<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INTERNATIONAL WIRELESS
COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 94-3248701
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
DOUGLAS S. SINCLAIR
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
400 SOUTH EL CAMINO REAL, SUITE 1275 400 SOUTH EL CAMINO REAL, SUITE 1275
SAN MATEO, CALIFORNIA 94402 SAN MATEO, CALIFORNIA 94402
(415) 548-0808 (415) 548-0808
(Address, including zip code, and telephone (Name, address, including zip code,
number, including area code, of registrant's and telephone number, including area code,
principal executive offices) of agent for service)
</TABLE>
--------------------------
WITH COPIES TO:
BROOKS STOUGH, ESQ.
RENEE LANAM BARTON, ESQ.
FRANK GRANT, ESQ.
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN AND HACHIGIAN, LLP
155 CONSTITUTION DRIVE
MENLO PARK, CALIFORNIA 94025
(415) 321-2400
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration number for
the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value...................................................... $55,000,000 $16,666.67
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act of 1933.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with the initial public offering of the Common Stock initially in
the United States and Canada (the "U.S. Prospectus") and one to be used in
connection with the concurrent initial public offering of the Common Stock
initially outside the United States and Canada (the "International Prospectus").
The two forms of prospectus are identical except that they contain different
front and back cover pages and a different "Underwriting" section. The form of
U.S. Prospectus is included herein and is followed by the pages (marked
"Alternate Pages for International Prospectus") to be used in the International
Prospectus.
<PAGE>
SUBJECT TO COMPLETION
FEBRUARY , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
SHARES
INTERNATIONAL WIRELESS
COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
All of the shares of common stock, $.01 par value per share (the "Common
Stock"), of International Wireless Communications Holdings, Inc. ("IWC Holdings"
or the "Company") being offered hereby are being issued and sold by the Company.
Of the shares of Common Stock offered, shares are being offered
by the U.S. Underwriters (as defined herein) in the United States and Canada
(the "U.S. Offering") and shares are being offered by the International
Underwriters (as defined herein), in a concurrent offering outside the United
States and Canada (the "International Offering" and together with the U.S.
Offering, the "Offerings"), subject to transfers between the U.S. Underwriters
and the International Underwriters (collectively, the "Underwriters"). The
initial public offering price and the underwriting discount per share will be
identical for the Offerings. See "Underwriting." The closings of the U.S.
Offering and the International Offering are conditioned upon each other.
Prior to the Offerings, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "IWCH."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 17 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share......................... $ $ $
Total(2).......................... $ $ $
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting offering expenses payable by the Company estimated to be
$ .
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of additional shares of Common Stock at the Price to
Public, less Underwriting Discount, solely to cover over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Common Stock will be made through the
facilities of The Depository Trust Company, on or about , 1997.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[IWC LOGO]
[ARTWORK]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, THE TERM THE "COMPANY" REFERS TO
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. ("IWC HOLDINGS") AND ITS
SUBSIDIARY INTERNATIONAL WIRELESS COMMUNICATIONS, INC. ("IWC"), UNLESS THE
CONTEXT OTHERWISE REQUIRES OR UNLESS OTHERWISE EXPRESSLY STATED. 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 PROSPECTUS HAVE BEEN
DERIVED FROM THE SOURCES SET FORTH UNDER "BUSINESS--BACKGROUND--DEMAND FOR
COMMUNICATIONS SERVICES IN DEVELOPING COUNTRIES."
THE COMPANY
The Company is a leading developer, owner and operator of wireless
communications companies and projects in emerging markets in Asia and Latin
America. These companies and projects provide, or are developing, a variety of
wireless communications services, including cellular telephone, wireless local
loop ("WLL"), enhanced capacity trunked radio ("ECTR") 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 585 million people ("POPs") which, based on the
Company's equity interests in these operating companies, represented an
estimated 205 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 136,700 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 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
3
<PAGE>
efficiencies through the sharing of cell sites, microwave transmission networks
and marketing and administrative functions.
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 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 discounts with
selected vendors.
4
<PAGE>
ACTIVELY MANAGE OPERATING COMPANIES AND DEVELOPMENTAL STAGE PROJECTS. The
Company generally seeks to play 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, administrative and in some cases
financial support to 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. Moreover, shareholder agreements often
provide the Company with the right to approve key decisions at the operating
company or developmental stage project level, including approval of operating
budgets, business plans and major corporate transactions, even though the
Company may own less than 50% of the equity of the operating company or
developmental stage project.
PROMOTE FLEXIBLE MANAGEMENT STRUCTURE. The Company relies heavily on local
country managers to develop existing operating companies and developmental stage
projects and to identify new wireless communications opportunities. These
managers are often natives of the local country with significant managerial and
operating experience. Although Company employees, they typically serve as senior
executives of operating companies. They are supported by a corporate staff
located primarily in the United States with extensive experience in wireless
communications and international operations. The Company believes that the use
of local country managers, supported by the Company's experienced corporate
staff, allows it to rapidly and effectively respond to operational matters,
develop and maintain close working relationships with local partners and quickly
capitalize on wireless communications opportunities as they arise.
FINANCING STRATEGY AND HISTORY
The Company generally seeks to finance its operating companies and
developmental stage projects at the project level. Initial funding is typically
provided by equity contributions from the Company and its project partners.
During the initial construction and expansion of the wireless network, debt
financing may be provided by equipment vendors, commercial banks and other third
parties. Such financing may be guaranteed by the Company and its local partners.
Once the project becomes operational, the Company seeks to obtain long-term
project financing with limited or no recourse to the Company or its partners. In
addition, shareholder agreements for many of the Company's projects provide for
raising public equity at the operating company level, subject to market
conditions and the status of the project.
As of September 30, 1996, the Company had directly raised an aggregate of
approximately $132.5 million in equity capital through private placements and
$94.2 million through the sale of units (the "Unit Offering") consisting of
$196,720,000 aggregate principal amount of 14% Senior Secured Discount Notes and
warrants to purchase an aggregate of 2,289,927 shares of Common Stock (the
"Warrants"). The notes sold in the Unit Offering were subsequently exchanged for
registered notes (the "Notes") that are substantially identical (including
principal amount, interest rate, maturity, exchange and ranking) to the original
notes. The Notes are governed by the terms of an indenture (the "Indenture").
5
<PAGE>
OWNERSHIP AND MANAGEMENT
Vanguard Cellular Systems, Inc. ("Vanguard"), one of the largest independent
cellular operators in the United States, through its indirect wholly owned
operating company, Vanguard Cellular Operating Corp., 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. Vanguard
has provided and continues to provide a number of services relating to the
formation, development and operation of the Company's wireless communications
businesses, including identification and evaluation of wireless communications
opportunities, review of business and technical plans, and assistance in
training operating company personnel. Haynes G. Griffin, Chairman of the Board
of Directors of the Company, is Co-Chief Executive Officer and Chairman of the
Board of Directors of Vanguard.
The Company's senior management has extensive experience in developing and
operating wireless communications networks and managing international
operations. Collectively, the seven members of the Company's senior management
have over 83 years of experience in the wireless communications industry and
over 65 years of experience conducting business in the Company's existing
markets.
6
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data as of and for the years
ended December 31, 1993, 1994 and 1995 have been derived from the Company's
consolidated financial statements which have been audited by KPMG Peat Marwick
LLP, independent public accountants, whose report indicated a reliance on other
auditors relative to certain amounts relating to the Company's investment in PT
Rajasa Hazanah Perkasa ("RHP") as of and for the year ended December 31, 1995.
The audited financial statements of RHP as of and for the year ended December
31, 1995, together with the independent auditors' reports thereon, are included
elsewhere in this Prospectus. The summary consolidated financial data as of and
for the year ended December 31, 1992 were derived from financial statements
which have been audited by other auditors. The Company was incorporated in
January 1992. The following summary consolidated financial data as of September
30, 1996 and for the nine-month periods ended September 30, 1995 and 1996 have
been derived from unaudited financial statements that, in the opinion of
management of the Company, reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial data for such
periods and as of such date. Operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the entire year. The unaudited pro forma financial data do not purport to
represent what the Company's results of operations would have been if the Unit
Offering and the acquisitions and mergers reflected therein had in fact occurred
as of the beginning of the period or on the date indicated, as applicable, or to
project the Company's financial position or results of operations for any future
date or period. The data set forth below are qualified by reference to, and
should be read in conjunction with, the consolidated financial statements and
notes thereto, the Unaudited Pro Forma Consolidated Condensed Financial
Statements and notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations, included elsewhere in this
Prospectus."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1995(1)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Revenue...................................... $ -- $ -- $ -- $ -- $ 369
Cost of sales................................ -- -- -- -- 785
----------- ----------- ----------- ----------- -----------
-- -- -- -- (416)
General and administrative expenses.......... 169 809 2,481 6,365 8,698
Equity in losses of affiliates............... -- -- -- 3,756 5,825
----------- ----------- ----------- ----------- -----------
Loss from operations......................... (169) (809) (2,481) (10,121) (14,939)
----------- ----------- ----------- ----------- -----------
Interest income.............................. 5 2 106 232 232
Interest expense............................. -- (33) (115) (1,354) (18,397)
Other expense................................ -- (1) (13) (28) (28)
----------- ----------- ----------- ----------- -----------
Net loss..................................... $ (164) $ (841) $ (2,503) $ (11,271) $ (33,132)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Pro forma net loss per share(2).............. $ (0.98) $ (2.89)
----------- -----------
----------- -----------
Shares used in calculation of pro forma net
loss per share(2).......................... 11,460 11,460
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
PRO FORMA
1995 1996 1996(1)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (UNAUDITED) (UNAUDITED)
Revenue...................................... $ -- $ 532 $ 814
Cost of sales................................ -- 541 879
----------- ----------- -----------
-- (9) (65)
General and administrative expenses.......... 3,565 10,610 11,369
Equity in losses of affiliates............... 1,171 5,507 5,629
----------- ----------- -----------
Loss from operations......................... (4,736) (16,126) (17,063)
----------- ----------- -----------
Interest income.............................. 130 937 937
Interest expense............................. (785) (2,663) (15,961)
Other expense................................ (10) 1 1
----------- ----------- -----------
Net loss..................................... $ (5,401) $ (17,851) $ (32,086)
----------- ----------- -----------
----------- ----------- -----------
Pro forma net loss per share(2).............. $ (0.84) $ (1.50)
----------- -----------
----------- -----------
Shares used in calculation of pro forma net
loss per share(2).......................... 21,367 21,367
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Total assets................................................. $ 536 $ 2,640 $ 18,424 $ 95,643
Long-term debt, net.......................................... -- -- -- --
Redeemable convertible preferred stock....................... -- -- 19,578 98,845
Total stockholders' equity (deficit)......................... 486 425 (3,154) (14,759)
Working capital.............................................. (46) (1,514) 10,580 15,294
<CAPTION>
AS OF SEPTEMBER 30,
-------------------------
AS
1996 ADJUSTED(3)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA: (UNAUDITED) (UNAUDITED)
Total assets................................................. $ 183,475 $ 240,886
Long-term debt, net.......................................... 71,623 71,623
Redeemable convertible preferred stock....................... 102,519 --
Total stockholders' equity (deficit)......................... (3,563) 156,367
Working capital.............................................. 79,272 136,683
</TABLE>
- ------------------------------
(1) Pro forma financial data for the year ended December 31, 1995 and for the
nine months ended September 30, 1996 give effect to the Unit Offering and
the acquisitions and mergers as described in "Unaudited Pro Forma
Consolidated Condensed Financial Statements" included elsewhere in this
Prospectus, as if such transactions had occurred on January 1, 1995 for
purposes of the statement of operations data and as of September 30, 1996
for purposes of the balance sheet data. Pro forma adjustments to statement
of operations data for the year ended December 31, 1995 and for the nine
months ended September 30, 1996 include (i) adjustments to interest expense
reflecting the addition of interest expense associated with the Unit
Offering, (ii) amortization of debt issuance costs associated with the Unit
Offering, (iii) the consolidation of TeamTalk (as defined below), (iv) the
amortization of licenses and other intangibles for consolidated
subsidiaries, (v) the amortization of the excess of the cost of the
Company's investments over its proportionate interest in the net assets in
entities accounted for by the equity method, and (vi) the additional equity
in net losses of RHP (as defined below) assuming the Company's investment
for ownership interest of 29.2% had been made on January 1, 1995.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(3) The "as adjusted" balance sheet data gives effect to (i) the automatic
conversion of all outstanding shares of Preferred Stock to Common Stock,
(ii) the assumed exercise, on a cash basis, of warrants to purchase
1,173,360 shares of Preferred Stock, as such warrants terminate upon the
closing of these Offerings, and (iii) the receipt of the estimated net
proceeds of $50 million from these Offerings. Total assets include proceeds
of $7,411,000 from the exercise of the warrants. Actual cash proceeds may be
up to $4,117,000 less than this amount as warrants to purchase 456,360
shares are exercisable on a net basis. If such warrants are exercised on a
net basis, the number of shares issued would be reduced accordingly.
7
<PAGE>
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 under "Business--Operating Companies."
<TABLE>
<CAPTION>
EQUITY
POPS POPS
COVERED BY COVERED BY
EQUITY LICENSES LICENSES
OPERATING COMPANY LOCATION TYPE OF PROJECT INTEREST (MM)(1) (MM)(1) SUBSCRIBERS
- ------------------------------ --------------- -------------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Via 1 Communicacoes S.A. ("Via
1") Brazil Regional ECTR 65.1%(2) 60.0 39.1(2) 900
Star Digitel Limited ("SDL") China Regional Cellular 40.0% 200.0 80.0 21,000
RPG Paging Service Limited
("RPSL") India Regional Paging 7.0%(3) 14.0 1.0(3) 55,000
PT Mobile Selular Indonesia
("Mobisel") Indonesia National Cellular 20.4%(4) 195.3 39.8(4) 17,000
PT Mobilkom Telekomindo
("Mobilkom") Indonesia National ECTR 15.0% 195.3 29.3 4,000
Syarikat Telefon Wireless (M)
SDN BHD ("STW") Malaysia National WLL 30.0%(5) 20.0 6.0(5) 5,000
Corporacion Mobilcom, S.A. de
C.V. ("Mobilcom Mexico") Mexico Regional ECTR 2.2%(6) 65.0 1.4(6) 28,000
TeamTalk Limited ("TeamTalk") New Zealand National ECTR 100.0% 3.5 3.5 5,600
Universal Telecommunications
Service, Inc. ("UTS") Philippines Regional ECTR 19.0%(7) 27.0 5.1(7) 180
</TABLE>
- ------------------------------
(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
to be formed. Does not give effect to exercise of options presently being
negotiated with the Company's local partners that, if exercised in their
entirety, would reduce the Company's interest in Via 1 below 50%.
(3) Does not include a proposed increase in the Company's indirect ownership
interest in RPSL to 13.3%, which is expected to occur in February 1997, with
final governmental approval of the share transfer by June 1997.
(4) Does not reflect the anticipated sale of a 3.0% equity interest in RHP, the
70.0% shareholder of Mobisel, to a financial institution that has provided a
credit facility to Mobisel, which, upon its consummation would reduce the
Company's indirect interest in Mobisel to 19.8%.
(5) 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%.
(6) Does not reflect the potential dilution to the Company's interest to 1.8% if
the Company does not participate in a capital call proposed to be made on or
before March 31, 1997. 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%
(7) 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.
8
<PAGE>
DEVELOPMENTAL STAGE PROJECTS
As of December 31, 1996, the Company had direct or indirect interests in the
following five developmental stage projects. 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 under "Business--Developmental Stage Projects."
<TABLE>
<CAPTION>
EQUITY
POPS POPS
COVERED BY COVERED BY
DEVELOPMENTAL EQUITY LICENSES LICENSES
STAGE PROJECT LOCATION TYPE OF PROJECT INTEREST(1) (MM)(2) (MM)(2)
- ------------------------------ ---------- ------------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mexico National WLL Mexico National WLL 40.0%(3) 94.8 37.9 (3)
Mobilcom (Private) Limited
("Mobilcom Pakistan") Pakistan National ECTR 90.0%(4) 130.1 117.1 (4)
PeruTel S.A. ("PeruTel") Peru National ECTR 98.7% 23.8 23.5
Promociones Telefonicas S.A.
("Protelsa") Peru National Paging 66.0% 23.8 15.7
Taiwan Mobile Communications
Corporation ("TMCC") Taiwan National ECTR 20.0% 21.3 4.3
</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 project 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.
9
<PAGE>
SUMMARY OF OPERATING COMPANIES
The Company has ownership interests in nine operating companies. The
following briefly describes these operating companies and sets forth the amount
of the Company's investment and its equity interest in the operating companies
as of December 31, 1996, and its anticipated additional investment in the
operating companies through December 31, 1997. See "Use of Proceeds." The
aggregate amount of the Company's investment in the following operating
companies includes shares of the Company's preferred stock ("Preferred Stock")
to which the Company has assigned a value of $19.1 million, which shares were
issued by the Company to acquire Vanguard's interests in such operating
companies pursuant to the Vanguard Exchange (as defined below). See "Certain
Transactions--The Vanguard Exchange." This summary is qualified by reference to,
and should be read in conjunction with, the more complete descriptions of the
operating companies set forth below in "Business--Operating Companies." The
actual additional amount invested by the Company may vary significantly from the
anticipated amount indicated below. See "Risk Factors--Project Level Risks."
<TABLE>
<CAPTION>
ANTICIPATED
ADDITIONAL
COMPANY COMPANY
INVESTMENT INVESTMENT
AS OF THROUGH
DECEMBER 31, DECEMBER 31,
OPERATING COMPANY 1996 1997 DESCRIPTION OF OPERATING COMPANY
- ------------------------ ------------- ------------- --------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Via 1 $ 17.9 $ 10.0 Following fulfillment of certain regulatory and
(Brazil Regional ECTR) corporate requirements, the Company will obtain a
65.1% equity interest in Via 1, a company formed
to hold and develop certain existing ECTR
operations in Brazil. The Company's primary
partner in Via 1 is Rede Brasil Sul ("RBS"), one
of Brazil's largest media companies, with
operations in television and radio broadcasting
and newspaper publishing. Pending completion of
the Company's contribution of licenses to Via 1,
the Company and its partners are operating the
project as if Via 1 had been formed and the
contributions consummated (the "Via 1 Project").
The licenses under which Via 1 will operate cover
major cities in Southern and Central Brazil,
including Rio de Janeiro, Curitiba and Sao Paulo.
The continued operation of the Via 1 Project and
the transfer of certain licenses to Via 1 are
subject to certain governmental approvals or
authorizations. In October 1996, in anticipation
of the formation of Via 1, SRC Servicos de Rario
Comunicacoes Ltda, the Company's wholly owned
Brazilian subsidiary, entered into a contract with
Nokia pursuant to which Nokia will provide
equipment for the project. The Via 1 project
commenced operations in July 1996 and, as of
December 31, 1996, served approximately 900
subscribers.
SDL (China Regional $ 20.0 $ 28.0 The Company holds a 40.0% equity interest in SDL,
Cellular) a Hong Kong corporation engaged
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
ANTICIPATED
ADDITIONAL
COMPANY COMPANY
INVESTMENT INVESTMENT
AS OF THROUGH
DECEMBER 31, DECEMBER 31,
OPERATING COMPANY 1996 1997 DESCRIPTION OF OPERATING COMPANY
- ------------------------ ------------- ------------- --------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
in various cellular projects in China. The
Company's partner in SDL is Star Telecom Holding
Limited ("STHL"), one of the largest paging and
internet service providers in Hong Kong. As
foreign ownership of telecommunications ventures
is prohibited in China, SDL has entered into
agreements with various business entities
affiliated with the People's Liberation Army
("PLA") and the Chinese Ministry of Posts and
Telecommunication ("MPT") to provide equipment and
certain services relating to the development and
operation of cellular networks in several major
provinces of China, covering an estimated 200
million POPs. SDL is currently also in
negotiations for future projects with China
Telecom Great Wall Mobile Communications, which
comprises a number of joint ventures set up, or
being established, between the PLA and the MPT.
The projects to which SDL provides equipment and
services (the "SDL Projects") commenced operations
in the mid 1980s. As of December 31, 1996, the SDL
Projects served approximately 21,000 subscribers.
RPSL (India Regional $ 1.4 $ 2.1 The Company owns a 7.0% indirect interest in RPSL,
Paging) a provider of regional paging services in India,
through its 70.0% interest in Star Telecom
Overseas (Cayman Islands) Limited ("STOL"), a
Cayman Islands company that is pursuing paging
opportunities in various countries in Asia,
including India, Indonesia and Thailand. The
Company's partner in STOL is STHL, the Company's
partner in SDL, its China Regional Cellular
operating company. STOL has agreed to acquire an
additional 9.0% interest in RPSL, thereby
increasing the Company's indirect equity interest
in RPSL to 13.3%. RPSL commenced operations in
early 1995, and, as of December 31, 1996, served
approximately 55,000 subscribers.
Mobisel (Indonesia $ 34.1 $ 0 The Company holds a 20.4% indirect interest in
National Cellular) Mobisel, a provider of cellular services in
Indonesia through its 29.2% equity interest in
RHP, the 70.0% shareholder of
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
ANTICIPATED
ADDITIONAL
COMPANY COMPANY
INVESTMENT INVESTMENT
AS OF THROUGH
DECEMBER 31, DECEMBER 31,
OPERATING COMPANY 1996 1997 DESCRIPTION OF OPERATING COMPANY
- ------------------------ ------------- ------------- --------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Mobisel. RHP was formed in 1985 to provide
cellular services in Indonesia and, in 1995, RHP
contributed its cellular operations to Mobisel in
return for a 70.0% interest in Mobisel. The
Company's partners in Mobisel include PT (Persero)
Telekomunikasi Indonesia ("Telkom Indonesia"), the
state-owned telecommunications company. Mobisel
holds a provisional license covering all of
Indonesia, the fourth most populous country in the
world. As of December 31, 1996, Mobisel served
approximately 17,000 subscribers.
Mobilkom (Indonesia $ 1.5 $ 0 The Company indirectly owns a 15.0% equity
National ECTR) interest in Mobilkom, a provider of ECTR services
in Indonesia. The Company's partners in Mobilkom
include PT Telekomindo Prima Bhakti
("Telekomindo"), the investment subsidiary of
Telkom Indonesia, PT Inka Forindo Jaya ("PT
Inka"), an Indonesian telecommunications and engi-
neering company, and Jasmine International Public
Company Limited ("Jasmine"), a Thai
telecommunications company with operations
throughout Asia. Mobilkom's five-year license
covers all of Indonesia and its ECTR system is
operational in the three largest cities of Java,
including Jakarta. Mobilkom commenced operations
in September 1995 and, as of December 31, 1996,
served approximately 4,000 subscribers.
STW (Malaysia National $ 23.4 $ 2.8 The Company holds a 30.0% equity interest in STW,
WLL) a provider of WLL communications services in
Malaysia. The Company's partners, Shubila Holding
SDN BHD and Laranda SDN BHD ("Laranda"), own 60.0%
and 10.0% of STW, respectively. STW holds a
national license to provide telephone services in
Malaysia. STW commenced operations in Northern
Malaysia in late 1993 and, as of December 31,
1996, served approximately 5,000 subscribers.
Mobilcom Mexico (Mexico $ 2.1 $ 0 The Company owns a 2.2% equity interest in
Regional ECTR) Mobilcom Mexico, a provider of ECTR services in
Mexico. The Company's partners in
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
ANTICIPATED
ADDITIONAL
COMPANY COMPANY
INVESTMENT INVESTMENT
AS OF THROUGH
DECEMBER 31, DECEMBER 31,
OPERATING COMPANY 1996 1997 DESCRIPTION OF OPERATING COMPANY
- ------------------------ ------------- ------------- --------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Mobilcom Mexico include Grupo Comunicaciones San
Luis S.A. de C.V. and NEXTEL Communications, Inc.
("NEXTEL"), one of the largest operators of
specialized mobile radio in the world. Mobilcom
Mexico operates under licenses covering the major
cities in Northern Mexico and Central Mexico,
including Mexico City. Mobilcom Mexico commenced
commercial service in 1993 and, as of December 31,
1996, served approximately 28,000 subscribers.
TeamTalk (New Zealand $ 13.5 $ 6.8 The Company, through its wholly owned subsidiary,
National ECTR) TeamTalk, currently provides ECTR coverage in the
major population centers throughout the North
Island of New Zealand as well as in the city of
Christchurch, the largest city on the South
Island. TeamTalk commenced operations in 1994 and,
as of December 31, 1996, served approximately
5,600 subscribers.
UTS (Philippines $ 2.0 $ 1.8 The Company owns a 19.0% equity interest in UTS, a
Regional ECTR) provider of ECTR services in the Philippines. The
Company's partners in UTS include 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. UTS
operates under a provisional license permitting it
to provide ECTR services in the Visayas and
Mindanao regions of the country and has applied
for the authority to extend its provisional
license and expand service into Luzon, the third
Philippine region which includes metropolitan
Manila. UTS commenced operations in October 1996
and as of December 31, 1996, served approximately
180 subscribers.
</TABLE>
13
<PAGE>
SUMMARY OF DEVELOPMENTAL STAGE PROJECTS
The Company is currently involved in five developmental stage projects. The
following summarizes the status of these projects, the Company's actual or
proposed equity interest as of December 31, 1996 and the amount of the Company's
proposed investment in these projects through December 31, 1997. This summary is
qualified by reference to, and should be read in conjunction with the more
complete descriptions of the developmental stage projects set forth below in
"Business--Developmental Stage Projects." The Company's developmental stage
projects are generally subject to ongoing negotiations, compliance with local
law, receipt of necessary licenses and governmental approvals and receipt of
necessary corporate and other third party approvals. Accordingly, the Company's
proposed 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 will be
received for these developmental stage projects and the Company otherwise may
elect not to pursue one or more of these developmental stage projects.
<TABLE>
<CAPTION>
PROPOSED
COMPANY COMPANY
INVESTMENT EQUITY
THROUGH INTEREST AS OF
DECEMBER 31, DECEMBER 31,
PROJECT 1997 1996 STATUS OF DEVELOPMENTAL STAGE PROJECT
- ------------------------ --------------- --------------- ------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Mexico National WLL $ 18.5 40.0%(1) The Company has entered into an MOU with an individual
member of a prominent Mexican industrial group to provide
national WLL services in Mexico. It is the parties' intent
to operate the WLL business in alliance with an existing
long distance telecommunications business, whereby the
Company believes it will be able to realize operational and
marketing advantages.
Mobilcom (Private) $ 12.8(2) 90.0%(2)(3) Mobilcom Pakistan has been awarded a national license to
Limited ("Mobilcom provide ECTR services in Pakistan. The Company is currently
Pakistan") (Pakistan evaluating the economics of regional networks covering most
National ECTR) of the major population centers of the country, including
Karachi, Lahore and Islamabad. Pakistan has a population of
approximately 130 million.
PeruTel S.A. ("PeruTel") $ 17.6 98.7% The Company owns a 98.7% equity interest in PeruTel, which
(Peru National ECTR) has been awarded a national license to provide ECTR services
in Peru. With a population of approximately 24 million, real
GDP growth of 6.6% during the year ended December 31, 1995
and one of the least developed telephone networks in Latin
America, the Company believes there exists a significant
opportunity to provide telecommunications services in Peru.
Promociones Telefonicas $ 3.0(4) 66.0% The Company owns a 66.0% equity interest in Protelsa, which
S.A. ("Protelsa") has been awarded a national license to provide paging
(Peru National Paging) services in Peru. The Company's partner in Protelsa
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
PROPOSED
COMPANY COMPANY
INVESTMENT EQUITY
THROUGH INTEREST AS OF
DECEMBER 31, DECEMBER 31,
PROJECT 1997 1996 STATUS OF DEVELOPMENTAL STAGE PROJECT
- ------------------------ --------------- --------------- ------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
is Marmaud S.A. ("Marmaud"), a local telecommunications
engineering company. Protelsa has recently begun
construction of its paging network.
Taiwan Mobile $ 3.0(5) 20.0%(6) The Company and its Taiwanese partner have submitted a joint
Communications application for a variety of voice and data licenses to
Corporation ("TMCC") provide national ECTR services in Taiwan. License awards are
(Taiwan National ECTR) expected to be announced in the first six months of 1997.
Based on its experience in providing ECTR services, the
Company believes that it is well-positioned to receive a
number of these licenses, although there can be no assurance
in this regard.
</TABLE>
- ------------------------
(1) Represents the Company's proposed equity interest in this project pursuant
to the terms of an MOU with the Company's local partner.
(2) Includes Preferred Stock to which the Company has assigned a value of $5.4
million which shares were issued by the Company to acquire Vanguard's
interest in this developmental stage project pursuant to the Vanguard
Exchange. See "Certain Transactions--The Vanguard Exchange."
(3) Reflects the anticipated sale of a 10.0% interest in this project to the
Company's local partner.
(4) Includes $1.6 million paid by the Company to acquire its 66.0% equity
interest in Protelsa in December 1996.
(5) As part of the application process and in accordance with applicable
regulations, the Company has deposited its proposed investment in a
Taiwanese bank account as a license deposit to support the joint application
discussed above.
(6) In order to comply with foreign ownership restrictions on Taiwanese
telecommunications ventures, the Company's interest is anticipated to be
structured in part as a direct equity investment and in part through
contractual agreements that, taken as a whole, will give the Company a 20.0%
aggregate interest in the project.
15
<PAGE>
OTHER
IWC was incorporated in Delaware in January 1992. In July 1996, IWC Holdings
was formed as a holding company with no business operations of its own. Its only
assets consist of all of the outstanding capital stock of IWC, its wholly owned
subsidiary, and an intercompany note executed by IWC in a principal amount equal
to the net proceeds of the Unit Offering. The Company's principal executive
offices are located at 400 South El Camino Real, Suite 1275, San Mateo,
California 94402, USA. Its telephone number at this address is (415) 548-0808.
The Company also has offices in Sao Paulo, Brazil; Jakarta, Indonesia; Kuala
Lumpur, Malaysia; Singapore and Hong Kong.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..........
Common Stock Outstanding After these
Offerings(1)...............................
Use of Proceeds.............................. For general corporate purposes and working
capital.
Proposed Nasdaq National Market Symbol....... IWCH
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of December 31, 1996. Excludes
1,982,000 shares of Common Stock issuable upon the exercise of outstanding
options as of December 31, 1996. See "Capitalization" and "Management--1996
Stock Option/Stock Issuance Plan".
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION CONTAINED HEREIN (I) ASSUMES
THE EXERCISE ON A CASH BASIS OF WARRANTS TO PURCHASE 1,173,360 SHARES OF
PREFERRED STOCK, AS SUCH WARRANTS TERMINATE UPON THE CLOSING OF THESE OFFERINGS;
(II) ASSUMES NO EXERCISE OF WARRANTS TO PURCHASE IN THE AGGREGATE APPROXIMATELY
2,289,427 SHARES OF COMMON STOCK ISSUED IN THE UNIT OFFERING (SUCH FIGURE IS
APPROXIMATED AS HOLDERS OF THE WARRANTS SHALL NOT BE ENTITLED TO FRACTIONAL
SHARES); (III) EXCLUDES 1,982,000 SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF OUTSTANDING OPTIONS AS OF DECEMBER 31, 1996; (IV) REFLECTS THE
CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK UPON
THE CLOSING OF THESE OFFERINGS; AND (V) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTIONS. ACTUAL CASH PROCEEDS FROM THE EXERCISE OF THE WARRANTS
MAY BE UP TO $4,116,785 LESS THAN ESTIMATED PROCEEDS OF $7,410,734 TO THE EXTENT
456,360 WARRANTS ARE EXERCISABLE ON A NET BASIS. IF SUCH WARRANTS ARE EXERCISED
ON A NET BASIS, THE NUMBER OF SHARES ISSUED WOULD BE REDUCED ACCORDINGLY.
16
<PAGE>
RISK FACTORS
INVESTMENT IN THE SHARES OF COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS
MAY BE FOUND IN THE MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES" AND "BUSINESS," AS WELL AS WITHIN
THE PROSPECTUS GENERALLY. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET
FORTH BELOW AND THE MATTERS SET FORTH IN THE PROSPECTUS GENERALLY.
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 $34.8 million as of September
30, 1996. The Company anticipates that its net losses will increase
significantly in the foreseeable future, and there can be no assurance as to
whether or when the Company's operations will become profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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 $36.9
million and $38.7 million, respectively, for the nine months ended September 30,
1996 and the year ended December 31, 1995, and expects such negative cash flows
to continue and likely increase in the foreseeable future. Because of such
negative cash flow and 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.
Moreover, although the Company anticipates that its cash balances are
sufficient to meet its cash requirements throughout 1997, there can be no
assurance that the Company will not require additional financing prior to such
time. In addition, the Company intends to pursue aggressively additional
investment opportunities for wireless projects and anticipates that it will
require additional sources of financing in order to pursue those investments.
However, the Company has no commitments or arrangements for additional
financing, and there can be no assurance that any additional debt or equity
financing will be available to the Company on acceptable terms when required by
the Company or at all. If adequate sources of additional financing are not
available, the Company will be forced to delay, scale back or eliminate one or
more of its projects or to liquidate one or more of its investments, may be
unable to repay 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.
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 September 30, 1996, the
17
<PAGE>
Company's (i) long term debt and (ii) total stockholders' deficit and redeemable
convertible Preferred Stock were $71.6 and $99.0, respectively. The high level
of the Company's indebtedness will have important consequences, including (i)
the Company's ability to obtain additional debt financing in the future may be
limited, and (ii) the Company's level of indebtedness could limit its
flexibility in reacting to changes in the industry and economic conditions
generally. In addition, most of the existing operating companies and
developmental stage projects will not be subject to any limitations restricting
the inccurrence of additional indebtedness and, to the extent that the Company
is successful in its strategy of obtaining additional financing at the operating
company or developmental stage project level, the amount of such indebtedness
could increase substantially, which will have consequences similar to those
described in clauses (i) and (ii) above with respect to the Company.
RISK OF INABILITY TO REPAY NOTES AT MATURITY
For each of the three years ended December 31, 1995 and the nine months
ended September 30, 1996, the Company had net losses and did not generate
positive cash flow from operations and, as discussed 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 "Business--Operating
Companies--Malaysia National WLL--Investment and Budgeted Capital Expenditures."
Any failure by the Company to repay the Exchange Notes when due would have a
material adverse effect on the Company.
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
18
<PAGE>
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 subsidiary 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.
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
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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.
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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. After giving effect to the Offering, Vanguard will
beneficially own approximately % of the Company's outstanding Common Stock
(approximately % if the over-allotment options are exercised in full).
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
"Management--Arrangements Concerning Election of Directors."
CONFLICTS OF INTEREST
Vanguard is not precluded from competing with the Company by itself or
through affiliates by developing, owning and/or operating international wireless
communications businesses, including businesses that use the same or similar
technologies or provide the same services as the Company's existing and future
operating companies. This is true even though the Company acquired substantially
all of Vanguard's interests in certain of its international wireless projects in
December 1995. 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, it is
anticipated that Vanguard will purchase an equity interest in
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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
"Business--Background--Strategic Relationships," "Certain Transactions--Private
Placement Transactions--The Series F Financing," "Certain Transactions--The
Vanguard Exchange" and "Description of Capital Stock."
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 EXCHANGE NOTES AS DEBT; ORIGINAL ISSUE DISCOUNT
Although the Company intends to treat the Exchange Notes as debt for all
purposes, there can be no assurance that the Internal Revenue Service will agree
that the Exchange Notes qualify as debt for federal income tax purposes. If the
Exchange Notes are not respected as debt for such purposes, they would likely be
recharacterized as an equity interest in the Company and the interest that
accretes on the Exchange Notes would not be deductible by the Company when
accrued or paid. Loss of such interest deductions would increase income taxes
ultimately payable by the Company, and thus, reduce cash flow otherwise
available to repay the Exchange Notes, which would have a material adverse
effect on the Company. Recharacterization of the Exchange Notes as equity could
also adversely affect non-corporate holders as well as non-United States holders
of the Exchange Notes.
Assuming the Exchange Notes are respected as debt for federal income tax
purposes, they will be subject to the original issue discount provisions of the
Code because they will have been issued at a non-de minimis discount from their
principal amount. Consequently, the holders of the Exchange Notes generally will
be required to include amounts in gross income for federal income tax purposes
in advance of receipt of the cash payments to which the income is attributable.
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code after the issuance of the Exchange Notes, the claim of a
holder of any of the Exchange Notes with respect to the principal amount thereof
may be limited to an amount equal to the sum of (i) the initial offering price
allocable to the Exchange Notes and (ii) that portion of the original issued
discount which
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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.
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.
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
The Company currently has no specific plan for a significant portion of the
proceeds of this offering. As a consequence, the Company's management will have
the discretion to allocate a portion of the proceeds to uses which the
shareholders may not deem desirable, and there can be no assurance that the
proceeds can or will yield a significant return or any return at all. See "Use
of Proceeds."
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. See "Dividend Policy."
NO PRIOR MARKET FOR THE SHARES; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop upon
completion of the Offering or, if it does develop, that such market will be
sustained. The initial public offering price of the Common Stock will be
determined by negotiation among the Company and the representatives of the
Underwriters and may not be indicative of the market price of the Common Stock
after the Offering. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
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The market price for the Common Stock may be significantly affected by
factors such as the announcement of new projects by the Company or its
competitors, quarterly variations in the Company's operating results or the
operating results of the Company's competitors, changes in earnings (losses) or
other estimates by analysts or reported results that vary materially from such
estimates. In addition, the stock market has experienced significant price
fluctuations that have particularly affected the market prices of equity
securities of many high technology and emerging growth companies and that often
have been unrelated to the operating performance of such companies. These broad
market fluctuations may materially and adversely affect the market price of the
Company's Common Stock. Following periods of volatility in the market price of a
company's securities, securities class action litigation against the Company
could result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's business,
operating results and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock into the public
market after the Offerings, or the perception that such sales could occur, could
materially and adversely affect the market price of the Common Stock or could
impair the Company's future ability to obtain capital through an offering of
equity securities. See "Management--1996 Stock Option/Stock Issuance Plan."
The Company anticipates that pursuant to the Underwriting Agreement, all
directors, officers, stockholders and option holders of the Company will agree
not to offer or sell any shares of Common Stock or options to purchase Common
Stock for a period of 180 days following the date of this Prospectus. Upon the
termination of such lock-up agreements approximately 7,528,720 shares of Common
Stock will be eligible for sale, subject to the volume limitations and other
requirements of Rule 144. The remainder of the outstanding shares of Common
Stock will become eligible for sale upon expiration of their respective two year
holding periods under Rule 144, subject to the volume limitations and other
requirements of Rule 144. See "Shares Eligible for Future Sale."
The Company has granted certain stockholders the right to cause the Company
to register the sale of an aggregate of 16,509,840 shares under the Securities
Act of 1933, as amended (the "Securities Act") in the event that the Company
proposes to register any of its securities under the Securities Act on Forms
S-1, S-2, S-3 or any successor form subsequent to these Offerings. In addition,
the Company has filed a registration statement on Form S-8 to register an
aggregate of 2,400,000 shares of Common Stock reserved for issuance under its
1996 Stock Option/Stock Issuance Plan. See "Management-- 1996 Stock Option/Stock
Issuance Plan," "Description of Capital Stock" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
The initial public offering price is substantially higher than the
anticipated net tangible book value per share of the outstanding Common Stock
immediately after the Offerings. Investors purchasing Common Stock in the
Offerings will, therefore, incur immediate and substantial dilution of
approximately $ in the pro forma net tangible book value per share of Common
Stock from the initial public offering price and may incur additional dilution
upon the exercise of outstanding options. See "Dilution."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION AND DELAWARE LAW
Upon completion of the Offerings, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights of such shares, without any further vote or action by the
Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The
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issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware General
Corporation Law ("DGCL") could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. See "Description of Capital
Stock--Preferred Stock" and "--Antitakeover Effects of Provisions of the
Certificate of Incorporation and Delaware Law."
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 "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources." The Indenture contains certain restrictions on the ability
of the Company to make investments in, or guarantee the indebtedness of, the
operating companies and developmental stage projects.
