operating its wireless networks. Second, where
appropriate, the Company seeks to obtain initial or additional licenses
through private negotiation, rather than competitive bidding. Third, the
Company seeks to provide multiple wireless services within an existing market
to generate economies of scale. Fourth, when a common technology is selected
for multiple operating companies, the Company seeks to secure global
purchasing discounts with selected vendors.
Actively Manage Operating Companies. The Company typically plays an active
role in the development and management of its operating companies. Its local
country managers and corporate staff provide technical, financial and
administrative support to most of these companies, including serving as senior
executives of operating companies and/or serving on the boards of directors of
these companies. Moreover, shareholder agreements often provide the Company
with the right to approve key decisions at the operating company level,
including approval of operating budgets, business plans and major corporate
transactions, even though the Company may own less than 50% of the equity of
the operating company.
Promote Flexible Management Structure. The Company relies heavily on local
country managers to develop existing operating companies and identify new
wireless communications opportunities. These managers are often natives of the
local country with significant managerial and operating experience. Although
Company employees, they typically serve as senior executives of operating
companies. They are supported by a corporate staff located primarily in the
United States with extensive experience in wireless communications and
international operations. The Company believes that the use of local country
managers, supported by the Company's experienced corporate staff, allows it to
rapidly and effectively respond to operational matters, develop and maintain
close working relationships with local partners and capitalize on wireless
communications opportunities.
Strategic Relationships
The Company has entered into strategic relationships with selected
communications companies to assist it in identifying wireless communications
opportunities and to provide resource support to its operating companies and
developmental stage projects.
Vanguard. Vanguard, one of the largest independent cellular operators in the
United States, is the Company's principal strategic partner as well as its
largest stockholder. As of September 30, 1996, Vanguard beneficially owned
approximately 39% of the Company's equity on an as converted basis. Vanguard
has
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provided and continues to provide a number of services relating to the
formation, development and operation of the Company's wireless communication
businesses, including identification and evaluation of wireless communications
opportunities, review of business and technical plans, and assistance in
training operating company personnel. Haynes G. Griffin, Chairman of the Board
of Directors of the Company, is President, Chief Executive Officer and a
director of Vanguard. See "Management--Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions."
Broadcast Communications Limited. Broadcast Communications Limited ("BCL"),
a wholly owned subsidiary of the national television company of New Zealand,
is a leading telecommunications engineering and network operating company. BCL
provides a variety of services including wireless communications engineering
design, cell site planning, microwave and fiber optic transmission design, and
project management for network implementation. BCL has comprehensive
experience in WLL and has installed and commissioned major wireless networks
in the Asia-Pacific region. BCL has assisted in the planning, engineering and
project management of the WLL network of the Company's operating company in
Malaysia.
OPERATING COMPANIES
Unless otherwise indicated, information set forth below regarding POPs,
population growth, GDP per capita, and GDP growth is from 1995, data regarding
POPs covered by licenses is based on POPs data from 1995 (or in certain cases
estimates provided by the operating companies) and licenses held as of
September 30, 1996, and data regarding telephone lines per 100 POPs and the
waiting time for installation of land-line telephones is from 1994. Such data
has been taken from the sources indicated above under "Business--Background--
Demand for Communication Services in Developing Countries."
For a discussion of the risks associated with the ownership and operation of
the operating companies, see "Risk Factors--Project Level Risks."
MALAYSIA NATIONAL WLL
The Company currently holds a 30% interest in Syarikat Telefon Wireless (M)
SDN BHD ("STW"), a provider of WLL services in Malaysia. STW commenced a pilot
program in Northern Malaysia in 1993, and acquired its first commercial
subscribers by the end of 1994. In December 1994, based on its success in
Northern Malaysia, STW was granted a national license to provide wireless
telecommunications services in Malaysia. STW believes that, based on its
license, which covers an estimated 20 million POPs, as well as the size of its
equipment contract and the scale of its proposed build-out, its project is one
of the largest digital WLL projects in the world. As of September 30, 1996,
STW served approximately 2,200 subscribers.
Market Opportunity. Malaysia is one of the fastest growing countries in the
Asia-Pacific region. Malaysia has experienced rapid economic development and
significant population growth, as evidenced by real GDP and population growth
rates of 9.5% and 2.4%, respectively, for the year ended December 31, 1995.
With approximately 14.5 telephone lines per 100 POPs in 1994, rapid growth of
businesses and international trade and a large and increasingly affluent
population, the Company believes Malaysia has a large unmet demand for
communications services.
The Malaysian government has announced a national telecommunications plan
which includes an objective to increase the country's telephone network from
approximately 2.8 million lines in 1994 to 9 million lines by the year 2000.
Based on conversations with the Malaysian Economic Planning Unit, STW believes
that Telekom Malaysia Berhad ("Telekom"), the national telephone company, will
not be able to provide more than 6 million lines by the year 2000, resulting
in a shortfall of approximately 3 million lines.
STW's sales and marketing efforts focus on this anticipated shortfall of
approximately 3 million telephone lines, primarily by pursuing opportunities
with businesses and housing developments in the growing suburban markets,
which the Company believes are not adequately served by Telekom. STW estimates
that the suburban markets currently cover more than 15 million POPs and
expects further growth in this market segment. In
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addition, STW is also targeting small- to medium-sized businesses which
require additional telephone lines to satisfy their communication needs,
including facsimile, data and additional voice lines, which STW believes are
not being adequately served by Telekom.
Regulatory Environment. In an effort to meet the goal of 9 million lines by
the year 2000, the Malaysian government has begun permitting private companies
to provide wireless communications service. However, in an apparent reversal
of its prior policies, in early 1996, the government announced a program
designed to consolidate the telecommunications industry in Malaysia into a
limited number of telecommunications companies. Pursuant to this program, the
government undertook efforts to cause the sale of STW to one of such surviving
telecommunications companies. STW resisted these efforts and, in July 1996,
the Malaysian government announced that it did not intend to proceed with this
program. However, there can be no assurance that the Malaysian government will
not initiate similar programs in the future, or that it will not otherwise
impose further restrictions on private or foreign telecommunication providers.
See "Risk Factors--Project Level Risks-- Risks Inherent In Foreign
Investment."
In addition, during the time that the Malaysian government was proceeding
with its consolidation program, the government denied STW certain microwave
frequencies necessary for linking STW's radio base stations and switches.
Also, Telekom denied STW interconnection in certain regions not previously
covered by STW, which prevented STW from adding new subscribers in such
regions. Since the Malaysian government announced its intention not to proceed
with the consolidation program, it has granted STW such microwave frequencies,
and Telekom has begun the process of providing interconnection capability in
such regions. However, there can be no assurance that the Malaysian government
will continue to grant additional microwave frequencies or that Telekom will
not impede interconnection in the future, either of which could have a
material adverse effect on STW.
Moreover, the Malaysian government has continued a number of other
restrictive policies, including a moratorium on further licensing of private
communications operators, a deferral on equal access (which allows a telephone
subscriber of one company to make domestic long-distance and international
calls through another telephone company) until 1999 and a limitation on
foreign investment in Malaysian telecommunication companies to no more than a
30% equity interest. In addition, the Malaysian government continues to
regulate tariffs.
Local Strategic Partner. The Company's principal strategic partner in STW is
Shubila Holding SDN BHD ("Shubila Holding"), whose equity interest in STW is
60%. Shubila Holding is controlled by Rosli Bin Man, the former president of
Cellular Communications Network SDN BHD (Celcom), one of the largest cellular
operators in Malaysia. The remaining 10% of STW is owned by Laranda SDN BHD
("Laranda"), an entity controlled by certain private individuals. See
"Prospectus Summary--Recent Operating Developments."
Project Background. The Company began efforts to develop a WLL project in
Malaysia in 1993. In 1994, the Company and its local strategic partners
acquired STW, provided additional capital and obtained a national
telecommunications license. In March 1996, the Company entered into a
shareholders' agreement with its partners, pursuant to which the Company
increased its interest in STW to 30%. In October 1996, the Company paid $1
million for an option to purchase 50% of Laranda for an exercise price of $7.2
million and certain other contractual rights. In November 1996, the Company
notified Laranda of its intent to exercise this option, which will increase
the Company's aggregate direct and indirect interest in STW to 35%. The
Company is currently in the process of conducting its financial and legal due
diligence with regard to Laranda and applying for certain governmental
approvals with respect to such proposed purchase.
License and Interconnection. STW's national wireless license was the second
such license awarded in Malaysia. STW believes that its license currently
allows it to provide a wide variety of communication services, including
cellular, WLL and long distance. The license has a term of 20 years and
expires in 2014, at which time STW will be required to seek governmental
approval to renew the license. The license does not restrict the type of
technology STW may use, nor does it contain any requirements regarding
construction of the wireless networks. The license allows for an unlimited
number of subscribers. STW has been granted authorization to utilize 4-8 MHz
of spectrum in the 800 MHz frequency band to provide WLL services in various
parts of Malaysia and has submitted applications for additional spectrum.
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STW has entered into an interconnect agreement with Telekom which permits
STW's wireless systems to be connected to Telekom's national telephone
network. Pursuant to this agreement, STW has the right to retain a substantial
share of local, long distance and international calling revenues generated by
STW's subscribers as well as a portion of the revenues generated by calls
terminated on STW's network which originated on Telekom's network. The
interconnect agreement provides for national coverage and expires in August
1997. Although STW believes that a successor interconnect agreement will be
executed, any failure by STW to obtain a successor agreement would have a
material adverse effect on STW. In addition, any successor agreement on terms
less favorable to STW than the current agreement could have a material adverse
effect on STW. See "Risk Factors--Project Level Risks--Dependence on Other
Telecommunications Providers."
Existing Operations and Development Plan. For the year ended December 31,
1995, STW realized revenues of approximately $749,000 while cash flow from
operations was a deficit of approximately $4.3 million. As of September 30,
1996, STW had approximately 2,200 subscribers, primarily in the states of
Penang and Keddah, two growing industrial regions in Malaysia. Due primarily
to the attempt by the Malaysian government to consolidate the Malaysian
telecommunications industry and the related adverse effects on STW, which,
among other things, hindered STW's marketing efforts and delayed network
deployment, STW's subscriber base, which had increased from 1,000 at December
31, 1995 to 3,500 at June 30, 1996, declined to 2,200 as of September 30,
1996. In October 1996, in connection with the acquisition of a controlling
interest in Shubila by an investor group headed by Rosli Bin Man, the former
president of Celcom, STW's senior management team was replaced by a new
management team consisting of Rosli Bin Man and certain former members of the
management of Celcom. This new management team and IWC are currently in the
process of conducting an extensive review of STW's business plan and strategy,
which is anticipated to be completed by the end of 1996.
As of September 30, 1996, STW had 13 operational cell sites with an
additional 12 sites installed and awaiting interconnect. STW has a system
capacity of 34,000 subscribers. STW uses digital AMPS ("D-AMPS") technology.
D-AMPS is a widely used cellular standard prevalent throughout much of the
United States and supported by a number of large equipment suppliers. STW's
network equipment and subscriber terminals are currently supplied by Ericsson
Telecommunications, SDN BHD ("Ericsson") pursuant to a $400 million contract.
As of September 30, 1996, STW had a total of 109 full-time employees.
Investment and Budgeted Capital Expenditures. As of September 30, 1996, the
Company had expended $22.2 million to acquire its 30% interest in, and to make
capital contributions to, STW. In addition, in October 1996, IWC expended $1
million for an option to purchase 50% of Laranda and certain other contractual
rights and $1.2 million to fund its pro rata share of a $4 million capital
call made by STW.
Pursuant to STW's business plan, which is currently under review by IWC and
STW's new management team, STW has budgeted capital expenditures of
approximately $35.0 million and $100.0 million in 1996 and 1997 respectively,
primarily to fund the continued buildout of its network. STW has funded a
significant portion of its 1996 capital expenditures with borrowings under its
existing five-year Malaysian Ringgit 91.0 ($36.4 million) senior credit
facility (the "STW Credit Facility"). However, at September 30, 1996, STW had
borrowed substantially all of the amount available under the STW Credit
Facility, and STW will require substantial additional financing to complete
its planned capital expenditures, including equipment purchases under the
contract with Ericsson, and for other cash needs. There can be no assurance
that STW will be able to obtain any such financing, in which case STW would be
required to defer or abandon portions of its planned network development,
which would have a material adverse effect on STW. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." Further, there can be no assurance that upon
completion of the review of STW's business plan, STW's budgeted capital
expenditures for the remainder of 1996 and 1997 will not be significantly
higher than those set forth in STW's current business plan for such periods.
The STW Credit Facility has been provided by a syndicate of Malaysian banks
to finance the construction of STW's network. Pursuant to the terms of the STW
Credit Facility, the Company and STW's other shareholders have each executed a
"keep well" covenant pursuant to which they have agreed (i) to ensure that STW
will remain solvent and be able to meet its financial liabilities when due and
(ii) to ensure that the project
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is timely completed and to make additional debt and equity investments in STW
to meet cost overruns. In addition, Shubila Holding and certain directors of
STW, including Jan-Olof Conny Dolonius, an officer of the Company, have
guaranteed amounts payable under the STW Credit Facility. Accordingly, the
Company and the other STW shareholders could be jointly and severally liable
for amounts payable under the STW Credit Facility in the event of a default by
STW. In addition, each shareholder has agreed to subordinate all amounts owing
to it by STW to obligations arising under the STW Credit Facility.
Borrowings under the STW Credit Facility bear interest at a floating rate
based on standard reference rates and are secured by substantially all of
STW's assets and a pledge of the STW stock held by the Company and STW's other
shareholders. In addition, STW has agreed to assign to and deposit with the
banks all of its cash, including revenues, loan drawings and shareholders
advances. Under the terms of the STW Credit Facility, the syndicate was
granted an option, exercisable upon the occurrence of certain events, to
purchase 7.5% of the shares held by IWC and each of the other shareholders of
STW at a price, under certain circumstances, equal to 50% of the current
market value at the time of exercise. The STW Credit Agreement contains
certain covenants that, among other things, (i) prohibit STW from paying
dividends or making other distributions to its shareholders and from incurring
any other indebtedness and (ii) prohibit IWC and the other shareholders of STW
from reducing their respective stockholdings in STW without the prior written
consent of the lenders. As of September 30, 1996, the STW Credit Facility,
which must be repaid in eleven semi-annual installments commencing October
1997, was fully drawn.
STW currently has a number of trade creditors to whom payments are currently
past due. Certain of these trade creditors have notified STW that they are
considering legal action against STW for non-payment. STW's failure to resolve
this matter in a timely manner may give rise to rights in such creditors,
including the right to file an action for the winding up of STW. Further,
under the "keep well" covenant of the STW Credit Facility, IWC may be deemed
liable for the entire amount of such trade payables, which may have a material
adverse effect on IWC. Management believes that a recent capital contribution
by the shareholders of STW will provide sufficient capital to address this
matter.
Competition. STW's primary competitor is Telekom, which provided service to
approximately 2.9 million telephone subscribers as of December 31, 1994. In
addition, there are seven cellular providers, including three PCS operators,
providing service to approximately 950,000 subscribers. There are currently
four other licenses that can deploy wireless local loop technology in
Malaysia. Because the Malaysian government regulates tariffs, competition is
limited to marketing and service. STW seeks to differentiate itself from its
competitors by, among other things, its rapid deployment of service, its focus
on businesses and housing developments in the growing suburban markets and its
emphasis on customer service.
INDONESIA NATIONAL CELLULAR
As of September 30, 1996, the Company indirectly owned a 17.5% equity
interest in PT Mobile Selular Indonesia ("Mobisel"), a provider of cellular
services in Indonesia. In October 1996, the Company acquired an additional
2.9% indirect equity interest in Mobisel by increasing to 29.2% its direct
equity interest in PT Rajasa Hazanah Perkasa, an Indonesian company ("RHP")
that owns 70% of Mobisel. Mobisel currently holds a provisional license which
covers 225 channels in the 400 MHz frequency band permitting it to build and
operate a cellular system throughout Indonesia. Mobisel commenced operations
in February 1996 after having acquired RHP's cellular operations, which, at
the time of the acquisition, had approximately 17,000 subscribers. For
purposes of this section, the term "Mobisel" includes RHP's cellular
operations for periods prior to their acquisition by Mobisel.
Market Opportunity. Mobisel's provisional license was expanded in 1995 to
cover all of Indonesia, one of the most populous countries in the world with
more than 195 million people. Indonesia has experienced rapid economic and
significant population growth, as evidenced by real GDP and population growth
rates of approximately 7.3% and 1.6%, respectively, for the year ended
December 31, 1995. With approximately 1.2 telephone lines per 100 POPs in
1994, rapid growth of businesses and international trade and a large and
increasingly affluent population, the Company believes Indonesia has a large
unmet demand for communications services.
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Mobisel's sales and marketing efforts focus on the suburban and rural
markets. The Company believes there is less competition in these markets and
that it will have a competitive advantage as a result of its technology which
it believes allows for broader geographic coverage at a lower cost than its
principal competitors. The Company estimates that this market segment
currently covers more than 145 million POPs, the great majority of whom have
no telephone service. Although Mobisel anticipates that the majority of its
subscribers will be located in suburban and rural markets, it also seeks to
further develop its urban market base. Mobisel has also initiated the
conversion of subscriber equipment from mobile phones in vehicles to portable
handsets. The Company believes that portable handsets provide subscribers with
increased usage opportunities.
Regulatory Environment. Since the early 1990s, the Indonesian government has
been deregulating its telecommunications industry in order to improve the
quality and expand the coverage of telecommunications services. Prior to that
time, cellular operators in Indonesia were typically given licenses of short
duration (6 to 10 years) which were subject to revenue-sharing arrangements
with PT (Persero) Telekomunikasi Indonesia ("Telkom Indonesia"), the state-
owned telecommunications company, that resulted in operators, including RHP,
charging over $5,000 per handset and thereby limiting the growth of the
cellular market. In 1994, the government changed its policy to allow
arrangements whereby cellular operators could form equity alliances with
Telkom Indonesia. Under these equity alliances, the government has provided
longer license periods (generally 20-25 years) and introduced more favorable
interconnect arrangements in line with international standards. Subsequent to
this change in governmental policy, Mobisel has reduced handset prices and has
sought to improve customer service and cellular coverage. Notwithstanding the
government's effort with respect to deregulation, the government continues to
regulate tariffs in the telecommunications market.
Local Strategic Partners. The Company's three principal strategic partners
in Mobisel are Telkom Indonesia, which owns 30% of Mobisel, PT Deltona Satya
Dinamika ("DSD"), which indirectly owns 17.5% of Mobisel through its 25%
equity interest in RHP, and PT Bina Reksa Perdana ("BRP"), which indirectly
owns 35% of Mobisel through its 50% equity interest in RHP. Telkom Indonesia
provides the Company with strategic support and interconnect services.
Project Background. In early 1995, the Company invested $5.0 million in RHP,
a company formed in 1985 to provide cellular services in Indonesia. In October
1995, one of RHP's principal shareholders, Bell Atlantic, agreed to sell its
35% interest in RHP pro rata to RHP's other shareholders, including the
Company. Bell Atlantic's interest was purchased for a total amount of
$17.1 million. Following the sale of Bell Atlantic's interest, the Company's
interest in RHP increased to 25%. In November 1995, RHP contributed its
cellular operations to Mobisel in return for a 70% interest in Mobisel. In
November 1996, the Company purchased additional shares in RHP for $8.5
million, thereby increasing its aggregate ownership interest in RHP to 29.2%.
License and Interconnection. Mobisel's provisional license permits
nationwide coverage. Pursuant to the terms of the license, Mobisel was
obligated to and has already completed providing service to West Java,
including Jakarta, and is obligated to and expects to provide service in all
major population centers and along major highways throughout Java, Bali and
Lampung by the end of April 1997. The license requires that Mobisel complete
construction of its network no later than April 1998. The license has no fixed
term, does not limit the number of subscribers, but does require Mobisel to
use Nordic Mobile Telephone ("NMT") cellular technology. To date, the billing
for Mobisel's subscribers has been performed by Telkom Indonesia. Although the
billing function is expected to be transferred to Mobisel in October 1996, to
date Mobisel has relied on Telkom Indonesia for information as to the number
of its subscribers. Mobisel operates under an interconnection arrangement with
Telkom Indonesia that permits Mobisel's cellular network to be connected to
the fixed telephone network operated by Telekom Indonesia. This
interconnection agreement provides for interconnection at the rates published
by the Ministry of Tourism, Post and Telecommunications in Indonesia and shall
remain in effect as long as Mobisel's operating license remains in effect.
Existing Operations and Development Plan. As of September 30, 1996, Mobisel
provided cellular services to approximately 17,000 subscribers. For the fiscal
year ended December 31, 1995, RHP's cellular operations (later contributed to
Mobisel) realized revenues of approximately $7.3 million and cash flow from
operations of approximately $347,000. Mobisel experienced an average monthly
subscriber churn rate of less than 0.5% for the seven months ended September
30, 1996.
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As of September 30, 1996, Mobisel had the system capacity to serve
approximately 30,000 subscribers and has completed the upgrade of 32
transmitter sites in and around Jakarta and Bundung. In addition, Mobisel is
in the process of introducing or expanding services in all major population
centers and along major highways throughout the rest of Java, Bali and
Lampung. Subject to the availability of financing, Mobisel plans to construct
126 new transmitter sites in these areas, which will increase its total sites
to 148 and expand system capacity to serve approximately 150,000 subscribers.
Mobisel has selected 97 of these new sites and, subject to Mobisel's obtaining
financing, and most of the remaining sites are expected to be completed by the
end of the first quarter of 1997. In addition, Mobisel intends to install new
telephone switching exchanges in Jakarta, Bundung, Semarang, Surubaya and
Bali. All 32 existing transmitter sites are now fully operational.
As of September 30, 1996, Mobisel had a total of 160 employees and 10
contract persons working full time in Jakarta. Two of the contract persons are
provided by the Company to assist Mobisel in marketing and engineering
support. In return, it is anticipated that Mobisel will pay the Company
$300,000 in 1996, representing the cost to the Company of these Company
employees.
Investment and Budgeted Capital Expenditures. As of September 30, 1996, the
Company had expended approximately $25.5 million to acquire its 25% interest
in, and to make capital contributions to, RHP. In October 1996, the Company
expended an additional $4.3 million to repay its pro rata share of the Bell
Atlantic Note and interest accrued thereon and $8.6 million to increase its
interest in RHP to 29.2%.
Mobisel has budgeted capital expenditures of approximately $84.0 million and
$86.0 million for 1996 and 1997, respectively, primarily for the construction
of new transmitter sites and switching systems which will expand geographic
coverage and capacity. Mobisel expects to fund a portion of these expenditures
through its existing $60.0 million credit facility. Mobisel will require
substantial additional financing to complete its planned capital expenditures
through 1997 and for other cash needs. Although Mobisel is seeking to obtain
such additional financing from outside sources, there can be no assurance that
it will be able to do so. In such event, Mobisel would either seek such
additional financing from its shareholders or defer or abandon portions of its
planned network development. Such deferral or abandonment could result in the
loss of Mobisel's license, which could have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Mobisel has obtained a five-year $60.0 million credit facility from Nissho
Iwai International (Singapore) Pte. Ltd. ("Nissho Iwai") to finance the
construction of its network and the purchase of subscriber terminals.
Borrowings under the credit facility bear interest at a floating rate based on
LIBOR and are secured by all of Mobisel's assets and a pledge of all the
capital stock held by RHP. RHP has also guaranteed the credit facility. In
addition, Mobisel has agreed to assign to and deposit with Nissho Iwai all of
its cash, including revenues, loan drawings and shareholders' advances.
Borrowings under Mobisel's credit facility with Nissho Iwai are limited to
funds necessary for the construction of its network. As of September 30, 1996,
borrowings of approximately $44.0 million were outstanding under this
facility.
Competition. Mobisel's primary competitors in the Indonesian
telecommunications market are PT Komselindo, PT Satelit Palapa Indonesia,
Telecomcell and Excelcomindo. The Ministry of Tourism, Post and
Telecommunications regulates tariffs, and, as a result, competition is limited
to marketing and service. Mobisel seeks to differentiate itself from its
competitors by, among other things, offering wider coverage, flexible payment
and pricing packages targeted to specific market segments and focusing on
customer service.
INDONESIA NATIONAL ECTR
The Company, through its wholly owned subsidiary, New Zealand Wireless
Limited ("NZW"), owns 15% of PT Mobilkom Telekomindo ("Mobilkom"), a provider
of ECTR services in Indonesia. Mobilkom owns a national ECTR license for over
200 channels in the 400 MHz frequency band. Mobilkom commenced service in
September 1995 and as of September 30, 1996 had approximately 3,500
subscribers. The Company has entered into an agreement to purchase an
additional 5% interest in Mobilkom, although there can be no assurance that
such purchase will be completed.
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Market Opportunity. Mobilkom's license covers all of Indonesia, one of the
most populous countries in the world with more than 195 million people.
Indonesia has experienced rapid economic and significant population growth, as
evidenced by real GDP and population growth rates of approximately 7.3% and
1.6%, respectively, for the year ended December 31, 1995. With approximately
1.2 telephone lines per 100 POPs in 1994, rapid growth of businesses and
international trade and a large and increasingly affluent population, the
Company believes Indonesia has a large unmet demand for communications
services.
Mobilkom's sales and marketing efforts focus primarily on providing cost-
effective wireless voice and data communications services to small- and
medium-sized businesses engaged in the local distribution, financial services,
utility and construction industries. Additionally, Mobilkom focuses on
suburban markets and industrial complexes that are being constructed outside
the major cities in Indonesia. Based on the estimated number of Private Mobile
Radio ("PMR") users in Indonesia and the general movement from PMR to ECTR,
the Company believes that the market demand for ECTR services will continue to
grow.
Regulatory Environment. Since the early 1990s, the Indonesian government has
been deregulating the telecommunications industry in order to improve the
quality and expand the coverage of telecommunications services. See "--
Indonesia National Cellular--Regulatory Environment." In connection with this
deregulation, the government has awarded several wireless licences, including
cellular, ECTR and paging, and has provided for interconnection with the
state-owned network. The Indonesian government continues to regulate the
tariffs charged by telecommunications companies to their subscribers.
Local Strategic Partners. The principal shareholders of Mobilkom include
Jasmine International Public Company Limited ("Jasmine"), a Thai
telecommunications company with operations throughout Asia, PT Inka Forindo
Jaya ("PT Inka"), an Indonesian telecommunications and engineering company,
and PT Telekomindo Prima Bhakti ("Telekomindo"), a 40% owned investment
subsidiary of the national telephone company of Indonesia. The remaining 60%
of Telekomindo is owned by Rajawali Group, a private Indonesian entity.
Jasmine, PT Inka and Telekomindo own 56.25%, 15% and 5% of Mobilkom,
respectively.
Jasmine, directly and through its relationships throughout Asia, provides
Mobilkom with valuable technical, financial and strategic support. Mobilkom
has entered into a management agreement with Jasmine for the planning,
construction and implementation of the network and billing system. PT Inka
provides Mobilkom with microwave transmission system engineering support.
Project Background. In December 1991, the Company, through NZW, entered into
a joint venture agreement with several Indonesian telecommunications
companies, including Telekomindo, to develop a national ECTR system in
Indonesia. In June 1994, Jasmine acquired a 61.25% ownership interest in
Mobilkom and subsequently sold 5% of such interest to GS Capital Partners, an
affiliate of Goldman, Sachs & Co., in February 1995.
License and Interconnection. Mobilkom currently owns a five-year national
license issued February 28, 1995, covering over 200 channels in the 400 MHz
frequency band. Under the terms of the license, Mobilkom may request extension
of the license beyond the initial five-year term. The license has no
restrictions on capacity, type of technology Mobilkom may use, and covers over
an estimated 195 million POPs. Mobilkom's ECTR network currently has limited
interconnection with Telkom Indonesia, the state-owned telephone company;
however, no written interconnection agreement currently exists and any
termination of these interconnection arrangements by Telkom Indonesia would
have a material adverse effect on Mobilkom.
Existing Operations and Development Plan. Mobilkom's ECTR system is
operational in the three largest cities of Java, including Jakarta. Mobilkom
began selling its ECTR services in June 1995 and, as of September 30, 1996,
had over 3,500 subscribers. For the fiscal year ended December 31, 1995,
Mobilkom realized revenues of $82,000 while cash flow from operations was a
deficit of approximately $3.5 million. Mobilkom experienced an average monthly
subscriber churn rate of less than 1% for the nine months ended September 30,
1996.
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As of September 30, 1996 Mobilkom had the system capacity to serve
approximately 11,000 subscribers. Mobilkom is constructing a number of new
transmitter sites and, subject to the availability of financing, is planning
to invest in additional site capacity to increase capacity to 50,000
subscribers by the year 2001. Nokia infrastructure equipment is being used by
Mobilkom. As of September 30, 1996, Mobilkom had a total of 98 full-time
employees and 33 contract employees.
Investment and Budgeted Capital Expenditures. As of September 30, 1996, the
Company had expended approximately $1.5 million to acquire its 15% interest
in, and to make capital contributions to, Mobilkom.
Mobilkom has budgeted capital expenditures of $16.7 million and $15.6
million in 1996 and 1997, respectively, primarily to fund the continued
buildout of the network. Mobilkom expects to fund these capital expenditures
and the acquisition of subscriber terminals primarily through an eight-year
$50.0 million credit facility which it has obtained from a syndicate of Thai
banks. Borrowings under the credit facility bear interest at a floating rate
based on LIBOR and are secured by substantially all of Mobilkom's assets and a
pledge of all of the capital stock held by the Company and Mobilkom's other
shareholders. Jasmine has guaranteed borrowings of up to $25.0 million under
the credit facility. Such borrowings were primarily used for construction of
the network. The agreement governing this facility contains certain covenants
which, among other things, may restrict Mobilkom's ability to pay dividends or
make any other distributions to Mobilkom's shareholders and, under certain
circumstances, requires Mobilkom to require its shareholders, including the
Company, to make additional capital contributions to Mobilkom. As of September
30, 1996, borrowings of approximately $20.2 million were outstanding under
this facility.
Competition. As of September 30, 1996, the Indonesian government had awarded
six trunked radio licenses. However, operators under only three of these
licenses, including Mobilkom, were providing services as of September 30,
1996. The Ministry of Tourism, Post and Telecommunications regulates tariffs
and, as a result, competition is limited to marketing and service. The two
other existing ECTR operators, PT Jastrinda and PT Maesa, have designed their
infrastructures to primarily cover car mounted radio terminals. Mobilkom
differentiates itself from these competitors by, among other things, offering
portable handsets and the broadest geographic coverage of any of its
competitors.
PHILIPPINES REGIONAL ECTR
The Company owns a 20.3% beneficial interest in Universal Telecommunications
Service, Inc. ("UTS"), a provider of ECTR services in the Philippines. UTS
owns a provisional license covering over 300 channels in the 400 MHz frequency
band permitting it to build and operate an ECTR system in the Visayas and
Mindanao regions of the country. UTS has applied for authority to expand its
service area into metropolitan Manila and other parts of Luzon to make its
present regional ECTR network nationwide in coverage. The application has been
evaluated on its merits and is undergoing technical and financial evaluations
by the National Telecommunications Commission. UTS commenced operations in
July 1996, and as of September 30, 1996 had over 40 subscribers.
Market Opportunity. The Philippines, with a population of approximately 69
million people, has experienced economic development and rapid population
growth as evidenced by real GDP and population growth rates of 5% and 2.2%,
respectively, for the year ended December 31, 1995. With approximately 1.5
telephone lines per 100 POPs in 1994, growth of business and international
trade and a large and increasingly affluent population, UTS believes the
Philippines has a large, unmet demand for communication services.
UTS holds provisional authority to operate an ECTR system in eight major
cities in Visayas and Mindanao, which have a total population estimated at
greater than 27 million. The Company believes that Cebu, in the Visayas
region, is one of the fastest growing cities in the Philippines after
metropolitan Manila. Davao, in the Mindanao region, is an emerging economic
center which has received government infrastructure and development grants.
The Company believes that the other key cities covered by UTS's project, Gen.
Santos, Cagayan de Oro, Iligan, Zamboanga, Iloilo and Bacolod, are also
expanding.
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UTS's sales and marketing efforts focus on businesses located in the Visayas
and Mindanao region, where it believes the need for additional
telecommunications services is significantly greater than metropolitan Manila
where the majority of the telephone lines in the Philippines are concentrated.
In Visayas and Mindanao, the teledensity is much lower than the national
average, and is currently estimated by the Company to be approximately 0.7 and
0.3 telephone lines per 100 POPs, respectively. The Company believes that
there exist significant opportunities to provide wireless communications
services in these regions. UTS will target businesses whose operations involve
the use of field personnel, field offices, fleets of vehicles, and existing
PMR networks. UTS estimates this market segment to cover more than 7,500
businesses with a potential of more than 30,000 subscribers.
Regulatory Environment. The Philippine government has recently begun
deregulating its telecommunications industry. However, the government has
continued a number of restrictive policies, including a limitation on foreign
investment in Philippine telecommunications companies to no more than a 40%
equity interest.
Local Strategic Partners. The Company's strategic partners in UTS are
Marsman-Drysdale Corporation ("MDC"), a large Philippine company in the
agribusiness, food processing, tourism and communications businesses, and
Filinvest Development Corporation ("FDC"), a large Philippine real estate
investment company. George M. Drysdale, a shareholder and former director of
IWC, is Vice Chairman of MDC and Chairman of UTS. Both MDC and FDC have
extensive experience conducting business in the Philippines and have provided
UTS with valuable strategic support.
Project Background. In March 1994, the Company in alliance with MDC and FDC
agreed to purchase a 49% equity interest in UTS. In September 1995, the
Company and its partners exercised an option to purchase an additional 31% of
UTS' then outstanding capital stock from another stockholder. The Company
subsequently purchased additional interests and subscribed for a capital call
in UTS which, upon the completion of certain formalities, will bring its
ownership to 20.3%.
Licenses and Interconnection. UTS has received a legislative franchise and a
provisional authority to install, operate and maintain an ECTR system in eight
cities in Visayas and Mindanao. Up to 320 paired channels in the 400 MHz
frequency band are potentially available to the project. UTS recently obtained
governmental approval for a new frequency allocation within the 400 MHz
frequency band which was sought in part because of interference at the
frequency originally granted. UTS has applied for and expects that it will be
granted final authorization to operate its regional ECTR service in Visayas
and Mindanao. Because the major components in its network infrastructure are
completed and operational, UTS expects to obtain final authorization by the
end of 1996. No assurance, however, can be given that certain factors,
including UTS' failure to fully comply with the service date requirement
contained in its provisional authority, will not adversely affect its ability
to obtain such final authorization.
UTS's franchise was renewed in July 1991 and it received its provisional
authority to operate its ECTR network in May 1995. The franchise has a term of
twenty-five years from the date of renewal. The provisional authority has
expired, and UTS is in the process of applying for an extension of the term of
such authority. Final authorization to operate the ECTR system, once obtained,
is expected to be coterminous with the legislative franchise, but may be
terminated by the Philippine government under certain circumstances. UTS's
provisional authority does not contain, nor is the final authorization
expected to contain, any restriction on the type of technology UTS may use or
on the number of subscribers. Tariff rates, however, are subject to approval
by local regulatory authorities.
Interconnection among carriers is mandated by law. UTS has an
interconnection agreement with Radio Communications of the Philippines, Inc.
("RCPI") for connection to the land-line telephone system covering certain
regions of the Philippines, including Visayas and Mindanao.
The interconnection agreement is renewable on a year-to-year basis. RCPI is
owned by Bayantel, a large privately-held telecommunications company. MDC owns
10% of RCPI. With this interconnection agreement,
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UTS subscribers can make and receive local, regional and international calls.
The revenue sharing arrangement is in accordance with industry norm, providing
that revenues are allocated 30% to the originator, 40% to the carrier and 30%
to the terminating party. UTS is currently negotiating an agreement with the
Philippine Long Distance Telephone Company which, if entered into, would give
it full interconnection capabilities throughout the Philippines.
Existing Operations and Development Plan. The first link in the ECTR
network, the Cebu-Davao link, was completed in March 1996. The next link, the
Cebu-Cagayan de Oro link, was completed in July 1996. UTS has recently begun
marketing to potential subscribers. UTS plans to offer cellular-type calling,
dispatch radio, private long distance, and data transmission service from
mobile and fixed sites.
UTS has signed equipment supply and service contracts with Nokia with a
total equipment and service price in excess of $3 million.
Investment and Budgeted Capital Expenditures. As of September 30, 1996, the
Company had expended approximately $1.5 million to acquire its 19% interest
in, and to make capital contributions to, UTS. UTS has budgeted capital
expenditures of $4.5 million and $900,000 in 1996 and 1997, respectively,
primarily for infrastructure equipment. UTS has entered into a credit facility
with the Land Bank of the Philippines to partially fund the cost of the
ECTR network. Additional financing is expected to be provided by equipment
vendors or UTS shareholders.
Competition. Wireless communications services are provided by cellular and
public trunked radio operators. As of September 30, 1996, there were five
companies providing cellular service in the Philippines. As of September 30,
1996, the estimated total cellular subscriber base was almost 500,000.
Cellular is very popular and enjoys a high level of public awareness. Price
competition is intense. Although most cellular operators offer nationwide
service, their coverage is limited to urban areas.
As of September 30, 1996, there were eight companies providing ECTR
services, most of which compete in the metropolitan Manila market. The ECTR
business was introduced in the Philippines in 1990 and, as of June 30, 1996,
there were approximately 18,800 subscribers, mostly in the Manila area.
NEW ZEALAND NATIONAL ECTR
The Company provides ECTR services in New Zealand through its wholly owned
operating company, TeamTalk Limited ("TeamTalk"). The licenses under which
TeamTalk operates its ECTR network cover an aggregate of over 174 channels in
the 400 MHz frequency band. TeamTalk commenced operations in 1994 and, as of
September 30, 1996 served approximately 4,500 subscribers throughout the North
Island of New Zealand, as well as in and around the city of Christchurch on
the South Island.
Market Opportunity. The Company believes that, as of September 30, 1996,
there were approximately 114,000 mobile radio subscribers in New Zealand, of
which approximately 100,000 subscribers used PMR. PMR, however, has limited
coverage, generally poor sound quality and a lack of privacy. As a result of
these limitations, together with the decision of the New Zealand Ministry of
Commerce to reallocate a number of frequencies, there is an ongoing transition
in the New Zealand mobile radio market from PMR to trunked radio.
TeamTalk's sales and marketing efforts focus on a broad range of companies,
including trucking fleets and security businesses. TeamTalk believes that it
is able to provide smaller companies with a higher level of customer service
than Telecom New Zealand, its primary competitor. TeamTalk also believes that
the advanced features provided by its ECTR system should appeal to the needs
of larger companies. In addition, the Company believes that there is an
opportunity in New Zealand for trunked radio services in geographic areas that
are not currently covered by existing trunked radio operators. TeamTalk
currently has service in the major population centers throughout the North
Island of New Zealand as well as in the city of Christchurch on the South
Island.
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Regulatory Environment. The New Zealand communications market has been
deregulated and is now fully open to private companies to provide wireless
communications services.
Local Strategic Partner. The Company has entered into a local strategic
alliance with Broadcast Communications Limited ("BCL"), a leading
telecommunications engineering and operating company and wholly owned
subsidiary of Television New Zealand. BCL provides TeamTalk with access to
strategically located transmitter sites, many of which are connected by a
nationwide digital microwave and fiber optic network.
Project Background. The Company began efforts to develop an ECTR project in
New Zealand in 1994. These efforts resulted in the formation of a joint
venture with BCL. TeamTalk was incorporated in 1995 and was owned in equal
shares by the Company and BCL. Effective April 30, 1996, the Company acquired
BCL's 50% interest in TeamTalk for an aggregate price of approximately $3.2
million which was paid for in July 1996. In connection with this sale, BCL and
the Company entered into agreements whereby BCL agreed to, among other things,
provide TeamTalk with access to certain BCL cell sites, as well as access to
BCL's nationwide digital microwave and fiber optic network. These agreements
have terms of 20 years and provide for payments to BCL by TeamTalk.
License and Interconnection. TeamTalk has licenses to provide ECTR service
for approximately 174 channels. The licenses have a term of one year and have
no construction requirements or restrictions with respect to tariffs or the
type of technology TeamTalk may use.
In 1994, the Company and BCL entered into an agreement with Telecom New
Zealand to provide full interconnection for TeamTalk's ECTR network. Although
the agreement is assignable to TeamTalk, TeamTalk is currently negotiating,
and expects to enter into, a new interconnection agreement directly with
Telecom New Zealand.
Existing Operations and Development Plan. The TeamTalk network is
operational in the major population centers throughout the North Island of New
Zealand, as well as in the city of Christchurch, the largest city on the South
Island. TeamTalk began selling its ECTR services in December 1994 and had
approximately 2,500 subscribers by December 1995. As of September 30, 1996,
the number of TeamTalk's subscribers had grown to over 4,500. TeamTalk intends
to seek additional licenses allowing it to provide coverage in the major
population centers throughout New Zealand by the end of 1996, at which time
TeamTalk's network will have a capacity of approximately 7,000 subscribers.
For the fiscal year ended December 31, 1995, TeamTalk realized revenues of
approximately $369,000, while cash flow from operations was a deficit of
approximately $1.2 million. For the nine months ended September 30, 1996,
TeamTalk experienced an average monthly churn rate of approximately 2%.
As of September 30, 1996, TeamTalk had 24 full-time employees. TeamTalk
primarily uses Nokia infrastructure equipment.
Investment and Budgeted Capital Expenditures. As of September 30, 1996, the
Company had invested approximately $8.2 million in TeamTalk, including the
$3.2 million paid by the Company to acquire BCL's 50% interest in TeamTalk in
July 1996. Prior to the sale of its interest in TeamTalk to the Company, BCL
had invested approximately $3.8 million in TeamTalk.
TeamTalk currently plans to spend approximately $1.4 million and $6.9
million for capital expenditures in 1996 and 1997, respectively. TeamTalk is
now actively seeking external debt financing to fund these capital
expenditures. If external debt financing is not obtained, the Company
anticipates funding TeamTalk's 1996 and 1997 capital expenditures through
shareholder loans, capital contributions or a combination thereof.
Competition. Competition exists in the New Zealand telecommunications
market. TeamTalk's principal competitor is Fleetlink, a service provided by
Telecom New Zealand, which initiated the development of its trunked radio
network in 1992. TeamTalk believes that it has several competitive advantages
over Fleetlink.
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These include the use of Nokia ECTR technology, which is newer technology and,
consequently, provides a greater variety of features and services to customers
than the Tait technology used by Telecom New Zealand. In addition, TeamTalk
believes it provides superior customer service and greater flexibility on
billing than Fleetlink.
BRAZIL REGIONAL ECTR
Pursuant to an agreement with Rede Brasil Sul ("RBS"), the Company has the
right to acquire an equity interest in a joint venture ("Via 1") which is
being formed to provide ECTR services in the major cities in Southern and
Central Brazil. The Company, indirectly through its wholly owned subsidiary
Servicos de Radio Comunicacoes Ltda. ("SRC"), holds licenses covering 140
channels in the 800 MHz frequency band. RBS holds licenses covering 545
channels in the 800 MHz frequency band. RBS and the Company intend to
contribute the companies through which they hold their licenses to Via 1.
SRC's assets consist primarily of licenses, fixed assets and cash. Grupo Arbi,
a Brazilian industrial and financial group ("Arbi") has agreed to participate
as an equity partner in Via 1 by contributing the use of its licenses for
125 channels in the 800 MHz frequency band to the Via 1 project (the "Via 1
Project"). Upon the formation of Via 1, it is anticipated that the Company's
initial equity interest in Via 1 will be 65.1% and that RBS's and Arbi's
initial interests will be 27.9% and 7%, respectively. In the event that
certain options currently being negotiated with RBS and Arbi are exercised in
their entirety, the Company's equity interest in Via 1 will be reduced below
50%.
In anticipation of the formation of Via 1, the Company, RBS and Arbi
commenced initial operations of the Via 1 Project in the cities of Porto
Alegre, Novo Hamburgo and Caxias do Sul in July 1996. The Company's, RBS' and
Arbi's licenses that are anticipated to be contributed to Via 1 upon its
formation (the "Via 1 Licenses") cover major cities in Southern and Central
Brazil, including Sao Paulo, Curitiba and Rio de Janeiro. As of September 30,
1996, the Via 1 Project had approximately 190 subscribers.
Market Opportunity. Brazil, with a population of approximately 156.9
million, is among the largest countries in the world, and has the highest real
GDP in Latin America. In addition, since 1991 Brazil has experienced a
significant increase in international trade due to steady economic growth and
structural economic reforms, including the implementation of a successful
anti-inflation plan, and a regional free trade and customs union with
Argentina, Uruguay and Paraguay ("Mercosur"), which Chile recently joined as a
free trade partner. The Company believes that there is a significant unmet
demand for telephone services as evidenced by only 7.4 lines per 100 POPs. In
addition, with the exception of ECTR licenses, the government has not to date
issued licenses for cellular systems to private operators, although it is
taking steps to do so. As a result, the Company believes that Brazil is one of
the most attractive countries in Latin America for the introduction of an ECTR
system. The Via 1 Licenses cover approximately 60 million POPs.
Sales and marketing efforts will focus primarily on providing cost-effective
communications services to small- and medium-sized businesses in the local
distribution, financial services, utility and construction industries in
Southern and Central Brazil.
Regulatory Environment. The Brazilian communications market is widely
regulated. Private communications licenses, except those relating to ECTR, are
restricted to operators with a majority of the voting interest held by
Brazilian shareholders. However, various reform projects to liberalize
Brazil's telecommunications market are currently being considered by the
federal government.
Local Strategic Partners. RBS, the Company's proposed partner in Via 1, is
one of Brazil's largest media companies with operations in television and
radio broadcasting and newspaper publishing in Southern Brazil. To date, RBS
has contributed to the Via 1 Project by expediting the import of
infrastructure equipment and assisting in negotiations with governmental
regulatory authorities. Additionally, RBS owns both cell sites and large
microwave networks, which the Company anticipates Via 1 will use to carry its
network traffic. Pursuant to the stockholders' agreement between RBS and the
Company, the Company has been providing the Via 1 Project with technical
services, operational management and equipment necessary for the development
of the network. Implementation of the stockholders' agreement will require
certain governmental approvals. See "--Licenses and Interconnection" below.
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Project Background. The Company began efforts to develop an ECTR project in
Brazil in 1993. These efforts resulted in the execution of an MOU among RBS,
IWC and a subsidiary of Vanguard. In August 1995, in anticipation of the
Vanguard Exchange, Vanguard assigned its participation rights in the project
to IWC, which entered into a shareholders agreement with RBS that contemplates
the formation of Via 1. Pursuant to such agreement, the Company and RBS have
agreed to contribute to Via 1 the companies through which they hold their
licenses and their applications for additional licenses. The Company and RBS
have also invited Arbi to participate in the project by contributing to Via 1
all licenses it will control at the time of the transaction and its
applications for additional licenses. The Company's contribution will be SRC,
whose assets consist principally of cash, fixed assets and licenses.
Licenses and Interconnection. The licenses held by the companies that will
be contributed to Via 1 generally have terms of 15 years, with the first
licenses having been granted in 1994. These licenses cover 810 channels in the
800 MHz frequency band, and applications for licenses on file cover an
additional 12,000 and 4,500 channels in the 800 MHz and 400 MHz frequency
bands, respectively. Under Brazilian law, operations must commence within one
year of license grant, subject to extensions in certain circumstances. RBS and
SRC failed to meet such deadlines with respect to several licenses. However,
RBS and SRC have obtained extensions with respect to the deadlines for these
licenses and expect that operations will commence within the extended time
period. These licenses contain no restrictions regarding the technology which
may be used but, in certain cases, have operational requirements. The
continued operation of the Via 1 Project as well as the proposed transfer of
the Via 1 Licenses are subject to receipt of certain approvals or
authorizations from the Brazilian Ministry of Communications. There can be no
assurance that such approvals or authorizations will be received. Failure to
obtain such approvals could result in, among other things, the forfeiture of
some or all of the Via 1 Licenses and could have material adverse effect on
the Company. Brazilian law allows full interconnection with the public
network. Arrangements are in place with two of the four local exchange
operators on interconnection and additional interconnect arrangements are
under negotiation with the remaining local exchange operators. See "Risk
Factors--Project Level Risks--Risk of Modification or Loss of Licenses;
Uncertainty as to the Availability, Cost and Terms of Licenses; Restrictions
on Licenses."
Existing Operations and Development Plan. The Via 1 Project became
operational in July 1996 with six cell sites providing system capacity for
2,000 subscribers. Subject to the timely delivery of necessary equipment, it
is expected that by the end of 1997, Via 1 will construct cell sites to cover
an additional 28 cities in five states in Southern and Central Brazil
increasing system capacity to 25,000 subscribers.
Cell site transmission and switching equipment and network operations
management facilities are currently being installed in Belo Horizonte (Minas
Geiras), Campinas, Santos and Sorocaba (Sao Paulo) and Rio de Janeiro. A
combination of Uniden and Nokia infrastructure equipment is being used. As of
September 30, 1996, the operations that will comprise Via 1 had 25 employees
and used the services of approximately 30 additional outside engineering and
installation personnel for the construction of its network.
In October 1996, in anticipation of the legal formation of Via 1, SRC
entered into a contract with Nokia whereby Nokia will provide equipment for
the Via 1 Project. It is anticipated that this contract will be assigned to
Via 1 in connection with its legal formation.
Investment and Budgeted Capital Expenditures. As of September 30, 1996, the
Company had funded approximately $8.9 million as direct investments in SRC. In
addition, in connection with the Vanguard Exchange, the Company allocated $5.9
million to license rights derived from Vanguard's right to participate in the
Via 1 Project that were obtained by the Company in the Vanguard Exchange.
Via 1 has budgeted capital expenditures of $9.3 million and $12.0 million
for 1996 and 1997, respectively, primarily for the construction of its
network. Via 1 will seek to fund these expenditures through a combination of
external financing and equity or debt investments by its shareholders. In
accordance with the stockholders' agreement and Via 1's current business plan,
it is anticipated that the Company and Via 1's other stockholders will be
required to invest an additional aggregate amount of approximately $15.0
million in Via 1 prior to December 1998. If Via 1 is unable to obtain
necessary financing, it will be required to delay its planned capital
expenditures.
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Competition. Via 1's primary competition consists of cellular services
provided by local exchange carriers and three other multi-site ECTR service
providers (M-Comcast, Airlink Servicios e Comercio and Radio Mobile Digital).
The Company believes that Via 1 will have a pricing advantage over traditional
cellular services and will seek to market its services to small and medium-
sized businesses, which it believes are generally more cost-sensitive than the
retail customers targeted by cellular operators. The Company does not believe
that Via 1 will directly compete with the three other multi-site ECTR service
providers whose licenses and operations are concentrated in Sao Paulo and
which focus their marketing efforts on the retail user as compared to Via 1's
operations which are anticipated to cover the broader geographic area of
Southern and Central Brazil and focus on the business user.
MEXICO REGIONAL ECTR PROJECT
The Company currently owns a 2.23% equity interest in Corporacion Mobilcom,
S.A. de C.V. ("Mobilcom Mexico"), a provider of trunked radio services in
Mexico. Mobilcom Mexico holds licenses covering an aggregate of over 4,300
channels in the 400 and 800 MHz frequency bands covering the major cities in
Northern and Central Mexico, including Mexico City. Mobilcom Mexico commenced
providing commercial service in July 1993 and, as of September 30, 1996,
provided service to approximately 22,000 subscribers.
Market Opportunity. Strong government support for privatization and the
development of competitive alternatives to Telefonos de Mexico, S.A. de C.V.
("Telmex"), the national telephone company, as well as a need for enhanced
telecommunications services, have combined to make Mexico an attractive market
for investment in communications services. According to a private Mexican
market research group, the demand for new phone lines is projected to increase
to 2.2 million by the year 2000, from the approximately 1.6 million in
December 1995.
Mobilcom Mexico's sales and marketing efforts currently focus primarily on
providing cost-effective local and regional dispatch radio and data
transmission services to businesses engaged in manufacturing and distribution.
Regional dispatch radio services are expected to be provided by a high-
capacity digital microwave network being completed throughout Central and
Northern Mexico. NEXTEL, a large shareholder of Mobilcom Mexico, is proposing
to consolidate Mobilcom Mexico's network into NEXTEL's North American ECTR
network, which also includes Clearnet Communications, Inc. in Canada. In
linking these networks, NEXTEL would be able to provide seamless communication
services to its customers throughout North America. Mobilcom Mexico's existing
licenses currently cover approximately 65 million POPs.
Regulatory Environment. Since early 1994, the Mexican government has been
deregulating the telecommunications industry in order to improve the quality
and expand the coverage of telecommunications services. A new
telecommunications law, which became effective in June 1995, outlines the
broad rules for the opening of the local and long-distance service markets to
competition. The government has stated its intention to increase competition
within the telecommunication industries and its desire to attract foreign
investment for the purpose of improving Mexico's telecommunications
infrastructure. However, in June 1995, the Mexican government enacted
legislation limiting foreign investment in telecommunications companies, from
which Mobilcom Mexico's current operations are exempt.
Local Strategic Partners. The Company's strategic partners in Mobilcom
Mexico include: Grupo Comunicaciones San Luis S.A. de C.V. ("Grupo"), which
currently owns a 39.4% interest in Mobilcom Mexico; Associated SMR, Inc., an
international cellular radio operating company; LCC Incorporated, an
international wireless engineering and design company; and certain investment
companies, including The Carlyle Group. In March 1995, NEXTEL acquired a 16.5%
interest in Mobilcom Mexico for $52.5 million and in August 1995 acquired an
additional 2% for approximately $4.7 million. NEXTEL also received options to
acquire up to an additional 29.5% of Mobilcom Mexico on a fully diluted basis.
NEXTEL's current interest in Mobilcom Mexico is approximately 18%. In the
event NEXTEL exercises its options in full, the Company's interest in Mobilcom
Mexico will decrease to 1.8%.
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Project Background. Mobilcom Mexico was formed in 1991 by Grupo to pursue
mobile trunked radio opportunities in Mexico. At the time of the Company's
initial investment in December 1992, Mobilcom Mexico had already obtained
licenses to provide trunked radio services covering a substantial number of
channels through Central and Northern Mexico. Following such investment,
Mobilcom Mexico began providing ECTR services, brought in additional partners
and obtained licenses for more channels both from the Mexican government and
through the acquisition of other local operators.
Licenses and Interconnection. Mobilcom Mexico's existing licenses, which
expire from 2000 to 2016, include 1,976 channels in the 400 MHz frequency band
covering Central and Northern Mexico, and more than 2,370 channels in the 800
MHz frequency band covering Mexico City and areas in Northeastern Mexico. The
licenses do not contain restrictions on the type of technology Mobilcom Mexico
may use or on the number of subscribers. Mobilcom Mexico's licenses, however,
are subject to certain requirements and restrictions which include build-out
requirements and transfer restrictions. In particular, Mobilcom's licenses
generally require that they be held for at least three years before they may
be sold or transferred. Mobilcom Mexico has been, and expects to continue to
be, in full compliance with its license requirements. Failure to satisfy such
requirements, however, could result in a loss of licenses, which could have a
material adverse effect on Mobilcom Mexico. Mobilcom Mexico has full
interconnection capabilities through Telmex. Mobilcom Mexico currently
provides interconnection services to a limited number of its subscribers, but
expects to significantly increase subscriber interconnection as it upgrades
its network.
Existing Operations and Development Plan. As of June 30, 1996, Mobilcom
Mexico had approximately 22,000 subscribers in 39 cities throughout Central
and Northern Mexico, including Mexico City. For the fiscal year ended December
31, 1995, Mobilcom Mexico realized revenues of $5.3 million, while cash flow
from operations was a deficit of approximately $22.5 million. For the six
months ended June 30, 1996, Mobilcom Mexico experienced an average monthly
subscriber churn rate of approximately 2.7%.
As of June 30, 1996, Mobilcom Mexico had 42 transmitter sites and the system
capacity to serve approximately 26,600 subscribers. Mobilcom Mexico is in the
process of constructing 11 additional transmitter sites, thereby increasing
its total sites to 53 and expanding its network capacity to serve
approximately 30,500 subscribers by December 31, 1996. Motorola and Nokia
technology is being used by Mobilcom Mexico.
Mobilcom Mexico had a total of 162 employees working full-time throughout
Northern and Central Mexico as of June 30, 1996.
Investment and Budgeted Capital Expenditures. As of September 30, 1996, the
Company had expended approximately $2.1 million to acquire its 2.23% interest
in, and to make capital contributions to, Mobilcom Mexico.
Mobilcom Mexico has budgeted capital expenditures of approximately $17.2
million and $57.2 million for 1996 and 1997, respectively, primarily for the
continued development and expansion of its network. Mobilcom Mexico plans to
fund such capital expenditures primarily through financing under credit
facilities, anticipated cash flow from operations, as well as capital
contributions from shareholders.
Mobilcom Mexico has obtained various financing arrangements to fund the
infrastructure equipment being used in the 400 MHz network. The Export
Division of the Bank of Finland is providing 7-year debt financing on 85% of
the estimated cost of the 400 MHz infrastructure equipment, most of which is
being supplied by Nokia. Nacional Financiera ("Nafinsa") is providing the
remaining 15% of the estimated cost plus financing of freight, duties and
infrastructure installation. These loans are being made through Banco
Mexicano, which has established a $32.1 million line of credit for the 400 MHz
network. Borrowings under this credit facility bear interest at a floating
rate based on LIBOR and mature from 2000 to 2006. Borrowings under this credit
facility are secured by equipment purchased with such funds and all of the
assets and capital stock of RadioPhone, S.A. de C.V., a wholly owned
subsidiary of Mobilcom Mexico, as well as the capital stock of other Mobilkom
Mexico subsidiaries that hold the licenses under which Mobilkom Mexico
operates. As of May 30, 1996, borrowings of
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approximately $15.1 million were outstanding under this credit facility. In
addition to these bank financings, certain shareholders have made loans to
Mobilcom Mexico which in the aggregate equaled approximately $1.8 million as
of June 30, 1996.
Competition. Wireless communications services are provided both by cellular
and ECTR operators in Mexico. As of June 30, 1996, Mobilcom Mexico was one of
the largest ECTR service providers in Mexico with approximately 28% of
estimated total number of ECTR subscribers. Mobilcom Mexico has three primary
competitors in the wireless communications market in Mexico: Radiocel, an ECTR
operator with approximately 20,000 subscribers, as well as Radiomovil Dipsa,
S.A. de C.V. (Commercial Telcel) with approximately 400,000 subscribers and
Iusacell, S.A. de C.V. with approximately 209,000 subscribers, both of which
are cellular communications providers. Mobilcom Mexico seeks to differentiate
itself from its competitors by, among other things, offering widespread
coverage, a focus on custom service and payment packages tailored to meet
customer needs.
DEVELOPMENTAL STAGE PROJECTS
Unless otherwise indicated, information set forth below regarding population
and POPs, population growth, GDP per capita, and GDP growth is from 1995; data
regarding POPs covered by licenses is based on POPs data from 1995 and
licenses held as of September 30, 1996; and data regarding telephone lines per
100 POPs and the waiting time for installation of land-line telephones is from
1994. Such data has been taken from the sources indicated above under
"Business--Background--Demand for Communications Services in Developing
Countries."
As indicated below, the terms of the Company's proposed investment in the
developmental stage projects, including the percentage interest to be received
by the Company, are under negotiation and are typically provided for in MOUs
rather than definitive agreements and are typically subject to compliance with
local law and receipt of necessary licenses and approvals. There can be no
assurances that such licenses and approvals will be received. The Company's
anticipated investment and interest in these projects, as well as the scope of
the projects themselves, may change and the Company may elect not to pursue
one or more of the developmental stage projects described below. See "Risk
Factors--Project Level Risks--Early Stage of Development of Wireless
Projects."
TAIWAN NATIONAL ECTR
Background. Taiwan has a population of approximately 21.3 million people, of
which approximately seven million live in and around the capital of Taipei.
Taiwan's 1995 GDP per capita of approximately $12,485 was one of the highest
in Southeast Asia. Until recently, the telecommunications industry in Taiwan
was highly restricted, with only the government-owned telephone company
providing mobile communications of any form. In 1994, there were less than 40
telephone lines per 100 POPs. In early 1996, the government of Taiwan
announced that it would open up the country's telecommunications sector to
private enterprises.
The Project. The Company and the proposed shareholders of a Taiwanese
company to be called Taiwan Mobile Communications Corp. ("TMCC") have agreed
to file joint applications for a number of mobile voice and data licenses to
provide national coverage of Taiwan. This project was organized by Jason Wu
and Central Investment Holding, both of whom are existing shareholders of the
Company, and certain other proposed investors in TMCC. Selection of the
successful applicants by the government will not be done on the basis of an
auction, but rather based on the quality of the application, the expertise
demonstrated in the application and other factors. License applications have
been submitted, and license awards are expected to be announced during the
first quarter of 1997.
To date, the Company has funded $3.0 million to the project as a license
deposit to support the license applications. If such licenses are granted,
through a combination of direct and indirect ownership and revenue sharing
agreements, such deposit will be converted into a 20% economic interest in the
joint venture. The
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Company believes that, on the basis of its experience in providing ECTR
services and the quality of its local partners, it is well positioned to
receive one or more of the licenses for which it will apply, although no
assurance can be given that any such licenses will be awarded. See "Risk
Factors--Project Level Risks--Risk of Modification or Loss of Licenses;
Uncertainty as to the Availability, Cost and Terms of Licenses; Restrictions
on Licenses."
STAR TELECOM OVERSEAS
Background. The Company currently holds a 70% interest in Star Telecom
Overseas (Cayman Islands) Limited ("STOL"). STOL holds an equity interest in a
regional paging project in India and rights to an equity interest in a
national paging project in Taiwan and is actively pursuing paging
opportunities in Indonesia and Thailand. Pursuant to an agreement with Star
Telecom Holding Limited ("STHL"), which holds the remaining 30% interest in
STOL, the Company's interest may be reduced to approximately 57.1% upon the
exercise of options held by STHL as well as options that may be granted to
members of the senior management of STOL. STHL is a Hong Kong corporation that
is a wholly owned subsidiary of Star Telecom International Holding, Ltd., a
company listed on the Hong Kong stock exchange that owns one of the largest
paging operators and Internet service providers in Hong Kong. Pursuant to a
technical services agreement and a technology and trademark licensing
agreement between STHL and STOL, STHL has agreed to provide and/or license to
STOL certain technical services, personnel and know-how and certain technology
and other intellectual property for use in STOL's paging projects. Pursuant to
a management services agreement between the Company and STOL, the Company has
agreed to provide to STOL and its paging projects certain management,
financial and other operational services, personnel and know-how.
India Regional Paging. Through STOL, the Company holds an indirect interest
of approximately 7.7% in RPG Paging Service Limited ("RPSL"), a regional
provider of paging services in India. RPSL began operations in 1995 and, as of
June 30, 1996, had approximately 30,000 subscribers. STOL is currently
negotiating to increase its interest in RPSL to approximately 19%, which would
increase the Company's indirect interest in RPSL to approximately 13.3%. As of
June 30, 1996, RPSL provided paging services in New Delhi, Madras and
Ahmadabad, which together had approximately 14 million POPs, based on the most
recently available data. STOL's partners in RPSL are RPG Group ("RPG"), a
leading Indian manufacturer of chemical products and provider of
telecommunications services, and two Japanese companies, Itochu and Nippon
Telegraph and Telephone International ("NTTI"). As of June 30, 1996, each of
RPG, Itochu and NTTI held a 60%, 20% and 10% equity interest in RPSL,
respectively. In April 1995, STOL entered into an agreement with RPSL to
provide technical services for the installation, testing and commissioning of
its paging system and technical, sales and billing system training. As of
December 31, 1995, STOL had invested approximately $1.6 million in RPSL. The
Company currently anticipates future investments in RPSL by STOL of
approximately $200,000.
Taiwan National Paging. In 1996, the Taiwanese government adopted a policy
to liberalize the national telecommunications market for mobile services,
including cellular, trunked radio and paging. Pursuant to this policy, the
Taiwanese government invited applications for two nationwide paging licenses.
STOL is a member of a consortium led by Pacific Electric Wire and Cable
Limited, a large public Taiwanese telecommunications company and STOL's
partner in its Indonesian paging project ("PEWC"), that has applied for such a
national paging license. STOL has a right to a 20% economic interest in the
consortium, part of which is anticipated to be structured as a direct equity
interest. In July 1996, STOL funded approximately $3.0 million to the
consortium, which amount constitutes its pro-rata share of the minimum
capitalization required to be demonstrated by the consortium in support of its
license application. While the Company believes that the consortium is well
positioned to receive one of the nationwide paging licenses, there can be no
assurance that its application will be successful. See "Risk Factors--Project
Level Risks--Risk of Modification or Loss of Licenses; Uncertainty as to the
Availability, Cost and Terms of Licenses; Restrictions on Licenses." In the
event that the application is unsuccessful, the amounts funded by STOL to the
consortium, less bidding expenses, will be returned to STOL. Paging services
are currently available in Taiwan only through the government owned telephone
company. Therefore, the Company believes that a significant market for high
quality paging services currently exists in Taiwan.
In addition to the 14% indirect interest in the Taiwan Paging Project that
the Company holds through its 70% equity interest in STOL, the Company has
separately entered into agreements with a proposed partner in
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such project, pursuant to which the Company has the right to receive a 10%
economic interest in the project in exchange for the making of certain loans
to such shareholder.
Indonesia National Paging. In August 1995, STOL and PEWC entered into a MOU
with an Indonesian subsidiary of a leading Asian telecommunications company
with cellular operations in Indonesia. In 1995, this Indonesian company was
granted a 10-year license to provide national paging services. The Company
believes that only nine other licenses to provide paging services have been
granted by the Indonesian government and that it is unlikely that the
Indonesian government will issue additional licenses in the near future. The
terms of the MOU contemplate the formation of a joint venture between PEWC,
STOL and the Indonesian company to operate paging services under the
Indonesian company's licenses. It is intended that the Indonesian company
provide base station sites and sales outlets and guarantee financing for the
purchase of certain additional equipment. The Company anticipates that STOL
would invest approximately $3.2 million to acquire up to a 25% interest in
this joint venture, although no assurances can be given that the terms of such
investment will not differ substantially from those described above.
Thailand Paging. STOL is pursuing negotiations with a local Thai company to
form a joint venture that would provide paging services to the Royal Thai
Police Department (the "RTPD"). It is expected that the RTPD, which controls
the frequencies necessary to operate a paging network, would make such
frequencies available to STOL and its Thai partner under a 20-year license.
The network would initially serve police personnel and their relatives. The
Company anticipates that the network will also be used to provide security
related services to the general public. The Company expects that STOL would
initially invest approximately $8.0 million in exchange for a 25% interest in
this project.
CHINA REGIONAL CELLULAR
Background. The Company currently owns a 40% equity interest in Star Digitel
Limited ("SDL"), a Hong Kong corporation engaged in various cellular projects
in China. The Company's partner in SDL is STHL, the Company's partner in STOL,
which holds the remaining 60% of SDL.
In September 1996, in connection with its acquisition of an interest in SDL,
the Company entered into a subscription agreement (the "Subscription
Agreement") with STHL and SDL. In addition to the Company's initial investment
of $20 million for its 40% interest in SDL, which was paid in November 1996,
the Subscription Agreement also provides for the investment by the Company of
up to an additional $28 million if SDL achieves certain operational milestones
to the satisfaction of the Company in its sole discretion on or before August
7, 1997. If SDL does not achieve such milestones to the satisfaction of the
Company in its sole discretion on or before such date, the Company may
exchange its equity interest in SDL for a pre-determined number of ordinary
shares of Star Telecom International Holding Limited, the parent company of
STHL whose ordinary shares are listed on The Stock Exchange of Hong Kong
Limited, valued at an aggregate amount of $20 million.
The Project. In recent years, the Chinese People's Liberation Army (the
"PLA") has sought to use its extensive network of radio frequencies for
commercial purposes. To implement this policy, the PLA has created business
agencies which have developed and are operating regional cellular networks in
China with financial and technical support from foreign telecommunications
companies. SDL is the foreign partner in fourteen of these projects which, as
of June 30, 1996, were operational in the provinces of Guangdong, Sichuan,
Shangdong, Gansu, Hebei, Yunnan and Xinjiang. As of April 30, 1996, the
projects had approximately 20,000 subscribers in the aggregate.
