<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-
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INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
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(Exact name of Registrant as Specified in Its Charter)
Delaware 94-3248701
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 South El Camino Real, Suite 1275, San Mateo, California 94402
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (415) 548-0808
----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of December 31, 1996 there were 636,720 shares of the Registrant's
common stock outstanding and 16,906,400 shares of the Registrant's preferred
stock outstanding. Each such share of preferred stock is currently convertible
into one share of the Registrant's common stock.
Page 1 of 124 pages.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Final Prospectus filed with the
Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b)
under the Securities Act of 1933 on November 21, 1996 (Reg. No. 333-11987) are
incorporated by reference into Parts I and IV of this Annual Report as Form 10-K
to the extent provided herein. Except as specifically incorporated by reference
herein, such Final Prospectus is not to be deemed filed as part of this Annual
Report on Form 10-K.
Page 2 of 124 pages.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE REGISTRANT,
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE REGISTRANT'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF CERTAIN IMPORTANT FACTORS, INCLUDING THOSE SET FORTH UNDER "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," PARTICULARLY THOSE SET FORTH UNDER "--ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
AS USED HEREIN, THE TERM" THE COMPANY" REFERS TO THE REGISTRANT AND ITS
SUBSIDIARY, INTERNATIONAL WIRELESS COMMUNICATIONS, INC. ("IWC"), UNLESS THE
CONTEXT OTHERWISE REQUIRES OR UNLESS OTHERWISE EXPRESSLY STATED.
PART I
ITEM 1. BUSINESS
THE FOLLOWING DESCRIPTION OF THE BUSINESS OF THE REGISTRANT IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K. AN "OPERATING COMPANY" REFERS TO A WIRELESS COMMUNICATIONS COMPANY OR
PROJECT IN WHICH THE COMPANY HAS INVESTED AND THAT HAS 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 WIRELESS COMMUNICATIONS SERVICE ON A COMMERCIAL BASIS. REFERENCE TO
"DOLLARS" AND "$" REFERS TO UNITED STATES DOLLARS, UNLESS OTHERWISE EXPRESSLY
STATED. CERTAIN OF THE DEMOGRAPHIC AND STATISTICAL DATA APPEARING IN THIS ANNUAL
REPORT ON FORM 10-K HAVE BEEN DERIVED FROM THE SOURCES SET FORTH UNDER "--
BACKGROUND--DEMAND FOR COMMUNICATIONS SERVICES IN DEVELOPING COUNTRIES."
I. BACKGROUND
The Company is a leading developer, owner and operator of wireless
communications companies and projects primarily 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") and
paging. The Company currently has interests in nine operating companies in
Brazil, China, India, Indonesia, Malaysia, Mexico, New Zealand and the
Philippines. In addition, the Company has interests in five developmental stage
projects in Mexico, Pakistan, Peru and Taiwan and is actively pursuing other
development and acquisition opportunities. As of December 31, 1996, the
Company's operating companies had licenses covering an estimated 693 million
people ("POPs") which, based on the Company's equity interests in these
operating companies, represented an estimated 245 million equity POPs. As of
December 31, 1996, the Company's operating companies, which are generally in the
early stages of operating and expanding their networks, served approximately
144,900 subscribers.
The Company operates primarily in countries in Asia and Latin America where
management believes that there exists substantial unmet demand for
communications services, attractive license opportunities and political and
regulatory environments which encourage foreign investment in private
telecommunications 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 estimated to be less than 10 telephone lines per 100
POPs in 1994 (compared to an estimated 59 telephone lines per 100 POPs in the
United States in 1994) 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
Page 3 of 124 pages.
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developing the following services: cellular telephone, using both analog and
digital technologies; WLL, which provides a wireless telephone service linking
the home or business into the local telephone network; ECTR, which combines the
attributes of cellular and dispatch radio, and paging. Once the Company enters a
market with a wireless communications service, it generally seeks to develop
additional wireless communications 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.
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>
WAITING TIME
FOR INSTALLATION
POPULATION GDP PER REAL GDP TELEPHONE OF LAND-LINE CELLULAR
POPULATION GROWTH CAPITA GROWTH LINES PER TELEPHONE PENETRATION
(MILLIONS)(1) (% PER YEAR)(1) (US$)(1) (% PER YEAR)(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 N/A 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>
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(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.
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,
governments are beginning to privatize national carriers and encourage the
formation of private communications
Page 4 of 124 pages.
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competitors. As a result, the Company believes there is a substantial
opportunity for privately-owned companies to provide wireless communications
services in these countries.
ROLE OF WIRELESS TECHNOLOGIES
A number of wireless technologies provide voice and data services that
address the communications needs of developing countries. These services include
cellular telephone, WLL, ECTR and paging. 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 in the home or business rather than
through conventional land lines. This is accomplished by placing small
transmitter/receivers at the telephone site. From the perspective of the user,
WLL is operated in the same way as a regular telephone, with the added
possibility of wide area "cordless telephone" use. WLL networks are generally
less expensive and quicker to install than current land-line systems.
ENHANCED CAPACITY TRUNKED RADIO. ECTR combines attributes of cellular and
dispatch radio (e.g. emergency dispatch) to provide the potential for 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.
BUSINESS DEVELOPMENT APPROACH
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.
Page 5 of 124 pages.
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- 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 Cellular Systems, Inc.
("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 or
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 and WLL.
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 select 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 licenses through private negotiation
with the host government, rather than through competitive bidding. Third, the
Company seeks to provide multiple wireless
Page 6 of 124 pages.
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services within an existing market to reap certain 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 AND DEVELOPMENTAL STAGE PROJECTS. The
Company typically plays an active role in the development and management of its
operating companies and developmental stage projects. 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 developmental stage projects and/or serving on the boards of
directors of these companies and projects. Moreover, shareholder agreements
often provide the Company with the right to approve or veto key decisions at the
operating company or developmental stage project level, including operating
budgets, business plans and major corporate transactions, even though the
Company may own less than 50% of the equity of the operating company or
developmental stage project.
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
U.S., is the Company's principal strategic partner as well as its largest
stockholder. As of December 31, 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 communication businesses, including
identification and evaluation of wireless communications opportunities, review
of business and technical plans, and assistance in training operating company
personnel. Vanguard is also a partner of the Company in Star Digitel Limited
("SDL"), the Company's China Regional Cellular operating company. Haynes G.
Griffin, Chairman of the Board of Directors of the Company, is Chairman of the
Board and Co-Chief Executive Officer of Vanguard. See "Item 11. Executive
Compensation--Compensation Committee Interlocks and Insider Participation" and
"Item 13. Certain Relationships and Related Transactions."
BROADCAST COMMUNICATIONS LIMITED ("BCL"). 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 Syarikat Telefon Wireless (M) Sdn Bhd, the Company's WLL operating
company in Malaysia.
STAR TELECOM HOLDING LIMITED ("STHL"). STHL is the wholly owned subsidiary of
Star Telecom International Holding Limited, a company listed on The Stock
Exchange of Hong Kong Limited. STHL owns one of the largest paging and internet
service providers in Hong Kong and is the Company's local partner in SDL and
Star Telecom Overseas (Cayman Islands) Limited ("STOL"), a Cayman Islands
company through which the Company holds its interest in RPG Paging Service
Limited, the Company's India Regional Paging operating company, and through
which the Company is pursuing paging opportunities in various other countries in
the Asia-Pacific region. The Company and STHL have entered into various
agreements pursuant to which they have agreed, subject to certain geographic and
other exemptions, not to engage in the cellular business or the paging business
except through SDL or STOL, as applicable.
II. OPERATING COMPANIES
As of December 31, 1996, the Company had direct or indirect interests in
the following nine operating companies. The information set forth below is as of
December 31, 1996, and is qualified by reference to and should be read in
conjunction with the more complete descriptions of the operating companies set
forth below.
Page 7 of 124 pages.
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<TABLE>
<CAPTION>
EQUITY
POPS POPS
COVERED BY COVERED BY
EQUITY LICENSES LICENSES
OPERATING COMPANY LOCATION TYPE OF PROJECT INTEREST (MILLION)(1) (MILLION)(1) SUBSCRIBERS
- ----------------- -------- --------------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Via Movel 1 Brazil Regional ECTR 65.1%(2) 60.0 39.1(2) 900
Communicacoes S.A.
("Via 1")
Star Digitel Limited China Regional Cellular 40.0% 302.0 120.8 21,000
("SDL")
RPG Paging Service India Regional Paging 7.0%(3) 20.0 1.4(3) 58,000
Limited ("RPSL")
PT Mobile Selular Indonesia National Cellular 19.8% 195.3 38.7 22,000
Indonesia ("Mobisel")
PT Mobilkom Indonesia National ECTR 15.0% 195.3 29.3 4,100
Telekomindo
("Mobilkom")
Syarikat Telefon Wireless Malaysia National WLL 30.0%(4) 20.0 6.0(4) 5,200
(M) Sdn Bhd ("STW")
Corporacion Mobilcom, Mexico Regional ECTR 2.2%(5) 65.0 1.4(5) 27,900
S.A. de C.V.
("Mobilcom Mexico")
TeamTalk Limited New Zealand National ECTR 100.0% 3.5 3.5 5,600
("TeamTalk")
Universal Philippines Regional ECTR 19.0%(6) 27.0 5.1(6) 180
Telecommunications
Service, Inc. ("UTS")
</TABLE>
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(1) Based on the Company's estimate of the 1995 population covered by the
operating license(s) of each project and on DRI/McGraw-Hill World Markets
Executive Overview, Second Quarter 1996.
(2) Reflects the Company's anticipated equity interest in Via 1, a joint
venture that is currently in the process of being legally formed. Does not
give effect to exercise of options presently being negotiated with the
Company's local partners that, if exercised in their entirety upon the
terms that are currently envisioned by the Company, would reduce the
Company's interest in Via 1 below 50%.
(3) Does not include a proposed increase in the Company's indirect ownership
interest in RPSL to 13.3%, which is currently pending final governmental
approval.
(4) Does not give effect to an option held by a bank syndicate that has
provided project financing to STW which, if exercised, would reduce the
Company's interest in STW to 27.8%.
(5) Does not reflect the potential dilution to the Company's interest to 1.8%
if the Company does not participate in a capital call that was declared in
March 1997. The Company is currently evaluating whether to participate in
such capital call. Also does not give effect to options held by a local
partner which, if exercised in their entirety, would further dilute the
Company's interest to 1.3%.
Page 8 of 124 pages.
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(6) Assumes the completion of certain registration formalities in connection
with the Company's acquisition of approximately 6.0% of the UTS stock, and
excludes an additional 3.0% of UTS' stock which is currently under option
to the Company and which will vest upon completion of certain performance
milestones.
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
DECEMBER 31, 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 "--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
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS--PROJECT LEVEL
RISKS."
BRAZIL REGIONAL ECTR
Pursuant to an agreement with Rede Brasil Sul ("RBS"), the Company's
proposed primary local partner in this project, and following fulfillment of
certain regulatory and corporate requirements, the Company will obtain a 65.1%
equity interest in Via 1, the vehicle through which RBS and the Company would
provide ECTR services in the major cities in Southern and Central Brazil,
including Rio de Janeiro, Sao Paulo and Curitiba. The Company, indirectly
through its wholly owned Brazilian subsidiary, Servicos de Radio Comunicacoes
Ltda. ("SRC"), holds licenses covering 140 channels in the 800 MHz frequency
band while RBS, through six companies, holds licenses covering a further 540
channels in the same frequency band. RBS has contributed the companies through
which it holds its licenses to Via 1, and, as part of the legal formation of the
joint venture with RBS, it is anticipated that SRC will also be contributed to
Via 1. SRC's assets consist primarily of licenses and fixed assets. In
addition, Grupo Arbi, a Brazilian industrial and financial group ("Arbi"), has
agreed to participate as an initial 7% equity partner in Via 1 by contributing
the use of its licenses for 120 channels in the 800 MHz frequency band to Via 1
and, pending consummation of this transaction, Arbi has allowed Via 1 to
construct, manage and operate its licenses.
In anticipation of the completion of the contribution of Arbi's licenses
and of SRC to Via 1, the Company, RBS and Arbi commenced initial ECTR
operations in the cities of Porto Alegre, Novo Hamburgo and Caxias do Sul in
July 1996 under the trading name "Via 1." The pre-incorporation operations of
Via 1 are hereinafter referred to as the "Via 1 Project." As of December 31,
1996, the Via 1 Project had commenced operations in fifteen cities in
Brazil and had begun construction of its network in Rio de Janeiro. The
Company's, RBS' and Arbi's licenses that have been, or are anticipated to be,
contributed to Via 1 (the "Via 1 Licenses") cover major cities in Southern
and Central Brazil, including, in addition to the foregoing, Sao Paulo,
Curitiba and Rio de Janeiro. As of December 31, 1996, the Via 1 Project had
approximately 900 subscribers.
MARKET OPPORTUNITY. Brazil, with a population of approximately 156.9
million, is among the most populous countries in the world, and has the one
of the highest real GDPs 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 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 the fact that there were only
7.4 lines per 100 POPs in 1994. In addition, with the exception of ECTR
licenses, the government has not to date issued licenses for cellular systems
to private operators, although auctions for such licenses are currently in
progress. 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.
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
Page 9 of 124 pages.
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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 a shareholders agreement between RBS and the
Company, the Company has been providing the Via 1 Project with technical
services, operational management and has procured the equipment necessary for
the development of the network. Implementation of the shareholders agreement
will require certain governmental approvals. See "--Licenses and
Interconnection" below.
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 (as defined below under "Item 13. Certain Relationships and Related
Transactions--The Vanguard Exchange"), Vanguard assigned its participation
rights in the project to IWC, which entered into a shareholders' agreement with
RBS that contemplated the formation of Via 1. Pursuant to such agreement, the
Company and RBS 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, and Arbi has
agreed to contribute 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 licenses and fixed
assets.
The Company's initial equity interest in Via 1 will be 65.1%, RBS' initial
equity interest will be 27.9% and Arbi's initial equity interest will be 7%. The
Company is negotiating certain options held by or to be granted to RBS and Arbi
which, if exercised in their entirety, would reduce the Company's interest in
Via 1 below 50%.
LICENSES AND INTERCONNECTION. The Via 1 Licenses generally have terms of 15
years, with the first licenses having been granted in 1994. These licenses,
in aggregate, cover 800 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. In order
to build its network as contemplated in its current business plan, Via 1 will
have to secure additional channels. Negotiations are currently in progress to
obtain additional channels, and the possibility of a further auction of
channels in late 1997 has been discussed by the Brazilian government.
However, there can be no assurance Via 1 will be able to obtain these
channels at a reasonable price or at all. 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 a number of licenses. However, RBS and SRC have obtained extensions with
respect to the deadlines for these licenses and have commenced, or, it is
expected, will commence operations within the extended time period. The
licenses held by SRC, RBS and Grupo Arbi contain no restrictions regarding
the technology which may be used but, in certain cases, the licenses have
operational requirements. Further, new channels proposed to be granted by
the Brazilian government in the future may have restrictions regarding the
technology that may be used to provide trunking services.
The continued operation of the Via 1 Project as well as the proposed
transfer of the Via 1 Licenses to Via 1 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 a
material adverse effect on the Company.
Brazilian law allows full interconnection of ECTR services with the public
switched telephone network, although the terms of such interconnection have
not yet been promulgated. 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Additional Factors that May Affect Future Results--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, Via 1 will
seek by the end of 1997 to construct cell sites to cover an additional 28 cities
in five states in Southern and Central Brazil increasing system capacity to
25,000 subscribers. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Additional Factors that May
Affect Future Results--Project Level Risks."
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
Page 10 of 124 pages.
<PAGE>
combination of Uniden and Nokia infrastructure equipment is being used. As of
December 31, 1996, the Via 1 Project had 45 employees and was using the services
of approximately 5 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 pursuant to which Nokia is providing
equipment for the Via 1 Project. It is anticipated that this contract will be
assigned to Via 1 on completion of the various legal and regulatory formalities
associated with Via 1's formation.
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.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, the
Company had funded approximately $12.0 million into SRC. In addition, in
connection with the Vanguard Exchange, the Company allocated $5.9 million of the
consideration paid to Vanguard 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 $9.8 million for 1997, 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 at least an additional aggregate amount
of approximately $12.3 million in Via 1 prior to December 1998. If Via 1 is
unable to obtain necessary financing in order to make such additional
investments, it will be required to delay its planned capital expenditures. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Additional Factors that May Affect Future Results--
Project Level Risks."
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 Movil Digital). The Company
believes that Via 1 may have lower infrastructure and operating costs than many
of the cellular operators and, consequently, may have a pricing advantage over
traditional cellular services. Via 1 will accordingly 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 two of the
three other multi-site ECTR service providers as these two operators are
focusing on the largest cities of Brazil and concentrating 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. The other ECTR operator, Radio Movil Digital,
has focused on non-networked traditional dispatch radio business.
Page 11 of 124 pages.
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CHINA REGIONAL CELLULAR
The Company currently owns a 40% equity interest in SDL, a Hong Kong
corporation engaged in various cellular projects in China. The Company's
partners in SDL are STHL, which owns 53% of SDL, and Vanguard, which owns the
remaining 7% of SDL.
SDL is engaged in the development of various regional cellular projects in
China with its local partner, the Chinese People's Liberation Army (the "PLA").
In recent years, 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 Hainan. As of December
31, 1996, the projects had approximately 21,000 subscribers in the aggregate.
MARKET OPPORTUNITY. With a population of over 1.2 billion, China is the most
populous country in the world. China has recently experienced rapid economic and
significant population growth, as evidenced by real GDP and population growth
rates of approximately 9.9% and 1.2%, respectively, for the year ended
December 31, 1995. With approximately 2.3 telephone lines per 100 POPs in 1994
and the recent steady privatization of the Chinese economy, the Company believes
that China has a large unmet demand for communications services.
REGULATORY ENVIRONMENT. Foreign ownership of telecommunications operators is
currently prohibited in China. Accordingly, 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 such PLA
operators' networks.
LOCAL STRATEGIC PARTNER. The Company's local strategic partner in SDL is STHL,
a Hong Kong company that owns one of the largest paging and internet service
providers in Hong Kong. STHL is also the Company's local partner in STOL, the
entity through which the Company holds its interest in RPSL, the Company's India
Regional Paging operating company.
PROJECT BACKGROUND. In November 1996, the Company acquired a 40.0% equity
interest in SDL and entered into a shareholders agreement with SDL and STHL to
develop various regional cellular projects in China through SDL. STHL then held
the remaining 60.0% of SDL. In April 1997, Vanguard acquired a 7.0% equity
interest in SDL from STHL, thereby reducing STHL's equity interest in SDL to
53.0%.
LICENSE AND INTERCONNECTION. The PLA owns an extensive network of radio
frequencies that it has sought to use for commercial purposes in recent years.
The existing PLA cellular networks did not allow interconnection with the public
telephone system until 1995 when the Chinese Ministry of Posts and
Telecommunication ("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 between the PLA and MPT
are referred to as the China Telecom Great Wall Mobile Communications ("China
Telecom Great Wall") joint ventures. In these joint ventures, the MPT provides
interconnection with the public telephone system and numbering services, and the
PLA makes available its 800 MHz frequencies and base station sites.
EXISTING OPERATIONS AND DEVELOPMENT PLAN. Pursuant to cooperative agreements
with PLA operators, SDL provides equipment and technical and engineering
services necessary to build and operate the PLA's networks. These cooperative
agreements provide for 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 recovered, after 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
40.0% to 100.0% during the initial years and declines thereafter to as little as
30.0% of profits.
As the PLA and MPT form the China Telecom Great Wall joint ventures in
various provinces in China, SDL will seek to participate in these joint ventures
by providing the financing, technical and engineering services necessary for the
construction and operation of the networks of the China Telecom Great Wall joint
ventures for a fixed period of
Page 12 of 124 pages.
<PAGE>
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 Shandong, Hebei, Guangdong, Yunnan and Hainan.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, the
Company had expended $20.0 million to acquire its 40.0% interest in SDL. SDL
has budgeted capital expenditures of $80.5 million in 1997, primarily to fund
network expansion. SDL expects to fund these capital expenditures through
project financings. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Additional Factors that May
Affect Future Results--Project Level Risks."
COMPETITION. The principal provider of cellular services throughout China is
MPT. It is believed that MPT is now constrained with regard to future subscriber
growth by limitations on additional available frequency and hence its decision
to form the China Telecom Great Wall joint ventures with PLA. The second
largest provider of cellular services in China is Unicom, a joint venture
between the Ministry of Electronics, the Ministry of Power and the Ministry of
Railways formed to provide competition to MPT.
INDIA REGIONAL PAGING
The Company indirectly owns a 7.0% equity interest in RPSL, a regional
provider of paging services in India, through its 70.0% interest in STOL, a
Cayman Islands company formed to pursue regional paging projects in the
Asia-Pacific region. The Company's partner in STOL, holding the remaining 30.0%
of STOL, is STHL, the Company's partner in SDL, the Company's China Regional
Cellular operating company. STOL's partners in RPSL are RPG Group ("RPG"), an
Indian company, and two Japanese companies, Itochu and Nippon Telegraph and
Telephone International ("NTTI").
MARKET OPPORTUNITY. India is the second most populous country in the world with
approximately 930.8 million people at the end of 1995. India is divided into 25
States and 7 Union Territories. The Company believes that the top five
metropolitan areas in India are Greater Bombay, New Delhi, Calcutta, Madras and
Bangalore, which together account for almost 47 million people. India has
experienced rapid economic and significant population growth as evidenced by
reported real GDP and population growth rates of approximately 5.6% and 1.8%,
respectively, for the year ended December 31, 1995. With approximately 1.0
telephone lines per 100 POPs in 1994, the Company believes that India has a
large unmet demand for communications services.
The Company believes that at the end of 1996, India had approximately
400,000 paging subscribers. Paging licenses were initially granted in 1995. Pent
up demand for paging services is expected to be met rapidly by the expansion of
new operators in the market, a maximum of four to five operators per city.
REGULATORY ENVIRONMENT. Telecommunications in India is regulated by the
Department of Telecommunications ("DOT") which was set up as a separate entity
in 1985 after having existed as part of the Department of Posts and Telegraphs
("DPT") for almost 100 years. It is responsible for network planning,
maintenance and the management of telephone system in India. In 1991, the DOT
began the process of privatization of wireless services, including paging.
LOCAL STRATEGIC PARTNERS. STOL's partners in RPSL include RPG Group that holds
60.0% of RPSL. RPG Group is one of the top five public companies in India with a
group turnover of $1.4 billion and a market capitalization of $1.1 billion. Its
main lines of business include power, tires, chemical products,
telecommunications services, financial services, and retail industries. Itochu,
a Japan-based international trading company holds 20.0% of RPSL; and NTTI,
another Japan-based international company and a subsidiary of the largest
telephone company in the world holds the remaining 10.0% of RPSL.
PROJECT BACKGROUND. In August 1996, the Company invested $13.5 million for
its 70.0% interest in STOL, which was formed to pursue regional and national
paging projects in various countries in the Asia-Pacific Region. In addition
to RPSL in which STOL has to date invested approximately $1.4 million, STOL
is also pursuing paging projects in China, other cities and geographic areas
in India, Indonesia, New Zealand, Taiwan and Thailand. STHL acquired 10.0%
interest in RPSL in 1995. STHL contributed its interest in RPSL to STOL when
STHL and the Company formed STOL. In February 1997, STOL funded $2.1 million
for the purchase of additional shares to be issued by RPSL. The issuance of
such shares is currently pending the receipt of certain governmental
approvals. Upon the consummation of such issuance, STOL's equity interest in
RPSL will increase to 19%, which will, in turn, increase the Company's
indirect equity interest in RPSL to 13.3%.
Page 13 of 124 pages.
<PAGE>
LICENSES. The DOT issued a number of 10-year licenses to allow 16 private
companies to provide paging services in 27 cities and 19 paging circles in India
(2 to 5 operators per city or circle). RPSL holds a 10-year paging operating
license in New Delhi, Madras and Ahmedabad.
EXISTING OPERATIONS AND DEVELOPMENT PLAN. RPSL began operations in 1995, and as
of December 31, 1996, RPSL provided paging services to approximately 58,000
subscribers. RPSL has achieved an average of 46% market share in New Delhi,
Madras, and Ahmedabad which have an aggregate population of approximately 20
million population, based upon the most recently available data. RPSL has an
intention to acquire more operations in other cities when there are good
opportunities. RPSL is currently running on a POCSAG network and has planned in
1997 to adopt the Flex protocol in its second channel. Since its launch of
service in May 1995, RPSL has experienced a negligible churn rate. For the nine
months ended on December 31, 1996, RPSL realized revenue of approximately $5
million. 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. STOL has since helped RPSL in
the development of its MIS system, selection of hardware and software suppliers,
and provision of training in operation, sales and marketing.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, STOL had
expended approximately $1.4 million to acquire its 10.0% stake in and to make
capital contributions to RPSL.