In addition, there can be no assurance that the operating companies or
developmental stage projects will be able to pay their indebtedness or other
liabilities when due. Any failure to pay such indebtedness or other liabilities
when due could have a material adverse effect on the Company. See "--Company
Level Risks--Negative Operating Cash Flow; Dependence on Additional Financing;
No Commitments For Additional Financing" below.
To date, most of the debt financing obtained by the operating companies has
been secured by assets of the respective operating companies, and it is likely
that any debt financing the operating companies or developmental stage projects
obtain in the foreseeable future will also be similarly
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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
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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 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 "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 "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
27
<PAGE>
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 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
28
<PAGE>
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 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 and is currently in the
process of applying for a second extension of such service date deadline.
Similarly, in the Via 1 Project, because the
29
<PAGE>
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.
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.
30
<PAGE>
INFLATION; CURRENCY DEVALUATIONS AND FLUCTUATIONS
Many developing countries have experienced substantial, and in some periods
extremely high, rates of inflation and resulting high interest rates for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain developing countries and could have an adverse effect on the operating
companies and developmental stage projects in those countries, including an
adverse effect on their ability to obtain financing.
The value of the Company's investment in an operating company or
developmental stage project is partially a function of the currency exchange
rate between the U.S. dollar and the applicable local currency. In addition, the
operating companies will report their results of operations in the local
currency and, accordingly, the Company's results of operations will be affected
by changes in currency exchange rates between those currencies and 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, its ECTR operating company in Mexico, as a result of the 1994
devaluation of the Mexican peso and the resulting economic instability in
Mexico. Many of the currencies of developing countries have experienced steady
devaluations relative to the U.S. dollar, and major adjustments have been made
in the past and may again occur in the future, any of which could have a
material adverse effect on the Company.
To the extent that the operating companies commence or have commenced
commercial operations, any revenues they generate will generally be paid to the
operating companies in the local currency. By contrast, many significant
liabilities of the operating companies (such as liabilities for the financing of
telecommunications equipment) may be payable in U.S. dollars or in currencies
other than the local currency. As a result, any devaluation in the local
currency relative to the currencies in which such liabilities are payable could
have a material adverse effect on the Company.
FOREIGN CORRUPT PRACTICES ACT
The Company is subject to the Foreign Corrupt Practices Act ("FCPA"), which
generally prohibits U.S. companies and their intermediaries from bribing foreign
officials for the purpose of obtaining or keeping business or licenses or
otherwise obtaining favorable treatment. Although the Company has taken
precautions to comply 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
31
<PAGE>
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 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.
32
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock being offered by the Company are estimated to be $50.0 million,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses ($57.7 million if the over-allotment option is exercised in
full), assuming an initial public offering price of $ per share. The Company
presently intends to use such net proceeds (i) primarily to make investments in
its existing operating companies and developmental stage projects; and (ii) for
general corporate purposes that may include investments in additional
development and acquisition opportunities.
The following table summarizes the Company's anticipated remaining
investments in its operating companies and its proposed investments in
developmental stage projects through December 31, 1997, based on its current
estimate of funding requirements of such operating companies and developmental
stage projects as of December 31, 1996. Because of the Company's operating
losses, the proceeds from these Offerings plus cash on hand will not be
sufficient to make all of the investments in the full amounts set forth below.
To fully fund its anticipated future investments, the Company will be required
to find additional sources of capital. Although the Company currently
anticipates funding the amounts set forth below, there can be no assurance that
the Company's investments will not vary significantly from the currently
anticipated amounts. In particular, it may be necessary for the Company to make
additional capital contributions to the operating companies and developmental
stage projects. See "Risk Factors--Company Level Risks--Negative Operating Cash
Flow; Dependence on Additional Capital Financing; No Commitments for Additional
Financing; Broad Management Discretion in Use of Proceeds."
<TABLE>
<CAPTION>
REMAINING
ANTICIPATED
ADDITIONAL
TOTAL ANTICIPATED COMPANY
COMPANY INVESTMENT
INVESTMENT COMPANY INVESTMENT AS THROUGH DECEMBER
THROUGH OF 31,
TYPE OF PROJECT DECEMBER 31, 1997(1) DECEMBER 31, 1996(1) 1997
--------------------- ----------------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
OPERATING COMPANY (LOCATION) (IN MILLIONS)
- ----------------------------------------
Via 1 (Brazil)...................... Regional ECTR $ 27.9 $ 17.9 $ 10.0
SDL (China)......................... Regional Cellular 48.0 20.0 28.0
RPSL (India)........................ Regional Paging 3.5 1.4 2.1
Mobilsel (Indonesia)................ National Cellular 34.1 34.1 0.0
Mobilkom (Indonesia)................ National ECTR 1.5 1.5 0.0
STW (Malaysia)...................... National WLL 26.2 23.4 2.8
Mobilcom Mexico (Mexico)............ Regional ECTR 2.1 2.1 0.0
TeamTalk (New Zealand).............. National ECTR 20.3 13.5 6.8
UTS (Philippines)................... Regional ECTR 3.8 2.0 1.8
DEVELOPMENTAL STAGE PROJECT (LOCATION)
- ----------------------------------------
Mexico National WLL (Mexico)........ National WLL 18.5 0.0 18.5
Mobilcom Pakistan (Pakistan)........ National ECTR 12.8 5.4 7.4
PeruTel (Peru)...................... National ECTR 17.6 0.2 17.4
Protelsa Peru (Peru)................ National Paging 3.0 1.6 1.4
TMCC (Taiwan)....................... National ECTR 3.0 3.0 0.0
------- ------- -----
Total ............... $ 222.3 $ 126.1 $ 96.2
------- ------- -----
------- ------- -----
</TABLE>
- ------------------------------
(1) Includes Preferred Stock to which the Company has assigned a value of $19.1
million and $5.4 million that was issued by the Company to acquire interests
in certain operating companies and one developmental stage project,
respectively, pursuant to the Vanguard Exchange. See "Certain
Transactions--The Vanguard Exchange."
Pending use of the net proceeds from the Offerings as described above, the
Company intends to hold such proceeds in short-term investments.
The business of the Company and its operating companies and developmental
stage projects is capital intensive and will require continuing sources of
outside financing. There can be no assurance that the Company or the operating
companies or developmental stage projects will be able to obtain any such
additional financing on acceptable terms or at all. See "Risk Factors--Project
Level Risks-- Operating Losses and Negative Cash Flow; Dependence on Additional
Financing/Capital" and "--Company Level Risks--Negative Operating Cash Flow;
Dependence on Additional Financing; No Commitments for Additional Financing."
33
<PAGE>
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The Company
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 prohibits the
Company from paying dividends while the Notes are outstanding.
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company, as of
September 30, 1996 on (i) an actual basis, (ii) on a pro forma basis giving
effect to (A) the automatic conversion of all outstanding shares of Preferred
Stock to Common Stock and (B) the assumed exercise, on a cash basis, of warrants
to purchase 1,173,360 shares of Preferred Stock, as such warrants terminate upon
the closing of these Offerings, and (iii) on an as adjusted basis for the
receipt of an estimated $50 million in proceeds from the issuance and sale by
the Company of shares of Common Stock upon the closing of these Offerings. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt(1)........................................................ $ 71,623 $ 71,623 $ 71,623
Redeemable convertible preferred stock, $0.01 par value per share;
21,541,480 shares designated; 15,973,200 shares issued and outstanding,
net of note receivable from stockholder of $26, actual; none issued and
outstanding, pro forma and as adjusted................................. 102,519 -- --
Stockholders' deficit:
Convertible preferred stock, $0.01 par value per share; 1,200,000
shares designated; 933,200 shares issued and outstanding, actual;
none issued and outstanding, pro forma and as adjusted............... 9 -- --
Common stock, $0.01 par value per share; 26,000,000 shares authorized;
615,760 shares issued and outstanding, actual(1); 18,695,520 shares
issued and outstanding, pro forma(2); and shares issued and
outstanding, as adjusted............................................. 6 187 187
Additional paid-in capital(2).......................................... 31,055 140,813 190,813
Note receivable from stockholder....................................... (152) (152) (152)
Unrealized gain on investments......................................... 112 112 112
Cumulative translation adjustment...................................... 250 250 250
Accumulated deficit.................................................... (34,843) (34,843) (34,843)
----------- ----------- ------------
Total stockholders' deficit............................................ (3,563) 106,367 156,367
----------- ----------- ------------
Total capitalization............................................... $ 170,579 $ 177,990 $ 227,990
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
- ------------------------
(1) Excludes 1,922,960 shares of Common Stock issuable upon the exercise of
stock options outstanding as of September 30, 1996, pursuant to the
Company's 1996 Stock Option/Stock Issuance Plan (the "Stock Plan").
Subsequent to September 30, 1996, 20,960 options to purchase shares of
Common Stock were exercised, options to purchase 485,282 shares of Common
Stock were granted pursuant to the Stock Plan; and options to purchase 8,000
shares of Common Stock were granted to a non-employee of the Company. Also
excludes the 2,289,427 shares of Common Stock initially issuable upon the
exercise of the Unit Offering Warrants issued in the Unit Offering (such
figure is approximated as holders of the Unit Offering Warrants shall not be
entitled to fractional shares.)
(2) Pro forma and as adjusted balances include $7,411,000 from the assumed
exercise of warrants to purchase 1,173,360 shares on a cash basis. Actual
cash proceeds may be up to $4,117,000 less than this to the extent warrants
to purchase 456,360 shares are exercisable on a net basis. If such warrants
are exercised on a net basis, the number of shares issued would be reduced
accordingly.
35
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1996, was $ or $ per share of Common Stock. Net tangible book value
per share of Common Stock represents the Company's total tangible assets less
its total liabilities, divided by the pro forma aggregate number of shares of
Common Stock outstanding (after giving effect to the conversion of the Preferred
Stock into Common Stock). After giving effect to the sale by the Company of
shares of Common Stock offered hereby at an assumed initial public offering
price of $ per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses of $ , the net tangible book
value of the Company as of September 30, 1996 would have been $ , or
$ per share. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors. The following table illustrates this per
share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................... $
Pro forma net tangible book value per share before these Offerings..... $
Increase in net tangible book value per share attributable to new
investors............................................................
---------
Pro forma net tangible book value per share after the offering...........
---------
Dilution per share to new investors......................................
---------
---------
</TABLE>
The following table summarizes, as of September 30, 1996, and at an assumed
initial public offering price of $ per share (before deducting estimated
underwriting discounts and commissions and offering expenses), the differences
between existing stockholders and new investors with respect to the number of
shares purchased from the Company, the total consideration paid to the Company
and the average price per share paid by existing stockholders and by new
investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... $ $
New investors.............................
----------- ----------- ----------- ----------- --------------
Total................................. $ $
----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- --------------
</TABLE>
The above computations assume no exercise of the Underwriters'
over-allotment options and exclude 1,922,960 shares of Common Stock issuable
upon the exercise of options outstanding at September 30, 1996. To the extent
the aforementioned stock options are exercised, there will be further dilution
to new investors. See "Management--1996 Stock Option/Stock Issuance Plan,"
"Certain Transactions," and Note 10 and 13 of Notes to the Consolidated
Condensed Financial Statements.
36
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed financial
statements have been prepared by the Company's management from its historical
financial statements included in this Prospectus. The unaudited pro forma
consolidated condensed statements of operations for the year ended December 31,
1995 and the nine months ended September 30, 1996 reflect adjustments as if the
Company had acquired or merged with the entities described in the accompanying
notes as of January 1, 1995. The Unit Offering has been reflected in the
unaudited pro forma consolidated condensed statement of operations as if it had
occurred as of January 1, 1995. Acquisitions or mergers, other than the
increased ownership interest in RHP to 29.2%, have been fully reflected in the
Company's historical balance sheet as of September 30, 1996.
The unaudited pro forma consolidated condensed financial statements should
be read in conjunction with the notes included herewith, the Company's audited
consolidated financial statements and notes thereto as of December 31, 1994 and
1995 and for the three years ended December 31, 1995, the Company's unaudited
consolidated condensed financial statements as of and for the nine months ended
September 30, 1996 ("First Nine Months"), "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other financial statements
of significant 50% or less owned affiliates included elsewhere in the
Prospectus.
The unaudited pro forma consolidated condensed financial statements do not
purport to represent what the Company's results of operations or financial
position would have been had the Unit Offering or acquisitions and mergers
indicated occurred on the dates specified, or to project the Company's results
of operations or financial position for any future period or date. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable under the circumstances. In the opinion of
management, all adjustments have been made that are necessary to present fairly
the pro forma data. Actual amounts could differ from those set forth below.
37
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------------
ACQUISITION
HISTORICAL ADJUSTMENTS(1) PRO FORMA
----------- ----------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 82,766 $ (8,556)(c) $ 74,210
Accounts receivable................................................ 276 276
Notes receivable from affiliates................................... 853 853
Note receivable.................................................... 1,385 1,385
Advance to affiliate............................................... 102 102
Other current assets............................................... 1,386 1,386
----------- -------- -----------
Total current assets............................................. 86,768 (8,556) 78,212
Property and equipment, net.......................................... 11,698 11,698
Investments in affiliates............................................ 46,956 8,556(c) 55,512
Telecommunication licenses and other intangibles, net................ 17,198 17,198
License and other deposits........................................... 14,300 14,300
Debt issuance costs, net............................................. 5,891 5,891
Other assets......................................................... 664 664
----------- -------- -----------
Total assets..................................................... $ 183,475 $ -- $ 183,475
----------- -------- -----------
----------- -------- -----------
LIABILITIES, MINORITY INTEREST, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Account payable and accrued expenses............................... $ 3,496 $ 3,496
Note payable....................................................... 4,000 4,000
----------- -----------
Total current liabilities........................................ 7,496 7,496
Long-term debt....................................................... 71,623 71,623
Minority interest.................................................... 5,400 5,400
Redeemable convertible preferred stock............................... 102,519 102,519
Stockholders' deficit:
Convertible preferred stock........................................ 9 9
Common stock....................................................... 6 6
Additional paid-in capital......................................... 31,055 31,055
Note receivable from stockholder................................... (152) (152)
Unrealized gain on investments..................................... 112 112
Cumulative translation adjustment.................................. 250 250
Accumulated deficit................................................ (34,843) (34,843)
----------- -------- -----------
Total stockholders' deficit...................................... (3,563) -- (3,563)
----------- -------- -----------
Total liabilities, minority interest, redeemable convertible $ 183,475 $ -- $ 183,475
preferred stock and stockholders' deficit......................
----------- -------- -----------
----------- -------- -----------
</TABLE>
- ------------------------
(1) References in parenthetical are to Note 3 to the unaudited pro forma
consolidated condensed financial statements.
See accompanying notes on pages 40-43
to unaudited pro forma consolidated condensed financial statements.
38
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995(1)
-------------------------------------------------------------
UNIT OFFERING ACQUISITION
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenue.............. $ -- $ 369(d) $ 369
Cost of sales.................. -- 785(d) 785
------------- ------------- ------------- -------------
-- (416) (416)
Operating expenses:
General and administrative
expenses................... 6,365 1,493(d) 8,698
840(e)
Equity in (income) losses of
affiliates................. 3,756 1,521(f) 5,825
548(g)
------------- ------------- ------------- -------------
Loss from operations......... (10,121) (4,818) (14,939)
Other income (expense):
Interest income.............. 232 232
Interest expense............. (1,354) $ (16,146)(a) (18,397)
(897)(b)
Other........................ (28) (28)
------------- ------------- ------------- -------------
Net loss................... $ (11,271) $ (17,043) $ (4,818) $ (33,132)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net loss per share... (2.89)
-------------
-------------
Shares used in calculation of
pro forma net loss per
share........................ 11,460
-------------
-------------
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996(1)
-------------------------------------------------------------
UNIT OFFERING ACQUISITION
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenue.............. $ 532 $ 282(d) $ 814
Cost of sales.................. 541 338(d) 879
------------- ------------- ------------- -------------
(9) (56) (65)
Operating expenses:
General and administrative
expenses................... 10,610 589(d) 11,369
170(e)
Equity in (income) losses of
affiliates................. 5,507 300(f) 5,629
(178)(g)
------------- ------------- ------------- -------------
Loss from operations......... (16,126) (937) (17,063)
Other income (expense):
Interest income.............. 937 937
Interest expense............. (2,663) (12,645)(a) (15,961)
(653)(b)
Other........................ 1 1
------------- ------------- ------------- -------------
Net loss................... $ (17,851) $ (13,298) $ (937) $ (32,086)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net loss per share... (1.50)
-------------
-------------
Shares used in calculation of
pro forma net loss per
share........................ 21,367
-------------
-------------
</TABLE>
- ----------------------------------
(1) References in parenthetical are to Note 3 to the unaudited pro forma
consolidated condensed financial statements.
See accompanying notes on pages 40-43
to unaudited pro forma consolidated condensed financial statements.
39
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) THE UNIT OFFERING
The unaudited pro forma consolidated condensed financial statements reflect
adjustments for the Unit Offering, in which the Company sold 196,720 Units, each
consisting of a $1,000 principal amount Old Note and one Warrant initially
entitling the holder to purchase 11.638 shares of Common Stock. The Unit
Offering closed on August 15, 1996, providing total net proceeds of
approximately $94 million after deducting placement agent fees and offering
expenses. The Unit Offering has been reflected in the unaudited pro forma
consolidated condensed statements of operations as if the Unit Offering had
occurred as of January 1, 1995.
(2) THE ACQUISITIONS
The unaudited pro forma consolidated condensed financial statements reflect
adjustments for the following significant acquisitions and mergers:
STAR TELECOM OVERSEAS (CAYMAN ISLANDS) LIMITED
In August 1996, the Company funded a 70% interest in Star Telecom Overseas
(Cayman Islands) Limited ("STOL"), for a purchase price of $13,500,000. The
acquisition of STOL has been reflected in the unaudited pro forma consolidated
condensed statements of operations as if STOL had been a consolidated
majority-owned subsidiary since January 1, 1995.
TEAMTALK LIMITED
Effective April 30, 1996, the Company acquired the remaining 1,700,000
ordinary shares in TeamTalk Limited ("TeamTalk") from the other TeamTalk
shareholder for a purchase price of approximately $3,198,000. This acquisition
resulted in the Company obtaining 100% ownership in TeamTalk. The acquisition of
the remaining 50% ownership of TeamTalk has been reflected in the unaudited pro
forma consolidated condensed statements of operations as if the TeamTalk
acquisition had occurred on January 1, 1995. Prior to April 30, 1996, TeamTalk
was accounted for using the equity method.
SYARIKAT TELEFON WIRELESS (M) SDN BHD
At various times during 1995, the Company purchased ownership interests in
Syarikat Telefon Wireless (M) SDN BHD ("STW"), the Company's WLL operating
company in Malaysia, increasing its ownership percentage from 2% at the
beginning of fiscal 1995 to 30% by December 31, 1995. The investments have been
reflected in the unaudited pro forma consolidated condensed statements of
operations as if the Company's ownership had been 30% since January 1, 1995,
accounting for the investment under the equity method.
40
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS--(CONTINUED)
PT RAJASA HAZANAH PERKASA
During 1995, the Company acquired ownership interests in PT Rajasa Hazanah
Perkasa ("RHP") through which the Company owns its interest in its Indonesia
national cellular project. The initial interest acquired was 15% in March 1995,
which was then increased to 25% in October 1995. In October 1996, the Company
acquired an additional 4.2% of RHP for a purchase price of $8,556,000. These
investments have been reflected in the unaudited pro forma consolidated
condensed statements of operations as if the Company's ownership had been 29.2%
since January 1, 1995, accounting for the investment by the equity method.
MERGER WITH VANGUARD INTERNATIONAL TELECOMMUNICATIONS, INC.
On December 18, 1995, the Company consummated a merger with Vanguard
International Telecommunications, Inc. ("VIT"), a wholly owned subsidiary of
Vanguard, as described in "Certain Transactions--The Vanguard Exchange" and in
Note 4 of the Consolidated Financial Statements included elsewhere in this
Prospectus. This merger has been reflected in the unaudited pro forma
consolidated condensed statements of operations as if this merger had been
consummated on January 1, 1995.
(3) PRO FORMA ADJUSTMENTS
UNIT OFFERING ADJUSTMENTS
The unaudited pro forma consolidated condensed statements of operations give
effect to the following Unit Offering adjustments:
(a) Represents additional interest expense assuming the Unit Offering
occurred on January 1, 1995 of $16,146,000 and $12,645,000 for the year
ended December 31, 1995 and for the nine months ended September 30, 1996,
respectively, calculated using the interest method.
(b) Represents amortization of debt issuance costs assuming the Unit
Offering occurred on January 1, 1995 of $897,000 and $653,000 for the
year ended December 31, 1995 and for the nine months ended September 30,
1996, respectively, calculated using the interest method.
ACQUISITION ADJUSTMENTS
The unaudited pro forma consolidated condensed balance sheet gives effect to the
following acquisition adjustments:
(c) Represents the Company's acquisition of an additional 4.2% of RHP for a
purchase price of $8,556,000, as if the acquisition had occurred on
September 30, 1996. The adjustments reflect:
(i) the reduction of cash for the purchase price of the acquisition,
and
(ii) the recording of IWC's equity method investment in RHP for the
purchase price.
41
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS--(CONTINUED)
The unaudited pro forma consolidated condensed statements of operations give
effect to the following acquisition adjustments:
(d) Represents the results of operations of TeamTalk derived from financial
statements of TeamTalk for the following periods (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996(1)
------------------- -----------------------------
<S> <C> <C>
Operating revenues.................................... $ 369 $ 282
Cost of sales......................................... 785 338
Operating expenses.................................... 1,493 589
------- ------
Net loss.............................................. $ (1,909) $ (645)
------- ------
------- ------
</TABLE>
- ------------------------
(1) Includes the results of operations for the period from January 1,
1996 through April 30, 1996. Results of operations for the period
from May 1, 1996 through September 30, 1996 are reflected in the
historical financial statements for the six months ended September
30, 1996.
(e) Represents amortization of telecommunications licenses and other
intangibles over 20 years for consolidated subsidiaries (SRC Servicos de
Rario Comunicacaoes Ltda ("SRC") and M/S Mobilcom (Pte) Ltd. ("Mobilcom")
for periods prior to the date of their acquisition. The Company acquired
its ownership interests in SRC and Mobilcom in connection with the
Vanguard Exchange. In addition to these subsidiaries, the pro forma
financial statements also include TeamTalk and STOL as pro forma
consolidated subsidiaries. The additional amortization results from the
excess of the costs of the Company's investments in these entities over
the Company's proportionate interests in the net assets of these
entities, assuming the acquisitions had occurred on January 1, 1995. The
excess investment costs are attributed principally to telecommunication
licenses. Adjustments are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL MONTH FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
LICENSES ACQUIRED DECEMBER 31, 1995(2) SEPTEMBER 30, 1996(2)
--------- ------------ ----------------------- -----------------------------
<S> <C> <C> <C> <C>
TeamTalk................... $ 1,658 12/95(1) $ 83 $ 21
STOL....................... 3,971 8/96 198 149
SRC........................ 6,680 12/95 310 --
Mobilcom................... 5,439 12/95 249 --
--------- ----- -----
Total...................... $ 17,748 $ 840 $ 170
--------- ----- -----
--------- ----- -----
</TABLE>
- ------------------------
(1) The first allocation of $1,712,000 to telecommunication licenses for
TeamTalk occurred in December 1995 concurrent with the Vanguard
Exchange. When the Company acquired the remaining 50% ownership of
TeamTalk, effective April 30, 1996, an adjustment was made to this
amount reducing telecommunication licenses for TeamTalk to
$1,658,000.
(2) The pro forma adjustments to telecommunication license amortization
were calculated by taking the total amount of licenses amortized on a
straightline basis over 20 years and reduced by the amortization
recorded in the historical period.
(f) Represents additional amortization of the excess of the cost of the
Company's investments over its proportionate interests in the net assets
in entities accounted for by the equity method.
42
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS--(CONTINUED)
The excess investment costs are principally attributed to
telecommunication licenses and other intangibles held by the investees.
The additional amortization results from the assumption that all the
investments in the investees had been made on January 1, 1995. In
addition, an adjustment has been applied to remove TeamTalk's
amortization included in the historical financial statements, as TeamTalk
is accounted for as a consolidated subsidiary effective April 30, 1996.
Adjustments are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL MONTH FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
LICENSES ACQUIRED DECEMBER 31, 1995(3) SEPTEMBER 30, 1996(3)
--------- ------------ ---------------------- -----------------------------
<S> <C> <C> <C> <C>
STW........................ $ 17,459 1/95(1) $ 235 $ --
RHP........................ 32,236 3/95(2) 1,293 321
TeamTalk................... 1,712 12/95 (7) (21)
--------- ------- -----
Total...................... $ 65,169 $ 1,521 $ 300
--------- ------- -----
--------- ------- -----
</TABLE>
- ------------------------
(1) The Company acquired additional interests in STW at various times
during 1995 beginning in January 1995, when the Company's original
interest was 2%. The Company's interest reached 30% in August 1995.
The Company allocated the appropriate portion of the purchase price
to telecommunication licenses and other intangibles during each of
these incremental acquisitions.
(2) The Company first acquired an interest in RHP in March 1995 and
allocated the appropriate portion of the purchase price to
telecommunication licenses and other intangibles during this initial
acquisition. During the fourth quarter of 1995 and 1996, the Company
acquired additional ownership interests in RHP and allocated
additional amounts to telecommunication licenses and other
intangibles, including an allocation to RHP from the Vanguard
Exchange.
(3) The pro forma adjustments to telecommunication licenses and other
intangible amortizations were calculated by taking the total amount
of licenses amortized straightline over 20 years and reduced by the
amortization recorded in the historical period.
(g) Represents the additional equity in net losses of STW and RHP assuming
the Company's investments for current ownership interests of 30% and
29.2%, respectively, had been made on January 1, 1995. In addition, an
adjustment is required to remove the Company's equity in losses of
TeamTalk which is accounted for as a consolidated investment effective
April 30, 1996. Adjustments are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
--------------------- -----------------------------
<S> <C> <C>
STW................................................... $ 478 $ --
RHP................................................... 578 154
TeamTalk.............................................. (508) (332)
------ ------
Total................................................. $ 548 $ (178)
------ ------
------ ------
</TABLE>
43
<PAGE>
CONSOLIDATED SELECTED 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 Prospectus. The
consolidated selected financial data as of and for the years ended December 31,
1993, 1994 and 1995 are derived from, and qualified by reference to, such
financial statements, which have been audited by KPMG Peat Marwick LLP,
independent public accountants, whose report indicated a reliance on other
auditors relative to certain amounts relating to the Company's investment in RHP
as of and for the year ended December 31, 1995. The audited financial statements
of RHP as of and for the year ended December 31, 1995, together with the
independent auditors' report thereon, are included elsewhere in this Prospectus.
The consolidated selected financial data as of and for the year ended December
31, 1992 were derived from financial statements which have been audited by other
auditors. The Company was incorporated in January 1992. The consolidated
selected financial data as of September 30, 1996 and for the nine months ended
September 30, 1995 and 1996 are derived from unaudited financial statements
prepared by the Company that, in the opinion of management, reflect all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial data for such periods and as of such date. Operating
results for the nine months ended September 30, 1996 are not necessarily
indicative of the results to be expected for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ----------------------
1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue....................... $ -- $ -- $ -- $ -- $ -- $ 532
Cost of sales........................... -- -- -- -- -- 541
--------- --------- --------- --------- --------- ----------
-- -- -- -- -- (9)
Operating expenses:
General and administrative expenses... 169 809 2,481 6,365 3,565 10,610
Equity in losses of affiliates........ -- -- -- 3,756 1,171 5,507
--------- --------- --------- --------- --------- ----------
Loss from operations................ (169) (809) (2,481) (10,121) (4,736) (16,126)
Other income (expense):
Interest income....................... 5 2 106 232 130 937
Interest expense...................... -- (33) (115) (1,354) (785) (2,663)
Other expense......................... -- (1) (13) (28) (10) 1
--------- --------- --------- --------- --------- ----------
Net loss............................ $ (164) $ (841) $ (2,503) $ (11,271) $ (5,401) $ (17,851)
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
Pro forma net loss per share............ $ (0.98) $ (0.84)
--------- ----------
--------- ----------
Shares used in calculation of pro forma
net loss per share(1)................. 11,460 21,367
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- SEPTEMBER 30, 1996
1992 1993 1994 1995 1996 AS ADJUSTED(2)
--------- --------- --------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Total current assets.................... $ 4 $ 701 $ 12,580 $ 26,851 $ 86,768 $ 144,179
Property and equipment, net............. 10 15 88 4,269 11,698 11,698
Investments in affiliates............... 322 1,723 5,427 52,280 46,956 46,956
Telecommunication licenses and other
intangibles, net...................... -- -- -- 12,106 17,198 17,198
License and other deposits.............. -- -- -- -- 14,300 14,300
Debt issuance costs, net................ -- -- -- -- 5,891 5,891
Other assets............................ 200 201 329 137 664 664
--------- --------- --------- --------- ------------- ----------------
Total assets............................ $ 536 $ 2,640 $ 18,424 $ 95,643 $ 183,475 $ 240,886
--------- --------- --------- --------- ------------- ----------------
--------- --------- --------- --------- ------------- ----------------
Total current liabilities............... $ 50 $ 2,215 $ 2,000 $ 11,557 $ 7,496 $ 7,496
Long-term debt, net..................... -- -- -- -- 71,623 71,623
Minority interest....................... -- -- -- -- 5,400 5,400
Redeemable convertible preferred
stock................................. -- -- 19,578 98,845 102,519 --
Total stockholders' equity (deficit).... 486 425 (3,154) (14,759) (3,563) 156,367
--------- --------- --------- --------- ------------- ----------------
Total liabilities, minority interest,
redeemable convertible preferred stock
and stockholders' equity (deficit).... $ 536 $ 2,640 $ 18,424 $ 95,643 $ 183,475 $ 240,886
--------- --------- --------- --------- ------------- ----------------
--------- --------- --------- --------- ------------- ----------------
</TABLE>
- ----------------------------------
(1) See note 1 to consolidated financial statements for an explanation of the
determination of the number of shares and share equivalents used in
computing per share amounts.
(2) The "as adjusted" balance sheet data gives effect to (i) the automatic
conversion of all outstanding shares of Preferred Stock to Common Stock,
(ii) the assumed exercise, on a cash basis, of warrants to purchase
1,173,360 shares of Preferred Stock, as such warrants terminate upon the
closing of these Offerings, and (iii) the receipt of the estimated net
proceeds of $50 million from these Offerings. The assets include $7,411,000
from the exercise of the warrants. Actual cash proceeds may be up to
$4,117,000 less than this amount as warrants to purchase 456,360 shares are
exercisable on a net basis. If such warrants are exercised on a net basis,
the number of shares issued would be reduced accordingly.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND OTHER PARTS OF THIS PROSPECTUS 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 IN "RISK FACTORS"
AND "BUSINESS" AS WELL AS ELSEWHERE IN THIS PROSPECTUS.
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, and paging. As of September 30, 1996, seven of these projects
had commercial operations. In addition, the Company currently has a number of
developmental stage projects in these and other countries. The Company has
minority ownership positions in many of its operating companies and
developmental stage projects, largely due to restrictions on the level of
foreign ownership under local law and, in some cases, to historical limitations
on the Company's access to capital.
As the Company generally invests in early stage projects, these projects
typically have neither cash flow nor revenue to support operating costs, working
capital and capital expenditures. In addition, to the extent that such projects
generate positive cash flow, the continuing capital investment required to
satisfy the growth requirements often encountered in such wireless
communications companies, as well as increasing operating expenses and working
capital requirements, typically results in little or no excess funds being
available for distribution to stockholders. As a result, the Company does not
expect its operating companies or developmental stage projects to pay any cash
dividends or other cash distributions for the foreseeable future. Therefore, the
ability of the Company to meet its operating expenses, other cash needs and to
make additional investments will be dependent upon its ability to raise funds 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
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The Company's net loss increased from $5.4 million for the nine month period
ended September 30, 1995 to $17.9 million for the corresponding period in 1996,
an increase of 231%. The increase was due primarily to higher general and
administrative expenses, increase in equity in losses of affiliates and an
increase in interest expense, as more fully described below.
The Company recorded no operating revenues and cost of revenues for the nine
month period ended September 30, 1995 compared to $532,000 in operating
revenues, offset by $541,000 in cost of revenues, for the corresponding period
in 1996. The operating revenues and cost of revenues for the nine month period
ended September 30, 1996 resulted from the acquisition, effective April 30,
1996, of
45
<PAGE>
the remaining 50% of TeamTalk, which increased the Company's equity interest in
TeamTalk to 100%, and the resulting consolidation of TeamTalk's operations in
the Company's financial statements.
General and administrative expenses increased from $3.6 million for the nine
month period ended September 30, 1995 to $10.6 million for the corresponding
period in 1996, an increase of 198%. The increase was primarily due to increase
in salary and travel expenses and consulting fees that reflect the overall
growth in the Company's business.
General and administrative expenses for the nine month period ended
September 30, 1996 includes (i) $876,000 and $2.2 million of general and
administrative expenses associated with the consolidation of the operations of
TeamTalk and SRC, respectively, in the Company's financial statements and (ii)
$475,000 due to the amortization of telecommunication licenses of the Company's
consolidated subsidiaries. There was no material amortization of
telecommunication licenses for consolidated subsidiaries during the
corresponding nine month period in 1995.
Equity in losses of affiliates increased from $1.2 million for the nine
month period ended September 30, 1995 to $5.5 million for the corresponding
period in 1996, an increase of 370%. Equity in losses of affiliates for the nine
month period ended September 30, 1996 consisted of $647,000 of operating losses
and $524,000 of expense relating to the amortization of telecommunication
licenses. For the corresponding period in 1996, equity in losses of affiliates
consisted of $3.6 million of operating losses and $1.9 million of expense
relating to amortization of telecommunication licenses.
The increase in operating losses for the nine month period ended September
30, 1996 compared to the corresponding period in 1995 reflects an increase in
the underlying operating losses of STW and RHP. In 1995 and the first half of
1996, STW had increased operating losses due to the expansion of its operations.
Operating revenues during such period remained minimal, however, due to the
efforts of the Malaysian government to consolidate the Malaysian
telecommunication industry. Further, RHP's majority-owned subsidiary, Mobisel,
incurred increased operating losses due primarily to the expansion of its sales
and administrative operations.
The increase in expense relating to amortization of telecommunication
licenses for the nine month period ended September 30, 1996 compared to the
corresponding period in 1995 was primarily due to the amortization of RHP's
telecommunication licenses, which was minimal in 1995 and $1 million for the
nine month period ended September 30, 1996.
The Company's interest income increased from $130,000 for the first nine
months of 1995 to $937,000 for the corresponding period in 1996, an increase of
621%. This increase was due primarily to interest earned as a result of the
investment of the proceeds from the sale and issuance of shares of the Company's
Preferred Stock in late 1995 and from the Unit Offering in interest-bearing
government securities.
The Company's interest expense increased from $785,000 for the first nine
months of 1995 to $2.7 million for the corresponding period in 1996, an increase
of 239%. The increase in interest expense was primarily due to interest expense
associated with the Unit Offering, which was consummated in August 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company's net loss increased from $2.5 million for 1994 to $11.3 million
for 1995, an increase of 350%. As the Company did not have any revenues during
either year, the increase was caused by higher general and administrative
expenses, greater debt service costs and an increase in equity in losses of
affiliates.
General and administrative expenses increased from $2.5 million for 1994 to
$6.4 million for 1995, an increase of 157%. This was primarily due to expanded
business development activities with a
46
<PAGE>
resultant 151% increase in salary expense from $661,000 to $1.7 million, a 351%
increase in consultants fees 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 line with the growth in the
business activities.
Equity in losses of affiliates was $3.8 million for 1995. These losses
represent $2.8 million of operating losses and $966,000 of amortization expenses
relating to the amortization of telecommunication licenses. STW had expanded its
business activities during 1995 and invested substantial resources in the
network asset buildout. As a result significant increases in general and
administrative expenses and depreciation costs were incurred by STW in 1995.
This increased the equity in losses of affiliates by $1.9 million, represented
by operating losses of $1.3 million and amortization expense of
telecommunication licenses of $638,000. During 1995, RHP experienced a
substantial decrease in operating revenues due to increased competition,
changing market forces affecting the price of handsets and the transfer of
certain assets and customers of RHP to PT Telkom, the national Indonesian
telephone company. RHP's operating losses were consistent with the prior year,
although the Company had no investment in this entity during 1994. RHP increased
the equity in losses of affiliates by $1.3 million, comprising $1.0 million in
operating losses and $319,000 of amortization expense of telecommunication
licenses. During 1994, the Company had no material investments accounted for
under the equity method. For further financial information, reference to the
attached financial statements is recommended.
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 the year as a result of the issuance of Preferred Stock by
the Company.
Interest expense increased from $115,000 in 1994 to $1.4 million in 1995.
This was primarily due to increased financing activity during the year.
YEARS ENDED DECEMBER 31, 1994 AND 1993
The Company's net loss increased from $841,000 for 1993 to $2.5 million for
1994, an increase of 198%. This was primarily due to increases in general and
administrative costs of the Company, as a development stage enterprise, had no
operating revenue during either year.
General and administrative expenses increased from $809,000 for 1993 to $2.5
million for 1994, an increase of 207%. This was primarily due to an increase in
staff from six people at year end 1993 to nine people at year end 1994 and a
resulting increase in staff related costs such as travel and similar expenses.
Interest income increased from $2,000 for 1993 to $106,000 for 1994. This
was due to the increase in the Company's average cash balances over the year as
a result of the issuance of $18.5 million of Preferred Stock during 1994.
Interest expense increased from $33,000 for 1993 to $115,000 for 1994, an
increase of 248%, due to an increase in notes payable outstanding during 1994.
IMPACT OF INFLATION AND CURRENCY FLUCTUATION
Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain developing countries and could have an adverse effect on the operating
companies and developmental stage projects of the Company in those countries,
including an adverse effect on their ability to obtain financing.
The value of the Company's investment in its operating companies and
developmental stage projects is partially a function of the currency exchange
rate between the U.S. dollar and the applicable
47
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local currency. The operating companies will report their results of operations
in the local currency, except those entities that operate in a hyperinflationary
economy such as the Brazilian operating entity. This entity reports its
functional currency as U.S. dollars. The Company's results of operations will be
affected by fluctuations in currency exchange rates between those currencies and
U.S. dollars. In general, the Company does not hedge against foreign currency
exchange rate risks. As a result, the Company may experience economic loss with
respect to its investments and volatility in its results of operations solely as
a result of currency exchange rate fluctuations.
To the extent that the operating companies commence, or have commenced,
commercial operations, any revenues they generate will generally be received by
the operating companies in the local currency. By contrast, many significant
liabilities of the operating companies (such as liabilities for the financing of
telecommunications equipment) may be payable in U.S. dollars or in currencies
other than the local currency. As a result, any devaluation in the local
currency relative to the currencies in which such liabilities are payable could
have a material adverse effect on the Company. The primary foreign currency to
which the Company is exposed is the Indonesian Rupiah. As discussed in more
detail later, Mobisel, the Company's national cellular operating company in
Indonesia, has incurred U.S. dollar debt through its credit facility with Nissho
Iwai International (Singapore) Pte., Ltd. ("Nissho Iwai"). Further, it is
anticipated that substantial additional U.S. dollar debt will be sought to fund
future capital expenditures of Mobisel. Revenues to repay such U.S. dollar debt
will be denominated in the Indonesian Rupiah, the local Indonesian currency.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its cash requirements primarily using the
net proceeds from a series of Preferred Stock private placements, bridge loans
and the Unit Offering. The bridge loans have generally been converted into
Preferred Stock. The proceeds from these financings were mainly used to fund the
Company's investments in operating companies and developmental stage projects,
to provide working capital and for general corporate purposes, including the
expenses incurred in seeking and evaluating new investment opportunities. As of
December 31, 1995 and September 30, 1996, the Company had cash balances of $25.4
million and $82.8 million, respectively.
The Company has generated negative cash flow from operations for each of the
last three fiscal years and for the nine months ended September 30, 1996, and
its operating companies and developmental stage projects are not expected to
provide any cash to the Company for the foreseeable future. As a result, the
Company is and will remain dependent upon raising funds from outside sources to
fund its working capital needs, investments in operating companies and
developmental stage projects and other cash requirements and to repay the
Exchange Notes and any other indebtedness it may incur when it becomes due and
payable.