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Details of these projects are set out in tabular form below:
SUMMARIZED DESCRIPTION OF STAR DIGITEL PROJECTS
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
TOTAL PROFIT
TERM OF PROFIT/REVENUE SHARING INVESTMENT (4) DISTRIBUTION
PROJECT COOPERATION ARRANGEMENTS (HK$'000) (HK$'000)
------- -------------- ------------------------ -------------- ------------
<C> <C> <S> <C> <C>
GUANGZHOU (1) 20 years from 65.00% of revenue for 72,691
(Guangdong July 7, 1995 first 7 years;
Province) 47.00% thereafter
--plus--
GUANGZHOU 15 years from 100.00% of proceeds from 10,542
SWITCH (1) May 20, 1994 sale of phone lines sold
(Guangdong during first four years
Province) (up to a maximum of
3,000 lines) and 50.00%
of proceeds from balance
of 3,000 lines sold
thereafter. Plus 50.00%
of revenue (ie airtime)
from such lines.
--------------
Total: 83,233 19,669
Note 5: (70.6%)
SHENZEN (1) 15 years from 40.00% of revenue for 38,081 2,088
(Guangdong March 15, 1995 first 6 years; revenue Note 5: (100.0%)
Province) sharing for balance of
contract to be tied to
broader provincial
agreement.
HUIZHOU (2) 15 years from 70.00% of net profits 22, 869
(Guangdong the time that until SDL recovers its Note 5: (51.7%)
Province) 1,000 investment; 50.00%
users are thereafter
reached
SHANTOU (2) 15 years from 65.00% of net profits 19,501
(Guangdong the time that during the first 5 Note 5: (15.0%)
Province) 1,000 years; 50.00% thereafter
users are
reached
DONGGUAN (2) 15 years from 65.00% of net profits 3, 765
(Guangdong Commencement during first 4 years; Note 5: (80.6%)
Province) 47.00% thereafter
JINAN (1) 15 years from 60.00% of revenue until 23,406 1,910
(Shandong January 15, SDL recovers its Note 5: (80.6%)
Province) 1995 investment; 40.00%
thereafter
QINGDAO (2) 20 years from 100.00% of revenue until 25,954
(Shandong July 1, 1996 SDL recovers its Note 5: (0.0%)
Province) investment; 48.00% of
net profits thereafter
HEBEI (3) 15 years from 100.00% of revenue until 103,684
(Hebei Province) Commencement SDL recovers its Note 5: (9.3%)
investment; 30.00% of
net profits thereafter
CHENGDU (1) 15 years from 70.00% of revenue during 23,693 7,308
(Sichuan Province) October 15, the first 5 years; Note 5: (10.3%)
1996 50.00% for years 6
through 10; and 40.00%
for the remaining 5
years
LANZHOU (1) 15 years from 70.00% of net profits 27,559 1,631
(Gansu Province) October 15, for first 5 years; Note 5: (60.3%)
1996 50.00% for next 5 years;
and 35.00% thereafter
URUMQI (3) 20 years from Not yet specified 42
(Xinjiang Commencement Note 5: (0.0%)
Province)
HAIKOU (3) 15 years from 60.00% of all revenues 58,386 0
(Hainan Province) Commencement plus 100.00% of profit Note 5: (3.4%)
from telephone sales
plus roaming revenue
from outside Hainan
KUMMING (3) 20 years from 60.00% of revenue 717
(Yunnan Province) Commencement throughout Note 5: (0.0%)
-------------- ------
Total: 430,890 32,606
============== ======
1994 Distribution: 16,731
1995 Distribution: 9,774
1996 (first 6 months) 6,101
Distribution:
------
Total: 32,606
======
</TABLE>
- --------
(1) Project is operational
(2) Project is under construction
(3) Project is pre-construction
(4) Project investments comprise the following (in HK$'000)
<TABLE>
<S> <C>
Cellular network equipment (contributed to projects)............ 200,594
Cellular network equipment (sold to project partners and treated
in SDL's unaudited June 30, 1996 financial statements as a non-
recurring long-term receivable)................................ 100,869
Ancillary equipment............................................. 14,253
Frequency rights and other costs................................ 100,346
Project expenses................................................ 14,828
-------
Total........................................................... 430,890
=======
</TABLE>
(5) Reflects percentage of investment funded through loans from subsidiaries
and other affiliates of SDL.
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Given that foreign ownership of telecommunications ventures is prohibited in
China, SDL has entered into cooperative agreements with PLA operators pursuant
to which SDL is providing equipment and technical and engineering services
necessary to build and operate the networks. These cooperative agreements
comprise either revenue or profit sharing arrangements pursuant to which SDL
is generally allocated a portion of the revenues or profits collected by the
PLA until SDL's development costs are reimbursed, at which time SDL's share of
revenues or profits will be reduced. Certain of these cooperative agreements
include purchase and sale agreements whereby SDL provides network
infrastructure equipment to the PLA. The cooperation agreements have terms
ranging from 10 to 20 years. SDL's percentage of revenues or profits ranges
from 40% to 100% during the initial years and declines thereafter to as little
as 30% of profits.
SDL's turnover increased from HK$26.1 million (US$3.4 million) in 1994 to
HK$254.9 million (US$33.0 million) in 1995, a rise of 976%. This was primarily
due to the one-off sale of cellular network equipment in an aggregate amount
of HK$203.4 (US$26.3 million) to SDL's local partners in the Qingdao and Hebei
projects. The related profits arising from the sale of this equipment that
have been recognized in SDL's 1995 financial statements amount to HK$98.8
million (US$12.8 million). The sales proceeds are to be received over three
and four years for Hebei and Qingdao respectively and, to date, a total of
HK$102.0 million (US$12.8 million) has been received. Under the terms of these
sales agreement, SDL may also have the right to receive additional amounts to
the extent that the profitability of the two projects exceeds the minimum
scheduled payment installments.
Because the return to SDL under the cooperation agreements is a function of
the future profitability of the projects, funds invested by SDL in the
projects are treated as an investment and recorded as Interests in Mobile
Telephone Projects on SDL's balance sheet. As of April 30, 1996, SDL had
invested approximately HK$386 million (US $49.9 million) in the various
cellular projects in China. Of this amount, approximately HK$187 million
(US$24.2 million) is recorded as Interest in Mobile Telephone Projects and the
balance has been expensed.
The existing PLA cellular networks did not allow interconnection with the
public telephone system until 1995 when the Chinese Ministry of Post and
Telecommunications (the "MPT") agreed to cooperate with the PLA in operating
the PLA's existing cellular networks and developing further projects. The
joint venture entities formed as a result of this agreement are referred to as
the China Telecom Great Wall Mobile Communications ("China Telecom Great
Wall") joint ventures, pursuant to which the MPT would provide interconnection
with the public telephone system and numbering services and the PLA would make
available its 800 MHz frequencies and base station sites.
SDL intends to participate in the China Telecom Great Wall projects by
providing the financing, technical and engineering services necessary for the
construction and operation of the China Telecom Great Wall networks for a
fixed period of time under profit sharing arrangements. SDL intends initially
to enter into agreements with China Telecom Great Wall joint ventures to
construct additional networks in the provinces of Shangdong, Hebei, Guangdong
and Hainan.
PAKISTAN NATIONAL ECTR
Background. Pakistan has a population of approximately 130 million people
and is one of the largest countries in the world. The Company believes that
there exists substantial unmet demand for telephone services, as evidenced by
only 1.6 telephone lines in Pakistan per 100 POPs. Pakistan's real GDP grew at
a rate of approximately 4.5% during the year ended December 31, 1995.
Political unrest, which has inhibited foreign investment in Pakistan in the
past, has generally abated.
The Project. In December 1995, the Company formed Mobilcom (Private) Limited
("Mobilcom Pakistan"). The Company presently owns 100% of Mobilcom Pakistan,
but expects that a 10% interest will be acquired by its local partner, Habib
Rafiq International (Private) Limited ("Habib"). Habib is a major conglomerate
in Pakistan with interests in construction and other industries in addition to
telecommunications.
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A national trunked radio license, with an initial term of 15 years, has been
issued to Mobilcom Pakistan. Various frequency bands have been made available
by the government of Pakistan for trunked radio. Mobilcom Pakistan has chosen
800 MHz frequency band and is awaiting government confirmation of the Mobilcom
Pakistan frequency choice. Mobilcom Pakistan's business plan calls for
building regional networks covering most of the major population centers of
the country, including Karachi, Lahore and Islamabad and later connecting them
along major highways. Though a number of other trunked radio licenses have
been granted, the Company believes that other networks will provide only local
dispatch service and will not effectively compete with Mobilcom Pakistan's
regional/national network. Also, the Pakistan market is particularly
attractive as PMR systems have historically not been allowed in Pakistan.
MEXICO WLL
Background. In March 1996, a local company was incorporated in Mexico City
by a prominent Mexican business person (the "Mexican Partner") to provide
telecommunications services in Mexico.
In May 1996, another local company was incorporated by the Mexican Partner
in Mexico City to pursue a WLL business. This company expects to receive a
national WLL license within the next several months and has developed a
preliminary business plan and secured initial staffing.
The Mexican Partner executed an MOU with the Company in June 1996 giving the
Company the option to purchase a 40% ownership interest in each of the two
local companies described above, both of which are currently owned by the
Mexican Partner and certain associates. The anticipated investment by the
Company in the two local companies described above, in the event the Company
exercises its options, would be an aggregate of approximately $18.5 million.
The MOU also contemplates that one or more strategic partners may be invited
to purchase equity interests in the local companies.
In the event the Company and the Mexican Partner elect to proceed with the
investments described above, the local companies are expected to be organized
and managed on a coordinated basis, with each supporting the operations of the
other. The Company anticipates entering into a shareholders agreement with the
Mexican Partner providing, among other things, that each shareholder will
provide its proportionate share of all financing and all guarantees required
for capital equipment and operating expenses of each of the local companies
and make its proportional share of any and all capital contributions required
by each such company's approved business plan. In addition, each of the
Company and the Mexican Partner is expected to enter into a service agreement
with the local company formed to pursue the WLL business, pursuant to which it
would provide engineering, technical, marketing and management support to such
company.
PERU NATIONAL ECTR
Background. Peru has a population of 23.8 million. Peru's 1995 GDP per
capita was $2,640 and real GDP grew at a rate of approximately 6.6% during the
year ended December 31, 1995. Peru also has one of the least developed
telephone networks in Latin America, with only 3.3 telephone lines per 100
POPs and a waiting time for installation of approximately 4.3 years in 1994.
The Company estimates that approximately half of Peru's telephone lines are
located in Lima, representing a penetration rate in the city of approximately
5% and a penetration rate in the remainder of the country of less than 1%. The
main providers of telecommunications services in Peru are currently Telefonica
de Peru, the national telephone company that following privatization in 1994
is now majority owned by Telefonica de Espana, and Tele2000, a regional
cellular operator owned by the Delgado Parker Group.
The deregulation of the telecommunications industry in Peru, other than the
removal of restrictions on foreign ownership, includes the opening up of
spectrum grants to private enterprises and the reduction of import duties on
telecommunications equipment from a 1990 level of 66% to a current level
averaging approximately 16.5%.
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In May 1995 PeruTel S.A. ("PeruTel") was incorporated in Lima, Peru to apply
for ECTR radio licenses in Peru. The Company owns a 98% interest in PeruTel,
with the remainder owned by Promociones Telefonicas S.A. ("Protelsa"), a local
telecommunications engineering company that prepared the license application on
behalf of PeruTel, and Marmaud S.A. ("Marmaud"), the parent of Protelsa. In
November 1995, PeruTel was advised by the Director General of
Telecommunications that, subject to certain conditions that were subsequently
satisfied, it had been awarded up to 100 channels in the 800 MHz frequency band
for the provision of mobile trunked radio communications throughout Peru.
As part of its license application, PeruTel prepared and submitted a network
design to the Ministry of Telecommunications. Currently, PeruTel is awaiting
receipt of the proposed tariff agreement from the Ministry of
Telecommunications and, once finalized, it will then have 12 months to commence
construction of its network. The Company has invested approximately $200,000 in
connection with the establishment of PeruTel to date. An additional investment
of approximately $17.6 million will be required by December 31, 1997 if PeruTel
is to meet its business plan.
COMPETITION
Because the implementation of wireless technologies is at a early stage of
development in many developing countries, the Company believes there are
significant opportunities to form, develop and operate companies that deploy
these technologies. The Company believes its business will become increasingly
competitive, particularly as businesses and foreign governments realize the
market potential of wireless technologies. A number of large American, Japanese
and European companies, including RBOCs and major international carriers, are
actively engaged in programs to develop and commercialize wireless technologies
in developing countries. Most of these companies have substantially greater
financial and other resources, research and development staffs and technical
and marketing capabilities than the Company. The Company's operating companies
and developmental stage projects will frequently compete against traditional
land-line companies (i.e. local telephone companies), cellular telephone
companies and direct competitors using the same wireless technologies as the
operating companies. The Company's competitive strategy depends on the service
offered and the competitor. For example, the Company's strategy is for its ECTR
operating companies to compete against cellular telephone service providers by
offering greater functionality at lower cost, particularly for business users,
to compete against traditional land-line carriers by offering better service,
faster deployment and lower construction costs and to compete against direct
competitors, including those formed by large American, Japanese and European
companies, by relying on local partners to obtain operating licenses and
provide access to existing telecommunications asset bases. There will, however,
be increasing competition for licenses; and there will be increased competition
once licenses are obtained from both other wireless operators and, in some
cases, from government-owned telephone companies. Although the Company intends
to employ new technologies, there will be a continuing competitive threat that
even newer technologies will render the wireless systems employed by certain
operating companies obsolete. There is no assurance that any of the Company's
operating companies or developmental stage projects will compete successfully
in the marketplace. See "Risk Factors--Project Level Risks--Competition."
TECHNOLOGY
Cellular Telephone
Cellular telephone was first commercially introduced in Sweden in 1976.
Commercial introduction in the United States occurred in 1983. Cellular
services are now broadly available in developed countries and are available or
being introduced in most developing countries around the world.
The principle of cellular telephone service is coverage of the target market
with a number of overlapping "cells" each centered on a low tower or cell site.
In its simplest configuration, a cellular telephone system consists of a series
of cell sites, each with a cellular tower. Cell sites are linked to a mobile
telephone switching office, which consists of a central computer which controls
the network, and a switch to route calls between cells and the public switched
telephone network.
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Currently, most cellular systems use analog technologies such as AMPS (U.S.
standard), TACS (UK/European standard) or NMT (European standard). In some high
density markets analog systems are reaching their capacity limits and are being
supplemented with new digital technologies that offer greater capacity than
analog systems.
Several digital cellular technologies have been developed in the last three
to five years. D-AMPS has been introduced as an upgrade for operators of
existing AMPS systems. D-AMPS nominally provides three times the capacity of
analog systems and is now a mature and well proven technology. In Europe, the
Global System for Mobile Communication ("GSM") standard has been developed and
is widely available throughout Europe and Asia. GSM provides approximately two
to three times the capacity of analog systems and has the additional benefit of
international roaming due to its broad availability and system compatibility.
Another new digital technology, Code Division Multiple Access ("CDMA"), is
being introduced in the U.S. and several other major countries. CDMA provides
the highest capacity of any digital cellular technology at this point, with six
to ten times analog system capacity in a mobile environment. Its first
commercial deployment in Hong Kong has been successful, and it is now being
planned for deployment in Personal Communications Services ("PCS") networks in
the United States and elsewhere.
Despite the introduction of these digital technologies, analog networks
continue to dominate markets in most countries. For example, even after the
introduction of GSM services in Scandinavia, the NMT analog service continues
to experience significant growth, partly due to its superior coverage outside
of the major cities in the region. Two new enhancements, NMT 450-I and NMT 900-
I, provide NMT networks with GSM-like functionality, including calling number
display, short message service, voice mail indicator and real-time clock. In
addition, a common GSM/NMT number facility is now available.
Spectrum for cellular is usually allocated in the 400 MHz, 800 MHz or 900 MHz
frequency bands, depending on the country and the standard used. In many
countries, spectrum is also being made available in the 1.8 and 1.9 GHz "PCN"
and PCS bands. PCS is essentially a variant of cellular telephone operating in
different frequency ranges, but providing similar services. In the US market,
PCS is being targeted mainly towards the residential and individual subscriber
markets, where it competes not only with cellular but with existing wireline
telephone services. In developing countries, the availability of PCS spectrum
provides opportunities for operators to address both the mobile and fixed
telephone markets.
Wireless Local Loop
WLL refers to a group of technologies designed to provide customer access to
the public switched telephone network using wireless radio technologies rather
than traditional wire or fiber optic lines.
A WLL system typically consists of a number of radio base stations (similar
to cell sites used for cellular telephone) covering the target market area, a
switching center, and fixed subscriber terminals on the subscriber's premises.
On the fixed subscriber terminal a standard telephone jack allows connection to
standard telephone equipment. In some systems portable handsets are available,
providing the added value of wide-area cordless telephone service to the
subscriber.
The Company believes that WLL is an attractive technology for the rapid
expansion of telephone facilities in developing countries. The use of digital
technology provides substantially greater capacity than analog alternatives
which the Company believes results in WLL being a cost-effective communications
solution.
Several types of technology can be used to provide WLL. These include (i)
cellular telephone technologies such as CDMA, D-AMPS or GSM which are suitable
for providing WLL, wide-area cordless and combined WLL/PCS services, (ii) "PSTN
Transparent" technologies, designed specifically for WLL applications, which
provide a direct replacement to the traditional wireline (cable based) local
loop in a manner which is completely transparent to the user, and (iii) new
digital cordless technologies such as Digital European Cordless Telephone
(DECT) and the Japanese Personal HandiPhone System (PHP/PHS).
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Enhanced Capacity Trunked Radio
ECTR refers to a group of technologies designed to provide a combination of
cellular telephone, specialized mobile radio ("SMR") dispatch services, paging
services, data services, wide-area subscriber roaming and fixed site services
(WLL) all on a single system. Typically known as "Business Cellular," or
"Business Communications Services," the technology was developed in Europe in
the early 1980's as an outgrowth of previously developed cellular telephone and
trunked radio technology. Trunked radio was developed in the U.S. in the early
1970's to allow users of traditional single channel, PMR systems to share
channels in a dynamic manner, thereby increasing system capacity and reducing
competition for channels among users. Trunked radio has been traditionally used
for dispatching trucks, taxis, and other fleet vehicles.
In creating ECTR, a group of leading manufacturers (Nokia, Motorola,
Phillips) combined existing cellular telephone and trunked radio technologies
and incorporated new features to optimize the technology for business users.
The resulting "MPT 1327" technology is now one of the leading trunked radio
technologies in the world in terms of number of countries in which it is
deployed. Most countries in Western Europe now have commercial MPT 1327
systems, as do many countries in Eastern Europe, Asia and Latin America.
MPT 1327 is a combination of analog (traffic channels) and digital (control
channels) technology. An MPT 1327 system user can (i) make cellular calls on
terminals similar in size to GSM cellular telephone terminals, (ii) dispatch
vehicles and control field personnel, (iii) transmit data to fax machines and
mobile and fixed site computers, (iv) page users and provide short messages on
the terminal display, (v) connect out-of-office employees into office PABXs to
provide the functionality of the office PABX away from the office, and
(vi) provide primary or second line service to fixed sites (wireless local
loop). The Company believes that MPT 1327 ECTR technology provides these
capabilities at a lower cost per subscriber than cellular telephone in most
applications.
An added advantage of MPT 1327 ECTR is its ability to operate in numerous
frequency bands. The Company has found that this frequency flexibility makes it
easier to obtain frequency allocations to establish ECTR operations in
developing countries. Also, as MPT 1327 supports cellular calling services, the
Company has been able to obtain substantial blocks of ECTR frequency in its
project countries, and provide business cellular service, without paying the
high license fees typically paid for cellular licenses.
ECTR technologies continue to develop and evolve. The Company continually
evaluates these developments and adapts them as appropriate.
Paging
Paging is a well-established technology, with service widely available in
most developed and developing countries. A paging system typically consists of
a number of transmitter sites, connected to a central messaging center. The
messaging center receives incoming messages from the public telephone network
and prepares batches of messages for transmission to subscribers.
Paging systems are normally based on industry standard transmission
protocols, the most common being POCSAG 512. Newer systems such as POCSAG 1200
and Motorola "Flex" provide higher capacity by using higher transmission
speeds.
Two way paging systems are now available, allowing message acknowledgment
responses and short data messages to be sent back by the paging subscriber.
These systems normally require multiple receiver sites in the network to ensure
reliable reception of low power transmissions from pagers. Depending on the
technology used, existing paging systems can be upgraded to incorporate this
capability.
As paging networks are essentially broadcast messaging systems additional
applications can also be supported by the existing infrastructure, such as news
retrieval, stock market quotes and weather forecasts. In developing countries
where telephone penetration is low, paging often provides an affordable
alternative to public telephone service. The high penetration rates of paging
in China and Hong Kong are indicative of this phenomenon. When used in
conjunction with public voice mail services (which are often provided by paging
operators), a "virtual telephone" service can be provided.
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Wireless Cable Television
MMDS, commonly known as wireless cable television, transmits video
programming through broadcast microwaves instead of coaxial cable, providing
cable television-type services to subscribers. The Company
believes that MMDS is a cost-effective means of delivering video programming
to the home, particularly in developing countries where existing cable
infrastructure is underdeveloped or non-existent.
MMDS provides for wireless transmission from one or more central
transmitters directly to subscribers' rooftop antennas. The transmitter site
is co-located with or connected to a "headend" similar to that of a
traditional cable system, which receives programming from satellites, local
production studios or video tape. Conventional MMDS transmitters are capable
of delivering quality signals to subscribers within 20 to 30 miles of the
transmitter site.
The Company has developed an alternative MMDS system design which operates
in frequency ranges which are much higher than those of traditional MMDS
systems. The Company believes that licenses to provide MMDS services in these
frequency ranges may be more easily obtained than licenses to provide such
services in conventional MMDS frequency ranges. In addition, this alternative
system architecture is comprised of readily available electronic components.
As a result, the Company believes that this new system design holds great
potential in its targeted developing countries.
EMPLOYEES
As of September 30, 1996, the Company had 28 employees, including 7 local
country managers. None of the Company's employees are subject to collective
bargaining agreements. The Company believes that its relations with its
employees are good. The Company's operating companies had an aggregate of
approximately 525 employees at the end of September 30, 1996.
LEGAL PROCEEDINGS
The Company is not a party to any litigation at the present time.
FACILITIES
The Company leases approximately 2,800 square feet of space in a facility
located in San Mateo, California. The lease provides for current annual rent,
including expenses, of approximately $60,000 per year. Lease payments are
subject to adjustment in the event of increases in property taxes and other
events.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of September 30, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Haynes G. Griffin(1).... 49 Chairman of the Board
John D. Lockton......... 58 President, Chief Executive Officer and Director
Hugh B. L. McClung...... 55 Vice Chairman of the Board and Managing Director, Asia
Clarence "Sam" Endy..... 58 Executive Vice President, Operations and Chief Operating Officer
Douglas S. Sinclair..... 42 Executive Vice President and Chief Financial Officer
Patrick Ciganer......... 45 Senior Vice President, Latin America
Robert M. Curran........ 42 Senior Vice President, Marketing
Roger Quayle............ 42 Senior Vice President, Technology
Aarti C. Gurnani........ 29 Vice President, Legal Affairs and Secretary
Stephen R. Leeolou(2)... 39 Director
Piers Playfair.......... 37 Director
John S. McCarthy(2)..... 48 Director
Carl C. Cordova
III(1)(2).............. 34 Director
Brian Rich.............. 35 Director
Van Snowdon............. 41 Director
Carl F. Pascarella(1)... 53 Director
Stanley Wen............. 41 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Griffin was elected Chairman of the Board of Directors of the Company in
June 1996. Mr. Griffin is a co-founder of Vanguard Cellular Systems, Inc., a
wireless cellular telephone company ("Vanguard"), and has served as President
and Chief Executive Officer of Vanguard since 1984. Mr. Griffin also serves as
a director of Lexington Global Asset Managers, Inc. and Geotek Communications,
Inc. Mr. Griffin holds a B.A. in Economics from Princeton University.
Mr. Lockton is a co-founder of the Company and has served as President,
Chief Executive Officer and a director of the Company since August 1991. From
May 1991 to August 1991, he was Managing Partner of Corporate Technology
Partners ("CTP"), a partnership formed to pursue wireless communications
licenses and form local wireless communications businesses in developing
countries. In 1988, he founded Cellular Data, Inc., a wireless company, and
Star Associates, Inc., a cellular radio RSA company. From 1983 to mid-1986,
Mr. Lockton was Executive Vice President for Pacific Bell Company, with
responsibilities including its wireless business. Mr. Lockton has been a
director of Interactive Network, Inc., a wireless based interactive television
company, since 1987 and was Chairman of the Board of Directors until 1994. Mr.
Lockton holds a B.A. in Economics and Chemical Engineering from Yale
University, an L.L.B. from Harvard Law School and an Executive M.B.A. from the
Columbia University Business School.
Mr. McClung is a co-founder of the Company and has served as Vice Chairman
of the Board of Directors since December 1995 and Managing Director, Asia
since January 1996. Mr. McClung served as Chairman of the Board of Directors
of the Company from January 1992 to December 1995, and served as Chief
Financial Officer of the Company from January 1992 until April 1995. From 1986
to 1991, he was a general partner of CTP, which he co-founded to pursue
wireless communications licenses and form local wireless communications
businesses in developing countries. Mr. McClung holds a B.A. in Economics and
an M.B.A. from the University of Washington.
Mr. Endy has served as Chief Operating Officer of the Company since June
1996 and has served as Executive Vice President, Operations of the Company
since August 1994. From July 1988 to May 1994,
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Mr. Endy held the positions of Senior Vice President, Service and Engineering,
Senior Vice President, Marketing and Sales and Chief Service Officer at Centex
Telemanagement, Inc., a telecommunications management company. Mr. Endy served
as a member of the Board of Directors of TeamTalk and currently serves on the
Board of Directors of Mobilkom and STW. Mr. Endy holds a B.S. in Military
Science from the U.S. Military Academy, West Point, an M.S. in Electrical
Engineering from Purdue University and a Ph.D. in Electrical Engineering from
Purdue University.
Mr. Sinclair has served as Executive Vice President and Chief Financial
Officer of the Company since May 1995. From March 1993 to May 1995, Mr.
Sinclair was Chief Financial Officer, Secretary and Treasurer of Pittencrieff
Communications, Inc., a major U.S. trunked radio operator. From March 1990 to
March 1993, Mr. Sinclair was Group Finance Director of Pittencrieff, plc.,
Scotland, an oil exploration and development company. Mr. Sinclair is a member
of the Board of Directors of TeamTalk and Wireless Data Services. Mr. Sinclair
holds a B.Sc. in Electrical & Electronic Engineering from the University of
Glasgow and an M.B.A. from the Harvard Graduate School of Business
Administration.
Mr. Ciganer has served as Senior Vice President, Latin America of the
Company since May 1996 and Vice President, Operations--Latin America of the
Company from January 1994 to April 1996. From May 1992 to January 1994, Mr.
Ciganer was Chief Executive Officer of Transcom Corporation, a wireless
telecommunications engineering and service organization. From November 1990 to
April 1992, Mr. Ciganer was a director and co-founder of Chronos Tracking
Systems, Ltd., a privately financed wireless data start-up company. Mr.
Ciganer holds a B.A. in Economics from Georgetown University.
Mr. Curran has served as Senior Vice President, Marketing of the Company
since August 1996. From March to August 1996, Mr. Curran was Vice President,
Marketing of 360(degrees) Communications Company, a U.S. cellular operator
that is the successor corporation to Sprint Cellular Company ("Sprint
Cellular"), a U.S. cellular operator that was wholly owned by Sprint
Corporation. From February 1994 to March 1996, Mr. Curran served as Vice
President, Marketing for Sprint Cellular, and from September 1990 to February
1994, he served as Regional Vice President for Sprint Cellular. From March
1980 to September 1990, Mr. Curran served in various positions with Centel
Cellular Company, a U.S. cellular operator, and Centel Supply Company, a
telecommunications equipment supplier. Mr. Curran holds a B.S. in Criminal
Justice from the University of Nebraska and has participated in the Executive
Development Programs of Columbia University and Northwestern University.
Mr. Quayle has served as Senior Vice President, Technology of the Company
since May 1996, prior to which he served as Vice President, Technology of the
Company from May 1995 to April 1996 and as Vice President, Asian Operations
from August 1994 to May 1995. From July 1991 to the present, he has held
various management positions with Broadcast Communications Ltd., the
government-owned national broadcasting and telecommunications network company
of New Zealand, most recently as General Manager of Technology and Business
Development.
Ms. Gurnani has served as Vice President, Legal Affairs of the Company since
March 1996 and as Secretary of the Company since August 1996. From July 1993
to March 1996, Ms. Gurnani was an Associate at Brobeck, Phleger & Harrison
LLP, a private law firm. Ms. Gurnani holds a B.S. in Medical Microbiology from
Stanford University and a J.D. from Hastings College of the Law.
Mr. Leeolou has served as a director of the Company since February 1994 and
served as Chairman of the Board of Directors of the Company from December 1995
until June 1996. Mr. Leeolou is a co-founder of Vanguard and has served as its
Executive Vice President, Chief Operating Officer and Secretary since 1984.
Mr. Leeolou holds a B.A. in Communications from James Madison University.
Mr. McCarthy has served as a director of the Company since May 1993. Since
December 1984, Mr. McCarthy has been a General Partner of Gateway Associates,
a venture capital firm which he co-founded ("Gateway Associates"). Mr.
McCarthy also serves on the Boards of Directors of Transaction Network
Services,
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Inc., a publicly held electronic data telecommunications company, D & K
Wholesale Drug, Inc., a publicly held company. Mr. McCarthy also serves on the
boards of directors of Tek Now, Inc., a private paging networks system
company, and NetSolve, Inc., a private data communications network company.
Mr. McCarthy holds a B.S. in Business from Washington University and an M.B.A.
from St. Louis University.
Mr. Cordova has served as a director of the Company since December 1995. Mr.
Cordova is a Vice President of Electra Inc., a subsidiary of Electra
Investment Trust PLC, which he joined in 1993. He serves on the Boards of
Directors of a number of media and telecommunications companies. Prior to
joining Electra Inc., he was a Vice President of Columbia Capital Group. Mr.
Cordova received a B.A. from Gettysburg College and an M.B.A. from The Wharton
School of the University of Pennsylvania.
Mr. Rich has served as a director of the Company since December 1995. Since
July 1995, Mr. Rich has served as Managing Director and Group Head of Toronto
Dominion Capital, the U.S. merchant bank affiliate of Toronto Dominion Bank.
From September 1990 to July 1995 he served as Managing Director of
Communications Finance Group of The Toronto Dominion Bank in New York where he
focused on transactions in the wireless communications, cable and broadcast
industries. Mr. Rich also serves as a member of the Board of Directors of
Teletrac, Inc. and InterAct, Inc. Mr. Rich holds a B.S. in Engineering from
State University of New York at Buffalo and an M.B.A. from Columbia
University.
Mr. Snowdon has served as a director of the Company since March 1996. From
December 1995 to the present, Mr. Snowdon has served as Vice President of
Vanguard Communications, Inc., a subsidiary of Vanguard. From January 1990 to
December 1995, he was Vice President of Vanguard International
Telecommunications, Inc., a subsidiary of Vanguard. Mr. Snowdon also serves on
the Board of Directors of Servicecellular S.A., and Digitel-Telecommunications
Ltd. Mr. Snowdon holds a B.S. in Management and Marketing and an M.B.A. from
James Madison University.
Mr. Pascarella has served as a director of the Company since April 1996.
Since August 1993, Mr. Pascarella has served as President and Chief Executive
Officer of Visa U.S.A. Mr. Pascarella initially joined Visa International in
January 1983 as Assistant Chief General Manager of the Asia-Pacific region and
shortly thereafter was appointed President of Visa International's Asia-
Pacific region and director of the Asia-Pacific Regional Board of the
organization. Mr. Pascarella has served as a member of the Board of Directors
of General Magic. Mr. Pascarella holds a B.S. in Accounting from the State
University of New York at Buffalo and an M.B.A. from the Stanford Graduate
School of Business.
Mr. Playfair has served as a director of the Company since June 1996. Since
January 1996, Mr. Playfair has served as a Managing Principal of Bassini,
Playfair + Associates, LLC, an investment firm which he co-founded, and from
September 1990 to December 1995, he was a Managing Director and International
Portfolio Manager of BEA Associates. Mr. Playfair holds a B.A. from the School
of Slavonic and East European Studies, University of London and a post-
graduate degree from the Polytechnic of Central London.
Mr. Wen has served as a director of the Company since March 1996. Since May
1993, Mr. Wen has served as a Manager of Tai-Shin Management Consulting Co.,
Ltd. From May 1992 to May 1993, he was a Senior Engineer at Taiwan Aerospace
Co., Ltd., a Taiwanese aerospace company. Mr. Wen holds a B.S. in Electrical
Engineering from Virginia Military Institute and an M.S. in Industrial
Engineering from West Virginia University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has two standing committees: (i) an Audit
Committee (the "Audit Committee"); and (ii) a Compensation Committee (the
"Compensation Committee"). The Board of Directors may also establish other
committees to assist in the discharge of its responsibilities.
The duties of the Audit Committee include recommending independent auditors
to the Board of Directors, reviewing the intended scope of the annual audit
and the audit methods and principles being applied by the independent auditors
and the fees charged by the independent auditors, reviewing and discussing the
results of
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<PAGE>
the audit, reviewing the Company's significant accounting principles, policies
and practices and undertaking related matters. KPMG Peat Marwick LLP presently
serves as the independent auditors of the Company. The Audit Committee is
currently comprised of Messrs. Cordova, Leeolou and McCarthy.
The duties of the Compensation Committee include providing guidance and
periodic monitoring for all corporate compensation, benefit, perquisite and
employee equity programs, including those for all corporate officers, and
succession planning for corporate officers. The Compensation Committee is
currently comprised of Messrs. Cordova, Griffin and Pascarella.
ARRANGEMENTS CONCERNING ELECTION OF DIRECTORS
Pursuant to the Company's Amended and Restated Certificate of Incorporation
(the "Certificate"), (i) Vanguard, as the holder of Series E Preferred Stock
(as defined below), is entitled to elect three directors to the Company's
Board of Directors; and (ii) for so long as 20% of the shares of Series F
Preferred Stock (as defined below) remain outstanding, the holders of Series
F-1 Preferred Stock (as defined below) are entitled to elect three directors,
one of whom Electra has the right to elect, one of whom Central Investment
Holdings, Inc. ("CIH") has the right to elect and one of whom Toronto Dominion
Investments Inc. ("TDI") has the right, subject to the conversion of its
Series F-2 Preferred Stock (as defined below) into Series F-1 Preferred Stock,
to elect (subject, in each case, to minimum stock ownership requirements).
Pursuant to the IRA (as defined below), upon termination of the rights
referred to in clause (ii) of the preceding sentence, for so long as 20% of
the Series F Preferred Stock or the Common Stock issued or issuable upon
conversion thereof (the "Series F Conversion Shares") are held by Series F
Holders (as defined in the IRA), holders of the Company's Preferred Stock
("Preferred Stock") and certain transferees thereof have agreed to vote for
three directors designated by a majority of the Series F Conversion Shares,
one of whom Electra has the right to designate, one of whom CIH has the right
to designate and one of whom TDI has the right to designate (subject, in each
case, to minimum stock ownership requirements). The Company's Board of
Directors includes: Messrs. Griffin, Leeolou and Snowdon, who are
representatives of Vanguard; Mr. Cordova, who is a representative of Electra;
Mr. Wen, who is a representative of CIH; and Mr. Rich, who is a representative
of TDI.
The holders of Series F-1 Preferred Stock have certain additional rights
with respect to the election of one additional director upon the occurrence of
certain events specified in the Series F Purchase Agreement (as defined
below).
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
The Certificate limits the liability of the Company's directors for monetary
damages arising from a breach of their fiduciary duty as directors, except to
the extent otherwise required by the Delaware General Corporation Law
("Delaware Law"). Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware Law. The Company has
also entered into indemnification agreements with its officers, directors, and
certain other employees containing provisions that may require the Company,
among other things, to indemnify such persons against certain liabilities that
may arise by reason of their status or service as directors, officers or
employees of the Company (other than liabilities arising from willful
misconduct of a culpable nature) and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their service as members
of the Board of Directors, although they are reimbursed for their expenses in
attending Board and Committee meetings. Certain outside directors have been
granted options to purchase shares of Common Stock in connection with their
service as directors of the Company as follows: Stephen R. Leeolou--80,000
shares at an exercise price of $8.12 per share granted in March 1996; John S.
McCarthy--12,000 shares at an exercise price of $2 per share granted in
October 1994; and Carl F. Pascarella--12,000 shares at an exercise price of
$8.12 per share granted in June 1996.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and four other most highly compensated executive
officers, each of whom earned salary and bonus for the fiscal year ended
December 31, 1995 in excess of $100,000 (collectively, the "Named Officers"),
for services rendered in all capacities to the Company during its previous
fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
------------------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
John D. Lockton
President and Chief Executive
Officer...................... $ 120,000 $ 50,000 0 $ 0
Hugh B. L. McClung
Vice Chairman of the Board and
Managing Director, Asia....... $ 120,000 $ 50,000 0 $ 0
Clarence Endy
Executive Vice President,
Operations and Chief
Operating Officer............ $ 195,000 $ 20,000 0 $ 0
Douglas S. Sinclair(1)
Executive Vice President and
Chief Financial Officer....... $ 100,104 $ 15,000 120,000 $116,122(2)
Patrick Ciganer
Senior Vice President, Latin
America...................... $ 114,000 $ 0 0 $ 0
</TABLE>
- --------
(1) Mr. Sinclair joined the Company on May 7, 1995; his annual salary for 1996
will be $155,000.
(2) Represents reimbursement for relocation expenses of $68,642 and a cost of
living adjustment of $47,480.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the Named Officers for the fiscal year ended December 31,
1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SHARES OF % OF TOTAL PRICE APPRECIATION
COMMON STOCK OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED (1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
---- ------------ ------------ --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
John D. Lockton(4)...... 0 0 -- -- -- --
Hugh B. L. McClung(4)... 0 0 -- -- -- --
Clarence Endy(4)........ 0 0 -- -- -- --
Douglas S. Sinclair(4).. 120,000 70% $6.25 05/14/05 $ 471,671 $ 1,195,307
Patrick Ciganer(4)...... 0 0 -- -- -- --
</TABLE>
- --------
(1) Each option is immediately exercisable. The shares purchasable thereunder
are subject to repurchase by the Company at the original exercise price
paid per share upon the optionee's cessation of service prior to vesting
in such shares. The repurchase right lapses and the optionee vests as to
25% of the option shares upon completion of one year of service from the
date of grant and the balance in a series of equal monthly installments
over the next 36 months of service thereafter. The option shares will vest
upon an acquisition of the Company by merger or asset sale, unless the
Company's repurchase right with respect to the unvested option shares is
transferred to the acquiring entity. The options have a maximum term of
ten years, subject to earlier termination in the event of the optionee's
cessation of employment with the Company.
(2) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares, together with any federal and state income tax liability incurred
by the optionee in connection with such exercise.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are provided for informational purposes only based on rules of the
Securities and Exchange Commission. The Company is unable to predict
whether the stock price will increase or decrease and, if it does
increase, there can be no assurance that the actual stock price
appreciation over the ten-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized
from the option grants made to the executive officers.
(4) On March 6, 1996, each of the following Named Officers was granted options
covering the following number of shares of Common Stock at an exercise
price of $8.125 per share: Mr. Lockton--200,000; Mr. McClung--200,000; Mr.
Endy--40,000; and Mr. Ciganer--20,000. On May 1, 1996, Mr. Sinclair was
granted options to purchase 36,000 shares at an exercise price of $8.125
per share. The options are immediately exercisable and subject to a right
of repurchase by the Company, as described in footnote (1). None of the
Named Officers is currently vested in any of these options.
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<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option holdings for
the fiscal year ended December 31, 1995 with respect to each of the Named
Officers. No options were exercised during the fiscal year ended December 31,
1995, and no stock appreciation rights were exercised during such year or were
outstanding at the end of that year.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF VALUE OF
COMMON STOCK UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AS OF DECEMBER 31, 1995(#) AS OF DECEMBER 31, 1995(1)
---------------------------- ---------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ------------- ---------------------------
<S> <C> <C> <C> <C>
John D. Lockton......... 80,000 0 $ 730,000 0
Hugh B. L. McClung...... 80,000 0 $ 730,000 0
Clarence Endy........... 140,000 0 $ 1,277,500 0
Douglas S. Sinclair..... 120,000 0 $ 375,000 0
Patrick Ciganer......... 80,000 0 $ 730,000 0
</TABLE>
- --------
(1) Based on the estimated fair market value of Common Stock as of December
31, 1995 ($8.125 per share) less the exercise price payable for such
shares.
(2) The options are immediately exercisable for all the option shares, but any
shares of Common Stock purchased under the options will be subject to
repurchase by the Company at the original exercise price per share upon
the optionee's cessation of service prior to vesting in such shares. The
repurchase right has lapsed as to the following number of shares as of
December 31, 1995: Mr. Lockton--26,640; Mr. McClung--19,960; Mr. Endy--
46,640; Mr. Sinclair--0; Mr. Ciganer--38,320.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Griffin, Cordova and
Pascarella; Mr. Griffin serves as its Chairman. In 1995, Messrs. Lockton,
Leeolou, McCarthy and Schiff served on the Compensation Committee; Mr.
McCarthy served as its Chairman. Mr. Griffin is Chairman of the Board of
Directors of the Company and President and Chief Executive Officer of
Vanguard. Mr. Cordova is a Vice President of Electra Inc., an affiliate of
Electra. Mr. Lockton is President and Chief Executive Officer of the Company.
Mr. Leeolou has been a director of the Company since February 1994 and is
Executive Vice President and Chief Operating Officer of Vanguard. Mr. McCarthy
is a general partner of Gateway Associates, a venture capital firm affiliated
with Gateway (as defined below). Mr. Schiff is a general partner of Northwood
Ventures, a venture capital firm, and Chairman and Chief Executive Officer of
Northwood Capital Partners LLC (together with Northwood Ventures and an
affiliated individual, "Northwood"). As of September 30, 1996, Vanguard,
Electra and Gateway each held more than 5% of the outstanding voting equity
securities of the Company.
In March 1992, the Company sold 271,960 shares of Series B Preferred Stock
to Gateway (as defined) for an aggregate purchase price of $250,000 (a
purchase price of $0.92 per share). In June 1992, the Company issued Gateway a
warrant to purchase an additional 417,040 shares of Series B Preferred Stock
at an exercise price of $0.60 per share, which was subsequently canceled. In
May 1993, the Company sold 435,120 shares of Series B Preferred Stock to
Gateway for an aggregate purchase price of $399,984, including cancellation of
indebtedness in the amount of $75,000.
In October and November 1993, the Company issued convertible secured notes
in a principal amount of $485,812 to Gateway and $615,000 to Northwood. In the
Series C Financing (as defined), the Company sold 224,920 shares of Series C
Preferred Stock to Gateway for an aggregate purchase price of $499,997,
including cancellation of such note, 341,880 shares of Series C Preferred
Stock to Northwood for an aggregate purchase
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<PAGE>
price of $759,999, including cancellation of such note, and 837,880 shares of
Series C Preferred Stock to Vanguard for an aggregate purchase price of
$1,862,607. The Company also issued Vanguard warrants (as subsequently
amended) to purchase (i) 50,440 shares of Series C Preferred Stock at an
exercise price of $2.22 per share, (ii) 273,440 shares of Series C Preferred
Stock at an exercise price of $2.22 per share, and (iii) 393,120 shares of
Series D Preferred Stock at an exercise price of $6.55 per share and entered
into a Development Agreement (as defined) with Vanguard.
In May 1994, the Company issued May 1994 Bridge Notes (as defined) in a
principal amount of $500,000 to each of Gateway and Northwood and $770,234 to
Vanguard. In connection with such financing, the investors received warrants
exercisable for shares of Series D Preferred Stock, including: Gateway and
Northwood--11,440 shares each; and Vanguard--17,640 shares.
In the Series D Financing (as defined), the Company sold (i) 106,880 shares
of Series D Preferred Stock to Gateway for an aggregate purchase price of
$700,064, including cancellation of a May 1994 Bridge Note in the principal
amount of $500,000, (ii) 190,880 shares of Series D Preferred Stock to
Northwood for an aggregate purchase price of $1,250,264, including
cancellation of a May 1994 Bridge Note in the principal amount of $500,000,
and (iii) 445,400 shares of Series D Preferred Stock to Vanguard for an
aggregate purchase price of $2,917,370, including cancellation of a May 1994
Bridge Note in the principal amount of $770,234. In connection with the Series
D Financing, Vanguard loaned $1.8 million to the Company in exchange for two
convertible notes in the amount of $900,000 each. On April 26, 1996, Vanguard
converted both notes, as amended, into an aggregate of 274,800 shares of
Series D Preferred Stock.
On April 6, 1995, the Company issued April 6, 1995 Bridge Notes (as defined)
in principal amounts of $390,000 to Vanguard, $200,000 to Gateway and $100,000
to Northwood, which were canceled in a subsequent financing. In connection
with issuing such notes, the Company issued warrants exercisable for shares of
Series D Preferred Stock, including warrants to purchase 5,960 shares issued
to Vanguard, 3,080 shares issued to Gateway, and 1,560 shares issued to
Northwood.
On April 24, April 25, and June 27, 1995, the Company issued the April 24,
1995 Bridge Notes (as defined) in principal amounts of $1,541,070 to Vanguard,
$403,000 to Northwood and $200,000 to Gateway. Of the $1,541,070 loaned by
Vanguard, $390,000 was in the form of cancellation of the April 6, 1995 Bridge
Note held by Vanguard.
On July 31, 1995, the Company issued the First July 1995 Vanguard Note (as
defined) in the principal amount of $1,485,000 to Vanguard. The Company paid
Vanguard a $20,000 fee in connection with the transaction. The First July 1995
Vanguard Note was cancelled in the Series F Financing (as defined). The
Company also issued Vanguard, for a purchase price of $15,000, a warrant to
purchase 32,000 shares of Series F-1 Preferred Stock at an exercise price of
$9.37 per share.
In the July 1995 Financing (as defined), the Company issued additional notes
in the principal amount of $1,490,013 to Vanguard, $199,066 to Northwood and
$391,576 to Gateway. The Company also issued (i) 380,880 shares of Series D
Preferred Stock to Vanguard, 46,080 shares of Series D Preferred Stock to
Northwood and 680 shares of Series D Preferred Stock to Gateway and (ii)
warrants to purchase shares of Series F-1 Preferred Stock (not including the
warrant issued to Vanguard in connection with the First July 1995 Vanguard
Note) at an exercise price of $9.37 per share, including warrants to purchase
32,120 shares issued to Vanguard, 4,320 shares issued to Northwood and, 8,440
shares issued to Gateway. Certain notes previously issued by the Company were
canceled in the July 1995 Financing. In connection with the July 1995
Financing, Mr. Lockton agreed, pursuant to a letter agreement dated July 28,
1995, to vote his shares of the Company's capital stock in favor of the
election to the Company's Board of Directors of a person designated by the BEA
Funds (as defined). This obligation terminated on July 31, 1996.
In November and December 1995, the Company borrowed $1,000,000 from
Vanguard, $450,000 from Gateway and $300,625 from Northwood and issued short-
term convertible unsecured notes (the "Winter 1995
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Notes") that bore interest at 10% per annum. In connection with these
transactions, the Company paid loan fees of $30,000 to Vanguard, $13,500 to
Gateway and $9,019 to Northwood.
In the Series F Financing (as defined), the Company sold Series F-1
Preferred Stock to Vanguard (424,000 shares for an aggregate purchase price of
$3,975,000, including the conversion of certain outstanding notes), Northwood
(56,720 shares for an aggregate purchase price of $531,750, including the
conversion of certain outstanding notes), and Gateway (94,200 shares for an
aggregate purchase price of $883,125, including the conversion of certain
outstanding notes).
Pursuant to the Vanguard Exchange (as defined), the Company acquired the
interests or rights to acquire interests of Vanguard Sub (as defined) in ten
wireless projects in Indonesia, New Zealand, Brazil, India and Pakistan.
Vanguard's cost of acquiring such projects was in excess of approximately $3.5
million.
In January 1992, the Company issued 1,200,000 shares of Series A Preferred
Stock to CTI (as defined), an entity beneficially owned by Messrs. Lockton and
McClung and another individual, for an aggregate purchase price of $300,000.
CTI subsequently distributed 510,000 shares to Mr. Lockton. Pursuant to the
CTP Exchange (as defined), on December 18, 1995 the Company issued 103,280
shares of Common Stock to Mr. Lockton and deposited an additional 45,360
shares of Common Stock into escrow for the benefit of certain parties,
including Messrs. Lockton and McClung.
For additional information regarding the above transactions, see "Certain
Transactions." For a description of compensation of executive officers and
directors of the Company and the eligibility of executive officers and
directors to participate in the Stock Plan, see "Management--Executive
Compensation." "--1994 Stock Option/Stock Issuance Plan" and "--Director
Compensation."
1994 STOCK OPTION/STOCK ISSUANCE PLAN
The 1994 Stock Option/Stock Issuance Plan (the "Stock Plan") was initially
adopted by the Board of Directors of the Company on January 7, 1994, and
approved by its stockholders on May 11, 1994. A total of 2,400,000 shares of
Common Stock have been authorized for issuance under the Stock Plan after
giving effect to subsequent plan amendments which have been adopted by the
Company's Board of Directors and approved by its stockholders. The individuals
eligible to receive option grants or share issuances under the Stock Plan are
employees (including officers and directors), non-employee members of the
Board of Directors and consultants of the Company or any parent or subsidiary
corporation. As of September 30, 1996 options to purchase a total of 1,962,960
shares of Common Stock were outstanding under the Stock Plan. In addition, the
Board of Directors of the Company granted options to purchase an additional
20,000 shares subsequent to September 30, 1996 has approved the automatic
grant of options to purchase a total of 80,000 additional shares of Common
Stock to certain employees of the Company. The grant date of these options
will be the next anniversary of each such employee's initial date of service,
provided that certain conditions are met, including that such employee remains
in the service of the Company.
The Stock Plan is divided into two separate programs: the option grant
program and the stock issuance program. Under the option grant program,
eligible individuals may be granted options to purchase shares of Common Stock
at a discount of up to 15% of the fair market value of such shares on the
grant date, and options may be structured as installment options that become
exercisable for vested shares over the optionee's period of service or as
immediately exercisable options for unvested shares that may be subject to
repurchase upon the optionee's termination of employment. The stock issuance
program allows eligible individuals to purchase shares of Common Stock at fair
market value or at discounts of up to 15% of the fair market value of the
shares on the grant date. Such shares may be fully vested when issued or may
vest over time. In addition, shares of Common Stock may be issued as bonus
awards in recognition of services rendered to the Company.
The Stock Plan is administered by the Board of Directors of the Company or a
committee thereof. The Board will select the individuals to receive option
grants or share issuances and the number of shares subject to each such grant
or issuance; determine the exercise or vesting schedule for each granted
option or share issuance;
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and determine whether a granted option is to be an incentive stock option
affording favorable tax treatment to the optionee at the loss of a deduction
to the Company or a non-statutory option entitling the Company to a deduction
upon exercise. Each granted option will have a maximum term of ten years,
subject to earlier termination following the optionee's cessation of service
with the Company.
In the event the Company is acquired by merger or asset sale, each
outstanding option under the Stock Plan that is not to be assumed or replaced
with a comparable option from the successor corporation will automatically
terminate. The Company's outstanding repurchase rights under the Stock Plan
will also terminate, and the shares subject to those repurchase rights will
become fully vested, upon the merger or asset sale, unless such repurchase
rights are assigned to the successor corporation.
The Board has the authority to effect the cancellation of outstanding
options under the Stock Plan in return for the grant of new options for the
same or different number of option shares with an exercise price per share
based upon the lower fair market value of the Common Stock on the new grant
date. The Board may also amend or modify the Stock Plan at any time, provided
that no such amendment may adversely affect the rights and obligations of the
participants with respect to their outstanding options without their consent.
The Stock Plan will terminate on January 6, 2004, unless sooner terminated
upon the occurrence of certain events.
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CERTAIN TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS
See "Description of Capital Stock--Preferred Stock" for a description and
definition of each series of Preferred Stock of the Company and "Description
of Capital Stock--Authorized and Outstanding Capital Stock" for a description
of prior reclassifications of the Company's capital stock.
The Series B Financing
In March 1992, the Company sold 271,960 shares of Series B Preferred Stock
to Gateway Venture Partners III, L.P. ("Gateway") for an aggregate purchase
price of $250,000 (a purchase price of $0.92 per share). In June 1992, the
Company issued to Gateway a warrant to purchase an additional 417,040 shares
of Series B Preferred Stock at an exercise price of $0.60 per share, with the
number of shares and exercise price subject to adjustment in certain
circumstances, which was subsequently canceled.
In May 1993, the Company sold an aggregate of 848,520 shares of Series B
Preferred Stock for an aggregate purchase price of $780,000 (a purchase price
of $0.92 per share), of which 435,120 shares were sold to Gateway for an
aggregate purchase price of $399,984, including cancellation of indebtedness
in the amount of $75,000.
The Series C Financing
In October and November 1993, the Company issued convertible secured notes
in an aggregate principal amount of $1,350,812, including notes in aggregate
principal amounts of $615,000 issued to Northwood (the "Northwood Note") and
$485,812 issued to Gateway (the "Gateway Note"). These notes bore interest at
prime plus 1% per annum and were secured by all of the assets of the Company.
In a series of transactions during January and February 1994 (the "Series C
Financing"), the Company sold an aggregate of 1,762,280 shares of Series C
Preferred Stock for an aggregate purchase price of $3,917,550 (a purchase
price of $2.22 per share), including 224,920 shares sold to Gateway for an
aggregate purchase price of $499,997, including cancellation of the Gateway
Note; 341,880 shares sold to Northwood for an aggregate purchase price of
$759,999, including cancellation of the Northwood Note, and 837,880 shares
sold to Vanguard for an aggregate purchase price of $1,862,607.
In connection with the Series C Financing, the Company issued to Vanguard
warrants (as subsequently amended) to purchase (i) 50,440 shares of Series C
Preferred Stock at an exercise price of $2.22 per share, (ii) 273,440 shares
of Series C Preferred Stock at an exercise price of $2.22 per share, and (iii)
393,120 shares of Series D Preferred Stock at an exercise price of $6.55 per
share. The warrant described in clause (i) is exercisable until December 18,
1997; the warrants described in clauses (ii) and (iii) are exercisable until
May 15, 1997 or, if earlier, upon the initial public offering of the Company's
capital stock. The number of shares and exercise price for all such warrants
are subject to adjustment in certain circumstances.
In connection with the Series C Financing, the investors were granted
certain registration rights, information rights, board observer rights, board
representation rights, rights of first offer and co-sale rights. Vanguard was
also granted a right of first refusal to acquire an amount of any future
equity financing by the Company equal to (i) the amount Vanguard would be
entitled to acquire under its first offer rights based on its pro rata equity
ownership in the Company (calculated on an as-converted basis) plus (ii) an
overcall amount. The overcall amount was the number of shares which, when
added to the number of shares represented by the warrants issued to Vanguard
in the Series C Financing (including shares acquired upon the exercise of such
warrants), would equal 15.01% of the outstanding shares of the Company capital
stock on a post-transaction basis. The right of first refusal was amended in
connection with the Series D Financing (as defined below).
In connection with the Series C Financing, Vanguard and the Company entered
into a Business Development and Resource Access Agreement dated as of February
28, 1994 (the "Development Agreement").
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The Development Agreement has a five year term and provides that if either
party becomes aware of opportunities for wireless projects outside the United
States or PCS projects within or outside the United States, and brings the
opportunity to the attention of the other party, then the other party will
have the opportunity to participate in such projects. The Development
Agreement also provides for Vanguard to assist the Company, at the Company's
request and subject to availability of Vanguard resources, by providing
various services including project review, operations support, technical
support, training, site visits, staffing and recruiting. The Company
reimburses Vanguard for Vanguard's costs in providing certain of such
services; such reimbursement has not exceeded $60,000 in fiscal years 1994 or
1995 or 1996 through September 30, 1996.
The Series D Financing
In May 1994, the Company issued convertible notes (the "May 1994 Bridge
Notes") in an aggregate principal amount of $2,028,993, including $500,000 to
each of Gateway and Northwood and $770,234 to Vanguard. The May 1994 Bridge
Notes were due in 180 days and bore interest at prime plus 1% per annum. In
connection with the May 1994 Bridge Notes, the purchasers received warrants
exercisable for an aggregate of 46,440 shares of Series D Preferred Stock,
including: Gateway and Northwood--11,440 shares each; and Vanguard--17,640
shares. The warrants have an exercise price of $6.55 per share and are
exercisable until May 6, 1997, or, in the case of the warrants issued to
certain of the other lenders, May 23, 1997 or June 12, 1997, provided that the
warrants shall no longer be exercisable upon the occurrence of (i) the closing
of the initial public offering of the Company's capital stock, (ii) the sale
of all or substantially all of the Company's assets, (iii) the merger of the
Company with or into another entity resulting in the transfer of at least 50%
of the Company's outstanding voting equity securities, or (iv) any other
transfer of at least 50% of the Company's outstanding voting equity securities
(each or certain other similar events, a "Termination Event"). All share
amounts and the exercise price are subject to adjustment in certain
circumstances.
In a series of transactions in September and October 1994 (the "Series D
Financing"), the Company sold an aggregate of 2,230,560 shares of Series D
Preferred Stock for an aggregate purchase price of $14,610,168 (a purchase
price of $6.55 per share), including (i) 106,880 shares sold to Gateway for an
aggregate purchase price of $700,064, including cancellation of May 1994
Bridge Notes in the principal amount of $500,000, (ii) 190,880 shares sold to
Northwood for an aggregate purchase price of $1,250,264, including
cancellation of May 1994 Bridge Notes in the principal amount of $500,000, and
(iii) 445,400 shares sold to Vanguard for an aggregate purchase price of
$2,917,370, including cancellation of May 1994 Bridge Notes in the principal
amount of $770,234. Among the purchasers in the Series D Financing were
certain funds managed by or affiliated with BEA Associates (the "BEA Funds"),
which purchased an aggregate of 1,221,440 shares of Series D Preferred Stock
for an aggregate purchase price of $8,000,432. The Company also entered into
an agreement with the BEA Funds providing that, where feasible, appropriate
and mutually advantageous, the Company and the BEA Funds will bring to the
attention of each other trunked radio, WLL, PCS and other existing and future
wireless projects.
In connection with the Series D Financing, Vanguard loaned $1.8 million to
the Company in exchange for two convertible notes in the amount of $900,000
each. Each note was due upon the earlier of April 26, 1996 or the occurrence
of certain events which did not occur prior to that date. On April 26, 1996,
Vanguard converted both notes, as amended, pursuant to the Vanguard Exchange
(as defined below), into an aggregate of 274,800 shares of Series D Preferred
Stock.
The April 1995 Financings
On April 6, 1995, the Company issued convertible notes (the "April 6, 1995
Bridge Notes") in an aggregate principal amount of $696,700, including notes
in principal amounts of $390,000 to Vanguard, $200,000 to Gateway and $100,000
to Northwood. The April 6, 1995 Bridge Notes bore interest at prime plus 1%,
were due in 150 days, and were automatically convertible into equity
securities, subsequently determined to be Series D Preferred Stock, upon the
closing of the Company's next equity financing in which at least $5 million
was raised. The April 6, 1995 Bridge Notes were canceled in connection with a
subsequent financing of the Company.
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In connection with the issuance of the April 6, 1995 Bridge Notes, the
Company issued warrants (the "April Bridge Warrants") exercisable for an
aggregate of 10,720 shares of Series D Preferred Stock, including warrants to
purchase 5,960 shares issued to Vanguard, 3,080 shares issued to Gateway, and
1,560 shares issued to Northwood. The warrants have an exercise price of $6.55
per share and are exercisable until April 6, 1998, provided that the warrants
shall no longer be exercisable upon the occurrence of a Termination Event. All
share amounts and the exercise price are subject to adjustment in certain
circumstances.
On April 24, April 25, and June 27, 1995, the Company issued convertible
secured notes (the "April 24, 1995 Bridge Notes" and, together with the April
6, 1995 Bridge Notes, the "April 1995 Bridge Notes") in an aggregate principal
amount of $6,144,070, including notes in principal amounts of $1,541,070 to
Vanguard, $4,000,000 to the BEA Funds, $403,000 to Northwood and $200,000 to
Gateway. Of the $1,541,070 loaned by Vanguard, $390,000 was in the form of
cancellation of the April 6, 1995 Bridge Note held by Vanguard. The April 24,
1995 Bridge Notes bore interest at prime plus 1% per annum, were due 45 days
after their respective issue dates and were secured by a lien on substantially
all of the Company's assets. The April 24, 1995 Bridge Notes provided that
principal thereon was to be automatically converted on the respective due
dates into Series D Preferred Stock at a price of $6.55 per share, provided
that no holder was required to convert to the extent that conversion would
result in the holder owning 20% or more of the Company's capital stock.
The July 1995 Financing
On July 31, 1995, the Company issued a convertible unsecured note (the
"First July 1995 Vanguard Note") in the principal amount of $1,485,000 to
Vanguard (such issuance, together with the issuance of the other notes in July
1995 described below, the "July 1995 Financing"). The note bore interest at
prime plus 1% per annum and was due 180 days after the issue date or, at the
Company's option, 270 days after the issue date. The note provided that the
principal balance thereof was automatically convertible into the Company's
equity securities upon the closing of the Company's next equity financing
meeting certain conditions (at a conversion price per share equal to the share
price in such equity financing, but not to exceed $10.40). The Company paid
Vanguard a $20,000 fee in connection with the note transaction. The First July
1995 Vanguard Note was cancelled in the Series F Financing (as defined below).
In connection with the issuance of the First July 1995 Vanguard Note, the
Company issued Vanguard, for a purchase price of $15,000, a warrant to
purchase 32,000 shares of Series F-1 Preferred Stock at an exercise price of
$9.37 per share, with the number of shares and the exercise price subject to
adjustment in certain circumstances. The warrant is exercisable until December
18, 1998, provided that the warrants shall no longer be exercisable upon the
occurrence of a Termination Event.
In the July 1995 Financing, the Company issued additional July 1995 Notes in
an aggregate principal amount of $7,118,025, including notes in the amount of
$1,490,013 to Vanguard, $460,116 to the BEA Funds, $199,066 to Northwood and
$391,576 to Gateway. The July 1995 Notes bore interest at prime plus 1% per
annum, had due dates and conversion features substantially identical to those
contained in the First July 1995 Vanguard Note and were unsecured. These notes
were cancelled in the Series F Financing.
In the July 1995 Financing, the Company issued an aggregate of 1,147,600
shares of Series D Preferred Stock for an aggregate purchase price of
$7,516,780 (a purchase price of $6.55 per share), including 380,880 shares to
Vanguard, 539,600 shares to the BEA Funds, 46,080 shares to Northwood and 680
shares to Gateway. All of the remaining April 1995 Bridge Notes were canceled
in the July 1995 Financing.
In the July 1995 Financing, for an aggregate purchase price of $71,901, the
Company issued warrants to purchase an aggregate of 153,760 shares of Series
F-1 Preferred Stock (not including the warrant issued to Vanguard in
connection with the First July 1995 Vanguard Note) at an exercise price of
$9.37 per share, including warrants to purchase 32,120 shares issued to
Vanguard, 4,320 shares issued to Northwood, 8,440 shares issued to Gateway and
9,920 shares issued to the BEA Funds. All share amounts and the exercise price
are subject to adjustment in certain circumstances. The warrants are
exercisable until December 18, 1998, provided that the warrants shall no
longer be exercisable upon the occurrence of a Termination Event.
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In connection with the July 1995 Financing, Messrs. Lockton and McClung
agreed, pursuant to letter agreements dated July 28 and July 31, 1995,
respectively, to vote their shares of the Company's capital stock in favor of
the election to the Company's Board of Directors of a person designated by the
BEA Funds. This obligation terminated on July 31, 1996.
The 1995 TDI Financing
On August 15, 1995, pursuant to a Note and Warrant Purchase Agreement dated
as of August 14, 1995, the Company borrowed $4,950,000 from Toronto Dominion
Investments, Inc. ("TDI") and issued an unsecured convertible note in the
principal amount of $4,950,000 (the "TDI Unsecured Note"). The TDI Unsecured
Note bore interest at 9.75% per annum and was due on January 27, 1996, subject
to the Company's option to extend the maturity date to April 26, 1996. The
principal balance of the TDI Unsecured Note was automatically convertible into
shares of the Company's equity securities upon the closing of the Company's
next equity financing in which the gross proceeds to the Company exceeded
$15,000,000, provided that such equity financing closed on or before January
27, 1996. Pursuant to an Investors' Agreement dated as of July 31, 1995, the
July 1995 Notes and the First July 1995 Vanguard Note were amended to provide
that such notes were pari passu with the TDI Unsecured Note and with each
other.
On August 15, 1995, for a purchase price of $50,000, the Company issued TDI
a warrant (the "First TDI Warrant") to purchase 106,680 shares of Series F-2
Preferred Stock at an exercise price of $9.37 per share, with the number of
shares and exercise price subject to adjustment in certain circumstances. The
First TDI Warrant is exercisable until December 18, 1998, provided that the
warrants shall no longer be exercisable upon the occurrence of a Termination
Event.
Pursuant to a Loan Agreement dated as of August 14, 1995, between the
Company and TDI (the "1995 TDI Loan Agreement"), the Company borrowed
$5,000,000 from TDI and issued a note in the principal amount of $5,000,000
(the "TDI Secured Note"). The TDI Secured Note was due on the earlier of 180
days from its issue date or the closing of the Company's next equity financing
in which the Company received net proceeds of at least $5,000,000, and bore
interest at 11% per annum for the first 90 days and 13% per annum thereafter.
Pursuant to the 1995 TDI Loan Agreement, the Company paid TDI a fee of
$125,000. The Company's obligations under the 1995 TDI Loan Agreement were
secured by substantially all of the Company's assets and a pledge of the stock
of certain wireless projects owned by the Company. At the closing of the
Series F Financing (as defined below), the Company repaid the TDI Secured Note
in full through the issuance to TDI of 320,000 shares of Series F-2 Preferred
Stock at a purchase price of $9.37 per share, for an aggregate amount of
$3,000,000, and cash in the amount of $2,000,000 plus accrued interest, and
TDI released its security interest and returned the pledged stock to the
Company.
Pursuant to the 1995 TDI Loan Agreement, the Company issued to TDI a warrant
(the "Second TDI Warrant") to purchase 106,680 shares of Series F-2 Preferred
Stock at an exercise price of $9.37 per share, with the number of shares and
the exercise price subject to adjustment in certain circumstances. The Second
TDI Warrant is exercisable until the same date, with the date being subject to
change in the same circumstances, as the First TDI Warrant.
The Series F Financing
In November and December 1995, the Company borrowed a total of $1,797,515,
including $1,000,000 from Vanguard, $450,000 from Gateway and $300,625 from
Northwood and issued short-term convertible unsecured notes (the "Winter 1995
Notes") that bore interest at 10% per annum. In connection with these
transactions, the Company paid the lenders an aggregate of $53,925 in loan
fees, including $30,000 to Vanguard, $13,500 to Gateway and $9,019 to
Northwood.