RPSL has budget capital expenditures of approximately $2.25 million for
1997 primary for network expansion. RPSL expects to fund these expenditures
through the issuance of an additional 9.0% shares to STOL at a total price of
approximately $2.1 million.
COMPETITION. RPSL's primary competitors in the India paging market are
Microwave Communications Limited, Modi Korea Telecommunications Limited, DSS
Mobile Communications Limited and Hutchison Max Telecom Limited. Since the DOT
regulates the tariff, competition is limited to marketing and service. RPSL
seeks to maintain its market leader position by offering consistently high
quality service, building up customer loyalty, and widening distribution
network.
INDONESIA NATIONAL CELLULAR
The Company indirectly owns a 19.8% equity interest in PT Mobile Selular
Indonesia ("Mobisel"), a provider of cellular services in Indonesia through its
28.3% direct equity interest in PT Rajasa Hazanah Perkasa ("RHP"), an Indonesian
company that owns 70.0% of Mobisel. Mobisel currently holds a provisional
license that covers 225 channels in the 480 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 had approximately 17,000 subscribers at the time of the acquisition. As of
December 31, 1996 Mobisel had approximately 22,000 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, the fourth most populous country in the world with more than
195.3 million people. In recent years, 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.
Mobisel's sales and marketing efforts principally focus on the suburban and
rural markets. The Company believes there is less competition in these markets
and that Mobisel may have a competitive advantage as a result of its technology
that the Company believes allows for broader geographic coverage at a lower cost
than that of Mobisel's principal competitors. The Company estimates that this
market segment currently comprises 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.
Page 14 of 124 pages.
<PAGE>
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 (six to ten 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 to 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 principal strategic partners in Mobisel
are Telkom Indonesia and Telkom Indonesia's pension fund ("YDPP"), which
directly own 25.0% and 5.0% of Mobisel, respectively; PT Deltona Satya Dinamika
("DSD"), which indirectly owns 17.0% of Mobisel through its 24.3% equity
interest in RHP; PT Bina Reksa Perdana ("BRP"), which indirectly owns 31.1% of
Mobisel through its 44.4% equity interest in RHP; and Nissho Iwai Corporation,
which indirectly owns 2.1% of Mobisel through its 3.0% equity interest in RHP.
PROJECT BACKGROUND. In 1995, the Company invested $10.0 million in RHP, a
company formed in 1984 to provide cellular services in Indonesia. In October
1995, one of RHP's principal shareholders, Bell Atlantic, agreed to sell its
35.0% 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. As a result of the purchase of a portion of Bell Atlantic's interest in
RHP, the Company's interest in RHP increased to 25.0%. In November 1995, RHP
contributed its cellular operations to Mobisel in return for a 70.0% interest in
Mobisel. In October 1996, the Company purchased additional shares in RHP for
$8.6 million, thereby increasing its aggregate ownership interest in RHP to
29.2%. In March 1997, RHP issued and sold a 3% equity interest in RHP to Nissho
Iwai Corporation, an entity affiliated with Nissho Iwai International
(Singapore) Pte., Ltd. ("Nissho Iwai"), a financial institution that has
provided a credit facility to Mobisel, thereby diluting the Company's ownership
interest in RHP to 28.3% and its indirect interest in Mobisel to 19.8%.
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, Lombok and Lampung by the end of
July 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. Until recently, the billing of Mobisel's
subscribers was performed by Telkom Indonesia. As a result, Mobisel relied on
Telkom Indonesia for information as to the number of its subscribers. In
December 1996, the customer billing function was transferred to Mobisel, which
now operates its own billing system, called BSCS. 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
Telkom 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 December 31, l996, Mobisel
provided cellular services to approximately 22,000 subscribers. For the fiscal
year ended December 31, 1996, Mobisel's cellular operations realized revenues of
approximately $9.3 million and cash flow from operations generated a net loss of
approximately $4.2 million. Mobisel experienced an average monthly subscriber
churn rate of 2% for the ten months ended December 31, 1996.
As of December 31, 1996 Mobisel had upgraded its system capacity to serve
approximately 35,000 subscribers by installing a new Nokia switch and had
completed the upgrade of 32 transmitter sites and constructed an additional five
new sites in and around Jakarta and Bandung. The Nokia switch is currently
operational, and links have been established to all 37 sites. 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 122 new transmitter sites in these areas, increasing the total number
of sites to
Page 15 of 124 pages.
<PAGE>
154, and to install four additional switches, thereby expanding system capacity
to serve approximately 85,000 subscribers. Mobisel has selected all of these new
sites and, subject to Mobisel's obtaining financing, expects to complete
construction of these sites by the end of the second quarter of 1997. In
addition, Mobisel intends to install new telephone switching exchanges in
Jakarta, Bandung, Semarang, Surabaya and Bali.
As of December 31, 1996, Mobisel had a total of 286 employees and seven
contract persons working full time in Jakarta. Two of the contract persons are
provided by the Company to assist Mobisel in customer service and engineering
support. In return, it is anticipated that Mobisel will pay the Company certain
fees in 1996, representing the cost to the Company of these Company employees.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, the
Company had expended approximately $22.6 million to acquire its 29.2% interest
in, and to make capital contributions to, RHP. In addition, in connection with
the Vanguard Exchange, the Company allocated $11.5 million to license rights
derived from Vanguard's right to participate in Mobisel that were obtained by
the Company in the Vanguard Exchange.
Mobisel has budgeted capital expenditures of approximately $95.1 million
for 1997, primarily for the construction of new transmitter sites and switching
systems which will expand geographic coverage and capacity. In March 1996,
Mobisel obtained a five-year $60.0 million credit facility from Nissho Iwai to
finance the construction of its network. 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 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
December 31, 1996, borrowings of approximately $60.0 million were outstanding
under this facility.
In January 1997, Mobisel entered into a syndicated short-term notes
facility agreement with PT Bank Umura Servitia ("BUS"), as arranger, whereby the
banks agreed to purchase Indonesian Rupiah ("Rp") 60,000,000,000 of short-term
notes and interest notes of Rp15,000,000,000 (approximately $31.5 million in the
aggregate as of December 31, 1996). 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "-- Additional Factors that May
Affect Future Results--Project Level Risks."
COMPETITION. Mobisel's primary competitors in the Indonesian telecommunications
market are PT Komselindo, PT Satelit Palapa Indonesia ("Satelindo"), Telkomcell
and Excelcomindo. The Indonesian 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 and
pricing packages targeted to specific market segments and focusing on customer
service.
Page 16 of 124 pages.
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INDONESIA NATIONAL ECTR
The Company, through its wholly owned subsidiary, New Zealand Wireless
Limited ("NZW"), owns 15% of Mobilkom, a provider of ECTR services in Indonesia.
Mobilkom owns a national ECTR license for 160 channels in the 400 MHz frequency
band. Mobilkom commenced service in September 1995 and as of December 31, 1996
had approximately 4,000 subscribers.
MARKET OPPORTUNITY. Mobilkom's license covers all of Indonesia, the fourth most
populous country in the world with more than 195.3 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 licenses, including
cellular, ECTR and paging licenses, 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.
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 which was issued on February 28, 1995 and covers 160 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 or the type of technology Mobilkom may use, and covers
over an estimated 195 million POPs. Mobilkom has obtained government approval
for interconnection of its network with the network of Telkom Indonesia, the
state-owned telephone company. Any termination of interconnection by Telkom
Indonesia would have a material adverse effect on Mobilkom. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Additional Factors that May Affect Future Results--Project Level
Risks--Risk of Modification or Loss of Licenses; Uncertainty as to the
Availability, Cost and Terms of Licenses; Restrictions on Licenses" and
"--Dependence on Other Telecommunications Providers."
Page 17 of 124 pages.
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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 December 31, 1996,
had approximately 4,000 subscribers. For the fiscal year ended December 31,
1996, Mobilkom realized revenues of $1.5 million while cash flow from
operations generated a net loss of approximately $4.0 million. Mobilkom
experienced an average monthly subscriber churn rate of less than 1% for the
nine months ended September 30,1996.
As of December 31, 1996 Mobilkom had the system capacity to serve
approximately 20,000 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
December 31, 1996, Mobilkom had a total of 87 full-time employees and 16
contract employees.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 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 $7.1 million in 1997,
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 December 31, 1996, borrowings of approximately $20.2 million
were outstanding under this facility. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Additional Factors
that May Affect Future Results--Project Level Risks."
COMPETITION. As of December 31, 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 December 31, 1996. The
Indonesian 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.
MALAYSIA NATIONAL WLL
The Company currently holds a 30% interest in 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. As
of December 31, 1996, STW served approximately 5,200 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.
In 1995, the Malaysian government announced a national telecommunications
plan that 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 of
Malaysia, will not be able to provide more than 6 million lines by the year
2000, resulting in a shortfall of approximately 3 million lines.
Page 18 of 124 pages.
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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 urban and suburban
markets, which the Company believes are not adequately served by Telekom. STW
estimates that these markets currently cover more than 15 million POPs and
expects further growth in this market segment. In 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 and which STW believes are not being adequately served by
Telekom.
REGULATORY ENVIRONMENT. Prior to 1996, in an effort to meet the goal of 9
million lines by the year 2000, the Malaysian government began to permit 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
consolidation 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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Additional Factors that May Affect Future
Results--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 to provide interconnection capability in such regions. STW is
also negotiating a new interconnection agreement with Telekom and certain other
telecommunications service providers, which it expects to be signed prior to the
expiration of STW's existing interconnection agreement with Telekom. See "--
License and Interconnection" below. However, there can be no assurance that the
Malaysian government will continue to grant additional microwave frequencies or
that Telekom or another telecommunications service provider 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"), the largest cellular operator in
Malaysia. The remaining 10% of STW is owned by Laranda Sdn Bhd ("Laranda"), an
entity controlled by certain private individuals, including a former officer of
STW.
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, which documented the Company's 30% interest in STW.
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
Page 19 of 124 pages.
<PAGE>
of subscribers. STW has been granted authorization to utilize 6 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.
STW has entered into an interconnect agreement with Telekom that 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 originating
elsewhere that terminate on STW's network. The interconnect agreement provides
for national coverage and expires in August 1997. STW is currently negotiating a
successor agreement with Telekom and certain other telecommunications service
providers. Although STW believes that such a successor agreement will be
executed prior to the expiration of the existing agreement, 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Additional Factors that May Affect Future Results--Project Level
Risks--Dependence on Other Telecommunications Providers."
EXISTING OPERATIONS AND DEVELOPMENT PLAN. For the year ended December 31, 1996,
STW realized revenues of approximately $1.9 million while cash flow from
operations generated a net loss of approximately $6.8 million. As of
December 31, 1996, STW had approximately 5,200 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. After the appointment of this management team and in part
because of the operational delays resulting from the Malaysian government's
attempt to consolidate the Malaysian telecommunications industry, the Company
and Shubila undertook an extensive review of STW's previous business plan and
strategy. This review included an analysis of current market conditions and
requirements as well as an evaluation of other wireless technologies. Based
upon this review, STW is pursuing one of these recently developed technologies,
which it believes will offer increased capacity, functionality and quality of
service to its customers. The implementation of such new technology will
require the allocation of additional spectrum, and STW has recently submitted a
request to the Malaysian government for such allocation. However, there can be
no assurance that such spectrum will be allocated to STW or, even if allocated,
that STW will be able to implement such new technology successfully.
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 currently uses digital AMPS ("D-AMPS")
technology, which is a widely-used cellular standard prevalent throughout much
of the U.S. 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"), among other vendors. As of December
31, 1996, STW had approximately 100 full-time employees.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, the
Company had expended $23.4 million to acquire its 30% interest in, and to make
capital contributions to, STW.
Pursuant to STW's business plan, STW has budgeted capital expenditures of
approximately $ 48.9 million in 1997, 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
(approximately $36.0 million as of December 31, 1996) senior credit facility
(the "STW Credit Facility"). However, at December 31, 1996, STW had borrowed the
full amount available under the STW Credit Facility, and STW will require
substantial additional financing to complete its planned capital expenditures,
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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources,"
Page 20 of 124 pages.
<PAGE>
"--Additional Factors that May Affect Future Results--Project Level Risks--Risk
of Modification or Loss of Licenses; Uncertainty as to the Availability, Cost
and Terms of Licenses; Restrictions on Licenses" and "--Additional Factors that
May Affect Future Results--Project Level Risks--Dependence on Other
Telecommunications Providers."
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 is timely completed and to make additional debt
and equity investments in STW to meet cost overruns. In addition, Shubila
Holding and certain former directors of STW, including a former 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, arising from sources 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 December 31, 1996, the STW Credit Facility, which
must be repaid in eleven semi-annual installments commencing October 1997, was
almost fully drawn.
STW has a number of trade creditors to whom payments are past due. STW is
currently in discussions with these creditors regarding the amount and payment
terms for such trade payables and expects this matter to be resolved in an
acceptable manner. However, there can be no assurance that this matter will be
resolved in a timely manner, or at all, or that 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. In addition, the
shareholders of STW have in the past and may in the future be required in the
future to contribute additional capital to STW in order to address these trade
payables. Further, under the "keep well" covenant of the STW Credit Facility,
the Company may be deemed liable for the entire amount of such trade payables,
which could have a material adverse effect on the Company.
COMPETITION. There are currently four other licenses that permit the deployment
of WLL technology in Malaysia. 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. One
of these providers, Celcom, recently announced a significant expansion of its
WLL operations.
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
emphasis on customer service and billing and its focus on businesses and housing
developments in the growing urban and suburban markets.
MEXICO REGIONAL ECTR PROJECT
The Company currently owns a 2.2% equity interest in Mobilkom 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 December 31, 1996, provided service to approximately 28,000 subscribers.
Page 21 of 124 pages.
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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.
The Mexican economy has, in the past, experienced periods of substantial
instability. Although the Company believes that the Mexican economy has begun to
stabilize and that Mexico is still an attractive market for telecommunications
services, the devaluation of the Mexican Peso in 1994 resulted not only in a
decline in the value of the Company's investment in Mobilcom Mexico, but also
significantly delayed the deployment of Mexico Mobilcom's network and
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Inflation; Currency Devaluations and
Fluctuations."
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.
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: NEXTEL Communications, Inc. ("NEXTEL"), which currently owns a 38.0%
interest in Mobilcom Mexico; Grupo Comunicaciones San Luis S.A. de C.V.
("Grupo"), which currently owns a 21.0% 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. NEXTEL also holds options to acquire up
to an additional 29.5% of Mobilcom Mexico on a fully diluted basis (the "Nextel
Options").
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.
The Company currently holds a 2.2% equity interest in Mobilcom Mexico. In
January 1997, the Company became a party to a put-call option agreement (the
"Put-Call Agreement") among NEXTEL and certain other shareholders of Mobilcom
Mexico (the "Other Shareholders"), pursuant to which the Company has the right
and the obligation to sell its interest to NEXTEL upon exercise of a put option
by the Other Shareholders or a call option by NEXTEL, respectively. The minimum
exercise price for such put option and call options is based upon a $150 million
valuation for Mobilcom Mexico, subject to adjustment for subsequent capital
calls, recapitalizations and the like. NEXTEL's call option will become
exercisable in October 1999. The Other Shareholders' put option may, upon the
occurrence of certain events, some of which are within the control of the Other
Shareholders, become exercisable in October 1997 but will in any event become
exercisable in October 1999.
In March 1997, Mobilcom Mexico announced a capital call to its
shareholders. The Company is currently evaluating whether to participate in such
capital call. If the Company does not participate in such capital call, its
interest in Mobilcom Mexico will be diluted to 1.8%. In addition, if Nextel
exercises the Nextel Options in their entirety, the Company's interest in
Mobilcom Mexico will be further diluted to 1.3%
Page 22 of 124 pages.
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LICENSES AND INTERCONNECTION. Mobilcom Mexico's existing licenses, which
contain expiration dates ranging 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 Mexico'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 December 31, 1996, Mobilcom
Mexico had approximately 28,000 subscribers in 25 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 generated a net loss 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 December 31, 1996, Mobilcom Mexico had 48 transmitter sites and the
system capacity to serve approximately 38,020 subscribers. Mobilcom Mexico is in
the process of constructing 7 additional transmitter sites, thereby increasing
its total sites to 55 and expanding its network capacity to serve approximately
41,520 subscribers by the end of 1997. Motorola and Nokia technology is being
used by Mobilcom Mexico.
Mobilcom Mexico had a total of 150 employees working full-time throughout
Northern and Central Mexico as of December 31, 1996.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, the
Company had expended approximately $2.1 million to acquire its 2.2% interest in,
and to make capital contributions to, Mobilcom Mexico.
Mobilcom Mexico has budgeted capital expenditures of approximately
$57.2 million for 1997, 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. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Additional Factors that May Affect Future Results--Project Level
Risks."
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 seven-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 December 31, 1996,
borrowings of approximately $14.4 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 $867,000
million as of December 31, 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
customer service and payment packages tailored to meet customer needs.
Page 23 of 124 pages.
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NEW ZEALAND NATIONAL ECTR
The Company provides ECTR services in New Zealand through its wholly owned
operating company, TeamTalk. The licenses under which TeamTalk operates its ECTR
network cover an aggregate of over 280 channels in the 400 MHz frequency band.
TeamTalk commenced operations in 1994 and, as of December 31, 1996 served
approximately 5,600 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 December 31, 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.
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 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 substantially 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 280 channels. These licenses, which are renewable, 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 November 1994, the Company and BCL negotiated an arrangement with
Telecom New Zealand to provide full interconnection with TeamTalk's ECTR
network. In December 1996, this arrangement was superseded by an
interconnection agreement entered into directly between TeamTalk and 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 December 31, 1996, the number of
TeamTalk's subscribers had grown to approximately 5,600. In 1996, TeamTalk
sought and received seek additional licenses allowing it to provide coverage in
the major population centers throughout New Zealand, and, as of December 31,
1996, its network had a capacity of approximately 7,000 subscribers. For the
fiscal year ended December 31, 1996, TeamTalk realized revenues of approximately
$1.2 million, while cash flow from operations generated a net loss of
approximately $3.9 million. For the year ended 1996, TeamTalk experienced an
average monthly churn rate of approximately 1.3%.
Page 24 of 124 pages.
<PAGE>
As of December 31, 1996 TeamTalk had 26 full-time employees. TeamTalk
primarily uses Nokia infrastructure equipment.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, the
Company had invested approximately $11.6 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 $4.5 million in TeamTalk. In addition, in connection with
the Vanguard Exchange, the Company allocated $1.7 million to Vanguard's 25%
ownership interest in TeamTalk, that was obtained by the Company in the Vanguard
Exchange.
TeamTalk currently plans to spend approximately $6.3 million for capital
expenditures in 1997. 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 1997 capital expenditures through
shareholder loans, capital contributions or a combination thereof. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Additional Factors that May Affect Future Results--Project Level
Risks."
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.
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.
PHILIPPINES REGIONAL ECTR
The Company owns a 19.0% beneficial interest in UTS, a provider of ECTR
services in the Philippines. UTS owns a 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 by the National Telecommunications Commission
and the principal remaining issue appears to be the availability of frequency.
UTS commenced operations in July 1996, and as of December 31, 1996 had
approximately 180 subscribers.
MARKET OPPORTUNITY. The Philippines, with a population of approximately 68.6
million people, has experienced economic development and rapid population growth
in recent years as evidenced by real GDP and population growth rates of 5.0% 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 a license 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' projects, Gen. Santos, Cagayan de Oro, Iligan,
Zamboanga, Iloilo and Bacolod, are also expanding.
UTS' 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 plans to 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.
Page 25 of 124 pages.
<PAGE>
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 with interests and
operations in agribusiness, food processing, tourism and communications
businesses among other businesses, and Filinvest Development Corporation
("FDC"), a large Philippine real estate investment company. George M. Drysdale,
a shareholder and former director of the Company, 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 registration formalities, will bring its
ownership interest to 19.0%.
LICENSES AND INTERCONNECTION. UTS has received a legislative franchise and
final operating 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 new frequency was sought in part because of interference
at the frequency originally granted. UTS has been granted authorization to
operate its regional ECTR service in Visayas and Mindanao.
UTS's franchise was renewed in July 1991, and it received final authority
to operate its ECTR network in early 1997. The franchise has a term of
twenty-five years from the date of renewal. Tariff rates 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, 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 $3.0 million.
INVESTMENT AND BUDGETED CAPITAL EXPENDITURES. As of December 31, 1996, the
Company had expended approximately $2.0 million to acquire its 19% interest in,
and to make capital contributions to, UTS. UTS has budgeted capital expenditures
of $4.3 million in 1997, 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. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Additional Factors
that May Affect Future Results--Project Level Risks."
COMPETITION. Wireless communications services are provided by cellular and
public trunked radio operators. As of December 31, 1996, there were five
companies providing cellular service in the Philippines. As of December 31,
1996, the estimated total cellular subscriber base was almost one million.
Cellular service is very popular and enjoys a high
Page 26 of 124 pages.
<PAGE>
level of public awareness in the Philippines. Price competition between existing
operators is intense, however. 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.
Page 27 of 124 pages.
<PAGE>
III. DEVELOPMENTAL STAGE PROJECTS
As of December 31, 1996, the Company had direct or indirect interests in
the following five developmental stage projects. Except as to the information
referred to in footnote (2) of the following table, the information set forth
below is as of December 31, 1996, and is qualified by reference to and should be
read in conjunction with the more complete descriptions of the developmental
stage projects set forth below.
<TABLE>
<CAPTION>
EQUITY
POPS POPS
COVERED BY COVERED BY
DEVELOPMENTAL EQUITY LICENSES LICENSES
STAGE PROJECT LOCATION TYPE OF PROJECT INTEREST(1) (MILLIONS)(2) (MILLIONS)(2)
- ------------- -------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mexico National WLL Mexico National WLL 40.0%(3) 94.8 37.9(3)
Mobilcom (Private) Limited Pakistan National ECTR 90.0%(4) 130.1 117.1(4)
("Mobilcom Pakistan")
PeruTel S.A. ("PeruTel") Peru Regional ECTR 98.7% 9.2 9.0
Promociones Telefonicas S.A. Peru National Paging 66.0% 23.8 15.7
("Protelsa")
Taiwan Mobile Communications Taiwan National ECTR 20.0% 21.3 4.3
Corporation ("TMCC")
</TABLE>
- -----------
(1) The developmental stage projects are generally subject to ongoing
negotiations, compliance with local law, receipt of necessary governmental
licenses and approvals and receipt of necessary corporate and other third
party approvals. Accordingly, the Company's proposed participation 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 or financing 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.
(2) Based on the Company's estimate of the 1995 population covered by the
operating license(s) of each project and on DRI/McGraw-Hill World Markets
Executive Overview, Second Quarter 1996.
(3) Represents the Company's proposed equity interest in this developmental
stage project, which, under the terms of a memorandum of understanding
("MOU") with the Company's local partner, may be increased to 49.0%.
(4) Reflects the anticipated sale of a 10.0% interest in this developmental
stage project to the Company's local partner.
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 DECEMBER 31, 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
"--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
Page 28 of 124 pages.
<PAGE>
Company may elect not to pursue one or more of the developmental stage projects
described below. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Additional Factors that May Affect Future
Results--Project Level Risks--Early Stage of Development of Wireless Projects."
MEXICO WLL
BACKGROUND. In March 1996, a local company was incorporated in Mexico City by a
prominent Mexican industrial group to provide telecommunications services in
Mexico. In May 1996, another local company was incorporated by such industrial
group to pursue a WLL business. This latter 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 Company executed an MOU with an individual member of such industrial
group in June 1996 which gives the Company the option to purchase a 40%
ownership interest in each of the two local companies described above. 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 its local 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 its
local 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 its local
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.
PAKISTAN NATIONAL ECTR
BACKGROUND. Pakistan has a population of approximately 130.1 million people and
is one of the most populous 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 in 1994. 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 Pakistan. The
Company presently owns 100% of Mobilcom Pakistan, but expects that a 10.0%
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. In connection with the Vanguard Exchange, the Company
allocated $5.4 million to Vanguard's right to participate Mobilcom Pakistan,
which rights were obtained by the Company in the Vanguard Exchange.