The Company will require additional financing prior to December 31, 1997 to
meet currently anticipated investments in its operating companies and
developmental stage projects. The Company has no commitments or arrangements for
additional financing, and there can be no assurance that this additional
financing will be available to the Company on acceptable terms when required by
the Company or at all. The Company's inability to obtain such additional
financing on acceptable terms would have a material adverse effect on the
Company. In addition, the Company intends to pursue additional investment
opportunities for wireless communications projects and will require additional
sources of financing in order to pursue those investments. However, there can be
no assurance that such additional financing will be available on favorable terms
or at all. See "Risks Factors--Company Level Risks--Negative Operating Cash
Flow; Dependence on Additional Financing; No Commitments for Additional
Financing."
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<PAGE>
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 September 30, 1996, approximately $20.2 million was outstanding
under this facility. The Company anticipates that the current $50.0 million
facility will be sufficient for Mobilkom to meet all of its currently
anticipated expenditures through 1997. Borrowings outstanding under this credit
facility must be repaid in 16 quarterly installments commencing in 2000.
Mobisel, the Company's national cellular operating company in Indonesia in
which the Company holds an indirect 20.4% interest through RHP, has obtained a
$60.0 million credit facility from Nissho Iwai. 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.
Accordingly, Mobisel has commenced discussions with a number of potential
financing sources in order to obtain additional financing. Borrowings
outstanding under this credit facility must be repaid in six equal semi-annual
installments beginning in late 1998.
STW, the Company's national WLL operating company in Malaysia, has arranged
a Ringgit 91.0 million (approximately $36.4 million as of September 30, 1996)
credit facility through a syndicate of Malaysian banks. This facility is secured
by substantially all of STW's assets and a pledge of all of the capital stock of
STW held by the Company and STW's other shareholders, and has been guaranteed by
Shubila Holding SDN BHD, the 60% owner of STW, and certain directors of STW
(including an officer of the Company). In addition, STW has agreed to assign to
and deposit with the banks all of its cash, including revenues, loan drawings
and shareholder advances. In addition to pledging their capital stock in STW,
the Company and the other STW shareholders have entered into a "keep well"
covenant pursuant to which they have agreed (i) to 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 September 30, 1996,
this facility was fully drawn and it is the intention of the Company and its
partners to seek additional third party debt financing to fund continued
expansion of STW's network and to refinance outstanding indebtedness under the
credit facility. See "Business--Operating Companies" and Note 7 of Notes to
Consolidated Financial Statements for additional information regarding the
credit facilities of STW, Mobisel and Mobilkom.
The business of the operating companies and developmental stage projects is
capital intensive and will require continuing sources of outside financing to
fund their working capital needs, capital expenditures and other cash
requirements. In particular, STW and Mobisel will require substantial additional
financing in order to complete planned capital expenditures. However, there can
be no assurance that the operating companies and the developmental stage
projects will be able to obtain required additional financing on acceptable
terms or at all, which could have a material adverse effect on the Company. In
addition, there can be no assurance that the operating companies or
developmental stage projects will be able to pay their indebtedness or other
liabilities when due. See "Risk Factors--Project Level Risks-- Operating Losses
and Negative Cash Flow; Dependence on Additional Financing/Capital."
49
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BUSINESS
BACKGROUND
The Company is a leading developer, owner and operator of wireless
communications companies and projects in emerging markets in Asia and Latin
America. These companies and projects provide or are developing a variety of
wireless communications services, including cellular telephone, WLL, 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 585 million
POPs which, based on the Company's equity interests in these operating
companies, represented an estimated 205 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 136,700
subscribers.
DEMAND FOR COMMUNICATIONS SERVICES IN DEVELOPING COUNTRIES
Many countries in Asia and Latin America are experiencing rapid economic
growth, but are hindered by inadequate telecommunications services. The Company
believes that businesses in particular are demanding better services to improve
competitiveness and are seeking cost-effective mobile communications services to
enhance their operations. The following table sets forth certain information
with respect to the countries in which the Company's operating companies and
developmental stage projects are located, together with comparative information
for the United States.
<TABLE>
<CAPTION>
WAITING TIME
POPULATION REAL GDP FOR
GROWTH YEAR GROWTH INSTALLATION CELLULAR
ENDED GDP PER YEAR ENDED TELEPHONE OF LAND-LINE PENETRATION
POPULATION DECEMBER 31, CAPITA DECEMBER 31, LINES PER TELEPHONE (% OF
(MM)(1) 1995(1) (US$)(1) 1995(1) 100 POPS(2) (YEARS)(3) POPS)(2)
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASIA-PACIFIC
China................. 1,215.4 1.2% $ 541 9.9% 2.3 0.3 0.30%
India................. 930.8 1.8% 360 5.6% 1.0 1.9 0.01%
Indonesia............. 195.3 1.6% 1,025 7.3% 1.2 0.3 0.09%
Malaysia.............. 20.0 2.4% 4,261 9.5% 14.5 0.3 4.77%
New Zealand........... 3.5 1.1% 16,518 2.5% 48.7 0.0 8.35%
Pakistan.............. 130.1 2.9% 484 4.5% 1.6 1.1 0.04%
Philippines........... 68.6 2.2% 1,080 5.0% 1.5 5.5 0.52%
Taiwan................ 21.3 0.9% 12,485 6.1% 39.5 --(4) 3.63%
Thailand.............. 60.2 1.4% 2,751 8.5% 4.6 4.0 2.26%
LATIN AMERICA
Brazil................ 156.9 2.0% $ 4,316 4.2% 7.4 0.9 0.81%
Mexico................ 94.8 1.9% 2,634 (6.9)% 9.2 0.2 0.77%
Peru.................. 23.8 2.0% 2,640 6.6% 3.3 4.3 0.31%
UNITED STATES......... 263.6 1.0% $ 27,490 2.0% 59.4 0.0 12.79%
</TABLE>
- --------------------------
(1) Source: DRI/McGraw-Hill World Markets Executive Overview, Second Quarter
1996. The DRI/McGraw-Hill data are for 1995. "GDP Per Capita" means gross
domestic product per person and "Real GDP Growth" means growth in gross
domestic product after adjustment for inflation during the relevant
measurement period.
(2) Source: MTA-EMCI World Cellular Markets: 1996. Telephone lines per 100 POPs
is from 1994 and cellular penetration is from 1995. "Cellular Penetration"
means the number of cellular subscribers as a percentage of the total
population.
(3) Source: MTA-EMCI Wireless Local Loop: Opportunities in the Global
Marketplace (Volume 2), March 1996. Data are from 1994.
(4) Data not available.
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To address the growing demand for communications services and promote
economic growth, governments in many developing countries have begun
deregulating their telecommunications industries. In some developing countries,
governments are beginning to privatize national carriers and encourage the
formation of private communications competitors. As a result, the Company
believes there is a substantial opportunity for privately-owned companies to
provide wireless communications services in these countries.
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. WLL operates in the same way as a
regular telephone, with the added possibility of wide area "cordless telephone"
use. WLL networks are generally quicker to install and less expensive than
current land-line systems.
ENHANCED CAPACITY TRUNKED RADIO. ECTR combines attributes of cellular and
dispatch radio (e.g. emergency dispatch) to provide 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 MODEL
The Company typically plays an active role in the formation, development,
management and operation of its operating companies and developmental stage
projects. Once a wireless communications opportunity is identified, the Company
typically joins with local and strategic partners to develop the project. In
some cases the Company's local partners have previously been granted
telecommunications licenses. In addition, the Company and its partners may seek
to obtain initial or additional licenses
51
<PAGE>
through private negotiations rather than through competitive bidding. As the
cost of competitively awarded licenses, particularly cellular licenses, has
increased, the Company believes that wireless communications services based on
alternative technologies and privately negotiated licenses generally have a
pricing advantage.
The Company provides its operating companies and developmental stage
projects with a range of management services. These services often include:
- Defining license needs, preparing, submitting and monitoring license
applications and negotiating the acquisition of additional licenses.
- Seconding one or more of its own employees to a particular operating
company to provide initial and/or ongoing management support.
- Selecting equipment and negotiating with equipment manufacturers and
suppliers.
- Planning the network for the project, either by a team under the Company's
direction or with the equipment manufacturer for the project.
- Arranging debt and equity financing at the project level.
- Developing and implementing core marketing, customer service and terminal
distribution and support plans.
- Training project personnel, normally at the facilities of one of the
Company's strategic partners such as Vanguard.
BUSINESS STRATEGY
The Company's principal business objective is to become a pre-eminent
provider of wireless communications services in selected developing countries.
Key elements of the Company's strategy for achieving this objective include:
DEVELOP LONG-TERM RELATIONSHIPS WITH STRONG LOCAL PARTNERS. The Company
seeks to develop long-term relationships with financially strong and
strategically well-positioned local partners. These partners often own or have
access to an existing telecommunications asset base (such as cell sites and
microwave 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.
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<PAGE>
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 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 key decisions at the
operating company or developmental stage project level, including approval of
operating budgets, business plans and major corporate transactions, even though
the Company may own less than 50% of the equity of the operating company or
developmental stage project.
PROMOTE FLEXIBLE MANAGEMENT STRUCTURE. The Company relies heavily on local
country managers to develop existing operating companies and identify new
wireless communications opportunities. These managers are often natives of the
local country with significant managerial and operating experience. Although
Company employees, they typically serve as senior executives of operating
companies. They are supported by a corporate staff located primarily in the
United States with extensive experience in wireless communications and
international operations. The Company believes that the use of local country
managers, supported by the Company's experienced corporate staff, allows it to
rapidly and effectively respond to operational matters, develop and maintain
close working relationships with local partners and quickly capitalize on
wireless communications opportunities as they arise.
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. Haynes G. Griffin, Chairman of the Board of Directors of the Company,
is President, Chief Executive Officer and a director of Vanguard. See
"Management--Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions."
53
<PAGE>
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 STW, the Company's 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 partner in SDL, the
Company's China Regional Cellular operating company and STOL, through which the
Company holds its interest in RPSL, 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.
OPERATING COMPANIES
Unless otherwise indicated, information set forth below regarding POPs,
population growth, GDP per capita, and GDP growth is from 1995, data regarding
POPs covered by licenses is based on POPs data from 1995 (or in certain cases
estimates provided by the operating companies) and licenses held as of 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 "Business--Background--Demand for
Communication Services in Developing Countries."
For a discussion of the risks associated with the ownership and operation of
the operating companies, see "Risk Factors--Project Level Risks."
BRAZIL REGIONAL ECTR
Pursuant to an agreement with RBS, and following fulfillment of certain
regulatory and corporate requirements, the Company will obtain a 65.1% equity
interest in Via 1 a company formed by RBS as the vehicle through which they and
the Company would provide ECTR services in the major cities in Southern and
Central Brazil. The Company, indirectly through its wholly owned subsidiary
Servicos de Rario Comunicacoes Ltda. ("SRC"), holds licenses covering 140
channels in the 800 MHz frequency band while RBS, through six companies, holds
licenses covering a further 545 channels in the same frequency band. RBS has
contributed the companies through which it holds its licenses to Via 1 and it is
the intention of the Company that SRC would also be contributed to Via 1. SRC's
assets consist primarily of licenses and fixed assets. Grupo Arbi, a Brazilian
industrial and financial group ("Arbi") has agreed to participate as an equity
partner in Via 1 by contributing the use of its licenses for 125 channels in the
800 MHz frequency band to Via 1 and, pending consummation of this transaction,
Arbi has allowed Via 1 to construct, manage and operate its licenses.
In anticipation of the formation of Via 1 and 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 of Via 1. Hereinafter, the
pre-incorporation operations of Via 1 are referred to as the Via 1 project. Via
1 subsequently commenced, or are in the process of commencing, operations in an
additional fifteen cities in Brazil. 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
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<PAGE>
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 highest
real GDP in Latin America. In addition, since 1991 Brazil has experienced a
significant increase in international trade due to steady economic growth and
structural economic reforms, including the implementation of a successful
anti-inflation plan, and a free-trade and customs union with Argentina, Uruguay
and Paraguay ("Mercosur"), which Chile recently joined as a free trade partner.
The Company believes that there is a significant unmet demand for telephone
services as evidenced by only 7.4 lines per 100 POPs in 1994. In addition, with
the exception of ECTR licenses, the government has not to date issued licenses
for cellular systems to private operators, although the award, through auction,
of such licenses is anticipated to occur in the first half of 1997. As a result,
the Company believes that Brazil is one of the most attractive countries in
Latin America for the introduction of an ECTR system. The Via 1 Licenses cover
approximately 60 million POPs.
Sales and marketing efforts will focus primarily on providing cost-effective
communications services to small- and medium-sized businesses in the local
distribution, financial services, utility and construction industries in
Southern and Central Brazil.
REGULATORY ENVIRONMENT. The Brazilian communications market is widely
regulated. Private communications licenses, except those relating to ECTR, are
restricted to operators with a majority of the voting interest held by Brazilian
shareholders. However, various reform projects to liberalize Brazil's
telecommunications market are currently being considered by the federal
government.
LOCAL STRATEGIC PARTNERS. RBS, the Company's proposed partner in Via 1, is
one of Brazil's largest media companies with operations in television and radio
broadcasting and newspaper publishing in Southern Brazil. To date, RBS has
contributed to the Via 1 Project by expediting the import of infrastructure
equipment and assisting in negotiations with governmental regulatory
authorities. Additionally, RBS owns both cell sites and large microwave
networks, which the Company anticipates Via 1 will use to carry its network
traffic. Pursuant to the 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 stockholders' 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, 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 by contributing to Via 1 all licenses
it will control at the time of the transaction and its applications for
additional licenses. The Company's contribution will be SRC, whose assets
consist principally of fixed assets and licenses.
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 licenses held by the companies that will
be contributed to Via 1 generally have terms of 15 years, with the first
licenses having been granted in 1994. These licenses, in aggregate, cover 810
channels in the 800 MHz frequency band, and applications for licenses on file
55
<PAGE>
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 an
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 additional
channels or obtain these channels at a reasonable price. Under Brazilian law,
operations must commence within one year of license grant, subject to extensions
in certain circumstances. RBS and SRC failed to meet such deadlines with respect
to several licenses. However, RBS and SRC have obtained extensions with respect
to the deadlines for these licenses and have commenced or it is expected will
commence within the extended time period. These licenses contain no restrictions
regarding the technology which may be used but, in certain cases, the licenses
have operational requirements. The continued operation of the Via 1 Project as
well as the proposed transfer of the Via 1 Licenses are subject to receipt of
certain approvals or authorizations from the Brazilian Ministry of
Communications. There can be no assurance that such approvals or authorizations
will be received. Failure to obtain such approvals could result in, among other
things, the forfeiture of some or all of the Via 1 Licenses and could have a
material adverse effect on the Company. Brazilian law allows full
interconnection with the public network. Arrangements are in place with two of
the four local exchange operators on interconnection and additional interconnect
arrangements are under negotiation with the remaining local exchange operators.
See "Risk Factors--Project Level Risks--Risk of Modification or Loss of
Licenses; Uncertainty as to the Availability, Cost and Terms of Licenses;
Restrictions on Licenses."
EXISTING OPERATIONS AND DEVELOPMENT PLAN. The Via 1 Project became
operational in July 1996 with six cell sites providing system capacity for 2,000
subscribers. Subject to the timely delivery of necessary equipment, it is
expected that by the end of 1997, Via 1 will have constructed cell sites to
cover an additional 28 cities in five states in Southern and Central Brazil
increasing system capacity to 25,000 subscribers.
Cell site transmission and switching equipment and network operations
management facilities are currently being installed in Belo Horizonte (Minas
Geiras), Campinas, Santos and Sorocaba (Sao Paulo) and Rio de Janeiro. A
combination of Uniden and Nokia infrastructure equipment is being used. As of
December 31, 1996, the operations that will comprise Via 1 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 whereby Nokia will provide 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.
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 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 $17.7 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 an additional aggregate amount of
approximately $20.1 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.
COMPETITION. Via 1's primary competition consists of cellular services
provided by local exchange carriers and three other multi-site ECTR service
providers (M-Comcast, Airlink Servicios e Comercio and Radio Mobile Digital).
The Company believes that Via 1 may have lower infrastructure and operating
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costs than many of the cellular operators and, consequently, may have a pricing
advantage over traditional cellular services. Via 1 will accordingly will seek
to market its services to small and medium-sized businesses, which it believes
are generally more cost-sensitive than the retail customers targeted by cellular
operators. The Company does not believe that Via 1 will directly compete with
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 Mobile Digital,
has focused on non-networked traditional dispatch radio business.
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 partner
in SDL, which owns the remaining 60% of SDL, is STHL, a Hong Kong company that
is one of the Company's partners in its India Regional Paging operating company
and that owns one of the largest paging and internet service providers in Hong
Kong. In addition, it is anticipated that Vanguard will also purchase a 7%
interest in SDL from STHL.
SDL is engaged in the development of various regional cellular projects in
China with its local partner, 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 Xinjiang. As of April 30, 1996, the projects had approximately 21,000
subscribers in the aggregate.
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Details of these projects are set out in tabular form below:
SUMMARIZED DESCRIPTION OF STAR DIGITEL PROJECTS
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
TOTAL PROFIT
TERM OF PROFIT/REVENUE SHARING INVESTMENT (4)(5) DISTRIBUTION
PROJECT COOPERATION ARRANGEMENTS (HK$'000) (HK$'000)
- ------------------------------ -------------------- ------------------------------ ------------------------------ --------------
<S> <C> <C> <C> <C>
Guangzhou (1) 20 years from 65.0% of revenue for first 7 72,691
(Guangdong Province) July 7, 1995 years;
47.0% thereafter
--plus--
Guangzhou Switch (1) 15 years from 100.0% of proceeds from sale 10,542
(Guangdong Province) May 20, 1994 of phone lines sold during
first four years (up to a
maximum of 3,000 lines) and
50.0% of proceeds from balance
of 3,000 lines sold
thereafter. Plus 50.0% of
revenue (ie airtime) from such
lines
------------------------------
Total: 83,233 19,669
(70.6%)
Shenzen (1) 15 years from 40.0% of revenue for first 6 38,081 2,088
(Guangdong Province) March 15, 1995 years; revenue sharing for the (100.0%)
balance of the contract to be
tied to broader provincial
agreement
Huizhou (2) 15 years from the 70.0% of net profits until SDL 22,869
(Guangdong Province) time that 1,000 recovers its investment; 50.0% (51.7%)
users are reached thereafter
Shanton (2) 15 years from the 65.0% of net profits during 19,501
(Guangdong Province) time that 1,000 the first 5 years; (15.0%)
users are reached 50.0% thereafter
Dongguan (2) 15 years from 65.0% of net profits during 3,765
(Guangdong Province) commencement first 4 years; (80.6%)
47.0% thereafter
Jinan (1) 15 years from 60.0% of revenue until SDL 23,406 1,910
(Shandong Province) January 15, 1995 recovers its investment; 40.0% (80.6%)
thereafter
Qingdao (2) 20 years from July 100.0% of revenue until SDL 25,954
(Shandong Province) 1, 1996 recovers its investment; 48.0% (0.0%)
of net profits thereafter
Hebei (3) 15 years from 100.0% of revenue until SDL 103,684
(Hebei Province) commencement recovers its investment; 30.0% (9.3%)
of net profits thereafter
Chengdu (1) 15 years from 70.0% of revenue during the 23,693 7,308
(Sichuan Province) October 15, 1996 first 5 years; 50.0% for years (10.3%)
6 through 10; and 40.0% for
the remaining 5 years
Lauzhou (1) 15 years from 70.0% of net profits for first 27,559 1,631
(Gansu Province) October 15, 1996 5 years; 50.0% for next 5 (60.3%)
years; and 35.0% thereafter
Urumqi (3) 20 years from Not yet specified 42
(Xinjiang Province) commencement (0.0%)
Haikou (3) 15 years from 60.0% of all revenues plus 58,386 0
(Hainan Province) commencement 100.0% of profit from (3.4%)
telephone sales plus roaming
revenue from outside Hainan
Kumming (3) 20 years from 60.0% of revenue throughout 717
(Yunnan Province) commencement (0.0%)
------------------------------ -------
Total: 430,890 32,606
------------------------------ -------
------------------------------ -------
1994 Distribution: 16,731
1995 Distribution: 9,774
1996 (first 6 months) 6,101
Distribution:
-------
Total: 32,606
-------
-------
</TABLE>
- ----------------------------------
(1) Project is operational.
(2) Project is under construction.
(3) Project is pre-construction.
(4) Project investments comprise the following (in HK$'000)
<TABLE>
<S> <C>
Cellular network equipment (contributed to projects).......................................... 200,594
Cellular network equipment (sold to project partners and treated in SDL's unaudited June 30,
1996 financial statements as a non-recurring long-term receivable).......................... 100,869
Ancillary equipment........................................................................... 14,253
Frequency rights and other costs.............................................................. 100,346
Project expenses.............................................................................. 14,828
---------
Total......................................................................................... 430,890
---------
---------
</TABLE>
(5) Reflects percentage of investment funded through loans from subsidiaries and
other affiliates of SDL.
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<PAGE>
MARKET OPPORTUNITY. With a population of over 1.2 billion, China is the
most populous country in the world. China has 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 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 STHL to develop
various regional cellular projects in China through SDL. STHL currently holds
the remaining 60.0% of SDL. It is anticipated that Vanguard will purchase a 7.0%
equity interest in SDL from STHL in February 1997, thereby decreasing 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 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 consist of either revenue or profit sharing arrangements
pursuant to which SDL is generally allocated a portion of the revenues or
profits collected by the PLA until SDL's development costs are reimbursed, at
which time SDL's share of revenues or profits will be reduced. Certain of these
cooperative agreements include purchase and sale agreements whereby SDL provides
network infrastructure equipment to the PLA. The cooperation agreements have
terms ranging from 10 to 20 years. SDL's percentage of revenues or profits
ranges from 40.0% 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 intends to participate in these joint ventures
by providing the financing, technical and engineering services necessary for the
construction and operation of the China Telecom Great Wall networks for a fixed
period of time under profit sharing arrangements. SDL intends initially to enter
into agreements with China Telecom Great Wall joint ventures to construct
additional networks in the provinces of Shangdong, Hebei, Guangdong and Hainan.
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 $72.0 in 1997, primarily to fund
network expansion. SDL expects to fund these capital expenditures through
project financings.
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<PAGE>
COMPETITION. The principal provider of cellular services throughout China
is MPT with an estimated cellular subscribers as of December 31, 1996
according to . 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 in to provide competition to MPT. Unicom has
entered into a number of joint ventures with various foreign parties including
. The Company believes that Unicom currently has approximately
cellular subscribers throughout these various joint ventures.
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. India is divided into 25 States and 7
Union Territories. The Company believes that top five metropolitans in India are
Greater Bombay, New Delhi (capital), Calcutta, Madras and Bangalore which
together account for almost 30 million people. India has experienced rapid
economic and significant population growth as evidenced 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 rapidly absorbed by the
expansion of new operators in the market, a maximum of four 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 $1.25 billion and a market capitalization of $0.9
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 also the largest telephone company
in the world holds the remaining 10% 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 circles in India, Indonesia,
and Thailand. STHL acquired 10.0% interest in RPSL in 1995. STHL injected its
investment of RPSL into STOL when STHL and the Company formed STOL. The Board of
Directors of STOL has approved an increase of its interest in RPSL to 19.0%,
which would increase the Company's indirect equity interest in RPSL to 13.3%.
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<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 4 operators per city or circle). RPSL holds a 10-year paging operating
license in New Delhi, Madras and Ahmadabad.
EXISTING OPERATIONS AND DEVELOPMENT PLAN. RPSL began operations in 1995,
and as of December 31, 1996, RPSL provided paging services to approximately
60,000 subscribers. RPSL has achieved an average of 46% market share in New
Delhi, Madras, and Ahmadabad 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 planed in
1997 to adopt the Flex protocol in the second channel. Since its launch of
service in May 1995, RPSL has a negligible churn rate. For the eight 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 ABC
Comm, Modi Korea, and Hutchison Max. 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 20.4% equity interest in PT Mobile Selular
Indonesia ("Mobisel"), a provider of cellular services in Indonesia through its
29.2% direct equity interest in PT Rajasa Hazanah Perkasa, an Indonesian company
("RHP") that owns 70.0% of Mobisel. Mobisel currently holds a provisional
license which covers 225 channels in the 400 MHz frequency band permitting it to
build and operate a cellular system throughout Indonesia. Mobisel commenced
operations in February 1996 after having acquired RHP's cellular operations,
which, at the time of the acquisition, had approximately 17,000 subscribers. As
of December 31, 1996 Mobisel had approximately 17,000 subscribers. For purposes
of this section, the term "Mobisel" includes RHP's cellular operations for
periods prior to their acquisition by Mobisel.
MARKET OPPORTUNITY. Mobisel's provisional license was expanded in 1995 to
cover all of Indonesia, 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 it will have a competitive advantage as a result of its technology
which it believes allows for broader geographic coverage at a lower cost than
its principal competitors. The Company estimates that this market segment
currently comprises more than 145 million POPs, the great majority of whom have
no telephone service. Although
61
<PAGE>
Mobisel anticipates that the majority of its subscribers will be located in
suburban and rural markets, it also seeks to further develop its urban market
base. Mobisel has also initiated the conversion of subscriber equipment from
mobile phones in vehicles to portable handsets. The Company believes that
portable handsets provide subscribers with increased usage opportunities.
REGULATORY ENVIRONMENT. Since the early 1990s, the Indonesian government
has been deregulating its telecommunications industry in order to improve the
quality and expand the coverage of telecommunications services. Prior to that
time, cellular operators in Indonesia were typically given licenses of short
duration (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 three principal strategic partners
in Mobisel are Telkom Indonesia and Telkom's pension fund (YDPP), which own
25.0% and 5.0% of Mobisel, respectively, PT Deltona Satya Dinamika ("DSD"),
which indirectly owns 17.5% of Mobisel through its 25% equity interest in RHP
and PT Bina Reksa Perdana ("BRP"), which indirectly owns 31.1% of Mobisel
through its 45.8% equity interest in RHP.
PROJECT BACKGROUND. In 1995, the Company invested $10.0 million in RHP, a
company formed in 1985 to provide cellular services in Indonesia. In October
1995, one of RHP's principal shareholders, Bell Atlantic, agreed to sell its
35.0% 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. Following the sale of Bell Atlantic's interest, 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%. Subject to the
receipt of certain governmental approvals, it is anticipated that RHP will issue
and sell a 3.0% equity interest in RHP to Nissho Iwai International (Singapore)
Pte., Ltd. ("Nissho Iwai"), a financial institution that has provided a credit
facility to Mobisel. Upon the consummation of such sale and issuance, the
Company's interest in RHP will be diluted to 28.3% thereby reducing the
Company's 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 April 1997. The license requires that Mobisel complete construction
of its network no later than May 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 for 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 transfered to Mobisel, which
now operates 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
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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 17,000 subscribers. For the fiscal
year ended December 31, 1995, RHP's cellular operations (later contributed to
Mobisel) realized revenues of approximately $7.3 million and cash flow from
operations of approximately $347,000. Mobisel experienced an average monthly
subscriber churn rate of 2% for the ten months ended December 31, 1996.
As of December 31, 1996 Mobisel had upgraded its system capacity to serve
approximately 50,000 subscribers by installing a new Nokia Switch and had
completed the upgrade of 32 transmitter sites and had constructed an additional
five new sites in and around Jakarta and Bandung. 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, which will increase its total sites to 154 and expand
system capacity to serve approximately 150,000 subscribers. Mobisel has selected
all of these new sites and, subject to Mobisel's obtaining financing, most of
the remaining sites are expected to be completed by the end of the first quarter
of 1997. In addition, Mobisel intends to install new telephone switching
exchanges in Jakarta, Bandung, Semarang, Surabaya and Bali. All 37 existing
transmitter sites are now fully operational.
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 $86.0 million for
1997, primarily for the construction of new transmitter sites and switching
systems which will expand geographic coverage and capacity. Mobisel will require
substantial additional financing to complete its planned capital expenditures
through 1997 and for other cash needs. Although Mobisel is seeking to obtain
such additional financing from outside sources, there can be no assurance that
it will be able to do so. In such event, Mobisel would either seek such
additional financing from its shareholders or defer or abandon portions of its
planned network development. Such deferral or abandonment could result in the
loss of Mobisel's license, which could have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
In April 1996, Mobisel has obtained a five-year $60.0 million credit
facility from Nissho Iwai to finance the construction of its network and the
purchase of subscriber terminals. Borrowings under the credit facility bear
interest at a floating rate based on LIBOR and are secured by all of Mobisel's
assets and a pledge of all the capital stock held by RHP. RHP has also
guaranteed the credit facility. In addition, Mobisel has agreed to assign to and
deposit with Nissho Iwai all of its cash, including revenues, loan drawings and
shareholders' advances. Borrowings under Mobisel's credit facility with Nissho
Iwai are limited to funds necessary for the construction of its network. As of
December 31, 1996, borrowings of approximately $60.0 million were outstanding
under this facility.
COMPETITION. Mobisel's primary competitors in the Indonesian
telecommunications market are PT Komselindo, PT Satelit Palapa Indonesia,
Telecomcell and Excelcomindo. The Ministry of Tourism, Post and
Telecommunications regulates tariffs, and, as a result, competition is limited
to marketing and
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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.
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 over 200 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, a Thai telecommunications company with operations throughout Asia, PT
Inka, an Indonesian telecommunications and engineering company, and Telekomindo,
a 40% owned investment subsidiary of the national telephone company of
Indonesia. The remaining 60% of Telekomindo is owned by Rajawali Group, a
private Indonesian entity. Jasmine, PT Inka and Telekomindo own 56.25%, 15% and
5% of Mobilkom, respectively.
Jasmine, directly and through its relationships throughout Asia, provides
Mobilkom with valuable technical, financial and strategic support. Mobilkom has
entered into a management agreement with Jasmine for the planning, construction
and implementation of the network and billing system. PT Inka provides Mobilkom
with microwave transmission system engineering support.
PROJECT BACKGROUND. In December 1991, the Company, through NZW, entered
into a joint venture agreement with several Indonesian telecommunications
companies, including Telekomindo, to develop a national ECTR system in
Indonesia. In June 1994, Jasmine acquired a 61.25% ownership interest in
Mobilkom and subsequently sold 5% of such interest to GS Capital Partners, an
affiliate of Goldman, Sachs & Co., in February 1995.
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LICENSE AND INTERCONNECTION. Mobilkom currently owns a five-year national
license issued February 28, 1995, covering over 200 channels in the 400 MHz
frequency band. Under the terms of the license, Mobilkom may request extension
of the license beyond the initial five-year term. The license has no
restrictions on capacity, type of technology Mobilkom may use, and covers over
an estimated 195 million POPs. Mobilkom's ECTR network currently has limited
interconnection with Telkom Indonesia, the state-owned telephone company;
however, no written interconnection agreement currently exists and any
termination of these interconnection arrangements by Telkom Indonesia would have
a material adverse effect on Mobilkom.
EXISTING OPERATIONS AND DEVELOPMENT PLAN. Mobilkom's ECTR system is
operational in the three largest cities of Java, including Jakarta. Mobilkom
began selling its ECTR services in June 1995 and, as of December 31, 1996, had
approximately 4,000 subscribers. For the fiscal year ended December 31, 1995,
Mobilkom realized revenues of $82,000 while cash flow from operations was a
deficit of approximately $3.5 million. Mobilkom experienced an average monthly
subscriber churn rate of less than 1% for the nine months ended September
30,1996.
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.
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 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
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national license to provide wireless telecommunications services in Malaysia. As
of December 31, 1996, STW served approximately 5,000 subscribers.
MARKET OPPORTUNITY. Malaysia is one of the fastest growing countries in the
Asia-Pacific region. Malaysia has experienced rapid economic development and
significant population growth, as evidenced by real GDP and population growth
rates of 9.5% and 2.4%, respectively, for the year ended December 31, 1995. With
approximately 14.5 telephone lines per 100 POPs in 1994, rapid growth of
businesses and international trade and a large and increasingly affluent
population, the Company believes Malaysia has a large unmet demand for
communications services.
The Malaysian government has announced a national telecommunications plan
which includes an objective to increase the country's telephone network from
approximately 2.8 million lines in 1994 to 9 million lines by the year 2000.
Based on conversations with the Malaysian Economic Planning Unit, STW believes
that Telekom Malaysia Berhad ("Telekom"), the national telephone company, will
not be able to provide more than 6 million lines by the year 2000, resulting in
a shortfall of approximately 3 million lines.
STW's sales and marketing efforts focus on this anticipated shortfall of
approximately 3 million telephone lines, primarily by pursuing opportunities
with businesses and housing developments in the growing suburban markets, which
the Company believes are not adequately served by Telekom. STW estimates that
the suburban markets currently cover more than 15 million POPs and expects
further growth in this market segment. In addition, STW is also targeting small-
to medium-sized businesses which require additional telephone lines to satisfy
their communication needs, including facsimile, data and additional voice lines,
which STW believes are not being adequately served by Telekom.
REGULATORY ENVIRONMENT. In an effort to meet the goal of 9 million lines by
the year 2000, the Malaysian government has begun permitting private companies
to provide wireless communications service. However, in an apparent reversal of
its prior policies, in early 1996, the government announced a program designed
to consolidate the telecommunications industry in Malaysia into a limited number
of telecommunications companies. Pursuant to this program, the government
undertook efforts to cause the sale of STW to one of such surviving
telecommunications companies. STW resisted these efforts and, in July 1996, the
Malaysian government announced that it did not intend to proceed with this
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 "Risk Factors--Project Level Risks--Risks Inherent In Foreign
Investment."
In addition, during the time that the Malaysian government was proceeding
with its consolidation program, the government denied STW certain microwave
frequencies necessary for linking STW's radio base stations and switches. Also,
Telekom denied STW interconnection in certain regions not previously covered by
STW, which prevented STW from adding new subscribers in such regions. Since the
Malaysian government announced its intention not to proceed with the
consolidation program, it has granted STW such microwave frequencies, and
Telekom has begun the process of providing interconnection capability in such
regions. However, there can be no assurance that the Malaysian government will
continue to grant additional microwave frequencies or that Telekom will not
impede interconnection in the future, either of which could have a material
adverse effect on STW.
Moreover, the Malaysian government has continued a number of other
restrictive policies, including a moratorium on further licensing of private
communications operators, a deferral on equal access (which allows a telephone
subscriber of one company to make domestic long-distance and international calls
through another telephone company) until 1999 and a limitation on foreign
investment in Malaysian telecommunication companies to no more than a 30% equity
interest. In addition, the Malaysian government continues to regulate tariffs.
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LOCAL STRATEGIC PARTNER. The Company's principal strategic partner in STW
is 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, an entity controlled by certain
private individuals.
PROJECT BACKGROUND. The Company began efforts to develop a WLL project in
Malaysia in 1993. In 1994, the Company and its local strategic partners acquired
STW, provided additional capital and obtained a national telecommunications
license. In March 1996, the Company entered into a shareholders' agreement with
its partners, pursuant to which the Company increased its interest in STW to
30%.
LICENSE AND INTERCONNECTION. STW's national wireless license was the second
such license awarded in Malaysia. STW believes that its license currently allows
it to provide a wide variety of communication services, including cellular, WLL
and long distance. The license has a term of 20 years and expires in 2014, at
which time STW will be required to seek governmental approval to renew the
license. The license does not restrict the type of technology STW may use, nor
does it contain any requirements regarding construction of the wireless
networks. The license allows for an unlimited number of subscribers. STW has
been granted authorization to utilize 4-8 MHz of spectrum in the 800 MHz
frequency band to provide WLL services in various parts of Malaysia and has
submitted applications for additional spectrum.
STW has entered into an interconnect agreement with Telekom which permits
STW's wireless systems to be connected to Telekom's national telephone network.
Pursuant to this agreement, STW has the right to retain a substantial share of
local, long distance and international calling revenues generated by STW's
subscribers as well as a portion of the revenues generated by calls terminated
on STW's network which originated on Telekom's network. The interconnect
agreement provides for national coverage and expires in August 1997. Although
STW believes that a successor interconnect agreement will be executed, any
failure by STW to obtain a successor agreement would have a material adverse
effect on STW. In addition, any successor agreement on terms less favorable to
STW than the current agreement could have a material adverse effect on STW. See
"Risk Factors--Project Level Risks--Dependence on Other Telecommunications
Providers."
EXISTING OPERATIONS AND DEVELOPMENT PLAN. For the year ended December 31,
1995, STW realized revenues of approximately $749,000 while cash flow from
operations was a deficit of approximately $4.3 million. As of December 31, 1996,
STW had approximately 5,000 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.
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 but is also evaluating various other wireless technologies. D-AMPS 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") pursuant to a $400 million contract. As of September 30, 1996,
STW had a total of 109 full-time employees.
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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 $ 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
($36.4 million) 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, including equipment purchases under
the contract with Ericsson, and for other cash needs, There can be no assurance
that STW will be able to obtain any such financing, in which case STW would be
required to defer or abandon portions of its planned network development, which
would have a material adverse effect on STW. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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 directors of STW, including Jan-Olof Conny Dolonius, an
officer of the Company, have guaranteed amounts payable under the STW Credit
Facility. Accordingly, the Company and the other STW shareholders could be
jointly and severally liable for amounts payable under the STW Credit Facility
in the event of a default by STW. In addition, each shareholder has agreed to
subordinate all amounts owing to it by STW to obligations arising under the STW
Credit Facility.
Borrowings under the STW Credit Facility bear interest at a floating rate
based on standard reference rates and are secured by substantially all of STW's
assets and a pledge of the STW stock held by the Company and STW's other
shareholders. In addition, STW has agreed to assign to and deposit with the
banks all of its cash, including revenues, loan drawings and shareholders
advances. Under the terms of the STW Credit Facility, the syndicate was granted
an option, exercisable upon the occurrence of certain events, to purchase 7.5%
of the shares held by IWC and each of the other shareholders of STW at a price
under certain circumstances, equal to 50% of the current market value at the
time of exercise. The STW Credit Agreement contains certain covenants that,
among other things, (i) prohibit STW from paying dividends or making other
distributions to its shareholders and from incurring any other indebtedness and
(ii) prohibit IWC and the other shareholders of STW from reducing their
respective stockholdings in STW without the prior written consent of the
lenders. As of December 31, 1996, the STW Credit Facility, which must be repaid
in eleven semi-annual installments commencing October 1997, was fully drawn.
STW currently has a number of trade creditors to whom payments are currently
past due. Certain of these trade creditors have notified STW that they are
considering legal action against STW for non-payment. STW's failure to resolve
this matter in a timely manner may give rise to rights in such creditors,
including the right to file an action for the winding up of STW. Further, under
the "keep well" covenant of the STW Credit Facility, IWC may be deemed liable
for the entire amount of such trade payables, which may have a material adverse
effect on IWC. Management believes that a recent capital contribution by the
shareholders of STW will provide sufficient capital to address this matter.
COMPETITION. STW's primary competitor is Telekom, which provided service to
approximately 2.9 million telephone subscribers as of December 31, 1994. In
addition, there are seven cellular providers, including three PCS operators,
providing service to approximately 950,000 subscribers. There are currently four
other licenses that can deploy WLL technology in Malaysia. Because the Malaysian
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government regulates tariffs, competition is limited to marketing and service.
STW seeks to differentiate itself from its competitors by, among other things,
its rapid deployment of service, its focus on businesses and housing
developments in the growing suburban markets and its emphasis on customer
service.
MEXICO REGIONAL ECTR PROJECT
The Company currently owns a 2.2% equity interest in Corporacion Mobilcom,
S.A. de C.V. ("Mobilcom Mexico"), a provider of trunked radio services in
Mexico. Mobilcom Mexico holds licenses covering an aggregate of over 4,300
channels in the 400 and 800 MHz frequency bands covering the major cities in
Northern and Central Mexico, including Mexico City. Mobilcom Mexico commenced
providing commercial service in July 1993 and, as of December 31, 1996, provided
service to approximately 28,000 subscribers.
MARKET OPPORTUNITY. Strong government support for privatization and the
development of competitive alternatives to Telefonos de Mexico, S.A. de C.V.