In a transaction that was consummated on December 18, 1995 (the "Series F
Financing") pursuant to a Securities Purchase Agreement dated as of December
6, 1995 (the "Series F Purchase Agreement"), the
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Company sold an aggregate of 4,508,480 shares of Series F-1 Preferred Stock
and sold 848,000 shares of Series F-2 Preferred Stock to TDI, for an aggregate
purchase price of $50,217,000 (a purchase price of $9.375 per share). Among
the purchasers of Series F-1 Preferred Stock were Vanguard (424,000 shares for
an aggregate purchase price of $3,975,000, including the conversion of certain
outstanding notes), the BEA Funds (123,560 shares for an aggregate purchase
price of $1,158,375, including the conversion of certain outstanding notes),
Northwood (56,720 shares for an aggregate purchase price of $531,750,
including the conversion of certain outstanding notes), Gateway (94,200 shares
for an aggregate purchase price of $883,125, including the conversion of
certain outstanding notes), CIH (1,066,640 shares for an aggregate purchase
price of $9,999,750) and Electra (1,066,640 shares for an aggregate purchase
price of $9,999,750). TDI purchased 848,000 shares of non-voting Series F-2
Preferred Stock for an aggregate purchase price of $7,950,000, all of which
was paid for by conversion of the TDI Unsecured Note and conversion of
$3,000,000 in principal amount of the TDI Secured Note. In connection with the
Series F Financing, the Company paid Electra financing fees of $265,000 and
paid TDI fees for services performed as placement agent.
Pursuant to the Series F Purchase Agreement, the Company agreed to covenants
customary in financing transactions of such type, including limits on
incurring debt and granting liens and pledges and other negative convenants
including limitations on payments, dividends, investments, mergers, asset
sales, amendments of its Certificate or Bylaws that would adversely impact the
rights of the Series F-1 Preferred Stock and Series F-2 Preferred Stock,
changes to its business, changes in control and sales of equity securities.
Upon the occurrence of certain events in the nature of defaults by the Company
under the Series F Purchase Agreement, the holders of Series F-1 Preferred
Stock have the right to (i) cause the Company to increase the size of its
Board of Directors and (ii) elect one additional director. In July 1996,
certain covenants contained in the Series F Purchase Agreement were waived to
permit the transactions contemplated by the Offering.
In connection with the Series F Financing, the Company entered into the
Fifth Amended and Restated Investor Rights Agreement dated as of December 18,
1995 (the "IRA"), with certain investors, including holders of its Series B,
C, D, E and F Preferred Stock, and the Registration Rights Agreement dated as
of December 18, 1995 (the "Registration Rights Agreement") with holders of its
Series F Preferred Stock. See "Description of Capital Stock--Preferred Stock--
Registration Rights."
The IRA provides a right of first offer to purchase shares of any class of
the Company's capital stock sold by the Company (subject to certain
exceptions) to any investor who holds at least 10% of the Registrable
Securities (as defined in the IRA) it initially acquired and to any person who
acquires at least 10% in the aggregate of any of the Series B, C, D, E, or F
Preferred Stock outstanding as of December 18, 1995. Each such investor may
purchase up to its pro-rata share of the shares being offered determined on an
as-converted basis. The right of first offer does not apply to, and expires
upon, a public offering of Common Stock in which the offering price is at
least $18.75 per share and $25,000,000 in the aggregate.
The IRA provides that, with certain exceptions, transfers of their stock by
investors who hold at least 100,000 shares of Common Stock or securities
convertible into at least 100,000 shares of Common Stock ("Large Investors")
are subject to rights of first offer and co-sale rights in favor of the other
Large Investors (except holders of Series A Preferred Stock). In particular,
(i) each Large Investor (subject to certain exceptions) has a right of first
offer with respect to transfers of Company's capital stock by other Large
Investors to purchase up to its pro rata share of the shares being
transferred, determined on an as-converted basis, and (ii) each Large Investor
who elects not to exercise such right of first offer may sell a pro rata
number of the shares being transferred, determined on an as-converted basis.
The rights of first offer do not apply to shares sold in a public offering of
the Company's capital stock, and the co-sale rights do not apply to sales of
shares sold in a public offering of the Company's capital stock, sales by the
Company and certain other transfers and are subject to certain preferential
rights of the holders of Series F Preferred Stock. In addition, Mitsui & Co.
Ltd., Mitsubishi Corporation and their affiliates may elect to opt out of the
first offer obligations in certain circumstances. In addition, Messrs.
Lockton, McClung, Endy, Sinclair, Ciganer and Dolonius and other Company
management are prohibited from transferring more than 20,000 shares of the
Company stock, subject to certain exceptions.
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The IRA also contains board observer rights, board representation rights,
agreements concerning voting of shares and registration rights. See
"Management--Arrangements Concerning Election of Directors" and "Description
of Capital Stock."
The IRA requires that a special committee of the Board of Directors,
consisting of a Vanguard designee, a Series F designee (who shall be the
Electra designee, if there is an Electra designee on the Board of Directors),
a member designated by the other outside investors and a Company management
designee, shall from time to time consult with an unaffiliated investment bank
as to the commercial reasonableness of an initial public offering of the
Common Stock (an "IPO"). Based on such consultation, the committee shall make
a recommendation to the Board of Directors about proceeding with an IPO.
Subject to approval of the Board of Directors and to the registration rights
of holders of Series F Preferred Stock under the Registration Rights
Agreement, the Company shall proceed with an IPO unless three or more
directors oppose such a transaction, in which case the Company shall submit
the decision to proceed with an IPO to binding arbitration. If no IPO occurs
by December 31, 1996, the committee shall explore with unaffiliated investment
bankers other liquidity alternatives, including the sale of the Company.
THE VANGUARD EXCHANGE
In connection with the issuance of the April 24, 1995 Bridge Notes, the
Company and Vanguard agreed that a wholly owned subsidiary of Vanguard would
contribute its interests in ten wireless projects to the Company in exchange
(as amended, the "Vanguard Exchange") for shares of Preferred Stock resulting
in Vanguard owning not less than a 50% equity interest in the Company on a
fully diluted basis. On July 28, 1995, the Company, Vanguard and Vanguard
International Telecommunications, Inc., a wholly owned subsidiary of Vanguard
("Vanguard Sub"), entered into an Agreement and Plan of Reorganization (as
amended, the "Vanguard Reorganization") which specified the terms and
conditions of the Vanguard Exchange. The Vanguard Reorganization provided that
Vanguard Sub would be merged into the Company, with the Company as the
surviving corporation, and in exchange therefor Vanguard would receive
3,972,240 shares of Series E Preferred Stock, subject to adjustment in certain
circumstances. The Vanguard Exchange occurred on December 18, 1995
concurrently with the closing of the Series F Financing.
Pursuant to the Vanguard Exchange, the Company acquired Vanguard Sub's
interests or rights to acquire interests in ten wireless projects in
Indonesia, New Zealand, Brazil, India and Pakistan. Vanguard's cost of
acquiring such projects was in excess of approximately $3.5 million. The terms
of the Vanguard Exchange were arrived at through arms-length negotiations and
were approved by a majority of disinterested directors of the Company and by
the Company's stockholders. See "Business--Operating Companies" and "--
Developmental Stage Projects." In connection with the Vanguard Exchange, the
warrants issued to Vanguard in connection with the Series C Financing were
amended to, among other things, extend the maturity of certain of these
warrants.
TRANSACTIONS WITH FOUNDERS
In January 1992, the Company issued 1,200,000 shares of Series A Preferred
Stock to Corporate Technology International ("CTI"), an entity beneficially
owned by Messrs. Lockton and McClung and another individual, for an aggregate
purchase price of $300,000. CTI subsequently distributed 510,000 shares to
each of Messrs. Lockton and McClung.
In January 1994, the Company entered into an agreement (the "CTP Agreement")
with Messrs. Lockton, McClung and a third party to exchange 251,920 shares of
Common Stock (the "CTP Exchange") for 70% of the then outstanding equity of
CTP, a partnership owned by Messrs. McClung, Lockton and others that was
formed to pursue wireless communications opportunities. The CTP Exchange was
consummated on December 18, 1995. Pursuant to the CTP Exchange, the Company
issued 103,280 shares of Common Stock to each of Messrs. Lockton and McClung
and deposited an additional 45,360 shares of Common Stock into escrow for the
benefit of certain parties, including Messrs. Lockton and McClung. The terms
of the CTP Exchange were arrived at through arms' length negotiations and were
approved by a majority of disinterested directors of the Company.
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In August 1996, Mr. McClung converted 266,800 shares of Series A Preferred
Stock into a like number of shares of Common Stock.
INDEBTEDNESS OF MANAGEMENT
On October 19, 1994, pursuant to a Stock Purchase Agreement and a
Compensation Agreement, the Company sold Mr. Snowdon, who is a director of the
Company and Vice President of Vanguard Communications, Inc., 76,080 shares of
Common Stock at a purchase price of $2.00 per share and 3,920 shares of Series
D Preferred Stock at a purchase price of $6.55 per share, for an aggregate
purchase price of $177,836. The Company loaned Mr. Snowdon the purchase price,
which loan is evidenced by a note from Mr. Snowdon to the Company dated
October 19, 1994. The note bears interest at 7.69% per annum. Principal and
accrued interest are due on October 19, 2004. The note is secured by a pledge
of the stock purchased by Mr. Snowdon and is non-recourse to him.
1996 TD LOAN AGREEMENT
In July 1996, the Company entered into a Loan Agreement (the "1996 TD Loan
Agreement") with Toronto Dominion (Texas), Inc., an affiliate of Toronto
Dominion, providing for a $10.0 million revolving credit facility. Subject to
the terms and conditions of the 1996 TD Loan Agreement, the Company was able
to borrow funds in an initial amount of at least $2,000,000 and additional
amounts in integral multiples of at least $1.0 million. All borrowings were
evidenced by a promissory note bearing interest at a specified base rate plus
a margin increasing from 2.25% to 3.75% over the term of the facility or a
specified LIBOR rate plus a margin increasing from 3.5% to 5.0% over the term
of the facility and were due in July 1997, subject to mandatory repayment,
without premium, from the net proceeds from any public or private sale of debt
or equity securities (including the net proceeds of the Unit Offering), the
net proceeds from certain asset sales by the Company or its subsidiaries, or
certain other events. The obligations of the Company under the 1996 TD Loan
Agreement and the note issued pursuant thereto were secured by a pledge by the
Company of all capital stock of certain of the Company's subsidiaries and
affiliates. Under the 1996 TD Loan Agreement, Toronto Dominion (Texas), Inc.
received a facility fee of $300,000 and was reimbursed for certain costs and
expenses. In addition, Toronto Dominion (Texas), Inc. was entitled to a
commitment fee of 0.5% of the average unused available portion of such,
payable quarterly in arrears. Mr. Rich, a director of the Company, serves as
an executive officer of Toronto Dominion Capital, an affiliate of Toronto
Dominion (Texas), Inc. On August 15, 1996, the Company used $7.4 million of
the net proceeds from the Unit Offering to repay in full all outstanding
borrowings under the 1996 TD Loan Agreement.
OTHER TRANSACTIONS
In 1995 the Company paid Coriander Willow, an entity owned by Vicky Bratten,
who is Mr. McClung's wife, $90,330 for accounting services performed by
Coriander Willow for the Company. Management believes that this transaction
was upon terms substantially equivalent to or more favorable to the Company
than those that could have been obtained from unaffiliated third parties.
Pursuant to the Purchase Agreement (as defined), on August 15, 1996, the
Company issued and sold 196,720 Units consisting of $196,720,000 aggregate
principal amount Old Notes and 196,720 Warrants that initially entitle each
holder to purchase 11.638 shares of Common Stock upon the occurrence of an
Exercise Event (as defined) (the "Unit Offering"). Toronto-Dominion Securities
(USA) Inc., an affiliate of TDI, purchased Units in the Unit Offering as an
Initial Purchaser (as defined) at an aggregate discount of $ million from
the price to investors.
For a description of compensation of executive officers and directors of the
Company and the eligibility of executive officers and directors to participate
in the Stock Plan, see "Management--Executive Compensation," "--1994 Stock
Option/Stock Issuance Plan" and "--Director Compensation."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock and
Preferred Stock as of September 30, 1996 by (i) each person (or group of
affiliated persons) who is known by the Company to beneficially own more than
five percent of any class of the Company's capital stock, (ii) each of the
Company's directors, (iii) each Named Officer and (iv) the Company's directors
and executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------- -------------------------
NUMBER OF NUMBER OF
5% STOCKHOLDERS, SHARES PERCENT SHARES PERCENT
DIRECTORS, NAMED OFFICERS AND BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OFFICERS AND DIRECTORS AS A GROUP OWNED(1) OWNED(1)(2) OWNED(1) OWNED(1)(2)
- --------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Vanguard Cellular Operating -- * 7,139,920 40.31
Corp.(3)..................
c/o Vanguard Cellular
Systems, Inc.
2002 Pisgah Church Road,
Suite 300
Greensboro, NC 27455
BEA Funds(4)............... -- * 1,504,920 8.90
c/o BEA Associates
153 East 53rd Street
New York, NY 10022
Gateway Venture Partners -- * 1,156,720 6.83
III, L.P.(5)..............
8000 Maryland Ave., Suite
1190
St. Louis, MO 63105
Electra Investment Trust -- * 1,124,640 6.65
PLC(6)....................
70 East 55th Street
New York, NY 10022
Toronto Dominion -- * 1,061,360 6.20
Investments, Inc.(7)......
31 West 52nd Street
New York, NY 10019-6101
Central Investment Holding, -- * 1,066,640 6.31
Inc.......................
KMT Business Management
Committee
9F. 6 Chung Hsing W. Road,
Section 1
Taipei, Taiwan ROC
Haynes G. Griffin(8)....... -- * 7,139,920 40.31
John D. Lockton(9)......... 383,280 42.79 510,000 3.02
Hugh B. L. McClung(9)...... 650,080 72.57 167,000 *
Clarence "Sam" Endy(10).... 180,000 22.62 -- *
Douglas S. Sinclair(11).... 156,000 20.21 4,000 *
Patrick Ciganer(12)........ 100,000 13.97 -- *
Stephen R. Leeolou(13)..... 80,000 11.50 7,139,920 40.31
Piers Playfair............. -- * -- *
John S. McCarthy(14)....... 12,000 1.91 1,156,720 6.83
Carl C. Cordova III(15).... -- * 1,124,640 6.65
Brian Rich(16)............. -- * 1,061,360 6.20
Carl F. Pascarella(17)..... 12,000 1.91 -- *
Stanley Wen................ -- * -- *
Van Snowdon(18)............ 76,080 12.36 7,143,840 40.34
All directors and executive
officers as a group (17
persons).................. 1,849,440 96.54 11,169,560 62.23
</TABLE>
- --------
*Less than 1%
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- --------
(1) Except as indicated in the other footnotes to this table, based on
information provided by such persons to the Company. Subject to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all of the shares of
Common Stock shown as beneficially owned by them.
(2) Percentage ownership is based on 615,760 shares of Common Stock and
16,906,400 shares of Preferred Stock outstanding on August 31, 1996. The
number of shares of Common Stock and Preferred Stock beneficially owned
includes the shares issuable pursuant to stock options and warrants that
are exercisable within 60 days of August 31, 1996. Shares of Common Stock
issuable upon exercise of the Warrants are not treated as exercisable
within such 60 day period. Shares issuable pursuant to stock options or
warrants are deemed outstanding for computing the percentage owned by the
person holding such options or warrants but are not deemed outstanding
for computing the percentage of any other person.
(3) Includes 804,720 shares of Series C, D and F-1 Preferred Stock issuable
upon exercise of warrants held by Vanguard Cellular Operating Corp. See
"Management" and "Certain Transactions--Private Placement Transactions."
Mr. Griffin, President and Chief Executive Officer of Vanguard, the sole
stockholder of Vanguard Cellular Operating Corp., and Mr. Leeolou, Chief
Operating Officer and Secretary of Vanguard, disclaim beneficial
ownership of capital stock held by Vanguard Cellular Operating Corp. The
capital stock of the Company held by Vanguard has been pledged to secure
certain indebtedness of Vanguard. In the event of a default by Vanguard
in respect of such indebtedness, the pledgee of such capital stock would
be entitled to exercise voting and investment power in respect of such
shares.
(4) Includes shares of Series D and F-1 Preferred Stock held by The Emerging
Markets Telecommunications Fund, Inc., The Emerging Markets
Infrastructure Fund, Inc., Latin America Investment Fund, Inc., Latin
America Equity Fund, Inc., Latin America Capital Partners, Argentina
Equity Investments Partnership, (collectively, the "BEA Funds"), all of
which are affiliated with and/or managed by BEA Associates. Also includes
3,720 shares of Series F-1 Preferred Stock issuable upon the exercise of
warrants held by BEA Funds.
(5) Includes 22,960 shares of Series D and F-1 Preferred Stock issuable upon
exercise of warrants held by Gateway. Mr. McCarthy is a General Partner
of Gateway Associates, the general partner of Gateway, and disclaims
beneficial ownership of shares held by Gateway except to the extent of
his pecuniary interest therein.
(6) Includes shares of Series A Preferred Stock and Series F-1 Preferred
Stock held by Electra. Mr. Cordova, a Vice President of Electra Inc., a
subsidiary of Electra Investment Trust P.L.C., disclaims beneficial
ownership of shares held by Electra, except to the extent of his
pecuniary interest therein.
(7) Includes 848,000 shares of Series F-2 Preferred Stock and 213,360 shares
of Series F-2 Preferred Stock issuable upon exercise of warrants held by
TDI. Mr. Rich, Managing Director and Group Head of Toronto Dominion
Capital, an affiliate of TDI, disclaims beneficial ownership of the
shares held by TDI.
(8) Includes shares of capital stock beneficially owned by Vanguard Cellular
Operating Corp. Mr. Griffin, President and Chief Executive Officer of
Vanguard, the sole stockholder of Vanguard Cellular Operating Corp.,
disclaims beneficial ownership of the shares held by this entity.
(9) Includes options to purchase 280,000 shares of Common Stock that are
immediately exercisable, subject to certain rights of repurchase held by
the Company. In addition, the number of shares of Common Stock
beneficially owned includes 103,280 shares of Common Stock issued to such
person pursuant to the CTP Exchange on December 18, 1995. Excludes 45,360
shares of Common Stock deposited in escrow pursuant to the CTP Exchange
in which such person has a beneficial interest. See "Certain
Transactions--Transactions with Founders."
(10) Includes options to purchase 180,000 shares of Common Stock that are
immediately exercisable, subject to certain rights of repurchase held by
the Company.
(11) Includes an option to purchase 156,000 shares of Common Stock that is
immediately exercisable, subject to certain rights of repurchase held by
the Company.
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(12) Includes options to purchase 100,000 shares of Common Stock that are
immediately exercisable, subject to certain rights of repurchase held by
the Company.
(13) Includes an option to purchase 80,000 shares of Common Stock that is
immediately exercisable, subject to repurchase by the Company, as well as
shares of capital stock beneficially owned by Vanguard Cellular Operating
Corp. Mr. Leeolou, Chief Operating Officer and Secretary of Vanguard, the
sole stockholder of Vanguard Cellular Operating Corp., disclaims
beneficial ownership of shares held by Vanguard Cellular Operating Corp.
(14) Includes an option to purchase 12,000 shares of Common Stock that is
immediately exercisable, subject to repurchase by the Company, as well as
shares of capital stock beneficially owned by Gateway. Mr. McCarthy is a
general partner of Gateway Associates, the a general partner of Gateway,
and disclaims beneficial ownership of shares held by Gateway except to
the extent of his pecuniary interest therein.
(15) Includes shares of capital stock beneficially owned by Electra. Mr.
Cordova, a Vice President of Electra Inc., an affiliate of Electra
Investment Trust PLC, disclaims beneficial ownership of shares held by
Electra Investment and Electra Associates, except to the extent of his
pecuniary interest therein.
(16) Includes shares of capital stock beneficially owned by TDI. Mr. Rich,
Managing Director and Group Head of Toronto Dominion Capital, an
affiliate of TDI, disclaims beneficial ownership of shares held by TDI.
(17) Includes an option to purchase 12,000 shares of Common Stock that is
immediately exercisable, subject to repurchase by the Company.
(18) Includes 76,080 shares of Common Stock and 3,920 shares of Series D
Preferred Stock, as well as shares of capital stock beneficially owned by
Vanguard Cellular Operating Corp. Mr. Snowdon, Vice President of Vanguard
Communications, Inc., a subsidiary of Vanguard, the sole stockholder of
Vanguard Cellular Operating Corp., disclaims beneficial ownership of
shares held by Vanguard Cellular Operating Corp.
107
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued, and the Old Notes were issued, under the
Indenture between the Company and Marine Midland Bank, as Trustee. The terms
of the Exchange Notes are substantially identical (including principal amount,
interest rate, maturity, security and ranking) to the terms of the Old Notes
for which they may be exchanged pursuant to the Exchange Offer, except that
the Exchange Notes (i) are freely transferable by holders thereof (except as
provided below) and (ii) are not entitled to certain registration rights and
certain additional interest provisions which are applicable to the Old Notes
under the Registration Rights Agreement.
The Exchange Notes will be secured pursuant to a Pledge Agreement (the
"Company Pledge Agreement") between the Company and IWC in favor of Bankers
Trust Company, as collateral agent (the "Collateral Agent"). The terms of the
Notes include those stated in the Indenture and the Company Pledge Agreement
and those made part of the Indenture by reference to the Trust Indenture Act.
The Notes are subject to all such terms, and holders of Notes are referred to
the Indenture, the Company Pledge Agreement and the Trust Indenture Act for a
statement of those terms.
A copy of each of the Indenture and the Company Pledge Agreement is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The following is a summary of certain provisions of the Notes, and the
Indenture and the Company Pledge Agreement. This summary does not purport to
be complete and is subject to the detailed provisions of, and is qualified in
its entirety by reference to, the Notes, the Indenture and the Company Pledge
Agreement. The definitions of certain terms used in the following summary are
set forth below under "--Certain Definitions." Unless the context otherwise
requires, all references herein to the "Notes" shall include the Old Notes and
the Exchange Notes.
RANKING AND SECURITY
The Old Notes rank, and the Exchange Notes will rank, senior in right of
payment to all future Subordinated Indebtedness of the Company. The Old Notes
rank, and the Exchange Notes will rank, pari passu in right of payment with
all other existing and future senior obligations of the Company. However, the
Old Notes are, and the Exchange Notes will be, effectively subordinated to all
existing and future Indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's Subsidiaries
and Minority Owned Affiliates. Indenture, Section 4.09. See "Risk Factors--
Financing Risks--Holding Company Structure; Limitations on Access to Cash Flow
of Operating Companies."
As of the date of this Prospectus, only IWC, TeamTalk and NZW have been
designated as a Restricted Subsidiary for purposes of the Indenture. The
Company's other affiliated companies at the date hereof do not constitute
Restricted Subsidiaries or Restricted Affiliates under the Indenture and,
therefore, are not be subject to most of the restrictions set forth in the
Indenture unless and until they are designated as Restricted Subsidiaries or
Restricted Affiliates. In addition, under certain circumstances, the Company
is able to designate current or future Subsidiaries, other than IWC or any
Intermediate Holding Company, as Unrestricted Subsidiaries. Indenture, Section
4.18. Unrestricted Subsidiaries and Unrestricted Affiliates are subject to few
of the restrictive covenants set forth in the Indenture.
The Old Notes are, and the Exchange Notes will be, secured by a first
priority pledge of (i) all of the Capital Stock of (A) IWC, a direct Wholly
Owned Restricted Subsidiary of the Company that (directly or indirectly) holds
all of the Company's interests in the operating companies and developmental
stage projects and (B) any Domestic Intermediate Holding Company, (ii) all
intercompany notes of IWC or any Intermediate Holding Company issued to the
Company and (iii) all intercompany notes of any Domestic Intermediate Holding
Company issued to IWC. Pledge Agreement, Section 2.1. Neither IWC nor any
Intermediate Holding Company will be permitted to be designated as an
Unrestricted Subsidiary, and each will be prohibited from incurring any
Indebtedness or issuing any preferred stock other than to the Company or in
the case of an Intermediate Holding
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Company to IWC. Indenture, Sections 4.09 and 4.18. The Company is prohibited
from incurring any Liens on the Collateral (as defined) other than Liens
securing the Notes and Liens securing a Permitted Bank Facility (as defined)
which will rank pari passu with the Lien on the Notes. Indenture, Section
4.12. See "--Certain Covenants--Limitations on Liens" and "--Limitations on
Subsidiary Structure."
The Company, IWC and Bankers Trust Company, as Collateral Agent, have
entered into the Company Pledge Agreement providing for a first priority
pledge (subject to the possible pari passu Lien arising in connection with a
Permitted Bank Facility) by the Company to the Collateral Agent, for the
benefit of Holders of the Notes, of all Capital Stock of IWC, whether
outstanding on the date of the Indenture or thereafter issued, and all
intercompany notes of IWC or any Intermediate Holding Company issued from time
to time to the Company. Pursuant to the Company Pledge Agreement, IWC has
undertaken to enter into a Pledge Agreement (an "Intermediate Holding Company
Pledge Agreement") prior to forming or acquiring any interest in a Domestic
Intermediate Holding Company. Each Intermediate Holding Company Pledge
Agreement will provide for a first priority pledge (subject to the possible
pari passu Lien arising in connection with a Permitted Bank Facility) by IWC
to the Collateral Agent, for the benefit of Holders of the Notes, of all
Capital Stock of any Domestic Intermediate Holding Company, whether then
outstanding or thereafter issued, and all intercompany notes of such Domestic
Intermediate Holding Company issued from time to time to IWC. The stock and
other assets subject to the liens granted under the Company Pledge Agreement
and each Intermediate Holding Company Pledge Agreement (the "Collateral") will
secure the payment and performance when due of all of the Obligations of the
Company under the Indenture and the Notes as provided in the Pledge Agreement.
Indenture, Section 10.01.
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Indenture and the Company
Pledge Agreement and any Intermediate Holding Company Pledge Agreement
(collectively, the "Pledge Agreement"), the Company (or IWC, as the case may
be) is entitled to receive all cash dividends, interest and other payments
made upon or with respect to the Collateral and to exercise any voting and
other consensual rights pertaining to the Collateral. Pledge Agreement,
Section 7. Upon the occurrence and during the continuance of an Event of
Default (or, after the Company has entered into a Permitted Bank Facility, an
"Event of Default" as defined in the Intercreditor Agreement): (a) all rights
of the Company and IWC to exercise such voting or other consensual rights will
cease, and all such rights will become vested in the Collateral Agent, which,
to the extent permitted by law, will have the sole right to exercise such
voting and other consensual rights; (b) all rights of the Company and IWC to
receive all cash dividends, interest and other payments made upon or with
respect to the Collateral will cease and such cash dividends, interest and
other payments will be required to be paid to the Collateral Agent; and (c)
the Collateral Agent may sell the Collateral or any part thereof in accordance
with the terms of the Pledge Agreement and, if applicable, the Intercreditor
Agreement. Pledge Agreement, Sections 7 and 13. All funds distributed under
the Pledge Agreement and received by the Collateral Agent for the benefit of
the Holders of the Notes will be distributed by the Collateral Agent in
accordance with the provisions of the Pledge Agreement and the Intercreditor
Agreement, if any. Upon the occurrence and during the continuance of an Event
of Default, the Pledge Agreement will provide that all funds held by the
Collateral Agent (including all proceeds from the sale or any other
realization upon the Collateral) will be applied (after the payment of certain
fees and expenses of the Collateral Agent and the Trustee and subject to the
rights of the holder of Indebtedness (if any) under the Permitted Bank
Facility) to the ratable payment of the Accreted Value of, and other
Obligations with respect to, the Notes that are outstanding under the
Indenture. Pledge Agreement, Section 17.
There can be no assurance that the proceeds of any sale of the Collateral in
whole or in part pursuant to the Indenture and the Pledge Agreement following
an Event of Default will be sufficient to satisfy payments due on the Notes.
Moreover, the Collateral will be illiquid and may have no readily
ascertainable market value. Accordingly, there can be no assurance that the
Collateral can be sold in a short period of time, or at all. In addition, the
ability of the Holders of the Notes to realize upon the Collateral will be
subject to certain legal and contractual restrictions and to bankruptcy law
limitations in the event of a bankruptcy of the Company or IWC. Under
applicable federal bankruptcy laws, secured creditors are prohibited from
taking possession of their security from a debtor in a bankruptcy case, or
from disposing of security taken from such a debtor, without
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bankruptcy court approval. Moreover, applicable federal bankruptcy laws
generally permit the debtor to continue to retain collateral even though the
debtor is in default under the applicable debt instruments, provided generally
that the secured creditor is given "adequate protection." The meaning of the
term "adequate protection" may vary according to the circumstances, but is
intended in general to protect the value of the secured creditor's interest in
the collateral at the commencement of the bankruptcy case. Adequate protection
may include cash payments or the granting of additional security, if and at
such times as the court in its discretion determines, for any diminution in
the value of the collateral as a result of the stay of repossession or
disposition of the collateral by the debtor during the pendency of the
bankruptcy case. In view of the lack of a precise definition of the term
"adequate protection" and the broad discretionary powers of a bankruptcy
court, the Company cannot predict whether any payments in respect of the Notes
would be made following commencement of and during a bankruptcy case, whether
or when the Collateral Agent could foreclose upon or sell the Collateral or
whether or to what extent Holders of the Notes would be compensated for any
delay in payment or loss of value of the Collateral through the requirement of
"adequate protection." Furthermore, in the event the bankruptcy court
determines that the value of the Collateral is not sufficient to repay all
amounts due on the Notes, the Holders would hold "undersecured claims."
Applicable federal bankruptcy laws do not permit the payment and/or accrual of
interest, costs and attorney's fees for "undersecured claims" during the
debtor's bankruptcy case. See "Risk Factors -- Financing Risks."
The Pledge Agreement provides that it may be amended only in compliance with
all of the terms and provisions of the Indenture. Pledge Agreement, Section
19.9. As a result, the Pledge Agreement generally may not be amended without
the consent of each Holder affected or, in certain instances, of the holders
of a majority in principal amount of the then outstanding Notes. Indenture,
Section 9.02.
Under the terms of the Pledge Agreement, upon an Event of Default, the
Collateral Agent will determine the circumstances and manner in which the
Collateral will be disposed of, including, but not limited to the
determination of whether to release all or any portion of the Collateral from
the Liens created by the Pledge Agreement and whether to foreclose on the
Collateral following an Event of Default. Pledge Agreement, Section 13. Upon
the full and final payment and performance of all Obligations of the Company
under the Indenture and the Notes, the Pledge Agreement will terminate and the
Collateral will be released. Pledge Agreement, Section 19.17.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes offered hereby will be limited to $196.7 million in
aggregate principal amount at maturity (approximately $69.7 million, before
issuance costs of $5.8 million, of initial Accreted Value as of September 30,
1996 (assuming all of the Old Notes were exchanged for Exchange Notes as of
that date) that will fully accrete to face amount at maturity) and will mature
on August 15, 2001. No cash interest payments are scheduled to be made on the
Exchange Notes prior to maturity. Although for U.S. federal income tax
purposes a significant amount of original issue discount, taxable as ordinary
income, will be recognized by a Holder of Notes as such discount is amortized
from the date of issuance of the Notes, Holders of Notes will not receive any
payments on the Notes until maturity. See "Certain Federal Income Tax
Considerations."
The principal of the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or,
at the option of the Company, payment may be made by wire transfer to a
designated account within the United States or check mailed to the Holders of
the Notes at their respective addresses set forth in the register of Holders
of Notes. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of Bankers Trust Company, the initial
Paying Agent under the Indenture, maintained for such purpose. The Exchange
Notes will be issued in registered form, without coupons, and in denominations
of $1,000 and integral multiples thereof.
REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes prior to maturity.
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The Old Notes are not, and the Exchange Notes will not be, redeemable at the
Company's option prior to maturity. Indenture, Section 4.01.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
In the event of a Change of Control (as defined), the Company will be
required to make an offer to purchase all of the Notes outstanding at a
purchase price in cash equal to 101% of the Accreted Value thereof plus
accrued Additional Interest (as defined in the Registration Rights Agreement),
if any, to the date of repurchase in accordance with the terms set forth below
(a "Change of Control Offer"). Indenture, Section 4.15.
Within 30 days following the occurrence of any Change of Control, the
Company shall mail to each Holder of Exchange Notes at such Holder's
registered address a notice stating: (i) that a Change of Control has occurred
and that such Holder has the right to require the Company to repurchase all or
a portion (equal to $1,000 principal amount or an integral multiple thereof)
of such Holder's Notes at a purchase price in cash equal to 101% of the
Accreted Value thereof accrued plus Additional Interest, if any, to the date
of repurchase (the "Change of Control Purchase Date"), which shall be a
business day, specified in such notice, that is not earlier than 30 days or
later than 60 days from the date such notice is mailed, (ii) the Accreted
Value of the Notes as of, and the Additional Interest due on, the Change of
Control Purchase Date, (iii) that any Note not tendered will continue to
accrete, (iv) that, unless the Company defaults in the payment of the purchase
price for the Notes payable pursuant to the Change of Control Offer, any Notes
accepted for payment pursuant to the Change of Control Offer shall cease to
accrete after the Change of Control Purchase Date, (v) the procedures,
consistent with the Indenture, to be followed by a Holder of Notes in order to
accept a Change of Control Offer or to withdraw such acceptance, and (vi) such
other information as may be required by the Indenture and applicable laws and
regulations. Indenture, Section 3.01.
One Business Day prior to the Change of Control Purchase Date, the Company
will (i) accept for payment all Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent the aggregate
purchase price of all Notes or portions thereof accepted for payment as of the
Change of Control Purchase Date and (iii) deliver or cause to be delivered to
the Trustee all Notes tendered pursuant to the Change of Control Offer.
Indenture, Sections 3.02 - 3.03. The Trustee shall promptly mail to each
Holder of Notes or portions thereof accepted for payment an amount equal to
the purchase price for such Notes, and the Trustee shall promptly authenticate
and mail to any holder of Notes accepted for payment in part a new Note equal
in principal amount to any unpurchased portion of the Notes, and any Note not
accepted for payment in whole or in part shall be promptly returned to the
Holder of such Note. Indenture, Sections 3.03 - 3.04. On and after a Change of
Control Purchase Date, the Notes or portions thereof accepted for payment will
cease to accrete unless the Company defaults in the payment of the purchase
price therefor. The Company will announce the results of the Change of Control
Offer to Holders of the Notes on or as soon as practicable after the Change of
Control Purchase Date. Indenture, Section 3.03.
With respect to the sale of assets, the phrase "all or substantially all" as
used in the Indenture varies according to the facts and circumstances of the
subject transaction, has no clearly established meaning under relevant law and
is subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of a person and therefore it may be unclear whether a Change of Control
has occurred and whether the Notes are subject to a Change of Control Offer.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring. There can be no guarantee that the
Company will have sufficient cash resources to honor its obligations in the
event of a Change of Control.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Change
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of Control Offer. Indenture, Section 3.01. To the extent that the provisions
of any securities laws or regulations conflict with the "Change of Control"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Change of Control" provisions of the Indenture by
virtue thereof. Indenture, Section 3.01.
Asset Sales
The Indenture provides that the Company may not, and shall not permit any of
its Restricted Subsidiaries to, engage in an Asset Sale (other than a
Permitted Pledge Foreclosure) unless (i) the Company (or the applicable
Restricted Subsidiary, as the case may be) receives consideration at the time
of such Asset Sale at least equal to the fair market value (as evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets sold or otherwise disposed of and (ii)
at least 85% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash; provided, however, that the
amount of (A) any liabilities of any Restricted Subsidiary as shown on such
Restricted Subsidiary's most recent balance sheet or in the notes thereto
(other than liabilities that are incurred in connection with, or in
contemplation of, such Asset Sale) that are assumed by the transferee of any,
such assets and (B) any notes or other obligations received by the Company or
such Restricted Subsidiary from such transferee that are immediately converted
by the Company or such Restricted Subsidiary into cash (to the extent of the
cash received), shall be deemed to be cash for purposes of this paragraph.
Indenture, Section 4.10.
Notwithstanding the immediately preceding paragraph, the Company and its
Restricted Subsidiaries are permitted to consummate an Asset Sale without
complying with such paragraph if (i) the Company or the applicable Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Asset Sale at least equal to the fair market value of the assets sold or
otherwise disposed of (as evidenced by a resolution of the Company's Board of
Directors set forth in an Officer's Certificate delivered to the Trustee),
(ii) at least 85% of the consideration for such Asset Sale (other than any
Take-Along Asset Sale) constitutes assets or property of a kind usable by the
Company in accordance with the covenant described under "--Certain Covenants--
Limitations on Lines of Business" ("Related Business Assets") and (iii) at the
time of such Asset Sale (other than any Take-Along Asset Sale) and after
giving pro forma effect thereto, the Company would be permitted to incur at
least $1.00 of additional Subordinated Indebtedness pursuant to the first
paragraph of the covenant described under "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock;" provided that any consideration
received from such Asset Sale (including any Take-Along Asset Sale) by the
Company or any Restricted Subsidiary not constituting cash or Related Business
Assets shall constitute Net Proceeds subject to the provisions of the next
paragraphs. Indenture, Section 4.10.
Within 270 days after any Asset Sale (or, in the case of any Permitted
Pledge Foreclosure or Asset Sale compelled by a governmental authority, such
later date as the Company or the applicable Restricted Subsidiary shall
receive any Net Proceeds from such Asset Sale), the Company (or the applicable
Restricted Subsidiary, as the case may be) may apply the Net Proceeds from
such Asset Sale to make a Permitted Investment (other than an Investment in
Cash Equivalents). Any Net Proceeds from an Asset Sale that are not applied
within 270 days after such Asset Sale (or, in the case of any Permitted Pledge
Foreclosure or Asset Sale compelled by a governmental authority, such later
date as the Company or the applicable Restricted Subsidiary shall receive any
Net Proceeds from such Asset Sale) to make a Permitted Investment as provided
in the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds," provided that, in the case of an Asset Sale by a Restricted
Subsidiary of the Company that is not a Wholly Owned Restricted Subsidiary of
the Company, only the Company's Pro Rata Portion of such Net Proceeds to the
extent not reinvested shall constitute Excess Proceeds. Pending final
application of any Net Proceeds of an Asset Sale to a Permitted Investment
(other than Cash Equivalents) or to an Asset Sale Offer, such Net Proceeds may
only be invested in Cash Equivalents. When the aggregate amount of Excess
Proceeds exceeds $5 million, the Company is required to make an offer to all
Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased with the Excess Proceeds at an offer
price in cash equal to the Accreted Value thereof plus accrued Additional
Interest, if any, to the date of repurchase in accordance with the procedures
set forth in the Indenture. To the extent that the aggregate Accreted Value of
Notes tendered pursuant to an Asset Sale Offer plus accrued Additional
Interest, if any, is less than the Excess Proceeds to be applied to purchase
Notes, the Company may
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use any remaining Excess Proceeds for any purpose permitted by the other
provisions of the Indenture. If the aggregate Accreted Value of Notes
surrendered by Holders thereof plus accrued Additional Interest, if any,
exceeds the amount of Excess Proceeds, the Trustee will select the Notes to be
purchased on a pro rata basis (based upon the Accreted Value outstanding).
Upon completion of each Asset Sale Offer, the amount of Excess Proceeds shall
be reset at zero. Indenture, Section 4.10.
If an Asset Sale is (i)(A) compelled by action by a governmental authority
or (B) in the case of Mobilcom Mexico, is pursuant to a Take Along Asset Sale
and (ii) for consideration less than fair market value (as determined by the
Board of Directors), such sale shall not be deemed to be in contravention of
the requirement set forth in clause (i) of the first paragraph of this Section
to the extent that the difference between such fair market value and the
actual consideration received in such Asset Sale (and all other such Asset
Sales subject to this paragraph on a cumulative basis) is less than 10% of the
Total Market Value of Equity of the Company. Without limiting the foregoing,
any Asset Sale pursuant to that certain Agreement dated October 2, 1995
between the Company and Permata Merchant Bank Berhad (without giving effect to
any amendments or modifications thereto) shall not be deemed to be in
contravention of the requirement set forth in clause (i) of the first
paragraph of this Section. Indenture, Section 4.10.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company may not, and shall not permit any of
its Restricted Subsidiaries or Restricted Affiliates to, directly or
indirectly: (i) declare or pay any dividend or make any distribution on
account of the Equity Interests of the Company (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company; (iii) purchase, redeem or otherwise
acquire or retire for value any Subordinated Indebtedness; or (iv) make or
permit to remain outstanding any Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"). Indenture, Section 4.07.
The foregoing provisions do not prohibit (a) the redemption, repurchase,
retirement or other acquisition for value of any Equity Interests of the
Company in exchange for, or out of the net cash proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than any Disqualified Stock); (b) the
defeasance, redemption or repurchase of any Subordinated Indebtedness (in
whole or in part) with the net proceeds from an incurrence of Permitted
Refinancing Indebtedness; (c) the repurchase of Subordinated Indebtedness
pursuant to a Permitted Offer to Purchase; (d) the making or retention of any
Permitted Investment; or (e) payments in aggregate amount not to exceed $1.0
million to redeem or repurchase at original issuance cost the Common Stock of
terminated or deceased employees under employee stock option or stock purchase
agreements. Indenture, Section 4.07.
Not later than the date of making any Restricted Payment (other than an
Investment in Cash Equivalents), the Company shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which its calculations were computed. Indenture,
Section 4.07.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company may not, and shall not permit any
Restricted or Unrestricted Subsidiary of the Company, Restricted Affiliate or
Subsidiary of a Restricted Affiliate to, directly or indirectly, create,
incur, issue, assume, guaranty or otherwise become directly or indirectly
liable with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt), and that the Company will not issue any Disqualified Stock and
shall not permit any Restricted or Unrestricted Subsidiary of the Company,
Restricted Affiliate or Subsidiary of a Restricted Affiliate to issue any
shares of preferred stock; provided, however, that the Company may incur
Subordinated Indebtedness (including Acquired Debt that is such Subordinated
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Indebtedness), or issue shares of Disqualified Stock, if: (i) the Company's
Consolidated Debt to Consolidated Cash Flow Ratio is less than 7 to 1, in the
case of any such incurrence or issuance on or before August 15, 1998, or less
than 5 to 1, in the case of any such incurrence or issuance at any time
thereafter, in each case determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of the applicable four-quarter period; or
(ii) the Company's Consolidated Debt does not exceed 25% of the Company's
Total Market Capitalization, calculated as of the date of incurrence or
issuance and on a pro forma basis after giving effect to such incurrence or
issuance (including a pro forma application of the net proceeds therefrom).
Indenture, Section 4.09.
The provisions of the foregoing paragraph do not apply to (a) issuances of
preferred stock or Indebtedness by a Restricted Subsidiary or Unrestricted
Subsidiary of the Company, a Restricted Affiliate or a Subsidiary of a
Restricted Affiliate to the holders (or their Affiliates) of the common equity
of such Subsidiary, Restricted Affiliate or Subsidiary of a Restricted
Affiliate on a basis that is substantially proportionate to their common
equity interests; (b) the Notes; (c) intercompany Indebtedness between or
among the Company, a Restricted Subsidiary of the Company, a Restricted
Affiliate or a Restricted Subsidiary of a Restricted Affiliate to the extent
permitted by the other provisions of the Indenture; (d) the incurrence by the
Company, a Restricted Subsidiary of the Company, a Restricted Affiliate or a
Restricted Subsidiary of a Restricted Affiliate of Permitted Refinancing
Indebtedness; (e) the incurrence by a Restricted Subsidiary of the Company, a
Restricted Affiliate or a Restricted Subsidiary of a Restricted Affiliate of
Project Financing, the proceeds of which are used by such Restricted
Subsidiary, Restricted Affiliate or Restricted Subsidiary of a Restricted
Affiliate, directly or indirectly, to construct, develop, improve, acquire or
operate a Related Business; provided that no single Restricted Subsidiary
(together with its consolidated Restricted Subsidiaries and its Restricted
Affiliates) and no single Restricted Affiliate (together with its consolidated
Restricted Subsidiaries and its Restricted Affiliates), pro forma for such
incurrence and the application of the net proceeds therefrom, may, on the date
of such incurrence, have an aggregate principal amount of Project Financing
outstanding, determined without duplication, that exceeds the greater of (1)
five times the Consolidated Cash Flow of such Restricted Subsidiary or
Restricted Affiliate for the most recently completed four full fiscal quarters
for which internal financial statements are available as of the date of such
incurrence (calculated on a pro forma basis as if such Project Financing had
been incurred and the proceeds therefrom applied at the beginning of the
applicable four-quarter period) or (2) two times the Consolidated Invested
Equity Capital of such Restricted Subsidiary or Restricted Affiliate at such
time; (f) the issuance by Unrestricted Subsidiaries of the Company or
Unrestricted Subsidiaries of Restricted Affiliates of preferred stock or the
incurrence by Unrestricted Subsidiaries of the Company or Unrestricted
Subsidiaries of Restricted Affiliates of Non-Recourse Debt with respect to the
Company, a Restricted Subsidiary, Restricted Affiliate, or Restricted
Subsidiary of a Restricted Affiliate; provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary with
respect to the Company and its Restricted Subsidiaries, its Restricted
Affiliates and Restricted Subsidiaries of Restricted Affiliates, such event
shall be deemed to constitute an incurrence by a Restricted Subsidiary of all
of such Indebtedness of such Subsidiary or a Restricted Affiliate of all of
such Indebtedness of such Minority Owned Affiliate, as the case may be; (g)
the incurrence by the Company of Subordinated Indebtedness in an aggregate
principal amount (or accreted value, as applicable) at any one time
outstanding (measured as of the date of incurrence and without giving effect
to subsequent accretion) not to exceed the sum of $100.0 million (or the
equivalent amount in one or more foreign currencies); (h) Guarantees by the
Company, a Restricted Subsidiary, Restricted Affiliate, or Restricted
Subsidiary of a Restricted Affiliate of the Company of Project Financing of
the Company's Restricted Subsidiaries, Restricted Affiliates or Restricted
Subsidiaries of its Restricted Affiliates not to exceed $10.0 million (or the
equivalent amount in one or more foreign currencies) at the time such Project
Financing was guaranteed in aggregate principal amount outstanding and related
accrued interest at any one time outstanding and related accrued interest (in
addition to Guarantees outstanding on the date of the Indenture); (i) the
guarantee by the Company, its Restricted Subsidiaries, Restricted Affiliates
or Restricted Subsidiaries of Restricted Affiliates of Indebtedness of
Unrestricted Affiliates, but only to the extent that after the incurrence of
such guarantee of such Indebtedness the Company would be able to make at least
$1.00 of additional Investments pursuant to clause (d) of the definition of
Permitted Investments; and (j) a Permitted Bank Facility in an
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aggregate amount not to exceed $20.0 million in principal amount, with any
letters of credit issued thereunder being deemed to have a principal amount
equal to the maximum exposure thereof. Indenture, Section 4.09.
Limitations on Liens
The Indenture provides that the Company may not, and shall not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or otherwise cause or suffer to exist any Lien of any kind (other than
Permitted Liens) upon any property or assets, now owned or hereafter acquired,
of the Company or any such Restricted Subsidiary, or upon any income or
profits therefrom or assign or convey any right to receive income therefrom.
Indenture, Section 4.12.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company may not, and shall not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any such Restricted Subsidiary to (a)(i) pay dividends or make
any other distributions to the Company or any of its Restricted Subsidiaries
(A) on its Capital Stock or (B) with respect to any other interest or
participation in, or measured by, its profits, or (ii) pay any Indebtedness
owed to the Company or any of its Restricted Subsidiaries, (b) make loans or
advances to the Company or any of its Restricted Subsidiaries, or (c) sell,
lease or transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (i) the Indenture, the Pledge Agreement and the Notes,
(ii) applicable law, (iii) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the Company or any Restricted Subsidiary as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property or
assets of the Person, so acquired; provided that the Consolidated Cash Flow of
such Person is not taken into account in determining whether such acquisition
was permitted by the terms of the Indenture, (iv) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced,
(v) Indebtedness outstanding on the Issue Date, or (vi) Project Financing
permitted under the Indenture and any other Indebtedness consisting of Non-
Recourse Debt with respect to the Company or any other Restricted Subsidiary,
Restricted Affiliate, or Restricted Subsidiary of any Restricted Affiliate,
provided that the Consolidated Cash Flow of any Persons incurring such
Indebtedness is not taken into account when determining the Consolidated Cash
Flow of the Company. Notwithstanding the foregoing, the Indenture prohibits
IWC and any Intermediate Holding Company from creating or suffering to exist
any such encumbrances or restrictions, except those imposed by applicable law
or by the Indenture or Notes. Indenture, Section 4.08.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee, under the Indenture, the Pledge
Agreement, the Intercreditor Agreement and the Notes; (iii) immediately after
such transaction, no Default or Event of Default exists; and (iv) the Company
or any entity or Person formed by or surviving any such consolidation or
merger, or to which such sale, assignment, transfer, lease, conveyance or
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other disposition shall have been made (A) will have Consolidated Net Worth
(immediately after the transaction but prior to any purchase accounting
adjustments resulting from the transaction) equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction
and (B) would, at the time of such transaction and after giving pro forma
effect thereto (as if such transaction had occurred at the beginning of the
most recently ended four-quarter period for which internal financial
statements are available immediately preceding the date of such transaction,
for purposes of calculating the Consolidated Debt to Consolidated Cash Flow
Ratio, and as if such transaction had occurred as of such date for purposes of
calculating Consolidated Debt as a percentage of Total Market Capitalization),
be permitted to incur at least $1.00 of additional Subordinated Indebtedness
pursuant to the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock." Notwithstanding the foregoing, nothing in this covenant
shall restrict or limit the Company's ability to transfer all or substantially
all of its assets (other than those pledged pursuant to the Pledge Agreement)
to a Wholly Owned Restricted Subsidiary. Indenture, Section 5.01.
Transactions with Affiliates
The Indenture provides that the Company may not, and shall not permit any of
its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from,
or enter into any contract, agreement, understanding, loan, advance or
Guarantee with, or for the benefit of, any Affiliate of the Company (each of
the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate
Transaction is on terms that are no less favorable to the Company or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (b) the Company delivers to the Trustee (i) with respect
to any Affiliate Transaction involving aggregate payments in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate to the effect that such Affiliate Transaction complies with clause
(a) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (ii) with respect
to any Affiliate Transaction involving aggregate payments in excess of $5.0
million, an opinion as to the fairness to the Company or such Restricted
Subsidiary from a financial point of view issued by an investment banking firm
of national standing; provided, however, that none of the following shall be
deemed to be an Affiliate Transaction: (a) any employment agreement, stock
option agreement or other agreement relating to the terms of employment or
compensation entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business and consistent with the past practice of
the Company or such Restricted Subsidiary; (b) transactions effected pursuant
to the IRA, the Series F Purchase Agreement and the Registration Rights
Agreement; (c) transactions between or among the Company and/or any of its
Restricted Subsidiaries or Restricted Affiliates or Restricted Subsidiaries of
Restricted Affiliates that would not be deemed to be Affiliates but for the
Company's direct or indirect ownership interest therein; or (d) solely for
purposes of clause (b)(ii) above, transactions pursuant to a joint venture,
co-investment agreement or similar arrangement with an Affiliate in which the
Company or its Restricted Subsidiaries make an Investment in any Person who is
not an Affiliate of either the Company or its co-investing Affiliate at the
time such Investment is made, but only to the extent such Investment is
acquired solely for cash and the Company or its Restricted Subsidiary and such
co-investing Affiliate are investing on substantially identical terms.
Indenture, Section 4.11.
Limitations on Lines of Business
The Indenture provides that the Company may not, and shall not permit any
Restricted Subsidiary to, directly or indirectly engage to any substantial
extent in any line or lines of business other than a Related Business.
Indenture, Section 4.13.
Designation of Restricted Subsidiary as Unrestricted Subsidiary and
Restricted Affiliate as Unrestricted Affiliate; Designation of Unrestricted
Subsidiary as Restricted Subsidiary and Unrestricted Affiliate as Restricted
Affiliate
The Indenture provides that the Board of Directors may designate a
Restricted Subsidiary of the Company (other than IWC or any Intermediate
Holding Company) to be an Unrestricted Subsidiary and may designate a
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Restricted Affiliate to be an Unrestricted Affiliate if as a result of such
designation no Default or Event of Default shall have occurred and be
continuing, and if, after giving pro forma effect to such designation, the
Company would have been permitted to make at least $1.00 of additional
Investments pursuant to clause (d) of the definition of Permitted Investments.
Upon the designation of any Restricted Subsidiary as an Unrestricted
Subsidiary, or the designation of any Restricted Affiliate as an Unrestricted
Affiliate, all previous Investments by the Company in a Wholly Owned
Restricted Subsidiary and the Company's Pro Rata Portion of any Investments by
any of its Restricted Subsidiaries or Restricted Affiliates in such Restricted
Subsidiary or Restricted Affiliate (in all other cases) will be deemed to
constitute an Investment made on the date of such designation in an
Unrestricted Subsidiary or Unrestricted Affiliate, as applicable, in an amount
equal to the greatest of (x) the aggregate original fair market value of such
Investments (or the Company's Pro Rata Portion thereof, as applicable) as
determined in good faith by the Company's Board of Directors, (y) the net book
value of such Investments at the time of such designation (or the Company's
Pro Rata Portion thereof, as applicable), and (z) the fair market value of
such Investments at the time of such designation (or the Company's Pro Rata
Portion thereof, as applicable) as determined in good faith by the Company's
Board of Directors. Such designation will only be permitted if (i) such
Investment (or the Company's Pro Rata Portion thereof, as applicable) would be
permitted at such time by the terms of the covenant entitled "Restricted
Payments," (ii) such Restricted Subsidiary or Restricted Affiliate, as
applicable, otherwise meets the definition of an Unrestricted Subsidiary or an
Unrestricted Affiliate, as applicable, and has no Indebtedness other than
Non-Recourse Debt with respect to the Company and its Restricted Subsidiaries,
its Restricted Affiliates and Restricted Subsidiaries of Restricted
Affiliates, and (iii) any Guarantee by the Company of such Non-Recourse Debt
is permitted pursuant to clause (i) as described under "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock." Indenture,
Section 4.18.
The Indenture also provides that the Board of Directors may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary and may
designate any Unrestricted Affiliate to be a Restricted Affiliate; provided,
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary or Restricted Affiliate, as applicable, of all
outstanding Indebtedness of such Unrestricted Subsidiary or Unrestricted
Affiliate, as applicable, and such designation shall only be permitted if (1)
as a result of such designation no Default or Event of Default shall have
occurred and be continuing, (2) immediately after giving pro forma effect to
such designation, all Indebtedness of the Subsidiary or Affiliate so
designated would be permitted under the covenant described above under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock" if it
were incurred by a Restricted Subsidiary or Restricted Affiliate, as
applicable, on the date of designation, and (3) such designation does not and
will not result in the creation of any Lien on any asset of the Company or any
of its Restricted Subsidiaries (including the Subsidiary so designated),
except Liens permitted by the Indenture to be incurred. Indenture, Section
4.18.
Limitations on Subsidiary Structure
Notwithstanding anything in the Indenture to the contrary, the Indenture
provides that the Company is not allowed to make any Investment in any Person,
directly or indirectly, other than through IWC, which is required to hold,
directly or indirectly through any Intermediate Holding Company, all
Investments made by the Company or any of its Restricted Subsidiaries or
Restricted Affiliates (except that the Company may hold cash or Cash
Equivalents in amounts necessary to meet payroll and other operating expenses
of the Company). The Indenture also provides (i) that IWC shall at all times
continue to be a direct Wholly Owned Restricted Subsidiary of the Company and
that the Company shall not have any other direct Subsidiaries, (ii) that IWC
shall not (although its Restricted Subsidiaries and Restricted Affiliates,
other than an Intermediate Holding Company, may, to the extent permitted by
the covenant described above under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock") incur any Indebtedness, except intercompany
Indebtedness from IWC to the Company that is pledged pursuant to the Pledge
Agreement, or issue any preferred stock, (iii) no Intermediate Holding Company
shall (although its Restricted Subsidiaries and Restricted Affiliates may, to
the extent permitted by the covenant described above under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock") incur any
Indebtedness, except intercompany Indebtedness from any such Intermediate
Holding Company to IWC or the Company that, in the case of a Domestic
Intermediate Holding Company, is pledged pursuant to the Pledge
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Agreement, (iv) that IWC will not consolidate or merge with or into any Person
other than an Intermediate Holding Company provided that IWC is the surviving
corporation and (v) no Intermediate Holding Company shall consolidate or merge
with or into any Person other than IWC provided that IWC is the surviving
corporation. Indenture, Section 4.16.
Limitation on Status as Investment Company
The Indenture provides that the Company may not, and shall not permit any of
its Restricted Subsidiaries to, conduct its business in a fashion that would
cause it to be required to register as an "investment company" (as that term
is defined in the Investment Company Act of 1940, as amended), or otherwise
become subject to regulation under the Investment Company Act of 1940, as
amended. Indenture, Section 4.17.
Reports
The Indenture provides that, following the first fiscal quarter ending after
the consummation of the Offering and whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company shall furnish to the Holders of Notes (i) all quarterly and annual
financial information that is substantially equivalent to that which would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K (or any successor Forms) if the Company were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and
(ii) all reports that are substantially equivalent to that which would be
required to be filed with the Commission on Form 8-K (or any successor Form)
if the Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company shall
file a copy of all such information with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to investors who request it in writing. Indenture,
Section 4.03(a). The Indenture also requires that, so long as any of the Notes
remain outstanding, the Company shall make available to any prospective
purchaser of Notes or beneficial owner of Notes in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act,
until such time as the Company has either exchanged the Notes for securities
identical in all material respects which have been registered under the
Securities Act or until such time as the holders thereof have disposed of such
Notes pursuant to an effective registration statement under the Securities
Act. Indenture, Section 4.03(b).
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default in payment when due of Additional Interest, premium,
principal or Accreted Value (as applicable) of the Notes, at maturity, upon
acceleration, repurchase or otherwise; (ii) failure by the Company or any of
its Restricted Subsidiaries or Restricted Affiliates to comply with the
provisions described above under the captions "--Repurchase at the Option of
Holders--Change of Control," "--Asset Sales," "--Restricted Payments," "--
Incurrence of Indebtedness and Issuance of Preferred Stock," "--Merger,
Consolidation or Sale of Assets" or "--Limitations on Subsidiary Structure";
(iii) failure by the Company for 60 days after notice to comply with any of
its other agreements in the Indenture or the Notes; (iv) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries or the payment of which is
Guaranteed by the Company or any of its Restricted Subsidiaries whether such
Indebtedness or Guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (v) failure by
the Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $3.0 million, which judgments are not paid,
discharged or stayed
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for a period of 60 days; (vi) certain events of bankruptcy or insolvency with
respect to the Company or any of its Restricted Subsidiaries which have more
than $3.0 million in total assets and (vii) breach by the Company or IWC of
any material representation or warranty set forth in the Pledge Agreement or
the Intercreditor Agreement, or default by the Company or IWC in the
performance of any covenant set forth in the Pledge Agreement or the
Intercreditor Agreement, or repudiation by the Company of its obligations
under the Pledge Agreement or the Intercreditor Agreement or the
unenforceability of any substantive provision of the Pledge Agreement or the
Intercreditor Agreement for any reason. Indenture, Section 6.01.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Indenture, Section 6.02.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company or any
Restricted Subsidiary having more than $3.0 million in total assets, all
outstanding Notes will become due and payable without further action or
notice. Except as provided below in the following paragraph, in the event of
any such acceleration of Notes, the Company will become obligated to pay the
Accreted Value of the Notes plus in the case of the old Notes accrued
Additional Interest, if any, immediately. Indenture, Section 6.02. Holders of
the Notes may not enforce the Indenture or the Notes except as provided in the
Indenture, the Pledge Agreement and, if applicable, the Intercreditor
Agreement. Indenture, Section 6.06. Subject to certain limitations, Holders of
a majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. Indenture, Section 6.05.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
an offer to purchase or the payment of principal, premium or Additional
Interest or in the case of the Company's failure to comply with the covenant
described above under the caption "--Certain Covenants--Merger, Consolidation
or Sale of Assets") if it determines that withholding notice is in their
interest. Indenture, Section 7.05.
The Holders of a majority in principal amount of the Notes then outstanding
may, by notice to the Trustee, on behalf of the Holders of all of the Notes
outstanding, waive any existing Default or Event of Default and its
consequences under the Indenture except a Default or Event of Default relating
to the payment of principal of, or premium or Additional Interest, if any, on
the Notes (which would be required to be unanimous) or in respect of a
covenant or a provision of the Indenture which cannot be amended or modified
without the consent of all Holders of the Notes. Indenture, Section 6.04.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default. Indenture, Section
4.04.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company, as such, currently has, or will have, any
liability for any obligations of the Company under the Notes, the Indenture or
the Pledge Agreement, or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Indenture, Section 11.07. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the Indenture, the Pledge Agreement and
the outstanding Notes ("Legal Defeasance") except for (i) the rights of
Holders of outstanding Notes to receive payments in respect of the principal
of, and premium and Additional Interest, if any, on such Notes when such
payments are due, from the funds held by the Trustee in the trust referred to
below, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, transfer of the Notes and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties
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and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture.
Indenture, Section 8.02. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect
to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any failure to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes. Indenture, Section 8.03.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee or the Paying Agent on
behalf of the Trustee, in trust, for the benefit of the Holders of the Notes,
cash in U.S. dollars, non-callable Government Securities, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
and premium and Additional Interest, if any, on the outstanding Notes on the
stated maturity for payment thereof or on the applicable repurchase date, as
the case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such Opinion of Counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under any material agreement
or instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally, and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of the
Holders of the Notes; (vii) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with. Indenture,
Section 8.04.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
accepted for repurchase. Indenture, Section 2.06.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, the Indenture, the Notes or
the Pledge Agreement may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Notes
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then outstanding (including consents obtained in connection with a tender
offer or exchange offer for Notes), and any existing default or compliance
with any provision of the Indenture, the Notes or the Pledge Agreement may be
waived with the consent of the Holders of a majority in principal amount of
the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for Notes). Indenture, Sections 6.04 and 9.02.
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder of Notes): (i)
reduce the amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note, (iii) reduce the rate of accretion on any Note, (iv)
reduce the repurchase price for the offers to purchase described above under
the caption "--Repurchase at the Option of the Holder", change the time at
which any Note may be repurchased or otherwise amend in any material respect
(including through amendment of any of the definitions relating thereto) or
waive the Company's obligation to make and consummate a Change of Control
Offer in the event of a Change of Control or an Asset Sale Offer in the event
of an Asset Sale, (v) waive a Default or Event of Default in the payment of
principal of, or premium or Additional Interest, if any, on the Notes (except
a rescission of acceleration of the Notes that resulted from a non-payment
default by the Holders of at least a majority in aggregate principal amount of
the Notes and a waiver of the payment default that resulted from such
acceleration), (vi) make any Note payable in money other than that stated in
the Notes, (vii) make any change in the provisions of the Indenture relating
to waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of, or premium or Additional Interest, if any, on the
Notes, (viii) modify or amend the Indenture or the Pledge Agreement, or take
or fail to take any action, that would have the effect of impairing the Lien
on the Collateral granted pursuant to the Pledge Agreement or permitting any
release of Collateral from such Lien except as expressly contemplated by the
Indenture or the Pledge Agreement, (ix) make any changes in certain provisions
dealing with waivers of past Defaults and the right of the Holders of the
Notes to receive payments or (x) make any change in the foregoing amendment
and waiver provisions. Indenture, Section 9.02.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Trustee and the Collateral Agent, as applicable, may amend or
supplement the Indenture, the Pledge Agreement or the Notes to (i) cure any
ambiguity, defect or inconsistency (provided that such amendment or supplement
does not adversely affect the rights of any of the Holders of the Notes in any
material respect), (ii) provide for uncertificated Notes in addition to or in
place of certificated Notes, (iii) provide for the assumption of the Company's
obligations to Holders of the Notes in the case of a merger, consolidation or
sale of all or substantially all of the Company's assets, (iv) make any change
that would provide any additional rights or benefits to the Holders of the
Notes or that does not adversely affect the legal rights under the Indenture,
the Notes or the Pledge Agreement of any such Holder, (v) comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or (iv) to
provide for the issuance of exchange securities in accordance with the
Registration Rights Agreement. Indenture, Section 9.01.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign. Indenture, Section 7.03.
The Holders of a majority in principal amount of the then outstanding Notes
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. Indenture, Section 6.05. The Indenture provides that in
case an Event of Default shall occur (which shall not be cured), the Trustee
is required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Indenture, Section 7.01.
Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Indenture, Section 7.01.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination, for each $1,000 in
principal amount of Notes the sum of (a) $508.35 and (b) the portion of the
excess of the principal amount of each Note over the amount stated in clause
(a) that shall have been amortized through such date, such amount to be so
amortized on a daily basis and compounded semi-annually on February 15 and
August 15 of each year at the rate of 14% per annum from the date of issuance
of the Notes through the date of determination.
"Acquired Debt" means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (ii) Indebtedness encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purpose of this definition: "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided, however, that: (i) holding office as an executive officer or
director of a Person or (ii) beneficial ownership of 10% or more of the equity
securities of a Person, either individually or as part of a group, shall be
deemed to be control.
"Asset Sale" means the sale, lease, conveyance or other disposition of any
assets other than a sale of Cash Equivalents for cash (including, without
limitation, by way of a sale-and-leaseback), whether in a single transaction
or a series of related transactions, (a) that have a fair market value in
excess of $500,000, or (b) for net proceeds in excess of $500,000.
Notwithstanding the foregoing, (i) a transfer of assets by the Company to a
Wholly Owned Restricted Subsidiary of the Company or by a Wholly Owned
Restricted Subsidiary of the Company to the Company or to another Wholly Owned
Restricted Subsidiary of the Company shall not be deemed to be an Asset Sale,
(ii) Permitted Investments made solely with cash and Cash Equivalents shall
not be deemed to be an Asset Sale and (iii) the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company are
governed by the provisions of the Indenture described above under the caption
"--Repurchase at the Option of Holders -- Change of Control" and/or the
provisions described above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provisions described above
under the caption "Repurchase at Option of Holders--Asset Sale."
"Bank Financing Conditions" means (i) the due execution and delivery by or
on behalf of the lender or lenders party to a Permitted Bank Facility of the
Intercreditor Agreement, (ii) the due acknowledgment of, and consent to, the
Intercreditor Agreement by the Company, and (iii) the receipt by the Trustee
of an Officers' Certificate and opinion of counsel that the conditions set
forth in the foregoing clauses (i) and (ii) have been complied with.
"Basket Investment" has the meaning specified in the definition of Permitted
Investments.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock, including,
without limitation, with respect to partnerships, partnership interests
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(whether general or limited) and any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, such partnership.
"Cash Equivalents" means (i) United States dollars or other currencies, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities
of not more than six months from the date of acquisition, (iii) certificates
of deposit, eurodollar time deposits and bankers' acceptances with maturities
not exceeding six months and overnight bank deposits with any commercial bank,
depository institution or trust company incorporated or doing business under
the laws of the United States of America, any state thereof or the District of
Columbia or a branch or subsidiary of any such depository institution or trust
company operating outside the United States, provided, that such depository
institution or trust company has, at the time of the Investment, (A) capital
and surplus in excess of $250.0 million and (B) outstanding short-term debt
securities which are rated at least A-1 by Standard & Poor's Rating Services
or at least P-1 by Moody's Investors Service, Inc., or carry an equivalent
rating by a nationally recognized statistical rating organization if both the
two named rating agencies cease publishing ratings of investments, (iv)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having a rating in the highest rating
categories from Standard & Poor's Rating Services or Moody's Investors
Service, Inc. or carry an equivalent rating by a nationally recognized
statistical rating organization if both of the two named rating agencies cease
establishing ratings of investments and in each case maturing within six
months after the date of acquisition and (vi) money market mutual or similar
funds having assets in excess of $250.0 million, provided, that with respect
to any Non-Domestic Person, Cash Equivalents shall also mean those investments
that are comparable to clauses (iii) through (v) above in such Person's
country of organization or country where it conducts business operations.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, whether direct or
indirect (by way of a merger, consolidation or otherwise), by the Company or a
Restricted Subsidiary of the Company, in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole, to any Person other than a Wholly
Owned Restricted Subsidiary of the Company; (ii) the adoption of a plan
relating to the liquidation or disolution of the Company; (iii) any Person or
group (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act), other than Permitted Holders, directly or indirectly acquires more than
50% of the total voting power of all classes of voting stock of the Company
and/or warrants or options to acquire such voting stock, calculated on a fully
diluted basis; or (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors.