In 1995, Mobilcom Pakistan was issued a national trunked radio license with
an initial term of 15 years. Various frequency bands were made available by the
Pakistan government for trunked radio operators. Mobilcom Pakistan elected an
allocation in the 800 MHz band and is currently awaiting government confirmation
of this frequency grant. The Company has recently undertaken a review of
whether or not an economically viable ECTR project can be implemented in
Pakistan given the high level of local import duties and taxation and the
relatively low per capita income. Under consideration are a selection of
technologies, network configurations and marketing focuses. The Company is also
monitoring the progress of economic changes currently being implemented by the
government of Pakistan, including the reduction of government-imposed duties and
other tax schemes. The Company believes that these types of economic changes
will have a favorable impact on its assessment of the financial viability of an
ECTR project in Pakistan.
It is currently anticipated that Mobilcom Pakistan's business plan will
involve the building of regional networks initially covering the major
population centers of Karachi, Lahore and Islamabad and later, the traffic
corridors
Page 29 of 124 pages.
<PAGE>
connecting these cities. Though a number of other trunked radio licenses have
been granted, the Company believes that other operators will provide only local
dispatch service and this will not effectively compete with the service under
consideration by Mobilcom Pakistan.
PERU REGIONAL 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. The Company believes 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 Tele2OOO, a provider of cellular
services in Lima, originally owned by the Delgado Parker Group, 58.7% of which
was recently acquired by Bell South for approximately $112 million.
The deregulation of the telecommunications industry in Peru, other than the
removal of restrictions on foreign ownership, includes the offering 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%.
THE PROJECT. In May 1995 PeruTel S.A. ("PeruTel") was incorporated in Lima,
Peru to apply for ECTR licenses in Peru. The Company currently owns a 98.7%
interest in PeruTel, with the remainder owned by Marmaud S.A. ("Marmaud"), a
Peruvian telecommunications engineering company that is the Company's partner in
its Peru National Paging developmental stage project. OSIPTEL, the Peruvian
telecommunications regulatory authority, has awarded PeruTel an aggregate of 117
trunking channels throughout Peru, with 37 of such channels in Lima and the
remaining 80 channels in seven other smaller cities in Peru. The government has
also reserved an additional 453 channels for grant to PeruTel if it achieves
certain subscriber and traffic levels. If all of these additional channels are
granted to PeruTel, such grants will increase the number of channels held by
PeruTel to 90 in Lima and an aggregate of 480 in the other seven cities in 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. The amount of the Company's future investments
in PeruTel is dependent upon the technology selected for PeruTel's trunking
network, and the selection of such technology is dependent upon market
conditions and the ability to obtain additional channels for network expansion
in the future. Although the Company is currently evaluating the market
conditions and available technologies, the Company anticipates that an
additional investment of approximately $15 to $20 million will be required in
order for PeruTel to meet its business plan. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Additional Factors that May Affect Future Results--Project Level Risks."
PERU NATIONAL PAGING
BACKGROUND. Peru has a population of 23.8 million, and, as more fully described
above, with 3.3 telephone lines per 100 POPs and a waiting time for telephone
installation of approximately 4.3 years in 1994, the Company believes there
exists significant unmet demand for telecommunications services in Peru.
THE PROJECT. In December 1996, the Company acquired a 66.0% equity interest in
Protelsa, a company that holds a national paging license in Peru, from Marmaud
for a purchase price of $1.6 million. The Company's interest in Protelsa is held
through a wholly owned Bermudan subsidiary, and the remaining 34.0% of Protelsa
is held by Marmaud.
Protelsa holds a national paging license for Peru and has recently begun
construction of its paging network. Protelsa currently anticipates that it will
commence providing paging services in Lima during the second half of 1997,
Page 30 of 124 pages.
<PAGE>
with coverage in seven other cities in Peru to follow later in 1997 and 1998.
Protelsa has budgeted capital expenditures of $1.8 million for 1997, which it
expects to fund through capital contributions and vendor financing.
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 state-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 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, Inc., both of whom are
existing shareholders of the Company, and certain other potential 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 half 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 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
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Additional Factors that May Affect Future Results--Project Level
Risks--Risk of Modification or Loss of Licenses; Uncertainty as to the
Availability, Cost and Terms of Licenses; Restrictions on Licenses."
IV. 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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Additional Factors that May Affect Future
Results--Project Level Risks--Competition."
Page 31 of 124 pages.
<PAGE>
V. 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.
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 U.S. 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.
Page 32 of 124 pages.
<PAGE>
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).
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 (including Nokia,
Motorola and 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.
Page 33 of 124 pages.
<PAGE>
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.
VI. EMPLOYEES
As of December 31, 1996, the Company had 32 employees, including four 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.
VII. INCORPORATION HISTORY
IWC was incorporated in Delaware in January 1992. In July 1996,
International Wireless Communications Holdings, Inc. ("IWC Holdings") was formed
as a holding company with no business operations of its own. In August 1996,
through a merger transaction, IWC became a wholly owned subsidiary of IWC
Holdings, and each outstanding share of the capital stock of IWC was exchanged
for 40 shares of the same class and series of the capital stock of IWC Holdings
(the "IWC Reorganization").
ITEM 2. PROPERTIES
The Company leases approximately 8,600 square feet of space in a facility
located in San Mateo, California. The lease provides for current annual rent,
including expenses, of approximately $219,000 per year. Lease payments are
subject to adjustment in the event of increases in property taxes and other
events.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation at the present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 1996.
Page 24 of 124 pages.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
I. TRADING MARKET.
There is no established trading market for the Registrant's capital stock.
As of December 31, 1996, there were 636,720 shares of the Registrant's Common
Stock outstanding held of record by six stockholders, and 16,906,400 shares of
the Registrant's Preferred Stock outstanding held of record by 54 stockholders.
The Registrant's outstanding shares of Preferred Stock consisted of 933,200
shares of Series A Preferred Stock, 1,229,240 shares of Series B Preferred
Stock, 1,762,280 shares of Series C Preferred Stock, 3,652,960 shares of Series
D Preferred Stock, 3,972,240 shares of Series E Preferred Stock and 5,356,480
shares of Series F Preferred Stock.
II. RECENT SALES OF UNREGISTERED SECURITIES.
In August 1996, in connection with the IWC Reorganization, the Registrant
issued an aggregate of 348,960 shares of Common Stock, 1,200,000 shares of
Series A Preferred Stock, 1,229,240 shares of Series B Preferred Stock,
1,762,280 shares of Series C Preferred Stock, 3,652,960 shares of Series D
Preferred Stock, 3,972,240 shares of Series E Preferred Stock and 5,356,480
shares of Series F Preferred Stock to the then existing stockholders of IWC in
exchange for all of the then outstanding shares of capital stock of IWC. See
"Item 1. Business--Incorporation History." In connection with the IWC
Reorganization, the Registrant also issued options to purchase an aggregate of
1,922,960 shares of Common Stock of the Registrant at exercise prices ranging
from $0.25 per share to $9.38 per share under the Registrant's Stock Plan (as
defined below under "Item 11. Executive Compensation--1996 Stock Option/Stock
Issuance Plan") in exchange for then outstanding options to purchase an
aggregate of 48,598 shares of the Common Stock of IWC.
In August 1996, the Registrant issued 266,800 shares of Common Stock to a
stockholder of the Registrant upon the voluntary conversion by such stockholder
of 266,800 shares of the Series A Preferred Stock of the Registrant then held by
such stockholder.
In August 1996, the Company issued 196,720 units, each consisting of a
$1,000 principal amount 14% Senior Secured Discount Note due 2001 (an "Old Note"
and, collectively, the "Old Notes") and one warrant to purchase 11.638 shares of
Common Stock (a "Warrant" and, collectively, the "Warrants") for total gross
proceeds of $100 million (the "Debt Offering").
The Old Notes were subsequently exchanged for registered notes (the
"Exchange Notes") that are substantially identical (including principal amount,
interest rate, maturity, exchange and ranking) to the Old Notes in November
1996. The Old Notes and the Exchange Notes are hereinafter collectively
referred to as the "Notes." See also "Item 13. Certain Relationships and
Related Transactions--The Debt Offering." If the Registrant does not complete
a public offering of shares of its Common Stock in which the Registrant raises
at least $50 million in net cash proceeds on or before May 15, 1997, the number
of shares issuable upon exercise of each Warrant shall increase from 11.638 to
14.283. On March 27, 1997, the Board of Directors of the Registrant determined,
based upon discussion with prospective underwriters, that it was unlikely that
the Registrant will complete such an offering on or before May 15, 1997. The
terms of the Warrants, the Old Notes and the Exchange Notes are incorporated
herein by reference to the Registrant's Final Prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended,
on November 21, 1996 (Reg. No. 333-11987).
In November 1996, the Registrant issued options to purchase 20,000 shares
of Common Stock at an exercise price of $9.38 per share to an individual
employee of IWC under the Stock Plan; and in December 1996, the Registrant
issued options to purchase an aggregate of 60,000 shares of Common Stock at an
exercise price of $9.38 per share to two employees of IWC under the Stock Plan.
Also in December 1996, the Registrant issued and sold 20,960 shares of Common
Stock to a former director of the Company for an aggregate purchase price of
$5,240 upon exercise of a then outstanding option to purchase such shares held
by such director.
Page 35 of 124 pages.
<PAGE>
Since December 31, 1996, the Registrant has issued options to purchase an
aggregate of 425,282 shares of Common Stock at an exercise price of $9.38 per
share to various service providers of the Company.
III. DIVIDENDS
The Registrant has never paid cash dividends on its capital stock. The
Registrant currently intends to retain its available funds from earnings for
future growth and, therefore, does not anticipate paying any cash dividends on
its capital stock in the foreseeable future. In addition, the indenture
agreement governing the Notes (the "Indenture") prohibits the Registrant from
paying dividends while the Notes are outstanding.
Page 36 of 124 pages.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE 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 Annual Report on
Form 10-K. The consolidated selected financial data as of and for the years
ended December 31, 1993, 1994, 1995 and 1996 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 years ended December 31, 1995 and 1996. The
independent auditors' report as of and for the years ended December 31, 1995 and
1996 are included elsewhere in this Annual Report on Form 10-K. 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
predecessor to the Registrant was incorporated in January 1992.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue. . . . . . . . . . . . . . . . . . . . . . . .$ -- $ -- $ -- $ -- $ 869
Cost of revenue. . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 1,948
-------- -------- -------- -------- --------
-- -- -- -- (1,079)
Operating expenses:
Selling, general and administrative expenses . . . . . . . . . 169 809 2,481 6,365 17,333
Equity in losses of affiliates . . . . . . . . . . . . . . . . -- -- -- 3,756 11,783
Minority interest in losses of consolidated subsidiaries . . . -- -- -- -- (275)
-------- -------- -------- -------- --------
Loss from operations. . . . . . . . . . . . . . . . . . . . (169) (809) (2,481) (10,121) (29,920)
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . . . . . . 5 2 106 232 1,823
Interest expense . . . . . . . . . . . . . . . . . . . . . . . -- (33) (115) (1,354) (6,790)
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . -- (1) (13) (28) (1,021)
-------- -------- -------- -------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(164) $(841) $(2,503) $(11,271) $(35,908)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
DECEMBER 31,
------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
--------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets . . . . . . . . . . . . . . . . . . . . . . $ 4 $ 701 $12,580 $ 26,851 $ 54,408
Property and equipment, net. . . . . . . . . . . . . . . . . . . 10 15 88 4,269 18,426
Investments in affiliates. . . . . . . . . . . . . . . . . . . . 322 1,723 5,427 52,280 68,394
Telecommunication licenses and other intangibles, net. . . . . . -- -- -- 12,186 18,484
License deposit. . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 3,042
Debt issuance costs, net . . . . . . . . . . . . . . . . . . . . -- -- -- -- 6,431
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 200 201 329 57 173
-------- -------- -------- -------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 536 $2,640 $18,424 $95,643 $169,358
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . $ 50 $2,215 $ 2,000 $11,557 $ 7,313
Long-term debt, net. . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 75,466
Minority interests in consolidated subsidiaries. . . . . . . . . -- -- -- -- 5,685
Redeemable convertible preferred stock . . . . . . . . . . . . . -- -- 19,578 98,845 103,021
Total stockholders' equity (deficit) . . . . . . . . . . . . . . 486 425 (3,154) (14,759) (22,127)
-------- -------- -------- -------- --------
Total liabilities, minority interest, redeemable convertible
preferred stock and stockholders' equity (deficit) . . . . . . $ 536 $2,640 $18,424 $95,643 $169,358
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Page 37 of 124 pages.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT
ON FORM 10-K. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
HEREIN. FACTORS THAT COULD CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED BELOW UNDER "--ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
INTRODUCTION
The Company owns and operates wireless communications projects in various
developing countries, primarily in Asia and Latin America. The Company owns
interests in nine operating companies located in Brazil, China, India,
Indonesia, Malaysia, Mexico, New Zealand and the Philippines. These companies
offer a variety of wireless communications services including cellular
telephone, WLL, ECTR and paging. As of December 31, 1996, all of these projects
had commercial operations. In addition, the Company currently has a number of
developmental stage projects in these and other countries. 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 projects in which the Company generally invests are in their early
stages, 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. In
addition, certain debt financings at the operating company level restrict the
distribution of dividends from such company while the loan is outstanding.
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 at the Company and/or operating company level 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
YEARS ENDED DECEMBER 31, 1995 AND 1996
The Company's net loss increased from $11.3 million in 1995 to $35.9
million in 1996, an increase of 219%. This increase was due primarily to higher
selling, general and administrative expenses, an increase in equity in losses of
affiliates, including the amortization of telecommunication licenses, and an
increase in interest expense, as more fully described below. The Company
anticipates that its net loss will continue to increase as its operating
companies and developmental stage projects continue to grow and expand their
operations in the foreseeable future.
The Company recorded no operating revenues and cost of revenues in 1995 as
compared to $869,000 in operating revenues, offset by $1,948,000 in cost of
revenues, in 1996. The majority of operating revenues and cost of revenues in
1996 resulted from the acquisition, effective April 30, 1996, of 50% interest in
TeamTalk, which increased the Company's equity ownership in TeamTalk to 100%,
and the resulting consolidation of TeamTalk's operations in the Company's
consolidated financial statements.
Page 38 of 124 pages.
<PAGE>
The Company's selling, general and administrative expenses increased from
$6.4 million in 1995 to $17.3 million in 1996, an increase of 172%. This
increase was due primarily to continued growth both in the Company's own
general and administrative expenses, including salaries and benefits expense,
professional fees and outside consulting expense, and in the selling, general
and administrative expenses of its consolidated subsidiaries that have commenced
operations, primarily TeamTalk and SRC. The Company's selling, general and
administrative expenses also reflected the consolidated results of four other
subsidiaries whose operations are currently in the developmental stage, all of
which contributed to the overall increase in the Company's selling, general and
administrative expenses in 1996.
The primary components of the Company's selling, general and administrative
expenses for 1996 include (i) overall growth in the Company's own general and
administrative expenses, including an increase in salaries and benefits from
$2.1 million in 1995 to $4.0 million in 1996, an increase in professional fees
from $463,000 in 1995 to $1.9 million in 1996 and an increase in outside
consulting expense from $1.2 million in 1995 to $1.9 million in 1996; (ii) $1.1
million attributable to the amortization of telecommunication licenses and other
intangibles of the Company's consolidated subsidiaries in 1996 as compared to
$294,000 in 1995; and (iii) $528,000 and $3.4 million of selling, general and
administrative expenses associated with the consolidation of the operations of
TeamTalk and SRC, respectively, in the Company's consolidated financial
statements as compared to $109,000 of selling, general and administrative
expenses associated with the consolidation of the operations of SRC in 1995. In
addition, the Company reflected selling, general and administrative expenses of
four other subsidiaries whose operations are currently in the developmental
stage in 1996 with a resultant increase of $866,000 as compared to 1995. The
Company anticipates that its selling, general and administrative expenses will
continue to increase in the foreseeable future as the Company and the operations
of the subsidiaries which it consolidates continue to expand their respective
operations.
The Company's equity in losses of affiliates increased from $3.8 million in
1995 to $11.8 million in 1996, an increase of 214%. For 1995, equity in losses
of affiliates consisted of $2.8 million of operating losses and $1.0 million of
expense relating to amortization of telecommunication licenses. For 1996,
equity in losses of affiliates consisted of $8.6 million of operating losses and
$3.2 million of expense relating to amortization of telecommunication licenses.
The increase in equity in losses of affiliates from 1995 as compared to 1996 is
attributable primarily to the increase in the underlying operating losses of
STW, RHP and SDL.
During 1996, STW incurred increased operating losses as it continued to
expand its WLL operations. The Company's equity in loss of affiliate
attributable to STW increased from $1.3 million in 1995 to $3.6 million in 1996,
an increase of 176%, and the Company's amortization of telecommunication license
attributable to STW increased from $638,000 in 1995 to $969,000 in 1996, an
increase of 52%. Although STW's revenues from operations increased from $749,000
in 1995 to $1.9 million in 1996, an increase of 149%, and STW's costs of
telecommunication revenues increased from $593,000 in 1995 to $1.8 million in
1996, an increase of 209%, the majority of the increase in STW's operating loss
was generated by an increase in depreciation expense from $2.3 million in 1995
to $3.7 million in 1996, an increase of 61%, and an increase in general and
administrative expenses, from $3.9 million in 1995 to $4.7 million in 1996, an
increase of 19%. In addition, STW's interest expense increased from $663,000 in
1995 to $3.8 million in 1996, an increase of 479%, resulting from the almost
full draw down of STW's Malaysian Ringgit 91 million secured loan facility
during 1996. The Company anticipates that its equity in losses of affiliates
attributable to STW will continue to grow in the foreseeable future as STW
expands its operations. See "Item 1. Business--Operating Companies--Malaysia
National WLL--Existing Operations and Development Plan."
During 1996, RHP's 70% owned consolidated subsidiary, Mobisel, incurred
increased operating losses due primarily to the expansion of its sales and
administrative operations. The Company's equity in loss of affiliate
attributable to RHP increased from $1.0 million in 1995 to $3.5 million in 1996,
an increase of 250%, and the Company's amortization of telecommunication license
attributable to RHP increased from $319,000 in 1995 to $1.3 million in 1996, an
increase of 301%, as Mobisel continued to expand its operations and roll-out its
nationwide telecommunication network. During this expansion phase, Mobisel did
not market its services, and although revenues increased from $7.3 million in
1995 to $10.3 million in 1996, an increase of 45%, Mobisel's cost of revenues
increased from $3.4 million in 1995 to $11.5 million in 1996, an increase of
248%. This increase in Mobisel's cost of revenues was due primarily to greater
pulse sharing and airtime costs and an increase in depreciation expense due to
the build-out of Mobisel's telecommunication network. As part of its expansion
effort, Mobisel experienced growth in its selling, general and administrative
expense base in order to meet the anticipated growth in its operations. During
this build-out phase, Mobisel's employee headcount increased by approximately
200% to 286 employees as of December 31, 1996.
Page 39 of 124 pages.
<PAGE>
Also, as part of Mobisel's expansion during 1996, Mobisel increased its
allowance for doubtful accounts as it transferred its customer base to its own
billing system. Previously customer billing and collection had been performed
on behalf of Mobisel by Telkom Indonesia, the national Indonesian telephone
company. Mobisel anticipates that its cost of revenues and operating expenses
will increase in the foreseeable future, offset in part by an anticipated
increase in its operating revenues. See "Item 1. Business--Operating Companies--
Indonesia National Cellular--Existing Operations and Development Plan."
The Company's increase in equity losses of affiliates also reflects losses
attributable to its 40% interest in SDL, which the Company acquired in November
1996, resulting in an increase of its equity in losses of affiliates of $1.0
million for 1996. The Company anticipates that the equity in loss of affiliates
attributable to SDL will continue to grow in the foreseeable future as SDL
expands its operations. See "Item 1. Business--Operating Companies--China
Regional Cellular--Existing Operations and Development Plan."
The Company's interest income increased from $232,000 in 1995 to $1.8
million in 1996, an increase of 686%. This increase was due primarily to
interest income earned on interest-bearing government securities in which the
Company invested the proceeds received from the sale and issuance of shares of
the Company's Preferred Stock in December 1995 and from the Debt Offering in
August 1996.
The Company's interest expense increased from $1.4 million in 1995 to $6.8
million in 1996, an increase of 401%, primarily due to interest expense
associated with the Debt Offering, which was consummated in August 1996. The
Company anticipates that its interest expense will increase in the foreseeable
future as it continues to pursue additional short- and long-term financings.
The Company's other expense increased from $28,000 in 1995 to $1.0 million
in 1996, as the Company elected not to exercise, and therefore permitted to
lapse, an option purchased for $1.0 million from the shareholders of Laranda, a
10% shareholder of STW, to acquire 50% of Laranda.
YEARS ENDED DECEMBER 31, 1994 AND 1995
The Company's net loss increased from $2.5 million in 1994 to $11.3 million
in 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.
The Company's general and administrative expenses increased from $2.5
million in 1994 to $6.4 million in 1995, an increase of 157%. This was primarily
due to expanded business development activities resulting in a 151% increase in
salary expense, from $661,000 to $1.7 million, a 351% increase in outside
consultants expense, from $269,000 to $1.2 million, and a 140% increase in
travel and related expenses, from $719,000 to $1.7 million. All other general
and administrative costs increased approximately in proportion with the growth
in the Company's business activities.
The Company's equity in losses of affiliates was $3.8 million in 1995. The
equity in losses of affiliates was comprised of $2.8 million of operating losses
and $966,000 of expense related to the amortization of telecommunication
licenses.
STW expanded its business activities during 1995 and invested
substantial resources in the network asset buildout. As a result, it realized
significant increases in general and administrative expenses and depreciation
costs. The Company's equity in loss of affiliate attributable to STW was $1.9
million in 1995, representing 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, changing market forces affecting the price of handsets and the
transfer of certain assets and customers of RHP to Telkom Indonesia. RHP's
operating losses were consistent with those in the prior year, but the
Company had no investment in this entity during 1994. RHP increased the
equity in losses of affiliates of the Company by $1.3 million, comprised of
$1.0 million in operating losses and $319,000 of expense related to the
amortization of telecommunication licenses attributable to RHP. During 1994,
the Company had no material investments accounted for under the equity
method. For further financial information,
Page 40 of 124 pages.
<PAGE>
reference to the financial statements of the Company included elsewhere in this
Annual Report on Form 10-K is recommended.
The Company's interest income increased from $106,000 in 1994 to $232,000
in 1995, an increase of 119%. This was primarily due to higher average cash
balances during the latter part of 1995 as a result of the issuance of Preferred
Stock by the Company.
The Company's interest expense increased from $115,000 in 1994 to $1.4
million in 1995. This was primarily due to increased financing activity during
1995.
IMPACT OF INFLATION AND CURRENCY FLUCTUATION
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 Company's
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 U.S. dollar and the applicable local currency. In addition, the
operating companies will generally 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 the
U.S. dollar. 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, the Company's 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had directly raised an aggregate of
approximately $102.2 million in equity capital through a series of private
placements of Preferred Stock, including bridge loans converted into Preferred
Stock in the private placements, and $94.2 million in the Debt Offering through
the sale of units in August 1996 consisting of $196,720,000 aggregate principal
amount of Old Notes, which were subsequently exchanged for the Exchange Notes,
and Warrants to purchase an aggregate of 2,289,421 shares of Common Stock,
subject to certain adjustments. See "Item 5. Market for Registrant's Common
Equity and Related Shareholder Matters--Recent Sales of Unregistered
Securities." 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, 1996, the Company had a cash balance of $41.7 million.
The Company has generated negative cash flow from operations since
inception, 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.
Page 41 of 124 pages.
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The Company will require additional financing prior to December 31, 1997,
to meet currently anticipated requirements for working capital and 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. Among other things, the Company may be forced to
delay, scale back or eliminate one or more of its projects, to suffer a
significant dilution of its equity interest or loss of value in one or more of
its investments or to liquidate one or more of its investments, may be unable to
repay its liabilities (including the Notes) as they become due, and may be
unable to meet its working capital and other cash requirements. 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 "--
Additional Factors that May Affect Future Results--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, a 56.3% owner of
Mobilkom. As of December 31, 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 the year
2000.
Mobisel, the Company's national cellular operating company in Indonesia in
which the Company holds an indirect 19.8% interest through RHP, has obtained a
$60.0 million credit facility from 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 this credit facility. Borrowings under the credit facility
with Nissho Iwai are to be used solely for the implementation and construction
of Mobisel's network. Mobisel will require substantial additional financing to
complete its planned capital expenditures through 1997 and for other cash needs.