("Telmex"), the national telephone company, as well as a need for enhanced
telecommunications services, have combined to make Mexico an attractive market
for investment in communications services. According to a private Mexican market
research group, the demand for new phone lines is projected to increase to 2.2
million by the year 2000, from the approximately 1.6 million in December 1995.
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 "Risk Factors--Project Level Risks--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, 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
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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. It is
anticipated that Mobilcom Mexico will make an additional capital call on or
before March 31, 1997. The Company does not currently intend to participate in
such capital call, which will result in the dilution of the Company's interest
in Mobilcom Mexico 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%
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 was a deficit of approximately $22.5 million. For the six months
ended June 30, 1996, Mobilcom Mexico experienced an average monthly subscriber
churn rate of approximately 2.7%.
As of 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.
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
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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.
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 210 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
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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 174 channels. The licenses have a term of one year and have no
construction requirements or restrictions with respect to tariffs or the type of
technology TeamTalk may use.
In 1994, the Company and BCL entered into an agreement with Telecom New
Zealand to provide full interconnection for TeamTalk's ECTR network. Although
the agreement is assignable to TeamTalk, TeamTalk is currently negotiating, and
expects to enter into, a new interconnection agreement directly with Telecom New
Zealand.
EXISTING OPERATIONS AND DEVELOPMENT PLAN. The TeamTalk network is
operational in the major population centers throughout the North Island of New
Zealand, as well as in the city of Christchurch, the largest city on the South
Island. TeamTalk began selling its ECTR services in December 1994 and had
approximately 2,500 subscribers by December 1995. As of December 31, 1996, the
number of TeamTalk's subscribers had grown to 5,600. TeamTalk intends to seek
additional licenses allowing it to provide coverage in the major population
centers throughout New Zealand by the end of 1996, at which time TeamTalk's
network had a capacity of approximately 7,000 subscribers. For the fiscal year
ended December 31, 1995, TeamTalk realized revenues of approximately $369,000,
while cash flow from operations was a deficit of approximately $1.2 million. For
the year ended 1996, TeamTalk experienced an average monthly churn rate of
approximately 1.4%.
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 $11.8 million in TeamTalk, including the $3.2
million paid by the Company to acquire BCL's 50% interest in TeamTalk in July
1996. Prior to the sale of its interest in TeamTalk to the Company, BCL had
invested approximately $3.8 million in TeamTalk. 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.
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 provisional license covering over 300
channels in the 400 MHz frequency band permitting it to build and operate an
ECTR system in the Visayas and Mindanao regions of the country. UTS has applied
for authority to expand its service area into metropolitan Manila and other
parts of Luzon to make its present regional ECTR network nationwide in coverage.
The application has been
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evaluated on its merits by the National Telecommunications Commission and the
only remaining issue is 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 provisional authority to operate an ECTR system in eight major
cities in Visayas and Mindanao, which have a total population estimated at
greater than 27 million. The Company believes that Cebu, in the Visayas region,
is one of the fastest growing cities in the Philippines after metropolitan
Manila. Davao, in the Mindanao region, is an emerging economic center which has
received government infrastructure and development grants. The Company believes
that the other key cities covered by UTS's projects, Gen. Santos, Cagayan de
Oro, Iligan, Zamboanga, Iloilo and Bacolod, are also expanding.
UTS's sales and marketing efforts focus on businesses located in the Visayas
and Mindanao region, where it believes the need for additional
telecommunications services is significantly greater than metropolitan Manila
where the majority of the telephone lines in the Philippines are concentrated.
In Visayas and Mindanao, the teledensity is much lower than the national
average, and is currently estimated by the Company to be approximately 0.7 and
0.3 telephone lines per 100 POPs, respectively. The Company believes that there
exist significant opportunities to provide wireless communications services in
these regions. UTS will target businesses whose operations involve the use of
field personnel, field offices, fleets of vehicles, and existing PMR networks.
UTS estimates this market segment to cover more than 7,500 businesses with a
potential of more than 30,000 subscribers.
REGULATORY ENVIRONMENT. The Philippine government has recently begun
deregulating its telecommunications industry. However, the government has
continued a number of restrictive policies, including a limitation on foreign
investment in Philippine telecommunications companies to no more than a 40%
equity interest.
LOCAL STRATEGIC PARTNERS. The Company's strategic partners in UTS are 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 to 20.3%.
LICENSES AND INTERCONNECTION. UTS has received a legislative franchise and
a provisional authority to install, operate and maintain an ECTR system in eight
cities in Visayas and Mindanao. Up to 320 paired channels in the 400 MHz
frequency band are potentially available to the project. UTS recently obtained
governmental approval for a new frequency allocation within the 400 MHz
frequency band which was sought in part because of interference at the frequency
originally granted. UTS has been granted authorization to operate its regional
ECTR service in Visayas and Mindanao.
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UTS's franchise was renewed in July 1991 and it received its provisional
authority to operate its ECTR network in May 1995. The franchise has a term of
twenty-five years from the date of renewal. The provisional authority has
expired, and UTS is in the process of applying for an extension of the term of
such authority. Final authorization to operate the ECTR system, once obtained,
is expected to be co-terminous with the legislative franchise, but may be
terminated by the Philippine government under certain circumstances. UTS's
provisional authority does not contain, nor is the final authorization expected
to contain, any restriction on the type of technology UTS may use or on the
number of subscribers. Tariff rates, however, are subject to approval by local
regulatory authorities.
Interconnection among carriers is mandated by law. UTS has an
interconnection agreement with Radio Communications of the Philippines, Inc.
("RCPI") for connection to the land-line telephone system covering certain
regions of the Philippines, including Visayas and Mindanao.
The interconnection agreement is renewable on a year-to-year basis. RCPI is
owned by Bayantel, a large privately-held telecommunications company. MDC owns
10% of RCPl. 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.
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 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.
DEVELOPMENTAL STAGE PROJECTS
Unless otherwise indicated, information set forth below regarding population
and POPs, population growth, GDP per capita, and GDP growth is from 1995; data
regarding POPs covered by licenses is based on POPs data from 1995 and licenses
held as of December 31, 1996; and data regarding telephone lines per 100 POPs
and the waiting time for installation of land-line telephones is from 1994.
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Such data has been taken from the sources indicated above under
"Business--Background--Demand for Communications Services in Developing
Countries."
As indicated below, the terms of the Company's proposed investment in the
developmental stage projects, including the percentage interest to be received
by the Company, are under negotiation and are typically provided for in MOUs
rather than definitive agreements and are typically subject to compliance with
local law and receipt of necessary licenses and approvals. There can be no
assurances that such licenses and approvals will be received. The Company's
anticipated investment and interest in these projects, as well as the scope of
the projects themselves, may change and the Company may elect not to pursue one
or more of the developmental stage projects described below. See "Risk Factors--
Project Level Risks--Early Stage of Development of Wireless Projects."
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 in Mexico City to pursue a WLL business. This company expects
to receive a national WLL license within the next several months and has
developed a preliminary business plan and secured initial staffing.
The 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 elects 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 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
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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. It is anticipated, however, that the 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 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 NATIONAL ECTR
BACKGROUND. Peru has a population of 23.8 million. Peru's 1995 GDP per
capita was $2,640 and real GDP grew at a rate of approximately 6.6% during the
year ended December 31, 1995. 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 regional
cellular operator owned by the Delgado Parker Group.
The deregulation of the telecommunications industry in Peru, other than the
removal of restrictions on foreign ownership, includes the opening up of
spectrum grants to private enterprises and the reduction of import duties on
telecommunications equipment from a 1990 level of 66% to a current level
averaging approximately 16.5%.
THE PROJECT. In May 1995 PeruTel S.A. ("PeruTel") was incorporated in Lima,
Peru to apply for ECTR radio licenses in Peru. The Company owns a 98.7% interest
in PeruTel, with the remainder owned by Marmaud S.A., a Peruvian
telecommunications engineering company that is the Company's partner in its Peru
National Paging developmental stage project. In November 1995, PeruTel was
advised by the Director General of Telecommunications that, subject to certain
conditions that were subsequently satisfied, it had been awarded up to 100
channels in the 800 MHz frequency band for the provision of mobile trunked radio
communications throughout Peru.
As part of its license application, PeruTel prepared and submitted a network
design to the Ministry of Telecommunications. Currently, PeruTel is awaiting
receipt of the proposed tariff agreement from the Ministry of Telecommunications
and, once finalized, it will then have 12 months to commence construction of its
network. The Company has invested approximately $200,000 in connection with the
establishment of PeruTel to date. An additional investment of approximately
$17.6 million will be required by December 31, 1997 if PeruTel is to meet its
business plan.
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 S.A., a local telecommunications engineering company, for a purchase
price of $1.6 million. The Company's interest in Protelsa is held
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through a wholly owned Bermudian 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 has budgeted capital expenditures
of $1.4 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 quarter of 1997.
To date, the Company has funded $3.0 million to the project as a license
deposit to support the license applications. If such licenses are granted,
through a combination of direct and indirect ownership and revenue sharing
agreements, such deposit will be converted into a 20% economic interest in the
joint venture. The Company believes that, on the basis of its experience in
providing ECTR services and the quality of its local partners, it is well
positioned to receive one or more of the licenses for which it will apply,
although no assurance can be given that any such licenses will be awarded. See
"Risk Factors--Project Level Risks--Risk of Modification or Loss of Licenses;
Uncertainty as to the Availability, Cost and Terms of Licenses; Restrictions on
Licenses."
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
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construction costs and to compete against direct competitors, including those
formed by large American, Japanese and European companies, by relying on local
partners to obtain operating licenses and provide access to existing
telecommunications asset bases. There will, however, be increasing competition
for licenses; and there will be increased competition once licenses are obtained
from both other wireless operators and, in some cases, from government-owned
telephone companies. Although the Company intends to employ new technologies,
there will be a continuing competitive threat that even newer technologies will
render the wireless systems employed by certain operating companies obsolete.
There is no assurance that any of the Company's operating companies or
developmental stage projects will compete successfully in the marketplace. See
"Risk Factors--Project Level Risks-- Competition."
TECHNOLOGY
CELLULAR TELEPHONE
Cellular telephone was first commercially introduced in Sweden in 1976.
Commercial introduction in the United States occurred in 1983. Cellular services
are now broadly available in developed countries and are available or being
introduced in most developing countries around the world.
The principle of cellular telephone service is coverage of the target market
with a number of overlapping "cells" each centered on a low tower or cell site.
In its simplest configuration, a cellular telephone system consists of a series
of cell sites, each with a cellular tower. Cell sites are linked to a mobile
telephone switching office, which consists of a central computer which controls
the network, and a switch to route calls between cells and the public switched
telephone network.
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
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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.
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
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Company believes that MPT 1327 ECTR technology provides these capabilities at a
lower cost per subscriber than cellular telephone in most applications.
An added advantage of MPT 1327 ECTR is its ability to operate in numerous
frequency bands. The Company has found that this frequency flexibility makes it
easier to obtain frequency allocations to establish ECTR operations in
developing countries. Also, as MPT 1327 supports cellular calling services, the
Company has been able to obtain substantial blocks of ECTR frequency in its
project countries, and provide business cellular service, without paying the
high license fees typically paid for cellular licenses.
ECTR technologies continue to develop and evolve. The Company continually
evaluates these developments and adapts them as appropriate.
PAGING
Paging is a well-established technology, with service widely available in
most developed and developing countries. A paging system typically consists of a
number of transmitter sites, connected to a central messaging center. The
messaging center receives incoming messages from the public telephone network
and prepares batches of messages for transmission to subscribers.
Paging systems are normally based on industry standard transmission
protocols, the most common being POCSAG 512. Newer systems such as POCSAG 1200
and Motorola "Flex" provide higher capacity by using higher transmission speeds.
Two way paging systems are now available, allowing message acknowledgment
responses and short data messages to be sent back by the paging subscriber.
These systems normally require multiple receiver sites in the network to ensure
reliable reception of low power transmissions from pagers. Depending on the
technology used, existing paging systems can be upgraded to incorporate this
capability.
As paging networks are essentially broadcast messaging systems additional
applications can also be supported by the existing infrastructure, such as news
retrieval, stock market quotes and weather forecasts. In developing countries
where telephone penetration is low, paging often provides an affordable
alternative to public telephone service. The high penetration rates of paging in
China and Hong Kong are indicative of this phenomenon. When used in conjunction
with public voice mail services (which are often provided by paging operators),
a "virtual telephone" service can be provided.
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.
LEGAL PROCEEDINGS
The Company is not a party to any litigation at the present time.
FACILITIES
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
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
</TABLE>
- ------------------------
(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 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
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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.
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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
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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.
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
The Board of Directors currently has two standing committees: (i) an Audit
Committee (the "Audit Committee"); and (ii) a Compensation Committee (the
"Compensation Committee"). The Board of Directors may also establish other
committees to assist in the discharge of its responsibilities.
The duties of the Audit Committee include recommending independent auditors
to the Board of Directors, reviewing the intended scope of the annual audit and
the audit methods and principles being applied by the independent auditors and
the fees charged by the independent auditors, reviewing and discussing the
results of the audit, reviewing the Company's significant accounting principles,
policies and practices and undertaking related matters. KPMG Peat Marwick LLP
presently serves as the independent auditors of the Company. The Audit Committee
is currently comprised of Messrs. Cordova, Leeolou and McCarthy.
The duties of the Compensation Committee include providing guidance and
periodic monitoring for all corporate compensation, benefit, perquisite and
employee equity programs, including those for all corporate officers, and
succession planning for corporate officers. The Compensation Committee is
currently comprised of Messrs. Cordova, Griffin and Pascarella.
ARRANGEMENTS CONCERNING ELECTION OF DIRECTORS
Pursuant to the Company's Amended and Restated Certificate of Incorporation
(the "Certificate"), (i) Vanguard, as the holder of Series E Preferred Stock (as
defined below), is entitled to elect three directors to the Company's Board of
Directors; and (ii) for so long as 20% of the shares of Series F Preferred Stock
(as defined below) remain outstanding, the holders of Series F-1 Preferred Stock
(as defined below) are entitled to elect three directors, one of whom Electra
has the right to elect, one of whom Central Investment Holdings, Inc. ("CIH")
has the right to elect and one of whom Toronto Dominion Investments Inc. ("TDI")
has the right, subject to the conversion of its Series F-2 Preferred Stock (as
defined below) into Series F-1 Preferred Stock, to elect (subject, in each case,
to minimum stock ownership requirements). Pursuant to the IRA (as defined
below), upon termination of the rights referred to in clause (ii) of the
preceding sentence, for so long as 20% of the Series F Preferred Stock or the
Common Stock issued or issuable upon conversion thereof (the "Series F
Conversion Shares") are held by Series F Holders (as defined in the IRA),
holders of the Company's Preferred Stock ("Preferred Stock") and certain
transferees thereof have agreed to vote for three directors designated by a
majority of the Series F Conversion Shares, one of whom Electra has the right to
designate, one of whom CIH has the right to designate and one of whom TDI has
the right to designate (subject, in each case, to minimum stock ownership
requirements). The Company's Board of Directors includes: Messrs. Griffin,
Leeolou and Snowdon, who are representatives of Vanguard; Mr. Cordova, who is a
representative of Electra; 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).
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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.
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 (as defined below).
The Compensation Committee as Plan Administrator of the 1996 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.
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 $100,000 (collectively, the "Named Officers"),
for services rendered in all capacities to the Company during its previous
fiscal year.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION SECURITIES
NAME AND ------------------------ UNDERLYING ALL OTHER
PRINCIPAL POSITION(1) YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(2)
- ------------------------------------------ --------- ----------- ----------- -------------- --------------------
<S> <C> <C> <C> <C> <C>
John D. Lockton
President and Chief Executive Officer... 1996 157,500 50,000 200,000 2,237
1995 120,000 50,000 0 2,237
Hugh B. L. McClung
Vice Chairman of the Board and Managing
Director, Asia.......................... 1996 157,500 50,000 200,000 4,115
1995 120,000 50,000 0 2,574
Clarence Endy
Executive Vice President, Operations and
Chief Operating Officer................. 1996 195,000 45,000 40,000 3,804
1995 195,000 20,000 0 3,804
Douglas S. Sinclair
Executive Vice President and Chief
Financial Officer....................... 1996 155,000 38,000 36,000 48,383(3)
1995 100,104 15,000 120,000 116,122(4)
Patrick Ciganer
Senior Vice President, Latin America.... 1996 126,000 20,000 20,000 708
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 $62,500, $55,000 and $19,087,
respectively. Mr. Curran also received options for 100,000 shares and other
compensation in the amount of $125,731, consisting of $114,263 for
reimbursement of moving expenses, $9,196 for a cost of living adjustment and
$1,912 for premiums for life insurance paid by the Company, in 1996.
(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 $68,642.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the Named Officers for the fiscal year ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF AT
SHARES OF ASSUMED ANNUAL RATES OF
COMMON STOCK % OF TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS GRANTED EMPLOYEES IN FISCAL PRICE EXPIRATION ----------------------------
NAME (#)(1) YEAR ($/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
Securities and Exchange Commission. The Company is unable to predict whether
the stock price will increase or decrease and, if it does increase, there
can be no assurance that the actual stock price appreciation over the
ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants made
to the executive officers.
(4) 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 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
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<PAGE>
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.
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.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Griffin, Cordova and
Pascarella; Mr. Griffin serves as its Chairman. In 1996, Messrs. Lockton,
Leeolou, McCarthy and Schiff served on the Compensation Committee; Mr. McCarthy
served as its Chairman. Mr. Griffin is Chairman of the Board of Directors of the
Company and President and Chief Executive Officer of Vanguard. Mr. Cordova is a
Vice President of Electra Inc., an affiliate of Electra. Mr. Lockton is
President and Chief Executive Officer of the Company. Mr. Leeolou has been a
director of the Company since February 1994 and is Executive Vice President and
Chief Operating Officer of Vanguard. Mr. McCarthy is a general partner of
Gateway Associates, a venture capital firm affiliated with Gateway (as defined
below). Mr. Schiff is a general partner of Northwood Ventures, a venture capital
firm, and Chairman and Chief Executive Officer of Northwood Capital Partners LLC
(together with Northwood Ventures and an affiliated individual, "Northwood"). As
of September 30, 1996, Vanguard, Electra and Gateway each held more than 5% of
the outstanding voting equity securities of the Company.
In March 1992, the Company sold 271,960 shares of Series B Preferred Stock
to Gateway (as defined) for an aggregate purchase price of $250,000 (a purchase
price of $0.92 per share). In June 1992, the Company issued Gateway a warrant to
purchase an additional 417,040 shares of Series B Preferred Stock at an exercise
price of $0.60 per share, which was subsequently canceled. In May 1993, the
Company sold 435,120 shares of Series B Preferred Stock to Gateway for an
aggregate purchase price of $399,984, including cancellation of indebtedness in
the amount of $75,000.
In October and November 1993, the Company issued convertible secured notes
in a principal amount of $485,812 to Gateway and $615,000 to Northwood. In the
Series C Financing (as defined), the Company sold 224,920 shares of Series C
Preferred Stock to Gateway for an aggregate purchase price of $499,997,
including cancellation of such note, 341,880 shares of Series C Preferred Stock
to Northwood for an aggregate purchase 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
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<PAGE>
for shares of Series D Preferred Stock, including warrants to purchase 5,960
shares issued to Vanguard, 3,080 shares issued to Gateway, and 1,560 shares
issued to Northwood.
On April 24, April 25, and June 27, 1995, the Company issued the April 24,
1995 Bridge Notes (as defined) in principal amounts of $1,541,070 to Vanguard,
$403,000 to Northwood and $200,000 to Gateway. Of the $1,541,070 loaned by
Vanguard, $390,000 was in the form of cancellation of the April 6, 1995 Bridge
Note held by Vanguard.
On July 31, 1995, the Company issued the First July 1995 Vanguard Note (as
defined) in the principal amount of $1,485,000 to Vanguard. The Company paid
Vanguard a $20,000 fee in connection with the transaction. The First July 1995
Vanguard Note was cancelled in the Series F Financing (as defined). The Company
also issued Vanguard, for a purchase price of $15,000, a warrant to purchase
32,000 shares of Series F-1 Preferred Stock at an exercise price of $9.37 per
share.
In the July 1995 Financing (as defined), the Company issued additional notes
in the principal amount of $1,490,013 to Vanguard, $199,066 to Northwood and
$391,576 to Gateway. The Company also issued (i) 380,880 shares of Series D
Preferred Stock to Vanguard, 46,080 shares of Series D Preferred Stock to
Northwood and 680 shares of Series D Preferred Stock to Gateway and (ii)
warrants to purchase shares of Series F-1 Preferred Stock (not including the
warrant issued to Vanguard in connection with the First July 1995 Vanguard Note)
at an exercise price of $9.37 per share, including warrants to purchase 32,120
shares issued to Vanguard, 4,320 shares issued to Northwood and, 8,440 shares
issued to Gateway. Certain notes previously issued by the Company were canceled
in the July 1995 Financing. In connection with the July 1995 Financing, Mr.
Lockton agreed, pursuant to a letter agreement dated July 28, 1995, to vote his
shares of the Company's capital stock in favor of the election to the Company's
Board of Directors of a person designated by the BEA Funds (as defined). This
obligation terminated on July 31, 1996.
In November and December 1995, the Company borrowed $1,000,000 from
Vanguard, $450,000 from Gateway and $300,625 from Northwood and issued
short-term convertible unsecured notes (the "Winter 1995 Notes") that bore
interest at 10% per annum. In connection with these transactions, the Company
paid loan fees of $30,000 to Vanguard, $13,500 to Gateway and $9,019 to
Northwood.
In the Series F Financing (as defined), the Company sold Series F-1
Preferred Stock to Vanguard (424,000 shares for an aggregate purchase price of
$3,975,000, including the conversion of certain outstanding notes), Northwood
(56,720 shares for an aggregate purchase price of $531,750, including the
conversion of certain outstanding notes), and Gateway (94,200 shares for an
aggregate purchase price of $883,125, including the conversion of certain
outstanding notes).
Pursuant to the Vanguard Exchange (as defined), the Company acquired the
interests or rights to acquire interests of Vanguard Sub (as defined) in ten
wireless projects in Indonesia, New Zealand, Brazil, India and Pakistan.
Vanguard's cost of acquiring such projects was in excess of approximately $3.5
million.
In January 1992, the Company issued 1,200,000 shares of Series A Preferred
Stock to CTI (as defined), an entity beneficially owned by Messrs. Lockton and
McClung and another individual, for an aggregate purchase price of $300,000. CTI
subsequently distributed 510,000 shares to Mr. Lockton. Pursuant to the CTP
Exchange (as defined), on December 18, 1995 the Company issued 103,280 shares of
Common Stock to Mr. Lockton and deposited an additional 45,360 shares of Common
Stock into escrow for the benefit of certain parties, including Messrs. Lockton
and McClung.
For additional information, regarding the above transactions, see "Certain
Transactions." For a description of compensation of executive officers and
directors of the Company and the eligibility of executive officers and directors
to participate in the Stock Plan, see "Management--Executive Compensation."
"--1996 Stock Option/Stock Issuance Plan" and "--Director Compensation."
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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 358,196 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 Common Stock were outstanding under the Stock Plan. In
addition, the Board of Directors of the Company granted options to purchase an
additional 405,282 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.
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CERTAIN 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 aggregate
principal amounts of $615,000 issued to Northwood (the "Northwood Note") and
$485,812 issued to Gateway (the "Gateway Note"). These notes bore interest at
prime plus 1% per annum and were secured by all of the assets of the Company.
In a series of transactions during January and February 1994 (the "Series C
Financing"), the Company sold an aggregate of 1,762,280 shares of Series C
Preferred Stock for an aggregate purchase price of $3,917,550 (a purchase price
of $2.22 per share), including 224,920 shares sold to Gateway for an aggregate
purchase price of $499,997, including cancellation of the Gateway Note; 341,880
shares sold to Northwood for an aggregate purchase price of $759,999, including
cancellation of the Northwood Note, and 837,880 shares sold to Vanguard for an
aggregate purchase price of $1,862,607.
In connection with the Series C Financing, the Company issued to Vanguard
warrants (as subsequently amended) to purchase (i) 50,440 shares of Series C
Preferred Stock at an exercise price of $2.22 per share, (ii) 273,440 shares of
Series C Preferred Stock at an exercise price of $2.22 per share, and (iii)
393,120 shares of Series D Preferred Stock at an exercise price of $6.55 per
share. The warrant described in clause (i) is exercisable until December 18,
1997; the warrants described in clauses (ii) and (iii) are exercisable until May
15, 1997 or, if earlier, upon the initial public offering of the Company's
capital stock. The number of shares and exercise price for all such warrants are
subject to adjustment in certain circumstances.
In connection with the Series C Financing, the investors were granted
certain registration rights, information rights, board observer rights, board
representation rights, rights of first offer and co-sale rights. Vanguard was
also granted a right of first refusal to acquire an amount of any future equity
financing by the Company equal to (i) the amount Vanguard would be entitled to
acquire under its first offer rights based on its pro rata equity ownership in
the Company (calculated on an as converted basis) plus (ii) an overcall amount.
The overcall amount was the number of shares which, when added to the number of
shares represented by the warrants issued to Vanguard in the Series C Financing
(including shares acquired upon the exercise of such warrants), would equal
15.01% of the outstanding shares of the Company capital stock on a
post-transaction basis. The right of first refusal was amended in connection
with the Series D Financing (as defined below).
In connection with the Series C Financing, Vanguard and the Company entered
into a Business Development and Resource Access Agreement dated as of February
28, 1994 (the "Development Agreement"). The Development Agreement has a five
year term and provides that if either party
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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
each of Gateway and Northwood and $770,234 to Vanguard. The May 1994 Bridge
Notes were due in 180 days and bore interest at prime plus 1% per annum. In
connection with the May 1994 Bridge Notes, the purchasers received warrants
exercisable for an aggregate of 46,440 shares of Series D Preferred Stock,
including: Gateway and Northwood--11,440 shares each; and Vanguard--17,640
shares. The warrants have an exercise price of $6.55 per share and are
exercisable until May 6, 1997, or, in the case of the warrants issued to certain
of the other lenders, May 23, 1997 or June 12, 1997, provided that the warrants
shall no longer be exercisable upon the occurrence of (i) the closing of the
initial public offering of the Company's capital stock, (ii) the sale of all or
substantially all of the Company's assets, (iii) the merger of the Company with
or into another entity resulting in the transfer of at least 50% of the
Company's outstanding voting equity securities, or (iv) any other transfer of at
least 50% of the Company's outstanding voting equity securities (each or certain
other similar events, a "Termination Event"). All share amounts and the exercise
price are subject to adjustment in certain circumstances.
In a series of transactions in September and October 1994 (the "Series D
Financing"), the Company sold an aggregate of 2,230,560 shares of Series D
Preferred Stock for an aggregate purchase price of $14,610,168 (a purchase price
of $6.55 per share), including (i) 106,880 shares sold to Gateway for an
aggregate purchase price of $700,064, including cancellation of May 1994 Bridge
Notes in the principal amount of $500,000, (ii) 190,880 shares sold to Northwood
for an aggregate purchase price of $1,250,264, including cancellation of May
1994 Bridge Notes in the principal amount of $500,000, and (iii) 445,400 shares
sold to Vanguard for an aggregate purchase price of $2,917,370, including
cancellation of May 1994 Bridge Notes in the principal amount of $770,234. Among
the purchasers in the Series D Financing were certain funds managed by or
affiliated with BEA Associates (the "BEA Funds"), which purchased an aggregate
of 1,221,440 shares of Series D Preferred Stock for an aggregate purchase price
of $8,000,432. The Company also entered into an agreement with the BEA Funds
providing that, where feasible, appropriate and mutually advantageous, the
Company and the BEA Funds will bring to the attention of each other trunked
radio, WLL, PCS and other existing and future wireless projects.
In connection with the Series D Financing, Vanguard loaned $1.8 million to
the Company in exchange for two convertible notes in the amount of $900,000
each. Each note was due upon the earlier of April 26, 1996 or the occurrence of
certain events which did not occur prior to that date. On April 26, 1996,
Vanguard converted both notes, as amended, pursuant to the Vanguard Exchange (as
defined below), into an aggregate of 274,800 shares of Series D Preferred Stock.
THE APRIL 1995 FINANCINGS
On April 6, 1995, the Company issued convertible notes (the "April 6, 1995
Bridge Notes") in an aggregate principal amount of $696,700, including notes in
principal amounts of $390,000 to Vanguard, $200,000 to Gateway and $100,000 to
Northwood. The April 6, 1995 Bridge Notes bore interest at prime plus 1%, were
due in 150 days, and were automatically convertible into equity securities,
subsequently
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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, 3,080 shares issued to Gateway, and
1,560 shares issued to Northwood. The warrants have an exercise price of $6.55
per share and are exercisable until April 6, 1998, provided that the warrants
shall no longer be exercisable upon the occurrence of a Termination Event. All
share amounts and the exercise price are subject to adjustment in certain
circumstances.
On April 24, April 25, and June 27, 1995, the Company issued convertible
secured notes (the "April 24, 1995 Bridge Notes" and, together with the April 6,
1995 Bridge Notes, the "April 1995 Bridge Notes") in an aggregate principal
amount of $6,144,070, including notes in principal amounts of $1,541,070 to
Vanguard, $4,000,000 to the BEA Funds, $403,000 to Northwood and $200,000 to
Gateway. Of the $1,541,070 loaned by Vanguard, $390,000 was in the form of
cancellation of the April 6, 1995 Bridge Note held by Vanguard. The April 24,
1995 Bridge Notes bore interest at prime plus 1% per annum, were due 45 days
after their respective issue dates and were secured by a lien on substantially
all of the Company's assets. The April 24, 1995 Bridge Notes provided that
principal thereon was to be automatically converted on the respective due dates
into Series D Preferred Stock at a price of $6.55 per share, provided that no
holder was required to convert to the extent that conversion would result in the
holder owning 20% or more of the Company's capital stock.
THE JULY 1995 FINANCING
On July 31, 1995, the Company issued a convertible unsecured note (the
"First July 1995 Vanguard Note") in the principal amount of $1,485,000 to
Vanguard (such issuance, together with the issuance of the other notes in July
1995 described below, the "July 1995 Financing"). The note bore interest at
prime plus 1% per annum and was due 180 days after the issue date or, at the
Company's option, 270 days after the issue date. The note provided that the
principal balance thereof was automatically convertible into the Company's
equity securities upon the closing of the Company's next equity financing
meeting certain conditions (at a conversion price per share equal to the share
price in such equity financing, but not to exceed $10.40). The Company paid
Vanguard a $20,000 fee in connection with the note transaction. The First July
1995 Vanguard Note was 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, $199,066 to Northwood and
$391,576 to Gateway. The July 1995 Notes bore interest at prime plus 1% per
annum, had due dates and conversion features substantially identical to those
contained in the First July 1995 Vanguard Note and were unsecured. These notes
were cancelled in the Series F Financing.
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In the July 1995 Financing, the Company issued an aggregate of 1,147,600
shares of Series D Preferred Stock for an aggregate purchase price of $7,516,780
(a purchase price of $6.55 per share), including 380,880 shares to Vanguard,
539,600 shares to the BEA Funds, 46,080 shares to Northwood and 680 shares to
Gateway. All of the remaining April 1995 Bridge Notes were canceled in the July
1995 Financing.
In the July 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, 4,320 shares
issued to Northwood, 8,440 shares issued to Gateway and 9,920 shares issued to
the BEA Funds. All share amounts and the exercise price are subject to
adjustment in certain circumstances. The warrants are exercisable until December
18, 1998, provided that the warrants shall no longer be exercisable upon the
occurrence of a Termination Event.
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.
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Pursuant to the 1995 TDI Loan Agreement, the Company issued to TDI a warrant
(the "Second TDI Warrant") to purchase 106,680 shares of Series F-2 Preferred
Stock at an exercise price of $9.37 per share, with the number of shares and the
exercise price subject to adjustment in certain circumstances. The Second TDI
Warrant is exercisable until the same date, with the date being subject to
change in the same circumstances, as the First TDI Warrant.
THE SERIES F FINANCING
In November and December 1995, the Company borrowed a total of $1,797,515,
including $1,000,000 from Vanguard, $450,000 from Gateway and $300,625 from
Northwood and issued short-term convertible unsecured notes (the "Winter 1995
Notes") that bore interest at 10% per annum. In connection with these
transactions, the Company paid the lenders an aggregate of $53,925 in loan fees,
including $30,000 to Vanguard, $13,500 to Gateway and $9,019 to Northwood.
In a transaction that was consummated on December 18, 1995 (the "Series F
Financing") pursuant to a Securities Purchase Agreement dated as of December 6,
1995 (the "Series F Purchase Agreement"), the Company sold an aggregate of
4,508,480 shares of Series F-1 Preferred Stock and sold 848,000 shares of Series
F-2 Preferred Stock to TDI, for an aggregate purchase price of $50,217,000 (a
purchase price of $9.375 per share). Among the purchasers of Series F-1
Preferred Stock were Vanguard (424,000 shares for an aggregate purchase price of
$3,975,000, including the conversion of certain outstanding notes), the BEA
Funds (123,560 shares for an aggregate purchase price of $1,158,375, including
the conversion of certain outstanding notes), Northwood (56,720 shares for an
aggregate purchase price of $531,750, including the conversion of certain
outstanding notes), Gateway (94,200 shares for an aggregate purchase price of
$883,125, including the conversion of certain outstanding notes), CIH (1,066,640
shares for an aggregate purchase price of $9,999,750) and Electra (1,066,640
shares for an aggregate purchase price of $9,999,750). TDI purchased 848,000
shares of non-voting Series F-2 Preferred Stock for an aggregate purchase price
of $7,950,000, all of which was paid for by conversion of the TDI Unsecured Note
and conversion of $3,000,000 in principal amount of the TDI Secured Note. In
connection with the Series F Financing, the Company paid Electra financing fees
of $265,000 and paid TDI fees for services performed as placement agent.
Pursuant to the Series F Purchase Agreement, the Company agreed to covenants
customary in financing transactions of such type, including limits on incurring
debt and granting liens and pledges and other negative 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. See "Description of Capital Stock--Registration
Rights."
The IRA provides a right of first offer to purchase shares of any class of
the Company's capital stock sold by the Company (subject to certain exceptions)
to any investor who holds at least 10% of the Registrable Securities (as defined
in the IRA) it initially acquired and to any person who acquires at least 10% in
the aggregate of any of the Series B, C, D, E, or F Preferred Stock outstanding
as of December 18, 1995. Each such investor may purchase up to its pro-rata
share of the shares being offered determined
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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
"Management--Arrangements Concerning Election of Directors" and "Description of
Capital Stock."
The IRA requires that a special committee of the Board of Directors,
consisting of a Vanguard designee, a Series F designee (who shall be the Electra
designee, if there is an Electra designee on the Board of Directors), a member
designated by the other outside investors and a Company management designee,
shall from time to time consult with an unaffiliated investment bank as to the
commercial reasonableness of an initial public offering of the Common Stock (an
"IPO"). Based on such consultation, the committee shall make a recommendation to
the Board of Directors about proceeding with an IPO. Subject to approval of the
Board of Directors and to the registration rights of holders of Series F
Preferred Stock under the Registration Rights Agreement, the Company shall
proceed with an IPO unless three or more directors oppose such a transaction ,
in which case the Company shall submit the decision to proceed with an IPO to
binding arbitration. If no IPO occurs by December 31, 1996, the committee shall
explore with unaffiliated investment bankers other liquidity alternatives,
including the sale of the Company.
THE UNIT OFFERING
On August 15, 1996, the Company sold 196,720 Units (the "Units"), each
consisting of a $1,000 principal amount 14% Senior Secured Discount Note due
2001 (collectively, the "Old Notes") and one Warrant (collectively, the
"Warrants") 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 ("a Threshold Initial Public Offering") 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 tradeable 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.
Under the terms of the Unit Offering, the Company filed a registration
statement (the " Exchange Registration Statement") with the SEC registering
senior debt securities that are substantially identical
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(including principal amount, interest rate, maturity, exchange and ranking)
terms to the Old Notes ("Exchange Notes") to be offered in exchange for the Old
Notes (the "Exchange Offer"). The Registration Statement was declared effective
by the SEC on November 21, 1996 and the Exchange Offer was completed on December
27, 1996.
The Old Notes and the Warrants became separably transferable on November 15,
1996.
The Old Notes were issued pursuant to the Indenture. The Old Notes have been
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 "Business-- Operating Companies" and "--Developmental Stage
Projects." In connection with the Vanguard Exchange, the warrants issued to
Vanguard in connection with the Series C Financing were amended to, among other
things, extend the maturity of certain of these warrants.
TRANSACTIONS WITH FOUNDERS
In January 1992, the Company issued 1,200,000 shares of Series A Preferred
Stock to Corporate Technology International ("CTI"), an entity beneficially
owned by Messrs. Lockton and McClung and another individual, for an aggregate
purchase price of $300,000. CTI subsequently distributed 510,000 shares to each
of Messrs. Lockton and McClung.
In January 1994, the Company entered into an agreement (the "CTP Agreement")
with Messrs. Lockton, McClung and a third party to exchange 251,920 shares of
Common Stock (the "CTP Exchange") for 70% of the then outstanding equity of CTP,
a partnership owned by Messrs. McClung, Lockton and others that was formed to
pursue wireless communications opportunities. The CTP Exchange was consummated
on December 18, 1995. Pursuant to the CTP Exchange, the Company issued 103,280
shares of Common Stock to each of Messrs. Lockton and McClung and deposited an
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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 Unit Offering), the net proceeds
from certain asset sales by the Company or its subsidiaries, or certain other
events. The obligations of the Company under the 1996 TD Loan Agreement and the
note issued pursuant thereto were secured by a pledge by the Company of all
capital stock of certain of the Company's subsidiaries and affiliates. Under the
1996 TD Loan Agreement, Toronto Dominion (Texas), Inc. received a facility fee
of $300,000 and was reimbursed for certain costs and expenses. In addition,
Toronto Dominion (Texas), Inc. was entitled to a commitment fee of 0.5% of the
average unused available portion of such, payable quarterly in arrears. Mr.
Rich, a director of the Company, serves as an executive officer of Toronto
Dominion Capital, an affiliate of Toronto Dominion (Texas), Inc. On August 15,
1996, the Company used $7.4 million of the net proceeds from the Unit Offering
to repay in full all outstanding borrowings under the 1996 TD Loan Agreement.
OTHER TRANSACTIONS
In 1995 the Company paid Coriander Willow, an entity owned by Vicky Bratten,
who is Mr. McClung's wife, $90,330 for accounting services performed by
Coriander Willow for the Company. Management believes that this transaction was
upon terms substantially equivalent to or more favorable to the Company than
those that could have been obtained from unaffiliated third parties.
TD Securities (USA) Inc., previously Toronto Dominion Securities (USA) Inc.,
an affiliate of TDI, in connection with the Unit Offering, received fees and
purchased Units in the Unit Offering at a discount (as an Initial Purchaser) of
$1.2 million from the price offered to other investors.
For a description of compensation of executive officers and directors of the
Company and the eligibility of executive officers and directors to participate
in the Stock Plan, see "Management-- Executive Compensation," "--1996 Stock
Option/Stock Issuance Plan" and "--Director Compensation."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock 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
SHARES BENEFICIALLY OWNED
5% STOCKHOLDERS, BEFORE THE OFFERING AFTER THE OFFERING
DIRECTORS, NAMED OFFICERS AND -------------------------- --------------------------
OFFICERS AND DIRECTORS AS A GROUP NUMBER(1) PERCENT(2) NUMBER(1) PERCENT(2)
- ---------------------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Vanguard Cellular Operating Corp.(3) ..................... 7,139,920 38.91
c/o Vanguard Cellular Systems, Inc.