"Closing Price" means, on any Trading Day with respect to any share of
Capital Stock, the last reported sale price regular way for a share of such
Capital Stock or, in case no such reported sale takes place on such day, the
reported closing bid price regular way, in either case on the New York Stock
Exchange or, if such shares of Capital Stock are not listed or admitted to
trading on such Exchange, on the principal national securities exchange on
which such shares are listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on
any national securities exchange or quoted on such Market but the issuer is a
"Foreign Issuer" (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a "Designated Offshore Securities Market" (as defined in Rule
902(a) under the Securities Act), the reported closing bid price regular way
on such principal exchange, or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on such automated
quotation system and the issuer and principal securities exchange do not meet
such requirements, the closing bid price in the over-the-counter market as
furnished by any New York Stock Exchange member firm that is selected from
time to time by the Company for that purpose and is reasonably acceptable to
the Trustee.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (a) an amount
equal to any extraordinary loss of such Person or any of its Restricted
Subsidiaries plus any net loss realized in connection with an Asset Sale by
such Person or any of its
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Restricted Subsidiaries (to the extent such losses were deducted in computing
such Consolidated Net Income), plus (b) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent such provision for taxes was included in computing Consolidated Net
Income, plus (c) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued (including
amortization of original issue discount, non-cash interest payments and the
interest component of any payments associated with Capital Lease Obligations
and net payments (if any) pursuant to Hedging Obligations), to the extent such
expense was deducted in computing Consolidated Net Income, plus
(d) depreciation and amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) of such Person and its Restricted Subsidiaries
for such period to the extent such depreciation and amortization were deducted
in computing Consolidated Net Income, in each case, on a consolidated basis
with respect to such Person and its Restricted Subsidiaries and determined in
accordance with GAAP. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, interest and the depreciation and
amortization of, a Restricted Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow of such Person only
to the extent (and in the same proportion) that the Net Income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to such Person by such Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter
and all agreements, instruments, judgments, decrees, orders, statutes, rules
and governmental regulations applicable to that Subsidiary or its
stockholders. In addition, for purposes of computing Consolidated Cash Flow,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including all mergers and consolidations and including any
related financing transactions, during the most recently completed four full
fiscal quarters for which financial statements are available or subsequent to
such four-quarter reference period and on or prior to the date on which the
calculation of the Consolidated Cash Flow is made (the "Calculation Date")
shall be deemed to have occurred on the first day of the four-quarter
reference period, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded.
"Consolidated Debt" means, with respect to any Person as of any date of
determination, the aggregate amount of Indebtedness and Disqualified Stock of
such Person and its Restricted Subsidiaries outstanding as of such date of
determination, determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP; provided that, for purposes
of calculating the Company's Consolidated Debt as a percentage of the
Company's Total Market Capitalization, all Project Financing of the Company's
Restricted Subsidiaries that has not been Guaranteed by the Company shall be
excluded in calculating the amount of such Consolidated Debt and the amount of
such Total Market Capitalization.
"Consolidated Debt to Consolidated Cash Flow Ratio" means, as at any date of
determination, the ratio of the Consolidated Debt of the Company as of such
date to the Consolidated Cash Flow of the Company for the most recently
completed four full fiscal quarters for which internal financial statements
are available as of such date of determination.
"Consolidated Invested Equity Capital" means, with respect to any Person as
of any date, the sum of the Invested Equity Capital of such Person as of such
date and, without duplication, the Invested Equity Capital of each of its
Restricted Subsidiaries and Restricted Affiliates (and their Restricted
Subsidiaries) as of such date. For purposes of calculating the Consolidated
Invested Equity Capital of any Person as of any date, in order to avoid
duplication, the Invested Equity Capital of a Restricted Subsidiary or
Restricted Affiliate (or their Restricted Subsidiaries) of such Person shall
not include any amounts that would be included in the Consolidated Invested
Equity Capital of any equity owner of such Restricted Subsidiary or Restricted
Affiliate (or their Restricted Subsidiaries), to the extent that such amounts
were utilized by such equity owner prior to such date to permit the Incurrence
of Project Financing pursuant to clause (e) of the second paragraph of the
covenant entitled "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock." For example, if a direct Restricted Subsidiary
of the Company has Consolidated Invested Equity Capital of $100 and incurs
$200 of
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Project Financing, then a direct or indirect Restricted Subsidiary (or a
Restricted Affiliate) of such first Restricted Subsidiary will not be deemed
to have any Invested Equity Capital based on contributions or loans to it by
such first Restricted Subsidiary. In addition, the Invested Equity Capital of
a Restricted Subsidiary or Restricted Affiliate of a Person will never be
considered to be greater than the Invested Equity Capital of such Person,
except as a result of contributions of Invested Equity Capital to such
Restricted Subsidiary or Restricted Affiliate by third parties.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to such Person or a Wholly Owned Restricted Subsidiary thereof;
(ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded; (iii) the cumulative effect of a change in accounting principles
shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary of
such Person shall be excluded, whether or not distributed to such Person or
one of its Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock).
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity of Notes.
"Domestic Intermediate Holding Company" means any Intermediate Holding
Company organized under the laws of the United States or any political
subdivision thereof and all of the outstanding Capital Stock of which is
pledged to the Collateral Agent pursuant to an Intermediate Holding Company
Pledge Agreement.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for Capital Stock).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession in the United States, which are in effect on the date of the
Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirectly, in any manner (including, without limitation, letters of credit
and reimbursement agreements in respect thereof), of all or any part of any
Indebtedness. The amount of any Guarantee shall be equal to the maximum
potential liability in respect of the Guarantee, even if less than the
Indebtedness supported by such Guarantee.
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"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued expense or trade
payable, if and to the extent any of the foregoing indebtedness (other than
letters of credit) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person), except any Lien described in clause
(h) and (i) of the definition of Permitted Liens and, to the extent not
otherwise included, the Guarantee by such Person of any Indebtedness of any
other Person (whether or not such Guarantee would be required to be reflected
on a balance sheet).
"Initial Public Offering" means the initial bona fide underwritten sale to
the public of common stock or any other Capital Stock of the Company that is
made pursuant to a registration statement (other than a registration statement
or Form S-8 or any other form relating to securities issuable under an
employee benefit plan of the Company) that is declared effective by the SEC.
"Intercreditor Agreement" means any Intercreditor and Collateral Agency
Agreement between the Collateral Agent, on the one hand, and the lender or
lenders party to a Permitted Bank Facility, on the other hand, and
acknowledged and consented to by the Company.
"Intermediate Holding Company" means any Direct Wholly Owned Subsidiary of
IWC formed solely for purposes of holding Permitted Investments.
"Invested Equity Capital" means, with respect to any Person as of any date,
the sum of (i) the total dollar amount contributed in cash plus the value of
all property contributed (valued at the lower of fair market value at the time
of contribution, determined in good faith by the Company's Board of Directors,
or the book value of such property at the time of contribution on the books of
the Person making such contribution) to such Person since the date of its
creation in the form of Equity Interests (other than Disqualified Stock),
plus, without duplication, (ii) the total dollar amount contributed in cash
plus the value of all property contributed (valued at the lower of fair market
value at the time of contribution, determined in good faith by the Company's
Board of Directors, or the book value of such property at the time of
contribution on the books of the Person making such contribution) to such
Person since the date of creation by the holders of its Equity Interests (and
their Affiliates) in consideration of the issuance of preferred equity or
Indebtedness, on a basis that is substantially proportionate to their Equity
Interests (with any disproportionately large equity interests received by the
Company, a Restricted Subsidiary of the Company, a Restricted Affiliate or a
Restricted Subsidiary of a Restricted Affiliate relative to their respective
contributions being ignored for this purpose), plus, without duplication,
(iii) the total dollar amount contributed in cash plus the value of all
property contributed (valued at the lower of fair market value at the time of
contribution, determined in good faith by the Company's Board of Directors, or
the book value of such property at the time of contribution on the books of
the Person making such contribution) to such Person since the date of its
creation by the Company or a Wholly Owned Restricted Subsidiary of the Company
in consideration of the issuance of preferred equity or Indebtedness, less
(iv) the fair market value of all interest, dividends and other distributions
(in whatever form and however designated) made by such Person since the date
of its creation to the holders of its Equity Interests (and their Affiliates),
provided that in no event shall the aggregate amount of interest, dividends
and other distributions made to any holder of Equity Interests of a Person (or
its Affiliates) operate to reduce the Invested Equity Capital of such Person
by more than the total contributions to such Person (per clauses (i) through
(iii) above) by such equity holder (and its Affiliates), and less (v) the
total amount of Basket Investments (measured as of the date made but without
giving effect to any proration) made by such Person or any of its Restricted
Subsidiaries or Restricted Affiliates since the date of the Indenture that are
outstanding as of such date.
"Investment" means, with respect to any Person, any investment by such
Person in other Persons (including Affiliates) in the form of loans (including
Guarantees), advances (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), capital
contributions, or other
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acquisitions for consideration of Indebtedness, Equity Interests or other
securities, or any binding contractual obligation not subject to a condition
within the sole control of the Company to make any such investment or enter
into any such transaction on a future date prior to the maturity of the Notes
or upon the happening of any event, and all other items that are or would be
classified as investments on a balance sheet in accordance with GAAP. Except
as otherwise specified, Investments will be valued as of the date made for all
purposes under the Indenture.
"Liens" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Minority Owned Affiliate" of any specified Person means any other Person in
which such specified Person owns Equity Interests other than a direct or
indirect Subsidiary of the specified Person.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), or (b)
the disposition of any securities or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries, and (ii) any extraordinary
gain (but not loss), together with any related provision for taxes on such
extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale or the
liquidation of any Investment, net of the direct costs relating to such Asset
Sale or the liquidation of any Investment (including, without limitation,
reasonable legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available
tax credits or deductions and any tax sharing arrangements), amounts required
to be applied to the repayment of Indebtedness secured by a Lien on the asset
or assets the subject of such Asset Sale or the liquidation of any Investment
(other than intercompany Indebtedness and Subordinated Indebtedness) and any
reserve for adjustment in respect of the sale price of such asset or assets.
"Non-Recourse Debt" means, with respect to any Person, Indebtedness or that
portion of Indebtedness (a) as to which the specified Person (i) does not
provide credit support of any kind (including, without limitation, pursuant to
any undertaking, agreement or instrument that would constitute Indebtedness),
(ii) is not directly or indirectly liable (as a guarantor or otherwise), or
(iii) does not constitute the lender; and (b) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of such Indebtedness to take any action against the
specified Person or would permit any holder of Indebtedness of the specified
Person to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and (c) as
to which the lenders have been notified in writing that they will not have any
recourse to the stock or assets of the specified Person.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Bank Facility" means, at any time, a single credit facility
between the Company and the lender or lenders party thereto provided for loans
(i) incurred in compliance with the covenant described above under "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and
(ii) as to which the Bank Financing Conditions shall have been satisfied.
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"Permitted Basket Investments" means Basket Investments in Unrestricted
Affiliates that do not exceed $40.0 million (or the equivalent amount in one
or more foreign currencies) at any one time (measured by the fair market value
of each such Investment at the time made as determined in good faith by the
Company's Board of Directors).
"Permitted Holders" means Vanguard Cellular Systems, Inc., a North Carolina
corporation, and its wholly-owned subsidiaries.
"Permitted Investments" means (a) Investments in Cash Equivalents, (b)
Investments in Restricted Subsidiaries of the Company, Restricted Affiliates
and Restricted Subsidiaries of any Restricted Affiliates of the Company, (c)
all Investments that were outstanding on the date hereof, and (d) Investments
by the Company or any Restricted Subsidiary or Restricted Affiliate in
Unrestricted Subsidiaries or Unrestricted Affiliates (collectively, "Basket
Investments"), in each case only to the extent that such Investments are in
Persons that are primarily engaged in Related Businesses; provided that the
aggregate amount of all Basket Investments, other than Permitted Basket
Investments, at any one time outstanding (measured by the fair market value of
each such Investment at the time made as determined in good faith by the
Company's Board of Directors) may not exceed the sum of (i) $10 million (or
the equivalent amount in one or more foreign currencies), plus (ii) the
aggregate net cash proceeds from the sale of Equity Interests other than
Disqualified Stock received by the Company since the date of the Indenture,
plus (iii) the aggregate net cash proceeds from sales of Subordinated
Indebtedness of the Company received by the Company since the date of the
Indenture, plus (iv) to the extent that any Investment pursuant to this clause
(d) was made in an Unrestricted Subsidiary or Unrestricted Affiliate and is
sold for cash or otherwise liquidated for cash, 50% of the Net Proceeds from
the sale or liquidation of such Investment, plus (v) to the extent that any
Unrestricted Subsidiary is properly designated as a Restricted Subsidiary in
accordance with the terms of the Indenture, or to the extent that any
Unrestricted Affiliate is properly designated as a Restricted Affiliate in
accordance with the terms of the Indenture, the lesser of (x) the initial
amount of all Investments made since the date of the Indenture in such
Unrestricted Subsidiary or Unrestricted Affiliate and (y) the fair market
value of all such Investments as of the date of such designation less the
amount of Indebtedness guaranteed by the Company, a Restricted Subsidiary,
Restricted Affiliate, or the Restricted Subsidiary of a Restricted Affiliate
pursuant to the covenant described under clause (i) in the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." For
purposes of this definition, only the Company's Pro Rata Portion of any Basket
Investment will be counted in determining the amount of Basket Investments
outstanding at any time or proposed to be made.
"Permitted Liens" means (a) Liens in favor of the Company or a Wholly Owned
Restricted Subsidiary of the Company; (b) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the
Company or any Restricted Subsidiary of the Company; provided that such Liens
were in existence prior to the contemplation by the Company of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (c) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company; provided that such Liens were in existence prior to the
contemplation by the Company of such acquisition; (d) Liens to secure the
performance of statutory obligations, surety or appeal bounds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (e) Liens existing on the date of the Indenture; (f) Liens for
taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded; provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (g) Liens incurred in the ordinary course
of business of the Company or any Restricted Subsidiary of the Company with
respect to obligations that do not exceed $5.0 million (or the equivalent in
one or more foreign currencies) measured at the time such Lien was incurred
and that (A) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary
course of business) and (B) do not in the aggregate materially detract from
the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary; (h) Liens
on assets of Restricted Subsidiaries of the Company, Restricted Affiliates or
Restricted Subsidiaries of Restricted Affiliates
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securing Project Financing that is permitted by the Indenture to be incurred;
(i) Liens on assets or the Equity Interests of Unrestricted Subsidiaries,
Unrestricted Affiliates or Unrestricted Subsidiaries of Unrestricted
Affiliates that secure Indebtedness of such Unrestricted Subsidiaries,
Unrestricted Affiliates or Unrestricted Subsidiaries of Unrestricted
Affiliates that constitutes Non-Recourse Debt with respect to the Company and
its Restricted Subsidiaries, Restricted Affiliates and Restricted Subsidiaries
of Restricted Affiliates; (j) Liens created pursuant to the terms of the
Pledge Agreement; (k) Liens on the Collateral which secure a Permitted Bank
Facility and rank pari passu with the Lien securing the Notes; and (l) the
Lien in favor of the Trustee and Agents arising under the Indenture.
"Permitted Pledge Foreclosure" means any Asset Sale resulting from the
foreclosure on or judicial enforcement of any rights or remedies under or with
respect to any Lien described in clause (i) of the definition of Permitted
Liens, provided that the Company shall have delivered to the Trustee, with
respect to any such Lien, a resolution of the Board of Directors set forth in
an Officer's Certificate to the effect that such Lien arose in the ordinary
course of the Company's business pursuant to a bona fide pledge or similar
arrangement that was in the best interests of the Company.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company,
a Restricted Subsidiary of the Company, a Restricted Affiliate or a Restricted
Subsidiary of a Restricted Affiliate issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company, a Restricted Subsidiary of the
Company, a Restricted Affiliate or a Restricted Subsidiary of a Restricted
Affiliate; provided that, unless such Indebtedness is being incurred to
substantially concurrently repay the Notes in full at maturity: (1) the
principal amount (or accreted value, as applicable) of such Indebtedness does
not exceed the principal amount (or accreted value, as applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith); (2)
such Indebtedness has a Weighted Average Life to Maturity equal to or greater
than the Weighted Average Life to Maturity of the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
Subordinated Indebtedness, then such Indebtedness is Subordinated
Indebtedness; and (4) such Indebtedness is incurred by the Company or the
Restricted Subsidiary or Restricted Affiliate (or Restricted Subsidiary
thereof) who is the obligor of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Pro Rata Portion" means, when applied to the Company for purposes of
determining the amount of Net Proceeds from an Asset Sale made by a Restricted
Subsidiary (other than a wholly owned Restricted Subsidiary) that constitute
Excess Proceeds or for purposes of determining the amount of an Investment
that will be deemed to be outstanding under a particular covenant or
definition, that portion of such Net Proceeds or Investment as corresponds to
the Company's direct or indirect percentage ownership interest in the profits
of the Person who engaged in the Asset Sale or the Person in whom the
Investment was made, as applicable (which would be 100% in the case of any
Investments made by the Company in wholly owned Subsidiaries). The Pro Rata
Portion of the Net Proceeds from an Asset Sale shall be determined in good
faith by the Company's Board of Directors in connection with such Asset Sale.
The Pro Rata Portion of an Investment as of any date shall be determined in
good faith either by the Company's Board of Directors or in accordance with
procedures established as to such Investment by the Company's Board of
Directors.
"Project Financing" means any Indebtedness after the date of the Indenture
by a Restricted Subsidiary of the Company, a Restricted Affiliate or a
Restricted Subsidiary of a Restricted Affiliate that is Non-Recourse Debt with
respect to the Company (except to the extent permitted by the covenant
described under clause (h) in the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock) and each of its other Restricted
Subsidiaries, Restricted Affiliates and Restricted Subsidiaries of Restricted
Affiliates except any such Restricted Subsidiary, Restricted Affiliates and
Restricted Subsidiaries of a Restricted Affiliate that owns, either directly
or indirectly through a directly owned Restricted Subsidiary or Restricted
Affiliate, all or a portion of the business that will use the proceeds of such
Project Financing.
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"Qualified Reorganization" means any Reorganization that (a) occurs
simultaneously with or following a Change of Control and (b) results in there
being deliverable upon exercise of any Warrant cash and/or securities
registered under Section 12 of the Exchange Act that are freely tradeable and
listed on a national securities exchange or traded on a national quotation
service.
"Related Business" means any business in which the Company, its Subsidiaries
or Minority Owned Affiliates are engaged, directly or indirectly, (i) that
uses existing or future technology for the transmission and delivery of video,
voice or other data, or (ii) that supports or is incidental to any business
described in clause (i).
"Restricted Affiliate" means any direct or indirect Minority Owned Affiliate
of the Company that has been designated in a Board Resolution as a Restricted
Affiliate based on a determination by the Board of Directors that the Company
has, directly or indirectly, the requisite control over such Minority Owned
Affiliate to prevent it from incurring any Indebtedness or issuing any
preferred stock or taking any other action at any time in contravention of any
of the provisions of the Indenture described above under the captions "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
and "--Certain Covenants--Limitations on Subsidiary Structure" that are
applicable to Restricted Affiliates. The Company will be required to deliver
an Officers' Certificate to the Trustee, including a copy of the Board
Resolution, upon designating any Minority Owned Affiliate as a Restricted
Affiliate.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Subordinated Indebtedness" means any Indebtedness of the Company that by
its terms is expressly subordinated in right of payment to the prior payment
in full of the Notes and that does not provide for (i) any scheduled payment
of principal or interest or redemption prior to the maturity or repayment in
full of the Notes or (ii) any offer to purchase prior to the maturity or
repayment in full of the Notes other than an offer to purchase (a "Permitted
Offer to Purchase") that (x) arises from any event or circumstance that
obligates the Company to make an Asset Sale Offer or Change of Control Offer
and (y) provides that the repurchase obligation is subject to the prior
consummation of any such Asset Sale Offer or Change of Control Offer.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof and (ii) any partnership
of which more than 50% of the partnership's capital accounts, distribution
rights or general or limited partnership interests are owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
"Take Along Asset Sale" means any Asset Sale involving the sale, lease,
conveyance or other disposition of all or any portion of any Investment held
by the Company or any Restricted Subsidiary in any Minority Owned Affiliate
effected (i) at the direction of the holders of a majority of the Voting
Equity Interests of such Minority Owned Affiliate pursuant to the exercise of
any "drag-along" or similar rights available to such holders or (ii) pursuant
to the exercise of any "take along" or similar rights available to the Company
or such Restricted Subsidiary.
"Threshold Initial Public Offering" means an Initial Public Offering that
results in net cash proceeds to the Company of at least $50 million.
"Total Market Capitalization" of any Person means, as of any date of
determination, the sum of (1) the Consolidated Debt of such Person on such
date, plus (2) the Total Market Value of Equity of such Person on such date.
"Total Market Value of Equity" of any Person means, as of any date of
determination, the sum of (1) the product of (i) the aggregate number of
outstanding primary shares of common stock of such Person (which shall
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not include any options or warrants on, or securities convertible or
exchangeable into, shares of such common stock) and (ii) the average Closing
Price of such common stock over the 20 consecutive Trading Days immediately
preceding such date of determination, plus (2) the stated liquidation
preference of any outstanding shares of preferred stock of such Person
outstanding as of such date of determination. If no such Closing Price exists
with respect to any class of common stock, the value of such shares for
purposes of clause (1) of the preceding sentence will be determined by the
Board of Directors of such Person on the basis of a valuation opinion issued
by an investment banking firm of national standing with experience in such
valuations that has been filed with the Trustee.
"Unrestricted Affiliate" means any direct or indirect Minority Owned
Affiliate of the Company other than a Restricted Affiliate.
"Unrestricted Subsidiary" means any Person that is designated by the Board
of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but
in each case only to the extent that such Person: (a) is not a party to any
contract, agreement, understanding or other arrangement of any kind with the
Company or any of its Restricted Subsidiaries other than on terms no less
favorable to the Company or such Restricted Subsidiary than those that could
be obtained from Persons who are not Affiliates of the Company; (b) is a
Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; (c) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries except insofar as such subscription, maintenance or
preservation of financial condition or achievement of operating results, or
guarantee or credit support would be permissible under the Indenture; and (d)
has at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors will be required to be evidenced to the Trustee by filing
with the Trustee a certified copy of the board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
If at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," the Company shall be in default of such covenant).
"Voting Equity Interests" of a Person means Equity Interests of such Person
of the class or classes pursuant to which the holders thereof have the general
voting power under ordinary circumstances to elect at least a majority of the
Board of Directors (irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each of the remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary"' of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than the directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of that Person or a combination thereof.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 26,000,000 shares of
Common Stock, par value $0.01 per share ("Common Stock"), and 23,080,000
shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"). As
of September 30, 1996, there were 615,760 shares of Common Stock outstanding
held of record by four stockholders and 16,906,400 shares of Preferred Stock
outstanding held of record by 52 stockholders. The information contained
herein gives effect to (i) a reclassification of the Company's capital stock
on May 19, 1993, in which each then outstanding share of Common Stock was
converted into 100 shares of Common Stock, each then outstanding share of
Series A Preferred Stock was converted into 151.0892 shares of Series A
Preferred Stock and each then outstanding share of Series B Preferred Stock
was converted into 184.3802 shares of Series A Preferred Stock and (ii) a
reclassification of the Company's capital stock on January 7, 1994, in which
each then outstanding share of Common Stock was converted into one share of
Series A Preferred Stock and each then outstanding share of Series A Preferred
Stock was converted into one share of Series B Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share and shall be
entitled to vote upon such matters and in such manner as may be provided by
law. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. As described more fully
below under "--Preferred Stock--Liquidation," in the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably with the Existing Preferred (as defined below) in
all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock then outstanding (including the
Existing Preferred) and the right of holders of Common Stock to receive an
amount equal to $0.50 per share plus any declared and unpaid dividends per
such share. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and non-assessable, and the Warrant Shares to be reserved for
issuance upon completion of this Offering will be fully paid and non-
assessable when issued in accordance with the terms of the Warrants.
PREFERRED STOCK
General
The Preferred Stock has been divided into seven series of shares of the same
class, as follows: 1,200,000 shares are designated Series A Preferred Stock
("Series A Preferred Stock"), 933,200 of which are issued and outstanding;
1,229,240 shares are designated Series B Preferred Stock ("Series B Preferred
Stock"), all of which are issued and outstanding; 2,460,000 shares are
designated Series C Preferred Stock ("Series C Preferred Stock"), 1,762,280 of
which are issued and outstanding; 5,800,000 shares are designated Series D
Preferred Stock ("Series D Preferred Stock"), 3,652,960 of which are issued
and outstanding; 3,972,240 shares are designated Series E Preferred Stock
("Series E Preferred Stock"), all of which are issued and outstanding;
7,000,000 shares are designated Series F-1 Preferred Stock ("Series F-1
Preferred Stock"), 4,508,480 of which are issued and outstanding; and
1,080,000 shares are designated Series F-2 Preferred Stock ("Series F-2
Preferred Stock;" together with the Series F-1 Preferred Stock, the "Series F
Preferred Stock"), 848,000 of which are issued and outstanding. The Series A,
Series B, Series C, Series D, Series E, Series F-1 and Series F-2 Preferred
Stock are sometimes collectively referred to as the "Existing Preferred
Stock."
Subject to certain preferences of the Existing Preferred Stock, the Board of
Directors has the authority to issue Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption
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prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and
other rights of the holders of Common Stock. The issuance of Preferred Stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. The
Company currently has no plans to issue any other shares of Preferred Stock,
other than shares of Existing Preferred Stock issuable upon exercise of
outstanding warrants.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Existing Preferred Stock and Common Stock shall be entitled to
receive the following amounts in the following order of priority, subject to
the prior distribution rights of any Preferred Stock hereafter issued by the
Company:
(i) Holders of Series F Preferred Stock shall first be entitled to receive
an amount per share equal to $4.6875, plus any declared but unpaid
dividends on such share;
(ii) Holders of Series B, Series C, Series D and Series E Preferred Stock
(the "Junior Preferred Stock") shall next be entitled to receive
amounts per share equal to $0.5055, $1.2228, $3.6025 and $3.4615,
respectively, plus any declared and unpaid dividends on such share;
(iii) Holders of Series B, Series C, Series D, Series E and Series F
Preferred Stock shall next be entitled to receive amounts per share
equal to $0.4597, $1.1115, $3.2750, $3.2750 and $4.6875,
respectively, plus any declared and unpaid dividends on such share;
(iv) Holders of the Series A Preferred Stock shall next be entitled to
receive an amount per share equal to $0.85, plus any declared and
unpaid dividends on such share;
(v) Holders of Common Stock shall be entitled to receive an amount per
share equal to $0.50, plus any declared and unpaid dividends on such
share; and
(vi) The remaining assets of the Company available for distribution shall
be distributed among the holders of Existing Preferred Stock and
Common Stock pro rata on an as-converted basis.
Notwithstanding the foregoing, in the event of the sale of the Company for
consideration in excess of $18.75 per share of Common Stock, then, in lieu of
the distributions set forth above, the proceeds from such sale shall be
distributed ratably to the stockholders based on the number of shares of
Common Stock outstanding on an as-converted basis.
Dividends
Subject to the preferences of any Preferred Stock hereafter issued by the
Company, holders of Existing Preferred Stock are entitled to receive ratably
such noncumulative dividends, at the same time and on the same basis, as
holders of Common Stock when, as and if declared by the Company's Board of
Directors; provided, however, that so long as any shares of Junior Preferred
Stock or Series F-1 Preferred Stock are outstanding, any payment of dividends
must be approved by the holders of at least 50% in the aggregate of such then
outstanding shares.
Redemption
On or after the later of (i) December 31, 1998, or (ii) the date on which
the Notes shall have been repaid in full, upon the written request of the
holders of at least a majority of the outstanding shares of the Junior
Preferred Stock and Series F-1 Preferred, all shares of each such series shall
be redeemed at a price per share payable in cash equal to the greater of (a)
the fair market value of such share on an as-converted basis and (b) the
liquidation preference with respect to such shares indicated in subsections
(i) through (iii) of "Liquidation" above (the "Redemption Price"). In
addition, on or after December 31, 2000 or a Change of Control (as defined in
the Certificate) not approved by the directors of the Company designated by
the holders of Series F Preferred
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Stock, the holders of a majority of the outstanding shares of Series F-1
Preferred Stock may, subject to the prior repayment in full of the Notes,
cause the Company to redeem the then outstanding shares of Series F Preferred
at the Redemption Price then applicable to such shares.
Conversion
At the option of the holder, each share of Existing Preferred Stock may be
converted at any time and from time to time into one share of Common Stock,
subject to adjustment for, among other things, stock splits, stock dividends
and issuances of additional shares of Common Stock and securities convertible
into Common Stock at a per share price less than the original issue price of
such share of Existing Preferred Stock. In addition, each share of Existing
Preferred Stock shall automatically be converted into Common Stock upon the
sale of the Common Stock in a firm commitment underwritten public offering in
which the offering price is not less than $13.10 per share, subject to
adjustment, and $8.0 million in the aggregate; provided, however, the Series F
Preferred Stock shall not automatically be converted unless such a public
offering occurs on or prior to December 31, 1998 and the offering price is not
less than $18.75 per share, subject to adjustment, and $25.0 million in the
aggregate (a "Threshold Public Offering").
Certain shares of Series F-1 Preferred are entitled to be converted at the
option of the holder into one share of Series F-2 Preferred. Subject to
certain limitations, each share of Series F-2 Preferred held by Toronto
Dominion, its affiliates or any transferee thereof shall be convertible, at
the option of the holder, into one share of Series F-1 Preferred.
Voting
Holders of Preferred Stock are entitled to vote, on an as-converted basis,
together with holders of Common Stock, on all matters on which holders of
Common Stock are entitled to vote and as otherwise provided by law, except
that the Series F-2 Preferred Stock is non-voting. The holders of Series E
Preferred Stock are entitled to elect three directors to the Company's Board
of Directors; and for so long as 20% of the shares of Series F Preferred Stock
remain outstanding, the holders of Series F-1 Preferred Stock are entitled to
elect three directors, one of whom Electra has the right to elect, one of whom
CIH has the right to elect and one of whom TDI has the right, subject to
certain limitations and the conversion of its Series F-2 Preferred Stock into
Series F-1 Preferred Stock, to elect (subject, in each case, to minimum stock
ownership requirements). In addition, the holders of Series F-1 Preferred
Stock have the right, exercisable on one occasion, to cause the number of
directors constituting the Board of Directors to be increased by one and to
elect such additional director.
Until the earlier of a Threshold Public Offering and the date on which less
than 20% of the presently issued shares of Series F Preferred remain
outstanding, the majority of the Board of Directors may not be comprised of
representatives of Vanguard and officers of the Company.
Protective Provisions
The protective provisions of the Certificate require that the Company obtain
the approval of certain stockholders prior to taking the following actions:
(A) The approval of the holders of at least 50% of the outstanding shares
of Series B, Series C, Series D, Series E and Series F-1 Preferred
Stock (the "Protected Stock") is required to:
(i) authorize a series of capital stock with voting, dividend or
liquidation rights on parity with or superior to the Protected
Stock;
(ii) authorize, issue, redeem or acquire any shares of capital stock of
the Company, except pursuant to employee benefit plans or similar
arrangements to a maximum of 2.4 million shares of Common Stock,
as adjusted;
(iii) approve a Corporate Transaction (generally defined in the
Certificate to include certain acquisitions, mergers or sales);
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(iv) approve any amendment to the Certificate or the By-Laws of the
Company;
(v) organize or acquire an interest in any business unrelated to the
core businesses of the Company;
(vi) declare or pay any dividends in cash, stock or other property;
(vii) reinvest more than $3.0 million in proceeds from the sale or
liquidation of any single investment by the Company; or
(viii) liquidate or dissolve the Company;
(B) The approval of the holders of at least 66 2/3% of the Protected Stock
is required to:
(i) change the number of authorized directors of the Company; or
(ii) remove any officer or director of the Company, except that any
director separately elected by the holders of a series of Existing
Preferred Stock may only be removed by such holders;
(C) The approval of the holders of at least 75% and, in certain instances,
80% of the Series F-1 Preferred Stock is required to take various other
actions, including any action that requires the consent of the holders
of any other series of Preferred Stock voting as a class and actions
that would violate provisions of the Series F Purchase Agreement,
unless in certain cases such actions are approved by specified members
of the Company's Board of Directors;
(D) The approval of the holders of at least a majority of any series of the
Existing Preferred Stock is required to amend the provisions of the
Certificate to adversely affect the rights of such series;
(E) The approval of the holders of at least 66 2/3% of the shares of Series
E Preferred or Series F-1 Preferred Stock, as the case may be, is
required to amend the provisions of the Certificate to adversely affect
their respective rights to elect directors.
Registration Rights
The IRA provides the holders of Common Stock issued or issuable upon the
conversion of the Series B, Series C, Series D, Series E and the October 1994
Vanguard Notes or upon the exercise of currently outstanding warrants to
purchase Preferred Stock, demand, piggyback and other registration rights with
respect to such Common Stock. The demand registration rights commence on the
earlier of December 18, 1998 or six months after the effective date of the
first registration statement for the initial public offering of the Company
securities. Such stockholders are entitled to a maximum of two demand
registrations. The piggyback registration rights of any holder terminate at
such time on or after the closing of the first Company-initiated public
offering of the Common Stock as all of such stockholder's registrable
securities may immediately be sold under Rule 144 of the Securities Act during
any 90-day period. The rights of such stockholders to include shares of
registrable securities in a registration pursuant to either a demand or
piggyback registration are subject to restrictions on the number of shares to
be included in the offering at the discretion of the underwriters and are
subordinate to the rights of the holders of Series F Preferred Stock
summarized below. Stockholders who are parties to the IRA are also entitled to
registration rights on Form S-3 registration statements under the Securities
Act. The expenses of the demand and piggyback registrations, and, with certain
exceptions, other registrations, except underwriting discounts and
commissions, are to be borne by the Company. The IRA also limits the Company's
ability to grant subsequent registration rights.
The Company and the purchasers in the Series F Financing (the "Series F
Investors") are parties to a Registration Rights Agreement dated as of
December 18, 1995 (the "Series F Registration Rights Agreement") which grants
registration rights (the "Series F Rights") to the Series F Investors with
respect to Common Stock issued or issuable upon conversion of Series F-1
Preferred Stock and Series F-2 Preferred Stock or acquired pursuant to
exercises of the rights of first offer contained in the IRA. The IRA contains
an acknowledgment of the Series F Rights. The Series F Rights include (i)
demand registration rights which commence on the earlier of
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December 31, 1997 or the consummation of an initial public offering of the
Common Stock or a merger of the Company with or into a public company, (ii)
piggyback registration rights, and (iii) registration rights on Form S-3
registration statements under the Securities Act. A demand registration may be
initiated by the holders of at least 20% of the Series F Registrable
Securities (as defined in the Series F Registration Rights Agreement). The
Series F Rights are pari passu with the registration rights under the Warrant
Agreement with respect to any Initial Public Offering. The Series F Rights
generally have precedence, however, with respect to the registration rights of
other stockholders, to the extent that the Company's underwriters require a
limit on the number of additional shares in the offering. All expenses of
registrations pursuant to the Series F Rights, except underwriting discounts
and commissions, are to be borne by the Company. The Company agrees not to
enter into any agreements inconsistent with the Series F Rights. The Series F
Registration Rights Agreement also limits the Company's ability to grant
subsequent registration rights.
Holders of the Warrants have certain rights to cause the shares of Common
Stock issuable upon exercise thereof to be registered under the Securities Act
and applicable state securities laws. Whenever the Company proposes to effect
an Initial Public Offering (as defined) in which shares will be offered by any
stockholder of the Company, the Company must provide prompt written notice
thereof to the holders of the Warrants and the shares of Common Stock issuable
upon exercise of the Warrants (the "Warrant Shares"). Each such holder will
have the right, within 20 business days after receipt of such notice, to
request that the Company include any or all of such holder's Warrant Shares
for sale pursuant to such registration statement.
The Company will include in any such registration statement all the Warrant
Shares for which it receives the request-described in the preceding paragraph,
unless the managing underwriter for the Initial Public Offering (the "Managing
Underwriter") determines that, in its opinion, the number of Warrant Shares
that the holders of Warrants (the "Requesting Holders") have requested to be
sold in such Initial Public Offering, plus the total number of shares of such
Common Stock that the Company and any other selling stockholders entitled to
sell shares in such Initial Public Offering propose to sell in such Initial
Public Offering, exceed the maximum number of shares that may be distributed
without materially adversely affecting the marketing, price, timing or
distribution of the shares to be sold in such offering. In such event, the
Company will be required to include in such Initial Public Offering only that
number of shares which the Managing Underwriter believes maybe sold without
causing such adverse effect in the following order: (i) all the shares that
the Company proposes to sell in such Initial Public Offering, and (ii) shares
of the Requesting Holders and all other shares that are proposed to be sold by
any holder of Common Stock of the Company on a pro rata basis based on the
number of shares held by the Requesting Holders and such other holders. The
Company will have the right to postpone or withdraw any registration statement
prior to the effective date without obligation to any Requesting Holder.
On the date 181 days following an Initial Public Offering (or if such day is
not a business day, then the next succeeding business day), the Company has
agreed to file a registration statement (the "Warrant Registration Statement")
on the appropriate form covering the Warrant Shares, to take all necessary
action to make such registration statement effective as promptly as
practicable, and to keep such registration statement effective until 30 days
after the earliest date on which all of the Warrants shall have expired or
been exercised. During any consecutive 365-day period, the Company may suspend
availability of the Warrant Registration Statement for up to two 30 day
periods (or one 60-day period), except for the 60-day period beginning
immediately after the Warrant Registration Statement is declared effective by
the Commission and the 60-day period ending on August 15, 2001, if the
Company's Board of Directors determines in the exercise of its reasonable
judgment that there is a valid business purpose for such suspension.
WARRANTS
The holders of Warrants issued in connection with the Unit Offering are
entitled to purchase, on or after the occurrence of (i) a Change in Control of
the Company, (ii) the closing of an Initial Public Offering, (iii) the
dissolution, liquidation or winding up of the affairs of the Company or (iv)
August 14, 2001, 11.638 shares of Common Stock per Warrant, representing in
aggregate approximately 10% of the outstanding Common Stock on a fully diluted
basis on the Issue Date. In the event that a Threshold Initial Public Offering
or a Qualified
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Reorganization has not occurred on or before May 15, 1997, each unexercised
Warrant will entitle the holder thereof to purchase 14,283 shares of Common
Stock, which will represent in the aggregate (assuming no Warrants have been
exercised) approximately 12% of the outstanding Common Stock on a fully
diluted basis on the Issue Date.
CERTAIN INCOME TAX CONSIDERATIONS
The following summary describes certain material United States federal
income tax consequences as of the date hereof of the exchange of Exchange
Notes for Old Notes pursuant to the Exchange Offer and the ownership and
disposition of Exchange Notes. Except where noted, it deals only with Exchange
Notes held as capital assets by holders that are United States Holders (as
defined below) and acquired in the Exchange Offer by holders who acquired
their Old Notes directly from the Company. The following summary does not deal
with special situations, such as those of dealers in securities or currencies,
financial institutions, life insurance companies, persons holding Exchange
Notes as a part of a hedging or conversion transaction or a straddle or
holders whose functional currency is not the U.S. dollar. Furthermore, the
discussion below is based upon the current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the applicable Treasury Regulations
("Regulations") and public judicial interpretations of the Code and the
Regulations, as of the date hereof, and such authorities may be repealed,
revoked or modified so as to result in U.S. federal income tax consequences
different from those discussed below. In particular, the discussion below is
based upon Regulations issued under section 1273 and related sections of the
Code relating to "original issue discount" ("OID") (the "OID Regulations").
The Company intends to treat the Exchange Notes as debt for all purposes and
such characterization by the Company is binding on all holders unless contrary
treatment is disclosed on a holder's tax return. Such classification is not
binding on the Internal Revenue Service, however, and there can be no
assurance that the Internal Revenue Service will agree that the Exchange Notes
qualify as debt for federal income tax purposes. If the Exchange Notes are not
respected as debt for such purposes, they would likely be recharacterized as
an equity interest in the Company and the interest that accretes on the
Exchange Notes would not be deductible by the Company when accrued or paid.
Loss of such interest deductions could increase income taxes ultimately
payable by the Company, and thus, reduce cash flow otherwise available to
repay the Exchange Notes. Recharacterization of the Exchange Notes as equity
could also adversely affect non-corporate holders as well as non-United States
holders of the Exchange Notes. The discussion of material federal income tax
consequences set forth below assumes that the Exchange Notes will be respected
as debt of the Company.
THIS DISCUSSION IS FOR GENERAL INFORMATION ONLY. PERSONS CONSIDERING
EXCHANGING OLD NOTES FOR EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER STATE, LOCAL
OR FOREIGN LAWS.
As used herein, a "United States Holder" means (i) an individual that is a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source, or (iv) any other person whose income or gain in respect of an
Exchange Note is effectively connected with the conduct of a United States
trade or business.
EXCHANGE OFFER
The exchange of Exchange Notes for Old Notes pursuant to the Exchange Offer
should not be treated as an "exchange" for federal income tax purposes because
the Exchange Notes should not be considered to differ materially in kind or
extent from the Old Notes. Rather, the Exchange Notes received by a holder
should be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there should be no federal
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income tax consequences to holders exchanging the Old Notes for the Exchange
Notes pursuant to the Exchange Offer, and the federal income tax consequences
of holding and disposing of the Exchange Notes should be the same as the
federal income tax consequences of holding and disposing of the Old Notes.
Accordingly, the holder must, among other things, continue to include OID in
income as if the exchange had not occurred. See "--The Exchange Notes--
Original Issue Discount" for a description of the OID rules applicable to the
Exchange Notes.
THE EXCHANGE NOTES
Original Issue Discount
The Old Notes were issued as part of a unit (the "Units") comprised of
$1,000 principal amount of Old Notes and one Warrant to purchase Company
shares of Common Stock of the Company. The Company and the initial purchasers
(the "Initial Purchasers") of the Old Notes allocated in the purchase
agreement for the Old Notes a purchase price of $354.32 to each $1,000
principal amount at maturity of Old Notes. This allocation reflected their
judgment as to the relative values of the Old Notes and such Warrants at the
time of issuance, but is not binding on the Internal Revenue Service (the
"IRS").
The Company and the Initial Purchasers' allocation of the issue price of the
Units will be binding on holders of the Exchange Notes who acquire such Notes
in the Exchange Offer in exchange for Old Notes that were in turn acquired by
such holder directly from the Company, unless such a holder discloses the use
of a different allocation on its U.S. federal income tax return for the year
including the acquisition date of such Unit. If such a holder acquired a Unit
at a price different from that on which the Company's allocation is based,
such holder may be treated as having acquired its Old Notes for an amount
greater or less than the amount allocated to such Notes as set forth above
thereby resulting in "acquisition premium" or "market discount," as defined
below. Holders considering the use of an issue price allocation different from
that described above should consult their tax advisors as to the consequences
thereof.
The Old Notes will have OID in an amount equal to the excess of the stated
redemption price at maturity over the issue price of such Old Notes (as
discussed above) and the Exchange Notes that are acquired in exchange for such
Old Notes will have the same amount of OID. Under the OID Regulations, all
payments under a debt instrument, whether denominated as principal or
interest, are included in the stated redemption price at maturity unless they
are "qualified stated interest." The Old Notes do not, and therefore the
Exchange Notes will not, have "qualified stated interest" since the Notes do
not provide for the payment of any cash interest throughout their term. As a
consequence, the difference between the face amount of the Exchange Notes,
which is the only amount payable thereunder, and the issue price of the Old
Notes will constitute OID. Holders of Exchange Notes will generally be
required to include in gross income the OID in advance of the receipt of the
face amount of the Exchange Notes, which will be paid in full at maturity of
the Exchange Notes.
The amount of OID includible in income by a holder of Exchange Notes who
acquired such Notes in the Exchange Offer in exchange for Old Notes that were
in turn acquired by such holder directly from the Company is the sum of the
"daily portions" of OID with respect to such Exchange Notes for each day
during the taxable year or portion of the taxable year in which such holder
held such Exchange Notes ("accrued OID"). The daily portion is determined by
allocating to each day in any "accrual period" a pro rata portion of the OID
allocable to that accrual period. The "accrual period" for Exchange Notes may
be of any length and may vary in length over the term of the Exchange Notes,
provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs on the first day or the
final day of an accrual period.
The amount of OID allocable to any accrual period is an amount equal to the
product of the adjusted issue price of the Exchange Notes at the beginning of
such accrual period and the "yield to maturity" of such Exchange Notes
(determined on the basis of compounding at the close of each accrual period
and properly adjusted for the length of the accrual period). OID allocable to
a final accrual period is the difference between the amount payable at
maturity and the adjusted issue price at the beginning of the final accrual
period. The "adjusted issue price" of an Exchange Note at the beginning of any
accrual period is equal to the issue price of
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the Old Note that was exchanged for such Exchange Note increased by the
accrued OID for all prior accrual periods (determined without regard to the
amortization of any acquisition premium, as described below) with respect to
such Exchange Note and any Old Note that was exchanged for such Exchange Note,
and reduced by any payments made on such Notes on or before the first day of
the accrual period. The yield to maturity is the discount rate that, when used
in computing the present value of all principal and interest payments to be
made under an Exchange Note, produces an amount equal to the issue price of
the Old Note that was exchanged
for such Exchange Note. The initial accrual period of a Note is the short
period beginning on the Issue Date and ending on the day before the first day
of the first full accrual period. The amount of OID attributable to such
initial accrual period may be computed under any reasonable method.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of Exchange Notes, information with respect
to OID accruing during the calendar year. The OID information will be based
upon the adjusted issue price of the Old Note that was exchanged for the
Exchange Note as if the holder were the original holder of the Old Note.
Holders who purchased Old Notes or who purchase Exchange Notes for an amount
other than the adjusted issue price and/or on a date other than the last day
of an accrual period will be required to determine for themselves the amount
of OID, if any, they are required to include in gross income for U.S. federal
income tax purposes.
IN GENERAL, HOLDERS WHO HOLD EXCHANGE NOTES WILL HAVE TO INCLUDE IN INCOME
INCREASINGLY GREATER AMOUNTS OF OID OVER THE LIFE OF THE EXCHANGE NOTES.
Market Discount, Acquisition Premium
If a holder purchases Exchange Notes or has purchased Old Notes for an
amount that is less than the adjusted issue price of such Exchange Notes, the
amount of the difference will be treated as "market discount" for U.S. federal
income tax purposes, unless such difference is less than a specified de
minimis amount. Under the market discount rules, a holder will be required to
treat any principal payment on, or any amount received on the sale, exchange,
retirement or other disposition of, Exchange Notes as ordinary income to the
extent of any market discount which has not previously been included in income
and is treated as having accrued on such Exchange Notes or Old Notes that were
exchanged for such Exchange Notes, by the time of such payment or disposition.
If a holder makes a gift of an Exchange Note, accrued market discount, if any,
will be recognized as if such holder had sold such Exchange Note for a price
equal to its fair market value. In addition, the holder may be required to
defer, until the maturity of the Exchange Notes or their earlier disposition
in a taxable transaction, the deduction of a portion of the interest expense
on any indebtedness incurred or continued to purchase or carry such Exchange
Notes or Old Notes that were exchanged for such Exchange Notes.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Exchange Notes, unless the holder elects to accrue market discount under a
constant interest method. A holder of Exchange Notes may elect to include
market discount in income currently as it accrues (under either a straight-
line or constant interest method), in which case the rules described above
regarding the deferral of interest deductions will not apply. This election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent
of the IRS.
A holder that purchases Exchange Notes for an amount that is greater than
the adjusted issue price of such Exchange Notes but equal to or less than the
sum of all amounts payable on such Exchange Notes after the purchase date will
be considered to have purchased such Exchange Notes at an "acquisition
premium." Under the acquisition premium rules, the amount of OID which such
holder must include in its gross income with respect to such Exchange Notes
for any taxable year will be reduced by the portion of such acquisition
premium properly allocable to such year.
Sale, Exchange and Retirement of Exchange Notes
A holder of Exchange Notes who acquired such Notes in the Exchange Offer in
exchange for Old Notes that were in turn acquired by such holder directly from
the Company will initially have a tax basis in Exchange
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Notes that is equal to the issue price of the Old Notes that were exchanged
for such Exchange Notes, as discussed above, increased by the OID or market
discount previously included in income by the holder with respect to such Old
Notes and Exchange Notes and reduced by any cash payments on such Notes other
than payments of qualified stated interest. Upon the sale, exchange,
retirement or other disposition of Exchange Notes, a holder will generally
recognize gain or loss equal to the difference between the amount realized
upon such sale, exchange, retirement or other disposition and the adjusted tax
basis of the Exchange Notes. Except with respect to market discount and
payments for
accrued interest not previously included in income, such gain or loss will be
capital gain or loss and will be long-term capital gain or loss if the
Exchange Notes have been held for more than one year (including for this
purpose the period of time such holders held the Old Notes that were exchanged
for such Exchange Notes). The deductibility of capital losses is subject to
limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to OID on the
Exchange Notes and to the proceeds of a disposition of an Exchange Note, other
than a disposition by certain exempt recipients (including, among others,
corporations). A 31% backup withholding tax will generally apply to any
"reportable payment" if, among other things, the holder fails to provide a
taxpayer identification number or certification of exempt status or fails to
report in full dividend and interest income and the payor is notified by the
IRS of such failure. A "reportable payment" includes, among other things, OID.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or credit against such holder's U.S. federal income tax liability,
provided the required information is furnished to the IRS.
NON-UNITED STATES HOLDERS
Exchange Notes. A non-United States Holder will not be subject to United
States federal income taxes on payment of principal, original issue discount
or interest on an Exchange Note pursuant to the so-called "portfolio interest
exemption" to the general tax withholding rules of the Code unless such non-
United States Holder is (i) a direct or indirect ten percent (10%) or greater
shareholder of the Company, (ii) a controlled foreign corporation, as that
term is defined in the Code, related to the Company or (iii) a bank receiving
interest described in Code Section 881(c)(3)(A). A non-United States Holder
who does not qualify for the portfolio interest exemption generally would be
subject to United States withholding tax at a flat rate of thirty percent
(30%), or a lower rate that may be permitted by application of a tax treaty,
on interest payments and payments (including redemption proceeds) attributable
to OID on the Exchange Notes.
To qualify for the portfolio exemption from taxation, the last United States
payor in the chain of payments to the non-United States Holder (the
"Withholding Agent") must have received in the year in which a payment of
principal, original issue discount or interest occurs, or in either of the two
preceding calendar years, a statement that (i) is signed by the beneficial
owner of the Exchange Note under penalties of perjury, (ii) certifies that
such owner is not a United States Holder and (iii) provides the name and
address of the beneficial owner. The statement may be made on an IRS Form W-8
or a substantially similar form, and the beneficial owner must inform the
Withholding Agent of any change in the information on the statement within 30
days of such change. If an Exchange Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However,
in such case, the signed statement must be accompanied by a copy of the IRS
Form W-8 or the substitute form provided by the beneficial owner to the
organization or institution. The Treasury Department has proposed certain
additional certification requirements that may be applicable if adopted in
their present form.
Generally, a non-United States Holder will not be subject to federal income
taxes on any amount which constitutes capital gain upon retirement or
disposition of an Exchange Note, provided the gain is not effectively
connected with the conduct of a trade or business in the United States by the
non-United States Holder. Certain other exceptions may be applicable and a
non-United States Holder should consult its own tax advisor as to these
matters.
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EMPLOYEE BENEFIT PLANS
Prior to acquiring an Exchange Note, a prospective holder who is a fiduciary
with respect to an "employee benefit plan," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), must
comply with the fiduciary responsibility requirements of ERISA, including the
prudency and diversification requirements, in making a decision to acquire an
Exchange Note. In addition, such plans, together with plans described in
Section 4975(e)(1) of the Code, must consider the prohibited transaction
provisions of ERISA and the Code and determine that the Company is not a
"disqualified person" (as defined in the Code) or a "party in interest" (as
defined in ERISA) with respect to such plan or that an exemption from the
prohibited transaction provisions of ERISA or the Code is available.
OLD NOTES REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into the Registration Rights
Agreement pursuant to which the Company agreed, for the benefit of the holders
of the Old Notes, that it would, at its own cost, (i) within 45 days after the
Issue Date, file a registration statement (the "Exchange Offer Registration
Statement") with the Commission with respect to the Exchange Offer for the
Exchange Notes (except that the Exchange Notes will not contain terms with
respect to transfer restrictions), (ii) use its best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 90 days after the Issue Date, and (iii) use its best
efforts to consummate the Exchange Offer within 135 days after the Issue Date.
Upon the Exchange Offer Registration Statement being declared effective, the
Company shall offer the Exchange Notes in exchange for surrender of the Old
Notes. The Company shall keep the Exchange Offer open for not less than 20
business days (or longer if required by applicable law) after the date notice
of the Exchange Offer is mailed to the holders of the Old Notes. For each of
the Old Notes surrendered pursuant to the Exchange Offer, the holder who
surrendered such Old Note will receive an Exchange Note having a principal
amount equal to that of the surrendered Old Note.
In the event that applicable law or interpretations of the staff of the
Commission do not permit the Company to effect the Exchange Offer, or if for
any other reason the Exchange Offer is not consummated within 135 days after
the Issue Date, or, under certain circumstances, if the Initial Purchasers
shall so request, the Company will, at its cost, (a) as promptly as
practicable, file a shelf registration statement covering resales of the Old
Notes (a "Shelf Registration Statement"), (b) use its best efforts to cause
such Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective such Shelf
Registration Statement until the earlier of three years after the Issue Date
and such time as all of the applicable Old Notes have been sold thereunder.
The Company will, in the event of the filing of a Shelf Registration
Statement, notify each such holder when such Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder that sells its Old Notes
pursuant to a Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
Although the Company intends to file the registration statement described
above, there can be no assurance that such registration statement will be
filed, or, if filed, that it will become effective. If the Company fails to
comply with the above provisions or if such registration statement fails to
become effective, then, as liquidated damages, additional interest
("Additional Interest") shall become payable with respect to the Old Notes as
follows:
(i) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 45 days following the Issue Date, Additional
Interest shall accrue on the Old Notes over and above the stated interest
at a rate of 0.50% per annum for the first 90 days commencing on the
46th day after the Issue Date, such Additional Interest shall increase by
an additional 0.50% per annum at the beginning of each subsequent 90-day
period;
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(ii) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 90 days following the Issue
Date, Additional Interest shall accrue on the Old Notes over and above the
stated interest at a rate of 0.50% per annum for the first 90 days
commencing on the 91st day after the Issue Date, such Additional Interest
shall increase by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; or
(iii) If (A) the Company has not exchanged all Old Notes validly tendered
in accordance with the terms of the Exchange Offer on or prior to 135 days
after the Issue Date or (B) the Exchange Offer Registration Statement
ceases to be effective at any time prior to the time that the Exchange
Offer is consummated or (C) if applicable, the Shelf Registration Statement
has been declared effective and such Shelf Registration Statement ceases to
be effective at any time prior to the third anniversary of the Issue Date
(unless all the Old Notes have been sold thereunder), then Additional
Interest shall accrue on the Old Notes over and above the stated interest
at a rate of 0.50% per annum for the first 90 days commencing on (x) the
day 136 days after the Issue Date with respect to the Old Notes validly
tendered and not exchanged by the Company, in the case of (A) above, or (y)
the day the Exchange Offer Registration Statement ceases to be effective or
usable for its intended purpose in the case of (B) above, or (z) the day
such Shelf Registration Statement ceases to be effective in the case of (C)
above, such Additional Interest shall increase by an additional 0.50% per
annum at the beginning of each subsequent 90-day period; provided, however,
that the Additional Interest on the Old Notes may not exceed 2.0% per annum
in the aggregate; and provided, further that (1) upon the filing of the
Exchange Offer Registration Statement or Shelf Registration Statement (in
the case of clause (i) above), (2) upon the effectiveness of the Exchange
Offer Registration Statement or Shelf Registration Statement (in the case
of (ii) above), or (3) upon the exchange of Exchange Notes for all Old
Notes tendered (in the case of clause (iii)(A) above), or upon the
effectiveness of the Exchange Offer Registration Statement which had ceased
to remain effective in the case of clause (iii)(B) above, or upon the
effectiveness of the Shelf Registration Statement which had ceased to
remain effective (in the case of clause (iii)(C) above), Additional
Interest on the Old Notes as a result of such clause (or the relevant
subclause thereof), as the case may be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on February 15 and August 15 of each
year, commencing with the first such date occurring after any such Additional
Interest commences to accrue. The amount of the Additional Interest will be
determined by multiplying the applicable rate of Additional Interest by the
principal amount of the Old Notes multiplied by a fraction, the numerator of
which is the number of days such Additional Interest rate was applicable
during such period (determined on the basis of a 360-day year comprised of
twelve 30-day months), and the denominator of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which will be available upon request to the Company.
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OLD NOTES TRANSFER RESTRICTIONS
Because the following restrictions will apply to any Old Notes held by
holders who do not participate in the Exchange Offer, holders of Old Notes are
advised to consult legal counsel prior to making any offer, resale, pledge or
transfer of any of the Old Notes.
None of the Old Notes have been registered under the Securities Act and they
may not be offered or sold within the United States or to, or for the account
or benefit of, U.S. persons except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act. Accordingly, the Old Notes were offered and sold only (A) to a limited
number of "qualified institutional buyers" (as defined in Rule 144A) ("QIBs")
in compliance with Rule 144A, (B) to a limited number of other institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D under the Securities Act) ("Accredited Investors") that, prior to
their purchase of any Old Notes, deliver to the Initial Purchasers a letter
containing certain representations and agreements, and (C) to non-U.S. persons
(which term shall include dealers or other professional fiduciaries in the
United States acting on a discretionary basis for foreign beneficial owners
(other than an estate or trust) outside the United States in an offshore
transaction in reliance upon Regulation S under the Securities Act
("Regulation S"). As used herein, the terms "United States," "U.S. person" and
"offshore transaction" have the meanings given to them in Regulation S under
the Securities Act.
Each purchaser of Old Notes has been deemed to have represented and agreed
as follows:
1. It purchased the Old Notes for its own account or an account with
respect to which it exercises sole investment discretion and that it and
any such account is (A) a QIB, and is aware that the sale to it is being
made in reliance on Rule 144A, (B) an Accredited Investor, or (C) a non-
U.S. Person that is outside the United States, and is aware that the sale
to it is being made in reliance on Regulation S under the Securities Act.
2. It understood and acknowledged that none of the Old Notes have been
registered under the Securities Act or any other applicable securities
laws, and may not be sold except as set forth in paragraph (3) below.
3. It agreed not to resell or otherwise transfer any of such Old Notes
within three years after the later of the original issue date of the Old
Notes or the last date on which the Company or any affiliate (within the
meaning of Rule 144 under the Securities Act) of the Company was the owner
of such Old Notes (or any predecessor thereto) except (A) to the Company or
any of its subsidiaries, (B) for so long as such security is eligible for
resale pursuant to Rule 144A, to a QIB in compliance with Rule 144A, (C) to
non-U.S. persons outside the United States in an offshore transaction in
accordance with Regulation S, (D) to an institutional Accredited Investor
that, prior to such transfer, furnishes (or has furnished on its behalf by
a U.S. broker-dealer) to the Trustee for the Old Notes, a signed letter
certifying to the Company and the Trustee that such transferee is an
institutional Accredited Investor and is acquiring the Old Notes for
investment purposes and not for distribution, (E) pursuant to the exemption
from registration provided by Rule 144 under the Securities Act or (F)
pursuant to an effective registration statement under the Securities Act.
Each purchaser acknowledged that the Company and the Trustee reserved the
right prior to any proposed resale of the Old Notes to require delivery of
an opinion of counsel, certification and/or information satisfactory to the
Company and the Trustee.
4. It agreed that it will give to each person to whom it transfer the Old
Notes notice of any restrictions on transfer of such securities.
5. It understood that the Old Notes will bear a legend substantially to
the following effect unless otherwise agreed by the Company and the holder
thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR
THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS
ACQUISITION HEREOF,
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THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 (a)(1), (2), (3), OR (7) UNDER
THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON
AND IS ACQUIRING THIS SECURITY OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE YEARS AFTER THE LATER OF
THE ORIGINAL ISSUANCE OF THIS SECURITY OR THE LAST DATE ON WHICH THE COMPANY
OR ANY AFFILIATE (WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT) OF
THE COMPANY WAS THE OWNER OF SUCH SECURITY (OR ANY PREDECESSOR THERETO) (THE
"RESALE RESTRICTION TERMINATION DATE") RESELL OR OTHERWISE TRANSFER THIS
SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG
AS SUCH SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT, TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE
144A, (C) TO NON-U.S. PERSONS OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (D) TO
AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES
(OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO THE TRUSTEE A
SIGNED LETTER (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE
CERTIFYING TO THE COMPANY AND SUCH TRUSTEE THAT SUCH TRANSFEREE IS AN
INSTITUTIONAL ACCREDITED INVESTOR AND IS ACQUIRING SUCH SECURITY FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, (E) PURSUANT TO THE EXEMPTION
FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, OR (F)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND
(3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION
WITH ANY TRANSFER OF THIS SECURITY PRIOR TO THE RESALE RESTRICTION TERMINATION
DATE, THE HOLDER SHALL, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE
COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS ANY OF
THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING
GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
6. It shall not sell or otherwise transfer such Old Notes to, and each
purchaser represented and covenanted that it was not acquiring such
securities for or on behalf of, any pension or welfare plan (as defined in
Section 3 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), except that such a purchase for or on behalf of a
pension or welfare plan shall be permitted:
a. to the extent such purchase is made by or on behalf of a bank
collective investment fund maintained by the purchaser in which, at any
time while the Old Notes are held by the purchaser, no plan (together
with any other plans maintained by the same employer or employee or
organization) has an interest in excess of 10% of the total assets in
such collective investment fund and the conditions of Section III of
Prohibited Transaction Class Exemption 91-38 issued by the Department
of Labor are satisfied;
b. to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the purchaser
in which, at any time while the Old Notes are held by the purchaser, no
plan (together with any other plans maintained by the same employer or
employee organization) has an interest in excess of 10% of the total of
all assets in such pooled separate account and the conditions of
Section III or Prohibited Transaction Class Exemption 90-1 issued by
the Department of Labor are satisfied;
c. to the extent such purchase is made on behalf of a plan by (i) an
investment adviser registered under the Investment Advisers Act of 1940
that had as of the last day of its most recent fiscal year
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total assets under its management and control in excess of $50.0
million and had stockholders' or partners' equity in excess of
$750,000, as shown in its most recent balance sheet prepared in
accordance with generally accepted accounting principles, (ii) a bank
as defined in Section 202(a)(2) of the Investment Advisers Act of 1940
with equity capital in excess of $1.0 million as of the last day of its
most recent fiscal year, (iii) an insurance company which is qualified
under the laws of more than one state to manage, acquire or dispose of
any assets of a plan, which insurance company has, as of the last day
of its most recent fiscal year, net worth in excess of $1.0 million and
which is subject to supervision and examination by a state authority
having supervision over insurance companies, or (iv) a savings and loan
association, the accounts of which are insured by the Federal Savings
and Loan Insurance Corporation, that has made application for and been
granted trust powers to manage, acquire or dispose of assets of a plan
by a State or Federal authority having supervision over savings and
loan associations, which savings and loan association has, as of the
last day of its most recent fiscal year, equity capital or net worth in
excess of $1.0 million and, in any case, such investment adviser, bank,
insurance company or savings and loan is otherwise a qualified
professional asset manager, as such term is used in Prohibited
Transaction Exception 84-14 issued by the Department of Labor, and the
assets of such plan when combined with the assets of other plans
established or maintained by the same employer (or affiliate thereof)
or employee organization and managed by such investment adviser, bank,
insurance company or savings and loan do not represent more than 20% of
the total client assets managed by such investment adviser, bank,
insurance company or savings and loan and the conditions of Section I
of such exemption are otherwise satisfied; or
d. to the extent such plan is a governmental plan (as defined in
Section 3 of ERISA) which is not subject to the provisions of Title I
or ERISA or Section 4975 of the Internal Revenue Code.
7. It acknowledged that the Trustee will not be required to accept for
registration of transfer any Old Notes acquired by it, except upon
presentation of evidence satisfactory to the Company and the Trustee that
the restrictions set forth herein have been complied with.
8. It acknowledged that the Company and others will rely upon the truth
and accuracy of the foregoing acknowledgments, representations and
agreements and agrees that if any of the acknowledgments, representations
or agreements deemed to have been made by its purchase of the Old Notes are
no longer accurate, it shall promptly notify the Company. If it is acquired
the Old Notes as a fiduciary or agent for one or more investor accounts, it
represented that it had sole investment discretion with respect to each
such account and it had full power to make the foregoing acknowledgments,
representations, and agreements on behalf of each account.
PLAN OF DISTRIBUTION
Under existing Commission interpretations, the Exchange Notes would be
freely transferable by holders thereof other than affiliates of the Company
after the Exchange Offer without further registration under the Securities Act
if the holder of the Exchange Notes represents that it is acquiring the
Exchange Notes in the ordinary course of business, that it has no arrangement
or understanding with any person to participate in the distribution of the
Exchange Notes and that it is not an affiliate of the Company, as such terms
are interpreted by the Commission; provided that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange
Offer will have a prospectus delivery requirement with respect to resales of
such Exchange Notes. The Commission has taken the position that the
Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with the prospectus
contained in the Exchange Offer Registration Statement. The Company has agreed
for a period of 180 days after the consummation of the Exchange Offer to make
available a prospectus meeting requirements of the Securities Act to
Participating Broker-Dealers and other persons, if any, with similar
prospectus delivery requirements, that requests such documents in the Letter
of Transmittal, for use in connection with any resale of such Exchange Notes.
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Each holder who wishes to exchange its Old Notes for Exchange Notes in the
Exchange Offer will be required to represent that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business and
that at the time of the commencement of the Exchange Offer it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Old
Notes and that it is not an "affiliate," as defined in Rule 405 under the
Securities Act, of the Company or, if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent practicable
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the applicable Exchange Notes. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making, activities or other trading activities,
it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such Exchange Notes.
Any broker-dealer that resells Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concession of any brokers or dealers and will
indemnify holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in
the Registration Rights Agreement.
BOOK-ENTRY; DELIVERY AND FORM
The Old Notes were issued in the form of a single global note that was
deposited with or on behalf of The Depository Trust Company, New York, New
York, as depositary ("DTC"), and registered in the name of a nominee of DTC.
Except as set forth below, the Exchange Notes exchanged for Old Notes
represented by the global note will be issued in the form of a single global
Exchange Note (the "Global Note") that will be deposited with DTC and
registered in the name of a nominee of DTC.
Old Notes transferred to "foreign purchasers" or Accredited Investors who
are not qualified institutional buyers (in each case, as defined in "Old Notes
Transfer Restrictions") (collectively referred to herein as the "Non-Global
Purchasers") will be issued certificated notes in registered form registered
in the name of DTC or its nominee and deposited with or on behalf of DTC. Any
Exchange Notes issued in exchange for Old Notes held by Non-Global Purchasers
will be issued certificated notes in registered forms ("Certificated Notes")
registered in the name of DTC or its nominees and deposited with or on behalf
of DTC. Upon the transfer to a qualified institutional buyer of any
Certificated Notes initially issued to a Non-Global Purchaser, such
Certificated Notes will, unless the transferee requests otherwise or an
interest in the Global Note has previously been exchanged in whole for
Certificated Notes, be exchanged for an interest in the Global Note.
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The Global Note. The Company expects that pursuant to procedures established
by DTC (i) upon deposit of the Global Unit, DTC will credit the accounts of
persons who have accounts with DTC ("participants") or persons who hold
interests through participants designated by the Initial Purchasers with
portions of the Global Unit which shall be comprised of the corresponding
respective principal amount of the Global Note and (ii) ownership of the
Exchange Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants). Qualified institutional buyers
may hold their interests in the Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Notes, DTC or such nominee will be considered the sole owner or
holder of the Exchange Notes represented by the Global Note for all purposes
under the Indenture. No beneficial owner of an interest in the Global Note
will be able to transfer such interest except in accordance with DTC's
applicable procedures, in addition to those provided for under the Indenture.