Borrowings outstanding under this five year credit facility must be repaid in
six equal semi-annual installments beginning in late 1998. Also, Mobisel
entered into a syndicated short-term notes facility agreement in January 1997
with BUS, as arranger, whereby the banks agreed to purchase Indonesian Rupiah
("Rp") 60,000,000,000 of short-term notes and interest notes of Rp15,000,000,000
(approximately $31.5 million in the aggregate as of December 31, 1996). These
short-term notes would have repayment priority to the existing loans
outstanding. In addition, Mobisel is continuing to pursue various other long-
term financing solutions to enable it to meet its business plan objectives.
STW, the Company's national WLL operating company in Malaysia, has arranged
a Malaysian Ringgit 91.0 million (approximately $36.0 million as of December 31,
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 a former 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 ensure
that STW remains solvent and able to meet its financial liabilities as and when
due; and (ii) to ensure the timely completion of its WLL project and to make
additional debt or equity investments in STW as 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 in eleven semi-annual installments beginning in October 1997. As
of December 31, 1996, this facility was almost 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 the STW network and to refinance
outstanding indebtedness under the credit facility. See "Item 1. Business--
Operating Companies" and Note 13 of Notes to Consolidated Financial Statements
for additional information regarding the credit facilities of STW, Mobisel and
Mobilkom.
Page 42 of 124 pages.
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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, Mobisel and SDL will require substantial
additional financing in order to complete planned capital expenditures. See
"Item 1. Business--Operating Companies--Malaysia National WLL," "--Indonesia
National Cellular" and "--China Regional Cellular." 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 "--
Additional Factors that May Affect Future Results--Project Level Risks--
Operating Losses and Negative Cash Flow; Dependence on Additional
Financing/Capital."
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY OPERATES IN A RAPIDLY CHANGING ENVIRONMENT THAT INVOLVES A
NUMBER OF RISKS, SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL. THE FOLLOWING
DISCUSSION HIGHLIGHTS SOME OF THESE RISKS. THESE RISKS SHOULD BE READ IN
CONJUNCTION WITH THE "RISK FACTORS" SECTION INCLUDED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 AS FILED WITH THE COMMISSION ON FEBRUARY 12,
1997, AS SUBSEQUENTLY AMENDED (REG. NO. 333-21687).
COMPANY LEVEL RISKS
CONTINUING LOSSES; LIMITED OPERATING HISTORY
The Company has incurred net losses since its inception and had an accumulated
stockholders' deficit of approximately $53.4 million as of December 31, 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 "--Introduction" and "--Results
of Operations." The Company has a limited operating history. Since its
inception in January 1992, the Company's activities have been concentrated
primarily in 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.
NEGATIVE OPERATING CASH FLOW; DEPENDENCE ON ADDITIONAL FINANCING; NO COMMITMENTS
FOR ADDITIONAL FINANCING
The Company used cash in operations and investing activities of $38.7
million and $73.2 million, respectively, for the years ended December 31, 1995
and 1996, and expects such negative cash flows to continue and likely increase
in the foreseeable future. Because of such negative cash flow and negative
working capital 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.
In particular, the Company will require additional financing prior to
December 31, 1997, to meet currently anticipated requirements for working
capital and investments in its operating companies and developmental stage
projects. In addition, the Company intends to pursue additional investment
opportunities for wireless projects and anticipates that it will require
additional sources of financing in order to fund 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
may be forced to delay, scale back or eliminate one or more of its projects, to
suffer a significant dilution of its equity interest or loss of value in one or
more of its investments or to liquidate one or more of its investments, may be
unable to repay its liabilities (including the Notes) as they become due, and
may be unable to meet its working capital and other cash requirements. 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. Accordingly, the Company's inability to obtain
such additional financing would have a material adverse effect on the Company
and could result in its insolvency or liquidation.
Page 43 of 124 pages.
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SUBSTANTIAL LEVERAGE
The Company is highly leveraged and has indebtedness that is substantial in
relation to its stockholders' equity, including its redeemable convertible
Preferred Stock. As of December 31, 1996, the Company's long term debt was $75.5
million, and its stockholders' deficit and redeemable convertible Preferred
Stock was $80.9 million. The high level of the Company's indebtedness will have
important consequences, including (i) limitations on the Company's ability to
obtain additional debt financing in the future and (ii) limitations on the
Company's 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 restricting
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 may have consequences similar to those
described in clauses (i) and (ii) above with respect to the Company.
RISK OF INABILITY TO REPAY NOTES AT MATURITY
For each of the three years ended December 31, 1996, the Company had net
losses and did not generate positive cash flow from operations, and, as
discussed below 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 through dividends or other distributions from its operating
companies for the foreseeable future. Accordingly, the Company's ability to
repay the Notes and any other indebtedness which it may incur from time to time
at maturity will be dependent on developing one or more sources of financing
prior to the maturity of such indebtedness. The Company may, among other things,
(i) seek to refinance all or a portion of such indebtedness at maturity through
sales of additional debt or equity securities of the Company or other
borrowings, (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 below 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) the Company will be able to obtain debt or equity financing on acceptable
terms, or at all, 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 its indebtedness 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, a default
under the Notes or such other indebtedness as the Company may incur in the
future, for example, 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 proceed against any collateral pledged as security therefor. See
"Item 1. Business--Operating Companies--Malaysia National WLL--Investment and
Budgeted Capital Expenditures." Any failure by the Company to repay the Notes
when due would have a material adverse effect on the Company.
Page 44 of 124 pages.
<PAGE>
RISK OF GOVERNMENTAL ACTIONS RESULTING IN VIOLATION OF INDENTURE
The Indenture pursuant to which the Notes were issued contain certain
covenants which impose certain requirements with respect to sales or other
dispositions of assets (including capital stock in operating companies and in
developmental stage projects) by the Company and certain subsidiaries of the
Company which are restricted by the terms of the Indenture with a fair market
value in excess of $500,000 ("Asset Sales"). Among other things, the Indenture
requires that at least 85% of the consideration for an Asset Sale be in cash and
that the Company receive consideration equal to the fair market value of the
assets in question. However, if an Asset Sale occurs because of governmental
action (for example, by expropriation or confiscation), or in certain other
circumstances including, among other things, a sale of the Company's investment
in certain operating companies compelled by other stockholders of such operating
company or pursuant to rights granted to certain bank lenders of certain
operating companies, the requirement that the Company receive fair market value
for the assets shall be deemed to have been satisfied to the extent that the
difference between the fair market value of such assets and the actual
consideration received in such Asset Sale (and all other Asset Sales subject to
this exception) is less than 10% of the "total market value of equity" of the
Company. However, if an Asset Sale is compelled by governmental action, the
Indenture still requires that at least 85% of the consideration be in cash.
In certain of the countries in which the Company has made investments,
there is a risk that the Company's investments may be confiscated or
expropriated by governmental authorities. In particular, in early 1996, the
Malaysian government threatened to consolidate the Malaysian telecommunications
industry, which, if completed would have forced a sale or merger of STW, the
Company's Malaysian operating company, to or with one of a limited number of
surviving telecommunications companies. There can be no assurance that the
Malaysian government will not seek to take similar actions in the future.
Likewise, other countries may seek to expropriate or confiscate assets of the
Company. To the extent that the consideration, if any, received by the Company
in connection with these expropriations or confiscations failed to satisfy the
covenants under the Indenture, such a violation will be deemed an event of
default under the Indenture entitling the holders of the Notes to demand
immediate repayment thereof and to proceed against their collateral, which would
have a material adverse effect on the Company. See "--Project Level Risks--Risks
Inherent in Foreign Investment."
HOLDING COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW OF OPERATING
COMPANIES
The Company is a holding company with no business operations of its own.
All of the operations of the Company are conducted through its wholly owned
subsidiary, IWC, and its affiliated companies, which are separate and distinct
legal entities and have no obligation, contingent or otherwise to make any funds
available to the Company to enable it to make investments in operating companies
or developmental stage projects, meet working capital needs or other liabilities
of the Company (including liabilities under the Notes), 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) it 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/or (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 flow 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.
Page 45 of 124 pages.
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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 in the future
there will 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 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 that the Company is
required to do so in order to satisfy its cash needs, including providing funds
for investments and repayment of indebtedness. 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.
Moreover, even where the Company has majority control of a project, the exercise
of such control may be subject to contractual, regulatory or other restrictions.
In addition, the Company may be unable to access the cash flow, if any, of its
operating companies. See "--Company Level 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 December 31, 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. This 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 and on its
management. Any failure to manage the Company effectively could have a material
adverse effect on the Company.
Page 46 of 124 pages.
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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 and its contractual
rights as an equity holder, 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, 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 U.S. or engaging in interstate
commerce in the U.S., the Company would be subject to monetary penalties and
injunctive relief in an action brought by the Commission, and certain contracts
to which the Company is a party (including the Indenture and the Notes) might be
rendered unenforceable or subject to rescission by any party thereto. As a
result, any determination that the Company is an investment company would have a
material adverse effect on the Company and would likely require that the Company
cease operations.
CONTROL OF THE COMPANY
At December 31, 1996, Vanguard beneficially owned approximately 39% of the
Company's equity. 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 currently 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 "Item
10. Directors and Officers of the Registrant--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. Further, although many of the agreements governing the
relationship between the Company and its local partners contain preemptive
rights, rights of first refusal and/or rights of co-sale with respect to the
sale of shares in the Company's joint ventures, Vanguard is not precluded from
co-investing with the Company in such joint ventures. For example, in April
1997, Vanguard purchased a 7% equity interest in SDL directly from STHL, the
Company's local partner in SDL. Although the directors designated by Vanguard
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 "Item 1. Business--Background--Strategic
Relationships," "Item 1. Business--Operating Companies--China Regional
Cellular," "Item 13. Certain Relationships and Related Transactions--Private
Placement Transactions--The Series F Financing" and "Item 13. Certain
Relationships and Related Transactions--The Vanguard Exchange."
Page 47 of 124 pages.
<PAGE>
INFORMATION RELATING TO DEMOGRAPHIC, ECONOMIC, MARKET AND RELATED INFORMATION
The information contained herein includes certain demographic and economic
information, as well as information regarding cellular service, installation and
penetration in the countries in which the Company has operating companies or
developmental stage projects. This information was obtained from a number of
sources and the Company has not independently verified any such information and
there can be no assurance as to its accuracy. In addition, much of the
information related to POPs are estimates and reflect data that may be incorrect
or imprecise and such estimates and data have been obtained from a number of
sources and the Company has not independently verified any such information.
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 at each of the Company, operating company and developmental
stage project levels. There can be no assurance the Company will be able 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.
CLASSIFICATION OF NOTES AS DEBT; ORIGINAL ISSUE DISCOUNT
Although the Company intends to treat the Notes as debt for all purposes,
there can be no assurance that the Internal Revenue Service will agree that the
Notes qualify as debt for federal income tax purposes. If the 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 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 Notes, which would have
a material adverse effect on the Company. Recharacterization of the Notes as
equity could also adversely affect non-corporate holders as well as non-United
States holders of the Notes.
Assuming the 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 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.
If a bankruptcy case is commenced by or against the Company under the
United States Bankruptcy Code after the issuance of the Notes, the claim of a
holder of any of the 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 Notes and (ii) that portion of the original issued discount
which is not deemed to constitute "unmatured interest" for purposes of the
Bankruptcy Code. Any original issued discount that was not amortized as of any
such bankruptcy filing would constitute "unmatured interest."
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 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.
Page 48 of 124 pages.
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RISK OF INABILITY TO FINANCE A CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control (as defined in the Indenture to
include (i) a sale or transfer by the Company or a Restricted Subsidiary (as
defined in the Indenture) of all or substantially all of its assets; (ii) the
adoption of a plan of liquidation; (iii) the acquisition of greater than 50% of
the voting power by an entity other than Vanguard or (iv) upon the change of a
majority of the Board of Directors), the Company will be required to make an
offer to purchase all of the outstanding Notes at the price set forth in the
Indenture. The Company's failure to purchase the Notes would result in a default
under the Indenture. In the 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.
NO CASH DIVIDENDS ON COMMON STOCK
The Company is prohibited under the terms of the Indenture from paying
dividends or making other distributions with respect to the Company's capital
stock, including the Common Stock while the Notes are outstanding. The Company
anticipates that all earnings, if any, will be retained for the operation and
expansion of the Company's business.
PROJECT LEVEL RISKS
OPERATING LOSSES AND NEGATIVE CASH FLOW; DEPENDENCE ON ADDITIONAL
FINANCING/CAPITAL
Most of the 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 to seek such additional financing at the operating companies
primarily from third parties and not from the Company or its 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 December 31, 1996 a
significant portion of the Company's investments had been made in three
operating companies (namely STW, which is developing a national WLL system in
Malaysia; Mobisel, which is developing a national cellular system in Indonesia;
and SDL, which is developing various regional cellular systems in China), and
each of these operating companies will be required to obtain substantial
additional financing in order to complete planned capital expenditures.
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 lenders. See "--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.
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.
Page 49 of 124 pages.
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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 similarly 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.
EARLY STAGE OF DEVELOPMENT OF WIRELESS PROJECTS
Most of the Company's wireless projects are in the early stages of
development. Only the nine operating companies, Via 1, SDL, RPSL, Mobisel,
Mobilkom, STW, Mobilcom Mexico, TeamTalk and UTS, currently provide wireless
communications services on a commercial basis, and many of these operating
companies have only recently initiated such commercial service and have a
limited number of subscribers. Although MOUs have been signed with local
partners in 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 an attempt during the first
half of 1996 by the Malaysian government to consolidate the Malaysian
telecommunications industry. See "--Risks Inherent in Foreign Investment." As a
result, IWC and its principal strategic partner in STW recently undertook an
extensive review of STW's business plan and strategy. 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 and/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 (i) companies that are or may in the future
become competitors of the Company or (ii) 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. Similarly, government actions in the future could have a
significant adverse effect on economic conditions in a developing country or may
otherwise have a material adverse effect on the Company and its operating
companies and developmental stage projects. Expropriation, confiscatory
taxation, nationalization, political, economic or social instability or other
developments could materially adversely affect the value of the Company's
interests 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 or merger 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
Page 50 of 124 pages.
<PAGE>
deployment and marketing plans thereby contributing to a 37% decrease in STW's
subscribers 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 "Item 7. 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. Such unrest or instability resulting from
political, economic, social or other conditions in foreign countries could have
a material adverse effect on the Company. For example, in China, because foreign
ownership of telecommunications operators is prohibited, the Company, through
its ownership interest in SDL, has interests in China telecommunications
projects through certain "cooperative agreements" with Chinese cellular
operators. Pursuant to the terms of the cooperative agreements, SDL provides
equipment and technical and engineering services to the cellular operators and,
in return, is allocated a portion of the revenues or profits from the cellular
operations. There can be no assurance that the Chinese government will not
prohibit or otherwise impose restrictions on these types of arrangements, which
could have a material adverse effect on the Company. See "Item 1. Business--
Operating Companies--China Regional Cellular."
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, SDL, the Company's
China Regional Cellular project, is required by the Chinese government to
migrate to CDMA, a cellular technology that is not widely deployed on a
commercial basis at the present time. Additionally, the MPT 1327 ECTR 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 to be utilized may be unpopular with 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.
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
Page 51 of 124 pages.
<PAGE>
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. For example, the Brazilian government
has not approved the transfer to Via 1, the Company's Brazilian ECTR operating
company, of the licenses contributed or to be contributed to it by its current
and proposed shareholders, and there can be no assurance that such approval will
be obtained. The failure to obtain such approval or to obtain other licenses
would have a material adverse effect on the Company.
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, for example, to gain network capacity or to increase
geographic coverage. Furthermore, relevant governmental authorities may grant
additional telecommunications licenses covering the same geographical areas as
the operating companies' and developmental stage projects' licenses or otherwise
grant licenses which allow other companies to compete directly with such
operating companies and developmental stage projects for wireless subscribers.
Although the inherent limitation on suitable frequency bands may provide some
protection against the issuance of competing licenses, there can be no assurance
that such competitive licenses will not be granted or, if granted, 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, even if an operating company or developmental stage
project is able to obtain a required license, there can be no assurance that
such operating requirements will be satisfied and, as a result, there can be no
assurance that such license will not be lost or revoked or that the restrictions
imposed upon such license will prevent 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 microwave or fiber optic
networks belonging to other parties to link its wireless systems. Although a
number of operating companies have entered into required interconnection and/or
linking agreements or have interconnection and/or linking 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. Specifically,
STW, the Company's Malaysian WLL project, has in the past had difficulties
obtaining interconnect services from its interconnect provider, which is a
competitor of STW. In addition, STW's interconnect agreement expires in August
1997. Any failure of STW to obtain interconnect services pursuant to its
interconnect agreement or to obtain a successor agreement would have a material
adverse effect on STW.
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 larger scale projects, including certain WLL 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. The failure of the
Company to identify and enter into relationships with
Page 52 of 124 pages.
<PAGE>
strong partners, or the failure of those partners to provide these resources,
may 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
Mindanao regions of the Philippines, failed to comply with the service date
requirement contained in its provisional authority but subsequently cured such
failure and was issued a final operating authority by the Philippine government
in 1997. 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 have received, extensions
of such deadlines. Although such failures have not to date led to the loss of
any licenses, 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 to similar defaults occurring in the
future, which could have a material adverse effect on the Company.
SUBSTANTIAL LEVERAGE
As discussed above, 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, such operating companies may incur
additional indebtedness, and other operating companies or developmental stage
projects may in the future incur substantial indebtedness, in relation to their
respective base of 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 Common Stock, including (i) a possible restriction on such
entity's ability to pay dividends or make other distributions to the Company,
(ii) a possible limitation on such entity's ability to obtain additional debt
financing and (iii) a possible impairment of such entity's ability to react to
changes in the industry and economic conditions generally.
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
counties. In many cases, the Company will also compete against local land-line
carriers, including government-owned telephone companies. Most of these
companies have substantially greater financial and other resources, including
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.
Page 53 of 124 pages.
<PAGE>
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 foreign ownership restrictions, 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.
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 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.
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 U.S. 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 U.S.
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
Page 54 of 124 pages.
<PAGE>
distributed. The Company has not made any QEF elections 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.
Page 55 of 124 pages.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
PAGE
----
International Wireless Communications Holdings, Inc. and Subsidiary
Independent Auditors' Reports........................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996........ F-4
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995, and 1996........................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1994, 1995 and 1996.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996................................. F-7
Notes to Consolidated Financial Statements.......................... F-9
International Wireless Communications Holdings, Inc. ("IWC Holdings")
is a holding company which conducts all of its operations through its wholly
owned subsidiary, International Wireless Communications, Inc. and its
subsidiaries ("IWC") and has no assets, liabilities or operations other than
its investment in IWC as of December 31, 1996. 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 December
31, 1996, the financial statements of IWC Holdings and IWC are identical
except for a certain debt obligation, related warrants and debt issue costs
related to the Debt Offering as hereinafter described 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 Debt Offering.
Although separate financial statements of IWC would normally be required to
be presented 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, 1995 and 1996, 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, 1996. 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 years ended December 31, 1995
and 1996 (see Note 5). The investment in this company represents 25% and 17%
of consolidated assets as of December 31, 1995 and 1996, respectively. The
equity in its net loss was approximately $1,310,000 and $4,746,000 for the
years ended December 31, 1995 and 1996, respectively. 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 and 1996, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IWC
Holdings as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Jose, California
April 11, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
REPORT NO. 27181S
The Board of Directors and Stockholders
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
We have audited the consolidated balance sheets of PT Rajasa Hazanah
Perkasa and Subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income and deficit and cash flows for the years
then ended (not presented separately herein). 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 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PT
Rajasa Hazanah Perkasa and its subsidiary as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for the years 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 22 and 23 to the consolidated
financial statements (not presented separately herein).
PRASETIO, UTOMO & CO.
Drs M.P. Sibarani
License No. SI.570/MK.17/1993
March 24, 1997
F-3
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents................ $25,398 $41,657
Accounts receivable...................... -- 348
Notes receivable from affiliates......... 338 813
Note receivable.......................... -- 1,431
Advances to affiliate.................... 728 99
License deposit.......................... -- 5,255
Investment in affiliate held for sale.... -- 2,062
Other current assets..................... 387 2,743
-------- --------
Total current assets................. 26,851 54,408
Property and equipment, net................ 4,269 18,426
Investments in affiliates.................. 52,280 68,394
Telecommunication licenses and other
intangibles, net......................... 12,186 18,484
License deposit............................ -- 3,042
Debt issuance costs, net................... -- 6,431
Other assets............................... 57 173
-------- --------
Total assets......................... $95,643 $169,358
-------- --------
-------- --------
LIABILITIES, MINORITY INTERESTS, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.... $5,757 $7,313
Notes payable to related party........... 1,800 --
Note payable............................. 4,000 --
-------- --------
Total current liabilities............ 11,557 7,313
Long-term debt, net........................ -- 75,466
-------- --------
Total liabilities.................... 11,557 82,779
Minority interests in consolidated
subsidiaries............................. -- 5,685
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 in 1996...................... 98,845 103,021
Commitments and contingencies (Note 13)
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 636,720 shares issued and
outstanding in 1995 and 1996,
respectively........................... 3 6
Additional paid-in capital................. 749 31,060
Note receivable from stockholder........... (152) (152)
Unrealized gain on investments............. -- 68
Cumulative translation adjustment.......... (1) 271
Accumulated deficit........................ (15,370) (53,389)
-------- --------
Total stockholders' deficit.......... (14,759) (22,127)
-------- --------
Total liabilities, minority
interests, redeemable convertible
preferred stock and stockholders'
deficit............................ $95,643 $169,358
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Operating revenue ................. $- $- $869
Cost of revenue - - 1,948
------- -------- --------
- - (1,079)
Operating expenses:
Selling, general and
administrative expenses ...... 2,481 6,365 17,333
Equity in losses of affiliates . - 3,756 11,783
Minority interests in losses of
consolidated subsidiaries .... - - (275)
------- -------- --------
Loss from operations ...... (2,481) (10,121) (29,920)
Other income (expense):
Interest income ................ 106 232 1,823
Interest expense ............... (115) (1,354) (6,790)
Other .......................... (13) (28) (1,021)
------- -------- --------
Net loss ..................$(2,503) $(11,271) $(35,908)
------- -------- --------
------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Note
Convertible Additional receivable
preferred stock Common Stock paid-in from
--------------------------- ------------------------------
Shares Amount Shares Amount capital stockholder
------------- ------------ ---------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1993......................... 1,229,240 $ 11 1,200,000 $ 12 $ 1,407 $ -
Conversion of Series A
preferred stock to
Series B redeemable
preferred stock............. (1,229,240) (11) - - (933) -
Conversion of common
stock to Series A
preferred stock............. 1,200,000 12 (1,200,000) (12) - -
Issuance of common stock..... - - 76,080 1 151 (152)
Accretion of redeemable
preferred stock............. - - - - - -
Net loss..................... - - - - - -
------------- ------------ ---------------- ------------ --------------- ----------------
Balances as of December 31,
1994......................... 1,200,000 12 76,080 1 625 (152)
Issuance of common stock..... - - 251,920 2 124 -
Accretion of redeemable
preferred stock............. - - - - - -
Foreign currency
translation................. - - - - - -
Net loss..................... - - - - - -
------------- ------------ ---------------- ------------ --------------- ----------------
Balances as of December 31,
1995......................... 1,200,000 12 328,000 3 749 (152)
Conversion of Series A
preferred stock to
common stock................ (266,800) (3) 266,800 3 - -
Exercise of stock options.... - - 41,920 - 11 -
Issuance of warrants......... - - - - 30,300 -
Unrealized gain on
investments................. - - - - - -
Foreign currency
translation................. - - - - - -
Accretion of redeemable
preferred stock............. - - - - - -
Net loss..................... - - - - - -
------------- ------------ ---------------- ------------ --------------- ----------------
Balances as of December 31,
1996......................... 933,200 $ 9 636,720 $ 6 $ 31,060 $ (152)
------------- ------------ ---------------- ------------ --------------- ----------------
------------- ------------ ---------------- ------------ --------------- ----------------
Total
Unrealized Cumulative stockholders'
gain on translation Accumulated equity
investments adjustment deficit (deficit)
-------------- ------------ ------------------ -------------
<S> <C> <C> <C> <C>
Balances as of December 31,
1993......................... $ - $ - $ (1,005) $ 425
Conversion of Series A
preferred stock to
Series B redeemable
preferred stock............. - - - (944)
Conversion of common
stock to Series A
preferred stock............. - - - -
Issuance of common stock..... - - - -
Accretion of redeemable
preferred stock............. - - (132) (132)
Net loss..................... - - (2,503) (2,503)
------------- ------------ ---------------- ------------
Balances as of December 31,
1994......................... - - (3,640) (3,154)
Issuance of common stock..... - - - 126
Accretion of redeemable
preferred stock............. - - (459) (459)
Foreign currency
translation................. - (1) - (1)
Net loss..................... - - (11,271) (11,271)
------------- ------------ ---------------- ------------
Balances as of December 31,
1995......................... - (1) (15,370) (14,759)
Conversion of Series A
preferred stock to
common stock................ - - - -
Exercise of stock options.... - - - 11
Issuance of warrants......... - - - 30,300
Unrealized gain on
investments................. 68 - - 68
Foreign currency
translation................. - 272 - 272
Accretion of redeemable
preferred stock............. (2,111) (2,111)
Net loss..................... (35,908) (35,908)
------------- ------------ ---------------- ------------
Balances as of December 31,
1996......................... $ 68 $ 271 $ (53,389) $ (22,127)
------------- ------------ ---------------- ------------
------------- ------------ ---------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1994, 1995 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $(2,503) $(11,271) $(35,908)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation .......................................... 15 37 732
Amortization of telecommunication licenses and other
intangibles ......................................... 40 294 1,103
Amortization of debt issuance costs ................... - - 369
Amortization of long-term debt discount ............... - - 5,764
Equity in losses of affiliates ........................ - 3,756 11,783
Minority interest in losses of consolidated subsidiaries - - 275
Unrealized gain on investments ........................ - - 68
Changes in operating assets and liabilities:
Accounts receivable ................................ - - (138)
Other current assets ............................... 5 (350) (2,342)
Accounts payable and accrued expenses .............. 45 5,557 1,246
-------- -------- --------
Net cash used in operating activities ............ (2,398) (1,977) (17,048)
-------- -------- --------
Cash flows from investing activities:
Issuances of notes receivable from affiliates ......... - - (1,058)
Repayment of notes receivable from affiliates ......... (2,245) (113) 583
Issuance of note receivable ........................... - - (3,231)
Repayment of note receivable .......................... - - 1,800
Advances to affiliate ................................. - (728) (1,921)
Purchases of property and equipment ................... (88) (4,218) (8,657)
Purchase of TeamTalk Limited .......................... - - (3,198)
Investments in affiliates ............................. (3,704) (19,589) (31,943)
Minority interest in consolidated subsidiaries ........ - - 5,410
Purchase of telecommunication licenses
and other intangibles ................................ - (12,153) (5,772)
License deposits ...................................... - - (8,297)
Other assets .......................................... (169) 70 100
-------- -------- --------
Net cash used in investing activities ............ (6,206) (36,731) (56,184)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable ............... 5,180 28,138 -
Repayment of notes payable ............................ (2,060) (2,050) (4,000)
Net proceeds from issuance of stock and warrants ...... 15,122 27,720 30,300
Proceeds from revolving credit facility ............... - - 7,000
Repayment of revolving credit facility ................ - - (7,000)
Exercise of stock options ............................. - - 11
Debt issuance costs ................................... - - (6,800)
Proceeds from issuance of long-term debt .............. - - 69,702
-------- -------- --------
Net cash provided by financing activities ........ 18,242 53,808 89,213
-------- -------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents ................................... - - 278
-------- -------- --------
Net increase in cash and cash equivalents ................ 9,638 15,100 16,259
Cash and cash equivalents at beginning of year ........... 660 10,298 25,398
-------- -------- --------
Cash and cash equivalents at end of year ................. $10,298 $25,398 $41,657
-------- -------- --------
-------- -------- --------
</TABLE>
F-7
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1994, 1995 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for interest ................................. $103 $949 $662
-------- -------- --------
-------- -------- --------
Noncash financing and investing activities:
Conversion of loans to equity ............................ $3,380 $24,307 $2,052
-------- -------- --------
-------- -------- --------
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 assumed in connection with RHP investment ... - $4,000 -
-------- -------- --------
-------- -------- --------
Effect of net assets of TeamTalk Limited previously
accounted for by the equity method ...................... - - $4,395
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statement.