2002 Pisgah Church Road, Suite 300
Greensboro, NC 27455
BEA Funds(4) ............................................. 1,504,960 8.58
c/o BEA Associates
153 East 53rd Street
New York, NY 10022
Gateway Venture Partners III, L.P.(5) .................... 1,156,720 6.58
8000 Maryland Ave., Suite 1190
St. Louis, MO 63105
Electra Investment Trust PLC(6) .......................... 1,124,640 6.41
70 East 55th Street
New York, NY 10022
Toronto Dominion Investments, Inc.(7) .................... 1,061,360 5.98
31 West 52nd Street
New York, NY 10019-6101
Central Investment Holding, Inc. ......................... 1,066,640 6.08
KMT Business Management Committee
9F. 6 Chung Hsing W. Road, Section 1
Taipei, Taiwan ROC
Haynes G. Griffin(8)...................................... 7,139,920 38.91
John D. Lockton(9)........................................ 893,280 5.01
Hugh B. L. McClung(9)..................................... 817,080 4.58
Clarence "Sam" Endy(10)................................... 180,000 1.02
Douglas S. Sinclair(11)................................... 160,000 *
Patrick Ciganer(12)....................................... 100,000 *
Sanford L. Antignas....................................... -- --
Stephen R. Leeolou(13).................................... 7,219,920 39.18
John S. McCarthy(14)...................................... 1,168,720 6.65
Carl C. Cordova III(15)................................... 1,124,640 6.41
Brian Rich(16)............................................ 1,061,360 5.98
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED
5% STOCKHOLDERS, BEFORE THE OFFERING AFTER THE OFFERING
DIRECTORS, NAMED OFFICERS AND -------------------------- --------------------------
OFFICERS AND DIRECTORS AS A GROUP NUMBER(1) PERCENT(2) NUMBER(1) PERCENT(2)
- ---------------------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Carl F. Pascarella(17).................................... 12,000 *
Van Snowdon(18)........................................... 7,219,920 39.35
All directors and executive officers as a group (16
persons)................................................ 13,019,000 65.47
</TABLE>
- ------------------------
* 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 17,543,120 shares of Common Stock
outstanding on December 31, 1996, assuming the conversion of all outstanding
shares of Preferred Stock into Common Stock on a one-for-one basis. The
number of shares of Common Stock beneficially owned includes the shares
issuable pursuant to stock options and warrants that are exercisable within
60 days of December 31, 1996. Shares issuable pursuant to stock options or
warrants are deemed outstanding for computing the percentage owned by the
person holding such options or warrants but are not deemed outstanding for
computing the percentage of any other person.
(3) Includes an aggregate of 804,720 shares issuable upon exercise of warrants
held by Vanguard Cellular Operating Corp. See "Management" and "Certain
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. Snowden, a director of the Company,
is Vice President of Vanguard Communications, Inc., a subsidiary of
Vanguard. See notes 8, 13 and 18 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.
(4) Includes 1,501,200 shares and an aggregate of 3,760 shares issuable upon
the exercise of warrants 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.
(5) Includes an aggregate of 22,960 shares issuable upon exercise of warrants
held by Gateway. Mr. McCarthy, a director of the Company, is a General
Partner of Gateway Associates, the general partner of Gateway. See note 14
below.
(6) Mr. Cordova, a director of the Company, is a Vice President of Electra
Inc., a subsidiary of Electra Investment Trust P.L.C. See note 15 below.
(7) Includes 213,360 shares issuable upon exercise of warrants held by TDI. Mr.
Rich, a director of the Company, is Managing Director and Group Head of
Toronto Dominion Capital, an affiliate of TDI. See note 16 below.
(8) Represents 7,139,920 shares beneficially owned by Vanguard Cellular
Operating Corp. Mr. Griffin is the Chairman of the Board and Co-Chief
Executive Officer of Vanguard, the sole stockholder of
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Vanguard Cellular Operating Corp., and disclaims beneficial ownership of the
shares held by this entity. See note 3 above.
(9) Includes options to purchase 280,000 shares that are immediately
exercisable, subject to certain rights of repurchase held by the Company. In
addition, the number of shares beneficially owned includes 103,280 shares
issued to such person pursuant to the CTP Exchange on December 18, 1995.
Excludes 45,360 shares deposited in escrow pursuant to the CTP Exchange in
which such person may have a beneficial interest. See "Certain
Transactions--Transactions with Founders." Also excludes an option to
purchase 51,573 shares granted in February 1997, which option is immediately
exercisable.
(10) Represents options to purchase 180,000 shares that are immediately
exercisable, subject to certain rights of repurchase held by the Company.
Excludes an option to purchase 33,154 shares granted in February 1997, which
option is immediately exercisable.
(11) Includes options to purchase 156,000 shares that are immediately
exercisable, subject to certain rights of repurchase held by the Company.
Excludes an option to purchase 28,733 shares granted in February 1997, which
option is immediately exercisable.
(12) Represents options to purchase 100,000 shares that are immediately
exercisable, subject to certain right of repurchase held by the Company.
Excludes an option to purchase 18,419 shares granted in February 1997, which
option is immediately exercisable.
(13) Includes an option to purchase 80,000 shares that is immediately
exercisable, subject to repurchase by the Company, as well as 7,139,920
shares beneficially owned by Vanguard Cellular Operating Corp. 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.
(14) Includes an option to purchase 12,000 shares that is immediately
exercisable, subject to repurchase by the Company, as well as 1,156,720
shares beneficially owned by Gateway. Mr. McCarthy is a general partner of
Gateway Associates, the a general partner of Gateway, and disclaims
beneficial ownership of shares held by Gateway except to the extent of his
pecuniary interest therein.
(15) Includes 1,124,640 shares beneficially owned by Electra. Mr. Cordova, a
Vice President of Electra Inc., an affiliate of Electra Investment Trust
PLC, disclaims beneficial ownership of shares held by Electra Investment and
Electra Associates, except to the extent of his pecuniary interest therein.
(16) Includes 1,061,360 shares beneficially owned by TDI. Mr. Rich, Managing
Director and Group Head of Toronto Dominion Capital, an affiliate of TDI,
disclaims beneficial ownership of shares held by TDI.
(17) Includes an option to purchase 12,000 shares that is immediately
exercisable, subject to repurchase by the Company.
(18) Includes 7,139,920 shares beneficially owned by Vanguard Cellular Operating
Corp. Mr. Snowdon, Vice President of Vanguard Communications, Inc., a
subsidiary of Vanguard, the sole stockholder of Vanguard Cellular Operating
Corp., disclaims beneficial ownership of shares held by Vanguard Cellular
Operating Corp. Excludes an option to purchase 14,735 shares granted in
February 1997, which option is immediately exercisable.
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DESCRIPTION OF CAPITAL STOCK
After giving effect to an amendment and restatement of the Company's Amended
and Restated Certificate of Incorporation to be filed with the Secretary of
State of the State of Delaware in connection with the closing of these Offerings
to (i) delete references to Series A, Series B, Series C, Series D, Series E and
Series F Preferred Stock following conversion of such Preferred Stock into
Common Stock and (ii) authorize the preferred stock, as described below, the
authorized capital stock of the Company consists of shares of Common
Stock, par value $0.01 per share ("Common Stock"), and shares of
Preferred Stock, par value $0.01 per share ("Preferred Stock").
COMMON STOCK
As of December 31, 1996, there were 18,716,480 shares of Common Stock
outstanding held of record by 55 stockholders, excluding 1,982,000 shares of
Common Stock issuable upon the exercise of outstanding options and assuming (i)
the exercise on a cash basis of warrants to purchase 1,173,360 shares of
Preferred Stock; (ii) no exercise of Unit Offering Warrants to purchase in the
aggregate 2,926,427 shares of Common Stock issued in the Unit Offering; and
(iii) the conversion of all outstanding shares of Preferred Stock into shares of
Common Stock upon the closing of these Offerings.
The holders of Common Stock are entitled to one vote per share and shall be
entitled to vote upon such matters and in such manner as may be provided by law.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of holders of Preferred Stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be issued upon
completion of these Offerings will be fully paid and non-assessable.
PREFERRED STOCK
The Company's Amended and Restated Certificates of Incorporation will be
amended and restated upon the closing of these Offerings to authorize 5,000,000
shares of Preferred Stock. The Board of Directors has the authority to issue the
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others. At present, the Company has no
plans to issue any of the Preferred Stock.
WARRANTS
The holders of Warrants issued in connection with the Unit Offering are
entitled to purchase, on or after the occurrence of the effective date of these
Offerings, 11.638 shares of Common Stock per Unit Offering Warrant, representing
in the aggregate approximately 10% of the outstanding Common Stock on a fully
diluted basis as of August 15, 1996, the date the Unit Offering Warrants were
issued ("Issue Date"). In the event that these Offerings have not occurred on or
before May 15, 1997, each unexercised
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Unit Offering Warrant will entitle the holder thereof to purchase 14.283 shares
of Common Stock, which will represent in the aggregate (assuming no Unit
Offering Warrants have been exercised) approximately 12% of the outstanding
Common Stock on a fully diluted basis on the Issue Date.
On the date 181 days following the effective date of these Offerings (or if
such day is not a business day, then the next succeeding business day), the
Company has agreed to file a registration statement (the "Warrant Registration
Statement") on the appropriate form covering the shares of Common Stock issuable
upon exercise of the Unit Offering Warrants (the "Warrant Shares"), to take all
necessary action to cause such registration statement to become effective as
promptly as practicable, and to keep such registration statement effective until
30 days after the earliest date on which all of the Unit Offering Warrants shall
have expired or been exercised. During any consecutive 365-day period, the
Company may suspend the availability of the Warrant Registration Statement for
up to two 30 day periods (or one 60-day period), except for the 60-day period
beginning immediately after the Warrant Registration Statement is declared
effective by the Commission and the 60-day period ending on August 15, 2001, if
the Company's Board of Directors determines in the exercise of its reasonable
judgment that there is a valid business purpose for such suspension.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
The Certificate and Bylaws, as applicable, among other things, (i) permit
vacancies on the Board of Directors that may occur between annual meetings and
any newly created seats to be filled only by the Board of Directors and not by
the stockholders, subject to any rights of holders of the Preferred Stock that
may be granted by the Board of Directors in the future, (ii) limit the rights of
stockholders to call special meetings of stockholders and (iii) provide that the
Board of Directors, without action by the stockholders, may issue and fix the
rights and preferences of shares of Preferred Stock. These provisions may have
the effect of delaying, deferring or preventing a change of control of the
Company without further action by the stockholders, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock, may
adversely affect the market price of, and the voting and other rights of, the
holders of the Common Stock and could have the effect of discouraging certain
attempts to acquire the Company or remove incumbent management, including
incumbent members of the Company's Board of Directors, even if some or a
majority of the Company's stockholders deemed such an attempt to be in their
best interests.
The Company is subject to Section 203 of the DGCL ("Section 203"). Section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless (i) prior to such date, the board of directors of the
corporation approves either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock, excluding certain shares held by employee directors
and employee stock plans, or (iii) on or after the consummation date the
business combination is approved by the board of directors and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is not
owned by the interested stockholder. For purposes of Section 203, a "business
combination" includes, among other things, a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an "interested stockholder" is generally a person who, together with affiliates
and associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
REGISTRATION RIGHTS
Pursuant to the IRA and the Registration Rights Agreement, the holders of
16,509,840 shares of Common Stock (the "Holders") are entitled to certain rights
with respect to the registration of such
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shares under the Securities Act of 1933, as amended (the "Securities Act"). If
the Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders, the
Holders are entitled to notice of the registration and are entitled to include,
at the Company's expense, such shares therein, provided, among other conditions,
that the underwriters have the right to limit the number of such shares included
in the registration. In addition, certain of the Holders may require the Company
at its own expense to file a registration statement under the Securities Act
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect the registration, subject to certain conditions and
limitations. Further, certain of the Holders may require the Company at its
expense to register their shares on Form S-3 when such form becomes available to
the Company, subject to certain conditions and limitations.
In addition, on the date 181 days following the closing of the Offerings,
the Company has agreed to file a registration statement on the appropriate Form
covering approximately 2,289,427 shares of Common Stock issuable upon the
exercise of the Unit Offering Warrants.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
LISTING
The Company intends to apply to have the Common Stock approved for quotation
and trading on the Nasdaq National Market under the symbol "IWCH."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. The Company can make no prediction as to the effect, if any, that sales
of shares of Common Stock, or the availability of such shares for future sales,
will have on future market prices of the Common Stock. Such sales also may make
it more difficult for the Company to sell equity securities or equity-related
securities in the future at a time and price which it deems appropriate.
Upon completion of the Offerings, the Company will have shares of Common
Stock outstanding. Of these shares, the shares sold in the Offerings will be
freely tradeable without restriction under the Securities Act by persons who are
not "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 18,716,480 shares will be "restricted securities"
within the meaning of Rule 144. The remaining 18,716,480 shares (i) exclude
1,982,000 shares of Common Stock issuable upon the exercise of outstanding
options as of December 31, 1996; (ii) exclude approximately 2,289,427 shares of
Common Stock issuable upon conversion of warrants issued in the Unit Offering;
and (iii) assumes the exercise on a cash basis of warrants to purchase 1,173,360
shares of Preferred Stock.
The Company anticipates that as a result of the contractual restrictions
described below and the provisions of Rule 144, 144(k) and 701, the 18,716,480
remaining shares will be available for sale in the public market as follows (i)
no shares will be available for immediate sale in the public market on the
effective date of these Offerings; (ii) 7,528,720 shares will be eligible for
sale upon expiration of the lock-up agreements 180 days after the effective date
of this Offering; and (iii) 11,187,760 shares will be eligible for sale upon
expiration of their respective two-year holding periods or registered under the
Securities Act.
Restricted securities, as well as any Common Stock held by any person deemed
to be an affiliate of the Company, may be sold only if registered under the
Securities Act or sold in accordance with an available exemption from such
registration. Persons holding shares of Common Stock that constitute restricted
securities, and any affiliates of the Company, may be able to sell shares of
Common Stock without registration in accordance with Rule 144 or Rule 701 under
the Securities Act. For purposes of Rule 144, an "affiliate" of an issuer is a
person that directly or indirectly, through the use of one or more
intermediaries, controls, is controlled by or is under common control with such
issuer.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated in accordance with Rule 144) who has beneficially
owned his or her shares for at least two years, including any such persons who
are affiliates of the Company, would be entitled to sell, within any three-month
period, a number of shares of Common Stock that does not exceed the greater of
(i) one percent of the then outstanding number of shares of (ii) the average
weekly trading volume of the shares during the four calendar weeks preceding
each such sale, provided that certain manner of sale, notice and public
information requirements are satisfied. In addition, affiliates of the Company
must comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of Common Stock
that are not restricted securities (such as shares of Common Stock acquired by
affiliates in the Offerings). Furthermore, under Rule 144(k), after shares are
held for three years, a person who is not an affiliate of the Company is
entitled to sell such shares under Rule 144 without regard to such volume
limitations or manner of sale, notice or public information requirements under
Rule 144; however, sales of shares by affiliates will continue to be subject to
such volume limitations and manner of sale, notice or public information
requirements under Rule 144. The Commission has proposed an amendment to Rule
144 which would reduce the holding period for shares subject to Rule 144 to
become eligible for sale in the public market. This proposal, if adopted, would
increase the number of shares of Common stock eligible for immediate sale
following the expiration of the lock-up period described below.
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In addition, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of the Company who purchased or purchases
shares from the Company in connection with a compensatory, stock or option plan
or other written agreement, such as the Company's 1996 Stock Option/Stock
Issuance Plan, is eligible to resell such shares 90 days after the effective
date of the Offerings in reliance on Rule 144, but without compliance with
certain restrictions contained in Rule 144, including the holding period.
The Company anticipates that, its directors, officers and stockholders, and
certain holders of outstanding options issued by the Company will agree not to
offer, sell, contract to sell, or otherwise dispose of, directly or indirectly,
or announce the offering of, or file or cause to be filed a registration
statement under the Securities Act with respect to any shares of Common Stock
including any such shares beneficially or indirectly owned or controlled by the
Company, or any securities or options convertible into, or exchangeable or
exercisable for, shares of Common Stock, for a period of 180 days from the date
of this Prospectus without prior written consent, except for (i) shares of
Common Stock issued under the 1996 Stock Option/Stock Issuance Plan, (ii) shares
issued in respect of obligations existing before the date of this Prospectus and
(iii) shares issued in connection with the Offerings.
The Company has filed a Registration Statement on Form S-8 to cover
2,400,000 shares of Common Stock which have been reserved for issuance under the
1996 Stock Option/Stock Issuance Plan. Shares so registered will be eligible for
sale by non-affiliates in the public market without limitation and by affiliates
subject to the provisions of Rule 144, except for the holding period limitation
of Rule 144.
107
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the U.S. Underwriters (the "U.S. Underwriting Agreement"),
the Company will agree to sell to each of the U.S. Underwriters to be named
later (the "U.S. Underwriters") and each of the U.S. Underwriters, will
severally agree to purchase from the Company, the number of shares of Common
Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
.................................................................................
.................................................................................
.................................................................................
.................................................................................
-----------
Total..........................................................................
-----------
-----------
</TABLE>
The Company has been advised by the U.S. Representatives that the several
U.S. Underwriters initially propose to offer such shares of Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The U.S. Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per share of Common
Stock to other dealers. After the Offerings, the public offering price and such
concessions may be changed.
The Company has granted to the U.S. Underwriters and the international
underwriters to be named later (the "International Underwriters" and,
collectively with the U.S. Underwriters, the "Underwriters") an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to additional shares of Common Stock from the Company at the
price to public less the underwriting discount, solely to cover over-allotments.
To the extent that the U.S. Underwriters and the International Underwriters
exercise such option, each of the U.S. Underwriters and the International
Underwriters, as the case may be, will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such U.S.
Underwriter's or International Underwriter's initial commitment.
The Company has entered into an International Underwriting Agreement with
the International Underwriters named therein, for whom and
are acting as the representatives (the "International Representatives," and
together with the U.S. Representatives, the "Representatives"), providing for
the concurrent offer and sale of shares of Common Stock (in addition
to the shares covered by the over-allotment option described above) outside the
United States and Canada. Both the U.S. Underwriting Agreement and the
International Underwriting Agreement provide that the obligations of the U.S.
Underwriters and the International Underwriters are such that if any of the
shares of Common Stock are purchased by the U.S. Underwriters pursuant to the
U.S. Underwriting Agreement, or by the International Underwriters pursuant to
the International Underwriting Agreement, all the shares of Common Stock agreed
to be purchased by either the U.S. Underwriters or the International
Underwriters, as the case may be, pursuant to their respective agreements must
be so purchased. The price to public and underwriting discount per share of
Common Stock for the U.S. Offering and the International Offering will be
identical. The closing of the International Offering is a
108
<PAGE>
condition to the closing of the U.S. Offering and the closing of the U.S.
Offering is a condition to the closing of the International Offering.
Each U.S. Underwriter has severally agreed that, as part of the distribution
of the shares of Common Stock offered by the U.S. Underwriters, (i) it
is not purchasing any shares of Common Stock for the account of anyone other
than a United States or Canadian Person and (ii) it has not offered or sold, and
will not offer or sell, directly or indirectly, any shares of Common Stock or
distribute this Prospectus to any person outside the United States or Canada or
to anyone other than a United States or Canadian Person. Each International
Underwriter has severally agreed that, as part of the distribution of the
shares of Common Stock by the International Underwriters, (i) it is
not purchasing any shares of Common Stock for the account of any United States
or Canadian Person, and (ii) it has not offered or sold, and will not offer or
sell, directly or indirectly, any shares of Common Stock or distribute any
Prospectus relating to the International Offering to any person within the
United States or Canada or to any United States or Canadian Person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States or Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust which is subject to United States or Canadian federal income
taxation, regardless of the source of its income (other than the foreign branch
of any United States or Canadian Person), and includes any United States or
Canadian branch of a person other than a United States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of shares of Common Stock as may be
mutually agreed. The price of any shares of Common Stock so sold shall be the
public offering price, less an amount not greater than the concession to
securities dealers. To the extent that there are sales between the U.S.
Underwriters and the International Underwriters pursuant to the Agreement
Between U.S. Underwriters and International Underwriters, the number of shares
of Common Stock initially available for sale by the U.S. Underwriters or by the
International Underwriters may be more or less than the amount specified on the
cover page of this Prospectus.
Any offer of the shares of Common Stock in Canada will be made only pursuant
to an exemption from the registration and qualification requirements in any
jurisdiction in Canada in which such offer is made.
The U.S. Underwriting Agreement provides that the Company will indemnify the
several U.S. Underwriters against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the U.S.
Underwriters may be required to make in respect thereof.
The Company, its directors, officers and stockholders, and certain holders
of outstanding options issued by the Company have each agreed with the
Underwriters not to offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, or announce the offering of, or file or cause to be
filed a registration statement under the Securities Act with respect to any
shares of Common Stock, including any such shares beneficially or indirectly
owned or controlled by the Company, or any securities or options convertible
into, or exchangeable or exercisable for, shares of Common Stock, for a period
of 180 days from the date of this Prospectus, without prior written consent,
except for (i) shares of Common Stock issued under the 1996 Stock Option/Stock
Issuance Plan, (ii) shares issued in respect of obligations existing before the
date of this Prospectus and (iii) shares issued in connection with the
Offerings.
The U.S. Representatives do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
109
<PAGE>
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the shares of Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price
included the information set forth in this Prospectus and otherwise available to
the Representatives, the history of and future prospects for the industry in
which the Company competes, the ability of the Company's management, the general
conditions of the securities market at the time of the Offerings and the market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. There can be no
assurance, however, that the prices at which the Common Stock will sell in the
public market after the Offerings will not be lower than the price at which they
are sold in the Offerings by the Underwriters.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995 and the related consolidated statements of operations, of stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1995 included herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their report appearing herein, which
report indicates a reliance on other auditors relative to certain amounts
relating to the Company's investment in PT Rajasa Hazanah Perkasa ("RHP") as of
and for the year ended December 31, 1995, and have been included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The balance sheet of RHP as of December 31, 1995 and the related statements of
income, deficit and cash flows for the year then ended included herein have been
audited by Prasetio, Utomo & Co., independent accountants, as stated in their
report appearing herein, and have been included herein in reliance upon the
authority of said firm as experts in accounting and auditing. The balance sheet
of RHP as of December 31, 1994 and the related statements of loss, deficit and
cash flows for the two years ended December 31, 1994 included herein have been
audited by Siddharta Siddharta & Harsono, registered public accountants, as
stated in their report appearing herein, and have been included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of STW as of December 31, 1994 and 1995 and the
related consolidated profit and loss accounts, statements of shareholders equity
and cash flows for the three years ended December 31, 1995 included herein have
been audited by KPMG Peat Marwick LLP, independent accountants, as stated in
their report appearing herein, and have been included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Palo Alto, California. A partner of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP owns 6,720 shares of Preferred Stock and
warrants to purchase 120 shares of Preferred Stock.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in that Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and its Common Stock, reference
is hereby made to such Registration Statement, exhibits and schedules.
Statements contained in this Prospectus as to the contents of any contract or
any other document are not necessarily complete and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects to
such reference. The Registration Statement, including the
110
<PAGE>
exhibits and schedules thereto, can be inspected and copied at the Commission's
Public Reference Room, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
Los Angeles Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California, 90036-3648; and New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site (www.sec.gov.) that contains reports, proxy and information
statements and other information regarding registrants that submit electronic
filings to the Commission. The Registration Statement, including all exhibits
thereto and amendments thereof, has been filed with the Commission through
EDGAR. Copies of the Registration Statement, periodic reports, proxy statements
and other information also can be obtained from the Company upon request. Any
such request should be addressed to the Company's principal office at 400 South
El Camino Real, Suite 1275, San Mateo, California, 94402, attention: Secretary
(telephone number (415) 548-0808).
The Company, in accordance with the Exchange Act, is required to file
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and information may be inspected and copied at the
public reference facilities maintained by the Commission referenced above. The
Company intends to furnish holders of Common Stock with annual reports that
include audited annual consolidated financial statements and a report thereon by
its independent certified public accountants and quarterly reports containing
unaudited consolidated financial information for each of the first three
quarters of each fiscal year.
111
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
International Wireless Communications Holdings, Inc. and Subsidiary
Independent Auditors' Report........................................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995........................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994, and 1995............ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994
and 1995............................................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995............ F-6
Notes to Consolidated Financial Statements............................................................. F-7
Interim Consolidated Condensed Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of December 31, 1995 and September 30, 1996, and pro forma
September 30, 1996................................................................................... F-27
Consolidated Condensed Statements of Operations for the nine months ended September 30, 1995 and
1996................................................................................................. F-28
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 1995 and
1996................................................................................................. F-29
Notes to Consolidated Condensed Financial Statements................................................... F-30
Financial Statements of Significant 50% or less Owned Affiliates
PT Rajasa Hazanah Perkasa for the years ended December 31, 1993, 1994 and 1995......................... F-41
PT Rajasa Hazanah Perkasa for the six months ended June 30, 1995 and 1996 (unaudited).................. F-65
Syarikat Telefon Wireless (M) SDN BHD and its Subsidiary as of and for the three years ended December
31, 1995............................................................................................. F-84
Syarikat Telefon Wireless (M) SBN BHD and its Subsidiary as of and for the six months ended June 30,
1995 and 1996 (unaudited)............................................................................ F-99
</TABLE>
International Wireless Communications Holdings, Inc. (IWC Holdings) is a
holding company which conducts all of its operations through its sole direct
subsidiary, International Wireless Communications, Inc. and subsidiaries (IWC)
and has no assets, liabilities or operations other than its investment in IWC as
of December 31, 1994 and 1995. Separate consolidated financial statements of IWC
would be identical to the consolidated financial statements of IWC Holdings as
of December 31, 1994 and 1995. As of September 30, 1996, the financial
statements of IWC Holdings and IWC are identical except for the debt obligation,
related warrants and debt issue costs which are recorded at the IWC Holdings
level. IWC has executed an intercompany note to IWC Holdings in a principal
amount equal to the net proceeds of the unit offering. Although separate
financial statements of IWC are required by Regulation S-X, they are not
included as management believes they would not be meaningful due to the
separately identifiable differences described above.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
International Wireless Communications Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
International Wireless Communications Holdings, Inc. and subsidiary (IWC
Holdings) as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of IWC Holdings'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of PT Rajasa Hazanah Perkasa (RHP), an investment which is reflected
in the accompanying consolidated financial statements using the equity method of
accounting as of and for the year ended December 31, 1995 (see Note 3). The
investment in this company represents 25% of consolidated assets as of December
31, 1995. The equity in its net loss was approximately $1,310,000 for the year
ended December 31, 1995. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for that company, is based on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, based on our audit and the report of other auditors for
1995, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of IWC Holdings as of December 31,
1994 and 1995, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Francisco, California
July 12, 1996,
except for Note 1, as to
which the date is August 8, 1996
F-2
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 10,298 25,398
Notes receivable from affiliates......................................................... 2,245 338
Advances to affiliate.................................................................... -- 728
Other current assets..................................................................... 37 387
--------- ---------
Total current assets................................................................... 12,580 26,851
Property and equipment, net................................................................ 88 4,269
Investments in affiliates.................................................................. 5,427 52,280
Telecommunication licenses and other intangibles, net...................................... -- 12,106
Other assets............................................................................... 329 137
--------- ---------
Total assets........................................................................... $ 18,424 95,643
--------- ---------
--------- ---------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................................................... $ 200 5,757
Notes payable to related party........................................................... 1,800 1,800
Note payable............................................................................. -- 4,000
--------- ---------
Total current liabilities.............................................................. 2,000 11,557
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock, $.01 par value per share; 21,541,480 shares
designated; 5,222,080 and 15,698,400 shares issued and outstanding in 1994 and 1995,
respectively; net of note receivable from stockholder of $26 in 1994 and 1995;
liquidation and minimum redemption value of $105,509..................................... 19,578 98,845
Stockholders' deficit:
Convertible preferred sock, $.01 par value per share; 1,200,000 shares designated,
issued, and outstanding in 1994 and 1995; liquidation value of $1,020.................. 12 12
Common stock, $.01 par value per share; 26,000,000 shares authorized; 76,080 and 328,000
shares issued and outstanding in 1994 and 1995, respectively........................... 1 3
Additional paid-in capital............................................................... 625 748
Note receivable from stockholder......................................................... (152) (152)
Accumulated deficit...................................................................... (3,640) (15,370)
--------- ---------
Total stockholders' deficit............................................................ (3,154) (14,759)
--------- ---------
Total liabilities, redeemable convertible preferred stock and stockholders' deficit.... $ 18,424 95,643
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating revenue................................................................... $ -- -- --
Operating expenses:
General and administrative expenses............................................... 809 2,481 6,365
Equity in losses of affiliates.................................................... -- -- 3,756
--------- --------- ---------
Loss from operations............................................................ (809) (2,481) (10,121)
Other income (expense):
Interest income................................................................... 2 106 232
Interest expense.................................................................. (33) (115) (1,354)
Other............................................................................. (1) (13) (28)
--------- --------- ---------
Net loss........................................................................ $ (841) (2,503) (11,271)
--------- --------- ---------
--------- --------- ---------
Pro forma net loss per common share................................................. $ (0.98)
---------
---------
Shares used in computing pro forma net loss per common share........................ 11,460
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Balances as of December 31, 1992........ 271,960 $ 3 1,200,000 $ 12
Exercise of warrant..................... 108,760 -- -- --
Conversion of notes payable to Series A
preferred stock....................... 108,800 1 -- --
Issuance of Series A preferred stock.... 739,720 7 -- --
Net loss................................ -- -- -- --
------------- --- ------------- ---
Balances as of December 31, 1993........ 1,229,240 11 1,200,000 12
Conversion of Series A preferred stock
to Series B redeemable preferred
stock................................. (1,229,240) (11) -- --
Conversion of common stock to Series A
preferred stock....................... 1,200,000 12 (1,200,000) (12)
Issuance of common stock................ -- -- 76,080 1
Accretion of redeemable preferred
stock................................. -- -- -- --
Net loss................................ -- -- -- --
------------- --- ------------- ---
Balances as of December 31, 1994........ 1,200,000 12 76,080 1
Issuance of common stock................ -- -- 251,920 2
Accretion of redeemable preferred
stock................................. -- -- -- --
Net loss................................ -- -- -- --
------------- --- ------------- ---
Balances as of December 31, 1995........ 1,200,000 $ 12 328,000 $ 3
------------- --- ------------- ---
------------- --- ------------- ---
<CAPTION>
NOTE TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN FROM ACCUMULATED EQUITY
CAPITAL STOCKHOLDER DEFICIT (DEFICIT)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1992........ $ 635 $ -- $ (164) $ 486
Exercise of warrant..................... -- -- -- --
Conversion of notes payable to Series A
preferred stock....................... 99 -- -- 100
Issuance of Series A preferred stock.... 673 -- -- 680
Net loss................................ -- -- (841) (841)
----------- ----------- ------------- -------------
Balances as of December 31, 1993........ 1,407 -- (1,005) 425
Conversion of Series A preferred stock
to Series B redeemable preferred
stock................................. (933) -- -- (944)
Conversion of common stock to Series A
preferred stock....................... -- -- -- --
Issuance of common stock................ 151 (152) -- --
Accretion of redeemable preferred
stock................................. -- -- (132) (132)
Net loss................................ -- -- (2,503) (2,503)
----------- ----------- ------------- -------------
Balances as of December 31, 1994........ 625 (152) (3,640) (3,154)
Issuance of common stock................ 123 -- -- 125
Accretion of redeemable preferred
stock................................. -- -- (459) (459)
Net loss................................ -- -- (11,271) (11,271)
----------- ----------- ------------- -------------
Balances as of December 31, 1995........ $ 748 $ (152) $ (15,370) $ (14,759)
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................................... $ (841) (2,503) (11,271)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................. 3 15 37
Amortization................................................................. 40 40 294
Equity in losses of affiliates............................................... -- -- 3,756
Changes in operating assets and liabilities:
Other current assets....................................................... (42) 5 (350)
Accounts payable and accrued expenses...................................... 155 45 5,557
--------- --------- ---------
Net cash used in operating activities.................................... (685) (2,398) (1,977)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................ (8) (88) (4,218)
Notes receivable from affiliates............................................... -- (2,245) (113)
Advances to affiliate.......................................................... -- -- (728)
Investments in affiliates...................................................... (1,401) (3,704) (19,589)
Telecommunication licenses and other intangibles............................... -- -- (12,153)
Other assets................................................................... (40) (169) 70
--------- --------- ---------
Net cash used in investing activities.................................... (1,449) (6,206) (36,731)
--------- --------- ---------
Cash flows from financing activities:
Loan proceeds.................................................................. 2,160 5,180 28,138
Repayment of principal......................................................... (50) (2,060) (2,050)
Net proceeds from issuance of stock and warrant................................ 680 15,122 27,720
--------- --------- ---------
Net cash provided by financing activities................................ 2,790 18,242 53,808
--------- --------- ---------
Net increase in cash and cash equivalents........................................ 656 9,638 15,100
Cash and cash equivalents at beginning of year................................... 4 660 10,298
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 660 10,298 25,398
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Cash paid for interest......................................................... $ 16 103 949
--------- --------- ---------
--------- --------- ---------
Noncash financing and investing activities:
Conversion of loans to equity.................................................. $ 100 3,380 24,307
--------- --------- ---------
--------- --------- ---------
Conversion of note receivable to investment in affiliate....................... $ -- -- 2,020
--------- --------- ---------
--------- --------- ---------
Note receivable from sale of stock............................................. $ -- 178 --
--------- --------- ---------
--------- --------- ---------
Exchange of preferred stock for investment in affiliates....................... $ -- -- 25,000
--------- --------- ---------
--------- --------- ---------
Exchange of common stock for investment in CTP................................. $ -- -- 125
--------- --------- ---------
--------- --------- ---------
Note payable in connection with RHP investment................................. $ -- -- 4,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
International Wireless Communications, Inc. and subsidiaries (IWC or the
Company) was incorporated in Delaware in 1992. The Company develops, owns, and
operates wireless communications companies in emerging markets throughout Asia
and Latin America. These local wireless businesses (LWBs) provide a variety of
communications services. Together with local and strategic partners, the Company
has interests in Brazil, India, Indonesia, Malaysia, Mexico, New Zealand,
Pakistan, Peru, and the Philippines.
In prior years, the Company was considered a development stage enterprise.
During 1995, the Company's interests in Malaysia, Indonesia, New Zealand, and
Mexico commenced operations. Entities in which the Company has ownership
interests and have commenced operations are referred to as "operating entities."
As such, the Company's management has ceased to report the operations as a
development stage enterprise.
International Wireless Communications Holdings, Inc. ("IWC Holdings") was
incorporated in Delaware in July 1996 as a holding company whose primary asset
is the capital stock of IWC. Subsequent to the formation of IWC Holdings, the
Company completed a reorganization in which each share of the then outstanding
capital stock of IWC, which became a wholly owned subsidiary of IWC Holdings,
was converted into 40 shares of the corresponding class and series of capital
stock of IWC Holdings. IWC Holdings assumed and became the successor to the
agreements of IWC relating to capital stock. All data related to shares and per
share amounts for all periods presented have been adjusted to reflect the effect
of the reorganization and the stock conversion.
Consistent with industry practice, the Company considers itself to be
operating in one business segment.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
International Wireless Communications, Inc. and its wholly owned subsidiary,
Servicos de Radio Comunicacoes Ltda. (SRC) located in Brazil. In addition, the
accompanying consolidated financial statements include the accounts of two
majority owned subsidiaries, M/S Mobilcom (Pte) Ltd. (Mobilcom) located in
Pakistan, and PeruTel S.A. (PeruTel) located in Peru. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Minority interests are not reflected in the accompanying consolidated financial
statements as they are immaterial.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operating entities is the
applicable local currency, except for those located in highly inflationary
countries. Translation from the applicable foreign currencies to U.S. dollars is
performed for monetary assets and liabilities using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains or losses, net of
applicable deferred income taxes, resulting from such translation, if material,
are included in stockholders' equity. Gains or losses resulting from foreign
currency transactions are included in other income. For non-operating foreign
investees and for the Company's investee in Brazil, a highly inflationary
country, the functional currency is the U.S. dollar.
F-7
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Remeasurement adjustments for foreign entities where the U.S. dollar is the
functional currency, and exchange gains and losses arising from transactions
denominated in a currency other than the functional currency, are included in
income.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per share data has been computed using the weighted
average number of shares of common stock, including common equivalent shares
from stock options and warrants outstanding (when dilutive using the treasury
stock method) and the shares resulting from the conversion of all outstanding
shares of preferred stock at the closing of the IPO. Pursuant to SEC Staff
Accounting Bulletins, common equivalent shares issued during the 12-month period
prior to the initial filing of the Company's proposed IPO have been included in
the calculation as if they were outstanding for all periods presented (even if
antidilutive). Due to the significant impact of the conversion of preferred
stock into common stock at the closing of the IPO, historical net loss per
common share is not meaningful and is therefore not presented.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of 90
days or less at the time of acquisition to be cash equivalents. Cash equivalents
as of December 31, 1995 consisted of money market mutual funds. For all such
investments, cost approximates fair market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at original cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the respective
assets, generally three to five years for domestic assets and three to twenty
years for foreign assets.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies consist of the costs incurred to acquire
development stage projects or interest in entities that have been awarded
telecommunication licenses to provide various wireless services.
The cost method of accounting is used for the Company's investments in
affiliated companies where the Company's voting interest is less than 20% and
the Company does not exert significant influence. Under the cost method, the
investment is recorded at cost, and income is recognized only to the extent
distributed by the investee as dividends. No such dividends were declared or
distributed for the years ended December 31, 1994 and 1995. Write-downs to the
recorded historical cost are recognized when the Company believes that an
impairment in value has occurred.
Where the Company's voting interest is 20% to 50% and the Company does not
exercise control, the equity method of accounting is used. Under this method,
the investment, originally recorded at cost, is adjusted to recognize the
Company's share of net earnings or losses of the investee, limited, in the case
of losses, to the extent of the Company's investment therein, and the
amortization of telecommunication licenses and other intangibles, if any. The
amount of the purchase price that exceeded the fair value of Company's
percentage ownership of the equity investee's tangible assets at the date of
acquisition reflects the existence of intangible assets of the equity investee.
The primary intangible asset
F-8
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
of each equity investee consists of the equity investee's telecommunication
licenses or rights to participate in such licenses. Amounts attributable to
other intangibles, such as workforce, customer lists, and agreements with local
companies for transmitter and antenna locations, are not material. Accordingly,
the Company has accounted for the excess purchase price as attributable to
primarily telecommunication licenses and participation rights. To the extent
that goodwill exists, the Company believes that the difference in amortization
lives between licenses and goodwill would not have a material effect on the
accompanying financial statements. In some cases, the terms of the licenses held
by the equity investees are less than twenty years. However, the Company
believes that it will be able to renew the licenses indefinitely if it builds
out the infrastructure and establishes commercial service. The costs of license
renewal are expected to be nominal.
The Company consolidates entities it controls, generally through greater
than 50% ownership interest.
TELECOMMUNICATION LICENSES AND OTHER INTANGIBLES OF MAJORITY OWNED
SUBSIDIARIES
The Company has acquired majority ownership interest in various LWBs. These
acquisitions have been accounted for under the purchase method and are included
in the accompanying consolidated financial statements. The amount of the
purchase price that exceeded the fair value of Company's percentage ownership of
the LWB's tangible assets at the date of acquisition reflects the existence of
intangible assets of the LWB. The primary intangible asset of each LWB consists
of the LWB's telecommunication licenses or rights to participate in such
licenses. Given the early stage nature of the acquired entities, amounts
attributable to other intangibles, such as workforce, customer lists, and
agreements with local companies for transmitter and antenna locations, are not
material. Accordingly, the Company has accounted for the excess purchase price
as attributable to primarily telecommunication licenses and participation
rights. To the extent that goodwill exists, the Company believes that the
difference in amortization lives between licenses and goodwill would not have a
material effect on the accompanying financial statements. Licenses are amortized
over 20 years, commencing upon the completion of the acquisition. In some cases,
the terms of the licenses held by the LWB's are less than twenty years. However,
the Company believes that it will be able to renew the licenses indefinitely if
it builds out the infrastructure and establishes commercial service. The costs
of license renewal are expected to be nominal. Amortization expense of $47,000
was recorded in 1995. No amortization was recorded in 1993 or 1994.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets
F-9
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from these estimates.
BUSINESS AND CREDIT CONCENTRATIONS AND RISK FACTORS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents. The
Company's investments are comprised of investment grade short-term debt
instruments. Management believes that the financial risks associated with such
deposits are minimal.
Included in the Company's consolidated balance sheet as of December 31, 1994
and 1995, are long-term investments in various LWBs in such developing countries
as Malaysia, Indonesia, Brazil, Pakistan and Mexico (see Note 8). These
investments make up a significant portion of IWC's balance sheet (see Note 3).