Payments of the principal of, and premium, if any, on, the Global Note will
be made to DTC or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the Trustee nor any Paying Agent (as defined)
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, and premium, if any, on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note,
as shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in any such Global
Note held through such participants will be governed by standing instructions
and customary practice, as is now the case with securities held for the
accounts of customers registered to the names of nominees for such customers.
Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a holder requires physical delivery of a
Certificated Note for any reason, including to sell Exchange Notes to persons
in jurisdictions which require physical delivery of such securities or to
pledge such securities, such holder must transfer its interest in the Global
Note in accordance with the normal procedures of DTC and including the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account interests in the applicable Global Note is
credited and only in respect of such portion of the Global Note, as to which
such participant or participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and certain other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is
under no obligation to perform such procedures, and such
147
<PAGE>
procedures may be discontinued at any time. None of the Company or the Trustee
have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Certificated Notes. If DTC is at any time unwilling or unable to continue as
a depositary for any Global Note and a successor depositary is not appointed
by the Company within 90 days, Certificated Notes will be issued in exchange
for the Global Note.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995 and the related consolidated statements of operations, of stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1995 included herein have been audited by KPMG Peat Marwick
LLP, independent accountants, as stated in their report appearing herein,
which report indicates a reliance on other auditors relative to certain
amounts relating to the Company's investment in PT Rajasa Hazanah Perkasa
("RHP") as of and for the year ended December 31, 1995, and have been included
herein in reliance upon the authority of said firm as experts in accounting
and auditing. The balance sheet of RHP as of December 31, 1995 and the related
statements of income, deficit and cash flows for the year then ended included
herein have been audited by Prasetio, Utomo & Co., independent accountants, as
stated in their report appearing herein, and have been included herein in
reliance upon the authority of said firm as experts in accounting and
auditing. The balance sheet of RHP as of December 31, 1994 and the related
statements of loss, deficit and cash flows for the two years ended December
31, 1994 included herein have been audited by Siddharta Siddharta & Harsono,
registered public accountants, as stated in their report appearing herein, and
have been included herein in reliance upon the authority of said firm as
experts in accounting and auditing. The consolidated balance sheets of STW as
of December 31, 1994 and 1995 and the related consolidated profit and loss
accounts, statements of shareholders equity and cash flows for the three years
ended December 31, 1995 included herein have been audited by KPMG Peat
Marwick, independent accountants, as stated in their report appearing herein,
and have been included herein in reliance upon the authority of said firm as
experts in accounting and auditing. The balance sheet of TeamTalk Limited as
of December 31, 1995 and the related statements of operations, movements in
equity and cash flows for the year ended December 31, 1995 included herein
have been audited by KPMG, independent chartered accountants, as stated in
their report appearing herein, and have been included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of Star Digitel Limited as of December 31,
1994 and 1995 and the consolidated profit and loss accounts and cash flow
statements for each of the years in the three year period ended December 31,
1995 included in this registration statement have been audited by Deloitte
Touche Tohmatsu, independent auditors, as stated in their report appearing
herein, and have been included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Palo Alto,
California. A partner of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP owns 6,720 shares of Preferred Stock and warrants to purchase
80 shares of Preferred Stock.
148
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
AND SUBSIDIARY
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
International Wireless Communications Holdings, Inc. and Subsidiary
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995........... F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994, and 1995.................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1993, 1994 and 1995................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994, and 1995.................................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Interim Consolidated Condensed Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of December 31, 1995 and Sep-
tember 30, 1996....................................................... F-25
Consolidated Condensed Statements of Operations for the nine months
ended September 30, 1995 and 1996..................................... F-26
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 1995 and 1996..................................... F-27
Notes to Consolidated Condensed Financial Statements................... F-28
Financial Statements of Significant 50% or less Owned Affiliates
PT Rajasa Hazanah Perkasa for the years ended December 31, 1993, 1994
and 1995.............................................................. F-36
PT Rajasa Hazanah Perkasa for the six months ended June 30, 1995 and
1996 (unaudited)...................................................... F-58
Syarikat Telefon Wireless (M) SDN BHD and its Subsidiary as of and for
the three years ended December 31, 1995............................... F-76
Syarikat Telefon Wireless (M) SBN BHD and its Subsidiary as of and for
the six months ended June 30, 1995 and 1996 (unaudited)............... F-90
Financial Statements of Significant Businesses Acquired or About to be
Acquired
TeamTalk Limited for the period from January 1, 1995 to May 17, 1995
(Predecessor period) and from May 18, 1995 to December 31, 1995 (Suc-
cessor period)........................................................ F-98
TeamTalk Limited for the period from January 1, 1995 to May 17, 1995
(Predecessor period) and from May 18, 1995 to June 30, 1995 (Successor
period) and for the six months ended June 30, 1996 (unaudited)........ F-112
Star Digitel Limited and its subsidiaries as of and for the three years
ended December 31, 1995 and for the six months ended June 30, 1995 and
1996 (unaudited)...................................................... F-119
</TABLE>
International Wireless Communications Holdings, Inc. (IWC Holdings) is a
holding company which conducts all of its operations though its sole direct
subsidiary, International Wireless Communications, Inc. and subsidiaries (IWC)
and has no assets, liabilities or operations other than its investment in IWC
as of December 31, 1994 and 1995. Separate consolidated financial statements
of IWC would be identical to the consolidated financial statements of IWC
Holdings as of December 31, 1994 and 1995. As of September 30, 1996, the
financial statements of IWC Holdings and IWC are identical except for the debt
obligation, related warrants and debt issue costs which are recorded at the
IWC Holdings level. IWC has executed an intercompany note to IWC Holdings in a
principal amount equal to the net proceeds of the unit offering.Although
separate financial statements of IWC are required by Regulation S-X, they are
not included as management believes they would not be meaningful due to the
separately identifiable differences described above.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
International Wireless Communications Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
International Wireless Communications Holdings, Inc. and subsidiary (IWC
Holdings) as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of IWC Holdings'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of PT Rajasa Hazanah Perkasa (RHP), an investment which is
reflected in the accompanying consolidated financial statements using the
equity method of accounting as of and for the year ended December 31, 1995
(see Note 3). The investment in this company represents 25% of consolidated
assets as of December 31, 1995. The equity in its net loss was approximately
$1,310,000 for the year ended December 31, 1995. Those statements were audited
by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for that company, is based on
the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, based on our audit and the report of other auditors for
1995, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of IWC Holdings as of
December 31, 1994 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Francisco, California
July 12, 1996,
except for Note 1, as to
which the date is August 8, 1996
F-2
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1994 1995
ASSETS --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 10,298 25,398
Notes receivable from affiliates.................... 2,245 338
Advance to affiliate................................ -- 728
Other current assets................................ 37 387
--------- ---------
Total current assets.............................. 12,580 26,851
Property and equipment, net........................... 88 4,269
Investments in affiliates............................. 5,427 52,280
Telecommunication licenses and other intangibles,
net.................................................. -- 12,106
Other assets.......................................... 329 137
--------- ---------
Total assets...................................... $ 18,424 95,643
========= =========
<CAPTION>
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses............... $ 200 5,757
Notes payable to related party...................... 1,800 1,800
Note payable........................................ -- 4,000
--------- ---------
Total current liabilities......................... 2,000 11,557
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock, $.01 par value
per share; 21,541,480 shares designated; 5,222,080
and 15,698,400 shares issued and outstanding in 1994
and 1995, respectively; net of note receivable from
stockholder of $26 in 1994 and 1995; liquidation and
minimum redemption value of $105,509................. 19,578 98,845
Stockholders' deficit:
Convertible preferred stock, $.01 par value per
share; 1,200,000 shares designated, issued, and
outstanding in 1994 and 1995; liquidation value of
$1,020............................................. 12 12
Common stock, $.01 par value per share; 26,000,000
shares authorized; 76,080 and 328,000 shares issued
and outstanding in 1994 and 1995, respectively 1 3
Additional paid-in capital.......................... 625 748
Note receivable from stockholder.................... (152) (152)
Accumulated deficit................................. (3,640) (15,370)
--------- ---------
Total stockholders' deficit....................... (3,154) (14,759)
--------- ---------
Total liabilities, redeemable convertible pre-
ferred stock and stockholders' deficit........... $ 18,424 95,643
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Operating revenue................................ $ -- -- --
Operating expenses:
General and administrative expenses............ 809 2,481 6,365
Equity in losses of affiliates................. -- -- 3,756
-------- -------- --------
Loss from operations......................... (809) (2,481) (10,121)
Other income (expense):
Interest income................................ 2 106 232
Interest expense............................... (33) (115) (1,354)
Other.......................................... (1) (13) (28)
-------- -------- --------
Net loss..................................... $ (841) (2,503) (11,271)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
------------------ ------------------ PAID-IN FROM ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT (DEFICIT)
---------- ------ ---------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of Decem-
ber 31, 1992........... 271,960 $ 3 1,200,000 $12 $ 635 $ -- $ (164) $ 486
Exercise of warrant..... 108,760 -- -- -- -- -- -- --
Conversion of notes pay-
able to Series A pre-
ferred stock........... 108,800 1 -- -- 99 -- -- 100
Issuance of Series A
preferred stock........ 739,720 7 -- -- 673 -- -- 680
Net loss................ -- -- -- -- -- -- (841) (841)
---------- --- ---------- --- ------ ----- -------- --------
Balances as of Decem-
ber 31, 1993........... 1,229,240 11 1,200,000 12 1,407 -- (1,005) 425
Conversion of Series A
preferred stock to Se-
ries B redeemable pre-
ferred stock........... (1,229,240) (11) -- -- (933) -- -- (944)
Conversion of common
stock to Series A pre-
ferred stock........... 1,200,000 12 (1,200,000) (12) -- -- -- --
Issuance of common
stock.................. -- -- 76,080 1 151 (152) -- --
Accretion of redeemable
preferred stock........ -- -- -- -- -- -- (132) (132)
Net loss................ -- -- -- -- -- -- (2,503) (2,503)
---------- --- ---------- --- ------ ----- -------- --------
Balances as of Decem-
ber 31, 1994........... 1,200,000 12 76,080 1 625 (152) (3,640) (3,154)
Issuance of common
stock.................. -- -- 251,920 2 123 -- -- 125
Accretion of redeemable
preferred stock........ -- -- -- -- -- -- (459) (459)
Net loss................ -- -- -- -- -- -- (11,271) (11,271)
---------- --- ---------- --- ------ ----- -------- --------
Balances as of Decem-
ber 31, 1995........... 1,200,000 $12 328,000 $ 3 $ 748 $(152) $(15,370) $(14,759)
========== === ========== === ====== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (841) (2,503) (11,271)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................. 3 15 37
Amortization.................................. 40 40 294
Equity in losses of affiliates................ -- -- 3,756
Changes in operating assets and liabilities:
Other current assets......................... (42) 5 (350)
Accounts payable and accrued expenses........ 155 45 5,557
-------- -------- --------
Net cash used in operating activities....... (685) (2,398) (1,977)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............ (8) (88) (4,218)
Notes receivable from affiliates............... -- (2,245) (113)
Advances to affiliate.......................... -- -- (728)
Investments in affiliates...................... (1,401) (3,704) (19,589)
Telecommunication licenses and other intangi-
bles.......................................... -- -- (12,153)
Other assets................................... (40) (169) 70
-------- -------- --------
Net cash used in investing activities....... (1,449) (6,206) (36,731)
-------- -------- --------
Cash flows from financing activities:
Loan proceeds.................................. 2,160 5,180 28,138
Repayment of principal......................... (50) (2,060) (2,050)
Net proceeds from issuance of stock and war-
rant.......................................... 680 15,122 27,720
-------- -------- --------
Net cash provided by financing activities... 2,790 18,242 53,808
-------- -------- --------
Net increase in cash and cash equivalents........ 656 9,638 15,100
Cash and cash equivalents at beginning of year... 4 660 10,298
-------- -------- --------
Cash and cash equivalents at end of year......... $ 660 10,298 25,398
======== ======== ========
Supplemental cash flow information:
Cash paid for interest......................... $ 16 103 949
======== ======== ========
Noncash financing and investing activities:
Conversion of loans to equity.................. $ 100 3,380 24,307
======== ======== ========
Conversion of note receivable to investment in
affiliate..................................... $ -- -- 2,020
======== ======== ========
Note receivable from sale of stock............. $ -- 178 --
======== ======== ========
Exchange of preferred stock for investment in
affiliates.................................... $ -- -- 25,000
======== ======== ========
Exchange of common stock for investment in
CTP........................................... $ -- -- 125
======== ======== ========
Note payable in connection with RHP invest-
ment.......................................... $ -- -- 4,000
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
International Wireless Communications, Inc. and subsidiaries (IWC or the
Company) was incorporated in Delaware in 1992. The Company develops, owns,
and operates wireless communications companies in emerging markets
throughout Asia and Latin America. These local wireless businesses (LWBs)
provide a variety of communications services. Together with local and
strategic partners, the Company has interests in Brazil, India, Indonesia,
Malaysia, Mexico, New Zealand, Pakistan, Peru, and the Philippines.
In prior years, the Company was considered a development stage enterprise.
During 1995, the Company's interests in Malaysia, Indonesia, New Zealand,
and Mexico commenced operations. Entities in which the Company has
ownership interests and have commenced operations are referred to as
"operating entities." As such, the Company's management has ceased to
report the operations as a development stage enterprise.
International Wireless Communications Holdings, Inc. ("IWC Holdings") was
incorporated in Delaware in July 1996 as a holding company whose primary
asset is the capital stock of IWC. Subsequent to the formation of IWC
Holdings, the Company completed a reorganization in which each share of the
then outstanding capital stock of IWC, which became a wholly owned
subsidiary of IWC Holdings, was converted into 40 shares of the
corresponding class and series of capital stock of IWC Holdings. IWC
Holdings assumed and became the successor to the agreements of IWC relating
to capital stock. All data related to shares and per share amounts for all
periods presented have been adjusted to reflect the effect of the
reorganization and the stock conversion.
Consistent with industry practice, the Company considers itself to be
operating in one business segment.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
International Wireless Communications, Inc. and its wholly owned
subsidiary, Servicos de Radio Comunicacoes Ltda. (SRC) located in Brazil.
In addition, the accompanying consolidated financial statements include the
accounts of two majority owned subsidiaries, M/S Mobilcom (Pte) Ltd.
(Mobilcom) located in Pakistan, and PeruTel S.A. (PeruTel) located in Peru.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Minority interests are not reflected in the accompanying
consolidated financial statements as they are immaterial.
Foreign Currency Translation
The functional currency for the Company's foreign operating entities is the
applicable local currency, except for those located in highly inflationary
countries. Translation from the applicable foreign currencies to U.S.
dollars is performed for monetary assets and liabilities using current
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period.
The gains or losses, net of applicable deferred income taxes, resulting
from such translation, if material, are included in stockholders' equity.
Gains or losses resulting from foreign currency transactions are included
in other income. For non-operating foreign investees and for the Company's
investee in Brazil, a highly inflationary country, the functional currency
is the U.S. dollar. Remeasurement adjustments for foreign entities where
the U.S. dollar is the functional currency, and exchange gains and losses
arising from transactions denominated in a currency other than the
functional currency, are included in income.
F-7
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of 90
days or less at the time of acquisition to be cash equivalents. Cash
equivalents as of December 31, 1995 consisted of money market mutual funds.
For all such investments, cost approximates fair market value.
Property and Equipment
Property and equipment are stated at original cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the respective assets, generally three to five years for domestic assets
and three to twenty years for foreign assets.
Investments in Affiliated Companies
Investments in affiliated companies consist of the costs incurred to
acquire development stage projects or interests in entities that have been
awarded telecommunication licenses to provide various wireless services.
The cost method of accounting is used for the Company's investments in
affiliated companies where the Company's voting interest is less than 20%
and the Company does not exert significant influence. Under the cost
method, the investment is recorded at cost, and income is recognized only
to the extent distributed by the investee as dividends. No such dividends
were declared or distributed for the years ended December 31, 1994 and
1995. Write-downs to the recorded historical cost are recognized when the
Company believes that an impairment in value has occurred.
Where the Company's voting interest is 20% to 50% and the Company does not
exercise control, the equity method of accounting is used. Under this
method, the investment, originally recorded at cost, is adjusted to
recognize the Company's share of net earnings or losses of the investee,
limited, in the case of losses, to the extent of the Company's investment
therein, and the amortization of telecommunication licenses and other
intangibles, if any. The amount of the purchase price that exceeded the
fair value of Company's percentage ownership of the equity investee's
tangible assets at the date of acquisition reflects the existence of
intangible assets of the equity investee. The primary intangible asset of
each equity investee consists of the equity investee's telecommunication
licenses or rights to participate in such licenses. Amounts attributable to
other intangibles, such as workforce, customer lists, and agreements with
local companies for transmitter and antenna locations, are not material.
Accordingly, the Company has accounted for the excess purchase price as
attributable to primarily telecommunication licenses and participation
rights. To the extent that goodwill exists, the Company believes that the
difference in amortization lives between licenses and goodwill would not
have a material effect on the accompanying financial statements. In some
cases, the terms of the licenses held by the equity investees are less than
twenty years. However, the Company believes that it will be able to renew
the licenses indefinitely if it builds out the infrastructure and
establishes commercial service. The costs of license renewal are expected
to be nominal.
The Company consolidates entities it controls, generally through greater
than 50% ownership interest.
Telecommunication Licenses and Other Intangibles of Majority Owned
Subsidiaries
The Company has acquired majority ownership interest in various LWBs. These
acquisitions have been accounted for under the purchase method and are
included in the accompanying consolidated financial statements. The amount
of the purchase price that exceeded the fair value of Company's percentage
ownership of the LWB's tangible assets at the date of acquisition reflects
the existence of intangible assets of the LWB. The primary intangible asset
of each LWB consists of the LWB's telecommunication licenses
F-8
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or rights to participate in such licenses. Given the early stage nature of
the acquired entities, amounts attributable to other intangibles, such as
workforce, customer lists, and agreements with local companies for
transmitter and antenna locations, are not material. Accordingly, the
Company has accounted for the excess purchase price as attributable to
primarily telecommunication licenses and participation rights. To the
extent that goodwill exists, the Company believes that the difference in
amortization lives between licenses and goodwill would not have a material
effect on the accompanying financial statements. Licenses are amortized
over 20 years, commencing upon the completion of the acquisition. In some
cases, the terms of the licenses held by the LWB's are less than twenty
years. However, the Company believes that it will be able to renew the
licenses indefinitely if it builds out the infrastructure and establishes
commercial service. The costs of license renewal are expected to be
nominal. Amortization expense of $47,000 was recorded in 1995. No
amortization was recorded in 1993 or 1994.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of 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 and the reported amounts of expenses during the
reporting period. Actual results could differ from these estimates.
Business and Credit Concentrations and Risk Factors
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents. The
Company's investments are comprised of investment grade short-term debt
instruments. Management believes that the financial risks associated with
such deposits are minimal.
Included in the Company's consolidated balance sheet as of December 31,
1994 and 1995, are long-term investments in various LWBs in such developing
countries as Malaysia, Indonesia, Brazil, Pakistan and Mexico (see Note 8).
These investments make up a significant portion of IWC's balance sheet (see
Note 3).
Each IWC affiliate has a unique and distinct market, operating environment,
and local economy with different subscription rates and costs to build and
operate the systems. Achieving each operating plan is dependent upon
successfully contending not only with normal risks associated with
constructing and operating wireless properties, but also risks unique to
operating in foreign countries, such as regulatory compliance, contractual
restrictions, labor laws, expropriation, nationalization, political,
economic or social instability, and confiscatory taxation.
The Company anticipates that it will often have a minority interest in
operating companies, in part because applicable laws often limit foreign
investors to minority equity positions. As such, the Company may be unable
to access the cash flow, if any, of its operating companies. Additionally,
the Company's ability to
F-9
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
sell or transfer its ownership interest in its operating companies is
generally subject to limitations based on agreements with its strategic and
financial partners, as well as provisions in local operating licenses and
local government regulations that may prohibit or restrict the transfer of
the Company's ownership interest in such operating companies.
The Company's ability to retain and exploit its existing telecommunication
licenses, and to obtain new licenses in the future, is essential to the
Company's operations. However, these licenses are typically granted by
governmental agencies in developing countries, and there can be no
assurance that these governmental agencies will not seek to unilaterally
limit, revoke, or otherwise adversely modify the terms of these licenses in
the future, any of which could have a material adverse effect on the
Company, and the Company may have limited or no legal recourse if any of
these events were to occur. In addition, licenses typically require renewal
from time to time and there can be no assurance that renewals to these
licenses will be granted.
Most of the LWBs currently operating have incurred operating losses and
negative cash flow from operations since inception, and the Company expects
that most of its operating companies will continue to generate operating
losses and negative cash flow from operations for the foreseeable future.
Most of these operating companies have only recently initiated providing
commercial services and have a limited subscriber base. This is not
uncommon in the wireless communications industry, which requires
significant capital investments in the initial years prior to obtaining a
sufficient subscriber revenue base to support operations. Achievement of
positive cash flow from operations will depend on successful execution of
management's business plans. Those plans assume significant additional
capital investment, in some cases, to expand the wireless network. There
can be no assurance that such funding capacity will be available in the
future.
Nonoperating risks include substantial use of borrowings by unconsolidated
investee companies to leverage equity capital employed and risks with
respect to foreign currency exchange rates.
Recoverability of Long-Lived Assets
The recoverability of property and equipment, investments in equity and
cost investee companies is dependent upon the successful build-out of
system infrastructure, obtaining additional licenses by investee companies,
and successful development of systems in each of the respective markets in
which the Company's investees operate or through the sale of such assets.
The Company's policy is to assess annually any impairment in value based
upon a comparison of projected operating cash flows from each of the
underlying investee companies over their expected period of operation, on
an undiscounted basis, to the carrying amount of the related assets.
Fair Value of Financial Instruments
The carrying value of the Company's cash and cash equivalents, notes
receivable from and advance to affiliates, accounts payable and accrued
expenses, notes payable to related party and note payable approximates the
fair market value due to the relatively short maturity of these
instruments.
Acquisition, Transaction, and Development Costs
The Company expenses direct and incremental costs incurred relative to
pursuing potential investments due to the relative uncertainty of the
future realization of such costs principally due to the nature of early
stage development projects in foreign countries.
F-10
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain amounts in the accompanying 1993 and 1994 consolidated financial
statements have been reclassified to conform with the 1995 consolidated
financial statement presentation.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This statement requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. The
Company adopted SFAS No. 121 in fiscal 1995. The adoption of SFAS No. 121
did not have a material effect on the Company's results of operations.
The Financial Accounting Standards Board recently adopted SFAS No. 123,
Accounting for Stock-Based Compensation. This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock option/stock issuance plans. The
Company will adopt SFAS No. 123 in fiscal 1996. Management plans to
continue conforming to APB No. 25, Accounting for Stock Issued to
Employees, for purposes of measurement of compensation expense. Therefore,
adoption of SFAS No. 123 is not expected to have a material effect on the
Company's results of operations in the year of adoption.
(2) BALANCE SHEET COMPONENTS
Balance sheet components as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
---- -------
<S> <C> <C>
Property and equipment
Furniture and fixtures..................................... $ 36 $ 40
Equipment.................................................. 71 126
Automobiles................................................ -- 34
Construction in process.................................... -- 4,125
---- -------
107 4,325
Less accumulated amortization.............................. 19 56
---- -------
Property and equipment, net.............................. $ 88 $ 4,269
==== =======
Telecommunication licenses and other intangibles
SRC/Via l project.......................................... $ -- $ 6,714
Mobilcom................................................... -- 5,439
---- -------
-- 12,153
Less accumulated amortization.............................. -- 47
---- -------
Telecommunication licenses and other intangibles, net.... $ -- $12,106
==== =======
Accounts payable and accrued expenses
Professional services...................................... $ -- $ 3,041
Employee compensation and benefits......................... 89 189
Interest................................................... 30 256
Equipment purchases........................................ -- 1,719
Accounts payable and other................................. 81 552
---- -------
$200 $ 5,757
==== =======
</TABLE>
F-11
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) INVESTMENTS IN AFFILIATES
The Company's investments in affiliates represent interests in various LWBs
in several developing countries. These investments are accounted for under
the equity or cost methods.
Equity Investments
For those investments in companies in which the Company's voting interest
is 20% to 50%, or for investments in companies in which the Company exerts
significant influence through board representation and management
authority, the equity method of accounting is used. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the
Company's share of losses of affiliates, limited to the extent of the
Company's investment in and advances to affiliates, including any debt
guarantees or other contractual funding commitments. All affiliated
companies have fiscal years ended December 31. Investments in affiliated
companies are as follows as of December 31, 1994 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
PORTION OF
INVESTMENT
EXCEEDING
COMPANY'S
SHARE OF THE
PERCENTAGE INVESTMENTS UNDERLYING
OF IN AFFILIATED HISTORICAL
OWNERSHIP COMPANIES(2) NET ASSETS
AFFILIATED ------------- -------------- --------------
COUNTRY COMPANY 1994 1995 1994 1995 1994 1995
------- ---------- ----- ---- ------ ------- ------ -------
<C> <S> <C> <C> <C> <C> <C> <C>
Malaysia Syarikat Telefon
Wireless (STW)......... 2%(1) 30% $1,400 $20,879(3) $1,311 $17,459
Indonesia PT Rajasa Hazanah
Perkasa (RHP).......... -- 25% -- 24,539(4) -- 23,680
New Zealand TeamTalk Limited
(TeamTalk)............. 25% 50% 284 2,345 -- 1,712
India HFCL Mobile Radio
Limited (HFCL)......... -- 49% -- 243 -- 243
Indonesia PT Binamulti Visualindo
(PTBV)................. -- 49% -- 206 -- 206
------ ------- ------ -------
1,684 48,212 1,311 43,300
Less accumulated amortization.................... -- 966 -- 966
------ ------- ------ -------
$1,684 $47,246 $1,311 $42,334
====== ======= ====== =======
</TABLE>
--------
(1) In 1994 this investment was accounted for under the cost method.
(2) Adjusted for the Company's share of equity in losses of affiliated
companies.
(3) In connection with a Ringgit 91,000,000 (approximately $36,400,000)
senior credit facility with a Malaysian bank obtained by STW, the
Company along with other STW shareholders, agreed to provide certain
support to this debt (see Note 7).
(4) The investment in affiliated company includes $4,000,000 representing
the Company's pro rata share of a $16,000,000 note payable to an
unrelated party (see Note 7).
The Company acquired its interest in RHP, HFCL, and PTBV during 1995 and
accounted for them using the purchase method (see Note 4). The following
condensed financial statement data, presented in accordance with U.S.
generally accepted accounting principles and stated in U.S. dollars, has
been derived from audited and unaudited financial statements. The financial
information pertaining to RHP was derived from financial statements audited
by other auditors. Both HFCL and PTBV are nonoperating entities with
insignificant operations as of December 31, 1995, and as such, selected
financial information is not included. For the year ended December 31,
1993, no significant operations existed for any equity investment.
F-12
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial information for affiliated companies accounted for by the equity
method is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1994
------------------------------
STW RHP TEAMTALK
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets............................. $ 1,394 $ -- $ 24
Noncurrent assets.......................... 11,997 -- 239
Current liabilities........................ 878 -- 100
Noncurrent liabilities..................... 7,565 -- --
Net revenues............................... 83 -- --
Net loss................................... (1,285) -- --
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
------------------------------
STW RHP(A) TEAMTALK
------- -------- -----------
<S> <C> <C> <C>
Current assets............................. $ 2,611 $ 5,316 $ 213
Noncurrent assets.......................... 33,299 21,336 6,307
Current liabilities........................ 2,988 17,496 3,933
Noncurrent liabilities..................... 21,925 6,257 1,492
Net revenues............................... 749 5,463 348
Net loss................................... (5,898) (3,186) (1,490)
</TABLE>
--------
(A) For the period March 28, 1995 through December 31, 1995. Net revenues
and net loss for the period from January 1, 1995 through March 27, 1995
were $1,821 and $387, respectively.
Cost Investments
The Company uses the cost method of accounting for three other investments.
They are Corporacion Mobilcom, S.A. de C.V. (Mobilcom Mexico), PT Mobilkom
Telekomindo (Mobilkom), and Universal Telecommunications Service, Inc.
(UTS). The Company's ownership percentage is 2.47%, 15% and 19%,
respectively. Both Mobilcom Mexico and Mobilkom are operating entities.
UTS, owned directly, and indirectly through Mobilcom Corporation, is
nonoperating.
The Company's carrying value and estimated fair value of these investments
as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
CARRYING FAIR MARKET CARRYING FAIR MARKET
AMOUNT VALUE AMOUNT VALUE
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mobilcom Mexico................. $2,062 $3,510 $2,062 $3,510(A)
Mobilkom........................ 1,500 1,500 1,500 2,400(B)
UTS............................. 181 181 1,472 1,472(C)
------ ------ ------ ------
$3,743 $5,191 $5,034 $7,382
====== ====== ====== ======
</TABLE>
The Company considers these investments to be long-term in nature and are
not held for trading purposes. Fair value for these investments was
determined as follows:
(A) Fair value determined based upon the minimum value available through
the exercise of a put option.
(B) Fair value based upon recent investments by other shareholders. The
Company has undertaken to pledge all of its stock of Mobilkom to secure
Mobilkom's borrowings under a bank credit facility.
(C) Management has determined that the carrying cost approximates market
value.
F-13
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) RELATED PARTY TRANSACTIONS
Advances to Affiliate
The advances to affiliate as of December 31, 1995 represented advances to
TeamTalk in the amount of $728,000. The advances are interest-free with no
stated terms.
Notes Receivable from Affiliates
Notes receivable from affiliates as of December 31, 1994, consisted
primarily of a working capital loan to STW of $2,020,000, bearing interest
at market rates, which was converted to an equity interest in STW during
1995.
Notes receivable from affiliates as of December 31, 1995, consisted
primarily of a note due from Mobilcom Mexico for $158,000, which earns
interest at 6% per annum; and a note due from RHP for $128,000, bearing
interest at market rates. The notes expired on January 5, 1996 and April
15, 1996, respectively, and have subsequently been extended.
Notes Payable to Related Party
Notes payable as of December 31, 1994 and 1995, consisted of two notes
payable to Vanguard Cellular Operating Corp. (Vanguard), the Company's
largest stockholder, each in the amount of $900,000 and bearing interest at
9% compounded annually. The notes are due on the earlier of April 26, 1996
or the close of an initial public offering. These notes are convertible, at
the option of the holder, into 274,800 shares of redeemable convertible
Series D preferred stock. Subsequent to year-end, these notes were
converted (see Note 9).
Vanguard Merger
On December 18, 1995, the Company merged with Vanguard International
Telecommunications, Inc. (VIT) (see Note 5), a wholly owned subsidiary of
Vanguard. Prior to this merger, Vanguard owned 10.46% of the Company and
provided a variety of services relating to the formation, development and
operation of the Company's wireless communication businesses. In exchange
for 3,972,240 shares of redeemable convertible Series E preferred stock
with a liquidation preference of $6.29 per share, the Company acquired
VIT's interests in TeamTalk and VIT's rights to acquire an interest in
various international LWBs. The liquidation value was equal to the fair
market value of the Series E preferred stock on the date of the merger. The
resulting total value of $25,000,000, was allocated to the various LWBs
based on their respective stage of development and an independent valuation
study of the LWBs. As a result of this merger, Vanguard increased its
ownership position to approximately 39% and continues to provide the
services described above. The original cost to Vanguard of the net assets
acquired by IWC in the merger was approximately $550,000. The value of
these assets, however, appreciated significantly over time as licenses were
subsequently granted, joint ventures and other strategic alliances formed
and business plans developed.
The excess of the allocated portion of the merger value to TeamTalk over
the net book value of TeamTalk was attributed to telecommunication
licenses. This excess amounted to $1,712,000 and is amortized on a
straight-line basis over 20 years.
The Company also acquired VIT's rights to participate in RHP, SRC,
Mobilcom, HFCL and PTBV and other yet to be developed projects.
Approximately $23,288,000 was allocated to telecommunication licenses in
each LWB based on their relative stage of development. These amounts are
amortized on a straight-line basis over 20 years.
F-14
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited pro forma consolidated results of operations, as if the merger
with VIT had occurred on January 1, 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Revenues................................................ $ -- --
Operating loss.......................................... (3,731) (11,713)
Net loss................................................ (3,753) (12,863)
</TABLE>
The Company has entered into arrangements with certain of the operating
companies whereby the Company is reimbursed for direct costs, primarily
salary and out-of-pocket costs, associated with technical, financial and
administrative support provided by the Company. These amounts have been
recorded as an offset to general and administrative expenses on the
accompanying consolidated statements of operations. For the years ended
December 31, 1994 and 1995, expense reimbursements were not material. No
such arrangements existed in 1993.
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The Company is authorized to issue 23,080,000 shares of preferred stock, of
which 21,541,480 are designated redeemable convertible preferred stock,
1,200,000 are designated nonredeemable convertible preferred stock, 338,520
are undesignated, and 26,000,000 shares of common stock, each with a par
value of $0.01 per share.
Redeemable convertible preferred stock as of December 31, 1995, was
comprised of the following (in thousands except share and per share
amounts):
<TABLE>
<CAPTION>
SHARES LIQUIDATION AGGREGATE
SHARES ISSUED AND VALUE PER LIQUIDATION
REDEEMABLE CONVERTIBLE DESIGNATED OUTSTANDING SHARE VALUE
PREFERRED STOCK: ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series B...................... 1,229,240 1,229,240 .9652 $ 1,186
Series C...................... 2,460,000 1,762,280 2.3343 4,114
Series D...................... 5,800,000 3,378,160 6.8775 23,233
Series E...................... 3,972,240 3,972,240 6.7365 26,759
Series F-1.................... 7,000,000 4,508,480 9.3750 42,267
Series F-2.................... 1,080,000 848,000 9.3750 7,950
---------- ---------- --------
21,541,480 15,698,400 $105,509
========== ========== ========
</TABLE>
Each series of redeemable preferred stock is being accreted to its
respective minimum redemption amount, which is equal to the liquidation
value.
Nonredeemable convertible preferred stock as of December 31, 1994 and 1995,
was comprised of 1,200,000 designated, issued, and outstanding shares of
Series A preferred stock with a liquidation per share of $.85 and an
aggregate liquidation value of $1,020,000.
The rights, preferences, and privileges of the holders of preferred stock
are as follows:
. Liquidation
In the event of Company liquidation, holders of Series F-1 and F-2
preferred stock (collectively referred to as Series F preferred stock)
shall be entitled to receive, prior and in preference to the holders of
Series A, B, C, D and E preferred stock ("Junior preferred stock") and
common stock an amount per share equal to the sum of (i) the product of
(A) .50 multiplied by (B) the liquidation value per share specified
above, as adjusted, and (ii) any declared but unpaid dividends thereon.
Holders of Series B, C, D and E preferred stock shall next be entitled
to receive an amount per share equal to the sum of (i) the product of
(A) .55 multiplied by (B) an amount per share of .9192, 2.2232, 6.55
and 6.2937, respectively, as adjusted and (ii) any declared but unpaid
dividends thereon. Holders of the Junior preferred stock and Series F
preferred stock shall next be entitled to receive the product of
(1) .50 multiplied by (2) an amount per share of .9193, 2.223, 6.55,
6.55 and 9.375, respectively, as adjusted.
F-15
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Holders of the Series A preferred stock shall be entitled to receive an
amount per share equal to the liquidation value per share specified
above, as adjusted, plus any declared but unpaid dividends thereon.
After the distributions described above, and after the distribution
related to common stock described below, the remaining assets of the
Company shall be distributed among the holders of the preferred stock
and common stock pro rata assuming full conversion of preferred stock
into common stock.
.Distributions
The holders of preferred stock are entitled to receive noncumulative
dividends at the same time and on the same basis as holders of common
stock when, and if, declared by the Board of Directors. No dividends
had been declared through December 31, 1995.
.Redemption
Each share of Series B, C, D, E, and F preferred stock is redeemable at
any time on or after December 31, 1998, but within 45 days after the
receipt by the Company of a written request from the holders of a
majority of the then outstanding shares of Series B, C, D, E and F-1
preferred stock. The Company shall redeem all such shares by paying in
cash a sum per share equal to the greater of (1) the then fair market
value of such share of preferred stock on an as-converted basis, or (2)
the liquidation value of such share of preferred stock (hereinafter
referred to as the redemption price). In the event the assets of the
Company are insufficient to effect such redemption in full, the shares
of preferred stock not redeemed shall remain outstanding and entitled
to all the rights and preferences provided herein.
In addition to the above redemption, at any time on or after December
31, 2000, but within 45 days after the receipt by the Company of a
written request from the majority of the holders of Series F-1
preferred stock, the Company shall redeem all outstanding shares of
such stock by paying, in cash, an amount per share equal to the
redemption price of such stock.
Upon the occurrence of a change of control of the Company that is not
approved by certain directors designated by the holders of Series F
preferred stock, then the holders of a majority of the shares of Series
F-1 preferred stock then outstanding shall have the right, by written
demand to the Company, to require the Company to redeem immediately all
the shares of Series F preferred stock then outstanding, at a price per
share equal to the redemption price of the Series F preferred stock.
.Conversion and Voting Rights
Each share of preferred stock is convertible, at the option of the
holder, into such number of fully paid and nonassessable shares of
common stock as is determined by dividing the original preferred stock
issue price by the conversion price applicable to such preferred share.
The conversion price per share for each series of preferred stock is
equal to the preferred stock issue price of the respective series of
preferred stock, subject to adjustment under certain circumstances. An
automatic conversion into common stock will occur in the event of a
firm commitment underwritten public offering of at least $13.10 per
share, as adjusted, and $8,000,000 in the aggregate. However, the
Series F preferred stock shall not automatically be converted in Common
Stock unless: (i) the underwritten public offering is consummated on or
prior to December 31, 1998, (ii) the public offering per share is at
least $18.75, as adjusted and (iii) the aggregate offering price is not
less than $25,000,000.
Each share of preferred stock has voting rights equal to that of common
stock on an "as if converted" basis. The holder of Series E preferred
stock is entitled to elect three directors to the Company's Board of
Directors, and, for so long as 20% of the shares of Series F preferred
stock remain outstanding, the holders of Series F-1 preferred stock are
entitled to elect three directors. As of December 31, 1995, the Company
had 16,898,400 shares of common stock reserved for the conversion of
preferred stock.
F-16
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock Transactions
.The Series A and B Financings
The Company sold an aggregate of 848,520 shares of Series A preferred
stock in May 1993 for an aggregate purchase price of $780,000 (a
purchase price of $.92 per share), including cancellation of notes
payable in the amount of $100,000.
In January 1994, each share of then outstanding common stock was
converted to an equal number of shares of Series A preferred stock.
Concurrently, shares of Series A preferred stock were converted into an
equal number of shares of Series B preferred stock.
.The Series C Financing
In a series of transactions during January and February 1994, the
Company sold an aggregate of 1,762,280 shares of Series C preferred
stock for an aggregate purchase price of $3,918,000 (a purchase price
of $2.22 per share), (the "Series C Financing"), including cancellation
of notes payable to investors totaling $1,351,000.
In connection with the Series C Financing, the Company issued to an
investor warrants to purchase (a) 50,440 shares of Series C preferred
stock at an exercise price of $2.22 per share (b) 222,200 shares of
preferred stock at an exercise price of $7.15 per share, and (c)
444,360 shares of preferred stock at an exercise price of $3.58 per
share. Warrants (a), (b) and (c) were exercisable until December 18,
1995, April 15, 1995 and January 15, 1995, respectively. The warrants
were subsequently amended in July 1995 (see below).
.The Series D Financing
In connection with bridge financing obtained in May 1994, the
purchasers received warrants exercisable for an aggregate of 46,440
shares of Series D preferred stock. The warrants have an exercise price
of $6.55 per share and are exercisable until May 6, 1997.
In a series of transactions in September and October 1994, the Company
sold an aggregate of 2,230,560 shares of Series D preferred stock for
an aggregate purchase price, net of a $26,000 note receivable, of
approximately $14,584,000 (a purchase price of $6.55 per share), (the
"Series D Financing"), including cancellation of notes payable in the
principal amount of $2,029,000.
In connection with the issuance of Bridge Notes on April 6, 1995, the
Company issued a warrant (the "April Bridge Warrants") to purchase
10,720 shares of Series D preferred stock at $6.55 per share. The April
Bridge Warrants are outstanding and are exercisable until April 6, 1998
or, if earlier, upon the closing of the Company's initial public
offering.
In connection with the Series D Financing, Vanguard loaned $1.8 million
to the Company in exchange for two convertible notes in the amount of
$900,000 each (see Note 4). Each note was due upon the earlier of April
26, 1996 or the occurrence of certain events which did not occur prior
to that date. On April 26, 1996, Vanguard converted both notes into an
aggregate of 274,800 shares of Series D preferred Stock (see Note 9).
In July 1995, convertible secured bridge financing notes issued on
April 24, 1995 were converted into 1,147,600 shares of Series D
preferred stock for an aggregate purchase price of $7,517,000 (a
purchase price of $6.55 per share).
F-17
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
.The Series E Financing
In July 1995, the Company entered into a merger agreement with Vanguard
and VIT, a wholly-owned subsidiary of Vanguard, whereby VIT would merge
their international interests in numerous international wireless
projects into the Company in exchange for 3,972,240 shares of Series E
preferred stock. This merger was completed on December 18, 1995,
concurrent with the issuance of Series F preferred stock (see Note 4).
In connection with the Vanguard Merger, the Company entered into an
agreement with an investor to amend previously existing warrant
agreements granted in connection with the Series C Financing. The
investor's original warrant to purchase 50,440 shares of Series C
preferred stock was amended to extend the warrant through December 18,
1997. The investor's original warrant to purchase 222,200 shares of
preferred stock was amended to increase the number of shares to 393,120
and to define the preferred stock as Series D preferred stock at $6.55
per share. The warrant is exercisable until December 18, 1997. The
investor's original warrant to purchase 444,360 shares of preferred
stock was amended to decrease the number of shares to 273,440 and to
define the preferred stock as Series C preferred stock at $2.22 per
share. The warrant is exercisable until May 15, 1997.
.The Series F Financing
In connection with the issuance of a note payable to an investor in
July 1995, the Company issued for a purchase price of $15,000, a
warrant to purchase 32,000 shares of Series F-1 preferred stock at an
exercise price of $9.38 per share. The number of shares and the
exercise price are subject to adjustment in certain circumstances. The
warrant is exercisable until December 18, 1998.
Concurrent with the July 1995 Financing, for an aggregate purchase
price of $72,000, the Company issued warrants to purchase an aggregate
of 153,760 shares of Series F-1 preferred stock (not including the
warrant issued to Vanguard in connection with the first July 1995 note)
at an exercise price of $9.38 per share. All share amounts and the
exercise price are subject to adjustment in certain circumstances. The
warrants are exercisable until December 18, 1998.
On August 15, 1995 pursuant to a Note and Warrant Purchase Agreement
dated as of August 14, 1995, the Company issued for a purchase price of
$50,000 a warrant (the "First Warrant") to purchase 106,680 shares of
Series F-2 preferred stock at an exercise price of $9.38 per share,
with the number of shares and exercise price subject to adjustment in
certain circumstances. The First Warrant is exercisable until December
18, 1998.
Pursuant to a Loan Agreement dated August 14, 1995 between the Company
and an investor, the Company issued a second warrant (the "Second
Warrant") to purchase 106,680 shares of Series F-2 preferred stock at
an exercise price of $9.38 per share, with the number of shares and the
exercise price subject to adjustment in certain circumstances. The
Second Warrant is exercisable until the same date, with the date being
subject to change in the same circumstances, as the First Warrant.
On December 18, 1995, the Company sold and issued 5,356,480 shares of
Series F preferred stock for $50,217,000. Prior to the share issuance
of the Series F preferred stock, the Company entered into bridge
financing agreements with certain existing shareholders. Certain bridge
loans were repaid with proceeds from the issuance of shares of Series F
preferred stock, while the remaining bridge loans were converted into
1,147,600 shares of Series D preferred stock.
Pursuant to the Series F Purchase Agreement, the Company agreed to
covenants customary in financing transactions of such type, including
limits on incurring debt and granting liens and pledges and other
negative covenants including limitations on payments, dividends,
investments, mergers, asset sales,
F-18
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amendments of its Certificate of Incorporation or Bylaws that would
adversely impact the rights of the Series F-1 preferred stock and the
Series F-2 preferred stock, changes to its business, changes in
control, and sales of equity securities.
Warrants
The Company had the following warrants outstanding as of December 31, 1995:
<TABLE>
<CAPTION>
WARRANTS EXERCISE
PREFERRED STOCK OUTSTANDING PRICE EXPIRATION
--------------- ----------- -------- -----------------
<S> <C> <C> <C>
Series C............................ 273,440 $2.22 May 15, 1997
Series C............................ 50,440 2.22 December 18, 1997
Series D............................ 393,120 6.55 December 18, 1997
Series D............................ 46,440 6.55 May 6, 1997
Series D............................ 10,720 6.55 April 6, 1998
Series F-1.......................... 185,760 9.38 December 18, 1998
Series F-2.......................... 213,360 9.38 December 18, 1998
---------
1,173,280
=========
</TABLE>
Common Stock
In the event of a liquidation, holders of common stock will be entitled to
receive an amount equal to $.50 per share, as adjusted, plus any declared
and unpaid dividends, after completion of distributions to the holders of
preferred stock.
The remaining assets of the Company, after satisfaction of the stipulated
distribution requirements related to the various preferred stock and common
stock liquidation preferences, will be distributed on a pro rata basis
among all of the holders of common stock and all of the holders of the
preferred stock, assuming full conversion of the preferred stock into
common stock.
In January 1994, the Company entered into an agreement to acquire a 70%
interest in Corporate Technology Partners (CTP), a partnership established
to develop a Personal Communications Services (PCS) business, in exchange
for 251,920 shares of common stock in the Company. CTP was owned, in part,
by officers of the Company. This agreement was completed on December 18,
1995, concurrent with the issuance of Series F preferred stock. A total of
45,360 of these shares remain in escrow as of December 31, 1995 pending
finalization of an ex-employee matter. The Company wrote-off its investment
in 1995 as CTP was unsuccessful in obtaining any Federal Communications
Commission PCS licenses.
In October 1994, the Company loaned a Director of the Company, $178,000 to
purchase 76,080 shares of common stock at a purchase price of $2.00 per
share and 3,920 shares of redeemable convertible Series D preferred stock
at a purchase price of $6.55 per share. The note bears interest at 7.69%
per annum. Principal and accrued interest are due in October 2004. The note
is secured by a pledge of the stock by the Director and is non-recourse to
the Director. The note principal is included as a component of
stockholders' equity and redeemable convertible preferred stock on the
accompanying consolidated balance sheets as of December 31, 1994 and 1995.
Stock Option/Stock Issuance Plan
During 1994, the Board of Directors adopted the 1994 Stock Option/Stock
Issuance Plan (the Plan) under which incentive stock options may be granted
to employees and officers and nonqualified (supplemental) stock options may
be granted to employees, officers, directors, and consultants to purchase
shares of the Company's common stock. Accordingly, the Company, as of
December 31, 1995, had reserved a total of
F-19
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1,000,000 shares of the Company's common stock for issuance upon the
exercise of options granted pursuant to the Plan. Options granted under the
Plan generally expire 10 years following the date of grant and are subject
to limitations on transfer.
Option grants under the Plan are subject to various vesting provisions, all
of which are contingent upon the continuous service of the optionee and may
not impose vesting criterion more restrictive than 20% per year. The
exercise price of options granted under the Plan must equal or exceed the
fair market value of the Company's common stock on the date of grant.
Unless otherwise terminated by the Board of Directors, the Plan
automatically terminates in January 2004.
A summary of stock option/stock issuance transactions under the Plan
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES ----------------------
AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
--------- --------- ------------
<S> <C> <C> <C>
Initial shares reserved................... 1,000,000 -- --
Options granted........................... (761,920) 761,920 $ .25 - 2.50
--------- ------- ------------
Balances as of December 31, 1994........ 238,080 761,920 $ .25 - 2.50
Options granted........................... (160,000) 160,000 $6.25 - 6.88
Options canceled.......................... 40,000 (40,000) $ .25
--------- ------- ------------
Balances as of December 31, 1995........ 118,080 881,920 $6.25 - 6.88
========= =======
</TABLE>
As of December 31, 1995, there were 399,448 vested options.
(6) INCOME TAXES
The Company has incurred net losses since inception and has not recorded
any provision for income taxes. The reconciliation between the amount
computed by applying the U.S. federal statutory tax rate of 34% to net loss
before income taxes and the actual provision for income taxes as of
December 31, 1993, 1994, and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
----- ---- ------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate.............. $(286) (851) (3,832)
Equity in losses of foreign affiliates.............. -- -- 1,277
License amortization................................ -- -- 344
Net operating loss and temporary differences for
which no tax benefit was recognized................ 286 851 2,211
----- ---- ------
$ -- -- --
===== ==== ======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1994 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Loss carryovers and deferred start-up expenditures $1,360 3,911
Less valuation allowance................................. (1,360) (3,911)
------ ------
Total deferred tax assets.............................. -- --
====== ======
</TABLE>
F-20
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The valuation
allowance as of December 31, 1994 and 1995 was $1,360,000 and $3,911,000,
respectively. The net changes in valuation allowance during 1994 and 1995
was an increase of $960,000 and $2,551,000, respectively.
As of December 31, 1995, the Company has cumulative U.S. federal net
operating losses of approximately $9,200,000, which can be used to offset
future income subject to federal income taxes. The federal tax loss
carryforwards will expire from 2008 through 2010. The Company has
cumulative California net operating losses of approximately $5,900,000,
which can be used to offset future income subject to California income
taxes. The California tax loss carryforwards will expire from 1998 through
2000.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. All U.S. federal and California net
operating loss carryforwards are subject to limitation as a result of these
restrictions. The ownership change restrictions are not expected to impair
the Company's ability to utilize the affected carryforward items. If there
should be a subsequent ownership change, as defined, of the Company, its
ability to utilize its carryforwards could be reduced.
(7) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases a facility under a noncancelable operating lease
expiring in May 1999. Future minimum lease payments due under the lease
total approximately $62,000, $63,000, $63,000, and $26,000 in 1996 through
1999, respectively.
Rent expense was approximately $14,000, $47,000, and $60,000 for the years
ended December 31, 1993, 1994, and 1995, respectively.
Capital Contributions
In order to protect the Company's investments in affiliates from ownership
dilution, the Company has committed to make additional capital
contributions to the LWBs as needed.
The Company also anticipates making additional investments in various
operating companies totalling $16,500,000, including the acquisition of the
remaining 50% interest in TeamTalk Limited for $3,198,000 (see Note 9).
Note Payable
The Company is jointly and severally liable on a $16,000,000 note payable
to an unrelated party in connection with its RHP investment. The note bears
interest at 6.95% with principal and interest due October 10, 1996. The
Company has recorded its pro rata share of this note on the accompanying
consolidated balance sheet. In the event that the other payors, which are
also shareholders of RHP, and RHP itself are unable to honor their pro rata
obligation, the Company would be wholly liable.
Guarantee of Debt of Equity Investee
In connection with a Ringgit 91,000,000 (approximately $36,400,000 as
translated using effective exchange rates at December 31, 1995) senior
credit facility with a Malaysian bank obtained by the Company's 30% equity
investee, STW, the Company along with other STW shareholders, executed a
financial "keep well" covenant pursuant to which they have agreed (i) to
ensure that STW will remain solvent and be able to meet its financial
liabilities when due and (ii) to ensure that the project is timely
completed and to make additional debt and equity investments in STW to meet
cost overruns. The loan is repayable by STW in
F-21
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
eleven semi-annual installments beginning October 8, 1997. The Company and
other STW shareholders have separately executed an agreement, whereby each
shareholder has agreed to share in the liability on a pro rata basis in
relation to their interest in STW. In the event that the bank were to seek
repayment from the STW shareholders and the other shareholders were unable
to honor their pro rata share in the liability, the Company might be liable
for the full amount of the outstanding amount of the loan. As of
December 31, 1995, the balance on this loan was Ringgit 54,640,000 or
$21,500,000.
The Company does not believe it is practicable to estimate the fair value
of the guarantee and does not believe exposure to loss is likely.
Accordingly, no provision has been made in the accompanying consolidated
financial statements.
The Company, through its affiliate, New Zealand Wireless Limited, owns 15%
of PT Mobilkom Telekomindo (Mobilkom). Mobilkom expects to fund the
continued buildout of its network and the acquisition of subscriber
terminals primarily through a seven-year $50 million revolving/reducing
credit facility which it has obtained from a syndicate of Thai banks.
Borrowings under the credit facility bear interest at a floating rate based
on LIBOR and are secured by substantially all of Mobilkom's assets and a
pledge of all the capital stock held by the Company and Mobilkom's other
shareholders. Another Mobilkom shareholder has guaranteed borrowings of up
to $25 million under the credit facility. As of June 30, 1996, borrowings
of approximately $20 million were outstanding under this facility.
The Company indirectly owns a 17.5% equity interest in PT Mobile Selular
Indonesia ("Mobisel"), a provider of cellular services in Indonesia through
its 25% ownership in RHP. Mobisel has obtained a five-year $60 million
credit facility from Nissho Iwai International (Singapore) Pte. Ltd.
("Nissho Iwai") to finance the construction of its network and the purchase
of subscriber terminals. Borrowings under the credit facility bear interest
at a floating rate based on LIBOR and are secured by all of Mobisel's
assets and a pledge of all the capital stock held by RHP. RHP has also
guaranteed the credit facility. As of June 30, 1996, borrowings of
approximately $35 million were outstanding under this facility (see Note
9).
(8) GEOGRAPHIC INFORMATION
Information about the Company's consolidated operations in different
geographic areas for the three years ended December 31, 1993, 1994 and 1995
is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
Operating loss:
Latin America................................... -- -- (154)
Southeast Asia.................................. -- -- --
Pacific and Far East............................ -- -- (3,756)
United States................................... (809) (2,481) (6,211)
------ ------ -------
$ (809) (2,481) (10,121)
====== ====== =======
Identifiable assets:
Latin America................................... 668 2,157 13,017
Southeast Asia.................................. -- 10 5,658
Pacific and Far East............................ 1,056 3,429 50,017
United States................................... 916 12,828 26,951
------ ------ -------
$2,640 18,424 95,643
====== ====== =======
</TABLE>
The Company's consolidated operations in Latin America are in Brazil and
Peru. The Company's consolidated operations in Southeast Asia are in
Pakistan. The Company's equity method and cost investees are included in
the geographic areas in which principal operations exist or will exist (see
Note 3).
F-22
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) SUBSEQUENT EVENTS
On March 6, 1996, the Board of Directors approved the amendment and
restatement to the 1994 Stock Option/Stock Issuance Plan which authorizes
the issuance of an additional 1,000,000 shares of common stock thereunder.
On June 11, 1996, the Board of Directors approved the amendment and
restatement to the 1994 Stock Option/Stock Issuance Plan which authorizes
the issuance of an additional 400,000 shares of common stock thereunder.
On April 26, 1996, two notes payable, each in the amount of $900,000, plus
accrued interest were converted into 274,800 shares of the Company's Series
D preferred stock.
On June 10, 1996, the Board approved a $3,080,000 bridge loan to the
Company's local partner in its Mexican ECTR joint venture.
On June 28, 1996, the Board approved and the Company funded $3,042,000 for
its 20% interest in a National Taiwan Trunking Project. The funds have been
placed in an interest bearing account pending favorable government approval
of their various telecommunication license applications.
On July 12, 1996, the Board approved an initial investment of up to
$5,250,000 for a 30% interest in the Taiwan Paging Project (a portion of
this amount was funded in July 1996).
On July 26, 1996, the Company acquired 1,700,000 shares of TeamTalk Limited
for a purchase price of approximately $3,198,000. The acquisition resulted
in IWC obtaining a 100% ownership interest in TeamTalk Limited.
On July 26, 1996, the Company entered into a Loan Agreement (the "1996 TD
Loan Agreement") with Toronto Dominion (Texas), Inc., an affiliate of
Toronto Dominion, providing for a $10.0 million revolving credit facility.
A Director and shareholder of the Company is the Managing Director and
Group Head of Toronto Dominion Capital, the U.S. merchant bank affiliate of
Toronto Dominion Bank. Subject to the terms and conditions of the 1996 TD
Loan Agreement, the Company is able to borrow funds in an initial amount of
at least $2,000,000 and additional amounts in integral multiples of at
least $1.0 million. All borrowings are evidenced by a promissory note
bearing interest at a specified base rate plus a margin increasing from
2.25% to 3.75% over the term of the facility or a specified LIBOR rate plus
a margin increasing from 3.5% to 5.0% over the term of the facility and are
due in July 1997, subject to mandatory repayment, without premium, from the
net proceeds from any public or private sale of debt or equity securities,
the net proceeds from certain asset sales by the Company or its
subsidiaries, or certain other events. The obligations of the Company under
the 1996 TD Loan Agreement and the note issued pursuant thereto are secured
by a pledge by the Company of all capital stock of certain of the Company's
subsidiaries and affiliates. On July 26, 1996, the Company borrowed
$7,000,000 under the 1996 TD Loan Agreement.
F-23
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
F-24
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
ASSETS ------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 25,398 $ 82,766
Accounts receivable............................... -- 276
Notes receivable from affiliates.................. 338 853
Note receivable................................... -- 1,385
Advances to affiliates............................ 728 102
Other current assets.............................. 387 1,386
-------- --------
Total current assets............................ 26,851 86,768
Property and equipment, net......................... 4,269 11,698
Investments in affiliates........................... 52,280 46,956
Telecommunication licenses and other intangibles,
net................................................ 12,106 17,198
License deposit..................................... -- 14,300
Debt issuance cost, net............................. -- 5,891
Other assets........................................ 137 664
-------- --------
Total assets.................................... $ 95,643 $183,475
======== ========
<CAPTION>
LIABILITIES, MINORITY INTEREST, REDEEMABLE
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses............. $ 5,757 $ 3,496
Notes payable to related party.................... 1,800 --
Note payable...................................... 4,000 4,000
-------- --------
Total current liabilities....................... 11,557 7,496
Long-term debt, net................................. -- 71,623
Commitments and contingencies
Minority interest................................... -- 5,400
Redeemable convertible preferred stock, $.01 par
value per share; 21,541,480 shares designated;
15,698,400 and 15,973,200 shares issued and
outstanding in 1995 and 1996, respectively; net of
note receivable from stockholder of $26 in 1995 and
1996; liquidation and minimum redemption value of
$107,399........................................... 98,845 102,519
Stockholders' deficit:
Convertible preferred stock, $.01 par value per
share; 1,200,000 shares designated; 1,200,000 and
933,200 shares issued, and outstanding in 1995
and 1996, respectively; liquidation value of
$793............................................. 12 9
Common stock, $.01 par value per share; 26,000,000
shares authorized; 328,000 and 615,760 shares
issued and outstanding in 1995 and 1996,
respectively..................................... 3 6
Additional paid-in capital........................ 749 31,055
Note receivable from stockholder.................. (152) (152)
Unrealized gain on investments.................... -- 112
Cumulative translation adjustment................. (1) 250
Accumulated deficit............................... (15,370) (34,843)
-------- --------
Total stockholders' deficit..................... (14,759) (3,563)
-------- --------
Total liabilities, minority interest, redeemable
convertible preferred stock and stockholders'
deficit........................................ $ 95,643 $183,475
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-25
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
-------- ---------
(UNAUDITED)
<S> <C> <C>
Operating revenue......................................... $ -- $ 532
Cost of sales............................................. -- 541
-------- ---------
Gross margin............................................ -- (9)
Operating expenses:
General and administrative expenses..................... 3,565 10,610
Equity in losses of affiliates.......................... 1,171 5,507
-------- ---------
Loss from operations.................................. (4,736) (16,126)
Other income (expense):
Interest income......................................... 130 937
Interest expense........................................ (785) (2,663)
Other................................................... (10) 1
-------- ---------
Net loss.............................................. $ (5,401) $ (17,851)
======== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-26
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------
1995 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from investing activities:
Net loss................................................. $ (5,401) $(17,851)
Adjustments to reconcile net loss to net cash used in op-
erating activities:
Depreciation........................................... 12 460
Amortization of telecommunication licenses and other
intangibles........................................... 30 529
Amortization of debt issuance costs.................... -- 109
Amortization of long-term debt discount................ -- 1,921
Equity in losses of affiliates......................... 1,171 5,507
Minority interest...................................... -- 5,400
Unrealized gain on investments......................... -- 112
Changes in operating assets and liabilities:
Accounts receivable.................................. -- (66)
Other current assets................................. (6) (985)
Accounts payable and accrued expenses................ 662 (2,571)
-------- --------
Net cash used in operating activities.............. (3,532) (7,435)
-------- --------
Cash flows from investing activities:
Notes receivable from affiliates......................... (135) (1,098)
Repayment of notes receivable from affiliate............. -- 583
Note receivable.......................................... -- (3,185)
Repayment of note receivable............................. -- 1,800
Advances to affiliates................................... -- (1,924)
Purchases of property and equipment...................... (35) (1,657)
Purchase of TeamTalk Limited............................. -- (3,198)
Investments in affiliates................................ (28,474) (2,167)
Telecommunication licenses and other intangibles......... -- (3,971)
License and other deposits............................... -- (14,300)
Other assets............................................. -- (345)
-------- --------
Net cash used in investing activities.............. (28,644) (29,462)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................. 26,276 --
Proceeds from revolving credit facility.................. -- 7,000
Repayment of revolving credit facility................... -- (7,000)
Exercise of stock options................................ -- 6
Debt issuance costs...................................... -- (6,000)
Proceeds from issuance of long-term debt................. -- 69,702
Proceeds from issuance of warrants....................... -- 30,300
-------- --------
Net cash provided by financing activities.......... 26,276 94,008
-------- --------
Effect of foreign currency exchange rates on cash and cash
equivalents............................................... -- 257
-------- --------
Net (decrease) increase in cash and cash equivalents....... (5,900) 57,368
Cash and cash equivalents at beginning of year/period...... 10,298 25,398
-------- --------
Cash and cash equivalents at end of year/period............ $ 4,398 $ 82,766
======== ========
Supplemental cash flow information:
Cash paid for interest................................... $ -- $ 363
======== ========
Noncash financing and investing activities:
Conversion of note receivable from affiliate to invest-
ment in affiliate....................................... $ 2,020 $ --
======== ========
Conversion of notes payable and interest to related party
into redeemable convertible preferred stock............. $ -- $ 2,052
======== ========
Effect of net assets of TeamTalk Limited previously
accounted for by the equity method...................... $ -- $ 4,395
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-27
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
International Wireless Communications Holdings, Inc. ("IWC Holdings") was
incorporated in Delaware in July 1996 as a holding company whose primary
assets are all of the issued and outstanding capital stock of International
Wireless Communications, Inc. ("IWC") and a note receivable from IWC in a
principal amount equal to the net proceeds from the Debt Offering (see note
8). IWC was incorporated in Delaware in January 1992 and develops, owns and
operates wireless communications companies in emerging markets in Asia and
Latin America. These local wireless businesses ("LWBs") provide a variety
of communications services, including enhanced capacity trunked radio
("ECTR"), wireless local loop ("WLL"), cellular and paging. Together with
local and strategic partners, IWC has interests in Brazil, China, India,
Indonesia, Malaysia, Mexico, New Zealand, Pakistan, Peru, and the
Philippines, Taiwan and Thailand.
Subsequent to the formation of IWC Holdings, IWC Holdings and IWC completed
a reorganization in which IWC became a wholly owned subsidiary of IWC
Holdings through the conversion of each share of the then outstanding
capital stock of IWC into 40 shares of the corresponding class and series
of stock of IWC Holdings (the "Stock Conversion").
In the opinion of management, the accompanying audited financial statements
of IWC Holdings and subsidiary (the "Company") reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation of the Company's financial condition, results of
operation and cash flows for the period presented. These financial
statements should be read in conjunction with the Company's audited
consolidated financial statements as of December 31, 1994 and 1995, and for
each of the years in the three-year period ended December 31, 1995,
including notes thereto. The results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of results that may
be expected for the year ended December 31, 1996. All data related to
shares and per share amounts for all periods presented have been adjusted
to reflect the effect of the Stock Conversion.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
IWC, its wholly owned subsidiary, SRC Servicos de Rario Comunicacoes Ltda.
("SRC"), and two majority-owned subsidiaries, M/S Mobilcom (Pte) Ltd.
("Mobilcom") and PeruTel SA ("PeruTel"). Effective April 30, 1996, the
Company acquired the remaining 50% of TeamTalk Limited ("TeamTalk"), and as
such, the accompanying consolidated balance sheet as of September 30, 1996
also includes the accounts of TeamTalk. The consolidated statement of
operations for the nine months ended September 30, 1996 also include the
accounts of the now wholly owned TeamTalk subsidiary since April 30, 1996,
the effective date of the acquisition (see Note 3). Prior to April 30,
1996, the consolidated financial statements reflect TeamTalk as an
investment accounted for under the equity method. In August 1996, IWC
acquired a 70% interest in Star Telecom Overseas (Cayman Islands) Limited
("STOL"), and as such, the accompanying consolidated balance sheet as of
September 30, 1996 also includes the accounts of STOL. As of September 30,
1996, STOL had no significant operations. All significant intercompany
accounts and transactions have been eliminated in consolidation.
F-28
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(2) BALANCE SHEET COMPONENTS
Balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Property and equipment
Furniture and fixtures..................... $ 40 $ 304
Office equipment........................... 126 507
Automobiles................................ 34 183
Telecommunication equipment................ -- 9,114
Construction in process.................... 4,125 2,106
-------- -------
4,325 12,214
Less accumulated depreciation.............. 56 516
-------- -------
Property and equipment, net.............. $ 4,269 $11,698
======== =======
Telecommunication licenses and other
intangibles
SRC........................................ $ 6,714 $ 6,680
Mobilcom................................... 5,439 5,439
STOL....................................... -- 3,971
TeamTalk................................... -- 1,658
-------- -------
12,153 17,748
Less accumulated amortization................ 47 550
-------- -------
Telecommunication licenses and other
intangibles, net.......................... $ 12,106 $17,198
======== =======
Accounts payable and accrued expenses:
Accounts payable........................... $ -- $ 665
Professional services...................... 3,041 1,084
Employee compensation and benefits......... 189 458
Interest................................... 256 271
Equipment purchases........................ 1,719 --
Other...................................... 552 1,018
-------- -------
$ 5,757 $ 3,496
======== =======
</TABLE>
(3)CASH AND CASH EQUIVALENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" and has classified its investments in certain debt and
equity securities as "available for sale". Such investments are recorded at
fair value, with unrealized gains and losses reported as a separate
component of stockholders' deficit. The cost of securities sold is based
upon the specific identification method.
Upon closing of the Debt Offering (see Note 8), the Company invested the
net proceeds in a variety of short-term, highly-liquid investments all with
original maturities of 90 days or less. As of September 30, 1996, the
Company had cash of $13,976,000, and cash equivalents consisting of mutual
funds and US government and agency obligations totaling $1,751,000 and
$67,039,000 respectively. Unrealized gains on investments of $112,000 is
included as a component of stockholders' deficit on the accompanying
balance sheet as of September 30, 1996.
F-29
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(4)INVESTMENTS IN AFFILIATES
The Company's investments in affiliates represent interests in various LWBs
in several developing countries. These investments are accounted for under
the equity or cost methods.
Equity Investments
For those investments in companies in which the Company's voting interest
is 20% to 50%, or for investments in companies in which the Company exerts
significant influence through board representation and management
authority, the equity method of accounting is used. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the
Company's share of net earnings or losses of the affiliates, limited to the
extent of the Company's investment in and advances to the affiliates,
including any debt guarantees or other contractual funding commitments. The
Company's share of net earnings or losses of affiliates includes the
amortization of purchase accounting adjustments for the excess of cost over
the net book value of the interest acquired that is allocated to
telecommunication licenses, participation rights and other intangibles.