F-8
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(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" or "the Company") and a note receivable
from IWC in a principal amount equal to the net proceeds from the Debt
Offering (see Note 9). 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.
The Company's operations to date have principally been in the early
stage development of LWBs. In addition, the Company intends to pursue
aggressively additional investment opportunities. The Company's existing
cash balance is sufficient to meet its operating and contractual obligations
for the next fiscal year. It is not sufficient, however, to meet the
Company's business objective of participation in additional equity rounds to
finance the infrastructure buildout of its operating and nonoperating LWBs.
The ability of the Company to make additional investments is dependent on
available external financing. In the event the Company is unable to obtain
external financing it may ultimately be unable to either maintain its
existing ownership interests or fully realize the underlying LWBs potential.
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 forty shares of the corresponding class and series
of stock of IWC Holdings (the "Stock Conversion"). 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 IWC, its wholly owned subsidiaries, Servicos de Radio
Comunicacoes Ltda. ("SRC"), TeamTalk Limited ("TeamTalk"), New Zealand
Wireless Limited ("New Zealand Wireless"), International Wireless
Communications Asia Holdings, B.V. ("IWC Asia") and International Wireless
Communications Latin America Holdings, Limited ("IWC Latin America"), and
four majority owned subsidiaries, M/S Mobilcom (Pte) Ltd. ("Mobilcom
Pakistan"), PeruTel S.A. ("PeruTel"), Star Telecom Overseas (Cayman Islands)
Limited ("STOL"), and Promociones Telefonicas S.A. ("Protelsa"). In February
1996, the Company, through a joint venture agreement, entered into a wireless
data business and established Wireless Data Services, Ltd. ("WDS"). This
entity, although 50% owned by the Company, has also been consolidated in the
accompanying consolidated financial statements. Effective April 30, 1996, the
Company acquired the remaining 50% interest of TeamTalk, and as such, the
accompanying consolidated balance sheet as of December 31, 1996 also includes
the accounts of TeamTalk. The consolidated statement of operations for the
year ended December 31, 1996 also includes the accounts of the now wholly
owned TeamTalk subsidiary since April 30, 1996, the effective date of the
acquisition (see Note 5). Prior to May 1, 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 STOL, and as such,
the accompanying consolidated balance sheet as of December 31, 1996 also
includes the accounts of STOL. The consolidated statement of operations for
the year ended December 31, 1996 also includes the accounts of STOL since the
date of acquisition. In December 1996, IWC acquired a 66% interest in
Protelsa, and as such, the accompanying consolidated balance sheet as of
December 31, 1996 also includes the accounts of Protelsa. The consolidated
statement of operations for the year ended December 31, 1996 also includes
the accounts of Protelsa since the date of acquisition. All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-9
<PAGE>
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operating entities
is the applicable local currency, except for those entities 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 other income and are not material in any of the years
presented.
REVENUE RECOGNITION
Revenue includes primarily access and usage charges for subscriber
units under service agreements with the Company's consolidated subsidiaries
that have commenced operations. The terms of these service agreements range
from monthly to 36 month periods.
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.
The Company 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.
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
non-telecommunication equipment and ten years for telecommunication equipment.
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
telecommunication 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, 1995 and 1996.
Write-downs to the recorded historical cost are recognized when the Company
believes that a permanent 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 the 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
F-10
<PAGE>
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
and amortizes such intangibles generally over a period of 20 years. To the
extent that goodwill exists, the Company believes that the difference in
amortization lives between telecommunication 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
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 underlying fair value of the Company's
pro rata ownership in the LWB's net tangible assets at the date of
acquisition represents the level of intangible assets of the LWB. The primary
intangible asset of each LWB consists of the LWB's telecommunication licenses
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 deemed material. Accordingly, the
Company has accounted for the excess purchase price as attributable primarily
to 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 generally over a
period of 20 years, commencing upon the date of 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 was approximately $40,000, $294,000, and
$1,103,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value-based method of Accounting
Principles Board ("APB") Opinion No. 25 to account for all of its employee
stock-based compensation plans.
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.
F-11
<PAGE>
Included in the Company's consolidated balance sheet as of December
31, 1995 and 1996, are long-term investments in various LWBs in such
developing countries as Brazil, China, India, Indonesia, Malaysia, Pakistan,
New Zealand, Peru, and the Philippines (see Note 14). These investments make
up a significant portion of IWC's balance sheet (see Note 5).
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 emerging 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 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 and accordingly, the Company expects its losses to increase. 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 telecommunications 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.
RECOVERABILITY OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No.
121 ("SFAS 121"), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, the Company reviews for the impairment
of long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Under SFAS 121, an impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. In 1996, the
Company wrote off its investments in HFCL Mobile Radio, Ltd. ("HFCL") and PT
Binamulti Visualindo ("PTBV") of $320,000 and $205,000, respectively, based
on management's decisions to no longer pursue such projects.
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.
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-12
<PAGE>
RECLASSIFICATIONS
Certain amounts in the accompanying 1994 and 1995 consolidated
financial statements have been reclassified to conform with the 1996
consolidated financial statement presentation.
(2) CASH AND CASH EQUIVALENTS
The Company has invested in a variety of short-term, highly liquid
investments all with original maturities of 90 days or less. As of December
31, 1995, the Company had cash of $449,000 and cash equivalents consisting of
money market mutual funds totaling $24,949,000. As of December 31, 1996, the
Company had cash of $11,811,000, and cash equivalents consisting of money
market mutual funds and U.S. government and agency obligations totaling
$3,009,000 and $26,837,000, respectively. Unrealized gains on U.S.
government and agency obligations of $68,000 is included as a component of
stockholders' deficit on the accompanying consolidated balance sheet as of
December 31, 1996.
F-13
<PAGE>
(3) BALANCE SHEET COMPONENTS
Balance sheet components as of December 31 are as follows (in
thousands):
1995 1996
---- ----
Other current assets
Employee receivables.................. $109 $179
Taxes receivables..................... - 820
Other receivables..................... 153 1,373
Prepaid expenses and other............ 125 371
------- --------
$387 $2,743
------- --------
------- --------
Property and equipment
Furniture and fixtures................ $40 $320
Computer and office equipment......... 126 935
Automobiles........................... 34 197
Leasehold improvements................ - 276
Telecommunication equipment........... - 9,930
Construction in process............... 4,125 7,620
------- --------
4,325 19,278
Less accumulated depreciation......... 56 852
------- --------
Property and equipment, net........ $4,269 $18,426
------- --------
------- --------
Telecommunication licenses and other
intangibles
SRC/Via 1 project..................... $6,714 $6,680
Mobilcom Pakistan..................... 5,439 5,439
TeamTalk.............................. - 1,760
STOL.................................. - 3,965
Protelsa.............................. - 1,557
WDS................................... - 221
Other................................. 200 200
------- --------
12,353 19,822
Less accumulated amortization......... 167 1,338
------- --------
Telecommunication licenses and
other intangibles, net........... $12,186 $18,484
------- --------
------- --------
Accounts payable and accrued expenses
Accounts payable...................... $ - $5,163
Professional services................. 3,041 718
Employee compensation and benefits.... 189 619
Equipment purchases................... 1,719 27
Remaining TeamTalk purchase price..... - 156
Payable to UTS........................ - 178
Other................................. 808 452
------- --------
$5,757 $7,313
------- --------
------- --------
F-14
<PAGE>
(4) INVESTMENTS IN AFFILIATE HELD FOR SALE
In June 1996, the Company entered into a put-call agreement (the
Agreement) with various other shareholders of Corporacion Mobilcom, S.A. de
C.V. ("Mobilcom Mexico") with the intention of selling its entire 2.23%
shareholding of Mobilcom Mexico to one of the other shareholders of Mobilcom
Mexico. The sale of the Company's investment will be triggered by any one of
a variety of put events (as defined) in the Agreement, the earliest of which
will occur on October 24, 1997, which is one year after the effective date of
the Agreement. The Company carries this investment at its historical cost of
$2,062,000. The Company anticipates that the sale price of this investment
will exceed its historical cost.
(5) 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 of accounting.
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 even if its ownership is less than 20%, 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, 1995
and 1996 (dollars in thousands):
F-15
<PAGE>
<TABLE>
<CAPTION>
Investments
Percentage in affiliated Equity in losses of affiliates
Affiliated of companies Additional -------------------------------
Country Company ownership 1994 investment Amortization Losses (gains)
- --------- ---------- ----------- ------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Syarikat Telefon Wireless
Malaysia ("STW") 30% (1) $1,400 $20,770 $ 638 $ 1,291
PT Rajasa Hazanah Perkasa
Indonesia ("RHP") 25% - 25,530 319 991
New Zealand TeamTalk 50% 284 2,569 7 508
India HFCL 49% - 243 1 -
Indonesia PTBV 49% - 206 1 -
------ -------- ------- -------
$1,684 $49,318 $ 966 $2,790
------ -------- ------- -------
------ -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Portion of
investment
exceeding the
Company's share
Investments of the underlying
in affiliated historical
Affiliated companies net assets
Country Company 1995 1995
- ---------- ---------- ------------- -----------------
<S> <C> <C> <C>
Malaysia STW $ 20,241 $ 16,821
Indonesia RHP 24,220 23,361
New Zealand TeamTalk 2,338 1,526
India HFCL 242 242
Indonesia PTBV 205 205
--------- -------
$47,246 $42,155
--------- -------
--------- -------
</TABLE>
<TABLE>
<CAPTION>
Investments
Percentage in affiliated Equity in losses of affiliates
Affiliated of companies Additional ------------------------------
Country Company ownership 1995 investment Amortization Losses (gains)
- --------- ---------- ----------- ------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Malaysia STW 30% (1) $20,241 $ 1,201 (2) $ 969 $ 3,563
Indonesia RHP 28% (3) 24,220 8,556 (3) 1,278 3,468
Star Digitel Limited
China ("SDL") 40% - 20,000 347 1,000
Universal Telecommunications
Philippines Service, Inc. ("UTS") 19% - 1,906 (4) 51 (20)
New Zealand TeamTalk 100% (5) 2,338 (1,736) - 602
India HFCL 49% (6) 242 78 320 -
Indonesia PTBV 49% (6) 205 - 205 -
------- -------- ------- -------
$47,246 $30,005 $3,170 $8,613
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Portion of
investment
exceeding the
Company's share
Investments of the underlying
in affiliated historical
Affiliated companies net assets
Country Company 1996 1996
- ---------- ---------- ------------- -----------------
<S> <C> <C> <C>
Malaysia STW $ 16,910 $ 15,852
Indonesia RHP 28,030 28,030
China SDL 18,653 10,653
Philippines UTS 1,875 882
New Zealand TeamTalk - -
India HFCL - -
Indonesia PTBV - -
--------- -------
$65,468 $55,417
--------- -------
--------- -------
</TABLE>
- -------------------------
(1) The Company, along with other STW shareholders, agreed to provide
certain support in connection with a Malaysian Ringgit 91,000,000
(approximately $35,968,000) senior credit facility obtained by STW
from a Malaysian bank (see Note 13).
(2) In October 1996, the Board approved and the Company funded $1,201,000 to
STW as the Company's pro rata share of a capital call.
(3) In October 1996, the Company paid $8,556,000 to increase its interest in
RHP to 29.2%, thereby increasing its indirect interest in Mobisel to
20.4%. In December 1996, Nissho Iwai International (Singapore) Pte. Ltd.
purchased 3% of RHP, diluting the Company's ownership in RHP to 28.3%,
thereby decreasing its indirect interest in Mobisel to 19.8%.
(4) Reflects an additional investment of $532,000, of which $354,000 was
paid in 1996 and the remainder was paid in January 1997, pursuant to an
agreement dated September 25, 1996. This investment was previously
accounted for as a cost investment.
(5) Reflects acquisition of the remaining 50% of Team Talk, effective
April 30, 1996, pursuant to an agreement dated June 24, 1996.
(6) This investment was fully written off during 1996 based on management's
decision to no longer pursue the project.
F-16
<PAGE>
The Company acquired its interest in RHP, HFCL, and PTBV during 1995
and accounted for them using the purchase method.
In June 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 indebtedness to the shareholder
totaling $3,022,000, for a purchase price of approximately $3,198,000. The
transaction was accounted for by the purchase method effective April 30,
1996, with the majority of the purchase price paid in July 1996. As of
December 31, 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 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.
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 and accounted for by the purchase
method. 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. In November 1996,
in connection with the closing of the Company's acquisition of an equity
interest in SDL, the $9,000,000 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 and assigned $11,000,000
representing the amount of the purchase price that exceeded the fair value of
the Company's percentage ownership of SDL's tangible net assets to
participation rights in SDL's underlying projects.
In October 1996, the Company paid $8,556,000 to increase its interest
in RHP to 29.2% and accounted for this additional acquisition using the
purchase method. The Company assigned the entire amount of the purchase
price to the telecommunication license as the purchase price exceeded the
fair value of the Company's percentage ownership of RHP's tangible net assets
in full at the date of purchase. In December 1996, Nissho Iwai International
(Singapore) Pte. Ltd. Purchased 3% of RHP, diluting the Company's ownership
interest in RHP down to 28.3%.
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 Company, at
its discretion, allowed the option to lapse on November 6, 1996 and
subsequently expensed the entire $1,000,000, which is classified as other
expense in the accompanying consolidated statement of operations.
The following condensed financial statement data, presented in
accordance with U.S. generally accepted accounting principles and stated in
U.S. dollars for significant affiliated companies accounted for by the equity
method, has been derived from audited financial statements. The financial
information pertaining to RHP was derived from financial statements audited
by other auditors. This information is as follows (in thousands):
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
-----------------
STW RHP(A) TEAMTALK
--- ------ --------
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)
F-17
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996
-----------------
STW RHP TEAMTALK(B) SDL
--- ------ -------- ---
<S> <C> <C> <C> <C>
Current assets........................ $820 $13,354 - $11,215
Noncurrent assets..................... 41,686 64,556 - 55,617
Current liabilities................... 6,909 23,341 - 12,460
Noncurrent liabilities................ 33,526 63,834 - 47,817
Net revenues.......................... 1,858 10,268 - 436
Net loss.............................. (11,873) (12,072) - (2,618)
</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 $1,821,000 and $387,000, 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 two other
investments as of December 31, 1996. They are PT Mobilkom Telekomindo
("Mobilkom") and RPG Paging Services Limited ("RPSL"), the latter of which
the Company acquired in August 1996 as part of IWC's acquisition of STOL. As
of December 31, 1996, the Company's indirect ownership percentages in these
entities are 15% and 7%, respectively. Both are operating entities.
Prior to September 25, 1996, the Company accounted for UTS as a cost
investment. On September 25, 1996, the Company increased its ownership
interest to 19%, excluding its 3% incentive option, and as such, changed its
method of accounting to the equity method, as the Company felt it commenced
to exert significant influence. It is anticipated that the Company will
further increase its ownership percentage in the future.
The Company's carrying value of these investments as of December 31
are as follows (in thousands):
1995 1996
---- ----
Mobilcom Mexico.......... $ 2,062 $ -
Mobilkom................. 1,500 1,500
UTS...................... 1,472 -
RPSL..................... - 1,426
------- ------
$ 5,034 $2,926
------- ------
------- ------
The Company considers these investments to be long-term in nature and
are not held for trading purposes. During 1996, the Company decided to offer
Mobilcom Mexico for sale and has reclassified this investment as a current
asset (see Note 4).
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 30% and 28.3%, respectively, since January 1, 1995, (iii)
the merger with Vanguard International Telecommunications, Inc. ("VIT"), a
wholly owned subsidiary of Vanguard (see Note 6) had occurred on January 1,
1995, (iv) the acquisition of STOL had occurred at January 1, 1995, (v) the
acquisition of SDL had occurred at January 1, 1995, and (vi) the acquisition
of Protelsa had occurred at January 1, 1995.
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.
F-18
<PAGE>
Unaudited pro forma consolidated results of operations for the
various acquisitions and mergers as described above are as follows (in
thousands):
FOR THE YEAR ENDED
DECEMBER 31,
------------
1995 1996
---- ----
Revenues ............................................ $369 $1,161
Net loss ............................................ (17,068) (40,830)
(6) RELATED PARTY TRANSACTIONS
ADVANCES TO AFFILIATES
The advances to affiliate 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 eliminates
advances to TeamTalk in consolidation.
In January 1996, the Company advanced Philippine Peso 2,612,000 or
approximately $99,000 to UTS. The advance is interest-free with no stated
terms. Management believes the advance will be repaid during 1997.
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.
Notes receivable from affiliates as of December 31, 1996, consisted
primarily of the note due from Mobilcom Mexico for $158,000, plus cumulative
accrued interest of $20,000; and a series of interest-free promissory notes
loaned to PT Mobile Selular Indonesia ("Mobisel"), an entity which the
Company indirectly owns 19.8% through its investment in RHP, totaling
$635,000. In April 1997, the Company collected the $635,000 note receivable
from Mobisel. The Company expects to collect the note receivable from
Mobilcom Mexico during 1997.
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"), the
Company's largest stockholder, each in the amount of $900,000 plus accrued
interest and bearing interest at 9% compounded annually. The notes were due
on the earlier of April 26, 1996 or the close of an initial public offering.
On April 26, 1996, these notes, plus $252,000 of accrued interest, were
converted into 274,800 shares of the Company's Series D Redeemable
Convertible Preferred Stock.
VANGUARD MERGER
On December 18, 1995, the Company merged with Vanguard International
Telecommunications, Inc. ("VIT") (See Note 11), 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 Series E Redeemable Convertible 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 36% 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.
F-19
<PAGE>
The excess of the allocated portion of the merger value to TeamTalk
over the net book value of TeamTalk was attributed to telecommunication
licenses and other intangibles. 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 in aggregate was allocated to telecommunication licenses and
other intangibles in the LWBs based on their relative stage of development.
These amounts are amortized on a straight-line basis over 20 years.
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 Capital (U.S.A.), Inc., 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 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 9).
OTHER RELATED PARTY TRANSACTIONS
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, 1995 and 1996, expense reimbursements were not material.
(7) 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 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 December 31, 1996, the co-shareholder had
repaid $1,800,000 of the total amount loaned, bringing the remaining
principal plus interest owed to $1,431,000. In April 1997, the Company
collected an additional $900,000 and expects to collect the remainder of the
note receivable during 1997.
(8) LICENSE DEPOSITS
In June 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 contribution to the venture that is ultimately formed. If the
Taiwanese corporation is unsuccessful in securing these applications, the
Company's deposit, less its pro rata share of application related expenses,
will be returned to the Company.
In August 1996, the Company deposited $2,250,000 for a 10% interest
in a Taiwan paging project. Concurrently, STOL deposited $3,005,000 for a
20% interest in the Taiwan Paging Project. The total consolidated deposit is
$5,255,000. Had a national paging license been granted to the project, the
deposit would have become the Company's initial capital contribution to the
venture that would ultimately have been formed to pursue the paging
F-20
<PAGE>
business in Taiwan. In early February 1997 it was announced, that this bid
was unsuccessful, and the Company and STOL are expecting their deposits to be
returned during 1997. The Company has, therefore, classified these deposits
as a current asset.
(9) LONG-TERM DEBT AND DEBT ISSUANCE COSTS
In August 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 6) 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 $121,254,000 on the accompanying
consolidated balance sheet as of December 31, 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.
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.
In connection with the Debt Offering, the Company entered into the
Indenture, which contains certain covenants that, among other things, limits
the ability of the Company and its subsidiaries and affiliates to incur
additional indebtedness, limits the ability of the Company to merge,
consolidate or sell substantially all of its assets; and limits the ability
to make investments. In addition, the Indenture prohibits making restricted
payments (as defined) and creating certain liens (as defined) (see Note 16).
The Indenture also contained a provision that in the event the
Company does not complete an initial public offering ("IPO") of common stock
on or prior to May 15, 1997, each unexercised warrant, issued in connection
with the Debt Offering, will entitle the holder thereof to purchase an
additional 2.645 shares of common stock. The Company expects to issue such
additional warrants as it does not expect to complete an IPO of its common
stock prior to May 15, 1997 (see Note 16).
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 $369,000 on the accompanying consolidated balance
sheet as of December 31, 1996.
In November 1996, the Company exchanged new 14% Senior Secured
Discount Notes due 2001 (the "Exchange Notes") which were registered under
the Securities Act of 1933, as amended (the "1933 Act"), for its outstanding
Notes that were issued and sold in a transaction exempt from registration
under the 1933 Act. The terms of the Exchange Notes are substantially
identical (including principal amount, interest rate, maturity, security and
ranking) to the terms of the Notes.
(10) MINORITY INTEREST
In February 1996, the Company formed WDS, a joint venture, to
develop, install and support mobile data systems throughout the Pacific Rim.
The Company has a 50% equity interest in WDS, and funded its operations on a
pro rata basis for total equity funding during 1996 of $433,000. The Company
anticipates that it will increase its equity interest in WDS in the future.