Each IWC affiliate has a unique and distinct market, operating environment,
and local economy with different subscription rates and costs to build and
operate the systems. Achieving each operating plan is dependent upon
successfully contending not only with normal risks associated with constructing
and operating wireless properties, but also risks unique to operating in foreign
countries, such as regulatory compliance, contractual restrictions, labor laws,
expropriation, nationalization, political, economic or social instability, and
confiscatory taxation.
The Company anticipates that it will often have a minority interest in
operating companies, in part because applicable laws often limit foreign
investors to minority equity positions. As such, the Company may be unable to
access the cash flow, if any, of its operating companies. Additionally, the
Company's ability to sell or transfer its ownership interest in its operating
companies is generally subject to limitations based on agreements with its
strategic and financial partners, as well as provisions in local operating
licenses and local government regulations that may prohibit or restrict the
transfer of the Company's ownership interest in such operating companies.
The Company's ability to retain and exploit its existing telecommunication
licenses, and to obtain new licenses in the future, is essential to the
Company's operations. However, these licenses are typically granted by
governmental agencies in developing countries, and there can be no assurance
that these governmental agencies will not seek to unilaterally limit, revoke, or
otherwise adversely modify the terms of these licenses in the future, any of
which could have a material adverse effect on the Company, and the Company may
have limited or no legal recourse if any of these events were to occur. In
addition, licenses typically require renewal from time to time and there can be
no assurance that renewals to these licenses will be granted.
Most of the LWBs currently operating have incurred operating losses and
negative cash flow from operations since inception, and the Company expects that
most of its operating companies will continue to generate operating losses and
negative cash flow from operations for the foreseeable future. Most of these
operating companies have only recently initiated providing commercial services
and have a limited subscriber base. This is not uncommon in the wireless
communications industry, which requires significant capital investments in the
initial years prior to obtaining a sufficient subscriber revenue base to support
operations. Achievement of positive cash flow from operations will depend on
successful
F-10
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
execution of management's business plans. Those plans assume significant
additional capital investment, in some cases, to expand the wireless network.
There can be no assurance that such funding capacity will be available in the
future.
Nonoperating risks include substantial use of borrowings by unconsolidated
investee companies to leverage equity capital employed and risks with respect to
foreign currency exchange rates.
RECOVERABILITY OF LONG-LIVED ASSETS
The recoverability of property and equipment, investments in equity and cost
investee companies is dependent upon the successful build-out of system
infrastructure, obtaining additional licenses by investee companies, and
successful development of systems in each of the respective markets in which the
Company's investees operate or through the sale of such assets.
The Company's policy is to assess annually an impairment in value based upon
a comparison of projected operating cash flows from each of the underlying
investee companies over their expected period of operation, on an undiscounted
basis, to the carrying amount of the related assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, notes
receivable from and advance to affiliates, accounts payable and accrued
expenses, notes payable to related party and note payable approximates the fair
market value due to the relatively short maturity of these instruments.
ACQUISITION, TRANSACTION, AND DEVELOPMENT COSTS
The Company expenses direct and incremental costs incurred relative to
pursuing potential investments due to the relative uncertainty of the future
realization of such costs principally due to the nature of early stage
development projects in foreign countries.
RECLASSIFICATIONS
Certain amounts in the accompanying 1993 and 1994 consolidated financial
statements have been reclassified to conform with the 1995 consolidated
financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. This statement requires long-lived assets to be evaluated for
impairment whenever event or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. The Company adopted SFAS No. 121 in
fiscal 1995. The adoption of SFAS No. 121 did not have a material effect on the
Company's results of operations.
The Financial Accounting Standards Board recently adopted SFAS No. 123,
Accounting for Stock-Based Compensation. This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans,
including stock option/stock issuance plans. The Company will adopt SFAS No. 123
in fiscal 1996. Management plans to continue conforming to APB No. 25,
Accounting for Stock Issued to Employees, for purposes of measurement of
compensation expense.
F-11
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Therefore, adoption of SFAS No. 123 is not expected to have a material effect on
the Company's results of operations in the year of adoption.
(2) BALANCE SHEET COMPONENTS
Balance sheet component as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Property and equipment
Furniture and fixtures.................................................. $ 36 $ 40
Equipment............................................................... 71 126
Automobiles............................................................. -- 34
Construction in process................................................. -- 4,125
--------- ---------
107 4,325
Less accumulated amortization........................................... 19 56
--------- ---------
Property and equipment, net........................................... $ 88 $ 4,269
--------- ---------
--------- ---------
Telecommunication licenses and other intangibles
SRC/Via 1 project....................................................... $ -- $ 6,714
Mobilcom................................................................ -- 5,439
--------- ---------
-- 12,153
Less accumulated amortization........................................... -- 47
--------- ---------
Telecommunication licenses and other intangibles, net............... $ -- $ 12,106
--------- ---------
--------- ---------
Accounts payable and accrued expenses
Professional services................................................... $ -- $ 3,041
Employee compensation and benefits...................................... 89 189
Interest................................................................ 30 256
Equipment purchases..................................................... -- 1,719
Accounts payable and other.............................................. 81 552
--------- ---------
$ 200 $ 5,757
--------- ---------
--------- ---------
</TABLE>
(3) INVESTMENTS IN AFFILIATES
The Company's investments in affiliates represent interests in various LWBs
in several developing countries. These investments are accounted for under the
equity or cost methods.
EQUITY INVESTMENTS
For those investments in companies in which the Company's voting interest is
20% to 50%, or for investments in companies in which the Company exerts
significant influence through board representation and management authority, the
equity method of accounting is used. Under this method, the investment,
originally recorded at cost, is adjusted to recognize the Company's share of
losses of affiliates, limited to the extent of the Company's investment in and
advances to affiliates, including any debt guarantees or other contractual
funding commitments. All affiliated companies have fiscal years
F-12
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) INVESTMENTS IN AFFILIATES (CONTINUED)
ended December 31. Investments in affiliated companies are as follows as of
December 31, 1994 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
PORTION OF
INVESTMENT
EXCEEDING
COMPANY'S SHARE
INVESTMENTS OF THE UNDERLYING
PERCENTAGE IN AFFILIATED HISTORICAL
OF OWNERSHIP COMPANIES(2) NET ASSETS
AFFILIATED -------------- -------------------------- --------------------------
COUNTRY COMPANY 1994 1995 1994 1995 1994 1995
- -------------- ------------------------------------ ------ ----- -------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Malaysia Syarikat Telefon Wireless (STW)..... 2%(1) 30% $ 1,400 $ 20,879(3) $ 1,311 $ 17,459
Indonesia PT Rajasa Hazanah Perkasa (RHP)..... -- 25% -- 24,539(4) -- 23,680
New Zealand TeamTalk Limited (TeamTalk)......... 25% 50% 284 2,345 -- 1,712
India HFCL Mobile Radio Limited (HFCL).... -- 49% -- 243 -- 243
Indonesia PT Binamulti Visualindo (PTBV)...... -- 49% -- 206 -- 206
-------- --------------- ------------- ----------
1,684 48,212 1,311 43,300
Less accumulated amortization....................................... -- 966 -- 966
-------- --------------- ------------- ----------
$ 1,684 $ 47,246 $ 1,311 $ 42,334
-------- --------------- ------------- ----------
-------- --------------- ------------- ----------
</TABLE>
- ------------------------------
(1) In 1994 this investment was accounted for under the cost method.
(2) Adjusted for the Company's share of equity in losses of affiliated
companies.
(3) In connection with a Ringgit 91,000,000 (approximately $36,400,000) senior
credit facility with a Malaysian bank obtained by STW, the Company along
with other STW shareholders, agreed to provide certain support to this debt
(see Note 7).
(4) The investment in affiliated company includes $4,000,000 representing the
Company's pro rata share of a $16,000,000 note payable to an unrelated party
(see Note 7).
The Company acquired its interest in RHP, HFCL, and PTBV during 1995 and
accounted for them using the purchase method (see Note 4). The following
condensed financial statement data, presented in accordance with U.S. generally
accepted accounting principles and stated in U.S. dollars, has been derived from
audited and unaudited financial statements. The financial information pertaining
to RHP was derived from financial statements audited by other auditors. Both
HFCL and PTBV are nonoperating entities with insignificant operations as of
December 31, 1995, and as such, selected financial information is not included.
For the year ended December 31, 1993, no significant operations existed for any
equity investment.
Financial information for affiliated companies accounted for by the equity
method is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1994
---------------------------------
STW RHP TEAMTALK
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets............................... $ 1,394 $ -- $ 24
Noncurrent assets............................ 11,997 -- 239
Current liabilities.......................... 878 -- 100
Noncurrent liabilities....................... 7,565 -- --
Net revenues................................. 83 -- --
Net loss..................................... (1,285) -- --
</TABLE>
F-13
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) INVESTMENTS IN AFFILIATES (CONTINUED)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
----------------------------------
STW RHP(A) TEAMTALK
--------- --------- ------------
<S> <C> <C> <C>
Current assets.......................................... $ 2,611 $ 5,316 $ 213
Noncurrent assets....................................... 33,299 21,336 6,307
Current liabilities..................................... 2,988 17,496 3,933
Noncurrent liabilities.................................. 21,925 6,257 1,492
Net revenues............................................ 749 5,463 348
Net loss................................................ (5,898) (3,186) (1,490)
</TABLE>
- ------------------------
(A) For the period March 28, 1995 through December 31, 1995. Net revenues and
net loss for the period from January 1, 1995 through March 27, 1995 were
$1,821 and $387, respectively.
COST INVESTMENTS
The Company uses the cost method of accounting for three other investments.
They are Corporacion Mobilcom, S.A. de C.V. (Mobilcom Mexico), PT Mobilkom
Telekomindo (Mobilkom), and Universal Telecommunications Service, Inc. (UTS).
The Company's ownership percentage is 2.47%, 15% and 19%, respectively. Both
Mobilcom Mexico and Mobilkom are operating entities. UTS, owned directly, and
indirectly through Mobilcom Corporation, is nonoperating.
The Company's carrying value and estimated fair value of these investments
as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------------------------ ------------------------
CARRYING FAIR MARKET CARRYING FAIR MARKET
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mobilcom Mexico............................. $ 2,062 $ 3,510 $ 2,062 $ 3,510(A)
Mobilkom.................................... 1,500 1,500 1,500 2,400(B)
UTS......................................... 181 181 1,472 1,472(C)
----------- ----------- ----------- -----------
$ 3,743 $ 5,191 $ 5,034 $ 7,382
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The Company considers these investments to be long-term in nature and are not
held for trading purposes. Fair value for these investments was determined as
follows:
(A) Fair value determined based upon the minimum value available through the
exercise of a put option.
(B) Fair value based upon recent investments by other shareholders. The Company
has undertaken to pledge all of its stock of Mobilkom to secure Mobilkom's
borrowings under a bank credit facility.
(C) Management has determined that the carrying cost approximates market value.
(4) RELATED PARTY TRANSACTIONS
ADVANCES TO AFFILIATE
The advances to affiliate as of December 31, 1995 represented advances to
TeamTalk in the amount of $728,000. The advances are interest-free with no
stated terms.
F-14
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES RECEIVABLE FROM AFFILIATES
Notes receivable from affiliates as of December 31, 1994, consisted
primarily of a working capital loan to STW of $2,020,000, bearing interest at
market rates, which was converted to an equity interest in STW during 1995.
Notes receivable from affiliates as of December 31, 1995, consisted
primarily of a note due from Mobilcom Mexico for $158,000, which earns interest
at 6% per annum; and a note due from RHP for $128,000, bearing interest at
market rates. The notes expired on January 5, 1996 and April 15, 1996,
respectively, and have subsequently been extended.
NOTES PAYABLE TO RELATED PARTY
Notes payable as of December 31, 1994 and 1995, consisted of two notes
payable to Vanguard Cellular Operating Corp. (Vanguard), the Company's largest
stockholder, each in the amount of $900,000 and bearing interest at 9%
compounded annually. The notes are due on the earlier of April 26, 1996 or the
close of an initial public offering. These notes are convertible, at the option
of the holder, into 274,800 shares of redeemable convertible Series D preferred
stock. Subsequent to year-end, these notes were converted (see Note 9).
VANGUARD MERGER
On December 18, 1995, the Company merged with Vanguard International
Telecommunications, Inc. (VIT) (See Note 5), a wholly owned subsidiary of
Vanguard. Prior to this merger, Vanguard owned 10.46% of the Company and
provided a variety of services relating to the formation, development and
operation of the Company's wireless communication businesses. In exchange for
3,972,240 shares of redeemable convertible Series E preferred stock with a
liquidation preference of $6.29 per share, the Company acquired VIT's interests
in TeamTalk and VIT's rights to acquire an interest in various international
LWBs. The liquidation value was equal to the fair market value of the Series E
preferred stock on the date of the merger. The resulting total value of
$25,000,000, was allocated to the various LWBs based on their respective stage
of development and an independent valuation study of the LWBs. As a result of
this merger, Vanguard increased its ownership position to approximately 39% and
continues to provide the services described above. The original cost to Vanguard
of the net assets acquired by IWC in the merger was approximately $550,000. The
value of these assets, however, appreciated significantly over time as licenses
were subsequently granted, joint ventures and other strategic alliances formed
and business plans developed.
The excess of the allocated portion of the merger value to TeamTalk over the
net book value of TeamTalk was attributed to telecommunication licenses. This
excess amounted to $1,712,000 and is amortized on a straight-line basis over 20
years.
The Company also acquired VIT's rights to participate in RHP, SRC, Mobilcom,
HFCL and PTBV and other yet to be developed projects. Approximately $23,288,000
was allocated to telecommunication licenses in each LWB based on their relative
stage of development. These amounts are amortized on a straight-line basis over
20 years.
F-15
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) RELATED PARTY TRANSACTIONS (CONTINUED)
Unaudited pro forma consolidated results of operations, as if the merger
with VIT had occurred on January 1, 1994, are as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Revenues................................................................ $ -- --
Operating loss.......................................................... (3,731) (11,713)
Net loss................................................................ (3,753) (12,863)
Pro forma net loss per share............................................ (1.12)
</TABLE>
The Company has entered into arrangements with certain of the operating
companies whereby the Company is reimbursed for direct costs, primarily salary
and out-of-pocket costs, associated with technical, financial and administrative
support provided by the Company. These amounts have been recorded as an offset
to general and administrative expenses on the accompanying consolidated
statements of operations. For the years ended December 31, 1994 and 1995,
expense reimbursements were not material. No such arrangements existed in 1993.
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The Company is authorized to issue 23,080,000 shares of preferred stock, of
which 21,541,480 are designated redeemable convertible preferred stock,
1,200,000 are designated nonredeemable convertible preferred stock, 338,520 are
undesignated, and 26,000,000 shares of common stock, each with a par value of
$0.01 per share.
Redeemable convertible preferred stock as of December 31, 1995, was
comprised of the following (in thousands except share and per share amounts):
<TABLE>
<CAPTION>
SHARES ISSUED LIQUIDATION AGGREGATE
SHARES AND VALUE PER LIQUIDATION
REDEEMABLE CONVERTIBLE 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 3,378,160 6.8775 23,233
Series E................................................. 3,972,240 3,972,240 6.7365 26,759
Series F-1............................................... 7,000,000 4,508,480 9.3750 42,267
Series F-2............................................... 1,080,000 848,000 9.3750 7,950
------------- ------------- -----------
21,541,480 15,698,400 $ 105,509
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
Each series of redeemable preferred stock is being accreted to its
respective minimum redemption amount, which is equal to the liquidation value.
Nonredeemable convertible preferred stock as of December 31, 1994 and 1995,
was comprised of 1,200,000 designated, issued, and outstanding shares of Series
A preferred stock with a liquidation per share of $.85 and an aggregate
liquidation value of $1,020,000.
The rights, preferences, and privileges of the holders of preferred stock
are as follows:
- LIQUIDATION
In the event of Company liquidation, holders of Series F-1 and F-2
preferred stock (collectively referred to as Series F preferred stock) shall
be entitled to receive, prior and in preference to the holders of Series A,
B, C, D and E preferred stock ("Junior preferred stock") and common stock an
F-16
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
amount per share equal to the sum of (i) the product of (A) .50 multiplied
by (B) the liquidation value per share specified above, as adjusted, and
(ii) any declared but unpaid dividends thereon. Holders of Series B, C, D
and E preferred stock shall next be entitled to receive an amount per share
equal to the sum of (i) the product of (A) .55 multiplied by (B) an amount
per share of .9192, 2.2232, 6.55 and 6.2937, respectively, as adjusted and
(ii) any declared but unpaid dividends thereon. Holders of the Junior
preferred stock and Series F preferred stock shall next be entitled to
receive the product of (1) .50 multiplied by (2) an amount per share of
.9193, 2.223, 6.55, 6.55 and 9.375, respectively, as adjusted.
Holders of the Series A preferred stock shall be entitled to receive an
amount per share equal to the liquidation value per share specified above,
as adjusted, plus any declared but unpaid dividends thereon. After the
distributions described above, and after the distribution related to common
stock described below, the remaining assets of the Company shall be
distributed among the holders of the preferred stock and common stock pro
rata assuming full conversion of preferred stock into common stock.
- DISTRIBUTIONS
The holders of preferred stock are entitled to receive noncumulative
dividends at the same time and on the same basis as holders of common stock
when, and if, declared by the Board of Directors. No dividends had been
declared through December 31, 1995.
- REDEMPTION
Each share of Series B, C, D, E, and F preferred stock is redeemable at
any time on or after December 31, 1998, but within 45 days after the receipt
by the Company of a written request from the holders of a majority of the
then outstanding shares of Series B, C, D, E and F-1 preferred stock. The
Company shall redeem all such shares by paying in cash a sum per share equal
to the greater of (1) the then fair market value of such share of preferred
stock on an as-converted basis, or (2) the liquidation value of such share
of preferred stock (hereinafter referred to as the redemption price). In the
event the assets of the Company are insufficient to effect such redemption
in full, the shares of preferred stock not redeemed shall remain outstanding
and entitled to all the rights and preferences provided herein.
In addition to the above redemption, at any time on or after December
31, 2000, but within 45 days after the receipt by the Company of a written
request from the majority of the holders of Series F-1 preferred stock, the
Company shall redeem all outstanding shares of such stock by paying, in
cash, an amount per share equal to the redemption price of such stock.
Upon the occurrence of a change of control of the Company that is not
approved by certain directors designated by the holders of Series F
preferred stock, then the holders of a majority of the shares of Series F-1
preferred stock then outstanding shall have the right, by written demand to
the Company, to require the Company to redeem immediately all the shares of
Series F preferred stock then outstanding, at a price per share equal to the
redemption price of the Series F preferred stock.
- CONVERSION AND VOTING RIGHTS
Each share of preferred stock is convertible, at the option of the
holder, into such number of fully paid and nonassessable shares of common
stock as is determined by dividing the original preferred stock issue price
by the conversion price applicable to such preferred share. The conversion
price per share for each series of preferred stock is equal to the preferred
stock issue price of the respective series of preferred stock, subject to
adjustment under certain circumstances. An
F-17
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
automatic conversion into common stock will occur in the event of a firm
commitment underwritten public offering of at least $13.10 per share, as
adjusted, and $8,000,000 in the aggregate. However, the Series F preferred
stock shall not automatically be converted in Common Stock unless: (i) the
underwritten public offering is consummated on or prior to December 31,
1998, (ii) the public offering per share is at least $18.75, as adjusted and
(iii) the aggregate offering price is not less than $25,000,000.
Each share of preferred stock has voting rights equal to that of common
stock on an "as if converted" basis. The holder of Series E preferred stock
is entitled to elect three directors to the Company's Board of Directors,
and, for so long as 20% of the shares of Series F preferred stock remain
outstanding, the holders of Series F-1 preferred stock are entitled to elect
three directors. As of December 31, 1995, the Company had 16,898,400 shares
of common stock reserved for the conversion of preferred stock.
PREFERRED STOCK TRANSACTIONS
- THE SERIES A AND B FINANCINGS
The Company sold an aggregate of 848,520 shares of Series A preferred
stock in May 1993 for an aggregate purchase price of $780,000 (a purchase
price of $.92 per share), including cancellation of notes payable in the
amount of $100,000.
In January 1994, each share of then outstanding common stock was
converted to an equal number of shares of Series A preferred stock.
Concurrently, shares of Series A preferred stock were converted into an
equal number of shares of Series B preferred stock.
- THE SERIES C FINANCING
In a series of transactions during January and February 1994, the
Company sold an aggregate of 1,762,280 shares of Series C preferred stock
for an aggregate purchase price of $3,918,000 (a purchase price of $2.22 per
share), (the "Series C Financing"), including cancellation of notes payable
to investors totaling $1,351,000.
In connection with the Series C Financing, the Company issued to an
investor warrants to purchase (a) 50,440 shares of Series C preferred stock
at an exercise price of $2.22 per share (b) 222,200 shares of preferred
stock at an exercise price of $7.15 per share, and (c) 444,360 shares of
preferred stock at an exercise price of $3.58 per share. Warrants (a), (b)
and (c) were exercisable until December 18, 1995, April 15, 1995 and January
15, 1995, respectively. The warrants were subsequently amended in July 1995
(see below).
- THE SERIES D FINANCING
In connection with bridge financing obtained in May 1994, the purchasers
received warrants exercisable for an aggregate of 46,440 shares of Series D
preferred stock. The warrants have an exercise price of $6.55 per share and
are exercisable until May 6, 1997.
In a series of transactions in September and October 1994, the Company
sold an aggregate of 2,230,560 shares of Series D preferred stock for an
aggregate purchase price, net of a $26,000 note receivable, of approximately
$14,584,000 (a purchase price of $6.55 per share), (the "Series D
Financing"), including cancellation of notes payable in the principal amount
of $2,029,000.
F-18
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the issuance of Bridge Notes on April 6, 1995, the
Company issued a warrant (the "April Bridge Warrants") to purchase 10,720
shares of Series D preferred stock at $6.55 per share. The April Bridge
Warrants are outstanding and are exercisable until April 6, 1998 or, if
earlier, upon the closing of the Company's initial public offering.
In connection with the Series D Financing, Vanguard loaned $1.8 million
to the Company in exchange for two convertible notes in the amount of
$900,000 each (see Note 4). Each note was due upon the earlier of April 26,
1996 or the occurrence of certain events which did not occur prior to that
date. On April 26, 1996, Vanguard converted both notes into an aggregate of
274,800 shares of Series D preferred Stock (see Note 9).
In July 1995, convertible secured bridge financing notes issued on April
24, 1995 were converted into 1,147,600 shares of Series D preferred stock
for an aggregate purchase price of $7,517,000 (a purchase price of $6.55 per
share).
- THE SERIES E FINANCING
In July 1995, the Company entered into a merger agreement with Vanguard
and VIT, a wholly-owned subsidiary of Vanguard, whereby VIT would merge
their international interests in numerous international wireless projects
into the Company in exchange for 3,972,240 shares of Series E preferred
stock. This merger was completed on December 18, 1995, concurrent with the
issuance of Series F preferred stock (see Note 4).
In connection with the Vanguard Merger, the Company entered into an
agreement with an investor to amend previously existing warrant agreements
granted in connection with the Series C Financing. The investor's original
warrant to purchase 50,440 shares of Series C preferred stock was amended to
extend the warrant through December 18, 1997. The investor's original
warrant to purchase 222,200 shares of preferred stock was amended to
increase the number of shares to 393,120 and to define the preferred stock
as Series D preferred stock at $6.55 per share. The warrant is exercisable
until December 18, 1997. The investor's original warrant to purchase 444,360
shares of preferred stock was amended to decrease the number of shares to
273,440 and to define the preferred stock as Series C preferred stock at
$2.22 per share. The warrant is exercisable until May 15, 1997.
- THE SERIES F FINANCING
In connection with the issuance of a note payable to an investor in July
1995, the Company issued for a purchase price of $15,000, a warrant to
purchase 32,000 shares of Series F-1 preferred stock at an exercise price of
$9.38 per share. The number of shares and the exercise price are subject to
adjustment in certain circumstances. The warrant is exercisable until
December 18, 1998.
Concurrent with the July 1995 Financing, for an aggregate purchase price
of $72,000, the Company issued warrants to purchase an aggregate of 153,760
shares of Series F-1 preferred stock (not including the warrant issued to
Vanguard in connection with the first July 1995 note) at an exercise price
of $9.38 per share. All share amounts and the exercise price are subject to
adjustment in certain circumstances. The warrants are exercisable until
December 18, 1998.
On August 15, 1995 pursuant to a Note and Warrant Purchase Agreement
dated as of August 14, 1995, the Company issued for a purchase price of
$50,000 a warrant (the "First
F-19
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
Warrant") to purchase 106,680 shares of Series F-2 preferred stock at an
exercise price of $9.38 per share, with the number of shares and exercise
price subject to adjustment in certain circumstances. The First Warrant is
exercisable until December 18, 1998.
Pursuant to a Loan Agreement dated August 14, 1995 between the Company
and an investor, the Company issued a second warrant (the "Second Warrant")
to purchase 106,680 shares of Series F-2 preferred stock at an exercise
price of $9.38 per share, with the number of shares and the exercise price
subject to adjustment in certain circumstances. The Second Warrant is
exercisable until the same date, with the date being subject to change in
the same circumstances, as the First Warrant.
On December 18, 1995, the Company sold and issued 5,356,480 shares of
Series F preferred stock for $50,217,000. Prior to the share issuance of the
Series F preferred stock, the Company entered into bridge financing
agreements with certain existing shareholders. Certain bridge loans were
repaid with proceeds from the issuance of shares of Series F preferred
stock, while the remaining bridge loans were converted into 1,147,600 shares
of Series D preferred stock.
Pursuant to the Series F Purchase Agreement, the Company agreed to
covenants customary in financing transactions of such type, including limits
on incurring debt and granting liens and pledges and other negative
covenants including limitations on payments, dividends, investments,
mergers, asset sales, amendments of its Certificate of Incorporation or
Bylaws that would adversely impact the rights of the Series F-1 preferred
stock and the Series F-2 preferred stock, changes to its business, changes
in control, and sales of equity securities.
WARRANTS
The Company had the following warrants outstanding as of December 31, 1995:
<TABLE>
<CAPTION>
WARRANTS EXERCISE
PREFERRED STOCK OUTSTANDING PRICE EXPIRATION
- ------------------------------------------- ------------ ----------- -----------------------
<S> <C> <C> <C>
Series C................................... 273,440 $ 2.22 May 15, 1997
Series C................................... 50,440 2.22 December 18, 1997
Series D................................... 393,120 6.55 December 18, 1997
Series D................................... 46,440 6.55 May 6, 1997
Series D................................... 10,720 6.55 April 6, 1998
Series F-1................................. 185,760 9.38 December 18, 1998
Series F-2................................. 213,360 9.38 December 18, 1998
------------
1,173,280
------------
------------
</TABLE>
COMMON STOCK
In the event of a liquidation, holders of common stock will be entitled to
receive an amount equal to $.50 per share, as adjusted, plus any declared and
unpaid dividends, after completion of distributions to the holders of preferred
stock.
The remaining assets of the Company, after satisfaction of the stipulated
distribution requirements related to the various preferred stock and common
stock liquidation preferences, will be distributed on a
F-20
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
pro rata basis among all of the holders of common stock and all of the holders
of the preferred stock, assuming full conversion of the preferred stock into
common stock.
In January 1994, the Company entered into an agreement to acquire a 70%
interest in Corporate Technology Partners (CTP), a partnership established to
develop a Personal Communications Services (PCS) business, in exchange for
251,920 shares of common stock in the Company. CTP was owned, in part, by
officers of the Company. This agreement was completed on December 18, 1995,
concurrent with the issuance of Series F preferred stock. A total of 45,360 of
these shares remain in escrow as of December 31, 1995 pending finalization of an
ex-employee matter. The Company wrote-off its investment in 1995 as CTP was
unsuccessful in obtaining any Federal Communications Commission PCS licenses.
In October 1994, the Company loaned a Director of the Company, $178,000 to
purchase 76,080 shares of common stock at a purchase price of $2.00 per share
and 3,920 shares of redeemable convertible Series D preferred stock at a
purchase price of $6.55 per share. The note bears interest at 7.69% per annum.
Principal and accrued interest are due in October 2004. The note is secured by a
pledge of the stock by the Director and is non-recourse to the Director. The
note principal is included as a component of stockholders' equity and redeemable
convertible preferred stock on the accompanying consolidated balance sheets as
of December 31, 1994 and 1995.
STOCK OPTION/STOCK ISSUANCE PLAN
During 1994, the Board of Directors adopted the 1994 Stock Option/Stock
Issuance Plan (the Plan) under which incentive stock options may be granted to
employees and officers and nonqualified (supplemental) stock options may be
granted to employees, officers, directors, and consultants to purchase shares of
the Company's common stock. Accordingly, the Company, as of December 31, 1995,
had reserved a total of 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.
Option grants under the Plan are subject to various vesting provisions, all
of which are contingent upon the continuous service of the optionee and may not
impose vesting criterion more restrictive than 20% per year. The exercise price
of options granted under the Plan must equal or exceed the fair market value of
the Company's common stock on the date of grant. Unless otherwise terminated by
the Board of Directors, the Plan automatically terminates in January 2004.
A summary of stock option/stock issuance transactions under the Plan
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES ---------------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
----------- ----------- --------------
<S> <C> <C> <C>
Initial shares reserved................................................. 1,000,000 -- --
Options granted......................................................... (761,920) 761,920 $ .25 - 2.50
----------- ----------- --------------
Balances as of December 31, 1994.................................... 238,080 761,920 $ .25 - 2.50
Options granted......................................................... (160,000) 160,000 $ 6.25 - 6.88
Options canceled........................................................ 40,000 (40,000) $ .25
----------- ----------- --------------
Balances as of December 31, 1995.................................... 118,080 881,920 $ 6.25 - 6.88
----------- -----------
----------- -----------
</TABLE>
F-21
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1995, there were 399,448 vested options.
(6) INCOME TAXES
The Company has incurred net losses since inception and has not recorded any
provision for income taxes. The reconciliation between the amount computed by
applying the U.S. federal statutory tax rate of 34% to net loss before income
taxes and the actual provision for income taxes as of December 31, 1993, 1994,
and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate............................. $ (286) (851) (3,832)
Equity in losses of foreign affiliates............................. -- -- 1,277
License amortization............................................... -- -- 344
Net operating loss and temporary differences for which no tax
benefit was recognized........................................... 286 851 2,211
--------- --- ---------
$ -- -- --
--------- --- ---------
--------- --- ---------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1994 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Loss carryovers and deferred start-up expenditures..................... $ 1,360 3,911
Less valuation allowance............................................... (1,360) (3,911)
--------- ---------
Total deferred tax assets............................................ -- --
--------- ---------
--------- ---------
</TABLE>
Management has established a valuation allowance for the portion of deferred
tax assets for which realization is uncertain. The valuation allowance as of
December 31, 1994 and 1995 was $1,360,000 and $3,911,000, respectively. The net
changes in valuation allowance during 1994 and 1995 was an increase of $960,000
and $2,551,000, respectively.
As of December 31, 1995, the Company has cumulative U.S. federal net
operating losses of approximately $9,200,000, which can be used to offset future
income subject to federal income taxes. The federal tax loss carryforwards will
expire from 2008 through 2010. The Company has cumulative California net
operating losses of approximately $5,900,000, which can be used to offset future
income subject to California income taxes. The California tax loss carryforwards
will expire from 1998 through 2000.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. All U.S. federal and California net operating
loss carryforwards are subject to limitation as a result of these restrictions.
The ownership change restrictions are not expected to impair the Company's
ability to utilize the affected carryforward items. If there should be a
subsequent ownership change, as defined, of the Company, its ability to utilize
its carryforwards could be reduced.
F-22
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases a facility under a noncancelable operating lease expiring
in May 1999. Future minimum lease payments due under the lease total
approximately $62,000, $63,000, $63,000, and $26,000 in 1996 through 1999,
respectively.
Rent expense was approximately $14,000, $47,000, and $60,000 for the years
ended December 31, 1993, 1994, and 1995, respectively.
CAPITAL CONTRIBUTIONS
In order to protect the Company's investments in affiliates from ownership
dilution, the Company has committed to make additional capital contributions to
the LWBs as needed.
The Company also anticipates making additional investments in various
operating companies totalling $16,500,000, including the acquisition of the
remaining 50% interest in TeamTalk Limited for $3,198,000 (see Note 9).
NOTE PAYABLE
The Company is jointly and severally liable on a $16,000,000 note payable to
an unrelated party in connection with its RHP investment. The note bears
interest at 6.95% with principal and interest due October 10, 1996. The Company
has recorded its pro rata share of this note on the accompanying consolidated
balance sheet. In the event that the other payors, which are also shareholders
of RHP, and RHP itself are unable to honor their pro rata obligation, the
Company would be wholly liable.
GUARANTEE OF DEBT OF EQUITY INVESTEE
In connection with a Ringgit 91,000,000 (approximately $36,400,000 as
translated using effective exchange rates at December 31, 1995) senior credit
facility with a Malaysian bank obtained by the Company's 30% equity investee,
STW, the Company along with other STW shareholders, executed a financial "keep
well" covenant pursuant to which they have agreed (i) to ensure that STW will
remain solvent and be able to meet its financial liabilities when due and (ii)
to ensure that the project is timely completed and to make additional debt and
equity investments in STW to meet cost overruns. The loan is repayable by STW in
eleven semi-annual installments beginning October 8, 1997. The Company and other
STW shareholders have separately executed an agreement, whereby each shareholder
has agreed to share in the liability on a pro rata basis in relation to their
interest in STW. In the event that the bank were to seek repayment from the STW
shareholders and the other shareholders were unable to honor their pro rata
share in the liability, the Company might be liable for the full amount of the
outstanding amount of the loan. As of December 31, 1995, the balance on this
loan was Ringgit 54,640,000 or $21,500,000.
The Company does not believe it is practicable to estimate the fair value of
the guarantee and does not believe exposure to loss is likely. Accordingly, no
provision has been made in the accompanying consolidated financial statements.
The Company, through its affiliate, New Zealand Wireless Limited, owns 15%
of PT Mobilkom Telekomindo (Mobilkom). Mobilkom expects to fund the continued
buildout of its network and the acquisition of subscriber terminals primarily
through a seven-year $50 million revolving/reducing credit
F-23
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
facility which it has obtained from a syndicate of Thai banks. Borrowings under
the credit facility bear interest at a floating rate based on LIBOR and are
secured by substantially all of Mobilkom's assets and a pledge of all the
capital stock held by the Company and Mobilkom's other shareholders. Another
Mobilkom shareholder has guaranteed borrowings of up to $25 million under the
credit facility. As of June 30, 1996, borrowings of approximately $20 million
were outstanding under this facility.
The Company indirectly owns a 17.5% equity interest in PT Mobile Selular
Indonesia ("Mobisel"), a provider of cellular services in Indonesia through its
25% ownership in RHP. Mobisel has obtained a five-year $60 million credit
facility from Nissho Iwai International (Singapore) Pte. Ltd. ("Nissho Iwai") to
finance the construction of its network and the purchase of subscriber
terminals. Borrowings under the credit facility bear interest at a floating rate
based on LIBOR and are secured by all of Mobisel's assets and a pledge of all
the capital stock held by RHP. RHP has also guaranteed the credit facility. As
of June 30, 1996, borrowings of approximately $35 million were outstanding under
this facility (see Note 9).
(8) GEOGRAPHIC INFORMATION
Information about the Company's consolidated operations in different
geographic areas for the three years ended December 31, 1993, 1994 and 1995 is
as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating loss:
Latin America............................................... -- -- (154)
Southeast Asia.............................................. -- -- --
Pacific and Far East........................................ -- -- (3,756)
United States............................................... (809) (2,481) (6,211)
--------- --------- ---------
$ (809) (2,481) (10,121)
--------- --------- ---------
--------- --------- ---------
Identifiable assets:
Latin America............................................... 668 2,157 13,017
Southeast Asia.............................................. -- 10 5,658
Pacific and Far East........................................ 1,056 3,429 50,017
United States............................................... 916 12,828 26,951
--------- --------- ---------
$ 2,640 18,424 95,643
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's consolidated operations in Latin America are in Brazil and
Peru. The Company's consolidated operations in Southeast Asia are in Pakistan.
The Company's equity method and cost investees are included in the geographic
areas in which principal operations exist or will exist (see Note 3).
(9) SUBSEQUENT EVENTS
On March 6, 1996, the Board of Directors approved the amendment and
restatement to the 1994 Stock Option/Stock Issuance Plan which authorizes the
issuance of an additional 1,000,000 shares of common stock thereunder. On June
11, 1996, the Board of Directors approved the amendment and restatement to the
1994 Stock Option/Stock Issuance Plan which authorizes the issuance of an
additional 400,000 shares of common stock thereunder.
F-24
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) SUBSEQUENT EVENTS (CONTINUED)
On April 26, 1996, two notes payable, each in the amount of $900,000, plus
accrued interest were converted into 274,800 shares of the Company's Series D
preferred stock.
On June 10, 1996, the Board approved a $3,080,000 bridge loan to the
Company's local partner in its Mexican ECTR joint venture.
On June 28, 1996, the Board approved and the Company funded $3,042,000 for
its 20% interest in a National Taiwan Trunking Project. The funds have been
placed in an interest bearing account pending favorable government approval of
their various telecommunication license applications.
On July 12, 1996, the Board approved an initial investment of up to
$5,250,000 for a 30% interest in the Taiwan Paging Project (a portion of this
amount was funded in July 1996).
On July 26, 1996, the Company acquired 1,700,000 shares of TeamTalk Limited
for a purchase price of approximately $3,198,000. The acquisition resulted in
IWC obtaining a 100% ownership interest in TeamTalk Limited.
On July 26, 1996, the Company entered into a Loan Agreement (the "1996 TD
Loan Agreement") with Toronto Dominion (Texas), Inc., an affiliate of Toronto
Dominion, providing for a $10.0 million revolving credit facility. A Director
and shareholder of the Company is the Managing Director and Group Head of
Toronto Dominion Capital, the U.S. merchant bank affiliate of Toronto Dominion
Bank. Subject to the terms and conditions of the 1996 TD Loan Agreement, the
Company is able to borrow funds in an initial amount of at least $2,000,000 and
additional amounts in integral multiples of at least $1.0 million. All
borrowings are evidenced by a promissory note bearing interest at a specified
base rate plus a margin increasing from 2.25% to 3.75% over the term of the
facility or a specified LIBOR rate plus a margin increasing from 3.5% to 5.0%
over the term of the facility and are due in July 1997, subject to mandatory
repayment, without premium, from the net proceeds from any public or private
sale of debt or equity securities, the net proceeds from certain asset sales by
the Company or its subsidiaries, or certain other events. The obligations of the
Company under the 1996 TD Loan Agreement and the note issued pursuant thereto
are secured by a pledge by the Company of all capital stock of certain of the
Company's subsidiaries and affiliates. On July 26, 1996, the Company borrowed
$7,000,000 under the 1996 TD Loan Agreement.