Investments in affiliated companies as of December 31, 1995 and September
30, 1996 are as follows:
<TABLE>
<CAPTION>
PORTION OF
INVESTMENT
EXCEEDING THE
COMPANY'S SHARE
OF THE
INVESTMENTS IN UNDERLYING
PERCENTAGE AFFILIATED HISTORICAL NET
OF OWNERSHIP COMPANIES(1) ASSETS
------------ --------------- ---------------
COUNTRY AFFILIATED COMPANY 1995 1996 1995 1996 1995 1996
------- ------------------------ ---- ------- ------- ------- ------- -------
<C> <S> <C> <C> <C> <C> <C> <C>
Malaysia Syarikat Telefon
Wireless (M) Sdn Bhd
("STW")................. 30% 30% $20,879 $18,630 $17,459 $17,459
PT Rajasa Hazanah
Indonesia Perkasa (RHP)........... 25% 25% 24,539 23,572 23,680 23,680
TeamTalk Limited
New Zealand (TeamTalk).............. 50% 100%(2) 2,345 -- 1,712 --
HFCL Mobile Radio
India Limited (HFCL).......... 49% 49% 243 243 243 243
PT Binamulti Visualindo
Indonesia (PTBV).................. 49% 49% 206 206 206 206
Wireless Data Services
New Zealand Ltd. (WDS).............. -- 50% -- 181 -- --
Philippines Universal
Telecommunications
Service, Inc. ("UTS")... 19% 20%(3) -- 1,924 -- 933
------- ------- ------- -------
48,212 44,756 43,300 42,521
Less accumulated amortization........ 966 2,790 966 2,790
------- ------- ------- -------
$47,246 $41,966 $42,334 $39,731
======= ======= ======= =======
</TABLE>
--------
(1) Adjusted for the Company's share of cumulative equity losses of
affiliated companies.
(2) Reflects acquisition of remaining 50% of TeamTalk pursuant to agreement
dated June 24, 1996.
(3) Reflects acquisition of additional 1.25% pursuant to agreement dated
September 25, 1996; this investment was previously accounted for as a
cost investment.
On June 24, 1996, the Company entered into an agreement with the other 50%
owner of TeamTalk to acquire their 1,700,000 shares of TeamTalk's common
stock, as well as to assume TeamTalk's existing note payable to the
shareholder totaling $3,022,000, for a purchase price of approximately
$3,198,000. The agreement was effective April 30, 1996, with the purchase
price paid in July 1996. As of September 30, 1996, TeamTalk is consolidated
into the financial statements of the Company as a wholly owned subsidiary.
In connection with the incremental investment, the Company reclassified the
associated unamortized portion of investment exceeding the Company's share
of the underlying historical net assets to telecommunication licenses and
other intangibles. The fair value of the assets acquired and the
liabilities assumed in connection with the acquisition were $8,327,000 and
$3,584,000, respectively.
F-30
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Financial information for significant affiliated companies accounted for by
the equity method is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
-------------------------------------------
STW RHP(A) TEAMTALK
------------ ----------- ----------------
<S> <C> <C> <C>
Current Assets................... $ 2,611 5,316 213
Noncurrent assets................ 33,299 21,336 6,307
Current liabilities.............. 2,988 17,496 3,933
Noncurrent liabilities........... 21,925 6,257 1,492
Net Revenues..................... 749 5,463 348
Net loss......................... (5,898) (3,186) (1,490)
<CAPTION>
AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
-------------------------------------------
STW RHP TEAMTALK(B)
------------ ----------- ----------------
<S> <C> <C> <C>
Current Assets................... $ 1,852 42,537 --
Noncurrent assets................ 46,625 26,462 --
Current liabilities.............. 8,214 14,084 --
Noncurrent liabilities........... 36,545 51,233 --
Net Revenues..................... 832 6,969 --
Net loss......................... (7,630) (3,671) --
</TABLE>
--------
(A) For the period March 28, 1995 through December 31, 1995. Net revenues
and net loss for the period from January 1, 1995 through March 27, 1996
were $1,821 and $387, respectively.
(B) Effective April 30, 1996, TeamTalk became a wholly owned subsidiary of
the Company. Net revenues and net loss for the period from January 1,
1996 through April 30, 1996 were $282,000 and $645,000, respectively.
Cost Investments
The Company uses the cost method of accounting for three other investments
as of September 30, 1996. They are Corporacion Mobilcom, S.A. de C.V. and
subsidiaries ("Mobilcom Mexico"), PT Mobilkom Telekomindo ("Mobilkom"), and
RPG Paging Services Limited ("RPSL"), which the Company acquired in August
1996 as part of IWC's acquisition of STOL. The Company's ownership
percentages in these entities are 2.23%, 15% and 7%, respectively. All
three are operating entities. Prior to September 25, 1996, the Company
accounted for UTS, owned directly by the Company and indirectly through
Mobilcom Corporation, as a cost investment. On September 25, 1996, the
Company entered into an agreement to increase its ownership interest in UTS
from 19% to 20.25% for Philippine Peso 11,253,200, or approximately
$433,000, and correspondingly changed its method of accounting to the
equity method for this investment.
The following represents the Company's carrying value of these cost
investments:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Mobilcom Mexico................................... $2,062 $ 2,062
Mobilkom.......................................... 1,500 1,500
UTS............................................... 1,472 --
RPSL.............................................. -- 1,428
------ -------
$5,034 $ 4,990
====== =======
</TABLE>
Pro Forma Summary
The following unaudited pro forma summary combines the consolidated results
of operations of the Company as if (i) TeamTalk had been a wholly owned
consolidated subsidiary since January 1, 1995, (ii) ownership in STW and
RHP had been 35% and 29.2%, respectively, since January 1, 1995, (iii) the
merger with Vanguard International Telecommunications, Inc. ("VIT"), a
wholly owned subsidiary of Vanguard, had occurred on January 1, 1995, and
(iv) the acquisition of STOL had occurred at January 1, 1995.
F-31
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
This pro forma summary does not necessarily reflect the results of
operations as they would have been if the Company had acquired the entities
as of January 1, 1995.
Unaudited pro forma consolidated results of operations for the various
acquisitions and mergers as described above are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues................................................. $ 277 $ 814
Net loss................................................. (11,471) (18,877)
</TABLE>
(5) RELATED PARTY TRANSACTIONS
Notes receivable from Affiliates
Notes receivable from affiliates as of December 31, 1995, consisted
primarily of a note due from Mobilcom Mexico for $158,000, which earns
interest at 6% per annum; and an interest-free note due from RHP for
$128,000. During the nine months ended September 30, 1996, IWC loaned RHP
an additional $455,000 in exchange for a series of 90 day interest-free
promissory notes, which brought the total amount loaned to RHP to $583,000.
As of September 30, 1996, the loans to RHP had been repaid in full.
During the nine months ended September 30, 1996, the Company loaned PT
Mobile Selular Indonesia ("Mobisel"), an entity of which the Company then
indirectly owned 17.5% through IWC's investment in RHP, a total of $635,000
in exchange for a series of 90 day interest-free promissory notes. The
notes to Mobisel have subsequently been extended.
Advances to Affiliates
The advances to affiliates as of December 31, 1995, represented advances to
TeamTalk in the amount of $728,000. As a result of the acquisition of the
remaining 50% interest in TeamTalk, the Company now eliminates advances to
TeamTalk as a result of its consolidation.
In January 1996, the Company advanced $102,000 to UTS. The advance is
interest-free with no stated terms. Management believes the advance will be
repaid within one year.
Notes Payable to Related Party
Notes payable to a related party as of December 31, 1995, consisted of two
notes payable to Vanguard Cellular Operating Corp. (Vanguard), a
significant stockholder, each in the amount of $900,000 plus accrued
interest and bearing interest at 9% compounded annually. On April 26, 1996,
these notes, plus $252,000 of accrued interest, were converted into 274,800
of the Company's shares of Series D Redeemable Convertible Preferred Stock.
Revolving Credit Facility
On July 26, 1996, the Company entered into a Loan Agreement (the "1996 TD
Loan Agreement") with Toronto Dominion (Texas), Inc., an affiliate of
Toronto Dominion Bank, a stockholder of the Company, providing for a $10.0
million revolving credit facility. Subject to the terms and conditions of
the 1996 TD Loan Agreement, IWC was able to borrow funds in an initial
amount of at least $2,000,000 and additional amounts in multiples of at
least $1,000,000. All borrowings were evidenced by a promissory note
bearing interest at a specified base rate plus a margin increasing from
2.25% to 3.75% over the term of the facility or a specified LIBOR rate plus
a margin increasing from 3.5% to 5.0% over the term of the facility and
were due in July 1997, subject to mandatory repayment, without premium,
from the net proceeds from any public or private sale of debt or equity
securities, the net proceeds from certain asset sales by the Company or its
subsidiaries, or certain other events. The obligations of the Company under
the 1996 TD Loan Agreement and the note issued pursuant thereto were
secured by a pledge by the Company of all capital
F-32
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock of the Company's subsidiaries and affiliates. On July 26, 1996, IWC
borrowed $7,000,000 under the 1996 TD Loan Agreement. On August 15, 1996,
this amount, plus interest and fees, was repaid in full with the proceeds
from the Debt Offering (see Note 8).
(6) NOTE RECEIVABLE
On June 6, 1996, the Company loaned $3,080,000 to a co-shareholder of
Mobilcom Mexico, a trunked radio services operator in Mexico. The Company
then owned a 2.23% equity interest in Mobilcom Mexico. The loan, in the
form of a promissory note, accrues interest at 13% per annum and is due
upon written demand by the Company. The Company believes that this loan may
facilitate future strategic investments in projects in which this co-
shareholder is involved. As of September 30, 1996, the co-shareholder had
repaid $1,800,000 of the total amount loaned, bringing the remaining
principal plus interest owed to $1,385,000.
(7) LICENSE AND OTHER DEPOSITS
On June 28, 1996, the Company deposited $3,042,000 with a Taiwanese
corporation that is pursuing telecommunication licenses in Taiwan. This
deposit represents a 20% interest in a number of telecommunication license
applications currently being pursued. During the application process, the
deposit will be held in an interest-bearing escrow account in the name of
IWC. Once a license is granted, the deposit will become the Company's
initial capital of the venture that is ultimately formed. If the Taiwanese
corporation is unsuccessful in securing these applications, the Company's
deposit, less it's pro rata share of application related expenses, will be
returned to the Company.
On August 27, 1996, the Company deposited $2,250,000 for a 10% interest in
a Taiwan paging project, a project in which the Company already has an
indirect 14% interest through its investment in STOL. The Company and its
partners in this project have applied for a national paging license. If the
license is granted to the project, the deposit will become the Company's
initial capital of the venture that is ultimately formed to pursue the
paging business in Taiwan. If a license is not received, the Company's
deposit, less its pro rata share of application related expenses, will be
returned to the Company.
In September 1996, IWC entered into a subscription agreement (the "SDL
Subscription Agreement") with Star Telecom Holding Limited ("STHL"), the
Company's partner in STOL, to purchase a 40% equity interest in SDL for an
aggregate purchase price of $20 million. The consummation of such
investment is subject to the fulfillment of certain closing conditions,
including the attainment by STHL of shareholder approval for the
transaction. Pursuant to the Subscription Agreement, in September 1996, IWC
also entered into an escrow agreement (the "SDL Escrow Agreement") and
deposited, in escrow, $9 million of the $20 million purchase price. This
investment has subsequently been consummated (see Note 13).
(8)LONG-TERM DEBT
On August 15, 1996, the Company issued 196,720 units, each consisting of a
$1,000 principal amount 14% Senior Secured Discount Note due 2001 (a "Note"
and, collectively, the "Notes") and one warrant to purchase 11,638 shares
of common stock, $0.01 par value, for total gross proceeds of $100 million
(the "Debt Offering"). Net proceeds, after repayment of $7.4 million,
including interest and fees, borrowed under the 1996 TD Loan Agreement (see
Note 5) and other offering expenses, totaled $86,602,000. Of the $100
million gross proceeds, $30.3 million was allocated to additional paid-in
capital as the fair value of the warrants issued in the Debt Offering.
Long-term debt is presented net of unamortized discount of $125,097,000 on
the accompanying balance sheet as of September 30, 1996.
The aggregate principal amount of the Notes is $196,720,000. The Notes are
due on August 15, 2001 and bear interest at an effective interest rate of
22.05%, compounded semi-annually. There are no scheduled cash interest
payments on the Notes. The Notes are senior secured obligations of the
Company and will rank pari passu in right of payment with all existing and
future senior indebtedness of the Company and senior to all subordinated
indebtedness of the Company. The Notes are effectively subordinated to all
indebtedness and other liabilities (including trade payables) of the
Company's subsidiaries and affiliated companies. The collateral securing
the Notes consists of a pledge of all of the capital stock of the Company.
F-33
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There are no sinking fund requirements with respect to the principal of or
the interest on the Notes. Upon the occurrence of a change of control (as
defined in the indenture governing the Notes), each holder of the Notes
will have the option to require the Company to repurchase all or a portion
of such holder's Notes at 101% of the accreted value thereof to the date of
repurchase.
The costs related to the issuance of the long-term debt were capitalized
and are being amortized to interest expense using the effective interest
method over the life of the debt. Debt issuance costs are presented net of
amortization of $109,000 on the accompanying balance sheet as of September
30, 1996.
(9)MINORITY INTEREST
In August 1996, IWC acquired a 70% interest in STOL, which holds minority
interests in paging projects in India and Taiwan and is currently pursuing
additional paging opportunities in Indonesia and Thailand, for an aggregate
purchase price of $13.5 million. The Company's partner in STOL is STHL, the
Company's partner in SDL that owns one of the largest paging operators and
internet service providers in Hong Kong. The total stockholders' equity of
STOL at September 30, 1996 is $18,000,000, of which $5,400,000 represents a
minority interest.
(10) STOCK OPTION/STOCK ISSUANCE PLAN
On March 6, 1996, the Board of Directors of the Company approved the
amendment to and restatement of the 1994 Stock Option/Stock Issuance Plan
(the "1994 SO/SIP") and authorized the issuance of an additional 1,000,000
shares of common stock thereunder. The Board of Directors also granted an
additional 764,000 options at an exercise price of $8.13.
On April 19 and May 1, 1996 the Board of Directors granted an additional
60,000 and 48,000 options, respectively, under the 1994 SO/SIP at an
exercise price of $8.13.
On June 11, 1996, the Board of Directors approved another amendment and
restatement to the 1994 SO/SIP and authorized the issuance of an additional
400,000 shares of common stock thereunder. The Board of Directors also
granted an additional 20,000 options under the 1994 SO/SIP at an exercise
price of $9.38.
In July 1996, the Board of Directors granted an additional 170,000 options
under the 1994 SO/SIP at an exercise price $9.38.
(11)STOCKHOLDERS' DEFICIT
In August 1996, a stockholder of the Company converted 266,800 shares of
Series A preferred stock into 266,800 shares of common stock.
(12) COMMITMENTS AND CONTINGENCIES
Capital Contributions
In order to protect the Company's investments in affiliates from ownership
dilution, the Company has committed to make additional capital
contributions to the LWBs as needed.
The Company anticipates making additional investments in various operating
companies totaling $14,500,000.
Note Payable
The Company is jointly and severally liable on a $16,000,000 note payable
to an unrelated party in connection with its RHP investment. The note bears
interest at 6.95% with principal and interest due October 10, 1996. The
Company has recorded its 25% pro rata share of this note on the
accompanying consolidated balance sheets. In the event that the other
payors, which are also shareholders of RHP, and RHP itself, are unable to
honor their pro rata obligation, the Company would be wholly liable. This
note, plus accrued interest, was paid in October 1996 (see note 13).
Guarantee of Debt of Equity Investee
In connection with a Ringgit 91,000,000 (approximately $36,300,000 as
translated using effective exchange rates at September 30, 1996) senior
credit facility (the "STW Credit Facility") with a Malaysian bank
F-34
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
obtained by the Company's 30% equity investee, STW, the Company along with
other STW shareholders, executed a financial "keep well" covenant pursuant
to which they have agreed (i) to ensure that STW will remain solvent and be
able to meet its financial liabilities when due and (ii), to ensure that
the project is timely and completed, to make additional debt and equity
investments in STW to meet cost overruns. The loan is repayable by STW in
eleven semi-annual installments beginning October 8, 1997. The Company and
other STW shareholders have separately executed an agreement, whereby each
shareholder has agreed to share in the liability on a pro rata basis in
relation to their interest in STW. In the event that the bank were to seek
repayment from the STW shareholders and the other shareholders were unable
to honor their pro rata share in the liability, the Company would likely be
liable for the full amount of the outstanding amount of the loan. The
balance on this loan was Ringgit 54,640,000 or $21,500,000 and Ringgit
91,000,000 or $36,300,000 as of December 31, 1995 and September 30, 1996,
respectively. No provision has been made in the accompanying consolidated
financial statements for any loss that might result from this arrangement.
STW currently has a number of trade creditors to whom payments are
currently past due. The Company believes that the amount currently past due
consists of approximately $3.6 million from a large equipment vendor that
has agreed to waive past due interest and to provide additional equipment
to STW and an additional amount from other trade creditors that does not
exceed approximately $1.0 million. Certain of these trade creditors have
notified STW that they are considering legal action against STW for non-
payment. STW's failure to resolve this matter in a timely manner may give
rise to rights in such creditors, including the right to file an action for
the winding up of STW. Further, under the "keep well" covenant of the STW
Credit Facility, IWC may be deemed liable for the entire amount of such
trade payables, which may have a material adverse effect on IWC. Management
believes that a recent $1.6 million cash capital contribution by STW
shareholders will provide sufficient capital to address this matter. In
addition, shareholders of STW have committed to contribute an additional
$2.4 million and STW is currently in discussions with debt and equity
investors to raise additional capital.
The Company, indirectly through its wholly owned subsidiary, New Zealand
Wireless Limited, owns 15% of Mobilkom, a provider of enhanced capacity
trunked radio services in Indonesia. Mobilkom expects to fund the continued
buildout of its network and the acquisition of subscriber terminals
primarily through a seven-year $50 million revolving/reducing credit
facility which it has obtained from a syndicate of Thai banks. Borrowings
under the credit facility bear interest at a floating rate based on LIBOR
and are secured by substantially all of Mobilkom's assets and a pledge of
all the capital stock held by the Company and Mobilkom's other
shareholders. Another Mobilkom shareholder has guaranteed borrowings of up
to $25 million under the credit facility. As of September 30, 1996,
borrowings of approximately $20.2 million were outstanding under this
facility.
At September 30, 1996, the Company indirectly owns a 17.5% equity interest
in Mobisel, a provider of cellular services in Indonesia through the
Company's 25% interest in RHP. Mobisel has obtained a six-year $60 million
credit facility from Nissho Iwai International (Singapore) PTE., LTD.
("Nissho Iwai") to finance the construction of its network and the purchase
of subscriber terminals. Borrowings under the credit facility bear interest
at a floating rate based on LIBOR and are secured by all of Mobisel's
assets and a pledge of all the capital stock held by RHP and Mobisel's
other shareholders. RHP has also guaranteed the credit facility. As of
September 30, 1996, borrowings of approximately $50 million were
outstanding under this facility.
(13) SUBSEQUENT EVENTS
In October 1996, the Company paid $1,000,000 for an option to purchase 50%
of Laranda Sdn Bhd, a 10% shareholder of STW, for an exercise price of
$7,200,000 and certain other contractual rights. The exercise of such
option, which would increase the Company's aggregate direct and indirect
equity interest in STW to 35%, is at the Company's discretion and is
subject to the procurement of certain governmental approvals.
In October 1996, the Company expended an additional $4,300,000, consisting
of $4,000,000 of principal plus accrued interest, to repay its pro rata
share of a note payable to an unrelated party assumed in connection with
RHP and $8,556,000 to increase its interest in RHP to 29.2%, thereby
increasing its indirect equity interest in Mobisel to 20.4%.
In November 1996, in connection with the closing of the Company's
acquisition of an equity interest in SDL, the $9,000,000 that was held in
escrow pursuant to the SDL Subscription Agreement and the SDL Escrow
Agreement was released to STHL, and the Company funded an additional
$11,000,000 to acquire its 40% interest in SDL for an aggregate purchase
price of $20,000,000.
F-35
<PAGE>
PT RAJASA HAZANAH PERKASA
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
INDONESIAN CURRENCY
F-36
<PAGE>
PRASETIO UTOMO
ARTHUR ANDERSEN & CO. SC
INDEPENDENT AUDITORS' REPORT
Prasetio, Utomo & Co.
Registered Public Accountants
Report No. 26445S
- -----------------
Chase Plaza
Jalan Jend. Sudirman Kav. 21
Jakarta 12920
Indonesia
The Board of Directors and Stockholders
PT RAJASA HAZANAH PERKASA
We have audited the balance sheet of PT Rajasa Hazanah Perkasa as of
December 31, 1995, and the related statements of income and deficit and cash
flows for the year then ended. We also audited those reconciling adjustments
presented in Notes 20, 21 and 22 for the years ended December 31, 1994 and
1993. 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 in accordance with auditing standards established by
the Indonesian Institute of Accountants, which are substantially similar to
the generally accepted auditing standards in the United States of America.
Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PT Rajasa Hazanah Perkasa
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles in the Republic of Indonesia.
Generally accepted accounting principles in Indonesia vary in certain
respects with those in the United States of America. A description of the
significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net income and
stockholders' equity are set forth in Notes 20, 21 and 22 to the financial
statements.
PRASETIO, UTOMO & CO.
Drs M.P. Sibarani
Registered Accountant No. D-514
May 28, 1996
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
No.: L-014/WK/X/96
The Shareholders, Board of Commissioners and
Board of Directors
PT Rajasa Hazanah Perkasa:
We have audited the accompanying balance sheets of PT Rajasa Hazanah Perkasa
as of December 31, 1994 and 1993, and the related statements of loss, deficit,
and cash flows for the years then ended except for the information presented
in notes 20, 21 and 22. 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 in accordance with generally accepted auditing
standards established by the Indonesian Institute of Accountants, which are
substantially similar to the generally accepted auditing standards in the
United States of America. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, except for the information presented in notes 20, 21 and 22,
which was not audited by us, the financial statements referred to above
present fairly, in all material respects, the financial position of PT Rajasa
Hazanah Perkasa as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles in the Republic of Indonesia.
Our previously issued report on these financial statements contained an
explanatory paragraph concerning the adequacy of the liability recorded in
respect of Indonesian income tax assessments. As more fully discussed in Note
12, these assessments were fully paid in 1995. Also, our previously issued
report contained an explanatory paragraph concerning the Company's ability to
continue as a going concern, which has been mitigated as a result of the sale
of additional capital stock in 1995.
As discussed in Note 2 effective January 1, 1994 the Company changed its
revenue recognition policy for pulse-sharing revenues.
SIDDHARTA SIDDHARTA & HARSONO
REGISTERED PUBLIC ACCOUNTANTS
Drs. Istama T. Siddharta
Registered Public Accountant No. D-
2336
Jakarta, June 2, 1995 except for note 12 as it relates to payment of prior
year tax assessments and note 15, as to which the date is November 7, 1996.
F-38
<PAGE>
PT RAJASA HAZANAH PERKASA
BALANCE SHEETS
DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------- --------------- --------------------------
U.S.$
NOTES RP RP RP (NOTE 3)
----------- -------------- --------------- -------------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash
equivalents............ 2,4,9,14 1,855,749,168 775,147,011 5,543,708,243 2,401,953
Accounts receivable
Trade--net of allowance
for doubtful accounts
of Rp 5,908,861,000 in
1993, Rp 505,744,829
in 1994, and Rp
568,483,998 in 1995... 2,5,9,14,22 2,211,907,000 2,950,032,018 2,617,547,345 1,134,119
Others................. -- 5,295,250 59,039,898 25,580
Inventories--net of
allowance for
obsolescence
of Rp 891,089,416 in
1994 and Rp
3,858,732,612
in 1995 ............... 2,6,9,22 5,425,094,000 6,779,410,442 3,462,954,359 1,500,414
Prepaid taxes........... -- 327,163,736 63,564,058 27,541
Prepaid expenses........ 2 2,883,615,000 253,324,494 153,282,855 66,414
-------------- --------------- -------------- ----------
Total Current Assets.... 12,376,365,168 11,090,372,951 11,900,096,758 5,156,021
-------------- --------------- -------------- ----------
DUE FROM AN AFFILIATE... 2 -- -- 8,210,270,047 3,557,309
-------------- --------------- -------------- ----------
ADVANCE FOR INVESTMENT
IN SHARES OF STOCK..... 1,18 -- -- 29,112,810,000 12,613,869
-------------- --------------- -------------- ----------
PROPERTY AND EQUIPMENT 2,7,9,14
Cost.................... 4,373,235,000 4,373,725,945 3,915,182,447 1,696,353
Accumulated
depreciation........... (1,493,990,000) (2,450,647,331) (2,454,803,666) (1,063,606)
-------------- --------------- -------------- ----------
Net Book Value.......... 2,879,245,000 1,923,078,614 1,460,378,781 632,747
-------------- --------------- -------------- ----------
OTHER ASSETS
Pledged Cash and
Deposits............... 8,9,14 7,121,104,000 6,195,697,000 -- --
Deferred charges........ 2,18 35,734,707,000 32,001,908,891 -- --
-------------- --------------- -------------- ----------
Total Other Assets...... 42,855,811,000 38,197,605,891 -- --
-------------- --------------- -------------- ----------
TOTAL ASSETS............ 58,111,421,168 51,211,057,456 50,683,555,586 21,959,946
============== =============== ============== ==========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Short-term loans........ 9 5,992,693,000 15,822,744,048 9,475,366,558 4,105,445
Accounts payable
Trade.................. 10 6,237,168,000 4,294,723,512 564,424,841 244,551
Affiliates............. 2 -- -- 327,000,000 141,681
Others................. 11 5,445,055,000 654,737,094 12,759,468,992 5,528,366
Taxes payable........... 2,12 9,751,111,000 8,326,449,431 4,920,000,182 2,131,716
Accrued expenses........ 2,13 4,507,201,000 7,560,349,400 1,366,099,168 591,897
Current maturities of
long-term debts........ 14 18,422,245,000 19,054,254,112 2,714,491,758 1,176,123
-------------- --------------- -------------- ----------
Total Current Liabili-
ties................... 50,355,473,000 55,713,257,597 32,126,851,499 13,919,779
-------------- --------------- -------------- ----------
LONG-TERM DEBTS--net of
current maturities..... 14 14,598,961,000 8,602,303,862 135,656,507 58,777
-------------- --------------- -------------- ----------
STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Capital stock--Rp
1,000,000 par value
Authorized and issued--
1,000 shares in 1993
and 1994 and 25,000
shares in 1995........ 15 1,000,000,000 1,000,000,000 25,000,000,000 10,831,889
Receivable from
stockholders........... 2,16 (1,689,479,000) (4,041,764,800) -- --
Deficit................. (6,153,533,832) (10,062,739,203) (6,578,952,420) (2,850,499)
-------------- --------------- -------------- ----------
Total Stockholders'
Equity (Capital
Deficiency)........... (6,843,012,832) (13,104,504,003) 18,421,047,580 7,981,390
-------------- --------------- -------------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... 58,111,421,168 51,211,057,456 50,683,555,586 21,959,946
============== =============== ============== ==========
</TABLE>
See accompanying Notes to Financial Statements which are an integral part of
the financial statements.
F-39
<PAGE>
PT RAJASA HAZANAH PERKASA
STATEMENTS OF INCOME AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------- --------------- ---------------------------
U.S. $
NOTES RP RP RP (NOTE 3)
----- -------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES................ 2,17,18 38,171,012,000 34,981,603,290 16,812,363,798 7,284,386
COST OF REVENUES........ 2,17 23,690,291,000 17,425,723,608 7,679,495,493 3,327,337
-------------- --------------- --------------- ----------
GROSS PROFIT............ 14,480,721,000 17,555,879,682 9,132,868,305 3,957,049
-------------- --------------- --------------- ----------
OPERATING EXPENSES...... 12,675,997,000 12,784,298,746 10,840,193,673 4,696,791
-------------- --------------- --------------- ----------
INCOME (LOSS) FROM
OPERATIONS............. 1,804,724,000 4,771,580,936 (1,707,325,368) (739,742)
-------------- --------------- --------------- ----------
OTHER INCOME (CHARGES)
Interest income....... 558,855,000 587,672,516 403,155,251 174,677
Gain on disposals of
property and equip-
ment--net............ 2 850,000 2,936,000 344,054,448 149,070
Interest expense...... (4,975,872,000) (4,923,313,013) (4,813,937,236) (2,085,761)
Miscellaneous--net.... 18 789,148,000 (3,861,829,788) 13,431,326,688 5,819,465
-------------- --------------- --------------- ----------
Other Income (Charges)--
Net.................... (3,627,019,000) (8,194,534,285) 9,364,599,151 4,057,451
-------------- --------------- --------------- ----------
CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLE.............. 2 -- 1,048,136,128 -- --
-------------- --------------- --------------- ----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAX.................... (1,822,295,000) (2,374,817,221) 7,657,273,783 3,317,709
PROVISION FOR INCOME
TAX.................... 2,12 1,095,450,000 1,534,388,150 4,173,487,000 1,808,270
-------------- --------------- --------------- ----------
NET INCOME (LOSS)....... (2,917,745,000) (3,909,205,371) 3,483,786,783 1,509,439
DEFICIT AT BEGINNING OF
YEAR................... (3,235,788,832) (6,153,533,832) (10,062,739,203) (4,359,938)
-------------- --------------- --------------- ----------
DEFICIT AT END OF YEAR.. (6,153,533,832) (10,062,739,203) (6,578,952,420) (2,850,499)
-------------- --------------- --------------- ----------
</TABLE>
See accompanying Notes to Financial Statements which are an integral part of
the financial statements.
F-40
<PAGE>
PT RAJASA HAZANAH PERKASA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------------- -------------- ----------------------------
U.S. $
RP RP RP (NOTE 3)
--------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Income (loss) before
provision for income
tax.................... (1,822,295,000) (2,374,817,221) 7,657,273,783 3,317,709
Adjustments to reconcile
income (loss) before
provision for income
tax to net cash
provided by (used in)
operating activities:
Amortization of
deferred charges..... 11,837,328,000 6,429,397,219 4,819,331,622 2,088,099
Depreciation.......... 757,993,000 1,215,863,781 749,562,756 324,767
Provisions for:
Doubtful accounts... 39,239,000 469,876,000 62,739,169 27,183
Inventory
obsolescence....... -- 891,089,416 2,967,643,196 1,285,807
Gain on disposal of
network assets....... -- -- (10,967,490,528) (4,751,945)
Gain on disposals of
property and
equipment............ (850,000) (2,936,000) (344,054,448) (149,070)
Changes in operating
assets and
liabilities:
Accounts
receivable......... (783,972,000) (1,208,001,018) 216,000,856 93,588
Inventories......... (4,569,467,000) (2,163,187,253) 348,812,887 151,132
Prepaid tax and
expenses........... 1,882,755,000 2,297,831,520 363,641,317 157,557
Pledged cash and
deposits........... (674,301,000) 925,407,000 6,195,697,000 2,684,444
Accounts payable.... 4,042,779,168 (6,732,762,394) 8,701,433,227 3,770,118
Payable to former
stockholders....... (4,500,000,000) -- -- --
Accrued expenses.... 2,123,728,000 3,053,148,400 (6,194,250,232) (2,683,817)
Taxes payable
(excluding
corporate income
tax)............... (2,116,879,000) (2,204,640,847) (4,585,265,495) (1,986,683)
Payments of corporate
income tax........... (608,930,000) (754,408,872) (2,994,670,754) (1,297,518)
--------------- -------------- --------------- -----------
Net Cash Provided by
(Used in) Operating
Activities............. 5,607,128,168 (158,140,269) 6,996,404,356 3,031,371
--------------- -------------- --------------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Decrease (increase) in
deferred charges....... (8,908,137,000) (2,696,599,110) 38,150,067,797 16,529,492
Proceeds from sales of
property and
equipment.............. 909,000 61,375,000 498,794,393 216,115
Increase in advance for
investment in shares of
stock.................. -- -- (29,112,810,000) (12,613,869)
Acquisitions of property
and equipment.......... (3,411,300,000) (434,255,000) (441,602,868) (191,336)
Proceeds from casualty
insurance.............. -- 33,900,000 -- --
--------------- -------------- --------------- -----------
Net Cash Provided by
(Used in) Investing
Activities............. (12,318,528,000) (3,035,579,110) 9,094,449,322 3,940,402
--------------- -------------- --------------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from capital
stock issuance......... -- -- 24,000,000,000 10,398,614
Decrease (increase) in
due from stockholders.. (1,189,479,000) (2,352,285,800) 4,041,764,800 1,751,198
Increase (decrease) in
long-term debts........ 5,643,333,000 (5,364,648,026) (24,806,409,709) (10,748,011)
Increase in due from an
affiliate.............. -- -- (8,210,270,047) (3,557,309)
Increase (decrease) in
short-term loans....... 3,930,456,000 9,830,051,048 (6,347,377,490) (2,750,164)
--------------- -------------- --------------- -----------
Net Cash Provided by
(Used in) Financing
Activities............. 8,384,310,000 2,113,117,222 (11,322,292,446) (4,905,672)
--------------- -------------- --------------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 1,672,910,168 (1,080,602,157) 4,768,561,232 2,066,101
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 182,839,000 1,855,749,168 775,147,011 335,852
--------------- -------------- --------------- -----------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... 1,855,749,168 775,147,011 5,543,708,243 2,401,953
=============== ============== =============== ===========
</TABLE>
See accompanying Notes to Financial Statements which are an integral part of
the financial statements.
F-41
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
PT Rajasa Hazanah Perkasa (the Company) was established on December 17, 1984
based on notarial deed No. 22 of Pariwondo Soekarno SH. The deed of
establishment was approved by the Ministry of Justice (MOJ) in its decision
letter No. C2-2666-HT.01.01.TH'85 dated May 8, 1985, registered at the South
Jakarta Court of Justice under No. 503/Not/1985/PN.JKT.SEL on July 24, 1985
and was published in State Gazette No. 82, Supplement No. 1199 dated October
14, 1986. The Company's articles of association has been amended from time to
time, most recently by notarial deed No. 41 of Sinta Susikto SH dated November
9, 1995.
According to Article No. 2 of the Company's articles of association, the
Company is engaged in various business activities.
The Company changed its status to foreign capital investment based on the
approval of Investment Coordinating Board No. 22/V/PMA/11995 dated May 26,
1995 and No. 1226/A.6/1995 dated September 28, 1995.
Since 1985, the Company, in association with PT Telekomunikasi Indonesia
(Telkom), has provided cellular telephone connection services which are
integrated into the national telephone network, covering the Jakarta-Puncak-
Bandung area. Based on Letter from Ministry of Finance No. S-611/MK.016/1995
dated October 23, 1995, the Company in association with Telkom, established a
joint venture company, PT Mobile Selular Indonesia (Mobisel) which is engaged
in cellular telephone connection services covering the West Java, Lampung,
Jakarta, Central Java, Bali and Lombok areas. On November 30, 1995, the
Company transferred its cellular mobile telephone networks as advance for
investment in shares of stock of Mobisel (see Note 18).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
The financial statements have been prepared on the historical cost basis of
accounting, except for inventories which are valued at the lower of cost or
net realizable value (market).
Cash Equivalents
Time deposits and other short-term investments with maturities of three
months or less at the time of placement or purchase are considered as "Cash
Equivalents".
Allowance for Doubtful Accounts
The Company provides allowance for doubtful accounts based on a review of
the status of the individual receivable accounts at the end of the year.
Inventories
Inventories are stated at the lower of cost or net realizable value
(market). Cost is determined by the first-in, first-out method. The Company
provides an allowance for obsolescence on inventories based on a periodic
review of their conditions.
Transactions with Related Parties
The Company has transactions with entities which are regarded as having
special relationship as defined under Statement of Financial Accounting
Standards No. 7, "Related Party Disclosures".
F-42
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed based on the double-declining balance method at the
following rates:
<TABLE>
<CAPTION>
RATES
-----------
<S> <C>
Vehicles...................................................... 50%
Furniture and fixtures........................................ 50% and 25%
Building improvements......................................... 50%
Computer equipment............................................ 25%
Cellular mobile telephones.................................... 25%
Machinery and equipment....................................... 25%
</TABLE>
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. When assets are retired
or otherwise disposed of, their costs and the related accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
income for the year.
Prepaid Expenses
Prepaid expenses are amortized over the periods benefited using the
straight-line method.
Deferred Charges
Certain expenditures of which the benefits extend over one year are deferred
and amortized over their estimated useful lives using the straight-line
method.
Revenue and Expense Recognition
Revenue is recorded as earned when products are delivered to the customers
or when services are rendered. Expenses are recognized when these are
incurred.
Revenue is obtained from three primary sources:
. connection charge for each new line sold.
. pulse-sharing amounting to 56% of the charges raised for local calls on
the cellular network.
. sales, repair, maintenance and rental of outstations and accessories.
Effective January 1, 1994, the Company changed its revenue recognition
policy in connection with its pulse-sharing revenue. Previously, the Company
had recognized its pulse-sharing revenue in accordance with the billing
practices of Telkom. For purposes of monthly billing, Telkom has used a cut-
off date of the 20th of the month to determine a customer's bill. Accordingly,
all pulses incurred from the 20th to the end of the month are recognized as
part of the next month's billing. Effective January 1, 1994, the Company
changed its revenue recognition to record pulse-sharing revenue as incurred.
The Company adopted this method in 1995 as required by a recently issued
Statement of Financial Accounting Standards No 35. This change has been
recognized in the statement of income as a cumulative effect of a change in
accounting principle which amounted to Rp 1,048,136,128 in 1994.
Foreign Currency Transactions and Balances
Transactions involving foreign currencies are recorded at the rates of
exchange prevailing at the time the transactions are made. At balance sheet
date, assets and liabilities denominated in foreign currency are adjusted
F-43
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
to reflect the rates of exchange prevailing at such date, and any resulting
gains or losses are credited or charged to operations of the current year.
Provision for Income Tax
Provision for income tax is determined on the basis of estimated taxable
income for the year. No deferred tax is provided for the timing differences in
the recognition of income and expenses for financial reporting and income tax
purposes.
3. TRANSLATIONS OF INDONESIAN RUPIAH AMOUNTS INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Indonesian rupiah. The translations of
the Indonesian rupiah amounts into United States dollars are included solely
for the convenience of the readers, using the average buying and selling rates
published by Bank Indonesia (Central Bank) on December 31, 1995 of Rp 2,308 to
U.S.$ 1. The convenience translations should not be construed as
representations that the Indonesian rupiah amounts have been, could have been,
or could in the future be, converted into United States dollars at this or any
other rate of exchange.
4. CASH AND CASH EQUIVALENTS
A portion of cash amounting to Rp 50,417,840 and all cash equivalents
amounting to Rp 4,690,353,097 in 1995 are used as collateral for the short-term
loans and long-term debts (see Notes 9 and 14). Cash equivalents represent time
deposits with annual interest at 4.5%-6.06% in 1995.
5. ACCOUNTS RECEIVABLE--TRADE
This account consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Pulse revenue receivables.. Rp 640,116,000 Rp 2,408,308,173 Rp 2,579,752,929
Outstation receivables..... 7,480,652,000 1,047,468,674 606,278,414
---------------- ---------------- ----------------
Total...................... 8,120,768,000 3,455,776,847 3,186,031,343
Less allowance for doubtful
accounts................... 5,908,861,000 505,744,829 568,483,998
---------------- ---------------- ----------------
Net........................ Rp 2,211,907,000 Rp 2,950,032,018 Rp 2,617,547,345
================ ================ ================
</TABLE>
Trade receivables are used as collateral for short-term loans and long-term
debts (see Notes 9 and 14).
Substantially all of the allowance for doubtful accounts arose prior to 1993
as a result of the lack of internal control over the receipt of payment on
customer accounts. These accounts were ultimately declared uncollectible and
the related reserves were written off in 1994. The Company has taken
appropriate actions to strengthen the internal controls of the Company,
including implementation of an in-house billing system with enhanced credit
control capabilities, thereby allowing for timely recognition of doubtful
accounts and initiated customer usage surveys. The remaining allowance for
doubtful accounts is deemed appropriate and reasonable given the Company's
continued efforts to assess the ultimate collectibility of its remaining
accounts receivable balances.
F-44
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cellular mobile
telephones................. Rp 3,338,281,000 Rp 5,668,441,207 Rp 5,009,533,582
Optional equipment......... 742,085,000 1,828,198,651 2,286,941,570
Mobile telephones in
transit.................... 1,344,728,000 173,860,000 25,211,819
---------------- ---------------- ----------------
Total...................... 5,425,094,000 7,670,499,858 7,321,686,971
Less allowance for
obsolescence............... -- 891,089,416 3,858,732,612
---------------- ---------------- ----------------
Net........................ Rp 5,425,094,000 Rp 6,779,410,442 Rp 3,462,954,359
================ ================ ================
</TABLE>
Certain inventories are used as collateral for certain short-term loans (see
Note 9).
Allowance for obsolescence was significantly increased to provide for slow-
moving inventory of old and out-modelled mobile telephone equipment. The
Indonesian cellular market changed dramatically during 1995 including the
introduction of new and competing technologies and changing customer
preferences resulting in a higher than anticipated obsolescence provision
against cellular mobile telephone equipment.
7. PROPERTY AND EQUIPMENT
The details of property and equipment are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------
BEGINNING ENDING
BALANCE ADDITIONS DISPOSALS BALANCE
---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
COST
Vehicles................ Rp 2,452,282,407 Rp 432,687,868 Rp 710,052,795 Rp 2,174,917,480
Furniture and fixtures.. 403,108,997 -- 2,276,940 400,832,057
Building improvements... 474,708,473 -- -- 474,708,473
Computer equipment...... 513,888,700 7,880,000 41,667,500 480,101,200
Cellular mobile
telephones.............. 325,786,242 -- 146,149,131 179,637,111
Machinery and
equipment............... 203,951,126 1,035,000 -- 204,986,126
---------------- -------------- -------------- ----------------
Total................... 4,373,725,945 441,602,868 900,146,366 3,915,182,447
---------------- -------------- -------------- ----------------
ACCUMULATED DEPRECIATION
Vehicles................ 1,654,460,019 499,983,205 676,943,561 1,477,499,663
Furniture and fixtures.. 234,032,459 45,246,268 1,759,910 277,518,817
Building improvements... 261,340,006 53,342,117 -- 314,682,123
Computer equipment...... 149,419,287 96,819,502 18,620,970 227,617,819
Cellular mobile
telephones.............. 68,304,517 21,353,642 48,081,980 41,576,179
Machine and equipment... 83,091,043 32,818,022 -- 115,909,065
---------------- -------------- -------------- ----------------
Total................... 2,450,647,331 749,562,756 745,406,421 2,454,803,666
---------------- -------------- -------------- ----------------
Net Book Value.......... Rp 1,923,078,614 Rp 1,460,378,781
================ ================
</TABLE>
Depreciation charged to operations amounted to Rp 757,993,000, Rp
1,215,863,781 and Rp 749,562,756 in 1993, 1994 and 1995, respectively. The
Company's property and equipment are used as collateral to the short-term
loans and long-term debts (see Notes 9 and 14).
F-45
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. PLEDGED CASH AND DEPOSITS
This account represents cash in banks and time deposits pledged for credit
facilities obtained by the Company (see Notes 9 and 14).
9. SHORT-TERM LOANS
This account represents loans obtained from the following:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ----------------- ----------------
<S> <C> <C> <C>
PT Bank Utama............... Rp 5,435,000,000 Rp 15,822,744,048 Rp 9,475,000,000
PT Lippobank................ -- -- 366,558
PT Bank Dagang Negara....... 557,693,000 -- --
---------------- ----------------- ----------------
Total....................... Rp 5,992,693,000 Rp 15,822,744,048 Rp 9,475,366,558
================ ================= ================
</TABLE>
The loans bear annual interest ranging from 20% to 24%. The loans are
collateralized with certain inventories, receivables, cash, property and
equipment of the Company, corporate guarantee from PT Bina Reksa Perdana, a
stockholder and certain property and equipment of affiliates.
10. ACCOUNTS PAYABLE--TRADE
This account consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- --------------
<S> <C> <C> <C>
Ericsson Radio System AB..... Rp 1,205,839,000 Rp 1,762,803,091 Rp --
Nokia Mobile Phones (H.K.)
Ltd. ........................ 3,067,412,000 1,527,438,000 --
Dancall Radio A/S............ 746,940,000 347,600,001 --
PT Erindo Utama.............. 445,557,000 239,675,567 --
Rose Andersen Pte., Ltd...... 350,260,000 -- --
Others (below Rp 150 million
each)........................ 421,160,000 417,206,853 564,424,841
---------------- ---------------- --------------
Total........................ Rp 6,237,168,000 Rp 4,294,723,512 Rp 564,424,841
================ ================ ==============
</TABLE>
11. ACCOUNTS PAYABLE--OTHERS
As of December 31, 1995 this account mainly represents due to former
stockholder and PT Telekomunikasi Indonesia (Telkom) amounting to Rp 6,145
million and Rp 6,610 million, respectively. The amount due to Telkom represents
the difference between the agreed price of the network assets transferred to
Mobisel and Telkom's share of the capital contribution in Mobisel.
12. TAXES PAYABLE
This account consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Estimated income tax payable
(less tax prepayment of Rp
97,784,316 in 1995)........ Rp 2,160,015,000 Rp 2,939,994,278 Rp 4,075,702,684
Income taxes:
Article 21................ 448,012,000 1,811,256,939 268,692,322
Article 22................ 452,471,000 -- --
Article 23................ 102,565,000 85,822,512 357,878,479
Article 25................ -- -- 43,107,840
Article 26................ 755,072,000 319,049,988 174,618,857
Value Added Tax on Import... 5,832,976,000 3,170,325,714 --
---------------- ---------------- ----------------
Total....................... Rp 9,751,111,000 Rp 8,326,449,431 Rp 4,920,000,182
================ ================ ================
</TABLE>
F-46
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1994, the Company had accrued taxes payable amounting to
Rp 8,326,449,431. The Company has received several tax assessments and
additional tax assessments for the Company's tax returns for 1988, 1989, 1990,
1992, 1993 and 1994. The total taxes payable including interest and penalty of
the said tax assessments amounted to Rp 1,798,556,404 and has been fully paid
by the Company in 1995.
A reconciliation between income (loss) before provision for income tax, as
shown in the statement of income, and estimated taxable income for the year
ended December 31, 1995 (with comparative figures for 1993 and 1994) is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income (loss) before
provision for income
tax per statement of
income................. Rp (1,822,295,000) Rp (2,374,817,221) Rp 7,657,273,783
Timing differences:
Amortization of de-
ferred charges....... -- -- 4,819,331,622
Provision for inven-
tory obsolescence.... -- 891,089,416 2,967,643,196
Difference in begin-
ning balance of prop-
erty and equipment as
regulated by Direc-
torate General of
Taxes Circular Letter
No. 44/1995.......... -- -- 1,211,445,061
Depreciation.......... 5,653,227,000 1,727,531,584 473,000,943
Provision for uncol-
lectible trade re-
ceivables............ 39,239,000 469,876,000 62,739,169
Gain on disposal of
network assets....... -- -- (5,856,159,247)
Gain on disposals of
property and equip-
ment................. -- -- (401,162,201)
Permanent differences:
Donation.............. 18,540,000 106,605,000 2,090,349,100
Employees' benefits in
kind................. 704,497,000 865,755,000 599,409,987
Entertainment......... 87,821,000 446,774,000 461,698,721
Interest expense...... -- -- 206,746,361
Tax penalty and inter-
est.................. -- -- 17,415,989
Taxes, other than in-
come tax............. (2,745,464,000) 975,934,000 --
Others................ 2,473,158,000 1,292,362,000 --
Non-taxable income
Interest already sub-
jected to final in-
come tax............. -- -- (368,942,024)
----------------- ----------------- -----------------
Estimated taxable in-
come................. Rp 4,408,723,000 Rp 4,401,109,779 Rp 13,940,790,460
================= ================= =================
</TABLE>
F-47
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income tax and computation of the estimated corporate
income tax payable are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- -----------------
<S> <C> <C> <C>
Estimated taxable income
(rounded-off)............ Rp 4,408,723,000 Rp 4,401,109,000 Rp 13,940,790,000
---------------- ---------------- -----------------
Provision for income tax
before adjustment......... Rp 1,537,053,050 Rp 1,534,388,150 Rp 4,173,487,000
Adjustment for prior years
overaccrual............... 441,603,050 -- --
---------------- ---------------- -----------------
Provision for income tax
after adjustment......... Rp 1,095,450,000 Rp 1,534,388,150 Rp 4,173,487,000
---------------- ---------------- -----------------
Prepayments of income tax
Article 22.............. -- -- 52,898,433
Article 23.............. -- -- 1,350,000
Article 25.............. -- -- 43,535,883
---------------- ---------------- -----------------
-- -- 97,784,316
---------------- ---------------- -----------------
Estimated corporate income tax payable for
1995.................... Rp -- Rp -- Rp 4,075,702,684
1994.................... -- 1,534,388,150 --
1993 and 1992........... 2,160,015,000 1,405,606,128 --
---------------- ---------------- -----------------
Total..................... Rp 2,160,015,000 Rp 2,939,994,278 Rp 4,075,702,684
================ ================ =================
</TABLE>
13. ACCRUED EXPENSES
The details of this account are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest..................... Rp 896,956,000 Rp 2,240,442,112 Rp 572,321,782
Consulting services.......... -- 251,528,475 404,271,431
Salaries..................... 176,420,000 208,387,989 167,328,782
Professional services........ 2,693,191,000 4,331,800,000 22,531,652
Legal fees................... 119,600,000 33,607,200 18,133,652
Training..................... 137,448,000 67,420,950 --
Others....................... 483,586,000 427,162,674 181,511,869
---------------- ---------------- ----------------
Total........................ Rp 4,507,201,000 Rp 7,560,349,400 Rp 1,366,099,168
================ ================ ================
</TABLE>
Accrued professional services in 1993 and 1994 resulted from a consulting
services agreement between the Company and Bell Atlantic International, Inc.
Under the agreement, the Company had to pay annual fee amounting to U.S.$
1,600,000 for technical services provided by Bell Atlantic International, Inc.
F-48
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. LONG-TERM DEBTS
The details of this account are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ---------------- ----------------
<S> <C> <C> <C>
Rupiah
PT Bank Indonesia Raya... Rp 2,658,366,000 Rp 2,482,897,203 Rp 1,718,555,179
PT Bank Tamara........... 3,396,921,000 2,170,692,738 676,853,686
PT Lippobank............. 1,761,226,000 1,060,203,233 243,565,458
PT Bank Niaga............ -- -- 76,297,200
PT Astra Credit Company.. -- -- 74,429,400
PT Arthacakra Multi
Finance................. -- -- 39,666,678
PT Tunas Financindo
Corporation............. -- -- 20,780 664
U.S. Dollar
Svenska Handelsbanken,
Singapore
(U.S.$ 7,945,352 in 1993
and
U.S.$ 5,973,984 in
1994)................... 16,764,693,000 13,142,764,800 --
Bell Atlantic Interna-
tional, Inc.
(U.S.$ 4,000,000)....... 8,440,000,000 8,800,000,000 --
----------------- ---------------- ----------------
33,021,206,000 27,656,557,974 2,850,148,265
Less current maturities.... 18,422,245,000 19,054,254,112 2,714,491,758
----------------- ---------------- ----------------
Long-term portion.......... Rp 14,598,961,000 Rp 8,602,303,862 Rp 135,656,507
================= ================ ================
</TABLE>
Based on the Joint Venture Agreement No. PKS 234/HK.810/UTA-00/95 dated
November 30, 1995 between the Company, Telkom and Yayasan Dana Pensiun Pegawai
Telkom (YDPP Telkom), the Company has transferred the balance of the loan from
Svenska Handelsbanken, Singapore to Mobisel as of June 30, 1995 amounting Rp
10,752,598,140 (see Note 18).
The above loans are collateralized with 3,000 lines cellular telephone
network and certain receivables, property and equipment, time deposits and
cash of the Company and property and equipment of an affiliate. The Rupiah
loans bear interest at rates ranging from 15% to 23% per annum in 1993 and
1994, and 20% to 23% per annum in 1995. The loan from Svenska Handelsbanken,
Singapore bears annual interest at 0.55% above one month SIBOR and the loan
from Bell Atlantic International, Inc. bears annual interest at 12%.
F-49
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. CAPITAL STOCK
The Company's stockholders and their respective share ownerships as of
December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1993 AND 1994
-------------------------------------------
NUMBER OF
SHARES ISSUED PERCENTAGE
STOCKHOLDERS AND PAID OF OWNERSHIP AMOUNT
------------ ------------- ------------ ----------------
<S> <C> <C> <C>
PT Panutan Duta.................. 500 50% Rp 500,000,000
PT Bina Reksa Perdana............ 500 50 500,000,000
----- --- ----------------
Total............................ 1,000 100% Rp 1,000,000,000
===== === ================
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------
NUMBER OF
SHARES ISSUED PERCENTAGE
STOCKHOLDERS AND PAID OF OWNERSHIP AMOUNT
------------ ------------- ------------ -----------------
<S> <C> <C> <C>
PT Bina Reksa Perdana......... 12,500 50% Rp 12,500,000,000
International Wireless Commu-
nications, Inc............... 6,250 25 6,250,000,000
PT Deltona Satya Dinamika..... 6,250 25 6,250,000,000
------ --- -----------------
Total......................... 25,000 100% Rp 25,000,000,000
====== === =================
</TABLE>
Based on the Extraordinary General Meeting of the Stockholders dated November
9, 1995 which was notarized by deed No. 41 of Sinta Susikto SH, on the same
date, the stockholders approved the increase in the Company's authorized and
issued capital stock from Rp 1 billion to Rp 25 billion and the changes in
the composition of stockholders. The above changes were approved by MOJ in its
decision letter No. C2-1451.HT.01.04.TH'96 dated February 5, 1996.
16. RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders were resulted from the advance of funds by the
Company. For financial statement reporting purposes, these receivables have
been reclassified as a reduction of stockholders' equity similar to a
distribution.
17. REVENUES AND COST OF REVENUES
The details of revenues are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pulse sharing........... Rp 14,107,885,000 Rp 11,313,620,949 Rp 12,249,170,887
Sales of outstations.... 17,966,406,000 18,434,605,503 4,113,518,256
Connecting charges...... 5,798,980,000 4,602,300,000 126,500,000
Repair, maintenance and
others................. 297,741,000 631,076,838 323,174,655
----------------- ----------------- -----------------
Total................... Rp 38,171,012,000 Rp 34,981,603,290 Rp 16,812,363,798
================= ================= =================
</TABLE>
Cost of revenues amounted to Rp 23,690,291,000, Rp 17,425,723,608 and Rp
7,679,495,493 for 1993, 1994 and 1995, respectively.
F-50
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
18. COMMITMENTS
In its operations, the Company entered into several agreements with Telkom,
whereby the Company should build cellular mobile telephone networks. The costs
financed by the Company to build the cellular mobile telephone networks were
capitalized, and were presented under the account "Deferred Charges" which was
amortized over the revenue sharing period. In accordance with the term of
cooperation agreements with Telkom, ownership of the assets will belong to
Telkom at the end of the revenue sharing period. As compensation, the Company
is entitled to receive 100% of the revenue derived from customers for selling
and installing outstation, maintenance and repair of the outstation; while
during the revenue sharing period, the pulse revenue from the outgoing local
calls and monthly customers' fixed charges was shared by both parties at a 56%
sharing in favor of the Company and 44% sharing in favor of Telkom. Telkom is
entitled to receive 100% of the revenue from international call pulses. The
outstanding agreements as of December 31, 1994 are as follows:
a. Agreement No. 22/KS.010/UTA-00/89, dated January 23, 1989, stipulates
that the Company shall build a 5,000 line cellular mobile telephone
network for the Jakarta-Bandung area (Phase II). The revenue sharing
period is six years.
b. Agreement No. 312/KS.010/UTA-00/91, dated June 13, 1991, stipulates that
the Company shall build a 15,000 line cellular mobile telephone network
for the Jakarta-Bandung area (Phase III). The revenue sharing period is
approximately eight years and ten months.
On November 30, 1995, as covered by notarial deed No. 210 dated November 30,
1995 of Sinta Susikto SH, the Company, Telkom and YDPP Telkom established a
joint venture company named PT Mobile Selular Indonesia.
In accordance with the joint venture agreement, the Company transferred
network assets to Mobisel as capital contribution. The agreed value of the
assets transferred totaling Rp 52,342,326,140 is allocated as follows:
<TABLE>
<S> <C>
As capital contributions:
The Company......................................... Rp 29,112,810,000
Telkom.............................................. 10,397,432,000
YDPP Telkom......................................... 2,079,486,000
Assumption of the Company's loan from Svenska
Handelsbanken, Singapore............................. 10,752,598,140
-----------------
Total................................................. Rp 52,342,326,140
=================
</TABLE>
The excess of the Company's portion on the agreed price of the network
assets over the net book value of the network assets transferred amounting to
Rp 10,967,490,528 is presented under "Other Income (Charges)--Miscellaneous".
Under existing regulations, Mobisel can only operate upon the approval of
its articles of associations by MOJ. As such, the following arrangements and
conditions are adopted with respect to the transfer and assumption of the
operations of, and recognition and sharing of revenues being generated from,
the above-mentioned assets transferred to Mobisel:
a. The operations of the network assets will be transferred to and assumed
by Mobisel effective on the 20th day of the month of approval of its
articles of association by MOJ, with the condition that if the approval
is made exactly on the 20th day of the said month, then the transfer
shall be effective on that date.
b. Revenues generated from the operations of the transferred assets can
only be recognized by Mobisel starting from the effectivity date of the
transfer being referred to in point (a). Prior to the said date, all
revenues generated are recognized by the Company.
c. The revenue sharing agreement between Telkom and the Company covering
the transferred assets is still valid as long as the condition in point
(a) is not yet fulfilled.
F-51
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Since Mobisel's deed of establishment was approved by MOJ in its decision
letter No. C2-1238.HT.01.01-TH'96 dated January 31, 1996, the Company recorded
the assets transferred as capital contribution to Mobisel as "Advance for
Investment in Shares of Stock". Accordingly, the Company is still entitled to
the pulse sharing revenue until February 20, 1996.
19. CONTINGENT LIABILITIES
The Company is in a dispute with PT Larikerindo relating to the settlement of
loan. On August 9, 1994, the court dismissed the claims against the Company.
However, PT Larikerindo filed an appeal concerning the court decision. On
December 29, 1995, the higher court again dismissed the claims.
20. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED
BY THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with Indonesian
GAAP which differ in certain aspects from U.S. GAAP.
The differences are reflected in the approximations provided in Note 21 and
arise due to the items discussed in the following paragraphs:
a. Income Taxes
Under Indonesian GAAP, it is acceptable to recognize Income Tax expense based
upon the estimated current Income Tax liability on the current year's earnings.
When income and expense recognition for Income Tax purposes does not occur in
the same year as income and expense recognition for financial reporting
purposes, the resulting temporary differences are not considered in the
computation of Income Tax expense for the year.
Under U.S. GAAP, the liability method is used to calculate the Income Tax
provision. Under the liability method, deferred tax assets or liabilities are
recognized for differences between the financial reporting and tax bases of
assets and liabilities at each reporting date.
b. Regulation
The Company provides telephone service in Indonesia and therefore is subject
to the regulatory control of the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia. Rates for services are tariff-
regulated. Although changes in rates for services are authorized and computed
based on a decree issued by the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia, these are not based on a fixed
rate of return and are not designed to provide for the recovery of the
Company's cost of services. Accordingly, the requirements of U.S. GAAP related
to a business whose rates are regulated on the basis of its actual costs are
not applicable to the Company's financial statements.
c. Presentation of the Statements of Stockholders' Equity
Under Indonesian GAAP, except for public companies, it is not required to
present statements of retained earnings. Under U.S. GAAP, the Company is
required to present statements of stockholders' equity.
F-52
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
21. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED
UNDER INDONESIAN AND U.S. GAAP
The following is a summary of the significant adjustments to net income for
the years ended December 31, 1993, 1994 and 1995 and to stockholders' equity
as of December 31, 1993, 1994 and 1995 which would be required if U.S. GAAP
had been applied instead of Indonesian GAAP in the financial statements:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- --------------- -------------------------------
RP RP RP U.S.$ (NOTE 3)
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income (loss)
according to the
financial statements
prepared under
Indonesian GAAP........ (2,917,745,000) (3,909,205,371) 3,483,786,783 1,509,439
Adjustments due to:
Gain on disposal of
network
assets (A)........... -- -- (10,967,490,528) (4,751,946)
Expenses incurred
during preoperating
stage of Mobisel..... -- -- (762,417,085) (330,337)
-------------- --------------- --------------- ----------
-- -- (11,729,907,613) (5,082,283)
-------------- --------------- --------------- ----------
Income tax effect on
above adjustments.... -- -- 3,290,247,158 1,425,583
Income tax (B)........ 1,992,363,100 (974,573,164) 857,026,841 371,329
Valuation allowance... (2,430,991,019) 1,549,006,964 (4,147,273,999) (1,796,912)
-------------- --------------- --------------- ----------
Approximate net loss in
accordance with U.S.
GAAP................... (3,356,372,919) (3,334,771,571) (8,246,120,830) (3,572,844)
============== =============== =============== ==========
<CAPTION>
1993 1994 1995
-------------- --------------- -------------------------------
RP RP RP U.S.$ (NOTE 3)
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Stockholders' equity
according to the
financial statements
prepared under
Indonesian GAAP........ (6,843,012,832) (13,104,504,003) 18,421,047,580 7,981,390
Adjustments due to:
Income tax............ 1,856,557,219 881,984,055 5,029,258,053 2,179,055
Gain on disposal of
network assets (A)... -- -- (10,967,490,528) (4,751,946)
Expenses incurred
during preoperating
stage of Mobisel..... -- -- (762,417,085) (330,337)
Valuation allowance... (2,430,991,019) (881,984,055) (5,029,258,053) (2,179,055)
-------------- --------------- --------------- ----------
Approximate
stockholders' equity
(capital deficiency) in
accordance with U.S.
GAAP................... (7,417,446,632) (13,104,504,003) 6,691,139,967 2,899,107
============== =============== =============== ==========
</TABLE>
(A) The gain on disposal of network assets relates to the sale of network
assets to Mobisel at a gain of Rp 10,967,490,528, representing the excess
of the agreed sale price over the book value. Under U.S. GAAP, the gain
was eliminated since transfers between entities under common control does
not give rise to the recognition of realized gains.
(B) Reflects the tax effect solely due to the difference in accounting for
taxes under U.S. and Indonesian GAAP.
F-53
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
With regard to the balance sheets and statements of income, the following
significant captions determined under U. S. GAAP would have been:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- ------------------------------
RP RP RP U.S.$ (NOTE 3)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance sheets
Current assets........ 12,376,365,168 11,090,372,951 12,270,504,214 5,316,510
Total assets.......... 58,111,421,168 51,211,057,456 61,512,948,397 26,652,057
Current liabilities... 50,355,473,000 55,713,257,597 40,380,349,030 17,495,818
Total liabilities..... 65,528,876,800 64,315,561,459 54,821,808,430 23,752,950
Statements of income
Income (loss) from op-
erations............. 1,804,724,000 4,771,580,936 (2,796,492,632) (1,211,652)
</TABLE>
22. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP
The following information is presented on the basis of U.S. GAAP:
a. Income Tax
The tax effect on significant temporary differences is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- ------------ ------------------------------
RP RP RP U.S.$ (NOTE 3)
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Deferred tax assets--
current:
Provision for inventory
obsolescence........... -- 311,881,296 1,157,619,784 501,568
Provision for
uncollectible trade
receivable............. 2,068,101,350 177,010,690 170,545,199 73,893
-------------- ------------ -------------- ----------
2,068,101,350 488,891,986 1,328,164,983 575,461
Valuation allowance..... (2,068,101,350) (488,891,986) (1,328,164,983) (575,461)
-------------- ------------ -------------- ----------
Total deferred tax
assets--current--net... -- -- -- --
-------------- ------------ -------------- ----------
Deferred tax assets--
non-current:
Gain on disposal of
network assets......... -- -- 3,290,247,158 1,425,584
Property and equipment.. -- 30,202,400 410,845,912 178,009
Network assets.......... 362,889,669 362,889,669 -- --
-------------- ------------ -------------- ----------
362,889,669 393,092,069 3,701,093,070 1,603,593
Valuation allowance..... (362,889,669) (393,092,069) (3,701,093,070) (1,603,593)
-------------- ------------ -------------- ----------
Total deferred tax
assets--non-current--
net.................... -- -- -- --
-------------- ------------ -------------- ----------
Deferred tax
liabilities--non-
current:
Property and equipment.. (574,433,800) -- -- --
-------------- ------------ -------------- ----------
Deferred tax, net....... (574,433,800) -- -- --
============== ============ ============== ==========
</TABLE>
The temporary differences, on which deferred tax assets have been computed
are not deductible for income tax purposes until the provision for inventory
obsolescence and provision for uncollectible trade receivable are written-off.
The differences between the book and tax bases of gain on disposal of network
assets, property and equipment and network assets are due to the differing
recognition methods for Income Tax and financial reporting purposes.
F-54
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Income Tax provision reported under U.S. GAAP differs from the expected
provision due to certain permanent differences which are detailed below:
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
1993 1994 1995
-------------- -------------- ------------------------------
RP RP RP U.S.$ (NOTE 3)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Approximate loss before
Income Tax in
accordance with U.S.
GAAP................... (1,822,295,000) (2,374,817,221) (4,072,633,830) (1,764,573)
Effect of permanent
differences:
Donation.............. 18,540,000 106,605,000 2,090,349,100 905,697
Expenses incurred
during preoperating
stage of Mobisel..... -- -- 762,417,085 330,337
Employees' benefits in
kind................. 704,497,000 865,755,000 599,499,987 259,749
Entertainment......... 87,821,000 446,774,000 461,698,721 200,043
Interest expense...... -- -- 206,746,361 89,578
Tax penalty and
interest............. -- -- 17,415,989 7,546
Interest income which
was already subjected
to final tax......... -- -- (368,942,024) (159,854)
Taxes, other than
income tax........... (2,745,464,000) 975,934,000 -- --
Others................ 2,473,158,000 1,292,362,000 -- --
-------------- -------------- -------------- ----------
538,552,000 3,687,430,000 3,769,185,219 1,633,096
-------------- -------------- -------------- ----------
Approximate income
(loss) before Income
Tax in accordance with
U.S. GAAP.............. (1,283,743,000) 1,312,612,779 (303,448,611) (131,477)
-------------- -------------- -------------- ----------
Provision for Income Tax
on taxable income in
accordance with U.S.
GAAP before
adjustment............. (455,310,050) 453,414,200 (99,784,400) (43,234)
Increase (decrease) in
valuation allowance.... 2,430,991,019 (1,549,006,694) 4,273,271,721 1,851,504
Adjustment for prior
years overaccrual....... (441,603,050) -- -- --
-------------- -------------- -------------- ----------
Provision for income tax
on taxable income in
accordance with U.S.
GAAP after adjustment.. 1,534,077,919 (1,095,592,764) 4,173,487,321 1,808,270
-------------- -------------- -------------- ----------
</TABLE>
Donations amounting to Rp 2,079,486,000 were given to Yayasan Dana Pensiun
Pegawai (YDPP) Telkom (Pension Fund of Telkom) as YDPP Telkom's contribution
in Mobisel.
F-55
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
b. Valuation and Qualifying Accounts
Activity in the Company's allowance for doubtful accounts for the years ended
December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT COSTS
BEGINNING OF AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF PERIOD
------------- ----------- ------------- -------------
FOR THE YEARS ENDED RP RP RP RP
------------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1993........ 5,869,622,000 39,239,000 -- 5,908,861,000
December 31, 1994........ 5,908,861,000 469,876,000 5,872,992,171 505,744,829
December 31, 1995........ 505,744,829 62,739,169 -- 568,483,998
</TABLE>
Activity in the Company's allowance for inventory obsolescence for the years
ended December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO
OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------- ---------- -------------
FOR THE YEARS ENDED RP RP RP RP
------------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
December 31, 1994........... -- 891,089,416 -- 891,089,416
December 31, 1995........... 891,089,416 2,967,643,196 -- 3,858,732,612
</TABLE>
23. RECLASSIFICATION OF ACCOUNTS
Certain accounts in 1993 and 1994 financial statements have been reclassified
to conform with the presentation of accounts in the 1995 financial statements.