F-21
<PAGE>
In August 1996, the Company acquired a 70% equity interest in STOL
for an aggregate purchase price of $13,500,000 which has been accounted for
using the purchase method. STOL holds a minority interest in a paging
project in India (RPSL) and is currently pursuing additional paging
opportunities in Indonesia, Thailand and Taiwan. The Company's partner in
STOL is STHL, the Company's partner in SDL. The Company allocated $3,965,000
of the purchase price to participation rights.
In December 1996, the Company paid $1,600,000 to acquire a 66% equity
interest in Protelsa, which has been awarded a national license to provide
paging services in Peru and accounted for the acquisition using the purchase
method. The Company allocated $1,557,000 of the purchase price to the
telecommunication license.
Minority shareholders' interests in the equity of WDS, STOL and
Protelsa as of December 31, 1996 totaled approximately $198,000, $5,315,000
and $172,000, respectively.
(11) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
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.
Nonredeemable convertible preferred stock as of December 31, 1995 and
1996, was comprised of 1,200,000 and 933,200 issued and outstanding shares of
Series A preferred stock, respectively. In August 1996, a stockholder of the
Company converted 266,800 shares of Series A preferred stock into 266,800
shares of common stock. Series A preferred stock has a liquidation value per
share of $.85 and an aggregate liquidation value of $793,000.
Redeemable convertible preferred stock as of December 31, 1996, was
comprised of the following (in thousands except share and per share amounts):
<TABLE>
<CAPTION>
SHARES ISSUED LIQUIDATION AGGREGATE
REDEEMABLE CONVERTIBLE SHARES AND VALUE PER LIQUIDATION
PREFERRED STOCK: DESIGNATED OUTSTANDING SHARE VALUE
---------- ----------- ----- -----
<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 3,652,960 6.8775 25,123
Series E ............. 3,972,240 3,972,240 6.7365 26,759
Series F ............. 8,080,000 5,356,480 9.3750 50,217
---------- ---------- --------
21,541,480 15,973,200 $107,399
---------- ---------- --------
---------- ---------- --------
</TABLE>
Each series of redeemable preferred stock is being accreted
to its respective minimum redemption amount, which is equal to the
liquidation value.
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
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 .9193, 2.223, 6.55
and 6.2938, 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-22
<PAGE>
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,
1996.
- 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 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 redemption 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 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 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 preferred stock are entitled to elect three directors.
As of December 31, 1996, the Company had 16,906,400 shares of
common stock reserved for the conversion of preferred stock.
PREFERRED STOCK TRANSACTIONS
F-23
<PAGE>
- THE SERIES A AND B FINANCINGS
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 warrants (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 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).
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 including accrued interest into an aggregate of 274,800
shares of Series D Redeemable Convertible preferred stock (see
Note 6).
- 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 a number
of 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 6).
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
F-24
<PAGE>
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 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 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 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
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, amendments
of its Certificate of Incorporation or Bylaws that would adversely
impact the rights of the Series F preferred, changes to its
business, changes in control, and sales of equity securities.
F-25
<PAGE>
WARRANTS
The Company had the following warrants outstanding as of
December 31, 1996:
WARRANTS EXERCISE
PREFERRED AND COMMON STOCK OUTSTANDING PRICE EXPIRATION
- -------------------------- ----------- ----- ----------
Series D preferred ............ 45,880 $6.55 May 6, 1997
Series C preferred ............ 273,440 2.22 May 15, 1997
Series D preferred ............ 393,120 6.55 May 15, 1997
Series D preferred ............ 440 6.55 May 23, 1997
Series D preferred ............ 120 6.55 June 12, 1997
Series C preferred ............ 50,440 2.22 December 18, 1997
Series D preferred ............ 10,760 6.55 April 6, 1998
Series F preferred ............ 399,160 9.38 December 18, 1998
Common stock ..... ............ 2,289,421 0.01 August 15, 2001
---------
3,462,781
---------
---------
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, 1996 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, 1995 and 1996.
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 1,000,000
shares of the Company's common sock 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. During 1996, the Board of Directors approved the amendment to and
restatement of the Plan, and authorized this issuance of an additional
1,400,000 shares of common stock thereunder.
F-26
<PAGE>
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.
The Company has elected to use the intrinsic value-based method of
APB Opinion No. 25 to account for the Plan. Accordingly, no compensation
cost has been recognized in the accompanying consolidated financial
statements for the Plan because the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date
for each option.
The Company has adopted the pro forma disclosure provisions of SFAS
No. 123. Pro forma results may not be representative of the effects on
reported net loss for future years. Had compensation cost for the Company's
stock-based compensation plans been determined in a manner consistent with
the fair value approach described in SFAS No. 123, the Company's net loss
would be increased to the pro forma amounts indicated below (in thousands):
1995 1996
---- ----
Net loss As reported $(11,271) $(35,908)
Pro forma $(11,290) $(36,110)
Pro forma net loss reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts above because compensation cost is reflected over the options'
vesting period of 4-5 years and compensation cost for options granted prior
to January 1, 1995 is not considered.
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing minimum value method model with the
following weighted-average assumptions used for granted options in 1995 and
1996, respectively: zero dividend yield; zero expected volatility; risk-free
interest rates of 5.91% and 5.88%, respectively; and weighted average
expected lives of 2.65 years and 2.04 years, respectively.
A summary of the status of the Company's Plan as of December 31,
1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------------- ----------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 761,920 $0.41 881,920 $1.51
Granted 761,920 0.41 160,000 6.41 1,142,000 8.43
Exercised - - - - (41,920) 0.25
Canceled - - (40,000) 0.25 - -
------- ------- ---------
Outstanding at end of year 761,920 0.41 881,820 1.51 1,982,000 5.52
------- ------- ---------
------- ------- ---------
Options exercisable at end of year - 433,001 568,080
Shares available for grant 238,080 118,080 376,080
Weighted average fair value of
options granted during the year $0.90 $0.93
</TABLE>
F-27
<PAGE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGES OF OUTSTANDING CONTRACTUAL EXERCISE OUTSTANDING EXERCISE
EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE
- -------------- ----------- ----------- -------- ----------- --------
$0.25 612,000 7.36 $ 0.25 460,331 $0.25
From $2.00 to $2.50 68,000 6.55 2.09 42,750 2.08
From $6.25 to $9.38 1,302,000 8.05 8.18 64,999 6.40
--------- -------
From $0.25 to $9.38 1,982,000 7.78 5.52 568,080 1.09
--------- -------
--------- -------
(12) 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, 1994, 1995, and 1996 follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Income tax (benefit) at statutory rate .......... $(851) $(3,832) $(12,208)
License amortization ............................ - 341 302
Other ........................................... - - 18
Net operating loss and temporary differences
for which no tax benefit was recognized ........ 851 3,791 11,888
----- ------- --------
$ - $ - $ -
----- ------- --------
----- ------- --------
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities as of
December 31, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Loss carryovers and deferred start-up expenditures ............ $4,642 $12,788
Equity in foreign investments ................................. - 501
------ -------
Total gross deferred tax assets ............................ 4,642 13,289
Less valuation allowance ................................... (655) (9,948)
------ -------
Total deferred tax assets ............................... 3,987 3,341
Deferred tax liabilities:
Fixed assets .................................................. - (153)
Equity in foreign investments ................................. (3,987) -
License fees .................................................. - (3,103)
Debt issuance costs ........................................... - (85)
------ -------
Total deferred tax liabilities .......................... (3,987) (3,341)
------ -------
Net deferred tax assets ................................. $ - $ -
------ -------
------ -------
</TABLE>
Management has established a valuation allowance for the
portion of deferred tax assets for which realization is uncertain. The
valuation allowances as of December 31, 1995 and 1996 were $655,000 and
$9,948,000, respectively. The net changes in valuation allowance during 1995
and 1996 was a decrease of $705,000 for 1995 and an increase of $9,293,000
for 1996.
F-28
<PAGE>
As of December 31, 1996, the Company has cumulative U.S. federal net
operating losses of approximately $26,300,000, which can be used to offset
future income subject to federal income taxes. The federal tax loss
carryforwards will expire from 2008 through 2011. The Company has cumulative
California net operating losses of approximately $17,800,000, which can be
used to offset future income subject to California income taxes. The
California tax loss carryforwards will expire from 1998 through 2001.
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. Most of the 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.
The Company's foreign subsidiaries have aggregate net operating
losses of approximately $2,130,000. The foreign loss carryovers expire over
periods varying from six years to indefinitely.
(13) COMMITMENTS AND CONTINGENCIES
LEASE AND OTHER COMMITMENTS
The Company and its consolidated subsidiaries lease their facilities
and certain equipment under noncancelable operating lease agreements expiring
through 2001. Future minimum lease payments due under noncancelable operating
leases total approximately $768,000, $705,000, $637,000, $605,000 and
$573,000 in 1997 through 2001, respectively.
Total rent expense was approximately $47,000, $60,000 and $324,000
for the years ended December 31, 1994, 1995, and 1996, respectively.
In October 1996, SRC entered into a contract with Nokia
Telecommunications Oy to acquire approximately $12.3 million of trunking
equipment and related services in six phases. It is anticipated that this
contract will be assigned to Via 1 upon the legal formation of the joint
venture, which is anticipated to occur during the second quarter of 1997.
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. During 1997, the Company anticipates
making additional investments in various operating and nonoperating companies
totaling $24,597,000.
NOTE PAYABLE
The Company was jointly and severally liable on a $16,000,000 note
payable to an unrelated party in connection with its RHP investment. The note
bore interest at 6.95% with principal and interest due October 10, 1996. The
Company had recorded its pro rata share of this note on the accompanying
consolidated balance sheet. In October 1996, the Company paid its $4,000,000
pro rata share of this note, plus $278,000 of accrued interest and the other
shareholders of RHP paid their pro rata share.
CONTINGENT LIABILITY OF CONSOLIDATED SUBSIDIARY
During 1996, the Company entered into an agreement with the major
supplier of TeamTalk, agreeing to a moratorium on payments for work performed
prior to April 30, 1996. Subsequent to the agreement, invoices relating to
assets purchased prior to the cut-off period were submitted by the supplier
and are currently in dispute by TeamTalk. TeamTalk has not recognized any
liability pertaining to those invoices. The Company and TeamTalk expect to
resolve this matter without any material adverse consequence.
F-29
<PAGE>
GUARANTEE OF DEBT OF EQUITY INVESTEE
In connection with a Malaysian Ringgit 91,000,000 (approximately
$35,968,000 as translated using effective exchange rates at December 31,
1996) 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 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, 1996, the balance on
this loan was Ringgit 91,000,000 or $35,968,000.
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, indirectly 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 December 31, 1996, borrowings of
approximately $20,210,000 were outstanding under this facility.
The Company indirectly owns a 19.8% equity interest in PT Mobile
Selular Indonesia ("Mobisel"), a provider of cellular services in Indonesia
through its 28.3% ownership 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. 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 December 31, 1996, borrowings of approximately $60 million
were outstanding under this facility.
F-30
<PAGE>
(14) GEOGRAPHIC INFORMATION
Information about the Company's consolidated operations in different
geographic areas for the three years ended December 31, 1994, 1995 and 1996
is as follows (in thousands):
1994 1995 1996
---- ---- ----
Revenues:
Latin America ............. $- $- $-
Southeast Asia ........... - - -
Pacific and Far East ..... - - 869
United States ............ - - -
-------- --------- ---------
$- $- $869
-------- --------- ---------
-------- --------- ---------
Operating loss:
Latin America ........... $- $(154) $(3,844)
Southeast Asia .......... - - (692)
Pacific and Far East .... - (3,756) (13,717)
United States ........... (2,481) (6,211) (11,667)
-------- --------- ---------
$(2,481) $(10,121) $(29,920)
-------- --------- ---------
-------- --------- ---------
Identifiable assets:
Latin America ........... $2,157 $ 13,017 $19,712
Southeast Asia .......... 10 5,658 6,541
Pacific and Far East .... 3,429 50,017 104,966
United States ........... 12,828 26,951 38,139
-------- --------- ---------
$18,424 $95,643 $169,358
-------- --------- ---------
-------- --------- ---------
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 consolidated operations in Pacific and Far East are
in New Zealand and China. The Company's equity method and cost investees are
included in the geographic areas in which principal operations exist or will
exist (see Note 5).
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, notes
receivable from and advances 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.
The fair value of other financial instruments is described below.
The following methods and assumptions were used to estimate the fair
value of each category of financial instruments for which it is practicable
to estimate that value:
INVESTMENT IN AFFILIATE HELD FOR SALE -- The fair value of this
instrument is determined by management to be the same as its carrying amount.
INVESTMENTS IN AFFILIATES CARRIED ON THE COST METHOD -- The fair
value of these instruments is estimated based upon recent transactions in
this portfolio (see Note 5).
LONG-TERM DEBT, NET -- The fair value of the Exchange Notes was
estimated by management to be the same as the carrying amount as no change in
prevailing interest rates had occurred since the August 1996 issuance of the
Notes.
The estimated fair values of the Company's financial assets
(liabilities) as of December 31 are summarized as follows (in thousands):
F-31
<PAGE>
1996
---------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
Investment in affiliate held for sale .... $2,062 $2,062
Investment in affiliates carried on
the cost method ......................... 2,926 3,833
Long-term debt, net ...................... (75,466) (75,466)
(16) SUBSEQUENT EVENTS
In January 1997, STOL acquired an additional 9% of RPSL for
$2,100,000.
In March 1997, the Company loaned $3,500,000 to SDL. The loan, in
the form of a promissory note, accrues interest at 9% per annum and is due
upon written demand by the Company.
As discussed above, the holders of the Warrants issued in connection
with the Debt Offering are entitled to purchase 11.638 shares of common
stock per Warrant, representing in the aggregate approximately 10.0% of the
outstanding stock of the Company on a fully-diluted basis as of August 15,
1996 (see Note 9). In the event that a qualified initial public offering of
common stock in which the Company raises at least $50 million in net cash
proceeds does not occur on or prior to May 15, 1997, each unexercised Warrant
will entitle the holder thereof to purchase an additional 2.645 shares of
common stock. On March 27, 1997, the Board of Directors determined, based on
discussions with the Company's prospective underwriters, that it was unlikely
that the Company will complete such an offering on or prior to May 15, 1997.
The Company was not in compliance with its bond indenture covenants
to submit audited consolidated financial statements and a compliance
certificate within 90 days of the Company's fiscal year end. The Trustee has
indicated that it would not consider this matter to be an event of default
and that such noncompliance is curable upon the delivery of this document and
the compliance certificate to the Trustee prior to April 30, 1997.
F-32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Page 88 of 124 pages.
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The directors, executive officers and key employees of the Company as of
December 31, 1996 were as follows:
NAME AGE POSITION
- ---- --- --------
Haynes G. Griffin(1)........... 49 Chairman of the Board
John D. Lockton................ 59 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 and
Chief Operating Officer
Douglas S. Sinclair............ 42 Executive Vice President and
Chief Financial Officer
Patrick Ciganer................ 45 Senior Vice President,
Project Finance
Robert M. Curran............... 42 Senior Vice President,
Marketing
Roger Quayle................... 43 Senior Vice President,
Technology
Aarti C. Gurnani............... 29 Vice President, Legal
Affairs and Secretary
Sanford L. Antignas............ 35 Director
Carl C. Cordova III(1)(2)...... 35 Director
Stephen R. Leeolou(2).......... 41 Director
John S. McCarthy(2)............ 48 Director
Carl F. Pascarella(1).......... 55 Director
Brian Rich..................... 36 Director
Van Snowdon.................... 41 Director
___________
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Griffin has served as Chairman of the Board of Directors of the
Company since June 1996. Mr. Griffin is a co-founder of Vanguard Cellular
Systems, Inc., a wireless cellular telephone company ("Vanguard"), and has
served as Chairman of the Board and Co-Chief Executive Officer of Vanguard
since November 1996. From July 1984 to November 1996, he was President and
Chief Executive Officer of Vanguard. 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 its incorporation
in January 1992. From May 1990 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 August 1988, he founded Cellular Data,
Inc., a wireless company, and Star Associates, Inc., a cellular radio RSA
company. From December 1983 to July 1986, Mr. Lockton was Executive Vice
President for Pacific Bell Company, with responsibilities including its
wireless business. Mr. Lockton was a director of Interactive Network, Inc., a
wireless based interactive television company, from December 1987 to April
1996 and was Chairman of the Board of Directors until December 1994. He was
also a director
Page 89 of 124 pages.
<PAGE>
of Centex Telemanagement, Inc., a shared access telephone service provider
from May 1992 until the company was acquired by HFS, Inc. in July 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 been a director of
the Company since its inception in January 1992. Mr. McClung 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 of the Company since August
1994. From July 1988 to May 1994, 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. From 1982 to 1988, Mr. Endy was
Corporate Vice President for Sprint Communications, Inc., a
telecommunications company. 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 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, Project Finance of the
Company since December 1996. From May 1996 to December 1996, Mr. Ciganer
served as Senior Vice President, Latin America of the Company, and from
January 1994 to April 1996, he served as Vice President, Operations-Latin
America of the Company. 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 DEG. 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. From May 1995 to April 1996, he served as Vice
President, Technology of the Company, and from August 1994 to May 1995, he
served as Vice President, Asian Operations of the Company. From July 1991 to
August 1996, Mr. Quayle held various management positions with Broadcast
Communications Ltd., a New Zealand broadcasting and telecommunications
network and engineering company, most recently as General Manager of
Technology and Business Development. From 1989 to 1991, Mr. Quayle was Senior
Consultant and Principal of Amos Aked Swift, an Australian telecommunications
consulting company. Prior to that time, he was the founder and Managing
Director of Datacomm Equipment Ltd., a New Zealand data communications
company.
Page 90 of 124 pages.
<PAGE>
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. Antignas has served as a director of the Company since December
1996. Since April 1996, Mr. Antignas has served as a Vice President of
Bassini Playfair + Associates LLC, an emerging markets private equity
investment firm. From August 1994 to April 1996, he was Director of
International Direct Investments for a unit of American International Group,
Inc., and from September 1987 to August 1994, he held various positions with
GE Capital Corporation. Mr. Antignas is a Certified Public Accountant, having
previously been employed by Deloitte Haskins & Sells. Mr. Antignas holds a
B.S. in Business Administration from the University of California, Berkeley
and an M.B.A. from New York University.
Mr. Cordova has served as a director of the Company since December 1995.
Mr. Cordova is a Vice President of Electra Inc., an affiliate of Electra
Investment Trust PLC, which he joined in 1993. He serves on the Boards of
Directors of a number of private 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. 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 to June 1996. Mr. Leeolou is a co-founder of Vanguard and has served as
its President and Co-Chief Executive Officer since November 1996. From July
1984 to November 1996, he was Executive Vice President and Chief Operating
Officer of Vanguard. 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 serves on the Board of Directors of Transaction
Network Services, Inc., a publicly held electronic data telecommunications
company. Mr. McCarthy also serves on the boards of directors of Tek Now,
Inc., a private paging networks system company, NetSolve, Inc., a private
data communications network company, Savvis Communications Corp., a private
ATM network provider, and Omnilink Communication Corp., an ISDN terminal
products manufacturer. Mr. McCarthy holds a B.S. in Business from Washington
University and an M.B.A. from St. Louis 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. 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 August 1995 to the present, Mr. Snowdon has served as Vice President of
Vanguard Communications, Inc., a subsidiary of Vanguard. From January 1992 to
August 1995, he was Vice President of Vanguard International
Telecommunications, Inc., a subsidiary of Vanguard. Mr. Snowdon also serves
on the Board of Directors of Cellular Telecommunications Services, Ltd., and
Digitel Telecommunications Services Ltd. Mr. Snowdon holds a B.S. in
Management, a B.S. in Marketing and an M.B.A. from James Madison University.
Page 91 of 124 pages.
<PAGE>
The Company currently has authorized eleven directors. Each director
holds office until the next annual meeting of stockholders or until his
successor is duly elected and qualified. The Officers serve at the discretion
of the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
As of December 31, 1996, the Board of Directors had two standing
committees: (i) a Compensation Committee (the "Compensation Committee"); and
(ii) an Audit Committee (the "Audit Committee"). The Board of Directors may
also establish other committees to assist in the discharge of its
responsibilities.
As of December 31, 1996, the duties of the Compensation Committee
included 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 was then comprised of Messrs. Cordova,
Griffin and Pascarella. In February 1997, the Board of Directors established
a separate Option Committee (the "Option Committee") comprised of Messrs.
Cordova and Pascarella exclusively to administer the Company's Stock Plan (as
defined below under "Item 11. Executive Compensation-1996 Stock Option/Stock
Issuance Plan"). The charter of the Compensation Committee was
correspondingly amended to remove such Stock Plan administration duties.
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 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. As of December 31, 1996, the Audit Committee was
comprised of Messrs. Cordova, Leeolou and McCarthy. In February 1997, Mr.
Leeolou resigned from the Audit Committee and was replaced by Mr. 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; 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).
Page 92 of 124 pages.
<PAGE>
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 ("DGCL"). 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 DGCL. 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.
ITEM 11. 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, 1996 in excess of $100,000 (collectively, the "Named Officers"),
for services rendered in all capacities to the Company during its previous
fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES ALL OTHER
NAME AND UNDERLYING COMPENSATION
PRINCIPAL POSITION(1) YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)(2)
- --------------------- ---- ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
John D. Lockton 1996 157,500 50,000 200,000 2,237
President and Chief Executive 1995 120,000 50,000 0 2,237
Officer
Hugh B. L. McClung 1996 157,500 50,000 200,000 4,115
Vice Chairman of the Board and 1995 120,000 50,000 0 2,574
Managing Director, Asia
Clarence Endy 1996 195,000 45,000 40,000 3,804
Executive Vice President, Operations 1995 155,000 20,000 0 3,804
and Chief Operating Officer
Douglas S. Sinclair 1996 155,000 38,000 36,000 48,383(3)
Executive Vice President and Chief 1995 100,104 15,000 120,000 116,122(4)
Financial Officer
Patrick Ciganer 1996 126,000 20,000 20,000 708
Senior Vice President, Latin America 1995 114,000 0 0 708
</TABLE>
- -----------------
(1) Table does not include Robert M. Curran, Senior Vice President,
Marketing of the Company, who joined the Company in August 1996, whose
salary for 1996 was $150,000 on an annualized basis. Robert M. Curran's
actual salary, bonus and all other compensation earned in 1996 were
$56,250, $55,000 and $19,209, respectively. Mr. Curran also received
options for 100,000 shares and other compensation in the amount of
$130,709, consisting of $114,263 for reimbursement of relocation
expenses, $16,446 for a cost of living adjustment and $1,912 for
premiums for life insurance paid by the Company, in 1996.
Page 93 of 124 pages.
<PAGE>
(2) Represents premiums for life insurance paid by the Company, unless
otherwise noted.
(3) Includes a cost of living adjustment of $47,745 and life insurance
premiums in the amount of $638 paid by the Company.
(4) Includes a cost of living adjustment of $47,480 and reimbursement for
relocation expenses of $68,642.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option
grants made to each of the Named Officers for the fiscal year ended December
31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(3)
----------------- ------------------
% OF
NUMBER OF SHARES TOTAL OPTIONS
OF COMMON STOCK GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR ($/SH)(2) DATE 5% ($) 10% ($)
- ---- -------------- ----------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
John D. Lockton(4).......... 200,000 18% $8.125 03/05/06 $1,021,954 $2,589,831
Hugh B. L. McClung(5)....... 200,000 18% $8.125 03/05/06 $1,021,954 $2,589,831
Clarence Endy(6)............ 40,000 4% $8.125 03/05/06 $204,391 $517,966
Douglas S. Sinclair(7)...... 36,000 3% $8.125 03/05/06 $183,952 $466,170
Patrick Ciganer(8).......... 20,000 2% $8.125 03/05/06 $102,195 $258,983
</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 lending 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 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) In February 1997, Mr. Lockton received an option to purchase 51,573
shares of Common Stock. Such option is immediately exercisable, but the
underlying shares are subject to repurchase at cost should Mr. Lockton
cease to provide services to the Company prior to vesting in such
shares. The Company's right of repurchase will
Page 94 of 124 pages.
<PAGE>
lapse, and Mr. Lockton will vest, in such shares in five equal
successive annual installments, with the first such installment vesting
on January 1, 1998.
(5) In February 1997, Mr. McClung received an option to purchase 51,573
shares of Common Stock. Such option is immediately exercisable, but the
underlying shares are subject to repurchase at cost should Mr. McClung
cease to provide services to the Company prior to vesting in such
shares. The Company's right of repurchase will lapse, and Mr. McClung
will vest, in such shares in five equal successive annual installments,
with the first such installment vesting on January 1, 1998.