F-25
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
F-26
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL (NOTE 14)
-------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 25,398 $ 82,766 $ 90,177
Accounts receivable.................................................... -- 276 276
Notes receivable from affiliates....................................... 338 853 853
Note receivable........................................................ -- 1,385 1,385
Advances to affiliates................................................. 728 102 102
Other current assets................................................... 387 1,386 1,386
-------------- ---------- -----------
Total current assets................................................. 26,851 86,768 94,179
Property and equipment, net.............................................. 4,269 11,698 11,698
Investments in affiliates................................................ 52,280 46,956 46,956
Telecommunication licenses and other intangibles, net.................... 12,106 17,198 17,198
License deposit.......................................................... -- 14,300 14,300
Debt issuance cost, net.................................................. -- 5,891 5,891
Other assets............................................................. 137 664 664
-------------- ---------- -----------
Total asset.......................................................... $ 95,643 $ 183,475 $ 190,886
-------------- ---------- -----------
-------------- ---------- -----------
LIABILITIES, MINORITY INTEREST, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................................. $ 5,757 $ 3,496 $ 3,496
Notes payable to related party......................................... 1,800 -- --
Note payable........................................................... 4,000 4,000 4,000
-------------- ---------- -----------
Total current liabilities............................................ 11,557 7,496 7,496
Long-term debt, net...................................................... -- 71,623 71,623
Commitments and contingencies
Minority interest........................................................ -- 5,400 5,400
Redeemable convertible preferred stock, $.01 par value per share;
21,541,480 shares designated; 15,698,400 and 15,973,200 shares issued
and outstanding in 1995 and 1996, respectively, net of note receivable
from stockholder of $26 in 1995 and 1996; liquidation and minimum
redemption value of $107,399; pro forma no shares issued and
outstanding............................................................ 98,845 102,519 --
Stockholders' deficit:
Convertible preferred stock, $.01 par value per share; 1,200,000 shares
designated; 1,200,000 and 933,200 shares issued, and outstanding in
1995 and 1996, respectively; liquidation value of $793; pro forma no
shares issued and outstanding........................................ 12 9 --
Common stock, $.01 par value per share; 26,000,000 shares authorized;
328,000 and 615,760 shares issued and outstanding in 1995 and 1996,
respectively; pro forma 18,695,520 shares issued and outstanding..... 3 6 187
Additional paid-in capital............................................. 749 31,055 140,813
Note receivable from stockholder....................................... (152) (152) (152)
Unrealized gain on investments......................................... -- 112 112
Cumulative translation adjustment...................................... (1) 250 250
Accumulated deficit.................................................... (15,370) (34,843) (34,843)
-------------- ---------- -----------
Total stockholders' deficit.......................................... (14,759) (3,563) 106,367
-------------- ---------- -----------
Total liabilities, minority interest, redeemable convertible
preferred stock and stockholders' deficit.......................... $ 95,643 $ 183,475 $ 190,886
-------------- ---------- -----------
-------------- ---------- -----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-27
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
--------- ----------
(UNAUDITED)
<S> <C> <C>
Operating revenue......................................................................... $ -- $ 532
Cost of sales............................................................................. -- 541
--------- ----------
Gross loss.............................................................................. -- (9)
Operating expenses:
General and administrative expenses..................................................... 3,565 10,610
Equity in losses of affiliates.......................................................... 1,171 5,507
--------- ----------
Loss from operations.................................................................. (4,736) (16,126)
Other income (expense):
Interest income......................................................................... 130 937
Interest expense........................................................................ (785) (2,663)
Other................................................................................... (10) 1
--------- ----------
Net loss.............................................................................. $ (5,401) $ (17,851)
--------- ----------
--------- ----------
Pro forma net loss per common share....................................................... $ (0.84)
----------
----------
Shares used in computing pro forma net loss per common share.............................. 21,367
----------
----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-28
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from investing activities:
Net loss................................................................................. $ (5,401) $ (17,851)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation........................................................................... 12 460
Amortization of telecommunication licenses and other intangibles....................... 30 529
Amortization of debt issuance costs.................................................... -- 109
Amortization of long-term debt discount................................................ -- 1,921
Equity in losses of affiliates......................................................... 1,171 5,507
Minority interest...................................................................... -- 5,400
Unrealized gain on investments......................................................... -- 112
Changes in operating assets and liabilities:
Accounts receivable.................................................................. -- (66)
Other current assets................................................................. (6) (985)
Accounts payable and accrued expenses................................................ 662 (2,571)
--------- ---------
Net cash used in operating activities.............................................. (3,532) (7,435)
--------- ---------
Cash flows from investing activities:
Notes receivable from affiliates......................................................... (135) (1,098)
Repayment of notes receivable from affiliate............................................. -- 583
Note receivable.......................................................................... -- (3,185)
Repayment of note receivable............................................................. -- 1,800
Advances to affiliates................................................................... -- (1,924)
Purchases of property and equipment...................................................... (35) (1,657)
Purchase of TeamTalk Limited............................................................. -- (3,198)
Investments in affiliates................................................................ (28,474) (2,167)
Telecommunication licenses and other intangibles......................................... -- (3,971)
License and other deposits............................................................... -- (14,300)
Other assets............................................................................. -- (345)
--------- ---------
Net cash used in investing activities.............................................. (28,644) (29,462)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................................................. 26,276 --
Proceeds from revolving credit facility.................................................. -- 7,000
Repayment of revolving credit facility................................................... -- (7,000)
Exercise of stock options................................................................ -- 6
Debt issuance costs...................................................................... -- (6,000)
Proceeds from issuance of long-term debt................................................. -- 69,702
Proceeds from issuance of warrants....................................................... -- 30,300
--------- ---------
Net cash provided by financing activities.......................................... 26,276 94,008
--------- ---------
Effect of foreign currency exchange rates on cash and cash equivalents..................... -- 257
--------- ---------
Net (decrease) increase in cash and cash equivalents....................................... (5,900) 57,368
Cash and cash equivalents at beginning of year/period...................................... 10,298 25,398
--------- ---------
Cash and cash equivalents at end of year/period............................................ $ 4,398 $ 82,766
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid for interest................................................................... $ -- $ 363
--------- ---------
--------- ---------
Noncash financing and investing activities:
Conversion of note receivable from affiliate to investment in affiliate.................. $ 2,020 $ --
--------- ---------
--------- ---------
Conversion of notes payable and interest to related party into redeemable convertible
preferred stock........................................................................ $ -- $ 2,052
--------- ---------
--------- ---------
Effect of net assets of TeamTalk Limited previously accounted for by the equity method... $ -- $ 4,395
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-29
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
International Wireless Communications Holdings, Inc. ("IWC Holdings") was
incorporated in Delaware in July 1996 as a holding company whose primary assets
are all of the issued and outstanding capital stock of International Wireless
Communications, Inc. ("IWC") and a note receivable from IWC in a principal
amount equal to the net proceeds from the Debt Offering (see Note 8). IWC was
incorporated in Delaware in January 1992 and develops, owns and operates
wireless communications companies in emerging markets in Asia and Latin America.
These local wireless businesses ("LWBs") provide a variety of communications
services, including enhanced capacity trunked radio ("ECTR"), wireless local
loop ("WLL"), cellular and paging. Together with local and strategic partners,
IWC has interests in Brazil, China, India, Indonesia, Malaysia, Mexico, New
Zealand, Pakistan, Peru, and the Philippines, Taiwan and Thailand.
Subsequent to the formation of IWC Holdings, IWC Holdings and IWC completed
a reorganization in which IWC became a wholly owned subsidiary of IWC Holdings
through the conversion of each share of the then outstanding capital stock of
IWC into 40 shares of the corresponding class and series of stock of IWC
Holdings (the "Stock Conversion").
In the opinion of management, the accompanying audited financial statements
of IWC Holdings and subsidiary (the "Company") reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the Company's financial condition, results of operation and
cash flows for the period presented. These financial statements should be read
in conjunction with the Company's audited consolidated financial statements as
of December 31, 1994 and 1995, and for each of the years in the three-year
period ended December 31, 1995, including notes thereto. The results of
operations for the nine months ended September 30, 1996 are not necessarily
indicative of results that may be expected for the year ended December 31, 1996.
All data related to shares and per share amounts for all periods presented have
been adjusted to reflect the effect of the Stock Conversion.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
IWC, its wholly owned subsidiary, SRC Servicos de Rario Comunicacoes Ltda.
("SRC"), and two majority-owned subsidiaries, M/S Mobilcom (Pte) Ltd.
("Mobilcom") and PeruTel SA ("PeruTel"). Effective April 30, 1996, the Company
acquired the remaining 50% of TeamTalk Limited ("TeamTalk"), and as such, the
accompanying consolidated balance sheet as of September 30, 1996 also includes
the accounts of TeamTalk. The consolidated statement of operations for the nine
months ended September 30, 1996 also include the accounts of the now wholly
owned TeamTalk subsidiary since April 30, 1996, the effective date of the
acquisition (see Note 3). Prior to April 30, 1996, the consolidated financial
statements reflect TeamTalk as an investment accounted for under the equity
method. In August 1996, IWC acquired a 70% interest in Star Telecom Overseas
(Cayman Islands) Limited ("STOL"), and as such, the accompanying consolidated
balance sheet as of September 30, 1996 also includes the accounts of STOL. As of
September 30, 1996, STOL had no significant operations. All significant
intercompany accounts and transactions have been eliminated in consolidation.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per share data has been computed using the weighted
average number of shares of common stock, including common equivalent shares
from stock options and warrants outstanding (when dilutive using the treasury
stock method) and the shares resulting from the conversion of
F-30
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
all outstanding shares of preferred stock to common stock at the closing of the
IPO. Pursuant to SEC Staff Accounting Bulletins, common equivalent shares issued
during the 12-month period prior to the initial filing of the Company's proposed
IPO have been included in the calculation as if they were outstanding for all
periods presented (even if antidilutive). Due to the significant impact of the
conversion of preferred shares into common shares at the closing of the IPO,
historical net loss per common share is not meaningful and is therefore not
presented.
(2) BALANCE SHEET COMPONENTS
Balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- --------------
<S> <C> <C>
Property and equipment
Furniture and fixtures..................................... $ 40 304
Office equipment........................................... 126 507
Automobiles................................................ 34 183
Telecommunication equipment................................ -- 9,114
Construction in process.................................... 4,125 2,106
-------------- --------------
4,325 12,214
Less accumulated depreciation.............................. 56 516
-------------- --------------
Property and equipment, net.............................. $ 4,269 $ 11,698
-------------- --------------
-------------- --------------
Telecommunication licenses and other intangibles
SRC........................................................ $ 6,714 $ 6,680
Mobilcom................................................... 5,439 5,439
STOL....................................................... -- 3,971
TeamTalk................................................... -- 1,658
-------------- --------------
12,153 17,748
Less accumulated amortization................................ 47 550
-------------- --------------
Telecommunication licenses and other intangibles, net...... $ 12,106 $ 17,198
-------------- --------------
-------------- --------------
Account payable and accrued expenses:
Accounts payable........................................... $ -- $ 665
Professional services...................................... 3,041 1,084
Employee compensation and benefits......................... 189 458
Interest................................................... 256 271
Equipment purchases........................................ 1,719 --
Other...................................................... 552 1,018
-------------- --------------
$ 5,757 $ 3,496
-------------- --------------
-------------- --------------
</TABLE>
(3) CASH AND CASH EQUIVALENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and has classified its investments in certain debt and equity
securities as "available for sale". Such investments are recorded
F-31
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) CASH AND CASH EQUIVALENTS (CONTINUED)
at fair value, with unrealized gains and losses reported as a separate component
of stockholders' deficit. The cost of securities sold is based upon the specific
identification method.
Upon closing of the Debt Offering (see Note 8), the Company invested the net
proceeds in a variety of short-term, highly liquid investments all with original
maturities of 90 days or less. As of September 30, 1996, the Company had cash of
$13,976,000, and cash equivalents consisting of mutual funds and US government
and agency obligations totaling $1,751,000 and $67,039,000 respectively.
Unrealized gains on investments of $112,000 is included as a component of
stockholders' deficit on the accompanying balance sheet as of September 30,
1996.
(4) INVESTMENTS IN AFFILIATES
The Company's investments in affiliates represent interests in various LWBs
in several developing countries. These investments are accounted for under the
equity or cost methods.
EQUITY INVESTMENTS
For those investments in companies in which the Company's voting interest is
20% to 50%, or for investments in companies in which the Company exerts
significant influence through board representation and management authority, the
equity method of accounting is used. Under this method, the investment,
originally recorded at cost, is adjusted to recognize the Company's share of net
earnings or losses of the affiliates, limited to the extent of the Company's
investment in and advances to the affiliates, including any debt guarantees or
other contractual funding commitments. The Company's share of net earnings or
losses of affiliates includes the amortization of purchase accounting
adjustments for the excess of cost over the net book value of the interest
acquired that is allocated to telecommunication licenses, participation rights
and other intangibles. Investments in affiliated companies as of December 31,
1995 and September 30, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PORTION OF
INVESTMENT
EXCEEDING THE
COMPANY'S SHARE
INVESTMENTS OF THE UNDERLYING
PERCENTAGE IN AFFILIATED HISTORICAL
OF OWNERSHIP COMPANIES(1) NET ASSETS
AFFILIATED --------------- ----------------------- -----------------------
COUNTRY COMPANY 1995 1996 1995 1996 1995 1996
- -------------- ------------------------------------ ----- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Malaysia Syarikat Telefon Wireless (M) Sdn
Bhd ("STW")....................... 30% 30% $ 20,879 $ 18,630 $ 17,459 $ 17,459
Indonesia PT Rajasa Hazanah Perkasa (RHP)..... 25% 25% 24,539 23,572 23,680 23,680
New Zealand TeamTalk Limited (Team Talk)........ 50% 100%(2) 2,345 -- 1,712 --
India HFCL Mobile Radio Limited (HFCL).... 49% 49% 243 243 243 243
Indonesia PT Binamulti Visualindo (PTBV)...... 49% 49% 206 206 206 206
New Zealand Wireless Data Services Ltd. (WDS)... -- 50% -- 181 -- --
Philippines Universal Telecommunications
Service, Inc. ("UTS")............. 19% 19%(3) -- 1,924 -- 933
---------- ---------- ---------- ----------
48,212 44,756 43,300 42,521
Less accumulated amortization....................... 966 2,790 966 2,790
---------- ---------- ---------- ----------
$ 47,246 $ 41,966 $ 42,334 $ 39,731
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------------
(1) Adjusted for the Company's share of cumulative equity losses of affiliated
companies.
(2) Reflects acquisition of remaining 50% of TeamTalk pursuant to agreement
dated June 24, 1996.
(3) Reflects an additional investment of $500,000, of which $250,000 was paid in
September 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.
F-32
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(4) INVESTMENTS IN AFFILIATES (CONTINUED)
On June 24, 1996, the Company entered into an agreement with the other 50%
owner of TeamTalk to acquire their 1,700,000 shares of TeamTalk's common stock,
as well as to assume TeamTalk's existing note payable to the shareholder
totaling $3,022,000, for a purchase price of approximately $3,198,000. The
agreement was effective April 30, 1996, with the purchase price paid in July
1996. As of September 30, 1996, TeamTalk is consolidated into the financial
statements of the Company as a wholly owned subsidiary. In connection with the
incremental investment, the Company reclassified the associated unamortized
portion of investment exceeding the Company's share of the underlying historical
net assets to telecommunication licenses and other intangibles. The fair value
of the assets acquired and the liabilities assumed in connection with the
acquisition were $8,327,000 and $3,584,000, respectively.
Financial information for significant affiliated companies accounted for by
the equity method is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
-----------------------------------
STW RHP(A) TEAMTALK
--------- --------- -------------
<S> <C> <C> <C>
Current Assets........................................... $ 2,611 5,316 213
Noncurrent assets........................................ 33,299 21,336 6,307
Current liabilities...................................... 2,988 17,496 3,933
Noncurrent liabilities................................... 21,925 6,257 1,492
Net Revenues............................................. 749 5,463 348
Net loss................................................. (5,898) (3,186) (1,490)
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
-----------------------------------
<CAPTION>
STW RHP TEAMTALK(B)
--------- --------- -------------
<S> <C> <C> <C>
Current Assets........................................... $ 1,852 42,537 --
Noncurrent assets........................................ 46,625 26,462 --
Current liabilities...................................... 8,214 14,084 --
Noncurrent liabilities................................... 36,545 51,233 --
Net Revenues............................................. 832 6,969 --
Net loss................................................. (7,630) (3,671) --
</TABLE>
- ------------------------
(A) For the period March 28, 1995 through December 31, 1995. Net revenues and
net loss for the period from January 1, 1995 through March 27, 1996 were
$1,821 and $387, respectively.
(B) Effective April 30, 1996, TeamTalk became a wholly owned subsidiary of the
Company. Net revenues and net loss for the period from January 1, 1996
through April 30, 1996 were $282,000 and $645,000, respectively.
COST INVESTMENTS
The Company uses the cost method of accounting for three other investments
as of September 30, 1996. They are Corporacion Mobilcom, S.A. de C.V. and
subsidiaries ("Mobilcom Mexico"), PT Mobilkom Telekomindo ("Mobilkom"), and RPG
Paging Services Limited ("RPSL"), which the Company acquired in August 1996 as
part of IWC's acquisition of STOL. The Company's ownership percentages in these
entities are 2.23%, 15% and 7%, respectively. All three are operating entities.
Prior to September 25, 1996, the Company accounted for UTS, owned directly by
the Company and indirectly through
F-33
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(4) INVESTMENTS IN AFFILIATES (CONTINUED)
Mobilcom Corporation, as a cost investment. On September 25, 1996, the Company
entered into an agreement to increase its ownership interest in UTS from 19% to
20.25% for Philippine Peso 11,253,200, or approximately $433,000, and
correspondingly changed its method of accounting to the equity method for this
investment.
The following represents the Company's carrying value of these cost
investments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- ---------------
<S> <C> <C>
Mobilcom Mexico.............................................. $ 2,062 $ 2,062
Mobilkom..................................................... 1,500 1,500
UTS.......................................................... 1,472 --
RPSL......................................................... -- 1,428
------- -------
$ 5,034 $ 4,990
------- -------
------- -------
</TABLE>
PRO FORMA SUMMARY
The following unaudited pro forma summary combines the consolidated results
of operations of the Company as if (i) TeamTalk had been a wholly owned
consolidated subsidiary since January 1, 1995, (ii) ownership in STW and RHP had
been 30% and 29.2%, respectively, since January 1, 1995, (iii) the merger with
Vanguard International Telecommunications, Inc. ("VIT"), a wholly owned
subsidiary of Vanguard, had occurred on January 1, 1995, and (iv) the
acquisition of STOL had occurred at January 1, 1995.
This pro forma summary does not necessarily reflect the results of
operations as they would have been if the Company had acquired the entities as
of January 1, 1995.
Unaudited pro forma consolidated results of operations for the various
acquisitions and mergers as described above are as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues............................................................. $ 277 $ 814
Net loss............................................................. (11,471) (18,788)
Pro forma net loss per share......................................... (0.88)
</TABLE>
(5) RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM AFFILIATES
Notes receivable from affiliates as of December 31, 1995, consisted
primarily of a note due from Mobilcom Mexico for $158,000, which earns interest
at 6% per annum; and an interest-free note due from RHP for $128,000. During the
nine months ended September 30, 1996, IWC loaned RHP an additional $455,000 in
exchange for a series of 90 day interest-free promissory notes, which brought
the total amount loaned to RHP to $583,000. As of September 30, 1996, the loans
to RHP had been repaid in full.
F-34
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) RELATED PARTY TRANSACTIONS (CONTINUED)
During the nine months ended September 30, 1996, the Company loaned PT
Mobile Selular Indonesia ("Mobisel"), an entity of which the Company then
indirectly owned 17.5% through IWC's investment in RHP, a total of $635,000 in
exchange for a series of 90 day interest-free promissory notes. The notes to
Mobisel have subsequently been extended.
ADVANCES TO AFFILIATES
The advances to affiliates as of December 31, 1995, represented advances to
TeamTalk in the amount of $728,000. As a result of the acquisition of the
remaining 50% interest in TeamTalk, the Company now eliminates advances to
TeamTalk as a result of its consolidation.
In January 1996, the Company advanced $102,000 to UTS. The advance is
interest-free with no stated terms. Management believes the advance will be
repaid within one year.
NOTES PAYABLE TO RELATED PARTY
Notes payable to a related party as of December 31, 1995, consisted of two
notes payable to Vanguard Cellular Operating Corp. (Vanguard), a significant
stockholder, each in the amount of $900,000 plus accrued interest and bearing
interest at 9% compounded annually. On April 26, 1996, these notes, plus
$252,000 of accrued interest, were converted into 274,800 of the Company's
shares of Series D Redeemable Convertible Preferred Stock.
REVOLVING CREDIT FACILITY
On July 26, 1996, the Company entered into a Loan Agreement (the "1996 TD
Loan Agreement") with Toronto Dominion (Texas), Inc., an affiliate of Toronto
Dominion Bank, a stockholder of the Company, providing for a $10.0 million
revolving credit facility. Subject to the terms and conditions of the 1996 TD
Loan Agreement, IWC was able to borrow funds in an initial amount of at least
$2,000,000 and additional amounts in multiples of at least $1,000,000. All
borrowings were evidenced by a promissory note bearing interest at a specified
base rate plus a margin increasing from 2.25% to 3.75% over the term of the
facility or a specified LIBOR rate plus a margin increasing from 3.5% to 5.0%
over the term of the facility and were due in July 1997, subject to mandatory
repayment, without premium, from the net proceeds from any public or private
sale of debt or equity securities, the net proceeds from certain asset sales by
the Company or its subsidiaries, or certain other events. The obligations of the
Company under the 1996 TD Loan Agreement and the note issued pursuant thereto
were secured by a pledge by the Company of all capital stock of the Company's
subsidiaries and affiliates. On July 26, 1996, IWC borrowed $7,000,000 under the
1996 TD Loan Agreement. On August 15, 1996, this amount, plus interest and fees,
was repaid in full with the proceeds from the Debt Offering (see Note 8).
(6) NOTE RECEIVABLE
On June 6, 1996, the Company loaned $3,080,000 to a co-shareholder of
Mobilcom Mexico, a trunked radio services operator in Mexico. The Company then
owned a 2.23% equity interest in Mobilcom Mexico. The loan, in the form of a
promissory note, accrues interest at 13% per annum and is due upon written
demand by the Company. The Company believes that this loan may facilitate future
strategic investments in projects in which this co-shareholder is involved. As
of September 30, 1996, the co-shareholder had repaid $1,800,000 of the total
amount loaned, bringing the remaining principal plus interest owed to
$1,385,000.
F-35
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) LICENSE AND OTHER DEPOSITS
On June 28, 1996, the Company deposited $3,042,000 with a Taiwanese
corporation that is pursuing telecommunication licenses in Taiwan. This deposit
represents a 20% interest in a number of telecommunication license applications
currently being pursued. During the application process, the deposit will be
held in an interest-bearing escrow account in the name of IWC. Once a license is
granted, the deposit will become the Company's initial capital of the venture
that is ultimately formed. If the Taiwanese corporation is unsuccessful in
securing these applications, the Company's deposit, less its pro rata share of
application related expenses, will be returned to the Company.
On August 27, 1996, the Company deposited $2,250,000 for a 10% interest in a
Taiwan paging project, a project in which the Company already has an indirect
14% interest through its investment in STOL. The Company and its partners in
this project have applied for a national paging license. If the license is
granted to the project, the deposit will become the Company's initial capital of
the venture that is ultimately formed to pursue the paging business in Taiwan.
If a license is not received, the Company's deposit, less its pro rata share of
application related expenses, will be returned to the Company.
In September 1996, IWC entered into a subscription agreement (the "SDL
Subscription Agreement") with Star Telecom Holding Limited ("STHL"), the
Company's partner in STOL, to purchase a 40% equity interest in SDL for an
aggregate purchase price of $20 million. The consummation of such investment is
subject to the fulfillment of certain closing conditions, including the
attainment by STHL of shareholder approval for the transaction. Pursuant to the
Subscription Agreement, in September 1996, IWC also entered into an escrow
agreement (the "SDL Escrow Agreement") and deposited, in escrow, $9 million of
the $20 million purchase price. This investment has subsequently been
consummated (see Note 13).
(8) LONG-TERM DEBT
On August 15, 1996, the Company issued 196,720 units, each consisting of a
$1,000 principal amount 14% Senior Secured Discount Note due 2001 (a "Note" and,
collectively, the "Notes") and one warrant to purchase 11,638 shares of common
stock, $0.01 par value, for total gross proceeds of $100 million (the "Debt
Offering"). Net proceeds, after repayment of $7.4 million, including interest
and fees, borrowed under the 1996 TD Loan Agreement (see Note 5) and other
offering expenses, totaled $86,602,000. Of the $100 million gross proceeds,
$30.3 million was allocated to additional paid-in capital as the fair value of
the warrants issued in the Debt Offering. Long-term debt is presented net of
unamortized discount of $125,097,000 on the accompanying balance sheet as of
September 30, 1996.
The aggregate principal amount of the Notes is $196,720,000. The Notes are
due on August 15, 2001 and bear interest at an effective interest rate of
22.05%, compounded semi-annually. There are no scheduled cash interest payments
on the Notes. The Notes are senior secured obligations of the Company and will
rank PARI PASSU in right of payment with all existing and future senior
indebtedness of the Company and senior to all subordinated indebtedness of the
Company. The Notes are effectively subordinated to all indebtedness and other
liabilities (including trade payables) of the Company's subsidiaries and
affiliated companies. The collateral securing the Notes consists of a pledge of
all of the capital stock of the Company.
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.
F-36
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(8) LONG-TERM DEBT (CONTINUED)
The costs related to the issuance of the long-term debt were capitalized and
are being amortized to interest expense using the effective interest method over
the life of the debt. Debt issuance costs are presented net of amortization of
$109,000 on the accompanying balance sheet as of September 30, 1996.
(9) MINORITY INTEREST
In August 1996, IWC acquired a 70% interest in STOL, which holds minority
interests in paging projects in India and Taiwan and is currently pursuing
additional paging opportunities in Indonesia and Thailand, for an aggregate
purchase price of $13.5 million. The Company's partner in STOL is STHL, the
Company's partner in SDL that owns one of the largest paging operators and
internet service providers in Hong Kong. The total stockholders' equity of STOL
at September 30, 1996 is $18,000,000, of which $5,400,000 represents a minority
interest.
(10) STOCK OPTION/STOCK ISSUANCE PLAN
On March 6, 1996, the Board of Directors of the Company approved the
amendment to and restatement of the 1996 Stock Option/Stock Issuance Plan (the
"1996 SO/SIP") and authorized the issuance of an additional 1,000,000 shares of
common stock thereunder. The Board of Directors also granted an additional
764,000 options at an exercise price of $8.13.
On April 19 and May 1, 1996 the Board of Directors granted an additional
60,000 and 48,000 options, respectively, under the 1996 SO/SIP at an exercise
price of $8.13.
On June 11, 1996, the Board of Directors approved another amendment and
restatement to the 1996 SO/SIP and authorized the issuance of an additional
400,000 shares of common stock thereunder. The Board of Directors also granted
an additional 20,000 options under the 1996 SO/SIP at an exercise price of
$9.38.
In July 1996, the Board of Directors granted an additional 170,000 options
under the 1996 SO/SIP at an exercise price $9.38.
(11) STOCKHOLDERS' DEFICIT
In August 1996, a stockholder of the Company converted 266,800 shares of
Series A preferred stock into 266,800 shares of common stock.
(12) COMMITMENTS AND CONTINGENCIES
CAPITAL CONTRIBUTIONS
In order to protect the Company's investments in affiliates from ownership
dilution, the Company has committed to make additional capital contributions to
the LWBs as needed.
The Company anticipates making additional investments in various operating
companies totaling $14,500,000.
NOTE PAYABLE
The Company is jointly and severally liable on a $16,000,000 note payable to
an unrelated party in connection with its RHP investment. The note bears
interest at 6.95% with principal and interest due
F-37
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
October 10, 1996. The Company has recorded its 25% pro rata share of this note
on the accompanying consolidated balance sheets. In the event that the other
payors, which are also shareholders of RHP, and RHP itself, are unable to honor
their pro rata obligation, the Company would be wholly liable. This note, plus
accrued interest, was paid in October 1996 (see Note 13).
GUARANTEE OF DEBT OF EQUITY INVESTEE
In connection with a Ringgit 91,000,000 (approximately $36,300,000 as
translated using effective exchange rates at September 30, 1996) senior credit
facility (the "STW Credit Facility") with a Malaysian bank obtained by the
Company's 30% equity investee, STW, the Company along with other STW
shareholders, executed a financial "keep well" covenant pursuant to which they
have agreed (i) to ensure that STW will remain solvent and be able to meet its
financial liabilities when due and (ii), to ensure that the project is timely
and completed, to make additional debt and equity investments in STW to meet
cost overruns. The loan is repayable by STW in eleven semi-annual installments
beginning October 8, 1997. The Company and other STW shareholders have
separately executed an agreement, whereby each shareholder has agreed to share
in the liability on a pro rata basis in relation to their interest in STW. In
the event that the bank were to seek repayment from the STW shareholders and the
other shareholders were unable to honor their pro rata share in the liability,
the Company would likely be liable for the full amount of the outstanding amount
of the loan. The balance on this loan was Ringgit 54,640,000 or $21,500,000 and
Ringgit 91,000,000 or $36,300,000 as of December 31, 1995 and September 30,
1996, respectively. No provision has been made in the accompanying consolidated
financial statements for any loss that might result from this arrangement.
STW currently has a number of trade creditors to whom payments are currently
past due. The Company believes that the amount currently past due consists of
approximately $3.6 million from a large equipment vendor that has agreed to
waive past due interest and to provide additional equipment to STW and an
additional amount from other trade creditors that does not exceed approximately
$1.0 million. Certain of these trade creditors have notified STW that they are
considering legal action against STW for non-payment. STW's failure to resolve
this matter in a timely manner may give rise to rights in such creditors,
including the right to file an action for the winding up of STW. Further, under
the "keep well" covenant of the STW Credit Facility, IWC may be deemed liable
for the entire amount of such trade payables, which may have a material adverse
effect on IWC. Management believes that a recent $1.6 million cash capital
contribution by STW shareholders will provide sufficient capital to address this
matter. In addition, shareholders of STW have committed to contribute an
additional $2.4 million and STW is currently in discussions with debt and equity
investors to raise additional capital.
The Company, indirectly through its wholly owned subsidiary, New Zealand
Wireless Limited, owns 15% of Mobilkom, a provider of enhanced capacity trunked
radio services in Indonesia. Mobilkom expects to fund the continued buildout of
its network and the acquisition of subscriber terminals primarily through a
seven-year $50 million revolving/reducing credit facility which it has obtained
from a syndicate of Thai banks. Borrowings under the credit facility bear
interest at a floating rate based on LIBOR and are secured by substantially all
of Mobilkom's assets and a pledge of all the capital stock held by the Company
and Mobilkom's other shareholders. Another Mobilkom shareholder has guaranteed
borrowings of up to $25 million under the credit facility. As of September 30,
1996, borrowings of approximately $20.2 million were outstanding under this
facility.
At September 30, 1996, the Company indirectly owns a 17.5% equity interest
in Mobisel, a provider of cellular services in Indonesia through the Company's
25% interest in RHP. Mobisel has obtained a six-
F-38
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
year $60 million credit facility from Nissho Iwai International (Singapore)
PTE., LTD. ("Nissho Iwai") to finance the construction of its network and the
purchase of subscriber terminals. Borrowings under the credit facility bear
interest at a floating rate based on LIBOR and are secured by all of Mobisel's
assets and a pledge of all the capital stock held by RHP and Mobisel's other
shareholders. RHP has also guaranteed the credit facility. As of September 30,
1996, borrowings of approximately $50 million were outstanding under this
facility.
(13) SUBSEQUENT EVENTS
In October 1996, the Company paid $1,000,000 for an option to purchase 50%
of Laranda Sdn Bhd, a 10% shareholder of STW, for an exercise price of
$7,200,000 and certain other contractual rights. The Company, at its discretion,
allowed the option to lapse on November 6, 1996 and subsequently expensed the
entire $1,000,000.
In October 1996, the Company expended an additional $4,300,000, consisting
of $4,000,000 of principal plus accrued interest, to repay its pro rata share of
a note payable to an unrelated party assumed in connection with RHP and
$8,556,000 to increase its interest in RHP to 29.2%, thereby increasing its
indirect equity interest in Mobisel to 20.4%.
In November 1996, in connection with the closing of the Company's
acquisition of an equity interest in SDL, the $9,000,000 that was held in escrow
pursuant to the SDL Subscription Agreement and the SDL Escrow Agreement was
released to STHL, and the Company funded an additional $11,000,000 to acquire
its 40% interest in SDL for an aggregate purchase price of $20,000,000.
In November 1996, the Company offered to exchange new 14% Senior Secured
Discount Notes due 2001 ("Exchange Notes") which were registered under the
Securities Act of 1933, as amended (the 1933 Act), for its outstanding 14%
Senior Secured Discount Notes due 2001 ("Old 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 Old Notes.
From October 1996 through January 1997, the Company invested an additional
$4,039,000 in Via 1.
In October 1996, the Board approved and the Company funded $1,200,000 to STW
as the Company's pro rata share of a capital call.
From October 1996 through December 1997, the Company invested an additional
$3,578,000 in TeamTalk.
In November 1996, the Board of Directors granted an additional 20,000
options under the 1996 SO/ SIP at an exercise price of $9.38. In December 1996,
the Board of Directors granted an additional 60,000 options under the 1996
SO/SIP at an exercise price of $9.38. In January 1997, the Board of Directors
granted an additional 127,095 options under the 1996 SO/SIP at an exercise price
of $9.38. In February 1997, the Board of Directors granted an additional 286,187
options under the 1996 SO/SIP at an exercise price of $9.38.
In December 1996, the Company paid $1,600,000 to acquire a 66% equity
interest in Promociones Telefonicas S.A. ("Protelsa"), which has been awarded a
national license to provide paging services in Peru.
F-39
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(14) PROPOSED PUBLIC OFFERING
INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
On February 3, 1997, the Board of Directors (the Board) authorized the
filing of a registration statement on Form S-1 with the Securities and Exchange
Commission (SEC) in connection with a proposed initial public offering (IPO).
The unaudited pro forma amounts included in the accompanying pro forma balance
sheet as of September 30, 1996, reflect the conversion of all outstanding shares
of preferred stock into common stock.
The unaudited pro forma amounts also assume the exercise of warrants to
purchase, on a cash basis, 1,173,360 shares of preferred stock which terminate
upon the closing of these offerings. The pro forma balance sheet includes
$7,411,000 from the exercise of these warrants. Actual cash proceeds may be up
to $4,117,000 less than this amount as warrants to purchase 456,360 shares are
exercisable on a net basis. If such warrants are exercised on a net basis, the
number of shares issued would be reduced accordingly.
F-40
<PAGE>
PT RAJASA HAZANAH PERKASA
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
INDONESIAN CURRENCY
F-41
<PAGE>
PRASETIO UTOMO
ARTHUR ANDERSEN & CO. SC
INDEPENDENT AUDITORS' REPORT
Prasetio, Utomo & Co.
Registered Public Accountants
Report No. 26445S
Chase Plaza
Jalan Jend. Sudirman Kav. 21
Jakarta 12920
Indonesia
The Board of Directors and Stockholders
PT RAJASA HAZANAH PERKASA
We have audited the balance sheet of PT Rajasa Hazanah Perkasa as of
December 31, 1995, and the related statements of income and deficit and cash
flows for the year then ended. We also audited those reconciling adjustments
presented in Notes 20, 21 and 22 for the years ended December 31, 1994 and 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards established by
the Indonesian Institute of Accountants, which are substantially similar to the
generally accepted auditing standards in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PT Rajasa Hazanah Perkasa as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles
in the Republic of Indonesia.
Generally accepted accounting principles in Indonesia vary in certain
respects with those in the United States of America. A description of the
significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net income and
stockholders' equity are set forth in Notes 20, 21 and 22 to the financial
statements.
PRASETIO, UTOMO & CO.
Drs M.P. Sibarani
Registered Accountant No. D-514
May 28, 1996
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
No.: L-014/WK/X/96
The Shareholders, Board of Commissioners and
Board of Directors
PT Rajasa Hazanah Perkasa:
We have audited the accompanying balance sheets of PT Rajasa Hazanah Perkasa
as of December 31, 1994 and 1993, and the related statements of loss, deficit,
and cash flows for the years then ended except for the information presented in
notes 20, 21 and 22. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards established by the Indonesian Institute of Accountants, which are
substantially similar to the generally accepted auditing standards in the United
States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for an
opinion.
In our opinion, except for the information presented in notes 20, 21 and 22,
which was not audited by us, the financial statements referred to above present
fairly, in all material respects, the financial position of PT Rajasa Hazanah
Perkasa as of December 31, 1994 and 1993, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles in the Republic of Indonesia.
Our previously issued report on these financial statements contained an
explanatory paragraph concerning the adequacy of the liability recorded in
respect of Indonesian income tax assessments. As more fully discussed in Note
12, these assessments were fully paid in 1995. Also, our previously issued
report contained an explanatory paragraph concerning the Company's ability to
continue as a going concern, which has been mitigated as a result of the sale of
additional capital stock in 1995.
As discussed in Note 2 effective January 1, 1994 the Company changed its
revenue recognition policy for pulse-sharing revenues.
SIDDHARTA SIDDHARTA & HARSONO
REGISTERED PUBLIC ACCOUNTANTS
Drs. Istama T. Siddharta
REGISTERED PUBLIC ACCOUNTANT NO.
D-2336
Jakarta, June 2, 1995 except for note 12 as it relates to payment of prior
year tax assessments and note 15, as to which the date is November 7, 1996.
F-43
<PAGE>
PT RAFASA HAZANAH PERKASA
BALANCE SHEETS
DECEMBER 31, 1993, 1994, AND 1995
<TABLE>
<CAPTION>
1995
1993 1994 ---------------------------
-------------- --------------- U.S.$
NOTES RP RP RP (NOTE 3)
---------- -------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................... 2,4,9,14 1,855,749,168 775,147,011 5,543,708,243 2,401,953
Accounts receivable
Trade--net of allowance for doubtful accounts
of Rp 5,908,861,000 in 1993, Rp 505,744,829
in 1994, and Rp 568,483,998 in 1995........ 2,5,9,14,22 2,211,907,000 2,950,032,018 2,617,547,345 1,134,119
Others....................................... -- 5,295,250 59,039,898 25,580
Inventories--net of allowance for obsolescence
of Rp 891,089,416 in 1994 and Rp
3,858,732,612 in 1995........................ 2,6,9,22 5,425,094,000 6,779,410,442 3,462,954,359 1,500,414
Prepaid taxes.................................. -- 327,163,736 63,564,058 27,541
Prepaid expenses............................... 2 2,883,615,000 253,324,494 153,282,855 66,414
-------------- --------------- --------------- ----------
Total Current Assets........................... 12,376,365,168 11,090,372,951 11,900,096,758 5,156,021
-------------- --------------- --------------- ----------
DUE FROM AN AFFILIATE.......................... 2 -- -- 8,210,270,047 3,557,309
-------------- --------------- --------------- ----------
ADVANCE FOR INVESTMENT IN SHARES OF STOCK...... 1,18 -- -- 29,112,810,000 12,613,869
-------------- --------------- --------------- ----------
PROPERTY AND EQUIPMENT 2,7,9,14
Cost........................................... 4,373,235,000 4,373,725,945 3,915,182,447 1,696,353
Accumulated depreciation....................... (1,493,990,000) (2,450,647,331) (2,454,803,666) (1,063,606)
-------------- --------------- --------------- ----------
Net Book Value................................. 2,879,245,000 1,923,078,614 1,460,378,781 632,747
-------------- --------------- --------------- ----------
OTHER ASSETS
Pledged Cash and Deposits...................... 8,9,14 7,121,104,000 6,195,697,000 -- --
Deferred charges............................... 2,18 35,734,707,000 32,001,908,891 -- --
-------------- --------------- --------------- ----------
Total Other Assets............................. 42,855,811,000 38,197,605,891 -- --
-------------- --------------- --------------- ----------
TOTAL ASSETS................................... 58,111,421,168 51,211,057,456 50,683,555,586 21,959,946
-------------- --------------- --------------- ----------
-------------- --------------- --------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans............................... 9 5,992,693,000 15,822,744,048 9,475,366,558 4,105,445
Accounts payable
Trade........................................ 10 6,237,168,000 4,294,723,512 564,424,841 244,551
Affiliates................................... 2 -- -- 327,000,000 141,681
Others....................................... 11 5,445,655,000 654,737,094 12,759,468,992 5,528,366
Taxes payable.................................. 2,12 9,751,111,000 8,326,449,431 4,920,000,182 2,131,716
Accrued expenses............................... 2,13 4,507,201,000 7,560,349,400 1,366,099,168 591,897
Current maturities of long-term debts.......... 14 18,422,245,000 19,054,254,112 2,714,491,758 1,176,123
-------------- --------------- --------------- ----------
Total Current Liabilities...................... 50,355,473,000 55,713,257,597 32,126,851,499 13,919,779
-------------- --------------- --------------- ----------
LONG-TERM DEBTS--net of current maturities..... 14 14,598,961,000 8,602,303,862 135,656,507 58,777
-------------- --------------- --------------- ----------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock--Rp 1,000,000 par value
Authorized and issued--1,000 shares in 1993
and 1994 and 25,000 shares in 1995......... 15 1,000,000,000 1,000,000,000 25,000,000,000 10,831,889
Receivable from stockholders................... 2,16 (1,689,479,000) (4,041,764,800) -- --
Deficit........................................ (6,153,533,832) (10,062,739,203) (6,578,952,420) (2,850,499)
-------------- --------------- --------------- ----------
Total Stockholders' Equity (Deficiency).... (6,843,012,832) (13,104,504,003) 18,421,047,580 7,981,390
-------------- --------------- --------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... 58,111,421,168 51,211,057,456 50,683,555,586 21,959,946
-------------- --------------- --------------- ----------
-------------- --------------- --------------- ----------
</TABLE>
See accompanying Notes to Financial Statements
which are an integral part of the financial statements.