F-56
<PAGE>
ATTACHMENT I
PT RAJASA HAZANAH PERKASA
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
CAPITAL STOCK RECEIVABLES FROM STOCKHOLDERS' EQUITY
DESCRIPTION NOTES (ISSUED AND FULLY PAID) STOCKHOLDERS DEFICIT (CAPITAL DEFICIENCY)
----------- ----- ----------------------- ---------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1,
1993................... Rp 1,000,000,000 Rp -- Rp (3,235,788,832) Rp (2,235,788,832)
Addition in receivables
from stockholders...... -- (1,689,479,000) -- (1,689,479,000)
Net loss for 1993....... -- -- (2,917,745,000) (2,917,745,000)
----------------- -------------- ------------------- -----------------
Balance as of December
31, 1993............... 1,000,000,000 (1,689,479,000) (6,153,533,832) (6,843,012,832)
Addition in receivables
from stockholders...... -- (2,352,285,800) -- (2,352,285,800)
Net loss for 1994....... -- -- (3,909,205,371) (3,909,205,371)
----------------- -------------- ------------------- -----------------
Balance as of December
31, 1994............... 1,000,000,000 (4,041,764,800) (10,062,739,203) (13,104,504,003)
Approved during the
Extraordinary General
Meeting of the
Stockholders on
November 9, 1995:
Increase in the issued
and fully paid-up
capital from
RP 1,000,000,000 to
RP 25,000,000,000.... 15 24,000,000,000 -- -- 24,000,000,000
Settlement of receiv-
ables from stockhold-
ers.................... -- 4,041,764,800 -- 4,041,764,800
Net income for 1995..... -- -- 3,483,786,783 3,483,786,783
----------------- -------------- ------------------- -----------------
Balance as of December
31, 1995............... Rp 25,000,000,000 -- Rp (6,578,952,420) Rp 18,421,047,580
================= ============== =================== =================
</TABLE>
F-57
<PAGE>
PT RAJASA HAZANAH PERKASA
CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
(UNAUDITED)
F-58
<PAGE>
PT RAJASA HAZANAH PERKASA
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30, 1996*
DECEMBER 31, 1995* (UNAUDITED)
------------------ --------------- US$
NOTES RP RP (NOTE 3)
----------- ------------------ --------------- ----------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash
equivalents............ 2,4,8,12 5,543,708,243 39,398,217,400 16,822,467
Accounts receivable
Trade--net of allowance
for doubtful accounts
of Rp 568,483,998 in
1995 and Rp
1,252,235,660 in
1996.................. 2,5,8,12 2,617,547,345 4,997,214,005 2,133,738
Others................. 59,039,898 457,780,875 195,466
Inventories--net of
allowance for
obsolescence of Rp
3,858,732,612 in 1995
and 1996............... 2,6,8 3,462,954,359 2,788,426,126 1,190,617
Prepaid taxes........... 63,564,058 76,760,079 32,775
Prepaid expenses........ 2 153,282,855 3,419,388,669 1,460,030
Advances................ -- 8,508,746,039 3,633,111
-------------- --------------- ----------
Total Current Assets.... 16 11,900,096,758 59,646,533,193 25,468,204
-------------- --------------- ----------
DUE FROM AN AFFILIATE... 2 8,210,270,047 -- --
-------------- --------------- ----------
ADVANCE FOR INVESTMENT
IN SHARES OF STOCK..... 2 29,112,810,000 -- --
-------------- --------------- ----------
PROPERTY AND EQUIPMENT
Cost.................... 2,7,8,12,17 3,915,182,447 59,694,416,816 25,488,649
Accumulated
depreciation........... (2,454,803,666) (5,006,606,340) (2,137,748)
-------------- --------------- ----------
Net Book Value.......... 1,460,378,781 54,687,810,476 23,350,901
-------------- --------------- ----------
OTHER ASSETS
Long-term prepaid rent.. 2 -- 3,496,383,778 1,492,905
Deferred charges........ 2 -- 239,709,283 102,352
Refundable deposits..... 2 -- 670,066,643 286,109
Preoperating expenses... 2 -- 50,750,002 21,670
-------------- --------------- ----------
TOTAL OTHER ASSETS...... -- 4,456,909,706 1,903,036
============== =============== ==========
TOTAL ASSETS............ 50,683,555,586 118,791,253,375 50,722,141
============== =============== ==========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Short-term loans........ 8 9,475,366,558 9,475,000,000 4,045,687
Accounts payable
Trade.................. 9 564,424,841 6,869,946,229 2,933,367
Affiliate.............. 2 327,000,000 -- --
Others................. 10 12,759,468,992 5,027,983,698 2,146,876
Taxes payable........... 2,11 4,920,000,182 5,020,615,192 2,143,730
Accrued expenses........ 1,366,099,168 1,506,987,684 643,462
Current maturities of
long-term debts........ 12 2,714,491,758 4,747,385,517 2,027,065
-------------- --------------- ----------
Total Current Liabili-
ties................... 32,126,851,499 32,647,918,320 13,940,187
-------------- --------------- ----------
LONG-TERM DEBTS--net of
current maturities..... 12 135,656,507 60,839,193,541 25,977,452
-------------- --------------- ----------
DUE TO STOCKHOLDERS..... 2 -- 7,049,326,002 3,009,960
-------------- --------------- ----------
MINORITY INTEREST IN
EQUITY OF CONSOLIDATED
SUBSIDIARY............. 2 -- 12,579,678,715 5,371,340
-------------- --------------- ----------
STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Capital stock--Rp
1,000,000 par value
Authorized and issued--
25,000 shares in
1995.................. 13 25,000,000,000 25,000,000,000 10,674,638
Deficit................ (6,578,952,420) (19,324,863,203) (8,251,436)
-------------- --------------- ----------
Total Stockholders'
Equity................ 18,421,047,580 5,675,136,797 2,423,202
-------------- --------------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... 50,683,555,586 118,791,253,375 50,722,141
============== =============== ==========
</TABLE>
- -------
* Balance sheet as of December 31, 1995 is not consolidated since Mobisel, a
subsidiary has no legal existence yet as of that date.
See accompanying Notes to Consolidated Financial Statements which are an
integral part of the consolidated financial statements.
F-59
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(WITH COMPARATIVE FIGURES FOR THE SIX MONTHS ENDED JUNE 30, 1995)
<TABLE>
<CAPTION>
JUNE 30, 1995 * JUNE 30, 1996
--------------- -------------------------------
NOTES RP RP U.S.$ (NOTE 3)
----- --------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUES................ 2,14 7,714,286,374 11,458,331,062 4,892,541
COST OF REVENUES........ 2,15 1,888,918,368 4,435,863,310 1,894,049
--------------- --------------- ----------
GROSS PROFIT............ 5,825,368,006 7,022,467,752 2,998,492
OPERATING EXPENSES
Selling............... 818,346,475 769,492,476 328,562
General and adminis-
trative.............. 1,861,185,422 3,691,530,304 1,576,230
--------------- --------------- ----------
Total Operating Ex-
penses............. 2,679,531,897 4,461,022,780 1,904,792
--------------- --------------- ----------
INCOME FROM OPERATIONS.. 3,145,836,109 2,561,444,972 1,093,700
--------------- --------------- ----------
OTHER INCOME (CHARGES)
Interest income....... 217,948,600 210,978,524 90,085
Gain on disposals of
property and equip-
ment--net............ 2 -- 21,622,223 9,232
Interest expense...... (2,734,841,059) (2,305,644,318) (984,477)
Loss on foreign ex-
change--net.......... 2 (323,929,360) (166,717,433) (71,186)
Miscellaneous--net.... (242,635,602) (908,176,244) (387,778)
--------------- --------------- ----------
Others Charges--Net... (3,083,457,421) (3,147,937,248) (1,344,124)
--------------- --------------- ----------
INCOME (LOSS) BEFORE
MINORITY INTEREST IN
NET INCOME OF
CONSOLIDATED
SUBSIDIARY............. 62,378,688 (586,492,276) (250,424)
MINORITY INTEREST IN NET
INCOME OF CONSOLIDATED
SUBSIDIARY............. 2 -- (429,510,894) (183,395)
--------------- --------------- ----------
NET INCOME (LOSS)....... 62,378,688 (1,016,003,170) (433,819)
DEFICIT AT BEGINNING OF
PERIOD................. (10,062,739,203) (18,308,860,033) (7,817,617)
--------------- --------------- ----------
DEFICIT AT END OF PERI-
OD..................... (10,000,360,515) (19,324,863,203) (8,251,436)
=============== =============== ==========
</TABLE>
- --------
* Statement of Income and Deficit for the six months ended June 30, 1995 is
not consolidated since Mobisel, a subsidiary, has no legal existence yet as
of that date.
See accompanying Notes to Consolidated Financial Statementswhich are an
integral part of the consolidated financial statements.
F-60
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(WITH COMPARATIVE FIGURES FOR THE SIX MONTHS ENDED JUNE 30, 1995)
<TABLE>
<CAPTION>
JUNE 30, 1995 * JUNE 30, 1996
--------------- -------------------------------
RP RP U.S.$ (NOTE 3)
--------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss)............ 62,378,688 (1,016,003,170) (433,819)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation............... 510,744,403 2,746,326,043 1,172,641
Provision for doubtful
accounts.................. (7,583,329) 683,751,662 291,952
Minority interest in net
income of consolidated
subsidiary................ -- 429,510,894 183,395
Amortization of deferred
charges................... -- 107,941,840 46,090
Amortization of
preoperating expenses..... -- 7,249,998 3,096
Gain on disposals of
property and equipment.... (48,279,931) (21,622,223) (9,232)
Change in assets and
liabilities:
Accounts receivable...... 463,985,758 (3,442,159,299) (1,469,752)
Inventories.............. 528,633,605 675,528,233 288,441
Prepaid taxes............ 310,202,783 252,630,955 107,870
Prepaid expenses......... 18,422,334 (6,639,675,050) (2,835,045)
Advances................. -- (8,508,746,039) (3,633,111)
Refundable deposits...... -- (509,665,259) (217,620)
Pledged cash and
deposits................ 1,084,193,204 -- --
Accounts payable......... (2,360,732,111) (1,752,963,906) (748,490)
Taxes payable............ (87,126,063) 100,615,010 42,961
Accrued expenses......... 4,424,994,458 (155,117,138) (66,233)
--------------- --------------- ----------
Net Cash Provided by (Used
in) Operating Activities.... 4,899,833,799 (17,042,397,449) (7,276,856)
--------------- --------------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from disposals of
property and equipment...... 108,097,212 63,861,024 27,268
Acquisitions of property and
equipment................... (222,240,076) (8,861,190,273) (3,783,600)
Addition in preoperating
expenses.................... -- (3,000,000) (1,281)
Addition in deferred
charges..................... (54,393,821) -- --
--------------- --------------- ----------
Net Cash Used in Investing
Activities.................. (168,536,685) (8,800,329,249) (3,757,613)
--------------- --------------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (decrease) in long-
term debts.................. (18,895,370,848) 54,657,258,789 23,337,856
Increase in due to
stockholders................ -- 5,040,343,624 2,152,154
Increase (decrease) in short-
term loan................... 15,021,139,212 (366,558) (157)
--------------- --------------- ----------
Net Cash Provided by (Used
in) Financing Activities.... (3,874,231,636) 59,697,235,855 25,489,853
--------------- --------------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS................. 857,065,478 33,854,509,157 14,455,384
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD......... 775,147,011 5,543,708,243 2,367,083
--------------- --------------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD............... 1,632,212,489 39,398,217,400 16,822,467
=============== =============== ==========
</TABLE>
- --------
* Statement of Cash Flows for the six months ended June 30, 1995 is not
consolidated since Mobisel, a subsidiary, has no legal existence yet as of
that date.
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-61
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PT Rajasa Hazanah Perkasa (the Company) was established on December 17, 1984
based on notarial deed No. 22 of Pariwondo Soekarno SH. The deed of
establishment was approved by the Ministry of Justice (MOJ) in its decision
letter No. C2-2666-HT.01.01.TH'85 dated May 8, 1985, registered at the South
Jakarta Court of Justice under No. 503/Not/1985/PN.JKT.SEL on July 24, 1985
and was published in the State Gazette No. 82, Supplement No. 1199 dated
October 14, 1986. The Company's articles of association have been amended from
time to time, most recently by notarial deed No. 41 of Sinta Susikto SH dated
November 9, 1995.
According to Article No. 2 of the Company's articles of association, the
Company is engaged in various business activities.
The Company changed its status to foreign capital investment based on the
approval of Investment Coordinating Board No. 22/V/PMA/1995 dated May 26, 1995
and No. 1226/A.6/1995 dated September 28, 1995.
On November 30, 1995, as covered by notarial deed No. 210 dated November 30,
1995 of Sinta Susikto SH, the Company, PT Telekomunikasi Indonesia (Telkom)
and Yayasan Dana Pensiun Pegawai Telkom (YDPP Telkom) established a joint
venture company named PT Mobile Selular Indonesia (Mobisel). In accordance
with the joint venture agreement, the Company transferred network assets to
Mobisel as capital contribution.
Under existing regulation, Mobisel can only operate upon the approval of its
articles of associations by MOJ. As such, the following arrangements and
conditions are adopted with respect to the transfer and assumption of the
operations of, and recognition and sharing of revenues being generated from,
the above-mentioned assets transferred to Mobisel:
a. The operations of the network assets will be transferred to and assumed
by Mobisel effective on the 20th day of the month of approval of its
articles of association by MOJ, with the condition that if the approval
is made exactly on the 20th day of the said month, then the transfer
shall be effective on that date.
b. Revenues generated from the operations of the transferred assets can
only be recognized by Mobisel starting from the effectivity date of the
transfer being referred to in point (a). Prior to the said date, all
revenues generated are recognized by the Company.
c. The revenue sharing agreement between Telkom and the Company covering
the transferred assets is still valid as long as the condition in point
(a) is not yet fulfilled.
Mobisel's deed of establishment was approved by MOJ in its decision letter
No. C2-1238.HT.01.01-TH'96 dated January 31, 1996. Accordingly, the Company is
still entitled to the pulse sharing revenue until February 20, 1996.
As of December 31, 1995, the Company recorded the network assets transferred
as a capital contribution to Mobisel as "Advance for Investment in Shares of
Stock".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidated Financial Statements
The consolidated financial statements have been prepared on the historical
cost basis of accounting, except for inventory which are valued at the lower
of cost or net realizable value (market).
Principles of Consolidation
The consolidated financial statements for June 30, 1996 include the accounts
of the Company and its 70% owned subsidiary, PT Mobile Selular Indonesia
(Mobisel). The December 31, 1995 and June 30, 1995 accounts do not include
Mobisel's accounts since it was legally established on January 31, 1996.
F-62
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents
Time deposits and other short-term investments with maturities of three
months or less at the time of placement or purchase are considered as "Cash
Equivalents".
Allowance for Doubtful Accounts
The Company and its Subsidiary provide allowance for doubtful accounts based
on a review of the status of the individual receivable accounts at the end of
the period.
Inventories
Inventories are stated at the lower of cost or net realizable value
(market). Cost is determined by the first-in, first-out method. The Company
provides an allowance for obsolescence on inventories based on a periodic
review of their conditions.
Transactions with Related Parties
The Company and its Subsidiary have transactions with entities which are
regarded as having special relationship as defined under Statement of
Financial Accounting Standards No. 7, "Related Party Disclosures".
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. The
Company and its Subsidiary use double-declining balance method and straight-
line method, respectively, for computing the depreciation, based on the
estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
COMPANY YEARS
------- -----
<S> <C>
Vehicles............................................................ 2
Furniture and fixtures.............................................. 2-4
Building improvements............................................... 2
Computer equipment.................................................. 2
Cellular mobile telephones.......................................... 4
Machinery and equipment............................................. 4
<CAPTION>
SUBSIDIARY YEARS
---------- -----
<S> <C>
Vehicles............................................................ 4
Furniture and fixtures.............................................. 4
Telecommunication network:
Radio base station equipment...................................... 7
Switching equipment............................................... 7
Test and miscellaneous equipment.................................. 7
Real estate and civil works....................................... 7
Network miscellaneous equipment................................... 7
</TABLE>
Telecommunication network represents capitalized system costs for the
development of the Subsidiary's cellular mobile telephone systems. This
includes the costs of the construction, direct labor cost spent on the
construction, and interest on loans used to finance the construction.
Capitalization of interest ceases when the construction is completed and ready
for its intended use.
Construction in progress is stated at cost. The accumulated costs will be
reclassified to the appropriate property and equipment accounts when the
construction is completed and ready for its intended use.
F-63
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. When assets are retired
or otherwise disposed of, their costs and the related accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
income for the period.
Prepaid Expenses
Prepaid expenses are amortized over the periods benefited using the
straight-line method. Prepaid rent expenses which benefited more than one year
is classified in "Other Assets".
Deferred Charges
Certain expenditures of which the benefits extend over one year are deferred
and amortized over their estimated useful lives using the straight-line
method.
Preoperating Expenses
Preoperating expenses are amortized over three years up to 1998, in
accordance with the Statement of Financial Accounting Standards No. 6,
"Accounting and Reporting for a Development Stage Company".
Revenue and Expense Recognition
Revenue is recorded as earned when products are delivered to the customers
or when services are rendered. Expenses are recognized when these are
incurred.
Revenue is obtained from three primary sources:
--connection charge for each new line sold
--pulse-sharing
--sales, repair, maintenance and rental of outstations and accessories
Foreign Currency Transactions and Balances
Transactions involving foreign currencies are recorded at the rates of
exchange prevailing at the time the transactions are made. At the balance
sheet date, assets and liabilities denominated in foreign currencies are
adjusted to reflect the middle rate of Bank Indonesia prevailing at such date
and the resulting gains or losses are credited or charged to operations of the
current period.
Provision for Income Tax
Provision for income tax is determined on the basis of estimated taxable
income for the year. No deferred tax is provided for the timing differences in
the recognition of income and expenses in the financial statements for
financial reporting and income tax purposes.
3. TRANSLATIONS OF INDONESIAN RUPIAH AMOUNTS INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Indonesian rupiah. The translations
of the Indonesian rupiah amounts into United States dollars are included
solely for the convenience of the readers, using the average buying and
selling rates published by Bank Indonesia (Central Bank) on June 30, 1996 of
Rp 2,342 to U.S.$ 1. The convenience translations should not be construed as
representations that the Indonesian rupiah amounts have been, could have been,
or could in the future be, converted into United States dollars at this or any
other rate of exchange.
F-64
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 1995 and June 30, 1996 consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
Cash on hand............................ Rp 22,438,597 Rp 42,683,016
Cash in banks........................... 830,916,549 4,149,437,337
Cash equivalents Time deposits, with an-
nual interest at 4.5%--6.06%........... 4,690,353,097 35,206,097,047
--------------- ----------------
Total................................... Rp5,543,708,243 Rp39,398,217,400
=============== ================
</TABLE>
A portion of cash and cash equivalents amounting to Rp 4,740,770,937 and Rp
4,818,873,911 as of December 31, 1995 and June 30, 1996, respectively, are
used as collateral for the short-term loans and long-term debts (see Notes 8
and 12).
5. ACCOUNTS RECEIVABLE--TRADE
The details of this account are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ---------------
<S> <C> <C>
Pulse revenue receivables................. Rp2,579,752,929 Rp5,648,164,424
Outstation receivables.................... 606,278,414 601,285,241
--------------- ---------------
Total..................................... 3,186,031,343 6,249,449,665
Less allowance for doubtful accounts...... 568,483,998 1,252,235,660
--------------- ---------------
Net....................................... Rp2,617,547,345 Rp4,997,214,005
=============== ===============
</TABLE>
Trade receivables are used as collateral for short-term loans and long-term
debts (see Notes 8 and 12).
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ---------------
<S> <C> <C>
Cellular mobile telephones................ Rp5,009,533,582 Rp4,322,999,657
Optional equipment........................ 2,286,941,570 2,298,947,262
Mobile telephones in transit.............. 25,211,819 25,211,819
--------------- ---------------
Total..................................... 7,321,686,971 6,647,158,738
Less allowance for obsolescence........... 3,858,732,612 3,858,732,612
--------------- ---------------
Net....................................... Rp3,462,954,359 Rp2,788,426,126
=============== ===============
</TABLE>
Certain inventories are used as collateral for certain short-term loans (see
Note 8).
Allowance for inventory obsolescence is made for non-moving inventory of old
and out-modelled mobile telephone equipment.
F-65
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1996 consist of the following:
<TABLE>
<CAPTION>
BEGINNING
BALANCE
----------------------------
ENDING
COMPANY MOBISEL ADDITIONS DISPOSALS BALANCE
------------- -------------- ------------- ----------- --------------
RP RP RP RP RP
<S> <C> <C> <C> <C> <C>
COST
Vehicles................ 2,174,917,480 306,500,000 755,200,000 272,600,000 2,964,017,480
Furniture and fixtures.. 400,832,057 251,235,224 175,334,106 -- 827,401,387
Building improvements... 474,708,473 -- -- -- 474,708,473
Computer equipment...... 480,101,200 -- 115,653,950 -- 595,755,150
Cellular mobile
telephones............. 179,637,111 -- -- 1,950,000 177,687,111
Machinery and
equipment.............. 204,986,126 -- -- -- 204,986,126
RBS equipment........... -- 25,081,160,980 -- -- 25,081,160,980
Switching equipment..... -- 9,306,319,059 -- -- 9,306,319,059
Microwave equipment..... -- 3,807,752,324 -- -- 3,807,752,324
Test and miscellaneous
equipment.............. -- 3,571,581,875 -- -- 3,571,581,875
Network miscellaneous
equipment.............. -- 2,442,286,271 -- -- 2,442,286,271
Real estate and civil
works.................. -- 2,035,473,416 14,037,181 -- 2,049,510,597
Construction in
progress............... -- 390,284,947 7,800,965,036 -- 8,191,249,983
------------- -------------- ------------- ----------- --------------
Total................... 3,915,182,447 47,192,594,096 8,861,190,273 274,550,000 59,694,416,816
------------- -------------- ------------- ----------- --------------
ACCUMULATED DEPRECIATION
Vehicles................ 1,477,499,663 19,156,251 230,642,379 230,361,199 1,496,937,094
Furniture and fixtures.. 277,518,817 17,631,579 44,369,055 -- 339,519,451
Building improvements... 314,682,123 -- 20,003,294 -- 334,685,417
Computer equipment...... 227,617,819 -- 65,534,561 -- 293,152,380
Cellular mobile
telephones............. 41,576,179 -- 1,334,603 950,000 41,960,782
Machinery and
equipment.............. 115,909,065 -- 11,134,638 -- 127,043,703
RBS equipment........... -- -- 1,286,794,099 -- 1,286,794,099
Switching equipment..... -- -- 477,462,605 -- 477,462,605
Microwave equipment..... -- -- 195,357,513 -- 195,357,513
Test and miscellaneous
equipment.............. -- -- 183,240,738 -- 183,240,738
Network miscellaneous
equipment.............. -- -- 125,301,997 -- 125,301,997
Real estate and civil
works.................. -- -- 105,150,561 -- 105,150,561
------------- -------------- ------------- ----------- --------------
Total................... 2,454,803,666 36,787,830 2,746,326,043 231,311,199 5,006,606,340
------------- -------------- ------------- ----------- --------------
Net Book Value.......... 1,460,378,781 47,155,806,266 54,687,810,476
============= ============== ==============
</TABLE>
Depreciation charged to operations amounted to Rp 510,744,403 for the six
months period ended June 30, 1995 and Rp 2,746,326,043 for the six months
period ended June 30, 1996. The Company's property and equipment are used as
collateral to the short-term loans and long-term debts (see Notes 8 and 12).
F-66
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. SHORT-TERM LOANS
This account represents loans obtained from the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ---------------
<S> <C> <C>
PT Bank Utama.............................. Rp9,475,000,000 Rp9,475,000,000
PT Lippobank............................... 366,558 --
--------------- ---------------
Total...................................... Rp9,475,366,558 Rp9,475.000.000
=============== ===============
</TABLE>
The credit facility obtained from PT Bank Utama bears annual interest
ranging from 20% to 24%. The loan is collateralized with certain cash,
receivables, inventories, property and equipment, and corporate guarantee from
PT Bina Reksa Perdana, a stockholder, and certain property and equipment of
affiliates.
9. ACCOUNTS PAYABLE--TRADE
This account represents liabilities to:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ---------------
<S> <C> <C>
Nokia Telecommunications Oy................ Rp -- Rp2,265,628,902
Ericsson Radio System AB................... -- 2,093,452,328
PT Indosat (Persero)....................... -- 806,964,837
SEMA Group Consulting Ltd.................. -- 702,600,000
PT Alvarid Mas............................. -- 376,668,544
EDS Management Consulting.................. -- 141,875,000
Others (below Rp 100 million each)......... 564,424,841 482,756,618
------------- ---------------
Total...................................... Rp564,424,841 Rp6,869,946,229
============= ===============
</TABLE>
10. ACCOUNTS PAYABLE--OTHERS
As of December 31, 1995, this account mainly represents due to former
stockholder and PT Telekomunikasi Indonesia (Telkom) amounting to Rp 6,145
million and Rp 6,610 million, respectively. The amount due to Telkom
represents the difference between the agreed price of the network assets
transferred to Mobisel and Telkom's share of the capital contribution in
Mobisel. As of June 30, 1996, a portion of the above liabilities have been
settled.
11. TAXES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ---------------
<S> <C> <C>
Estimated income tax payable (less tax
prepayment of
Rp 97,784,316 in 1995)................... Rp4,075,702,684 Rp --
Income tax Article 21..................... 268,692,322 300,101,040
Article 23................................ 357,878,479 434,554,786
Article 25................................ 43,107,840 4,072,473,731
Article 26................................ 174,618,857 213,485,635
--------------- ---------------
Total..................................... Rp4,920,000,182 Rp5,020,615,192
=============== ===============
</TABLE>
No provision for income tax for the six months period ended June 30, 1996
since the Company and its Subsidiary are in a fiscal loss position.
F-67
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income tax and computation of the estimated corporate
income tax payable for the year ended December 31,1995 are as follows:
<TABLE>
<S> <C>
Estimated taxable income (rounded-off)..................... Rp13,940,790,000
----------------
Provision for income tax................................... 4,173,487,000
----------------
Prepayments of income tax Article 22....................... 52,898,433
Article 23............................................... 1,350,000
Article 25............................................... 43,535,883
----------------
97,784,316
----------------
Estimated corporate income tax payable..................... 4,075,702,684
================
</TABLE>
12. LONG-TERM DEBTS
This account represents long-term debts with details as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
Rupiah PT Bank Indonesia Raya Rp1,718,555,179 Rp 1,718,555,179
PT Bank Tamara.......................... 676,853,686 --
PT Lippobank............................ 243,565,458 --
Others (below Rp 100 million each)...... 211,173,942 165,853,351
U.S. Dollar Nissho Iwai International
Pte. Ltd., Singapore................... -- 58,550,000,000
Svenska Handelsbanken, Singapore........ -- 5,152,170,528
--------------- ----------------
2,850,148,265 65,586,579,058
Less current maturities................. 2,714,491,758 4,747,385,517
--------------- ----------------
Long-term portion....................... Rp 135,656,507 Rp60,839,193,541
=============== ================
</TABLE>
On March 12, 1996, Mobisel obtained a loan from Nissho Iwai International
(Singapore) Pte. Ltd. (Nissho Iwai) with a maximum facility amounting to U.S.$
60,000,000 to finance the construction and implementation of the NMT-450
Network in Bandar Lampung in Sumatra, Java, Bali and Lombok. The loan, which
term is five years and inclusive of a two years grace period on principal
payment, is repayable in six equal semi-annual installments. Proceeds from
collections of Mobisel's receivables are deposited directly into escrow
accounts maintain with certain banks as chosen and agreed-upon by both
parties.
The above loans are collateralized with 3,000 lines cellular telephone
network, cash and cash equivalents, receivables, and property and equipment of
the Company and Subsidiary and property and equipment of an affiliate,
corporate guarantee from the Company and shares of Mobisel. The Rupiah loans
bear interest at rates ranging from 20% to 23% per annum. The loan from
Svenska Handelsbanken, Singapore bears interest at 0.55% above one month
SIBOR, while the loan from Nissho Iwai bears interest at an annual rate of
2.5% above LIBOR.
Certain loan agreements contain terms and conditions restricting the Company
and Subsidiary from, such as, without prior consent from the lenders, taking
additional loans, entering into any investment, merger, consolidation,
reorganization and changing ownership. In addition, the Company has to
maintain certain financial ratios.
F-68
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. CAPITAL STOCK
The stockholders and their respective stockholdings as of June 30, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT
------------ ---------------- -------------- ----------------
<S> <C> <C> <C>
PT Bina Reksa Perdana........ 12,500 50% Rp12,500,000,000
International Wireless Commu-
nications, Inc.............. 6,250 25 6,250,000,000
PT Deltona Satya Dinamika.... 6,250 25 6,250,000,000
------ --- ----------------
Total........................ 25,000 100% Rp25,000,000,000
====== === ================
</TABLE>
14. REVENUES
The details of revenues are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
--------------- ----------------
<S> <C> <C>
Pulse sharing Rp4,520,566,279 Rp10,605,884,008
Sales of outstations..................... 2,761,705,440 378,801,952
Connecting charges....................... 126,500,000 367,200,000
Repair, maintenance and others........... 305,514,655 106,445,102
--------------- ----------------
Total.................................... Rp7,714,286,374 Rp11,458,331,062
=============== ================
</TABLE>
15. COST OF REVENUES
The details of cost of revenues are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
--------------- ---------------
<S> <C> <C>
Pulse sharing Rp360,773,061 Rp3,725,588,682
Cost of outstations....................... 1,368,873,578 700,137,165
Repair, maintenance and others............ 159,271,729 10,137,463
--------------- ---------------
Total..................................... Rp1,888,918,368 Rp4,435,863,310
=============== ===============
</TABLE>
16. CONTINGENT LIABILITY
The Company is in a dispute with PT Larikerindo relating to the settlement
of loan. On August 9, 1994, the court dismissed the claims against the
Company. However, PT Larikerindo filed an appeal concerning the court
decision. On December 29, 1995, the higher court again dismissed the claims.
F-69
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
17. CONSULTANCY AGREEMENTS
Mobisel had agreements with several parties in connection with the
installation and development of infrastructure of the STKB-C (Cellular mobile
telephone network) project. The agreements, made prior to the approval of
Mobisel's articles of association by MOJ, were entered into by the Company on
behalf of Mobisel. These agreements are as follows:
a. Consultancy service agreements with Telecon Ltd. (Telecon), Finland,
whereby Telecon agreed to provide a technical expert to work in Jakarta as
a technical manager for a period of 24 months starting from May 1995. The
expert shall work as a member management and shall, as an advisor, be
responsible for the further network build-up and for the operative
technical functions. The expert may also, on request, advise management on
business related issues.
b. Another consultancy agreement service with Telecon whereby Telecon
agreed to provide an expert to work in Jakarta as an installation
supervisor and testing and commissioning consultant for the RS 4000 Radio
Base Station equipment in the Final Fix project. The work started in
October 1995 and has a duration of three months.
c. Consultancy agreement with Broadcast Communications Limited (BCL), New
Zealand, whereby BCL agreed to send one expert to work in Jakarta as a
project manager for the Final Fix project. The work started in October 1995
and has a duration of three months.
d. Supply contract and service contract with Nokia Telecommunications Oy,
Finland, amounted U.S.$ 19.3 million and Nokia Telecommunications Pte.
Ltd., Singapore, amounted U.S.$ 4.37 million, respectively, in connection
with NMT-470 Network Expansion and Transmission System in order to provide
new network coverage for NMT mobile telephone system. These contracts were
made on January 19, 1996 and an advance payment amounted to U.S.$ 3.34
million has been made and recorded under "Advances" in the consolidated
balance sheet.
e. Billing process service agreement with Telkom whereby Telkom will
provide billing process, interconnection data, claim and detail of billing
process. As compensation, Mobisel is charged Rp 3,720 per station per month
(excluding 10% VAT). The agreement will mature on February 19, 1997.
f. Service agreement with Telkom whereby Telkom will provide billing
collection service to Mobisel. As compensation, Mobisel will pay 1% of its
revenue to Telkom. The agreement will mature on March 31, 1997.
All consultancy fees related to the installation and development of
infrastructure of STKB-C are capitalized and recorded under "Property and
Equipment" in the consolidated balance sheet.
18. OTHER
All transactions and agreements made prior to the approval of Mobisel's
articles of association by MOJ were entered into by the Company on behalf of
the Mobisel.
F-70
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
19. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED
BY THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with Indonesian
GAAP which differ in certain aspects from U.S. GAAP.
The differences are reflected in the approximations provided in Note 20 and
arise due to the items discussed in the following paragraphs:
a. INCOME TAXES
Under Indonesian GAAP, it is acceptable to recognize Income Tax expense
based upon the estimated current Income Tax liability on the current year's
earnings. When income and expense recognition for Income Tax purposes does
not occur in the same year as income and expense recognition for financial
reporting purposes, the resulting temporary differences are not considered
in the computation of Income Tax expense for the year.
Under U.S. GAAP, the liability method is used to calculate the Income Tax
provision. Under the liability method, deferred tax assets or liabilities
are recognized for differences between the financial reporting and tax
bases of assets and liabilities at each reporting date.
b. REGULATION
The Company provides telephone service in Indonesia and therefore is
subject to the regulatory control of the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia. Rates for services are
tariff-regulated. Although changes in rates for services are authorized and
computed based on a decree issued by the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia, these are not based on a
fixed rate of return and are not designed to provide for the recovery of
the Company's cost of services. Accordingly, the requirements of U.S. GAAP
related to a business whose rates are regulated on the basis of its actual
costs are not applicable to the Companies' financial statements.
c. PRESENTATION OF THE STATEMENTS OF STOCKHOLDERS' EQUITY
Under Indonesian GAAP, except for public companies, it is not required to
present statements of retained earnings. Under U.S. GAAP, the Companies are
required to present statements of stockholders' equity.
F-71
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
20. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED
UNDER INDONESIAN AND U.S. GAAP
The following is a summary of the significant adjustments to net income for
the six months period ended June 30, 1996 and 1995 and to stockholders' equity
as of June 30, 1996 and 1995 which would be required if U.S. GAAP had been
applied instead of Indonesian GAAP in the financial statements:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
--------------- ------------------------------
RP RP U.S.$ (NOTE 3)
--------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) according to
the consolidated financial
statements prepared under
Indonesian GAAP.............. 62,378,688 (1,016,003,170) (433,819)
U.S. GAAP adjustment due to
Income Tax (A)............... (128,272,721) (233,642,918) (99,762)
Valuation allowance........... 128,272,721 147,618,925 63,031
--------------- -------------- ----------
Approximate net loss in accor-
dance with U.S. GAAP......... 62,378,688 (1,102,027,163) (470,550)
--------------- -------------- ----------
Stockholders' equity (deficit)
according to the financial
statements prepared under
Indonesian GAAP.............. (13,871,185,815) 5,675,136,797 2,423,201
U.S. GAAP adjustment due to
Income Tax................... 753,711,334 4,795,615,137 2,047,658
Valuation Allowance........... (753,711,334) (4,881,639,129) (2,084,389)
--------------- -------------- ----------
Approximate stockholders' eq-
uity (deficit) in accordance
with U.S. GAAP............... (13,871,185,815) 5,589,112,805 2,386,470
=============== ============== ==========
</TABLE>
With regard to the consolidated balance sheet and statement of income, the
following significant captions determined under U.S. GAAP would have been:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ------------------------------
RP RP U.S.$ (NOTE 3)
----------------- --------------- --------------
<S> <C> <C> <C>
Balance sheet:
Current assets............... 12,270,504,214 59,646,533,193 25,468,204
Total assets................. 61,512,948,397 118,791,253,375 50,722,141
Current liabilities.......... 40,380,349,030 32,647,918,320 13,940,187
Total liabilities............ 54,821,808,430 113,202,140,570 48,335,671
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
----------------- ------------------------------
RP RP U.S.$ (NOTE 3)
----------------- --------------- --------------
<S> <C> <C> <C>
Statement of income:
Operating income............. 3,145,836,109 2,561,444,972 1,093,700
</TABLE>
- --------
(A) Reflects the tax effect solely due to the difference in accounting for
taxes under U.S. and Indonesian GAAP.
F-72
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
21. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP
The following information is presented on the basis of U.S. GAAP:
Income Tax
The tax effect on significant temporary differences is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------- ------------------------------
RP RP U.S.$ (NOTE 3)
------------- -------------- --------------
<S> <C> <C> <C>
Deferred tax assets--cur-
rent........................ 416,775,275 1,533,290,482 654,693
Allowance for deferred tax
assets--current............. (416,775,275) (1,533,290,482) (654,693)
Deferred tax assets--non-cur-
rent........................ 336,936,059 3,348,348,647 1,429,696
Allowance for deferred tax
asset-noncurrent............ (336,936,059) (3,348,348,647) (1,429,696)
Deferred tax liabilities--
non-current................. -- (86,023,992) (36,731)
------------ -------------- ----------
Total deferred tax--net...... -- (86,023,992) (36,731)
============ ============== ==========
</TABLE>
The temporary differences, on which deferred tax assets have been computed
are not deductible for income tax purposes until the provision for inventory
obsolescence and provision for uncollectible trade receivable are written-off.
The differences between the book and tax bases of gain on disposal of network
assets, property and equipment, and network assets are due to the differing
recognition methods for Income Tax and financial reporting purposes.
The Income Tax provision reported under U.S. GAAP differs from the expected
provision due to certain permanent differences which are detailed below:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------- ------------------------------
RP RP U.S.$ (NOTE 3)
------------- -------------- --------------
<S> <C> <C> <C>
Approximate income (loss)
before Income Tax in
accordance with U.S. GAAP..... 62,378,688 (1,016,003,170) (433,819)
Effect of permanent
differences:
Entertainment and donation..... 17,418,873 7,439
Interest expense............... 72,825,199 31,095
Interest income which was
already subjected to final
tax........................... (210,978,524) (90,085)
Others......................... (54,795,359) -- --
------------ -------------- --------
Approximate income (loss)
before Income Tax in
accordance with U.S. GAAP..... 7,583,329 (1,136,737,622) (485,370)
------------ -------------- --------
Expected provision for income
tax on taxable income in
accordance with U.S. GAAP..... 2,274,999 (349,771,100) (149,347)
Adjustment for enacted changes
in tax rates.................. 125,997,722 -- --
Decreases in valuation
allowance..................... (128,272,721) (147,618,925) (63,031)
------------ -------------- --------
Provision for income tax on
taxable income in accordance
with U.S. GAAP................ -- (497,390,025) (212,378)
============ ============== ========
</TABLE>
22. RECLASSIFICATIONS OF ACCOUNTS
Certain accounts in June 30, 1995 financial statements have been
reclassified to conform with the presentation of accounts in the June 30, 1996
financial statements.
F-73
<PAGE>
ATTACHMENT I
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(WITH COMPARATIVE FIGURES FOR THE SIX MONTHS ENDED JUNE 30, 1995)
<TABLE>
<CAPTION>
CAPITAL STOCK RECEIVABLES FROM STOCKHOLDERS'
(ISSUED AND FULLY PAID) STOCKHOLDERS DEFICIT EQUITY
----------------------- ---------------- --------------- ---------------
DESCRIPTION RP RP RP RP
- ----------- ----------------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance as of January 1,
1996................... 25,000,000,000 -- (18,308,860,033) 6,691,139,967
Net loss for the peri-
od..................... -- -- (1,016,003,170) (1,016,003,170)
-------------- -------------- --------------- ---------------
Balance as of June 30,
1996................... 25,000,000,000 -- (19,324,863,203) 5,675,136,797
-------------- -------------- --------------- ---------------
Balance as of January 1,
1995................... 1,000,000,000 (4,041,764,800) (10,062,739,203) (13,104,504,003)
Addition in receivables
from stockholders...... -- (829,060,500) -- (829,060,500)
Net income for the peri-
od..................... -- -- 62,378,688 62,378,688
-------------- -------------- --------------- ---------------
Balance as of June 30,
1995................... 1,000,000,000 (4,870,825,300) (10,000,360,515) (13,871,185,815)
============== ============== =============== ===============
</TABLE>
F-74
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-75
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
FINANCIAL STATEMENTS
FOR US REPORTING
THREE YEARS ENDED 31 DECEMBER 1995
F-76
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Syarikat Telefon Wireless (M) Sdn Bhd
We have audited the consolidated balance sheets of Syarikat Telefon Wireless
(M) Sdn Bhd ("STW") as at 31 December 1994 and 1995 and the related
consolidated profit and loss accounts, statements of shareholders equity and
cashflow statements for the three years ended 31 December 1995 together with
the notes, set out on pages F-78 to F-88. These Consolidated Financial
Statements are the responsibility of STW's management. Our responsibility is
to express an opinion on these Consolidated Financial Statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards in Malaysia which are essentially the same as United States
generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects the financial position of STW and
subsidiary as of 31 December 1994 and 1995, and of the results of their
operations and cash flows for each of the years in the three year-period ended
31 December 1995, in conformity with generally accepted accounting principles
in Malaysia.
Generally accepted accounting principles in Malaysia vary in certain
significant respects from generally accepted accounting principles in the
United States. Application of generally accepted accounting principles in the
United States would have affected stockholders' equity as of 31 December 1993,
1994 and 1995 and results of operations for each of the years in the three
year period ended 31 December 1995 to the extent summarized in Note 16 to the
Consolidated Financial Statements.
KPMG Peat Marwick
Public Accountants
Kuala Lumpur
Date: 17 July 1996
F-77
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED BALANCE SHEETS
AT 31 DECEMBER 1994 AND 31 DECEMBER 1995
<TABLE>
<CAPTION>
1994 1995
---------- ----------- U.S.$
RM RM (NOTE 2.8)
ASSETS ---------- ----------- ----------
<S> <C> <C> <C>
Current assets
Cash and cash equivalent (Note 3)....... 2,819,563 3,067,969 1,223,273
Trade debtors........................... 30,143 334,409 133,337
Other debtors (Note 4).................. 586,013 2,673,274 1,065,899
Deposits & prepayments.................. 125,246 471,918 188,165
---------- ----------- ----------
Total current assets.................. 3,560,965 6,547,570 2,610,674
Fixed assets, net of accumulated deprecia-
tion of RM666,631 (1994) and RM5,993,049
(1995) (Note 6) ......................... 29,046,193 80,383,813 32,050,962
License fee, net of accumulated
amortisation of RM15,000 (1994) and
RM30,000 (1995).......................... 285,000 270,000 107,656
Fixed deposit (Note 3).................... -- 1,000,000 398,724
---------- ----------- ----------
Total assets.......................... 32,892,158 88,201,383 35,168,016
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................ 333,977 531,499 211,921
Customers deposits...................... 34,800 233,471 93,091
Other creditors and accruals............ 495,417 257,381 102,624
Equipment supplier creditor............. -- 3,926,233 1,565,484
Consultancy fees payable................ 639,626 392,573 156,528
Provision for compensation to former
shareholder............................ -- 2,000,000 797,448
Term loan (secured) (Note 7)............ 679,292 -- --
Hire purchase creditors (Note 8)........ 30,810 108,398 43,221
Taxes payable........................... 27,000 43,550 17,364
---------- ----------- ----------
Total current liabilities............. 2,240,922 7,493,105 2,987,681
Term loan (secured) (Note 7).............. 5,566,206 54,639,164 21,785,951
Hire purchase creditors (Note 8).......... 81,171 349,477 139,345
Loans from shareholders................... 13,670,700 -- --
Shareholders' equity:
Common stock--RM1.00 par value, autho-
rized 50,000,000 shares; issued and
fully paid-up 16,280,000 (1994) and
46,418,000 (1995) shares (Note 9)...... 16,280,000 46,418,000 18,507,974
Revaluation reserve (Note 10)........... -- 2,971,432 1,184,782
Accumulated deficit..................... (4,946,841) (23,669,795) (9,437,717)
---------- ----------- ----------
Total shareholders' equity............ 11,333,159 25,719,637 10,255,039
---------- ----------- ----------
Total liabilities and shareholders'
equity............................... 32,892,158 88,201,383 35,168,016
========== =========== ==========
</TABLE>
The notes set out on pages F-82 to F-88 form an integral part of,
and should be read in conjunction with, these accounts.
F-78
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD. AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE THREE YEARS ENDED 31 DECEMBER 1995
<TABLE>
<CAPTION>
1993 1994 1995
------ ---------- ----------- U.S.$
RM RM RM (NOTE 2.8)
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue
Telecommunication revenues...... -- 43,240 934,808 372,730
Income from property rentals.... -- 191,258 944,485 376,589
------ ---------- ----------- ----------
Total revenue................. -- 234,498 1,879,293 749,319
Operating Expenses
Cost of telecommunication reve-
nues........................... -- 288,959 1,045,086 416,701
Depreciation.................... 4,592 662,039 5,669,938 2,260,741
General and administrative ex-
penses......................... 5,334 3,787,420 10,235,999 4,081,339
Preliminary & preoperating ex-
penses......................... -- 406,500 -- --
------ ---------- ----------- ----------
Total Operating Expenses...... 9,926 5,144,918 16,951,023 6,758,781
Operating loss.................... (9,926) (4,910,420) (15,071,730) (6,009,462)
Other income/(expense)
Provision for compensation to
former shareholder (Note 2).... -- -- (2,000,000) (797,448)
Interest income................. 3,452 102,923 27,466 10,952
Interest expense................ -- (105,117) (1,661,690) (662,556)
------ ---------- ----------- ----------
Net loss before income taxes...... (6,474) (4,912,614) (18,705,954) (7,458,514)
Income taxes (Note 14)............ (1,000) (26,753) (17,000) (6,778)
------ ---------- ----------- ----------
Net loss.......................... (7,474) (4,939,367) (18,722,954) 7,465,292
====== ========== =========== ==========
</TABLE>
The notes set out on pages F-82 to F-88 form an integral part of,
and should be read in conjunction with, these accounts.
F-79
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED 31 DECEMBER 1995
<TABLE>
<CAPTION>
ORDINARY SHARES REVALUATION
OF RM1 EACH DEFICIT RESERVE TOTAL
RM RM RM RM
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1993
Balance at 11 February
1993 (date of
incorporation)......... 3 -- -- 3
Ordinary shares issued.. 2,499,997 -- -- 2,499,997
Net loss for the period
ended 31 December
1993................... (7,474) -- (7,474)
---------- ----------- --------- -----------
Balance at 31 December
1993................... 2,500,000 (7,474) -- 2,492,526
1994
Ordinary shares issued.. 13,780,000 -- -- 13,780,000
Net loss for the year
ended 31 December
1994................... -- (4,939,367) -- (4,939,367)
---------- ----------- --------- -----------
Balance at 31 December
1994................... 16,280,000 (4,946,841) -- 11,331,159
1995
Ordinary shares issued.. 30,138,000 -- -- 30,138,000
Revaluation reserve..... -- -- 2,971,432 2,971,432
Net loss for the year
ended 31 December
1995................... -- (18,722,954) -- (18,722,954)
---------- ----------- --------- -----------
Balance at 31 December
1995................... 46,418,000 (23,669,795) 2,971,432 25,719,637
========== =========== ========= ===========
</TABLE>
The notes set out on pages F-82 to F-88 form an integral part of,
and should be read in conjunction with, these accounts.
F-80
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
CONSOLIDATED CASH FLOW STATEMENT
FOR THE THREE YEARS ENDED 31 DECEMBER 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- ----------- ----------- U.S.$
RM RM RM (NOTE 2.8)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING
ACTIVITIES
Net loss................... (7,474) (4,939,367) (18,722,954) (7,465,292)
Adjustments to reconcile
net loss to cash used in
operating activities
Depreciation............... 4,592 662,039 5,669,938 2,260,741
Loss on disposal of fixed
assets.................... -- -- 36,700 14,633
Provision for compensation
to former shareholder..... -- -- 2,000,000 797,448
Amortisation of license
fee....................... -- 15,000 15,000 5,981
Increase in trade and other
debtors................... (11,757) (604,399) (2,391,527) (953,560)
Increase in deposits and
prepayments............... -- (125,246) (346,672) (138,227)
Increase in license fee.... -- (300,000) -- --
Increase in equipment
supplier creditor......... -- -- 3,926,233 1,565,484
(Decrease)/increase in
other current
liabilities............... 76,439 1,454,381 (72,346) (28,846)
Increase in fixed
deposits.................. -- -- (1,000,000) (398,724)
Decrease/(increase) in
deferred expenses......... (404,000) 404,000 -- --
--------- ----------- ----------- -----------
Net cash used in operating
activities.................. (342,200) (3,433,592) (10,885,628) (4,340,362)
--------- ----------- ----------- -----------
CASHFLOWS FROM INVESTING
ACTIVITIES
Purchase of fixed assets... (30,615) (29,690,572) (54,169,326) (21,598,615)
Proceeds from disposal of
fixed assets.............. -- 8,363 96,500 38,477
--------- ----------- ----------- -----------
Net cash used in investing
activities................ (30,615) (29,682,209) (54,072,826) (21,560,138)
--------- ----------- ----------- -----------
CASHFLOWS FROM FINANCING
ACTIVITIES
Proceeds from term loan.... -- 6,245,498 54,639,164 21,785,950
Repayment of term loan..... -- -- (6,245,498) (2,490,230)
Loan (to)/from
shareholders.............. -- 13,670,700 (13,670,700) (5,450,837)
Proceeds from issue of
shares.................... 2,500,000 13,780,000 30,138,000 12,016,746
Increase in hire purchase.. 111,981 345,894 137,916
--------- ----------- ----------- -----------
Net cash from financing
activities................ 2,500,000 33,808,179 65,206,860 25,999,545
--------- ----------- ----------- -----------
Net increase in cash and cash
equivalents................. 2,127,185 692,378 248,406 99,045
Cash and cash equivalents at
beginning of year........... -- 2,127,185 2,819,563 1,124,228
--------- ----------- ----------- -----------
Cash and cash equivalents at
end of year.................. 2,127,185 2,819,563 3,067,969 1,223,273
========= =========== =========== ===========
Supplemental information:
(i) Cash paid for:
Interest................. -- 106,048 1,661,690 662,556
Income taxes............... -- 753 450 179
========= =========== =========== ===========
(ii) Supplemental schedules
on non-cash investing
activities:
Revaluation of fixed
assets.................... -- -- 2,971,432 1,184,781
========= =========== =========== ===========
</TABLE>
The notes set out on pages F-82 to F-88 form an integral part of,
and should be read in conjunction with, these accounts.
F-81
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS
1. PRINCIPAL ACTIVITIES
The principal activity of the Company is provision of telecommunication
services. The principal activities of the subsidiary is disclosed in Note 5.
These activities have remained unchanged during the period.
2. SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of Preparation
The accounts of the Company and its subsidiary have been prepared under the
historical cost convention modified to include the revaluation of certain
properties and in compliance with approved accounting standards.
2.2 Basis of Consolidation
The consolidated accounts incorporate the audited accounts of the Company
and its subsidiary made up to 31 December 1994 and 1995. The 1993 accounts
reflect the Company level only as the subsidiary was acquired in 1994.
Inter-company transactions are eliminated on consolidation and the
consolidated accounts reflect external transactions only.
2.3 Fixed Assets and Depreciation
Leasehold land and building will be amortised over the period of the lease.
Other fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight lines basis to
write off the cost of the assets over their expected useful lives.
The principal annual rates used are as follows:
<TABLE>
<CAPTION>
Leasehold land and building Over the period of the lease of 80 years
--------------------------- ----------------------------------------
<S> <C>
Furniture and fittings......... 15%
Office equipment............... 15%
Telecommunication network
equipment...................... 5%-15%
Plant and machinery............ 20%
Motor vehicles................. 20%
Renovation..................... 15%
</TABLE>
2.4 Deferred Taxation
Provision for deferred taxation is made on the liability method for all
timing differences except where no liability is expected to arise in the
foreseeable future. Deferred tax benefits are only recognised when there is a
reasonable expectation of realisation in the near future.
2.5 Foreign Currency
Assets and liabilities in foreign currencies are translated into Ringgit
Malaysia at rates of exchange ruling at the balance sheet date and items in
the profit and loss account are converted at rates ruling on the transaction
dates. Exchange differences are dealt within the profit and loss account.
There were no significant exchange differences during the three years ended 31
December 1995.
F-82
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
2.6 Leases
Fixed assets acquired under finance leases are capitalized in the accounts
and the corresponding obligation treated as a liability. Finance charges are
allocated to the profit and loss account over the lease periods to give a
constant periodic rate of interest on the remaining lease liabilities.
2.7 Compensation to Former Shareholder
The provision for compensation to a former shareholder resulted from a claim
by a former shareholder for RM 2.093 million which the Company settled. The
provision has been included in other expense on the accompanying consolidated
profit and loss accounts as the amount was derived from an event that was
distinct from the ordinary activities of the Company.
2.8 Translations of Ringgit Malaysia Amounts Into United States Dollar
Amounts
The financial statements are stated in Ringgit Malaysia (RM). The
translations of the Ringgit Malaysia amounts into United States dollars are
included solely for the convenience of the readers, using the average exchange
rate for the twelve months ended December 31, 1995 of RM 2.5080 to U.S.$1. The
convenience translations should not be construed as representations that the
Ringgit Malaysia amounts have been, could have been, or could in the future
be, converted into United States dollars at this or any other rate of
exchange.
3. CASH AND CASH EQUIVALENTS AND DEPOSITS
<TABLE>
<CAPTION>
1994 1995
--------- ----------
RM RM
--------- ----------
<S> <C> <C>
Cash and bank balances.............................. 2,819,563 267,969
Deposits with licensed banks........................ -- 3,800,000
--------- ----------
2,819,563 4,067,969
Non-current deposits................................ -- (1,000,000)
--------- ----------
Cash and cash equivalents........................... 2,819,563 3,067,969
========= ==========
</TABLE>
Non-current deposits with licensed banks comprise RM 1,000,000 (1994--RM
Nil) pledged as security for a syndicated term loan granted to the Company.
4. OTHER DEBTORS
Included in other debtors is RM2,564,000 (1994-RM Nil) due from a director
of the Company.
5. SUBSIDIARY COMPANY
The subsidiary company, incorporated in Malaysia, is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
EQUITY HELD
---------------
NAME OF COMPANY PRINCIPAL ACTIVITIES 1993 1994 1995
--------------- -------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Segar Kasturi Sdn Bhd............ Investment in property -- 100% 100%
</TABLE>
The investment in the subsidiary was acquired in 1994.
F-83
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
6. FIXED ASSETS
<TABLE>
<CAPTION>
DEPRECIATION
COST/ ACCUMULATED NET BOOK CHARGE FOR
VALUATION DEPRECIATION VALUE THE YEAR
1994 RM RM RM RM
---- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Freehold land--at cost........ 104,755 -- 104,755 --
Leasehold land and building--
at cost....................... 12,408,788 155,110 12,253,678 155,110
Telecommunication network
equipment..................... 16,522,855 390,548 16,132,307 390,548
Renovation.................... 86,705 13,970 72,735 13,006
Furniture and fittings........ 70,851 11,503 59,348 10,388
Office equipment.............. 195,444 30,815 164,629 28,302
Motor vehicles................ 323,426 64,685 258,741 64,685
---------- ------- ---------- -------
29,712,824 666,631 29,046,193 662,039
========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
COST/ ACCUMULATED NET BOOK CHARGE FOR
VALUATION DEPRECIATION VALUE THE YEAR
1995 RM RM RM RM
---- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Freehold land--at cost........ 104,755 -- 104,755 --
Leasehold land and building--
at valuation.................. 15,070,000 -- 15,070,000 155,110
Telecommunication network
equipment..................... 67,358,973 5,273,497 62,085,476 4,882,949
Renovation.................... 1,582,727 251,379 1,331,348 237,409
Furniture and fittings........ 380,322 68,552 311,770 57,049
Office equipment.............. 771,929 146,605 625,324 115,790
Plant and machinery........... 302,270 60,454 241,816 60,454
Motor vehicles................ 805,886 192,562 613,324 161,177
---------- --------- ---------- ---------
86,376,862 5,993,049 80,383,813 5,669,938
========== ========= ========== =========
</TABLE>
During the year ended 31 December 1995, the leasehold land and building of a
subsidiary company was revalued by a firm of professional valuers on a fair
market value basis (refer note 10).
The leasehold land and building are charged to a financial institution as
security for a syndicated term loan granted to the Company (refer note 7).
Included under fixed assets are motor vehicles amounting to RM667,977
(1994--RM156,926) at cost which are acquired under hire purchase agreements.
7. TERM LOAN (SECURED)
<TABLE>
<CAPTION>
1994 1995
--------- ----------
RM RM
--------- ----------
<S> <C> <C>
Amount outstanding................................ 6,245,498 54,639,164
Less: Amount due and repayable and due within
twelve months.................................... (679,292) --
--------- ----------
5,566,206 54,639,164
========= ==========
</TABLE>
F-84
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
The term loan is secured by way of fixed and floating amounts of certain
assets of the Group including leasehold land and building and fixed deposits
with licensed bank and are jointly and severally guaranteed by certain
directors of the Company and a corporate guarantee from the holding company.
The loans are subject to interest at 2.5% above the base lending rates of the
participating financial institutions. The loans are repayable in eleven
installments, the first installment of which is due on 8 October 1997 and
subsequent installments due on six monthly intervals thereafter.
8. HIRE PURCHASE CREDITORS
<TABLE>
<CAPTION>
1994 1995
------- -------
RM RM
------- -------
<S> <C> <C>
Amount outstanding........................................ 147,450 603,361
Less: Unearned interest................................... 35,469 145,486
------- -------
111,981 457,875
======= =======
Amount due within twelve months........................... 30,810 108,398
Amount due after twelve months............................ 81,171 349,477
------- -------
111,981 457,875
======= =======
</TABLE>
9. SHARE CAPITAL
<TABLE>
<CAPTION>
1994 1995
---------- ----------
RM RM
---------- ----------
<S> <C> <C>
Authorized--Ordinary shares of RM1 each
At 1 January..................................... 5,000,000 50,000,000
Increase during the year......................... 45,000,000 --
---------- ----------
At 31 December................................... 50,000,000 50,000,000
========== ==========
Issued and fully paid--Ordinary shares of RM1 each
At 1 January..................................... 2,500,000 16,280,000
Add: Issue of ordinary shares at par............. 13,780,000 30,138,000
---------- ----------
At 31 December................................... 16,280,000 46,418,000
========== ==========
</TABLE>
10. REVALUATION RESERVE
In 1995, leasehold land and building were re-appraised to give a valuation
of RM15,070,000 based on open market value by an independent firm of
professional valuers. This revaluation was incorporated in the accounts at 31
December 1995.
11. LOANS FROM SHAREHOLDERS
<TABLE>
<CAPTION>
1994 1995
---------- ----------
RM RM
---------- ----------
<S> <C> <C>
Loan from holding company........................... 1,900,000 --
Loan from other shareholders........................ 11,770,000 --
---------- ----------
13,670,000 --
========== ==========
</TABLE>
The loans from shareholders are unsecured, interest free with no fixed term
for repayment.
F-85
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
12. HOLDING COMPANY
The holding company is Shubila Holdings Sdn. Bhd., a company incorporated in
Malaysia.
13. TURNOVER
Turnover comprises gross billings in the provision of telecommunication
services and rental of office block.
14. TAXATION
<TABLE>
<CAPTION>
1993 1994 1995
----- ------ ------
RM RM RM
----- ------ ------
<S> <C> <C> <C>
Current income tax provision........................ 1,000 27,000 17,000
Overprovision of income taxes in the prior years.... -- (247) --
----- ------ ------
1,000 26,753 17,000
===== ====== ======
</TABLE>
The income taxes of the Group mainly relates to rental income of the
subsidiary.
15. DEFERRED TAXATION
Subject to agreement by the Inland Revenue Department, the Group has
potential deferred tax benefit at 30% amounting to RM6,089,000,000 (1994--
RM1,250,000) not taken up in the accounts as calculated under the liability
method in respect of the following items:--
<TABLE>
<CAPTION>
1994 1995
---------- -----------
RM RM
---------- -----------
<S> <C> <C>
Unabsorbed capital allowances.................. 5,128,000 22,524,000
Excess of net book value on book basis over tax
basis of fixed assets......................... (4,652,000) (16,834,000)
---------- -----------
476,000 5,690,000
Unabsorbed tax losses.......................... 3,691,000 14,606,000
---------- -----------
4,167,000 20,296,000
========== ===========
</TABLE>
16. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
The accompanying financial statements are prepared in accordance with GAAP
in Malaysia, which differ in certain significant respects to the GAAP in the
United States (US). The significant differences are described below. Other
differences do not have a significant effect on the consolidated net loss
after tax or shareholders' equity.
F-86
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
The estimated effects of the significant adjustments to the consolidated net
loss after tax and shareholders' equity which would be required if US GAAP
were applied instead of Malaysian GAAP are summarized as follows:--
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- -----------------------
U.S.$
NOTE RM RM RM (NOTE 2.8)
---- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net loss after tax--Ma-
laysian GAAP........... (7,474) (4,939,367) (18,722,954) (7,465,292)
Adjustments:
Preliminary expendi-
ture................. (i) (6,591) 6,591 -- --
Pre-operating expendi-
ture................. (i) (397,409) 397,409 -- --
Consultants fees...... -- 1,110,705 2,124,087 846,924
Amortisation of con-
sultants fees........ (iii) -- (55,535) (106,205) (42,347)
Debt issuance costs... -- -- 2,413,712 962,405
Amortisation of debt
issuance costs....... (iv) -- -- (344,816) (137,486)
Depreciation of lease-
hold land & build-
ing.................. (v) -- (155,110) (155,110) (61,846)
--------- ---------- ----------- ----------
Net loss after tax--US
GAAP................. (411,474) (3,635,307) (14,791,286) (5,897,642)
========= ========== =========== ==========
Total shareholders equi-
ty--Malaysian GAAP..... 2,492,526 11,333,159 25,719,637 10,255,039
Adjustments:
Preliminary expendi-
ture................. (i) (6,591) 6,591 -- --
Pre-operating expendi-
ture................. (i) (397,409) 397,409 -- --
Revaluation reserve... (ii) -- -- (2,971,432) (1,184,782)
Consultants fees--(cu-
mulative)............ (iii) -- 1,110,705 3,234,792 1,289,789
Amortization of con-
sultants fees--(cumu-
lative).............. (iii) -- (55,535) (161,740) (64,490)
Debt issuance costs... (iv) -- -- 2,413,712 962,405
Amortisation of debt
issuance costs....... (iv) -- -- (344,816) (137,486)
Depreciation of lease-
hold land & build-
ing--(cumulative).... (v) -- (155,110) (310,220) (123,692)
--------- ---------- ----------- ----------
Total shareholders equi-
ty--US GAAP............ 2,088,526 12,637,219 27,579,933 10,996,783
========= ========== =========== ==========
</TABLE>
- --------
(i) Preliminary and pre-operating expenditure
Preliminary and pre-operating expenditure are deferred for Malaysian GAAP
and written off in the year the company commences operations. However,
these costs are normally expensed as incurred under US GAAP.
(ii) Revaluation reserve
Revaluation performed by professional valuers of fixed assets are taken up
in the accounts for Malaysian GAAP. However, this is not incorporated in
the accounts under US GAAP.
(iii) Consultants fees
Consultants fees in relation to the installation of telecommunication has
been written-off as incurred as allowed under Malaysian GAAP. However,
these costs are normally capitalised and amortised under US GAAP.
The amortisation rate used is 20 years consistent with the life of
telecommunication equipment.
F-87
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
(iv) Debt issuance costs
Debt issuance costs in relation to the term loan has been written-off as
incurred as allowed under Malaysian GAAP. However, these amounts are
normally capitalised and amortised under US GAAP.
The amortisation rate used in 7 years, consistent with the tenure of the
loan.
(v) Depreciation of leasehold land and buildings
Leasehold land and building have been depreciated over the lease period of
80 years as allowed under Malaysian GAAP. However, under US GAAP, assets
may be depreciated up to 40 years only.
F-88
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-89
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
FINANCIAL STATEMENTS
30 JUNE 1996
(UNAUDITED)
F-90
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD. AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
1995 1996 1996
RM RM USD
----------- ----------- -----------
(UNAUDITED) (NOTE 4)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalent............. 3,067,969 1,415,803 568,596
Trade debtors........................ 334,409 1,020,278 409,750
Other debtors........................ 2,673,274 1,429,620 574,145
Deposits & prepayment................ 471,918 24,557 9,862
----------- ----------- -----------
Total current asset.................... 6,547,570 3,890,258 1,562,353
Fixed assets, net...................... 80,383,813 103,329,331 41,497,723
License fee, net....................... 270,000 270,000 108,434
Fixed deposit.......................... 1,000,000 1,000,000 401,606
----------- ----------- -----------
Total assets....................... 88,201,383 108,489,589 43,570,116
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts Payable..................... 531,499 3,502,531 1,406,639
Customers deposits................... 233,471 386,570 155,249
Other creditors and accruals......... 257,381 -- --
Equipment supplier creditors......... 3,926,233 -- --
Consultancy fees payables............ 392,573 -- --
Provision for compensation to former
shareholders........................ 2,000,000 -- --
Hire purchase creditors.............. 108,398 108,398 43,533
Taxes payables....................... 43,550 44,000 17,671
----------- ----------- -----------
Total current liabilities.......... 7,493,105 4,041,499 1,623,092
Term loan (secured).................... 54,639,164 90,946,722 36,524,788
Hire purchase creditors................ 349,477 473,048 189,979
Shareholders' equity:
Common stock--RM1.00 par value,
authorized 50,000,000 shares; issued
and fully paid-up 46,418,000.......... 46,418,000 46,418,000 18,641,767
Revaluation reserves................. 2,971,432 2,971,432 1,193,346
Accumulated deficit.................. (23,669,795) (36,361,112) (14,602,856)
----------- ----------- -----------
Total shareholders' equity......... 25,719,637 13,028,320 5,232,257
----------- ----------- -----------
Total liabilities and shareholders'
equity............................ 88,201,383 108,489,589 43,570,116
=========== =========== ===========
</TABLE>
F-91
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN.BHD. AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE SIX MONTHS ENDED 30 JUNE 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996 1996
RM RM USD
---------- ----------- ----------
(UNAUDITED) (NOTE 4)
<S> <C> <C> <C>
REVENUE
Telecommunication revenues............... 374,355 1,056,743 424,395
Income from property rentals............. 553,124 498,185 200,074
---------- ----------- ----------
Total revenue.......................... 927,479 1,554,928 624,469
Operating Expenses
Cost of telecommunication revenue........ 61,020 1,287,973 517,258
Depreciation............................. 263,570 3,968,373 1,593,724
General and administrative expenses...... 2,978,798 4,988,156 2,003,275
---------- ----------- ----------
Total Operating Expenses............... 3,303,388 10,244,502 4,114,257
Operating loss............................. (2,375,909) (8,689,574) (3,489,788)
Other income /(expense)
Interest income.......................... 13,185 97,101 38,996
Interest expense......................... -- (4,098,844) (1,646,122)
---------- ----------- ----------
Net loss before income taxes............... (2,362,724) (12,691,317) (5,096,914)
Income taxes............................... -- -- --
---------- ----------- ----------
Net loss................................... (2,362,724) (12,691,317) (5,096,914)
========== =========== ==========
</TABLE>
F-92
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN.BHD.
(INCORPORATED IN MALAYSIA)
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED 30 JUNE 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996 1996
RM RM USD
----------- ----------- -----------
(UNAUDITED) (NOTE 4)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss.............................. (2,362,724) (12,691,317) (5,096,914)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation.......................... 263,570 3,968,373 1,593,724
Decrease/(Increase) in trade and other
debtors.............................. (1,803,311) 557,785 224,010
Decrease/(Increase) in deposits and
prepayments.......................... (55,339) 447,361 179,663
(Decrease)/Increase in other current
liabilities.......................... 611,934 (5,071,783) (2,036,861)
(Increase) in stocks.................. (93,707) -- --
----------- ----------- -----------
Net cash used in operating
activities........................... (3,439,577) (12,789,581) (5,136,378)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets.............. (563,066) (26,913,891) (10,808,792)
----------- ----------- -----------
Net cash used in investing
activities........................... (563,066) (26,913,891) (10,808,792)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term loan............... 6,626,746 37,927,735 15,232,022
Loan (to) shareholders................ (13,670,700) -- --
Proceeds from issue of shares......... 22,750,000 -- --
Increase in hire purchase............. (19,780) 123,571 49,627
----------- ----------- -----------
Net cash from financing activities.... 15,686,266 38,051,306 15,281,649
----------- ----------- -----------
Net (decrease)/increase in cash and cash
equivalents............................ 11,683,623 (1,652,166) (663,521)
Cash and cash equivalents at beginning
of period.............................. 2,819,563 3,067,969 1,232,116
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. 14,503,186 1,415,803 568,595
=========== =========== ===========
Supplemental information:
(i) Cash paid for:
Interest............................ -- 4,089,844 1,646,122
=========== =========== ===========
</TABLE>
F-93
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS
1. PRINCIPAL ACTIVITIES
The principal activity of the Company is provision of telecommunication
services. These activities have remained unchanged during the period.
2. SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of Preparation
The accounts of the Company and its subsidiary have been prepared under the
historical cost convention modified to include the revaluation of certain
properties and in compliance with approved accounting standards.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the Company's
financial condition, results of operations, and cash flows for the periods
presented. These interim financial statements should be read in conjunction
with the Company's audited financial statements as at December 31, 1995,
including the notes thereto. The results for the six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
2.2 Basis of Consolidation
The consolidated accounts incorporate the accounts of the Company and its
subsidiary made up to 31 December 1995 and June 30, 1996. All intercompany
transactions have been eliminated.
Inter-company transactions are eliminated on consolidation and the
consolidated accounts reflect external transactions only.
2.3 Fixed Assets and Depreciation
Leasehold land and building is amortised over the period of the lease. Other
fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight line basis to
write off the cost of the assets over their expected useful lives.
The principal annual rates used are as follows:
<TABLE>
<CAPTION>
OVER THE PERIOD OF THE LEASE OF 80 YEARS
----------------------------------------
<S> <C>
Furniture and fittings.......... 15%
Office equipment................ 15%
Telecommunication network equip-
ment........................... 5%-15%
Plant and machinery............. 20%
Motor vehicles.................. 20%
Renovation...................... 15%
</TABLE>
2.4 Deferred Taxation
Provision for deferred taxation is made on the liability method for all
timing differences except where no liability is expected to arise in the
foreseeable future. Deferred tax benefits are only recognised when there is a
reasonable expectation of realisation in the near future.
2.5 Foreign Currency
Assets and liabilities in foreign currencies are translated into Ringgit
Malaysia at rates of exchange ruling at the balance sheet date and items in
the profit and loss account are converted at rates ruling on the transaction
dates. Exchange differences are dealt within the profit and loss account.
F-94
<PAGE>
3. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
The accompanying financial statements are prepared in accordance with GAAP
in Malaysia, which differ in certain significant respects to the GAAP in the
United States (US). The significant differences are described below. Other
differences do not have a significant effect on the consolidated net loss
after tax or shareholders' equity.
The estimated effects of the significant adjustments to the consolidated net
loss after tax and shareholders' equity which would be required if US GAAP
were applied instead of Malaysian GAAP are summarized as follows:--
<TABLE>
<CAPTION>
NOTE 1995 RM 1996 RM
---- ---------- -----------
<S> <C> <C> <C>
Net loss after tax--Malaysian GAAP.............. (2,362,724) (12,691,317)
Adjustments:--
Consultants fees.............................. (ii) 1,225,379 1,096,216
Amortization of consultants fees.............. (ii) (59,152) (101,878)
Debt issuance costs...........................
Amortization of debt issuance costs........... (iii) -- (172,408)
Depreciation of leasehold land & building..... (iv) (38,777) (77,554)
Depreciation relating to surplus on revalued
leasehold land & building.................... (v) -- 16,632
---------- -----------
Net loss after tax--US GAAP..................... (1,235,274) (11,930,309)
========== ===========
<CAPTION>
NOTE 1995 RM 1996 RM
---- ---------- -----------
<S> <C> <C> <C>
Total shareholders equity--Malaysian GAAP..... 25,719,637 13,028,320
Adjustments:--
Revaluation reserve........................... (i) (2,971,432) (2,971,432)
Consultants fees--(cumulative)................ (ii) 3,234,792 4,331,008
Amortization of consultants fees--
(cumulative)................................. (ii) (161,740) (263,618)
Debt issuance costs........................... (iii) 2,413,712 2,413,712
Amortization of debt issuance costs........... (iii) (344,816) (517,224)
Depreciation of leasehold land & building--
(cumulative)................................. (iv) (310,220) (387,774)
Depreciation relating to surplus on revalued
leasehold land & building.................... (v) -- 16,632
---------- -----------
Total shareholders equity--US GAAP.......... 27,579,933 15,649,624
========== ===========
</TABLE>
(i) Revaluation reserve
Revaluation performed by professional valuers of fixed assets are taken
up in the accounts for Malaysian GAAP. However, this is not incorporated
in the accounts under US GAAP.
(ii) Consultants fees
Consultants fees in relation to the installation of telecommunication has
been written-off as incurred as allowed under Malaysian GAAP. However,
these costs are normally capitalized and amortized under US GAAP.
The amortization rate used is 20 years consistent with the life of
telecommunication equipment.
(iii) Debt issuance costs
Debt issuance costs in relation to the term loan has been written-off as
incurred as allowed under Malaysian GAAP. However, these amounts are
normally capitalized and amortized over the life of the loan under US
GAAP.
F-95
<PAGE>
(iv) Depreciation of leasehold land and buildings
Leasehold land and building have been depreciated over the lease period
of 80 years as allowed under Malaysian GAAP. However, under US GAAP,
assets may be depreciated up to 40 years only.
(v) Depreciation on the revalued amount of leasehold land and buildings
Revalued leasehold land and building have been depreciated on the
revalued amounts as allowed under Malaysian GAAP. However, under US GAAP,
revaluation may not be incorporated into the accounts hence the
depreciation effect are also correspondingly adjusted.
4. TRANSLATIONS OF MALAYSIAN RINGGIT AMOUNT INTO UNITED STATES DOLLAR
AMOUNTS.
The financial statements are stated in Malaysian Ringgit (MR). The
translations of the MR amounts into United States dollars (US$) are
included solely for the convenience of the readers, using the standard
average buying and selling rates used by the Group for 30 June 1996 of
MR2.49 to US$1. The convenience translations should not be construed as
representations that the MR amounts have been, could have been, or could
in the future be, converted into US$ at this or any other rate of
exchange.
F-96
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-97
<PAGE>
TEAMTALK LIMITED
FINANCIAL STATEMENTS
DECEMBER 31, 1995
(WITH INDEPENDENT CHARTERED ACCOUNTANTS' REPORT THEREON)
F-98
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Directors
TeamTalk Limited
51 Vivian Street
Wellington
New Zealand
Dear Sirs
As auditor of TeamTalk Limited we report as follows:
AUDITED FINANCIAL STATEMENTS OF TEAMTALK LIMITED
We audited the financial statements of TeamTalk Limited (the "Company") set
out on pages F-101 to F-110 of this Registration Statement. The financial
statements provide information about the past financial performance of the
Company and its financial position as at December 31, 1995. This information
is stated in accordance with the accounting policies set out on pages F-105 to
F-106.
Directors' responsibilities
The directors were responsible for the preparation of financial statements
which gave a true and fair view of the financial position of the Company as at
December 31, 1995, and of the results of its operations and cash flows for the
period from January 1, 1995 to May 17, 1995 (Predecessor period) and from May
18, 1995 to December 31, 1995 (Successor period).
Auditors' responsibilities
It was our responsibility to express an independent opinion on the financial
statements presented by the directors and report our opinion to the
shareholders.
Basis of opinion
An audit includes examining, on a test basis, evidence relevant to the amounts
and disclosures in the financial statements. It also includes assessing:
. The significant estimates and judgements made by the directors in the
preparation of the financial statements; and
. Whether the accounting policies are appropriate to the Company's
circumstances, consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing
standards in New Zealand which are essentially the same as United States
generally accepted auditing standards. We planned and performed our audit so
as to obtain all the information and explanations which we considered
necessary in order to provide us with sufficient evidence to give reasonable
assurance that the financial statements are free from material misstatements,
whether caused by fraud or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the financial
statements.
Unqualified opinion
We obtained all the information and explanations we required.
In our opinion:
. Proper accounting records were kept by the Company as far as appeared
from our examination of those records; and
F-99
<PAGE>
. The financial statements on pages F-101 to F-110:
--Comply with generally accepted accounting practice in New Zealand;
and
--Give a true and fair view of the financial position of the Company
as at December 31, 1995 and of the results of its operations and cash
flows for the period from January 1, 1995 to May 17, 1995
(Predecessor period) and from May 18, 1995 to December 31, 1995
(Successor period).
Generally accepted accounting practice in New Zealand varies in certain
significant respects from generally accepted accounting principles in the
United States. Application of generally accepted accounting principles in the
United States would not have materially affected the results of operations or
shareholders funds for the period ended December 31, 1995.
Our audit was completed on February 23, 1996 and our unqualified opinion was
expressed as at that date.
Yours faithfully,
KPMG
Wellington, New Zealand
F-100
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NZD US$
------- --------
(000'S) (000'S)
(NOTE 3)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalent................................... $ 34 $ 22
Accounts receivable (Note 5)............................... 212 139
Prepayments and other assets............................... 80 52
------ -------
Total current assets..................................... 326 213
Fixed assets, net (Note 6)................................... 9,323 6,095
Intangible assets, net (Note 7).............................. 326 212
------ -------
Total assets............................................. $9,975 $ 6,520
====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 133 $ 87
Accrued expenses........................................... 22 14
Due to related parties (Note 9)............................ 5,862 3,832
------ -------
Total current liabilities................................ 6,017 3,933
Long term debt (Note 9)...................................... 2,283 1,492
------ -------
Total liabilities........................................ 8,300 5,425
------ -------
Shareholders' equity (Note 8):
Share capital.............................................. 3,400 2,223
Accumulated deficit........................................ (1,725) (1,128)
------ -------
Total shareholders' equity............................... 1,675 1,095
------ -------
Total liabilities and shareholders' equity................... $9,975 $ 6,520
====== =======
</TABLE>
The notes set out on pages F-105 to F-110 form an integral part of, and should
be read in conjunction with these financial statements.
F-101
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ------------------
PERIOD FROM
JANUARY 1, PERIOD FROM
1995 TO MAY 18, 1995 TO
MAY 17, 1995 DECEMBER 31, 1995
------------ ------------------
NZD NZD US$
(000'S) (000'S) (000'S)
<S> <C> <C> <C>
Revenue:
Network.................................... $ 76 $ 457 $ 298
Operating costs and expenses:
Network.................................... 181 887 580
----- -------- --------
Gross loss............................... (105) (430) (282)
Selling, general and administration expenses
(Note 4).................................... 394 1,174 767
Depreciation expense......................... 34 68 44
Amortization expense......................... 27 53 35
----- -------- --------
Net loss................................. $(560) $ (1,725) $(1,128)
===== ======== ========
</TABLE>
The notes set out on pages F-105 to F-110 form an integral part of, and should
be read in conjunctionwith these financial statements.
F-102
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
STATEMENTS OF MOVEMENTS IN EQUITY
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ -------------------
PERIOD FROM
JANUARY 1, PERIOD FROM
1995 TO MAY 18, 1995 TO
MAY 17, 1995 DECEMBER 31, 1995
------------ -------------------
NZD NZD US$
(000'S) (000'S) (000'S)
(NOTE 3)
<S> <C> <C> <C>
Shareholders' equity at start of the period.. $1,239 $ -- $ --
Contributions from owners.................... 564 3,400 2,223
Net loss for the period...................... (560) (1,725) (1,128)
------ -------- --------
Shareholders' equity at end of the period.... $1,243 $ 1,675 $ 1,095
====== ======== ========
</TABLE>
The notes set out on pages F-105 to F-110 form an integral part of, and should
be read in conjunctionwith these financial statements.
F-103
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ------------------
PERIOD FROM
JANUARY 1, PERIOD FROM
1995 TO MAY 18, 1995 TO
MAY 17, 1995 DECEMBER 31, 1995
------------ ------------------
NZD NZD US$
(000'S) (000'S) (000'S)
(NOTE 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Receipts from customers..................... $ 44 $ 347 $ 227
Payments to suppliers....................... (601) (2,142) (1,401)
----- -------- --------
Net cash flows used in operating activi-
ties................................... (557) (1,795) (1,174)
----- -------- --------
Cash flows used in investing activities--pur-
chase of fixed assets........................ -- (3,989) (2,607)
----- -------- --------
Cash flows from financing activities:
Proceeds from related party advances........ -- 1,410 922
Issue of ordinary shares.................... 564 2,157 1,410
Proceeds from long-term debt................ -- 2,283 1,492
----- -------- --------
564 5,850 3,824
----- -------- --------
Cash was applied to Incorporation expenses.... -- (32) (21)
----- -------- --------
Net cash flows from financing activi-
ties................................... 564 5,818 3,803
----- -------- --------
Net increase in cash held..................... 7 34 22
Cash, beginning of period..................... 19 -- --
----- -------- --------
Ending cash carried forward................... $ 26 $ 34 $ 22
===== ======== ========
Reconciliation of net loss to:
Net cash flows used in operating activities:
Net loss.................................. $(560) $ (1,725) $ (1,128)
Amortisation expense...................... 27 53 35
Depreciation expense...................... 34 68 44
Decrease (increase) in operating assets:
Accounts receivable....................... (32) (138) (90)
Prepayments and other assets.............. (36) (42) (27)
Increase (decrease) in operating liabili-
ties:
Accounts payable.......................... 4 (33) (22)
Accrued liabilities....................... 6 22 14
----- -------- --------
Net cash flows used in operating activi-
ties................................... $(557) $ (1,795) $ (1,174)
===== ======== ========
Noncash financing and investing activities:
Fixed assets obtained in exchange for re-
lated party advance........................ -- 4,452 2,910
===== ======== ========
Issuance of ordinary shares in exchange for
net assets of TeamTalk Joint Venture....... -- 1,243 813
===== ======== ========
</TABLE>
The notes set out on pages F-105 to F-110 form an integral part of, and should
be read in conjunction with these financial statements.
F-104
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE FINANCIAL STATEMENTS
(1) STATEMENT OF ACCOUNTING POLICIES
Organisation and Reporting Entity
TeamTalk Joint Venture ("JV" or the "Predecessor")
TeamTalk commenced operations as a joint venture on September 16, 1994. The
JV partners were Broadcast Communications Limited ("BCL"), International
Wireless Communications Inc. ("IWC") and Vanguard International
Telecommunications Inc. The JV ceased operations on May 18, 1995. The
predecessor financial statements presented are for the period from January 1,
1995 through May 17, 1995.
TeamTalk Limited ("the Successor")
On May 18, 1995, the business and operations of the JV were bought by
TeamTalk Limited (herein referred to as the Company or TeamTalk). TeamTalk
Limited is a limited liability company incorporated in New Zealand under the
Companies Act 1993. These financial statements presented herein are for
TeamTalk Limited for the period from May 18, 1995 to December 31, 1995.
Statutory Base
The financial statements have been prepared in accordance with the Generally
Accepted Accounting Principles in New Zealand ("NZ GAAP") and in compliance
with the Companies Act 1993 and the Financial Reporting Act 1993. These
accounting principles differ in certain respects from accounting principles
generally accepted in the United States ("US GAAP"). These differences and the
approximate related effect on the financial statements are not material.
Measurement Base
The financial statements have been prepared on the basis of historical cost.
Statement of Accounting Policies
Revenue
Network revenue includes primarily access and usage charges for subscriber
units under service agreements with the company. The terms of these service
agreements range from monthly to 36 month periods.
Fixed Assets
Fixed assets are recorded at historical cost less depreciation. Cost
includes the price to acquire the asset and other directly attributable
expenses incurred to bring the asset to the location and condition for its
intended use.
Depreciation
Depreciation is provided on a straight-line basis on all tangible fixed
assets, other than fixed asset work in progress, at rates calculated to
allocate the cost over their estimated useful lives.
The average depreciable lives for major categories of fixed assets are as
follows:
<TABLE>
<S> <C>
Transmitting equipment.................................... 5 to 25 years
Leasehold improvements.................................... 8 years
Office equipment.......................................... 10 years
Furniture and fittings.................................... 10 years
</TABLE>
F-105
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets
Intangible assets are recorded at cost less amount amortised.
Intellectual property was created on the commencement of the JV. The amount
represents the contribution by BCL towards the setting up of the business and
is being amortised using the straight-line method over five years.
Incorporation expenses are set-up costs for the incorporation of the Company
and are being amortised using the straight-line method over five years.
Accounts Receivable
Accounts receivable are valued at their estimated net realisable value after
allowance for doubtful debts.
Bad debts are written off to the Statement of Operations when considered
irrecoverable.
Taxation
The taxation expense is chargeable to the Statement of Operations, including
both the current year's provision and the income tax effects of timing
differences calculated using the liability method.
Tax effect accounting has been applied on a comprehensive basis to all
timing differences. A debit balance in the deferred tax account is only
recognised if there is virtual certainty of realisation.
Statement of Cash Flows
The following is the definition of the terms used in the statement of cash
flows:
. Cash means coins, notes, cash on deposit with banks and cash overdrafts.
. Investing activities comprise the purchase and sale of fixed assets and
investments.
. Financing activities comprise the changes in the equity structure of the
Company. These include the issuing and redemption of share capital and
the payment of dividends. Cash flows in respect of the proceeds or
repayment of loans are presented net where the movements are roll overs
covered by an arranged finance facility.
. Operating activities include all transactions and events that are not
investing or financing activities.
Changes in Accounting Policies
All accounting policies have been applied on a consistent basis during the
period.
F-106
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
(2) OWNERSHIP AND ACQUISITION
The Company was incorporated to purchase the assets and liabilities of the
JV. The partners of the JV effectively became shareholders in the Company. The
purchase of the JV's assets and liabilities was accounted for using the
purchase method of accounting. The purchase price paid was approximately
$1,243,000. The purchase price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
NZD
------
<S> <C>
Fixed assets, net..................................................... $ 951
Intangible assets, net................................................ 347
Current assets........................................................ 111
------
Total assets........................................................ 1,409
Current liabilities................................................... 166
------
Net assets acquired................................................... $1,243
======
</TABLE>
The purchase price consisted of the issuance of 1,243,000 ordinary shares of
the Company.
(3) TRANSLATIONS OF NEW ZEALAND DOLLAR AMOUNTS INTO UNITED STATES DOLLAR
AMOUNTS
The financial statements are stated in New Zealand Dollars ("NZD"). The
translations of the New Zealand dollars amounts into United States dollars are
included solely for the convenience of the readers, using the noon buying rate
in New York City for cable transfers in New Zealand Dollars as reported by the
Federal Reserve Bank of New York on December 29, 1995 of NZD$1 to US$0.6537.
The convenience translation should not be construed as representations that
the New Zealand dollar amounts have been, could have been, or could in the
future be, converted into United States dollars at this or any other rate of
exchange.
(4) SELLING, GENERAL AND ADMINISTRATION EXPENSES
The following items are included in selling, general and administration
expenses (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------- ---------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1995 MAY 18, 1995
TO MAY 17, TO DECEMBER 31,
1995 1995
--------------- ---------------
NZD NZD
<S> <C> <C>
Audit fee.................................... $ 5 $ 8
Amortisation expense......................... 27 53
Bad debts.................................... 1 3
Depreciation expense......................... 34 68
Rental expense............................... 13 35
</TABLE>
(5) ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
NZD
(000'S)
<S> <C>
Trade receivables............................................... $212
Allowance for doubtful debts.................................... --
----
$212
====
</TABLE>
F-107
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
(6) FIXED ASSETS
Fixed assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------ ------------ --------
NZD NZD NZD
<S> <C> <C> <C>
Transmission equipment.......................... $ 951 $(68) $ 883
Leasehold improvements.......................... 51 -- 51
Office equipment................................ 18 -- 18
Furniture and fittings.......................... 31 -- 31
------ ---- ------
1,051 (68) 983
Fixed Assets Work In Progress................... 8,340 -- 8,340
------ ---- ------
Total Fixed Assets............................ $9,391 $(68) $9,323
====== ==== ======
</TABLE>
(7) INTANGIBLE ASSETS
Intangible assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
---- ------------ --------
NZD NZD NZD
<S> <C> <C> <C>
Intellectual property............................ $347 $(53) $294
Incorporation expenses........................... 32 -- 32
---- ---- ----
$379 $(53) $326
==== ==== ====
</TABLE>
F-108
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
(8) SHARE CAPITAL AND ACCUMULATED DEFICIT
The authorised share capital of the Company is 5,000,000 ordinary shares
with a par value of NZD1 each. Issued and fully paid shares comprise of
3,400,000 ordinary shares. All shares carry equal shareholders entitlements.
Movements in share capital and accumulated deficit (in thousands):
<TABLE>
<CAPTION>
ORDINARY SHARES
---------------- ACCUMULATED TOTAL
NUMBER AMOUNT(1) DEFICIT EQUITY
------ --------- ----------- -------
NZD NZD NZD
<S> <C> <C> <C> <C>
PREDECESSOR
Balance at January 1, 1995........... $ -- $1,860 $ (621) $ 1,239
Proceeds from joint venture part-
ners................................ -- 564 -- 564
Net loss for the period.............. -- -- (560) (560)
------ ------ ------- -------
Balance at May 17, 1995.............. $ -- $2,424 $(1,181) $ 1,243
====== ====== ======= =======
SUCCESSOR:
Balance at May 18, 1995.............. $ -- $ -- $ -- $ --
Ordinary shares issued, on acquisi-
tion................................ 1,243 1,243 -- 1,243
Ordinary shares issued, for cash..... 2,157 2,157 -- 2,157
Net loss for the period.............. -- -- (1,725) (1,725)
------ ------ ------- -------
Balance at December 31, 1995......... $3,400 $3,400 $(1,725) $ 1,675
====== ====== ======= =======
</TABLE>
- --------
(1) For amounts contributed by the predecessor partners, this has been
included in ordinary shares.
(9) TRANSACTIONS WITH RELATED PARTIES
Due to related parties
These are amounts due to BCL. All transactions with BCL are at an arm's
length basis and in the normal course of business. These transactions
comprised primarily of co-siting, linking, maintenance and administrative
services. The recorded value of these transactions is $8,844,000 of which
$504,000 has been expensed and $8,340,000 been included in fixed assets work-
in-progress in relation to the construction of the network.
Long term debt
These are interest free current advances of no fixed maturity from the
shareholders of the Company, in ratio to their respective shareholding. The
shareholders of the Company have agreed not to request payment of this debt
outstanding at December 31, 1995, and to provide such financial assistance in
the foreseeable future to enable the company to continue operating. On this
basis, the long-term debt has been classified as non-current liabilities.
No debts with related parties were written off or forgiven during the period
covered by these financial statements.
F-109
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
(10) EMPLOYEE REMUNERATION
<TABLE>
<CAPTION>
REMUNERATION RANGE FOR EMPLOYEES NUMBER OF EMPLOYEES
-------------------------------- -------------------
<S> <C>
$110,000-$119,000 1
</TABLE>
(11) FINANCIAL INSTRUMENTS
Fair values
The carrying amount of cash, accounts receivable, prepayments, accounts
payables, accrued liabilities and due to related parties approximate fair
values due to the short maturity of these instruments. The fair value of the
long term debt has been estimated at $2,068,000 by discounting the debt one
year at the market rate of interest applicable to the debt.
(12) TAXATION
The Company has approximately $1,741,000 of tax losses to carry forward. No
tax losses have been recognised in the current period.
(13) LEASE COMMITMENTS
Commitments under non cancellable operating leases are (in thousands):
<TABLE>
<CAPTION>
NZD
----
<S> <C>
Within one year......................................................... $116
One to two years........................................................ 78
Two to five years....................................................... 49
Later than five years................................................... --
----
$243
====
</TABLE>
(14) SEGMENTAL INFORMATION
The company operates predominantly in one industry segment, the provision of
mobile trunk radio services in New Zealand.
(15) DIRECTORS REMUNERATION
No directors remuneration was paid by the Company during the period.
(16) EVENTS SUBSEQUENT TO BALANCE DATE (UNAUDITED)
Effective 30 April 1996, BCL sold its ordinary shares to IWC for NZD
$3,198,000 including BCL's shareholders debt of NZD $3,022,000. At the same
date BCL and the Company entered in various agreements relating to the
completion of the construction of the network, the maintenance of the network,
co-siting agreement and the provision of other administrative services. IWC
paid BCL what it was owed by TeamTalk and has assumed BCL's receivable.
F-110
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-111
<PAGE>
TEAMTALK LIMITED
CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
(UNAUDITED)
F-112
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------------------
NZD NZD US$
(000'S) (000'S) (000'S)
(NOTE 2)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets............................ $ 326 $ 412 $ 277
Fixed assets, net (Note 3)................ 9,323 9,101 6,108
Intangible assets, net.................... 326 311 208
------ ------ ------
Total assets............................ 9,975 9,824 6,593
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities (Note 4).............. 6,017 730 490
Long-term debt (Note 4)................... 2,283 8,883 5,962
------ ------ ------
Total liabilities....................... 8,300 9,613 6,452
Shareholders' equity...................... 1,675 211 141
------ ------ ------
Total liabilities and shareholders'
equity................................. $9,975 $9,824 $6,593
====== ====== ======
</TABLE>
The notes set out on pages F-116 to F-117 form an integral part of, and should
be read in conjunctionwith these interim financial statements.
F-113
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- -----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, MAY 18,
1995 TO 1995 TO
MAY 17, JUNE 30, SIX MONTHS ENDED
1995 1995 JUNE 30, 1996
----------- ----------- -----------------
NZD NZD NZD US$
(000'S) (000'S) (000'S) (000'S)
(NOTE 2)
<S> <C> <C> <C> <C>
Revenue:
Network.......................................................................... $ 76 $ 70 $ 697 $ 468
Operating costs and expenses:
Network.......................................................................... 181 147 777 522
----- ----- ------- -----
Gross loss......................................................................... (105) (77) (80) (54)
Selling, general and administration.............................................. 394 200 1,025 687
Depreciation and amortisation.................................................... 61 30 359 241
----- ----- ------- -----
Net loss........................................................................... $(560) $(307) $(1,464) $(982)
===== ===== ======= =====
</TABLE>
The notes set out on pages F-116 to F-117 form an integral part of, and should
be read in conjunctionwith these interim financial statements.
F-114
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------- ---------------------------------
PERIOD FROM
JANUARY 1, PERIOD FROM
1995 TO MAY 17, MAY 18, 1995 TO SIX MONTHS ENDED
1995 JUNE 30, 1995 JUNE 30, 1996
--------------- --------------- -----------------
NZD NZD NZD US$
(000'S) (000'S) (000'S) (000'S)
(NOTE 2)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers.................................................. $ 44 $ 62 $ 667 $ 448
Cash was applied to:
Payments to suppliers.................................................... (601) (234) (1,334) (895)
----- ------- ------- -----
Net Cash Flows used in Operating Activities................................ (557) (172) (667) (447)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was applied to:
Purchase of fixed assets................................................. -- (3,832) (97) (65)
----- ------- ------- -----
Net cash flows used in investing activities................................ -- (3,832) (97) (65)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Proceeds from related party advances..................................... -- 632 847 568
Issue of ordinary shares................................................. 564 2,157 -- --
Proceeds from long-term debt............................................. -- 1,243 -- --
----- ------- ------- -----
564 4,032 847 568
Cash was applied to:
Incorporation expenses................................................... -- -- (26) (18)
----- ------- ------- -----
Net cash flows from financing activities................................... -- 4,032 821 550
Net increase in cash held.................................................. 7 28 57 38
Beginning cash............................................................. 19 26 34 23
----- ------- ------- -----
Ending cash carried forward................................................ $ 26 $ 54 $ 91 $ 61
===== ======= ======= =====
RECONCILIATION OF NET LOSS TO NET CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss................................................................... $(560) $ (307) $(1,464) $(982)
Amortisation expense....................................................... 27 13 40 27
Depreciation expense....................................................... 34 17 319 214
Increase in operating assets............................................... (68) (8) (29) (19)
Increase in operating liabilities.......................................... 10 113 467 313
----- ------- ------- -----
Net Cash Flows used in operating activities................................ $(557) $ (172) $ (667) $(447)
===== ======= ======= =====
</TABLE>
The notes set out on pages F-116 to F-117 form an integral part of, and should
be read in conjunction with these interim financial statements.
F-115
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE INTERIM FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TeamTalk Joint Venture ("JV" or the "Predecessor")
TeamTalk commenced operations as a joint venture on September 16, 1994. The
JV partners were Broadcast Communications Limited ("BCL"), International
Wireless Communications Inc. ("IWC") and Vanguard International
Telecommunications Inc. The JV ceased operations on May 18, 1995. The
predecessor financial statements presented are for the period from January 1,
1995 through May 17, 1995.
TeamTalk Limited ("the Successor")
On May 18, 1995, the business and operations of the JV were bought by
TeamTalk Limited (herein referred to as the Company or TeamTalk). TeamTalk
Limited is a limited liability company incorporated in New Zealand under the
Companies Act 1993. These financial statements presented herein are for
TeamTalk Limited for the period from May 18, 1995 to December 31, 1995.
These interim financial statements are for the two month period ended June
30, 1995 (being the period from inception) and for the six month period ended
June 30, 1996.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the Company's
financial condition, results of operations, and cash flows for the periods
presented. These interim financial statements should be read in conjunction
with TeamTalk's audited financial statements as at December 31, 1995,
including the notes thereto. The results for the six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
The interim financial statements have been prepared in accordance with the
Generally Accepted Accounting Principles in New Zealand ("NZ GAAP") and these
accounting principles differ in certain respects from accounting principles
generally accepted in the United States ("US GAAP"). These differences and the
approximate related effect on these financial statements are not material.
(2) TRANSLATIONS OF NEW ZEALAND DOLLAR AMOUNTS INTO UNITED STATES DOLLAR
AMOUNTS
The financial statements are stated in New Zealand dollars. The translations
of the New Zealand dollar amounts into United States dollars are included
solely for the convenience of the readers, using the average exchange rate for
the six month period ended June 30, 1996 of NZD $1.4899 to US $1. The
convenience translation should not be constructed as representations that the
New Zealand Dollar amounts have been, could have been, or could in the future
be, converted into United States dollars at this or any other rate of
exchange.
F-116
<PAGE>
TEAMTALK LIMITED
(INCORPORATED IN NEW ZEALAND)
NOTES TO THE INTERIM FINANCIAL STATEMENTS--(CONTINUED)
(3) FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
NZD NZD NZD
(000'S) (000'S) (000'S)
<S> <C> <C> <C>
Fixed assets................................... $1,051 $ (68) $ 983
Fixed assets work in progress.................. 8,340 -- 8,340
------ ----- ------
Total fixed assets........................... $9,391 $ (68) $9,323
====== ===== ======
<CAPTION>
JUNE 30, 1996 (UNAUDITED)
-----------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
NZD NZD NZD
(000'S) (000'S) (000'S)
<S> <C> <C> <C>
Fixed assets................................... $6,563 $(387) $6,176
Fixed assets work in progress.................. 2,925 -- 2,925
------ ----- ------
Total fixed assets........................... $9,488 $(387) $9,101
====== ===== ======
</TABLE>
The increase in fixed assets relate to the construction of the radio
network.
(4) TRANSACTIONS WITH RELATED PARTIES
Current Liabilities
Included in current liabilities are amounts due to BCL. All transactions
with BCL are at an arm's length basis and in the normal course of business.
These transactions comprised primarily of co-siting, linking, maintenance and
administrative services. The recorded value of these transactions for the year
ended December 31, 1995 total $8,844,000 of which $504,000 has been expensed
and $8,340,000 been included in fixed assets work-in-progress in relation to
the construction of the network. An amount totaling $5,862,000 has been
included in current liabilities for the period ended December 31, 1995.
Long term debt
These are interest free current advances of no fixed maturity from the
shareholders of the Company, in ratio to their respective shareholding. The
shareholders of the company have agreed not to request payment of this debt
outstanding at December 31, 1995, and to provide such financial assistance in
the foreseeable future to enable the company to continue operating.
No debts with related parties were written off or forgiven during the period
covered by these interim financial statements.
(5) OTHER TRANSACTIONS
Effective, 30 April 1996, BCL sold its ordinary shares to IWC for
NZD$3,198,000 and agreed to assume BCL's shareholder debt of NZD$3,022,000. At
the same date BCL and the Company entered in various agreements relating to
the completion of the construction of the network, the maintenance of the
network, co-siting agreement and the provision of other administrative
services. IWC paid BCL what it was owed by TeamTalk and has assumed BCL's
receivable.
F-117
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-118
<PAGE>
STAR DIGITEL LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED 31ST DECEMBER, 1995,
AND FOR THE SIX MONTHS ENDED 30TH JUNE, 1995 AND 1996
(UNAUDITED)
F-119
<PAGE>
STAR DIGITEL LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................ F-121
Consolidated Balance Sheets at 31st December, 1994 and 1995 and at 30th
June, 1996 (unaudited)................................................. F-122
Consolidated Profit and Loss Accounts for the years ended 31st December,
1993, 1994 and 1995 and for the six months ended 30th June, 1995 and
1996 (unaudited)....................................................... F-123
Consolidated Cash Flow Statements for the years ended 31st December,
1993, 1994 and 1995 and for the six months ended 30th June, 1995 and
1996 (unaudited) F-124
Notes to Consolidated Financial Statements.............................. F-125
</TABLE>
F-120
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of
STAR DIGITEL LIMITED:
(incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of Star Digitel
Limited and its subsidiaries (the "Group") as of 31st December, 1994 and 1995
and the related consolidated profit and loss accounts and cash flow statements
for each of the three years in the period ended 31st December, 1995, all
expressed in Hong Kong dollars.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors are responsible for the preparation of financial statements
which give a true and fair view. In preparing financial statements which give
a true and fair view it is fundamental that appropriate accounting policies
are selected and applied consistently. Our responsibility is to express an
opinion on these financial statements based on our audits.
BASIS OF OPINION
We conducted our audits in accordance with Statements of Auditing Standards
issued by the Hong Kong Society of Accountants, which do not differ in any
material respect from auditing standards generally accepted in the United
States of America. These standards 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.
An audit also includes assessing the significant estimates and judgements made
by the directors, evaluating the overall financial statement presentation and
assessing whether the accounting policies are appropriate to the circumstances
of the Group, consistently applied and adequately disclosed. We believe that
our audits provide a reasonable basis for our opinion.
FUNDAMENTAL UNCERTAINTY RELATING TO THE GOING CONCERN BASIS
In forming our opinion, we have considered the adequacy of the disclosures
made in note 2 to the financial statements relating to a subscription
agreement with an independent third party to raise additional capital for the
Company and a loan agreement under which the immediate holding company will
make a cash loan to the Company. The financial statements have been prepared
on a going concern basis, the validity of which depends upon additional
funding being available. The financial statements do not include any
adjustments that would result from a failure to obtain additional funding. We
consider that appropriate estimates and disclosures have been made and our
opinion is not qualified in this respect.
OPINION
In our opinion, such consolidated financial statements give a true and fair
view of the financial position of the Group at 31st December, 1994 and 1995
and its results of operations and cash flows for each of the three years in
the period ended 31st December, 1995 in conformity with accounting principles
generally accepted in Hong Kong.
Deloitte Touche Tohmatsu
Hong Kong
1st November, 1996
F-121
<PAGE>
STAR DIGITEL LIMITED
CONSOLIDATED BALANCE SHEETS
AT 31ST DECEMBER, 1994 AND 1995 AND AT 30TH JUNE, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
31ST DECEMBER,
------------------------ 30TH JUNE,
1994 1995 1996
----------- ----------- -----------
HK$ HK$ HK$
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... 175,723 4,463 4,313
Amounts due from fellow subsidiaries.... 425,010 400,225 47,844,561
Non-current trade receivables--amount
due within one year (Note 9)........... -- 113,414,891 11,584,560
Debtors and prepayments................. 12,028,574 59,578,879 51,537,843
Stocks.................................. 7,571,854 17,389,481 34,821,845
----------- ----------- -----------
Total current assets.................. 20,201,161 190,787,939 145,793,122
Fixed assets, net (Note 7)................ 2,085,191 1,653,508 1,360,851
Interest in mobile telephone projects, net
(Note 8)................................. 156,177,144 193,495,822 241,421,288
Non-current trade receivables--amount due
after one year
(Note 9)................................. -- 86,295,529 86,295,529
----------- ----------- -----------
Total................................. 178,463,496 472,232,798 474,870,790
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEF-
ICIT)
Current Liabilities:
Creditors............................... 10,430,709 38,992,388 14,702,229
Accrued charges......................... 2,415,810 1,655,960 2,259,917
Amount due to ultimate holding company.. 11,970,381 19,373,153 19,373,153
Amount due to intermediate holding
company................................ 29,612,238 -- --
Amount due to immediate holding
company................................ 11,817,897 48,140,693 45,100,703
Amount due to fellow subsidiaries....... 112,077,712 185,078,683 215,241,363
Amount due to a related company......... -- 891,392 --
Taxation................................ 1,700,000 1,700,000 1,700,000
Borrowings--amount due within one year
(Note 10).............................. 2,010,199 26,870,238 43,175,599
----------- ----------- -----------
Total current liabilities............. 182,034,946 322,702,507 341,552,964
Borrowings--amount due after one year
(Note 10)................................ 12,289,892 90,934,422 97,757,235
Commitments (Notes 12 and 13).............
Shareholders' (deficit) equity
Share capital--ordinary shares of HK$1
each; 5,000,000 shares authorised,
issued and fully paid................... 5,000,000 5,000,000 5,000,000
(Accumulated deficit) retained profits... (20,861,342) 53,595,869 30,560,591
----------- ----------- -----------
Total shareholders' (deficit) equity.. (15,861,342) 58,595,869 35,560,591
----------- ----------- -----------
Total................................. 178,463,496 472,232,798 474,870,790
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-122
<PAGE>
STAR DIGITEL LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEARS ENDED 31ST DECEMBER, 1993, 1994 AND 1995 AND
FOR THE SIX MONTHS ENDED 30TH JUNE 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
30TH JUNE
YEAR ENDED 31ST DECEMBER, (UNAUDITED)
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
HK$ HK$ HK$ HK$ HK$
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Turnover (Note 4)....... 12,265,121 26,096,132 254,880,983 42,980,312 8,774,353
----------- ----------- ----------- ----------- -----------
Amortisation of interest
in mobile telephone
projects............... 4,708,172 11,834,919 26,892,004 13,610,687 16,610,603
Other cost of sales..... 6,954,600 8,543,022 113,193,362 2,874,921 2,472,236
----------- ----------- ----------- ----------- -----------
Total cost of
sales.............. 11,662,772 20,377,941 140,085,366 16,485,608 19,082,839
----------- ----------- ----------- ----------- -----------
Gross profit (loss)..... 602,349 5,718,191 114,795,617 26,494,704 (10,308,486)
Operating expenses...... 8,912,791 13,769,890 39,875,968 9,171,596 12,664,928
----------- ----------- ----------- ----------- -----------
Operating (loss)
profit............. (8,310,442) (8,051,699) 74,919,649 17,323,108 (22,973,414)
Other income............ 598,551 167,156 241,164 189,861 227,088
----------- ----------- ----------- ----------- -----------
(Loss) profit before
taxation
(Note 5)............... (7,711,891) (7,884,543) 75,160,813 17,512,969 (22,746,326)
Taxation (Note 6)....... (1,700,000) (703,602) (312,521) (288,952)
----------- ----------- ----------- ----------- -----------
(Loss) profit for
the period......... (7,711,891) (9,584,543) 74,457,211 17,200,448 (23,035,278)
Shareholders' (deficit)
equity-- Beginning of
period................. (3,564,908) (11,276,799) (20,861,342) (20,861,342) 53,595,869
----------- ----------- ----------- ----------- -----------
Shareholders' (deficit)
equity--
End of period.......... (11,276,799) (20,861,342) 53,595,869 (3,660,894) 30,560,591
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-123
<PAGE>
STAR DIGITEL LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED 31ST DECEMBER, 1993, 1994 AND 1995 AND
FOR THE SIX MONTHS ENDED 30TH JUNE, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED 31ST DECEMBER, ENDED 30TH JUNE,
-------------------------------------- ------------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- ------------
HK$ HK$ HK$ HK$ HK$
----------- ----------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit (loss) before
taxation.............. (7,711,891) (7,884,543) 75,160,813 17,512,969 (22,746,326)
Adjustments to recon-
cile profit (loss) be-
fore taxation to net
cash (used in) pro-
vided by operating ac-
tivities:
Amortisation of
investment in mobile
telephone projects.... 4,708,172 11,834,919 26,892,004 13,610,687 16,610,603
Depreciation........... 389,321 702,049 647,486 318,252 334,696
Loss on disposal of
fixed assets.......... -- 9,600 -- -- 411
Changes in operating
assets and liabili-
ties:
Increase in stocks..... (1,920,827) (2,006,934) (9,817,627) (10,962,512) (17,432,364)
(Increase) decrease in
debtors and prepay-
ments................. (4,093,738) (3,936,703) (47,550,305) (36,982,989) 8,041,036
(Increase) decrease in
non-current trade re-
ceivables............. -- -- (199,710,420) -- 101,830,331
Increase (decrease) in
creditors............. 1,128,857 9,294,277 28,561,679 (4,035,251) (24,290,159)
Increase (decrease) in
accrued charges....... 947,875 1,291,091 (759,850) 10,710,331 603,957
Increase (decrease) in
amount due to a
related company....... -- -- 891,392 -- (891,392)
Taxation paid.......... -- -- (703,602) (312,521) (288,952)
----------- ----------- ------------ ----------- ------------
Net cash (used in) pro-
vided by operating ac-
tivities............... (6,552,231) 9,303,756 (126,388,430) (10,141,034) 61,771,841
CASH FLOWS FROM
INVESTING ACTIVITIES
Increase in interest in
mobile telephone
projects.............. (65,800,382) (90,518,136) (26,740,955) (17,622,216) (64,536,069)
Purchase of fixed
assets................ (3,061,004) (383,905) (215,803) (156,829) (42,450)
Decrease (increase) in
amounts due from
fellow subsidiaries... -- (425,010) 24,785 1,002 (47,444,336)
Proceeds from disposal
of fixed assets....... 2,065,162 1,268,611 -- -- --
(Increase) decrease in
amount due from
intermediate holding
company............... (722,763) 722,763 -- -- --
----------- ----------- ------------ ----------- ------------
Net cash used in invest-
ing activities......... (67,518,987) (89,335,677) (26,931,973) (17,778,043) (112,022,855)
CASH FLOWS FROM
FINANCING ACTIVITIES
Net cash inflow
(outflow) from fellow
subsidiaries.......... 71,097,140 40,979,545 73,000,971 26,962,548 30,162,680
New borrowings raised.. -- -- 67,819,673 -- 36,360,010
Increase in bank
overdraft............. -- -- 225,368 -- 385,563
Net cash inflow
(outflow) from
immediate holding
company............... 1,476,700 (32,134) 36,322,796 38,514 (3,039,990)
Net cash inflow from
ultimate holding
company............... 630,000 11,340,381 7,402,772 654,560 --
Net cash inflow
(outflow) from
intermediate holding
company............... -- 29,612,238 (29,612,238) 1,099,520 --
Repayment of
borrowings............ -- (2,101,626) (2,010,199) (982,495) (13,617,399)
Repayment of amount due
to a shareholder...... (630,000) -- -- -- --
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing activities.. 72,573,840 79,798,404 153,149,143 27,772,647 50,250,864
----------- ----------- ------------ ----------- ------------
Decrease in cash and
cash equivalents....... (1,497,378) (233,517) (171,260) (146,430) (150)
Cash and cash equiva-
lents at the beginning
of the period.......... 1,906,618 409,240 175,723 175,723 4,463
----------- ----------- ------------ ----------- ------------
Cash and cash equiva-
lents at the end of the
period................. 409,240 175,723 4,463 29,293 4,313
=========== =========== ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
F-124
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST DECEMBER 1995
1. GENERAL
The Company is a private limited company incorporated in Hong Kong. Its
ultimate holding company is Star Telecom International Holding Limited, a
company which is incorporated in Bermuda.
The Company's business is the provision of cellular networks and services in
the People's Republic of China (the "PRC"). The activities of the wholly-owned
subsidiaries, Sombie International Limited and Somdi International Limited,
are the sales of telecommunications equipment in the PRC. Both subsidiaries
are incorporated in the British Virgin Islands.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared on a going concern basis on the
assumption that the subscription agreement set out below will be successfully
completed and that additional funding, including equity capital injection by
an independent third party and a cash loan from the Company's immediate
holding company, will be available as described below.
The net current liabilities of the Company and its subsidiaries (hereinafter
collectively referred to as the "Group") as at 31st December, 1995 amounted to
approximately HK$131.9 million. The Group's net current liabilities have
increased further to approximately HK$195.8 million as at 30th June, 1996 as
shown in the unaudited interim financial statements as at that date. The
aggregate amounts due to holding companies and fellow subsidiaries amounted to
approximately HK$252.6 million as at 31st December, 1995 and approximately
HK$279.7 million (unaudited) as at 30th June, 1996.
The ultimate holding company has taken steps to refinance its investment in
the Group. As more fully explained in note 15, the Company and Star Telecom
Holding Limited ("STHL"), its immediate holding company, entered into a
conditional subscription agreement with International Wireless Communications
Inc. ("IWC") on 23rd September, 1996. Under the agreement, the Company will
receive cash of up to US$30 million (approximately HK$231.9 million) as
additional equity capital to be subscribed by IWC if certain conditions are
met. STHL will also subscribe, at par, for up to an additional 342,850,000
shares of HK$1 each in the Company by means of capitalisation of intercompany
loans and will provide a loan of US$4 million (approximately HK$30.9 million)
to the Company for two years at an interest rate of 9% per annum. IWC will be
granted a put option whereby IWC may require STHL to purchase all or a portion
of the Company's shares held by IWC if the planned restructuring of a
designated telecommunications project in the PRC could not be completed to the
satisfaction of the Board of Directors of IWC in its sole discretion.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements have been prepared in accordance with accounting
principles generally accepted in Hong Kong.
Basis of Consolidation
The consolidated financial statements incorporate the financial statements
of the Company and its subsidiaries, Sombie International Limited and Somdi
International Limited, made up to 31st December each year or, in the case of
the unaudited interim financial statements, for six months to 30th June.
All significant inter-company transactions and balances within the Group are
eliminated on consolidation.
F-125
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Sales of goods are recognised when the goods are delivered and the
significant risks and rewards of ownership have been transferred to the
buyers. The Group's share of operating profits from its interest in mobile
telephone projects is recognised as the profits are earned by the projects.
Interest in Mobile Telephone Projects
Amortisation is provided to write off the Group's investment in mobile
telephone projects, other than the consideration paid for the right to use
radio frequencies in the PRC, using the straight line method over 7 years, the
estimated useful life of the equipment supplied by the Group under the co-
operative agreements, or the life of the agreement of the individual project,
whichever is the shorter. The Group's investment comprises all direct costs
incurred by the Group in fulfilling its obligations under the agreements,
including the supply of equipment which on expiration of the agreement will
not revert to the Group.
In the event that facts and circumstances indicate the carrying value of
interests in mobile telephone projects may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future cash flows (undiscounted and without interest charges) associated with
individual projects would be compared to the individual carrying amount of
interest in mobile telephone projects to determine if a write-down to market
value or discounted cash flow value is required. Future cash flow is based
upon managements' estimates of project participation rights to net profits or
revenues.
The cost of obtaining the right to use radio frequencies in designated areas
in the PRC is amortised over the period for which the Group has obtained the
use of the right, or the life of the related telecommunications projects,
whichever is the shorter. Should a project become no longer commercially
viable, the carrying value of the right will be written down to its net
realisable value, if any.
Fixed Assets and Depreciation
Fixed assets are stated at cost less depreciation. The cost of an asset
comprises its purchase price and any directly attributable costs of bringing
the asset to its working condition and location for its intended use.
Expenditure incurred after the fixed assets have been put into operation, such
as repairs and maintenance and overhaul costs, is normally charged to the
profit and loss account in the period in which it is incurred. In situations
where it can be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the use
of the fixed asset, the expenditure is capitalised as an additional cost of
the fixed asset. When assets are sold or retired, their cost and accumulated
depreciation are eliminated from the accounts and any gain or loss resulting
from their disposal is included in the profit and loss account.
Depreciation is provided to write off the cost of fixed assets over their
estimated useful lives, using the straight line method, at 20% per annum.
Leases
A lease is classified as a finance lease whenever the terms of the lease
transfer substantially all the risks and rewards of ownership of the leased
asset to the Group. An asset which is held under a finance lease is
capitalised at its fair value at the date of inception of the lease. The
outstanding principal portion of the resulting leasing commitment is shown as
an obligation of the Group on the balance sheet. The finance costs, which
represent the difference between the total leasing commitments and the
original principal amount at the inception of the lease, are charged to the
profit and loss account over the period of the lease so as to produce a
constant periodic rate of charge on the remaining balance of the obligation
for each accounting period.
All other leases are classified as operating leases and the rentals are
charged to the profit and loss account on a straight line basis over the
duration of the leases.
F-126
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stocks
Stocks consist primarily of mobile telephone hand sets for re-sale and are
stated at the lower of cost and net realisable value. Cost is calculated using
the first-in, first-out method. Net realisable value is determined by
reference to actual or anticipated selling prices less estimated future costs
for selling and distribution.
Foreign Currencies
Transactions in foreign currencies are translated at the approximate rates
ruling on the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated at the rates ruling on the
balance sheet date. Gains and losses arising on exchange are dealt with in the
profit and loss account.
Taxation
The charge for taxation is based on the results for the year after adjusting
for items which are non-assessable or disallowed. Certain items of income and
expense are recognised for tax purposes in a different accounting period from
that in which they are recognised in the financial statements. The tax effect
of the resulting timing differences, computed under the liability method, is
recognised as deferred taxation in the financial statements to the extent that
it is probable a liability or asset will crystallise in the foreseeable
future.
4. TURNOVER
Turnover represents the net amounts received and receivable in respect of
the sales of goods and profit distributions received and receivable from the
Group's interest in mobile telephone projects in the PRC during the period.
An analysis of the turnover is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED 31ST DECEMBER, 30TH JUNE,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- ---------
HK$ HK$ HK$ HK$ HK$
---------- ---------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales of telecommunica-
tions equipment........ -- -- 203,446,620 3,736,200 --
Sales of mobile phones.. 6,944,475 9,364,824 11,883,434 1,412,463 2,672,893
Other sales............. -- -- 29,776,786 29,776,786 --
Profit distributions
from the Group's inter-
est in mobile telephone
projects............... 5,320,646 16,731,308 9,774,143 8,054,863 6,101,460
---------- ---------- ----------- ---------- ---------
12,265,121 26,096,132 254,880,983 42,980,312 8,774,353
========== ========== =========== ========== =========
</TABLE>
F-127
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. (LOSS) PROFIT BEFORE TAXATION
(Loss) profit before taxation has been arrived at after charging:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED 31ST DECEMBER, 30TH JUNE,
-------------------------- -----------------------
1993 1994 1995 1995 1996
------- ------- ---------- ----------- -----------
HK$ HK$ HK$ HK$ HK$
------- ------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Depreciation............... 389,321 702,049 647,486 318,252 334,696
Finance lease charge....... -- 162,618 1,482,652 265,066 1,030,809
Interest on bank and other
borrowings................ 34,506 45,778 55,214 -- 1,499,765
Management fee paid to fel-
low subsidiaries.......... -- -- 18,500,000 -- --
Management fee paid to ul-
timate holding company.... -- -- 3,000,000 -- --
Operating lease rentals
paid for land and build-
ings...................... 926,532 -- 1,291,542 653,905 633,614
======= ======= ========== ======= =========
</TABLE>
6. TAXATION
The change represents taxation calculated at the rates prevailing in the
PRC.
No provision for Hong Kong Profits Tax has been made in the financial
statements as the Group had no assessable profits in Hong Kong during the
period. In the opinion of the Company's directors, the majority of the Group's
profits does not arise in nor is derived from Hong Kong.
There are no significant deferred tax balances for PRC tax. A net deferred
tax asset has not been recognised for timing differences related to Hong Kong
Profits Tax as it is uncertain whether the asset will be realized in the
foreseeable future.
F-128
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. FIXED ASSETS
<TABLE>
<CAPTION>
COMPUTER
AND FURNITURE
ELECTRONIC AND
EQUIPMENT FIXTURES TOTAL
---------- --------- ----------
HK$ HK$ HK$
---------- --------- ----------
<S> <C> <C> <C>
COST
At 1st January, 1994...................... 2,939,950 1,234,047 4,173,997
Additions................................. 307,406 76,499 383,905
Disposals................................. (1,385,895) (68,560) (1,454,455)
---------- --------- ----------
At 31st December, 1994.................... 1,861,461 1,241,986 3,103,447
Additions................................. 131,905 83,898 215,803
---------- --------- ----------
At 31st December, 1995.................... 1,993,366 1,325,884 3,319,250
Additions (unaudited)..................... 42,450 -- 42,450
Disposals (unaudited)..................... -- (1,450) (1,450)
---------- --------- ----------
At 30th June, 1996 (unaudited)............ 2,035,816 1,324,434 3,360,250
---------- --------- ----------
DEPRECIATION
At 1st January, 1994...................... 164,053 328,398 492,451
Provided for the year..................... 456,431 245,618 702,049
Eliminated on disposals................... (160,818) (15,426) (176,244)
---------- --------- ----------
At 31st December, 1994.................... 459,666 558,590 1,018,256
Provided for the year..................... 389,019 258,467 647,486
---------- --------- ----------
At 31st December, 1995.................... 848,685 817,057 1,665,742
Provided for the period (unaudited)....... 201,981 132,715 334,696
Eliminated on disposals (unaudited)....... -- (1,039) (1,039)
---------- --------- ----------
At 30th June, 1996 (unaudited)............ 1,050,666 948,733 1,999,399
========== ========= ==========
NET BOOK VALUES
At 30th June, 1996 (unaudited)............ 985,150 375,701 1,360,851
========== ========= ==========
At 31st December, 1995.................... 1,144,681 508,827 1,653,508
========== ========= ==========
At 31st December, 1994.................... 1,401,795 683,396 2,085,191
========== ========= ==========
</TABLE>
8. INTEREST IN MOBILE TELEPHONE PROJECTS
The Company has entered into co-operative agreements with outside parties to
set up mobile telephone communication networks in various cities in the PRC.
Pursuant to the co-operative agreements, the Company's contributions are in the
form of equipment supply or the provision of working capital or both. In
return, the Company is entitled to a share of the operating profits under the
co-operative agreements which have lives of 6 to 15 years. The Company has no
control over the operations under the co-operative agreements and on expiration
of the co-operative agreements, the Company will not be entitled to any of its
contributions.
The Company had also paid for the right to use a radio frequency in a certain
area in the PRC. The cost will be amortised over the period for which the Group
has obtained the right, or the life of the related telecommunications project,
whichever is the shorter. Whilst there is no established or available market
value for such radio frequency rights, the directors of the Company are of the
opinion that the amount paid is fair and reasonable.
F-129
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest in mobile telephone projects comprise equipment supplied and the
provision of working capital to the PRC projects, and the payment for the
right to use a radio frequency.
<TABLE>
<CAPTION>
TOTAL
-----------
HK$
-----------
<S> <C>
COST
At 1st January, 1994.......................................... 65,800,382
Additions for the year........................................ 106,919,853
-----------
At 31st December, 1994........................................ 172,720,235
Additions for the year........................................ 64,210,682
-----------
At 31st December, 1995........................................ 236,930,917
Additions for the period (unaudited).......................... 64,536,069
-----------
At 30th June, 1996 (unaudited)................................ 301,466,986
===========
AMORTIZATION
At 1st January, 1994.......................................... 4,708,172
Provided for the year......................................... 11,834,919
-----------
At 31st December, 1994........................................ 16,543,091
Provided for the year......................................... 26,892,004
-----------
At 31st December, 1995........................................ 43,435,095
Provided for the period (unaudited)........................... 16,610,603
-----------
At 30th June, 1996 (unaudited)................................ 60,045,698
===========
NET BOOK VALUE
At 30th June, 1996 (unaudited)................................ 241,421,288
===========
At 31st December, 1995........................................ 193,495,822
===========
At 31st December, 1994........................................ 156,177,144
===========
</TABLE>
9. NON CURRENT TRADE RECEIVABLES
<TABLE>
<CAPTION>
31ST DECEMBER,
---------------------- 30TH JUNE,
1994 1995 1996
--------- ------------ -----------
HK$ HK$ HK$
--------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Non current trade receivables...... -- 199,710,420 97,880,089
Less: Amount due within one year
shown under current assets........ -- (113,414,891) (11,584,560)
--------- ------------ -----------
Amount due after one year.......... -- 86,295,529 86,295,529
========= ============ ===========
</TABLE>
The non current trade receivables represent the present value of future
receipts arising from sales of telephone switching equipment (purchased from a
third party manufacturer) to two customers. The amounts are non-interest
bearing and are secured by a legal charge over the equipment sold, a 37.5%
equity interest in an unlisted company and certain land in the PRC.
Under the terms of the original sales agreements, total receipts of
US$40,300,000 would be receivable by the Group in annual instalments of
varying amounts over fifteen years. The initial instalments were due in 1996
and the final instalments in 2010. Subsequent to 31st December, 1995 the Group
entered into supplementary agreements with one of the two customers to effect
earlier payments and assigned certain instalments receivable after 1999 from
the second customer to a third party for an immediate cash consideration.
F-130
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of the above arrangements, the gross amount receivable has been
reduced from US$40,300,000 to US$28,058,900. However, the present value of the
receipts, which forms the basis of recording the sales in the financial
statements, remains unchanged at HK$199,710,420 as under the arrangements
referred to above, much larger payments become due in the first year and the
overall payment period has been shortened from fifteen to four years. The
amended payment schedule is as follows:
<TABLE>
<CAPTION>
AT 31ST DECEMBER, 1995 AT 30TH JUNE, 1996
------------------------ -------------------------
GROSS PRESENT VALUE GROSS PRESENT VALUE
---------- ------------- ----------- -------------
US$ HK$ US$ HK$
---------- ------------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Due in:
1996.................... 14,658,900 113,414,891 1,600,000 11,584,560
1997.................... 6,400,000 43,255,256 6,400,000 43,255,256
1998.................... 6,000,000 37,514,556 6,000,000 37,514,556
1999.................... 1,000,000 5,525,717 1,000,000 5,525,717
---------- ----------- ---------- ----------
28,058,900 199,710,420 15,000,000 97,880,089
========== =========== ========== ==========
</TABLE>
In arriving at the present value of the future cash receipts, discount rates
which approximate the cost of funds to the Group have been used.
Up to the date of this report, payments of approximately HK$101,800,000 were
received in respect of the instalments due in 1996.
10. BORROWINGS
<TABLE>
<CAPTION>
31ST DECEMBER,
---------------------- 30TH JUNE,
1994 1995 1996
---------- ----------- -----------
HK$ HK$ HK$
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Secured bank loan......................... -- 14,645,904 12,204,920
Unsecured bank loan....................... -- 21,185,942 18,041,970
Other loans............................... 8,284,692 77,742,246 107,149,911
Obligations under finance leases.......... 6,015,399 4,005,200 2,925,102
Bank overdraft............................ -- 225,368 610,931
---------- ----------- -----------
14,300,091 117,804,660 140,932,834
========== =========== ===========
</TABLE>
F-131
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The borrowings bear interest at market rates (5% to 9.5% at 31st December,
1995) and are repayable as follows:
<TABLE>
<CAPTION>
31ST DECEMBER,
---------------------- 30TH JUNE,
1994 1995 1996
---------- ----------- -----------
HK$ HK$ HK$
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Amount due within one year shown under
current liabilities................... 2,010,199 26,870,238 43,175,599
---------- ----------- -----------
Between 1-2 years...................... 2,207,197 26,855,567 28,747,028
Between 2-5 years...................... 10,082,695 64,078,855 69,010,207
---------- ----------- -----------
Amount due after one year.............. 12,289,892 90,934,422 97,757,235
---------- ----------- -----------
Total.................................. 14,300,091 117,804,660 140,932,834
========== =========== ===========
</TABLE>
11. SUPPLEMENTARY CASH FLOW INFORMATION
(a) Movements on Financing Activities--Group Companies
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
DUE TO DUE TO DUE TO AMOUNT
ULTIMATE INTERMEDIATE IMMEDIATE DUE TO
HOLDING HOLDING HOLDING FELLOW
COMPANY COMPANY COMPANY SUBSIDIARIES
---------- ------------ ---------- ------------
HK$ HK$ HK$ HK$
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Balance at 1st January,
1995.................... 11,970,381 29,612,238 11,817,897 112,077,712
Net cash inflow
(outflow).............. 7,402,772 (29,612,238) 36,322,796 73,000,971
---------- ----------- ---------- -----------
Balance at 31st December,
1995.................... 19,373,153 -- 48,140,693 185,078,683
Net cash inflow
(outflow) (unaudited).. -- -- (3,039,990) 30,162,680
---------- ----------- ---------- -----------
Balance at 30th June,
1996 (unaudited)........ 19,373,153 -- 45,100,703 215,241,363
========== =========== ========== ===========
</TABLE>
(b) Movements on Financing Activities--Borrowings
<TABLE>
<CAPTION>
BORROWINGS
-----------
UK$
<S> <C>
BALANCE AT 1ST JANUARY, 1995.................................. 14,300,091
New borrowings raised......................................... 67,819,673
New equipment loans and obligations under finance leases...... 37,469,727
Increase in bank overdraft.................................... 225,368
Repayment..................................................... (2,010,199)
-----------
BALANCE AT 31ST DECEMBER, 1995................................ 117,804,660
New borrowings raised (unaudited)............................. 36,360,010
Increase in bank overdraft (unaudited)........................ 385,563
Repayment (unaudited)......................................... (13,617,399)
-----------
Balance at 30th June, 1996 (unaudited)........................ 140,932,834
-----------
</TABLE>
F-132
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Major non-cash transactions
During each of the years ended 31st December, 1993, 1994 and 1995, the
Company raised borrowings of HK$Nil, HK$16,401,717 and HK$37,469,727 to
finance the acquisition of equipment which the Company used as its
contributions to the mobile telephone projects. For the six months ended 30th
June, 1995 and 1996, such non-cash transactions amounted to HK$16,555,819 and
HK$Nil respectively (unaudited).
12. CAPITAL COMMITMENTS
<TABLE>
<CAPTION>
31ST DECEMBER,
--------------------- 30TH JUNE,
1994 1995 1996 (A)
---------- ---------- -----------
HK$ HK$ HK$
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capital commitments in respect of invest-
ment in mobile telephone projects in the
PRC, contracted for but not provided in
the financial statements................ 20,148,808 17,666,835 71,004,800
---------- ---------- ----------
</TABLE>
- --------
(a) The outstanding capital commitments as at 30th June, 1996 comprised
commitments in respect of two mobile telephone projects in the PRC
amounting to approximately HK$65 million (Hainan project) and HK$6 million
(Qingdao project) (both figures being unaudited) respectively, payable
within 12 months from 30th June, 1996.
13. OPERATING LEASE COMMITMENT
At 31st December, 1995 and 30th June, 1996, the Group was committed to pay
approximately HK$5,100,000 and HK$2,800,000 (unaudited) respectively in the
following year for certain telecommunications equipment under a non-
cancellable operating lease which will expire within five years.
14. PLEDGE OF ASSETS
The Company pledged certain of its equipment for mobile telephone projects
with an aggregate net book value of approximately HK$14,646,000 and
HK$12,205,000 (unaudited) at 31st December, 1995 and 30th June, 1996,
respectively to a bank to secure the loan facility to the Company.
15. POST BALANCE SHEET EVENTS
(a) In July 1996, the Company issued a guarantee of US$6 million
(equivalent to approximately HK$46 million) given to a bank to secure
credit facilities granted to its ultimate holding company.
(b) During the period from May 1996 to August 1996, the Company entered
into four agreements with a PRC company, which is the assignee of the long-
term receivables under one of the two supplementary agreements referred to
in note 9, in connection with investments in telecommunications projects in
the PRC for a total consideration of approximately RMB251 million
(equivalent to approximately HK$235 million), of which approximately RMB176
million (equivalent to approximately HK$165 million) was used for obtaining
the right to use certain radio frequencies in two provinces in the PRC for
a period of 20 years. Up to the date of this report, the Company has paid a
total amount of approximately HK$159 million. The Company is committed to a
further payment of approximately HK$76 million.
On 29th August, 1996, the PRC company referred to in the preceding
paragraph signed an agreement with the Company whereby it agreed to waive
its rights as assignee of the long-term receivables if the Company could
properly fulfill its obligations under two of the four new agreements
referred to in the preceding paragraph.
(c) On 23rd September, 1996, the Company entered into a conditional
subscription agreement with International Wireless Communications Inc.
("IWC"), an independent third party. Under the terms of the agreement, the
Company would issue and allot shares to IWC at two stages or closing dates.
At the first
F-133
<PAGE>
STAR DIGITEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
closing date, IWC would subscribe US$11 million for shares of HK$1 each in
the Company at par plus a US$9 million premium to STHL. At the second
closing date, IWC would further subscribe US$19 million for shares in the
Company of HK$1 each at par plus a further US$9 million premium to STHL.
STHL would also subscribe for additional 122,545,000 and 220,305,000 shares
of HK$1 each in the Company at par on the two closing dates respectively by
means of capitalisation of intercompany balances so that STHL will hold 60%
of the enlarged issued share capital of the Company and IWC will hold the
remaining 40%. In addition, IWC will be granted a put option so that IWC
would have the right, exercisable for a period of six months, commencing
nine months after the date of the first closing, to require STHL to
purchase all or a portion of the Company's shares then held by IWC, in
exchange for shares in the Company's ultimate holding company, if the
planned restructuring of a designated PRC telecommunications project could
not be completed to the satisfaction of the Board of Directors of IWC in
its sole discretion.
16. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
In the Company's opinion, all adjustments necessary for a fair presentation
of the unaudited results for the six months ended 30th June, 1995 and 1996,
respectively, are included. All such adjustments are accruals of a normal and
recurring nature. The results of operations for the six months ended 30th
June, 1996 are not necessarily indicative of the results of operations to be
expected for the full year.
17. DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
The Company's consolidated financial statements are prepared in accordance
with Hong Kong GAAP. Financial statements prepared under US GAAP would not
differ significantly from these statements.
F-134
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CON-
TAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE
TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITA-
TION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 3
Prospectus Summary....................................................... 5
Risk Factors............................................................. 22
Use of Proceeds.......................................................... 36
The Exchange Offer....................................................... 37
Capitalization........................................................... 45
Unaudited Pro Forma Consolidated Condensed Financial Statements.......... 46
Consolidated Selected Financial Data..................................... 53
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 54
Business................................................................. 59
Management............................................................... 88
Certain Transactions..................................................... 98
Principal Stockholders................................................... 105
Description of Exchange Notes............................................ 108
Description of Capital Stock............................................. 132
Certain Income Tax Considerations........................................ 137
Old Notes Registration Rights............................................ 141
Old Notes Transfer Restrictions.......................................... 143
Plan of Distribution..................................................... 145
Book-Entry; Delivery and Form............................................ 146
Experts.................................................................. 148
Legal Matters............................................................ 148
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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PROSPECTUS
----------------------------
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
OFFER TO EXCHANGE $1,000
PRINCIPAL AMOUNT OF ITS
14% SENIOR SECURED
DISCOUNT NOTES DUE 2001
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR EACH $1,000 PRINCIPAL
AMOUNT OF ITS OUTSTANDING 14% SENIOR SECURED DISCOUNT NOTES DUE 2001
The Exchange Agent for the Exchange Offer is:
BANKERS TRUST COMPANY
By Facsimile: (615) 835-3572
Confirmation by Telephone: (615) 835-3701
By Hand Delivery:
Bankers Trust Company
Receipt & Delivery Window
123 Washington St., 1st Floor
New York, New York 10006
Attn: Corporate Trust and Agency Group
By Mail:
BT Services Tennessee, Inc.
P.O. Box 292737
Nashville, TN 37229-2737
Attn: Reorganization Unit
By Overnight Delivery:
BT Services Tennessee, Inc.
648 Grassmere Park Road
Nashville, TN 37211
Attn: Reorganization Unit
NOVEMBER 21, 1996
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