(6) In February 1997, Mr. Endy received an option to purchase 33,154 shares
of Common Stock. Such option is immediately exercisable, but the
underlying shares are subject to repurchase at cost should Mr. Endy
cease to provide services to the Company prior to vesting in such
shares. The Company's right of repurchase will lapse, and Mr. Endy will
vest, in such shares in five equal successive annual installments, with
the first such installment vesting on January 1, 1998.
(7) In February 1997, Mr. Sinclair received an option to purchase 28,733
shares of Common Stock. Such option is immediately exercisable, but the
underlying shares are subject to repurchase at cost should Mr. Sinclair
cease to provide services to the Company prior to vesting in such
shares. The Company's right of repurchase will lapse, and Mr. Sinclair
will vest, in such shares in five equal successive annual installments,
with the first such installment vesting on January 1, 1998.
(8) In February 1997, Mr. Ciganer received an option to purchase 18,419
shares of Common Stock. Such option is immediately exercisable, but the
underlying shares are subject to repurchase at cost should Mr. Ciganer
cease to provide services to the Company prior to vesting in such
shares. The Company's right of repurchase will lapse, and Mr. Ciganer
will vest, in such shares in five equal successive annual installments,
with the first such installment vesting on January 1, 1998.
Page 95 of 124 pages.
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option holdings
for the fiscal year ended December 31, 1996 with respect to each of the Named
Officers. No options were exercised during the fiscal year ended December 31,
1996, 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
COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($)(1)
--------------------- ------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John D. Lockton.................... 280,000 0 980,000 0
Hugh B. L. McClung................. 280,000 0 980,000 0
Clarence Endy...................... 180,000 0 1,327,500 0
Douglas S. Sinclair................ 156,000 0 420,000 0
Patrick Ciganer.................... 100,000 0 755,000 0
</TABLE>
- -----------------
(1) Based on the estimated fair market value of Common Stock as of December
31, 1996 ($9.38 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 had lapsed as to the following number
of shares as of December 31, 1996: Mr. Lockton-46,667; Mr. McClung-
63,333; Mr. Endy-81,667; Mr. Sinclair-47,500; and Mr. Ciganer-58,333.
DIRECTOR COMPENSATION
Directors other than Haynes Griffin 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.
Haynes Griffin receives compensation in the amount of $50,000 per year for
his services as Chairman of the Board. Further, 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: Van Snowdon-14,735
shares at an exercise price of $9.38 per share granted in February 1997;
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
$2.00 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.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company does not currently have any employment contracts with the
Named Officers.
The Compensation Committee as Plan Administrator of the Stock Plan (as
defined below) will have the authority to provide for the accelerated vesting
of the shares of Common Stock subject to outstanding options held by the
Named Officers, or the shares of Common Stock subject to direct issuances
held by such individuals, in connection with certain changes in control of
the Company or the subsequent termination of the officer's employment
following the change in control event.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Page 96 of 124 pages.
<PAGE>
As of December 31, 1996, the Compensation Committee consisted of Messrs.
Griffin, Cordova and Pascarella; Mr. Griffin served as its Chairman. During
1996, Messrs. Lockton, Leeolou, McCarthy and Peter G. Schiff served on the
Compensation Committee. Mr. Griffin is Chairman of the Board of Directors of
the Company and Chairman of the Board and Co-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 President and Co-Chief Executive Officer of Vanguard. Mr. McCarthy is
a general partner of Gateway Associates, a venture capital firm affiliated
with Gateway. Mr. Schiff, a former directory of the Company, 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, "Northwood"), a stockholder of the Company. As of December 31,
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 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.
Page 97 of 124 pages.
<PAGE>
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 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 424,000 shares
of Series F-1 Preferred Stock to Vanguard for an aggregate purchase price of
$3,975,000, including the conversion of certain outstanding notes, 56,720
shares of Series F-1 Preferred Stock to Northwood for an aggregate purchase
price of $531,750, including the conversion of certain outstanding notes, and
94,200 shares of Series F-1 Preferred Stock to Gateway 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 "Item
13. Certain Relationships and Related 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 "-1996 Stock Option/Stock Issuance Plan" and "-Director
Compensation."
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The 1996 Stock Option/Stock Issuance Plan (the "Stock Plan") was
initially adopted by the Board of Directors of the Company and approved by
its stockholders on August 7, 1996. The Stock Plan is the successor to the
International Wireless Communications, Inc. 1994 Stock Option/Stock Issuance
Plan (the "1994 Plan"), and no additional options will be granted under the
1994 Plan. A total of 2,400,000 shares of Common Stock have been authorized
for issuance under the Stock Plan. In February 1997, the Board of Directors
approved the reservation of an additional 411,526 shares of Common Stock for
issuance pursuant to the Stock Plan, subject to stockholder approval.
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 December 31, 1996 options to
purchase a total of 1,982,000 shares of
Page 98 of 124 pages.
<PAGE>
Common Stock were outstanding under the Stock Plan. In addition, the Board of
Directors of the Company granted options to purchase an additional 478,612
shares pursuant to the Stock Plan subsequent to December 31, 1996.
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 or such committee 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; 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, 2006, unless sooner terminated
upon the occurrence of certain events.
Page 99 of 124 pages.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 December 31, 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>
SHARES BENEFICIALLY OWNED
-------------------------
5% STOCKHOLDERS, COMMON STOCK PREFERRED STOCK
DIRECTORS, NAMED EXECUTIVE OFFICERS ------------ ---------------
AND OFFICERS AND DIRECTORS AS A GROUP NUMBER(1) PERCENT(1)(2) NUMBER(1) PERCENT(1)(3)
------------------------------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Vanguard Cellular Operating Corp.(4) -- -- 7,139,920 40.31%
c/o Vanguard Cellular Systems, Inc.
2002 Pisgah Church Road, Suite 300
Greensboro, NC 27455
BEA Funds(5) -- -- 1,504,920 8.90%
c/o BEA Associates
153 East 53rd Street
New York, NY 10022
Gateway Venture Partners III, L.P.(6) -- -- 1,156,720 6.83%
8000 Maryland Ave., Suite 1190
St. Louis, MO 63105
Electra Investment Trust PLC(7) -- -- 1,124,640 6.65%
70 East 55th Street
New York, NY 10022
Toronto Dominion Capital (USA), Inc.(8) -- -- 1,061,360 6.20%
31 W. 52nd Street, 20th Floor
New York, NY 10019
Central Investment Holding, Inc. -- -- 1,066,640 6.31%
KMT Business Management Committee
9F. 6 Chung Hsing W. Road, Section 1
Taipei, Taiwan ROC
Haynes G. Griffin(9) -- -- 7,139,920 40.31%
John D. Lockton(10) 383,280 41.81% 510,000 3.02%
Hugh B. L. McClung(11) 650,080 70.91% 167,000 *
Clarence "Sam" Endy(12) 180,000 22.04% -- --
Douglas S. Sinclair(13) 156,000 19.68% 4,000 *
Patrick Ciganer(14) 100,000 13.57% -- --
Sanford L. Antignas -- -- -- --
Carl C. Cordova III(15) -- -- 1,124,640 6.65%
Stephen R. Leeolou(16) 80,000 11.16% 7,139,920 40.31%
John S. McCarthy(17) 12,000 1.85% 1,156,720 6.83%
Carl F. Pascarella(18) 12,000 1.85% -- --
Brian Rich(19) -- -- 1,061,360 6.20%
Van Snowdon(20) 76,080 11.95% 7,143,840 40.34%
All directors and executive officers as a group 1,849,440 95.49% 11,169,560 62.23%
(16 persons)
</TABLE>
Page 100 of 124 pages.
<PAGE>
- ------------------
* Less than 1%.
(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 636,720 shares of Common Stock
outstanding on December 31, 1996. The number of shares of Common Stock
beneficially owned includes the shares issuable pursuant to stock
options exercisable within 60 days of December 31, 1996. Shares issuable
pursuant to stock options are deemed outstanding for computing the
percentage owned by the person holding such options but are not deemed
outstanding for computing the percentage of any other person.
(3) Percentage ownership is based on 16,906,400 shares of Preferred Stock
outstanding on December 31, 1996. The number of shares of Preferred
Stock beneficially owned includes the shares issuable pursuant to
warrants exercisable within 60 days of December 31, 1996. Shares
issuable pursuant to warrants are deemed outstanding for computing the
percentage owned by the person holding such warrants but are not deemed
outstanding for computing the percentage of any other person.
(4) Includes (i) 837,880 shares of Series C Preferred Stock, 1,101,080
shares of Series D Preferred Stock, 3,972,240 shares of Series E
Preferred Stock and 424,000 shares of Series F Preferred Stock and (ii)
717,000 shares of Series C Preferred Stock issuable upon exercise of
warrants to purchase such shares, 23,600 shares of Series D Preferred
Stock issuable upon exercise of warrants to purchase such shares and
64,120 shares of Series F Preferred Stock issuable upon exercise of
warrants to purchase such shares held by Vanguard Cellular Operating
Corp. See "Item 13. Certain Relationships and Related Transactions--
Private Placement Transactions." Mr. Griffin, Chairman of the Board of
the Company, is Chairman of the Board and Co-Chief Executive Officer of
Vanguard, the sole stockholder of Vanguard Cellular Operating Corp., Mr.
Leeolou, a director of the Company, is President and Co-Chief Executive
Officer of Vanguard, and Mr. Snowdon, a director of the Company, is Vice
President of Vanguard Communications, Inc., a subsidiary of Vanguard.
Excludes option to purchase shares of Common Stock held by Messrs.
Leeolou and Snowdon in their individual capacities. (See notes 9, 16
and 20 below.) 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.
(5) Includes (i) an aggregate of 1,423,760 shares of Series D Preferred
Stock and an aggregate of 77,440 shares of Series F Preferred Stock and
(ii) an aggregate of 3,720 shares of Series F Preferred Stock issuable
upon the exercise of warrants to purchase such shares held by The
Emerging Markets Telecommunications Fund, Inc., The Emerging Markets
Infrastructure Fund, Inc., CUC & Co. F/B/O 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.
(6) Includes (i) 707,080 shares of Series B Preferred Stock, 224,920 shares
of Series C Preferred Stock, 107,560 shares of Series D Preferred Stock
and 94,200 shares of Series F Preferred Stock and (ii) 14,520 shares of
Series D Preferred Stock issuable upon exercise of warrants to purchase
such shares and 8,440 shares of Series F Preferred Stock issuable upon
the exercise of warrants to purchase such shares held by Gateway Venture
Partners III, L.P. ("Gateway"). Excludes options to purchase shares of
Common Stock held by Mr. McCarthy, a director of the Company, who is a
General Partner of Gateway Associates, the general partner of Gateway.
(See note 17 below.)
(7) Includes an aggregate of 58,000 shares of Series A Preferred Stock and
an aggregate of 1,066,640 shares of Series F Preferred Stock held by
Electra Investment Trust, PLC and Electra Associates, Inc.
(collectively, "Electra"). Mr. Cordova, a director of the Company, is a
Vice President of Electra Inc., a subsidiary of Electra Investment Trust
PLC. (See note 15 below.)
Page 101 of 124 pages.
<PAGE>
(8) Includes 213,360 shares issuable upon exercise of warrants held by
Toronto Dominion Capital (USA), Inc. ("TDC"). Mr. Rich, a director of
the Company, is President of TDC and Managing Director and Group Head of
Toronto Dominion Capital, an affiliate of TDC. (See note 19 below.)
(9) Represents shares beneficially owned by Vanguard Cellular Operating
Corp. (See note 4 above.) Mr. Griffin is the Chairman of the Board and
Co-Chief Executive Officer of Vanguard, the sole stockholder of Vanguard
Cellular Operating Corp., and disclaims beneficial ownership of shares
held by Vanguard Cellular Operating Corp.
(10) Includes (i) 103,280 shares of Common Stock and options to purchase
280,000 shares of Common Stock that are immediately exercisable, subject
to certain rights of repurchase held by the Company, and (ii) 510,000
shares of Series A Preferred Stock. Excludes 45,360 shares of Common
Stock deposited in escrow pursuant to the CTP Exchange (as defined below
under "Item 13. Certain Relationships and Related Transactions--
Transactions with Founders") in which Mr. Lockton may have a beneficial
interest. See "Item 13. Certain Relationships and Related Transactions--
Transactions with Founders." Also excludes an option to purchase 51,573
shares of Common Stock granted to Mr. Lockton in February 1997, which
option is immediately exercisable, subject to certain rights of
repurchase held by the Company.
(11) Includes (i) 370,080 shares of Common Stock and options to purchase
280,000 shares of Common Stock that are immediately exercisable, subject
to certain rights of repurchase held by the Company, and (ii) 167,000
shares of Series A Preferred Stock. Excludes 45,360 shares of Common
Stock deposited in escrow pursuant to the CTP Exchange in which Mr.
McClung may have a beneficial interest. See "Item 13. Certain
Relationships and Related Transactions--Transactions with Founders."
Also excludes an option to purchase 51,573 shares of Common Stock
granted to Mr. McClung in February 1997, which option is immediately
exercisable, subject to certain rights of repurchase held by the Company.
(12) Represents options to purchase 180,000 shares of Common Stock that are
immediately exercisable, subject to certain rights of repurchase held by
the Company. Excludes an option to purchase 33,154 shares of Common
Stock granted in February 1997, which option is immediately exercisable,
subject to certain rights of repurchase held by the Company.
(13) Represents (i) options to purchase 156,000 shares of Common Stock that
are immediately exercisable, subject to certain rights of repurchase
held by the Company, and (ii) 4,000 shares of Series B Preferred Stock.
Excludes an option to purchase 28,733 shares of Common Stock granted in
February 1997, which option is immediately exercisable, subject to
certain rights of repurchase held by the Company.
(14) Represents options to purchase 100,000 shares of Common Stock that are
immediately exercisable, subject to certain right of repurchase held by
the Company. Excludes an option to purchase 18,419 shares of Common
Stock granted to Mr. Ciganer in February 1997, which option is
immediately exercisable, subject to certain rights of repurchase held by
the Company.
(15) Represents shares of Preferred Stock beneficially owned by Electra.
(See note 7 above.) Mr. Cordova, a Vice President of Electra Inc., an
affiliate of Electra, disclaims beneficial ownership of shares held by
Electra Investment and Electra Associates, except to the extent of his
pecuniary interest therein.
(16) Represents (i) an option to purchase 80,000 shares of Common Stock that is
immediately exercisable, subject to repurchase by the Company, and (ii)
7,139,920 shares of Preferred Stock beneficially owned by Vanguard Cellular
Operating Corp. (See note 4 above.) Mr. Leeolou is the President and
Co-Chief Executive Officer of Vanguard, the sole stockholder of Vanguard
Cellular Operating Corp., and disclaims beneficial ownership of shares held
by Vanguard Cellular Operating Corp.
(17) Represents (i) an option to purchase 12,000 shares of Common Stock that
is immediately exercisable, subject to repurchase by the Company and
(ii) 1,156,720 shares of Preferred Stock beneficially owned by Gateway.
(See note 6 above.) Mr. McCarthy is a general partner of Gateway
Associates, the a general partner of
Page 102 of 124 pages.
<PAGE>
Gateway, and disclaims beneficial ownership of shares held by Gateway
except to the extent of his pecuniary interest therein.
(18) Represents an option to purchase 12,000 shares of Common Stock that is
immediately exercisable, subject to certain rights of repurchase held by
the Company.
(19) Represents 1,061,360 shares beneficially owned by TDC. (See note 8
above.) Mr. Rich, President of TDC and Managing Director and Group Head
of Toronto Dominion Capital, an affiliate of TDC, disclaims beneficial
ownership of shares held by TDC.
(20) Includes (i) 76,080 shares of Common Stock and 3,920 shares of Series D
Preferred Stock held by Mr. Snowdon and (ii) 7,139,920 shares of
Preferred Stock beneficially owned by Vanguard Cellular Operating Corp.
(See note 4 above.) 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. Excludes an option to
purchase 14,735 shares of Common Stock ranted in February 1997, which
option is immediately exercisable, subject to certain rights of
repurchase held by the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS
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 warrant issued to Gateway in March 1992 was
canceled in connection with this financing.
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 an
aggregate principal amount of $485,812 issued to Gateway (the "Gateway
Note"). Such 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, 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.
Page 103 of 124 pages.
<PAGE>
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"). 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.
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
Gateway 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-11,440 shares 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, and (ii) 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 and $200,000 to Gateway.
Page 104 of 124 pages.
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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.
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 and 3,080 shares issued to Gateway.
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 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 canceled 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 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 and 680 shares to Gateway. All of
the remaining April 1995 Bridge Notes were canceled in the July 1995
Financing.
In the July l995 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, 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
Page 105 of 124 pages.
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until December 18, 1998, provided that the warrants shall no longer be
exercisable upon the occurrence of a Termination Event.
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 and $450,000 from Gateway 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 and $13,500 to Gateway.
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 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,
Page 106 of 124 pages.
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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 covenants
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.
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.
The IRA also contains board observer rights, board representation
rights, agreements concerning voting of shares and registration rights. See
"Item 10. Directors and Officers of the Registrant-Arrangements Concerning
Election of Directors."
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
Page 107 of 124 pages.
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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 DEBT OFFERING
On August 15, 1996, the Company sold 196,720 units (the "Units"), each
consisting of a $1,000 principal amount Old Note and one Warrant to purchase
11.638 shares of Common Stock to BT Securities Corporation, Toronto Dominion
Securities (USA) Inc. and Salomon Brothers Inc (the "Initial Purchasers") at
35.43% of the principal amount thereof. The Units were resold by the Initial
Purchasers in a private placement. Each Warrant provides that if the Company
does not complete an initial public offering of Common Stock that results in
net cash proceeds to the Company of at least $50 million or a qualified
reorganization (which is defined as being 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 tradable and
listed on a national securities exchange or traded on a national quotation
service) on or prior to May 15, 1997, each unexercised Warrant will entitle
the holder thereof to purchase an additional 2.645 shares of Common Stock.
The Old Notes and the Warrants became separably transferable on November 15,
1996.
Under the terms of the Debt Offering, the Company filed a registration
statement (the "Exchange Registration Statement") with the SEC registering
the Exchange Notes to be offered in exchange for the Old Notes (the "Exchange
Offer"). The Exchange Registration Statement was declared effective by the
SEC on November 21, 1996, and the Exchange Offer was completed on December
27, 1996.
The Notes were issued pursuant to the Indenture. The Notes are secured
pursuant to a Pledge Agreement by a first priority pledge of all of the
capital stock of IWC and the intercompany note due to the Company by IWC.
Under the terms of the Indenture, the Company is subject to certain covenants
including, but not limited to, (i) restrictions on certain payments by the
Company and certain subsidiaries and affiliates of the Company including
restrictions on the payment of dividends, and the redemption and/or
repurchase of equity interests, (ii) restrictions on the issuance of
additional indebtedness or the issuance of preferred stock, (iii) limitations
on heirs (iv) limitations on lines of business (v) restrictions on
transactions with affiliates (vi) limitations on the structure of the Company
and its subsidiaries, and (vii) reporting requirements.
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 $550,000. 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 "Item 1. Business-Operating Companies" and
"Item 1. Business-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
Page 108 of 124 pages.
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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.
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., a subsidiary
of Vanguard, 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 $2.0 million 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 Debt 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 Debt 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.
TD Securities (USA) Inc., previously Toronto Dominion Securities (USA)
Inc., an affiliate of TDI, in connection with the Debt Offering, received
fees and purchased Units in the Debt Offering at a discount (as an Initial
Purchaser) of $1.2 million from the price offered to other investors.
Page 109 of 124 pages.
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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 "Item 11. Executive Compensation-1996 Stock
Option/Stock Issuance Plan" and "Item 11. Executive Compensation-Director
Compensation."
Page 110 of 124 pages.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NO. EXHIBIT
------- -------
1.1* Purchase Agreement dated August 9, 1996, among Registrant, BT
Securities Corporation, Toronto Dominion Securities (USA) Inc.
and Salomon Brothers Inc
2.1* Agreement and Plan of Merger dated as of August 8, 1996 by
and among Registrant, International Wireless Communications
Acquisition Corporation and International Wireless
Communications, Inc.
2.2* Subscription Agreement among Star Digitel Limited ("SDL"),
Star Telecom Holding Limited ("STHL"), Star Telecom
International Holding Limited and International Wireless
Communications, Inc., dated September 23, 1996
2.3* Letter Agreement between International Wireless
Communications, Inc. and STHL regarding loan agreement, dated
November 7, 1996
2.4* Letter Agreements between International Wireless
Communications, Inc. and STHL regarding indemnification, dated
November 5, 1996 and November 7, 1996
3.1* Amended and Restated Certificate of Incorporation of
Registrant, as currently in effect
3.2* Bylaws of Registrant
4.1* Indenture dated as of August 15, 1996 between Registrant, as
issuer, and Marine Midland Bank, as Trustee
4.2* Pledge Agreement dated as of August 15, 1996 by Registrant
and International Wireless Communications, Inc. in favor of
Bankers Trust Company, as Collateral Agent
4.3* Unit Agreement dated as of August 15, 1996 among Registrant
and Bankers Trust Company, as Unit Agent and Warrant Agent and
Marine Midland Bank, as Trustee
4.4* Registration Rights Agreement dated as of August 15, 1996
among Registrant, BT Securities Corporation, Toronto Dominion
Securities (USA) Inc. and Salomon Brothers Inc
10.1* Warrant Agreement dated August 15, 1996 between Registrant
and Bankers Trust Company, as Warrant Agent
10.2* Securities Purchase Agreement dated as of December 6, 1995
among Registrant and the Investors named therein
10.3* Fifth Amended and Restated Investor Rights Agreement dated as
of December 18, 1995 among Registrant and the Investors named
therein
10.4* Registration Rights Agreement dated as of December 18, 1995
among Registrant and the Investors named therein
10.5* Stock Purchase Agreement dated as of December 18, 1995 among
Registrant, John D. Lockton and Hugh B.L. McClung
10.6* Assignment and Assumption Agreement dated as of August 7,
1996 between Registrant and International Wireless
Communications, Inc.
10.7* Consent, Waiver, Amendment, Assignment and Assumption
Agreement effective as of August 7, 1996 among Registrant and
the other parties named therein
10.8* Consent, Waiver, Amendment, Assignment and Assumption
Agreement effective as of August 7, 1996 among International
Wireless Communications, Inc. and the parties named therein
10.9* 1996 Stock Option/Stock Issuance Plan
10.10* Form of Indemnification Agreement
10.11* Real Property Lease between International Wireless
Communications, Inc. and PM Realty Group, dated May 5, 1994
10.11A* First Amendment to Lease between The Prudential Insurance
Company of America ("Prudential") and International Wireless
Communications, Inc., dated September 1, 1996
10.11B Second Amendment to Lease between Prudential and
International Wireless Communications, Inc., dated
November 15, 1996.
Page 111 of 124 pages.
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10.12A++* Shareholders Agreement by and among Shubila Holding Sdn Bhd,
International Wireless Communications, Inc. and Laranda Sdn
Bhd, dated March 26, 1996
10.12B* License granted to Syarikat Telefon Wireless (Malaysia) Sdn
Bhd ("STW"), dated November 16, 1994
10.12C++* Access and Interconnect Agreement between Telekom Malaysia
Berhad and STW, dated August 16, 1949
10.12D++* Loan Agreement among STW, Permata Merchant Bank Berhad
("Permata") and certain financial institutions listed therein,
dated August 18, 1995; Option Agreement between Permata and
International Wireless Communications, Inc., dated October 2,
1995; Collateral Agreement among International Wireless
Communications, Inc., Shubila Holding Sdn. Bhd., Laranda Sdn.
Bhd, STW and Permata, dated October 2, 1995; Agreement to
Allocate Responsibility among International Wireless
Communications, Inc., Shubila Holding Sdn. Bhd. and Laranda
Sdn. Bhd, dated November 1995
10.13A++* Cooperation Agreement on Network Interconnection of Mobisel
STBS with Telkom PSTN between PT. (Persero) Telekomunikasi
Indonesia ("Telekom Indonesia") and PT Mobile Selular
Indonesia, dated August 21, 1996
10.13B* Sale and Termination Agreement among PT Rajasa Hazanah
Perkasa ("RHP"), PT Deltona Satya Dinamika ("DSD"), PT Bina
Reksa Perdana ("BRP"), International Wireless Communications,
Inc. and Bell Atlantic Indonesia, Inc. ("BA"), dated
October 11, 1995; Promissory Note executed by RHP, DSD, BRP
and International Wireless Communications, Inc. in favor of
BA, dated October 11, 1995
10.13C* Shareholders' Agreement among BRP, International Wireless
Communications, Inc., DSD and RHP, dated November 9, 1995
10.13D* Cooperative Agreement among Telkom Indonesia, Yayasan Dana
Pensiun Pegawai PT Telkom and RHP, dated November 30, 1995
10.13E* License granted to RHP, dated April 28, 1995
10.13F* Facility Agreement between PT Mobile Selular Indonesia
("Mobisel") and Nissho Iwai International (Singapore) Pte.,
Ltd. ("Nissho Iwai"), dated March 12, 1996; Share Pledge
Agreement between RHP and Nissho Iwai, dated March 12, 1996
10.14* Stockholder Agreement between Teleparbs Participacoes Ltda.
(RBS) and International Wireless Communications, Inc., dated
August 31, 1995
10.15* Shareholders' Agreement among Mainstream Limited, International
Wireless Communications, Inc. and STHL, dated August 30, 1996
10.16A* Shareholders' Agreement among SDL, STHL and International
Wireless Communications, Inc., dated November 7, 1996
21.1 Subsidiaries of the Registrant
24.1 Power of Attorney
27.1 Financial Data Schedule
- --------------
* Incorporated by reference to a correspondingly numbered exhibit to the
Registrant's Registration Statement on Form S-1 declared effective by the
Commission on November 21, 1996 (Reg. No. 333-11987).
++ Confidential treatment was granted as to certain portions of this exhibit
by the Commission on November 11, 1996 in connection with the Registrant's
Registration Statement on Form S-1 declared effective by the Commission on
November 21, 1996 (Reg. No. 333-11987).
FINANCIAL STATEMENT SCHEDULE.
No Financial Statement Schedule has been included because it is not
required.
Page 112 of 124 pages.
<PAGE>
(b) REPORTS ON FORM 8-K.
On November 7, 1996, the Registrant filed a Report on Form 8-K to report
the acquisition by the Registrant of a 40% equity interest in Star Digitel
Limited, a Hong Kong company that is engaged in the development of various
regional cellular projects in China. No financial statements for Star
Digitel Limited or for the Registrant were required to be filed with such
Report on Form 8-K.
Page 113 of 124 pages.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 15, 1997.
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
By /s/ JOHN D. LOCKTON
---------------------------------
John D. Lockton
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John D. Lockton, as his true and
lawful attorneys-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN D. LOCKTON President, Chief Executive Officer April 15, 1997
- ---------------------------- and Director
JOHN D. LOCKTON
/s/ DOUGLAS S. SINCLAIR Chief Financial Officer April 15, 1997
- ---------------------------- (Principal Financial Officer)
DOUGLAS S. SINCLAIR
/s/ KEITH D. TAYLOR Controller April 15, 1997
- ---------------------------- (Principal Accounting Officer)
KEITH D. TAYLOR
/s/ HAYNES G. GRIFFIN Chairman of the Board April 15, 1997
- ----------------------------
HAYNES G. GRIFFIN
/s/ SANFORD L. ANTIGNAS Director April 15, 1997
- ----------------------------
SANFORD L. ANTIGNAS
/s/ CARL C. CORDOVA III Director April 15, 1997
- ----------------------------
CARL C. CORDOVA III
Page 114 of 124 pages.
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEPHEN R. LEEOLOU Director April 15, 1997
- ----------------------------
STEPHEN R. LEEOLOU
/s/ JOHN S. MCCARTHY Director April 15, 1997
- ----------------------------
JOHN S. MCCARTHY
/s/ HUGH B. L. MCCLUNG Director April 15, 1997
- ----------------------------
HUGH B. L. MCCLUNG
/s/ CARL F. PASCARELLA Director April 15, 1997
- ----------------------------
CARL F. PASCARELLA
/s/ BRIAN RICH Director April 15, 1997
- ----------------------------
BRIAN RICH
/s/ VAN SNOWDON Director April 15, 1997
- ----------------------------
VAN SNOWDON
</TABLE>
Page 115 of 124 pages.
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
Page 116 of 124 pages.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
1.1* Purchase Agreement dated August 9, 1996, among Registrant, BT --
Securities Corporation, Toronto Dominion Securities (USA) Inc.
and Salomon Brothers Inc
2.1* Agreement and Plan of Merger dated as of August 8, 1996 by --
and among Registrant, International Wireless Communications
Acquisition Corporation and International Wireless
Communications, Inc.
2.2* Subscription Agreement among Star Digitel Limited ("SDL"), --
Star Telecom Holding Limited ("STHL"), Star Telecom
International Holding Limited and International Wireless
Communications, Inc., dated September 23, 1996
2.3* Letter Agreement between International Wireless --
Communications, Inc. and STHL regarding loan agreement, dated
November 7, 1996
2.4* Letter Agreements between International Wireless --
Communications, Inc. and STHL regarding indemnification, dated
November 5, 1996 and November 7, 1996
3.1* Amended and Restated Certificate of Incorporation of --
Registrant, as currently in effect
3.2* Bylaws of Registrant
4.1* Indenture dated as of August 15, 1996 between Registrant, as --
issuer, and Marine Midland Bank, as Trustee
4.2* Pledge Agreement dated as of August 15, 1996 by Registrant --
and International Wireless Communications, Inc. in favor of
Bankers Trust Company, as Collateral Agent
4.3* Unit Agreement dated as of August 15, 1996 among Registrant --
and Bankers Trust Company, as Unit Agent and Warrant Agent and
Marine Midland Bank, as Trustee
4.4* Registration Rights Agreement dated as of August 15, 1996 --
among Registrant, BT Securities Corporation, Toronto Dominion
Securities (USA) Inc. and Salomon Brothers Inc
10.1* Warrant Agreement dated August 15, 1996 between Registrant --
and Bankers Trust Company, as Warrant Agent
10.2* Securities Purchase Agreement dated as of December 6, 1995 --
among Registrant and the Investors named therein
10.3* Fifth Amended and Restated Investor Rights Agreement dated as --
of December 18, 1995 among Registrant and the Investors named
therein
10.4* Registration Rights Agreement dated as of December 18, 1995 --
among Registrant and the Investors named therein
10.5* Stock Purchase Agreement dated as of December 18, 1995 among --
Registrant, John D. Lockton and Hugh B.L. McClung
10.6* Assignment and Assumption Agreement dated as of August 7, --
1996 between Registrant and International Wireless
Communications, Inc.
10.7* Consent, Waiver, Amendment, Assignment and Assumption --
Agreement effective as of August 7, 1996 among Registrant and
the other parties named therein
10.8* Consent, Waiver, Amendment, Assignment and Assumption --
Agreement effective as of August 7, 1996 among International
Wireless Communications, Inc. and the parties named therein
10.9* 1996 Stock Option/Stock Issuance Plan --
10.10* Form of Indemnification Agreement --
10.11* Real Property Lease between International Wireless --
Communications, Inc. and PM Realty Group, dated May 5, 1994
10.11A* First Amendment to Lease between The Prudential Insurance --
Company of America ("Prudential") and International Wireless
Communications, Inc., dated September 1, 1996
10.11B Second Amendment to Lease between Prudential and 119
International Wireless
</TABLE>
Page 117 of 124 pages.
<PAGE>
Communications, Inc., dated November 15, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
10.12A++* Shareholders Agreement by and among Shubila Holding Sdn Bhd, --
International Wireless Communications, Inc. and Laranda Sdn
Bhd, dated March 26, 1996
10.12B* License granted to Syarikat Telefon Wireless (Malaysia) Sdn --
Bhd ("STW"), dated November 16, 1994
10.12C++* Access and Interconnect Agreement between Telekom Malaysia --
Berhad and STW, dated August 16, 1949
10.12D++* Loan Agreement among STW, Permata Merchant Bank Berhad --
("Permata") and certain financial institutions listed therein,
dated August 18, 1995; Option Agreement between Permata and
International Wireless Communications, Inc., dated October 2,
1995; Collateral Agreement among International Wireless
Communications, Inc., Shubila Holding Sdn. Bhd., Laranda Sdn.
Bhd, STW and Permata, dated October 2, 1995; Agreement to
Allocate Responsibility among International Wireless
Communications, Inc., Shubila Holding Sdn. Bhd. and Laranda
Sdn. Bhd, dated November 1995
10.13A++* Cooperation Agreement on Network Interconnection of Mobisel --
STBS with Telkom PSTN between PT. (Persero) Telekomunikasi
Indonesia ("Telekom Indonesia") and PT Mobile Selular
Indonesia, dated August 21, 1996
10.13B* Sale and Termination Agreement among PT Rajasa Hazanah --
Perkasa ("RHP"), PT Deltona Satya Dinamika ("DSD"), PT Bina
Reksa Perdana ("BRP"), International Wireless Communications,
Inc. and Bell Atlantic Indonesia, Inc. ("BA"), dated
October 11, 1995; Promissory Note executed by RHP, DSD, BRP
and International Wireless Communications, Inc. in favor of
BA, dated October 11, 1995
10.13C* Shareholders' Agreement among BRP, International Wireless --
Communications, Inc., DSD and RHP, dated November 9, 1995
10.13D* Cooperative Agreement among Telkom Indonesia, Yayasan Dana --
Pensiun Pegawai PT Telkom and RHP, dated November 30, 1995
10.13E* License granted to RHP, dated April 28, 1995 --
10.13F* Facility Agreement between PT Mobile Selular Indonesia --
("Mobisel") and Nissho Iwai International (Singapore) Pte.,
Ltd. ("Nissho Iwai"), dated March 12, 1996; Share Pledge
Agreement between RHP and Nissho Iwai, dated March 12, 1996
10.14* Stockholder Agreement between Teleparbs Participacoes Ltda. --
(RBS) and International Wireless Communications, Inc., dated
August 31, 1995
10.15* Shareholders' Agreement among Mainstream Limited, International --
Wireless Communications, Inc. and STHL, dated August 30, 1996
10.16A* Shareholders' Agreement among SDL, STHL and International --
Wireless Communications, Inc., dated November 7, 1996
21.1 Subsidiaries of the Registrant --
24.1 Power of Attorney (See page 114 of Annual Report on Form 10-K) --
27.1 Financial Data Schedule 124
</TABLE>
- --------------
* Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 declared effective by the Commission on November 21, 1996 (Reg.
No. 333-11987).
++ Confidential treatment was granted as to certain portions of this exhibit
by the Commission on November 11, 1996 in connection with the Registrant's
Registration Statement on Form S-1 declared effective on November 21, 1996
(Reg. No. 333-11987).
Page 118 of 124 pages.
<PAGE>
EXHIBIT 10.11B
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease (the "Second Amendment") is made for
reference purposes only as of November 15, 1996, by and between The
Prudential Insurance Company of America, a New Jersey corporation
("Landlord"), and International Wireless Communications, a Delaware
corporation ("Tenant").
RECITALS
(A) Landlord and Tenant are parties to that certain Lease dated April 14,
1994 (the "Original Lease"), as amended by that certain First Amendment
to Lease dated September 1, 1996 (the "First Amendment") for the
Premises designated as Suite 1275 (the Twelfth Floor Premises) and as
Suite 575 (the "Fifth Floor Premises") located in that certain building
known as The 400 Building, 400 South El Camino Real, San Mateo,
California. The Original Lease, as amended by the First Amendment, is
referred to herein as the "Lease". Unless otherwise indicated,
capitalized terms are used in this Second Amendment as such terms are
defined in the Lease.
(B) Tenant desires to lease that certain additional premises designated as
Suite 580 as shown on attached EXHIBIT SA-1 ("Suite 580") in the
Building in accordance with the terms of this Second Amendment.
AMENDMENT
The parties hereby amend the Lease as follows:
1. SUITE 580. Effective as of the date the lease of Suite 580 with Wells
Fargo Bank, N.A. ("Wells Fargo") terminates and Wells Fargo delivers
possession of Suite 580 to Landlord (the "Suite 580 Commencement Date"), (a)
the Premises shall be deemed to include Suite 580, and (b), except as
specifically provided otherwise in this Second Amendment, the term "Premises"
as used in the Lease shall be deemed to include the Twelfth Floor Premises,
the Fifth Floor Premises and Suite 580.
2. TERM.
(a) The term of this Lease, as amended by this Second Amendment, with
respect to Suite 580 shall commence on the Suite 580 Commencement Date and
shall expire on the date before the fifth anniversary of the Suite 580 Rent
Commencement Date (as defined below) (the "Suite 580 Expiration Date").
The foregoing shall not be deemed to change the Twelfth Floor Expiration
Date or the Fifth Floor Expiration Date as specified in the Lease.
(b) The parties estimate that the Suite 580 Commencement Date will be
November 20, 1996. If, for any reason, the Suite 580 Commencement Date
does not occur on such estimated Suite 580 Commencement Date; (i) such
failure shall not affect the validity of the Lease, as amended by this
Second Amendment, or the obligations of Tenant under the Lease, as amended
by this Second Amendment; and (ii) Landlord shall not be subject to any
liability. Tenant acknowledges that Wells Fargo currently leases Suite
580, and that if Wells Fargo does not agree to terminate its lease and/or
deliver possession of Suite 580 before the estimated Suite 580 Commencement
Date, the Suite 580 Commencement Date will be delayed. The parties shall
execute a Commencement Date Memorandum in the form of attached EXHIBIT SA-2
to confirm the Suite 580 Commencement Date, the Suite 580 Rent Commencement
Date (as defined below) and the Suite 580 Expiration Date.
(c) Notwithstanding anything to the contrary specified in the Lease,
as modified by this Second Amendment, the provisions of Section 43 (Option
to Extend) shall not apply to the Fifth Floor Premises or Suite 580.
Tenant shall have no option to extend the term of this Lease with respect
to the Fifth Floor Premises or Suite 580.
Page 119 of 124 pages.
<PAGE>
3. BASE RENT. Effective on the date which is fifteen (15) calendar days
following the Suite 580 Commencement Date (the "Suite 580 Rent Commencement
Date"), the amounts specified below shall be payable as Base Rent for Suite 580
under the Lease, as amended by this Second Amendment. AS used in the Lease, the
term "Base Rent" shall mean the amounts specified in the Lease as Base Rent for
the Twelfth Floor Premises, the Fifth Floor Premises plus the amounts specified
as Base Rent for Suite 580. If the Suite 580 Rent Commencement Date occurs on a
date other than the first day of a month, then the Base Rent for the months in
which the Suite 580 Rent Commencement Date and the Suite 580 Expiration Date
occur shall be prorated with the following amounts applicable to the portion of
the month following the Suite 580 Commencement Date or prior to the Suite 580
Expiration Date, as the case may be.
MONTHS BASE RENT
------ ---------
(calculated from Suite 580 Rent Commencement Date)
1 -- 12................................................. $6,379.60 per month
13 -- 24................................................ $6,566.32 per month
25 -- 36................................................ $6,784.16 per month
37 -- 48................................................ $6,970.86 per month
49 -- 60................................................ $7,157.60 per month
4. OPERATING EXPENSES. Payment of Tenant's Percentage Share of Operating
Expenses for the Twelfth Floor Premises, the Fifth Floor Premises and Suite
580 shall be calculated separately. Tenant's Percentage Share of Operating
Expenses with respect to Suite 580 shall be 2.24% and the Base Year with
respect to Suite 580 shall be 1996. Tenant's Percentage Share with respect
to the Twelfth Floor Premises shall continue to be 2.1% and the Base Year
shall be 1995. Tenant's Percentage Share with respect to the Fifth Floor
Premises shall continue to be 2.43% and the Base Year shall be 1996. Except
as specified above, the Operating Expenses concerning the Premises shall be
calculated and payable in accordance with the terms of the Lease, as amended
by this Second Amendment.
5. SUITE 580 IMPROVEMENTS. Promptly following the Suite 580 Commencement
Date and in connection with certain Alterations requested by Tenant pursuant
to Paragraph 6 below, Landlord shall replace all carpeting in Suite 580 with
building standard carpet and repaint all interior painted walls in Suite 580
with building standard paint at no cost to Tenant (the "Suite 580
Improvements"). Except as specified above, Landlord shall have no obligation
to alter or improve or provide any funds to alter or improve Suite 580.
6. TENANT ALTERATIONS. Tenant intends to cause certain Alterations to be
constructed within Suite 580 promptly following the Suite 580 Commencement
Date in accordance with and subject to Section 10 of the Original Lease.
Tenant further intends to request that Landlord construct such Alterations
pursuant to Section 10 of the Original Lease. Tenant acknowledges that the
construction of such Alterations installed in the Premises will be conducted
during normal business hours. As a result, Tenant may not be able to use
Suite 580 until the completion of such Alterations. Such delay in Tenant's
ability to use Suite 580 shall have no effect on Tenant's obligation to pay
Base Rent for Suite 580 commencing on the Suite 580 Rent Commencement Date.
Tenant waives any and all claims against Landlord and Landlords agents,
employees and contractors (including, without limitation, any claim for
constructive eviction or abatement of rent), arising out of or related to any
disruption in Tenant's business or inability to use Suite 580 due to the
installation of such Alterations and/or the Suite 580 Improvements. Landlord
shall have reasonable access to Suite 580 in order to install the Suite 580
Improvements and such Alterations requested by Tenant.
7. PARKING. As of the Suite 580 Rent Commencement Date, Tenant shall have
the non-exclusive right to use six (6) parking stalls in the Building's
parking garage (in addition to the parking stalls allocated to Tenant
pursuant to Section 30 of the Original Lease and Section 6 of the First
Amendment). Tenant shall pay to Landlord as additional Rent (at the same
time and in the same manner as Base Rent is due under the Lease, as amended
by the Second Amendment) the sum of $50.00 per stall per month for such
stalls. Such monthly charges may be adjusted from time to time by Landlord
but no more than three percent (3%) per annum (calculated on a cumulative
basis) over the Term of the Lease.
8. SURRENDER OF PREMISES. Upon the expiration or early termination of the
Lease with respect to the Twelfth Floor Premises, the Fifth Floor Premises
and Suite 580, respectively, Tenant shall surrender such portions of the
Premises to Landlord in its condition as of the date of the term of this
Lease, as amended by this Second Amendment, commenced with respect to such
space, normal wear and tear and casualty excepted. Except as specified
above, the other terms and conditions of Section 19 of the Lease shall apply
to the Premises.
Page 120 of 124 pages.
<PAGE>
9. SECURITY DEPOSIT. Concurrently with the execution of this Second
Amendment, Tenant shall deliver the sum of $7,157 as an additional Security
Deposit to be held and applied in accordance with Section 18 of the Lease.
10. STATUS OF LEASE. Tenant hereby acknowledges and agrees that:
(a) The Lease, as amended by this Second Amendment, constitutes the
entire agreement between Landlord and Tenant with respect to the Premises
and, except for this Second Amendment, the Lease has not been modified,
changed, altered or amended in any respect.
(b) Tenant has accepted full and complete possession of the Twelfth
Floor Premises and the Fifth Floor Premises and is the actual occupant in
possession and has not sublet, assigned or hypothecated or otherwise
transferred all or any portion of Tenant's leasehold interest.
(c) All improvements to be constructed on the Twelfth Floor Premises
by Landlord have been completed to the satisfaction of Tenant and accepted
by Tenant and any tenant construction allowances have been paid in full.
All of Landlords obligations which have accrued prior to the date hereof
have been performed in full.
(d) There exists no breach or default, nor state of facts nor
condition which, with notice, the passage of time, or both, would result in
a breach or default on the part Landlord under the Lease.
11. BROKERS. Tenant warrants and represents that, except for The Volt
Companies representing Landlord, Tenant has had no dealings with any real
estate broker or agent in connection with the negotiation of this Second
Amendment and that it knows of no other real estate broker, agent or other
person who is or might be entitled to a commission or fee in connection with
this Second Amendment. Tenant shall indemnify and hold harmless Landlord
from and against any and all claims, liabilities or expenses arising out of
claims made by any broker or individual for commissions or fees arising out
of or resulting from representation of Tenant's interest in connection with
the negotiation of this Second Amendment.
12. RATIFICATION. The Lease as amended by this Second Amendment is hereby
ratified and shall remain in full force and effect.
LANDLORD TENANT
THE PRUDENTIAL INSURANCE INTERNATIONAL WIRELESS
COMPANY OF AMERICA, COMMUNICATIONS
a New Jersey corporation a Delaware corporation
By VOIT MANAGEMENT COMPANY, L.P., By /s/ Aarti C. Gurnani
its managing agent
By /s/ Its VP, Legal Affairs
Its
Page 121 of 124 pages.
<PAGE>
EXHIBIT SA-1
[Architectural drawing of leased premises ALTERNATIVES
including improvements.]
#1. Replace all (E) doors w/
(N)doors per building
standard w/ mahogany colored
stain
KEY
1. Replace (E) glass w/ (N)
tempered glass.
2. Stain (E) wood trim mahogany
color
3. Remove (E) cabinets, counter,
and sink. Install (N) HC
cab., +34 counter and
21 sink w/ insta-hot.
4. Replace (E) outlets w/ (N)
GFI units.
5. Line of wall above file
niche. Soffit above file
niche to be shelf accessible
from room #590.
6. (N) carpet and rubber base.
7. (N) VCT and rubber base.
8. Refinish (E) doors mahogany
stain.
9. Paint (E) frames black.
10. (N) door per building
standard, finish to match
others.
11. 1-Hour construction
12. (N) pair of 20-minute doors
per building standard w/
magnetic holder linked to
fire alarm system. Stain
mahogany both sides, paint
suite side of frame only
black. Hall side to match
building standard.
13. Relocate (E) door finish per
8 and 9
Page 122 of 124 pages.
<PAGE>
EXHIBIT SA-2
COMMENCEMENT DATE MEMORANDUM
LANDLORD: The Prudential Insurance Company of America
TENANT: International Wireless Communications
SECOND AMENDMENT DATE: November 15, 1996
PREMISES: Suite 580
Pursuant to Section 2 (b) of the above-referenced Second Amendment to
Lease, the Suite 580 Commencement Date hereby is established as _____________ ,
the Suite 580 Rent Commencement Date hereby is established as _____________ and
the Suite 580 Expiration Date is hereby established as _____________.
LANDLORD
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey corporation
By VOIT MANAGEMENT COMPANY, L.P., its managing agent
By _________________
Its _________________
TENANT
INTERNATIONAL WIRELESS COMMUNICATIONS,
a Delaware corporation
By _________________
Its _________________
Page 123 of 124 pages.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Percentage
Name of Subsidiary Incorporation Ownership
- ------------------ ------------- ---------
International Wireless Communications, Inc. Delaware, USA 100%
IWC Delaware Holdings, Inc. Delaware, USA 100%
International Wireless Communications Bermuda 100%
Latin America Holdings, Ltd.
International Wireless Communications Netherlands 100%
Asia Holdings, B.V.
International Wireless Communications Netherland Antilles 100%
Asia Holdings, N.V.
IWC Pakistan Ltd. Mauritius 100%
IWC China Ltd. Mauritius 100%
IWC Mauritius Holdings Ltd. Mauritius 100%
New Zealand Wireless Limited Cook Islands 100%
Corporacion Mobilcom, S.A. de C.V. Mexico 2.2%
PeruTel S.A. Peru 98.7%
Promociones Telefonicas S.A. Peru 66.0%
Servicos de Radio Comunicacoes Ltda. Brasil 100%
Pelot Telecomunicacoes Do Sul Ltda. Brasil 100%
M/S Mobilcom (Pte) Ltd. Pakistan 100%
Star Telecom Overseas(Cayman Islands) Limited Cayman Islands 70.0%
RPG Paging Service Limited India 13.3%
Star Digitel Limited Hong Kong 40.0%
TeamTalk Limited New Zealand 100%
Wireless Data Services Limited New Zealand 50.0%
PT Rajasa Hazanah Perkasa Indonesia 28.3%
PT Mobile Selular Indonesia Indonesia 19.8%
PT Mobilkom Telekomindo Indonesia 15.0%
Syarikat Telefon Wireless (M) Sdn Bhd Malaysia 30.0%
Universal Telecommunications Service, Inc. Philippines 19.0%
Singapore Wireless Communications (Pte) Ltd. Singapore 100%
Taiwan Mobile Communications Corporation Taiwan 20.0%
Page 124 of 124 pages.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 41,657
<SECURITIES> 0
<RECEIVABLES> 348
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,408
<PP&E> 18,426
<DEPRECIATION> 852
<TOTAL-ASSETS> 169,358
<CURRENT-LIABILITIES> 7,313
<BONDS> 75,466
103,021
9
<COMMON> 6
<OTHER-SE> 22,142
<TOTAL-LIABILITY-AND-EQUITY> 169,358
<SALES> 869
<TOTAL-REVENUES> 869
<CGS> 1,948
<TOTAL-COSTS> 1,948
<OTHER-EXPENSES> 17,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,790
<INCOME-PRETAX> (35,908)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,908)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