F-44
<PAGE>
PT RAJASA HAZANAH PERKASA
STATEMENTS OF INCOME AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1995
1993 1994 ---------------------------
-------------- --------------- U.S.$
NOTES RP RP RP (NOTE 3)
--------- -------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES................................. 2,17,18 38,171,012,000 34,981,603,290 16,812,363,798 7,284,386
COST OF REVENUES......................... 2,17 23,690,291,000 17,425,723,608 7,679,495,493 3,327,337
-------------- --------------- --------------- ----------
GROSS PROFIT............................. 14,480,721,000 17,555,879,682 9,132,868,305 3,957,049
-------------- --------------- --------------- ----------
OPERATING EXPENSES....................... 12,675,997,000 12,784,298,746 10,840,193,673 4,696,791
-------------- --------------- --------------- ----------
INCOME (LOSS) FROM OPERATIONS............ 1,804,724,000 4,771,580,936 (1,707,325,368) (739,742)
-------------- --------------- --------------- ----------
OTHER INCOME (CHARGES)
Interest income........................ 558,855,000 587,672,516 403,155,251 174,677
Gain on disposals of property and
equipment--net....................... 2 850,000 2,936,000 344,054,448 149,070
Interest expense....................... (4,975,872,000) (4,923,313,013) (4,813,937,236) (2,085,761)
Miscellaneous--net..................... 18 789,148,000 (3,861,829,788) 13,431,326,688 5,819,465
-------------- --------------- --------------- ----------
Other Income (Charges)--Net.............. (3,627,019,000) (8,194,534,285) 9,364,599,151 4,057,451
-------------- --------------- --------------- ----------
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE................... 2 -- 1,048,136,128 -- --
-------------- --------------- --------------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAX.................................... (1,822,295,000) (2,374,817,221) 7,657,273,783 3,317,709
PROVISION FOR INCOME TAX................. 2,12 1,095,450,000 1,534,388,150 4,173,487,000 1,808,270
-------------- --------------- --------------- ----------
NET INCOME (LOSS)........................ (2,917,745,000) (3,909,205,371) 3,483,786,783 1,509,439
DEFICIT AT BEGINNING OF YEAR............. (3,235,788,832) (6,153,533,832) (10,062,739,203) (4,359,938)
-------------- --------------- --------------- ----------
DEFICIT AT END OF YEAR................... (6,153,533,832) (10,062,739,203) (6,578,952,420) (2,850,499)
-------------- --------------- --------------- ----------
</TABLE>
See accompanying Notes to Financial Statements
which are an integral part of the financial statements.
F-45
<PAGE>
PT RAJASA HAZANAH PERKASA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1995
1993 1994 ----------------------------
--------------- -------------- U.S.$
RP RP RP (NOTE 3)
--------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before provision for income tax..... (1,822,295,000) (2,374,817,221) 7,657,273,783 3,317,709
Adjustments to reconcile income (loss) before
provision for income tax to net cash provided by
(used in) operating activities:
Amortization of deferred charges.............. 11,837,328,000 6,429,397,219 4,819,331,622 2,088,099
Depreciation.................................. 757,993,000 1,215,863,781 749,562,756 324,767
Provisions for:
Doubtful accounts........................... 39,239,000 469,876,000 62,739,169 27,183
Inventory obsolescence...................... -- 891,089,416 2,967,196 1,285,807
Gain on disposal of network assets............ -- -- (10,967,490,528) (4,751,945)
Gain on disposals of property and equipment... (850,000) (2,936,000) (344,054,448) (149,070)
Changes in operating assets and liabilities:
Accounts receivable......................... (783,972,000) (1,208,001,018) 216,000,856 93,588
Inventories................................. (4,569,467,000) (2,163,187,253) 348,812,887 151,132
Prepaid tax and expenses.................... 1,882,755,000 2,297,831,520 363,641,317 157,557
Pledged cash and deposits................... (674,301,000) 925,407,000 6,195,697,000 2,684,444
Accounts payable............................ 4,042,779,168 (6,732,762,394) 8,701,433,227 3,770,118
Payable to former stockholders.............. (4,500,000,000) -- -- --
Accrued expenses............................ 2,123,728,000 3,053,148,400 (6,194,250,232) (2,683,817)
Taxes payable (excluding corporate income
tax)...................................... (2,116,879,000) (2,204,640,847) (4,585,265,495) (1,986,683)
Payments of corporate income tax.............. (608,930,000) (754,408,872) (2,994,670,754) (1,297,518)
--------------- -------------- --------------- -----------
Net Cash Provided by (Used in) Operating
Activities...................................... 5,607,128,168 (158,140,269) 6,996,404,356 3,031,371
--------------- -------------- --------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in deferred charges........... (8,908,137,000) (2,696,599,110) 38,150,067,797 16,529,492
Proceeds from sales of property and equipment..... 909,000 61,375,000 498,794,393 216,115
Increase in advance for investment in shares of
stock........................................... -- -- (29,112,810,000) (12,613,869)
Acquisitions of property and equipment............ (3,411,300,000) (434,255,000) (441,602,868) (191,336)
Proceeds from casualty insurance.................. -- 33,900,000 -- --
--------------- -------------- --------------- -----------
Net Cash Provided by (Used in) Investing
Activities...................................... (12,318,528,000) (3,035,579,110) 9,094,449,322 3,940,402
--------------- -------------- --------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital stock issuance.............. -- -- 24,000,000,000 10,398,614
Decrease (increase) in due from stockholders...... (1,189,479,000) (2,352,285,800) 4,041,764,800 1,751,198
Increase (decrease) in long-term debts............ 5,643,333,000 (5,364,648,026) (24,806,409,709) (10,748,011)
Increase in due from an affiliate................. -- -- (8,210,270,047) (3,557,309)
Increase (decrease) in short-term loans........... 3,930,456,000 9,830,051,048 (6,347,377,490) (2,750,164)
--------------- -------------- --------------- -----------
Net Cash Provided by (Used in) Financing
Activities...................................... 8,384,310,000 2,113,117,222 (11,322,292,446) (4,905,672)
--------------- -------------- --------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 1,672,910,168 (1,080,602,157) 4,768,561,232 2,066,101
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.... 182,839,000 1,855,749,168 775,147,011 335,852
--------------- -------------- --------------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... 1,855,749,168 775,147,011 5,543,708,243 2,401,953
--------------- -------------- --------------- -----------
--------------- -------------- --------------- -----------
</TABLE>
See accompanying Notes to Financial Statements
which are an integral part of the financial statements.
F-46
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
PT Rajasa Hazanah Perkasa (the Company) was established on December 17, 1984
based on notarial deed No. 22 of Pariwondo Soekarno SH. The deed of
establishment was approved by the Ministry of Justice (MOJ) in its decision
letter No. C2-2666-HT.01.01.TH'85 dated May 8, 1985, registered at the South
Jakarta Court of Justice under No. 503/Not/1985/PN.JKT.SEL on July 24, 1985 and
was published in State Gazette No. 82, Supplement No. 1199 dated October 14,
1986. The Company's articles of association has been amended from time to time,
most recently by notarial deed No. 41 of Sinta Susikto SH dated November 9,
1995.
According to Article No. 2 of the Company's articles of association, the
Company is engaged in various business activities.
The Company changed its status to foreign capital investment based on the
approval of Investment Coordinating Board No. 22/V/PMA/11995 dated May 26, 1995
and No. 1226/A.6/1995 dated September 28, 1995.
Since 1985, the Company, in association with PT Telekomunikasi Indonesia
(Telkom), has provided cellular telephone connection services which are
integrated into the national telephone network, covering the
Jakarta-Puncak-Bandung area. Based on Letter from Ministry of Finance No.
S-611/MK.016/1995 dated October 23, 1995 the Company in association with Telkom,
established a joint venture company, PT Mobile Selular Indonesia (Mobisel) which
is engaged in cellular telephone connection services covering the West Java,
Lampung, Jakarta, Central Java, Bali and Lombok areas. On November 30, 1995, the
Company transferred its cellular mobile telephone networks as advance for
investment in shares of stock of Mobisel (see Note 18).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENTS
The financial statements have been prepared on the historical cost basis of
accounting, except for inventories which are valued at the lower of cost or net
realizable value (market).
CASH EQUIVALENTS
Time deposits and other short-term investments with maturities of three
months or less at the time of placement or purchase are considered as "Cash
Equivalents".
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides allowance for doubtful accounts based on a review of
the status of the individual receivable accounts at the end of the year.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value
(market). Cost is determined by the first-in, first-out method. The Company
provides an allowance for obsolescence on inventories based on a periodic review
of their conditions.
F-47
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSACTIONS WITH RELATED PARTIES
The Company has transactions with entities which are regarded as having
special relationship as defined under Statement of Financial Accounting
Standards No. 7, "Related Party Disclosures".
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed based on the double-declining balance method at the
following rates:
<TABLE>
<CAPTION>
RATES
---------------------
<S> <C>
Vehicles.................................................................... 50%
Furniture and fixtures...................................................... 50% and 25%
Building improvements....................................................... 50%
Computer equipment.......................................................... 25%
Cellular mobile telephones.................................................. 25%
Machinery and equipment..................................................... 25%
</TABLE>
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, their costs and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in income
for the year.
PREPAID EXPENSES
Prepaid expenses are amortized over the periods benefited using the
straight-line method.
DEFERRED CHARGES
Certain expenditures of which the benefits extend over one year are deferred
and amortized over their estimated useful lives using the straight-line method.
REVENUE AND EXPENSE RECOGNITION
Revenue is recorded as earned when products are delivered to the customers
or when services are rendered. Expenses are recognized when these are incurred.
Revenue is obtained from three primary sources:
- connection charge for each new line sold.
- pulse-sharing amounting to 56% of the charges raised for local calls on
the cellular network.
- sales, repair, maintenance and rental of outstations and accessories.
Effective January 1, 1994, the Company changed its revenue recognition
policy in connection with its pulse-sharing revenue. Previously, the Company had
recognized its pulse-sharing revenue in accordance with the billing practices of
Telkom. For purposes of monthly billing, Telkom has used a cut-off date of the
20th of the month to determine a customer's bill. Accordingly, all pulses
incurred from the 20th to the end of the month are recognized as part of the
next month's billing. Effective January 1, 1994,
F-48
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Company changed its revenue recognition to record pulse-sharing revenue as
incurred. The Company adopted this method in 1995 as required by a recently
issued Statement of Financial Accounting Standards No 35. This change has been
recognized in the statement of income as a cumulative effect of a change in
accounting principle which amounted to Rp 1,048,136,128 in 1994.
FOREIGN CURRENCY TRANSACTIONS AND BALANCES
Transactions involving foreign currencies are recorded at the rates of
exchange prevailing at the time the transactions are made. At balance sheet
date, assets and liabilities denominated in foreign currency are adjusted to
reflect the rates of exchange prevailing at such date, and any resulting gains
or losses are credited or charged to operations of the current year.
PROVISION FOR INCOME TAX
Provision for income tax is determined on the basis of estimated taxable
income for the year. No deferred tax is provided for the timing differences in
the recognition of income and expenses for financial reporting and income tax
purposes.
3. TRANSLATIONS OF INDONESIAN RUPIAH AMOUNTS INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Indonesian rupiah. The translations
of the Indonesian rupiah amounts into United States dollars are included solely
for the convenience of the readers, using the average buying and selling rates
published by Bank Indonesia (Central Bank) on December 31, 1995 of Rp 2,308 to
U.S.$ 1. The convenience translations should not be construed as representations
that the Indonesian rupiah amounts have been, could have been, or could in the
future be, converted into United States dollars at this or any other rate of
exchange.
4. CASH AND CASH EQUIVALENTS
A portion of cash amounting to Rp 50,417,840 and all cash equivalents
amounting to Rp 4,690,353,097 in 1995 are used as collateral for the short-term
loans and long-term debts (see Notes 9 and 14). Cash equivalents represent time
deposits with annual interest at 4.5%-6.06% in 1995.
5. ACCOUNTS RECEIVABLE--TRADE
This account consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Pulse revenue receivables..................... Rp 640,116,000 Rp 2,408,308,173 Rp 2,579,752,929
Outstation receivables........................ 7,480,652,000 1,047,468,674 606,278,414
-------------------- -------------------- --------------------
Total......................................... 8,120,768,000 3,455,776,847 3,186,031,343
Less allowance for doubtful accounts.......... 5,908,861,000 505,744,829 568,483,998
-------------------- -------------------- --------------------
Net........................................... Rp 2,211,907,000 Rp 2,950,032,018 Rp 2,617,547,345
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
</TABLE>
Trade receivables are used as collateral for short-term loans and long-term
debts (see Notes 9 and 14).
F-49
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. ACCOUNTS RECEIVABLE--TRADE (CONTINUED)
Substantially all of the allowance for doubtful accounts arose prior to 1993
as a result of the lack of internal control over the receipt of payment on
customer accounts. These accounts were ultimately declared uncollectible and the
related reserves were written off in 1994. The Company has taken appropriate
actions to strengthen the internal controls of the Company, including
implementation of an in-house billing system with enhanced credit control
capabilities, thereby allowing for timely recognition of doubtful accounts and
initiated customer usage surveys. The remaining allowance for doubtful accounts
is deemed appropriate and reasonable given the Company's continued efforts to
assess the ultimate collectibility of its remaining accounts receivable
balances.
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Cellular mobile telephones.................... Rp 3,338,281,000 Rp 5,668,441,207 Rp 5,009,533,582
Optional equipment............................ 742,085,000 1,828,198,651 2,286,941,570
Mobile telephones in transit.................. 1,344,728,000 173,860,000 25,211,819
-------------------- -------------------- --------------------
Total......................................... 5,425,094,000 7,670,499,858 7,321,686,971
Less allowance for obsolescence............... -- 891,089,416 3,858,732,612
-------------------- -------------------- --------------------
Net........................................... Rp 5,425,094,000 Rp 6,779,410,442 Rp 3,462,954,359
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
</TABLE>
Certain inventories are used as collateral for certain short-term loans (see
Note 9).
Allowance for obsolescence was significantly increased to provide for
slow-moving inventory of old and out-modelled mobile telephone equipment. The
Indonesian cellular market changed dramatically during 1995 including the
introduction of new and competing technologies and changing customer preferences
resulting in a higher than anticipated obsolescence provision against cellular
mobile telephone equipment.
F-50
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. PROPERTY AND EQUIPMENT
The details of property and equipment are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------------------
BEGINNING BALANCE ADDITIONS DISPOSALS ENDING BALANCE
-------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
COST
Vehicles.......................... Rp 2,452,282,407 Rp 432,687,868 Rp 710,052,795 Rp 2,174,917,480
Furniture and fixtures............ 403,108,997 -- 2,276,940 400,832,057
Building improvements............. 474,708,473 -- -- 474,708,473
Computer equipment................ 513,888,700 7,880,000 41,667,500 480,101,200
Cellular mobile telephones........ 325,786,242 -- 146,149,131 179,637,111
Machinery and equipment........... 203,951,126 1,035,000 -- 204,986,126
-------------------- ------------------ ------------------ --------------------
Total............................. 4,373,725,945 441,602,868 900,146,366 3,915,182,447
-------------------- ------------------ ------------------ --------------------
ACCUMULATED DEPRECIATION
Vehicles.......................... 1,654,460,019 499,983,205 676,943,561 1,477,499,663
Furniture and fixtures............ 234,032,459 45,246,268 1,759,910 277,518,817
Building improvements............. 261,340,006 53,342,117 -- 314,682,123
Computer equipment................ 149,419,287 96,819,502 18,620,970 227,617,819
Cellular mobile telephones........ 68,304,517 21,353,642 48,081,980 41,576,179
Machine and equipment............. 83,091,043 32,818,022 -- 115,909,065
-------------------- ------------------ ------------------ --------------------
Total............................. 2,450,647,331 749,562,756 745,406,421 2,454,803,666
-------------------- ------------------ ------------------ --------------------
Net Book Value.................... Rp 1,923,078,614 Rp 1,460,378,781
-------------------- --------------------
-------------------- --------------------
</TABLE>
Depreciation charged to operations amounted to Rp 757,993,000, Rp
1,215,863,781 and Rp 749,562,756 in 1993, 1994 and 1995, respectively. The
Company's property and equipment are used as collateral to the short-term loans
and long-term debts (see Notes 9 and 14).
8. PLEDGED CASH AND DEPOSITS
This account represents cash in banks and time deposits pledged for credit
facilities obtained by the Company (see Notes 9 and 14).
9. SHORT-TERM LOANS
This account represents loans obtained from the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- ---------------------- --------------------
<S> <C> <C> <C>
PT Bank Utama................................ Rp 5,435,000,000 Rp 15,822,744,048 Rp 9,475,000,000
PT Lippobank................................. -- -- 366,558
PT Bank Dagang Negara........................ 557,693,000 -- --
-------------------- ---------------------- --------------------
Total........................................ Rp 5,992,693,000 Rp 15,822,744,048 Rp 9,475,366,558
-------------------- ---------------------- --------------------
-------------------- ---------------------- --------------------
</TABLE>
The loans bear annual interest ranging from 20% to 24%.The loans are
collateralized with certain inventories, receivables, cash, property and
equipment of the Company, corporate guarantee from PT Bina Reksa Perdana, a
stockholder and certain property and equipment of affiliates.
F-51
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. ACCOUNTS PAYABLE--TRADE
This account consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- -------------------- ------------------
<S> <C> <C> <C>
Ericsson Radio System AB........................ Rp 1,205,839,000 Rp 1,762,803,091 Rp --
Nokia Mobile Phones (H.K.) Ltd.................. 3,067,412,000 1,527,438,000 --
Dancall Radio A/S............................... 746,940,000 347,600,001 --
PT Erindo Utama................................. 445,557,000 239,675,567 --
Rose Andersen Pte., Ltd......................... 350,260,000 -- --
Others (below Rp 150 million each).............. 421,160,000 417,206,853 564,424,841
-------------------- -------------------- ------------------
Total........................................... Rp 6,237,168,000 Rp 4,294,723,512 Rp 564,424,841
-------------------- -------------------- ------------------
-------------------- -------------------- ------------------
</TABLE>
11. ACCOUNTS PAYABLE--OTHERS
As of December 31, 1995 this account mainly represents due to former
stockholder and PT Telekomunikasi Indonesia (Telkom) amounting to Rp 6,145
million and Rp 6,610 million, respectively. The amount due to Telkom represents
the difference between the agreed price of the network assets transferred to
Mobisel and Telkom's share of the capital contribution in Mobisel.
12. TAXES PAYABLE
This account consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Estimated income tax payable (less tax
prepayment of Rp 97,784,316 in 1995)........ Rp 2,160,015,000 Rp 2,939,994,278 Rp 4,075,702,684
Income taxes:
Article 21.................................. 448,012,000 1,811,256,939 268,692,322
Article 22.................................. 452,471,000 -- --
Article 23.................................. 102,565,000 85,822,512 357,878,479
Article 25.................................. -- -- 43,107,840
Article 26.................................. 755,072,000 319,049,988 174,618,857
Value Added Tax on Import..................... 5,832,976,000 3,170,325,714 --
-------------------- -------------------- --------------------
Total......................................... Rp 9,751,111,000 Rp 8,326,449,431 Rp 4,920,000,182
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
</TABLE>
As of December 31, 1994, the Company had accrued taxes payable amounting to
Rp 8,326,449,431. The Company has received several tax assessments and
additional tax assessments for the Company's tax returns for 1988, 1989, 1990,
1992, 1993 and 1994.The total taxes payable including interest and penalty of
the said tax assessments amounted to Rp 1,798,556,404 and has been fully paid by
the Company in 1995.
F-52
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. TAXES PAYABLE (CONTINUED)
A reconciliation between income (loss) before provision for income tax, as
shown in the statement of income, and estimated taxable income for the year
ended December 31, 1995 (with comparative figures for 1993 and 1994) is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
Income (loss) before provision for income
tax per statement of income.............. Rp (1,822,295,000) Rp (2,374,817,221) Rp 7,657,273,783
Timing differences:
Amortization of deferred charges......... -- -- 4,819,331,622
Provision for inventory obsolescence..... -- 891,089,416 2,967,643,196
Difference in beginning balance of
property and equipment as regulated by
Directorate General of Taxes Circular
Letter No. 44/1995..................... -- -- 1,211,445,061
Depreciation............................. 5,653,227,000 1,727,531,584 473,000,943
Provision for uncollectible trade
receivables............................ 39,239,000 469,876,000 62,739,169
Gain on disposal of network
assets................................. -- -- (5,856,159,247)
Gain on disposals of property and
equipment.............................. -- -- (401,162,201)
Permanent differences:
Donation................................. 18,540,000 106,605,000 2,090,349,100
Employees' benefits in kind.............. 704,497,000 865,755,000 599,409,987
Entertainment............................ 87,821,000 446,774,000 461,698,721
Interest expense......................... -- -- 206,746,361
Tax penalty and interest................. -- -- 17,415,989
Taxes, other than income tax............. (2,745,464,000) 975,934,000 --
Others................................... 2,473,158,000 1,292,362,000 --
Non-taxable income
Interest already subjected to final
income tax............................. -- -- (368,942,024)
--------------------- --------------------- ----------------------
Estimated taxable income................. Rp 4,408,723,000 Rp 4,401,109,779 Rp 13,940,790,460
--------------------- --------------------- ----------------------
--------------------- --------------------- ----------------------
</TABLE>
F-53
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. TAXES PAYABLE (CONTINUED)
The provision for income tax and computation of the estimated corporate
income tax payable are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- -------------------- ----------------------
<S> <C> <C> <C>
Estimated taxable income
(rounded-off).............................. Rp 4,408,723,000 Rp 4,401,109,000 Rp 13,940,790,000
-------------------- -------------------- ----------------------
Provision for income tax before adjustment... Rp 1,537,053,050 Rp 1,534,388,150 Rp 4,173,487,000
Adjustment for prior years overaccrual....... 441,603,050 -- --
-------------------- -------------------- ----------------------
Provision for income tax after adjustment.... Rp 1,095,450,000 Rp 1,534,388,150 Rp 4,173,487,000
-------------------- -------------------- ----------------------
Prepayments of income tax
Article 22................................. -- -- 52,898,433
Article 23................................. -- -- 1,350,000
Article 25................................. -- -- 43,535,883
-------------------- -------------------- ----------------------
-- -- 97,784,316
-------------------- -------------------- ----------------------
</TABLE>
Estimated corporate income tax payable for
<TABLE>
<S> <C> <C> <C>
1995.............................. Rp -- Rp -- Rp 4,075,702,684
1994.............................. -- 1,534,388,150 --
1993 and 1992..................... 2,160,015,000 1,405,606,128 --
---------------- ---------------- -----------------
Total............................... Rp 2,160,015,000 Rp 2,939,994,278 Rp 4,075,702,684
---------------- ---------------- -----------------
---------------- ---------------- -----------------
</TABLE>
13. ACCRUED EXPENSES
The details of this account are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Interest...................................... Rp 896,956,000 Rp 2,240,442,112 Rp 572,321,782
Consulting services........................... -- 251,528,475 404,271,431
Salaries...................................... 176,420,000 208,387,989 167,328,782
Professional services......................... 2,693,191,000 4,331,800,000 22,531,652
Legal fees.................................... 119,600,000 33,607,200 18,133,652
Training...................................... 137,448,000 67,420,950 --
Others........................................ 483,586,000 427,162,674 181,511,869
-------------------- -------------------- --------------------
Total......................................... Rp 4,507,201,000 Rp 7,560,349,400 Rp 1,366,099,168
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
</TABLE>
Accrued professional services in 1993 and 1994 resulted from a consulting
services agreement between the Company and Bell Atlantic International, Inc.
Under the agreement, the Company had to pay annual fee amounting to U.S.$
1,600,000 for technical services provided by Bell Atlantic International, Inc.
F-54
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. LONG-TERM DEBTS
The details of this account are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- ---------------------- --------------------
<S> <C> <C> <C>
Rupiah
PT Bank Indonesia Raya................... Rp 2,658,366,000 Rp 2,482,897,203 Rp 1,718,555,179
PT Bank Tamara........................... 3,396,921,000 2,170,692,738 676,853,686
PT Lippobank............................. 1,761,226,000 1,060,203,233 243,565,458
PT Bank Niaga............................ -- -- 76,297,200
PT Astra Credit Company.................. -- -- 74,429,400
PT Arthacakra Multi Finance.............. -- -- 39,666,678
PT Tunas Financindo Corporation.......... -- -- 20,780,664
U.S. Dollar
Svenska Handelsbanken, Singapore (U.S.$
7,945,352 in 1993 and U.S.$ 5,973,984
in 1994)............................... 16,764,693,000 13,142,764,800 --
Bell Atlantic International, Inc. (U.S.$
4,000,000)............................. 8,440,000,000 8,800,000,000 --
---------------------- ---------------------- --------------------
33,021,206,000........ 27,656,557,974 2,850,148,265
Less current maturities.................... 18,422,245,000 19,054,254,112 2,714,491,758
---------------------- ---------------------- --------------------
Long-term portion.......................... Rp 14,598,961,000 Rp 8,602,303,862 Rp 135,656,507
---------------------- ---------------------- --------------------
---------------------- ---------------------- --------------------
</TABLE>
Based on the Joint Venture Agreement No. PKS 234/HK.810/UTA-00/95 dated
November 30, 1995 between the Company, Telkom and Yayasan Dana Pensiun Pegawai
Telkom (YDPP Telkom), the Company has transferred the balance of the loan from
Svenska Handelsbanken, Singapore to Mobisel as of June 30, 1995 amounting Rp
10,752,598,140 (see Note 18).
The above loans are collateralized with 3,000 lines cellular telephone
network and certain receivables, property and equipment, time deposits and cash
of the Company and property and equipment of an affiliate. The Rupiah loans bear
interest at rates ranging from 15% to 23% per annum in 1993 and 1994, and 20% to
23% per annum in 1995. The loan from Svenska Handelsbanken, Singapore bears
annual interest at 0.55% above one month SIBOR and the loan from Bell Atlantic
International, Inc. bears annual interest at 12%.
F-55
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. CAPITAL STOCK
The Company's stockholders and their respective share ownerships as of
December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1993 AND 1994
----------------------------------------------------------
NUMBER OF
SHARES ISSUED PERCENTAGE OF
STOCKHOLDERS AND PAID OWNERSHIP AMOUNT
- ---------------------------------------------------------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
PT Panutan Duta........................................... 500 50% Rp 500,000,000
PT Bina Reksa Perdana..................................... 500 50 500,000,000
------- --- ----------------------
Total..................................................... 1,000 100% Rp 1,000,000,000
------- --- ----------------------
------- --- ----------------------
<CAPTION>
1995
----------------------------------------------------------
NUMBER OF
SHARES ISSUED PERCENTAGE OF
STOCKHOLDERS AND PAID OWNERSHIP AMOUNT
- ---------------------------------------------------------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
PT Bina Reksa Perdana..................................... 12,500 50% Rp 12,500,000,000
International Wireless Communications, Inc................ 6,250 25 6,250,000,000
PT Deltona Satya Dinamika................................. 6,250 25 6,250,000,000
------- --- ----------------------
Total..................................................... 25,000 100% Rp 25,000,000,000
------- --- ----------------------
------- --- ----------------------
</TABLE>
Based on the Extraordinary General Meeting of the Stockholders dated
November 9, 1995 which was notarized by deed No. 41 of Sinta Susikto SH, on the
same date, the stockholders approved the increase in the Company's authorized
and issued capital stock from Rp 1 billion to Rp 25 billion and the changes in
the composition of stockholders. The above changes were approved by MOJ in its
decision letter No. C2-1451.HT.01.04.TH'96 dated February 5, 1996.
16. RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders were resulted from the advance of funds by the
Company. For financial statement reporting purposes, these receivables have been
reclassified as a reduction of stockholders' equity similar to a distribution.
17. REVENUES AND COST OF REVENUES
The details of revenues are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Pulse sharing............................. Rp 14,107,885,000 Rp 11,313,620,949 Rp 12,249,170,887
Sales of outstations...................... 17,966,406,000 18,434,605,503 4,113,518,256
Connecting charges........................ 5,798,980,000 4,602,300,000 126,500,000
Repair, maintenance and others............ 297,741,000 631,076,838 323,174,655
---------------------- ---------------------- ----------------------
Total..................................... Rp 38,171,012,000 Rp 34,981,603,290 Rp 16,812,363,798
---------------------- ---------------------- ----------------------
---------------------- ---------------------- ----------------------
</TABLE>
Cost of revenues amounted to Rp 23,690,291,000, Rp 17,425,723,608 and Rp
7,679,495,493 for 1993, 1994 and 1995, respectively.
F-56
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
18. COMMITMENTS
In its operations, the Company entered into several agreements with Telkom,
whereby the Company should build cellular mobile telephone networks. The costs
financed by the Company to build the cellular mobile telephone networks were
capitalized, and were presented under the account "Deferred Charges" which was
amortized over the revenue sharing period. In accordance with the term of
cooperation agreements with Telkom, ownership of the assets will belong to
Telkom at the end of the revenue sharing period. As compensation, the Company is
entitled to receive 100% of the revenue derived from customers for selling and
installing outstation, maintenance and repair of the outstation; while during
the revenue sharing period, the pulse revenue from the outgoing local calls and
monthly customers' fixed charges was shared by both parties at a 56% sharing in
favor of the Company and 44% sharing in favor of Telkom. Telkom is entitled to
receive 100% of the revenue from international call pulses. The outstanding
agreements as of December 31, 1994 are as follows:
a. Agreement No. 22/KS.010/UTA-00/89, dated January 23, 1989, stipulates
that the Company shall build a 5,000 line cellular mobile telephone
network for the Jakarta-Bandung area (Phase II). The revenue sharing
period is six years.
b. Agreement No. 312/KS.010/UTA-00/91, dated June 13, 1991, stipulates that
the Company shall build a 15,000 line cellular mobile telephone network
for the Jakarta-Bandung area (Phase III). The revenue sharing period is
approximately eight years and ten months.
On November 30, 1995, as covered by notarial deed No. 210 dated November 30,
1995 of Sinta Susikto SH, the Company, Telkom and YDPP Telkom established a
joint venture company named PT Mobile Selular Indonesia.
In accordance with the joint venture agreement, the Company transferred
network assets to Mobisel as capital contribution. The agreed value of the
assets transferred totaling Rp 52,342,326,140 is allocated as follows:
<TABLE>
<S> <C>
As capital contributions:
The Company........................................... Rp 29,112,810,000
Telkom................................................ 10,397,432,000
YDPP Telkom........................................... 2,079,486,000
Assumption of the Company's loan from Svenska
Handelsbanken, Singapore.............................. 10,752,598,140
------------------
Total................................................... Rp 52,342,326,140
------------------
------------------
</TABLE>
The excess of the Company's portion on the agreed price of the network
assets over the net book value of the network assets transferred amounting to Rp
10,967,490,528 is presented under "Other Income (Charges)--Miscellaneous".
Under existing regulations, Mobisel can only operate upon the approval of
its articles of associations by MOJ. As such, the following arrangements and
conditions are adopted with respect to the transfer and assumption of the
operations of, and recognition and sharing of revenues being generated from, the
abovementioned assets transferred to Mobisel:
a. The operations of the network assets will be transferred to and assumed
by Mobisel effective on the 20th day of the month of approval of its
articles of association by MOJ, with the condition
F-57
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
18. COMMITMENTS (CONTINUED)
that if the approval is made exactly on the 20th day of the said month,
then the transfer shall be effective on that date.
b. Revenues generated from the operations of the transferred assets can
only be recognized by Mobisel starting from the effectivity date of the
transfer being referred to in point (a). Prior to the said date, all
revenues generated are recognized by the Company.
c. The revenue sharing agreement between Telkom and the Company covering
the transferred assets is still valid as long as the condition in point
(a) is not yet fulfilled.
Since Mobisel's deed of establishment was approved by MOJ in its decision
letter No. C2-1238.HT.01.01.TH'96 dated January 31, 1996, the Company recorded
the assets transferred as capital contribution to Mobisel as "Advance for
Investment in Shares of Stock". Accordingly, the Company is still entitled to
the pulse sharing revenue until February 20, 1996.
19. CONTINGENT LIABILITIES
The Company is in a dispute with PT Larikerindo relating to the settlement
of loan. On August 9, 1994, the court dismissed the claims against the Company.
However, PT Larikerindo filed an appeal concerning the court decision. On
December 29, 1995, the higher court again dismissed the claims.
20. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY
THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with Indonesian
GAAP which differ in certain aspects from U.S. GAAP.
The differences are reflected in the approximations provided in Note 21 and
arise due to the items discussed in the following paragraphs:
a. INCOME TAXES
Under Indonesian GAAP, it is acceptable to recognize Income Tax expense
based upon the estimated current Income Tax liability on the current year's
earnings. When income and expense recognition for Income Tax purposes does not
occur in the same year as income and expense recognition for financial reporting
purposes, the resulting temporary differences are not considered in the
computation of Income Tax expense for the year.
Under U.S. GAAP, the liability method is used to calculate the Income Tax
provision. Under the liability method, deferred tax assets or liabilities are
recognized for differences between the financial reporting and tax bases of
assets and liabilities at each reporting date.
b. REGULATION
The Company provides telephone service in Indonesia and therefore is subject
to the regulatory control of the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia. Rates for services are
tariff-regulated. Although changes in rates for services are authorized and
computed based on a decree issued by the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia, these are not based on a fixed
rate of return and are not designed to provide for the recovery
F-58
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
20. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY
THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
of the Company's cost of services. Accordingly, the requirements of U.S. GAAP
related to a business whose rates are regulated on the basis of its actual costs
are not applicable to the Company's financial statements.
c. PRESENTATION OF THE STATEMENTS OF STOCKHOLDERS' EQUITY
Under Indonesian GAAP, except for public companies, it is not required to
present statements of retained earnings. Under U.S. GAAP, the Company is
required to present statements of stockholders' equity.
F-59
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
21. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED UNDER
INDONESIAN AND U.S. GAAP
The following is a summary of the significant adjustments to net income
for the years ended December 31, 1993, 1994 and 1995 and to stockholders'
equity as of December 31, 1993, 1994 and 1995 which would be required if
U.S. GAAP had been applied instead of Indonesian GAAP in the financial
statements:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ------------------ ----------------------------------
RP RP RP U.S.$ (NOTE 3)
---------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Net income (loss) according to the
financial statements prepared under
Indonesian GAAP...................... (2,917,745,000) (3,909,205,371) 3,483,786,783 1,509,439
Adjustments due to:
Gain on disposal of network assets
(A)................................ -- -- (10,967,490,528) (4,751,946)
Expenses incurred during preoperating
stage of Mobisel................... -- -- (762,417,085) (330,337)
---------------- ------------------ ------------------ --------------
-- -- (11,729,907,613) (5,082,283)
---------------- ------------------ ------------------ --------------
Income tax effect on above
adjustments........................ -- -- 3,290,247,158 1,425,583
Income tax (B)....................... 1,992,363,100 (974,573,164) 857,026,841 371,329
Valuation allowance.................. (2,430,991,019) 1,549,006,964 (4,147,273,999) (1,796,912)
---------------- ------------------ ------------------ --------------
Approximate net loss in accordance with
U.S. GAAP............................ (3,356,372,919) (3,334,771,571) (8,246,120,830) (3,572,844)
---------------- ------------------ ------------------ --------------
---------------- ------------------ ------------------ --------------
<CAPTION>
1993 1994 1995
---------------- ------------------ ----------------------------------
RP RP RP U.S.$ (NOTE 3)
---------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Stockholders' equity according to the
financial statements prepared under
Indonesian GAAP...................... (6,843,012,832) (13,104,504,003) 18,421,047,580 7,981,390
Adjustments due to:
Income tax........................... 1,856,557,219 881,984,055 5,029,258,053 2,179,055
Gain on disposal of network assets
(A)................................ -- -- (10,967,490,528) (4,751,946)
Expenses incurred during preoperating
stage of Mobisel................... -- -- (762,417,085) (330,337)
Valuation allowance.................. (2,430,991,019) (881,984,055) (5,029,258,053) (2,179,055)
---------------- ------------------ ------------------ --------------
Approximate stockholders' equity
(capital deficiency) in accordance
with U.S. GAAP....................... (7,417,446,632) (13,104,504,003) 6,691,139,967 2,899,107
---------------- ------------------ ------------------ --------------
---------------- ------------------ ------------------ --------------
</TABLE>
- --------------------------
(A) The gain on disposal of network assets relates to the sale of network assets
to Mobisel at a gain of Rp 10,967,490,528, representing the excess of the
agreed sale price over the book value. Under U.S. GAAP, the gain was
eliminated since transfers between entities under common control does not
give rise to the recognition of realized gains.
(B) Reflects the tax effect solely due to the difference in accounting for taxes
under U.S. and Indonesian GAAP.
F-60
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
21. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED UNDER
INDONESIAN AND U.S. GAAP (CONTINUED)
With regard to the balance sheets and statements of income, the following
significant captions determined under U.S. GAAP would have been:
<TABLE>
<CAPTION>
1993 1994 1995
------------------ ------------------ ----------------------------------
RP RP RP U.S.$ (NOTE 3)
------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Balance sheets
Current assets............................. 12,376,365,168 11,090,372,951 12,270,504,214 5,316,510
Total assets............................... 58,111,421,168 51,211,057,456 61,512,948,397 26,652,057
Current liabilities........................ 50,355,473,000 55,713,257,597 40,380,349,030 17,495,818
Total liabilities.......................... 65,528,876,800 64,315,561,459 54,821,808,430 23,752,950
Statements of income
Income (loss) from operations.............. 1,804,724,000 4,771,580,936 (2,796,492,632) (1,211,652)
</TABLE>
22. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP
The following information is presented on the basis of U.S. GAAP:
a. INCOME TAX
The tax effect on significant temporary differences is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- --------------- ---------------------------------
RP RP RP U.S.$ (NOTE 3)
----------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
Deferred tax assets--current:
Provision for inventory obsolescence............ -- 311,881,296 1,157,619,784 501,568
Provision for uncollectible trade receivable.... 2,068,101,350 177,010,690 170,545,199 73,893
----------------- --------------- ----------------- --------------
2,068,101,350 488,891,986 1,328,164,983 575,461
Valuation allowance............................. (2,068,101,350) (488,891,986) (1,328,164,983) (575,461)
----------------- --------------- ----------------- --------------
Total deferred tax assets--current--net......... -- -- -- --
----------------- --------------- ----------------- --------------
Deferred tax assets--non-current:
Gain on disposal of network assets.............. -- -- 3,290,247,158 1,425,584
Property and equipment.......................... -- 30,202,400 410,845,912 178,009
Network assets.................................. 362,889,669 362,889,669 -- --
----------------- --------------- ----------------- --------------
362,889,669 393,092,069 3,701,093,070 1,603,593
Valuation allowance............................. (362,889,669) (393,092,069) (3,701,093,070) (1,603,593)
----------------- --------------- ----------------- --------------
Total deferred tax assets--non-current-- net.... -- -- -- --
----------------- --------------- ----------------- --------------
Deferred tax liabilities--non-current:
Property and equipment.......................... (574,433,800) -- -- --
----------------- --------------- ----------------- --------------
Deferred tax, net............................... (574,433,800) -- -- --
----------------- --------------- ----------------- --------------
----------------- --------------- ----------------- --------------
</TABLE>
The temporary differences, on which deferred tax assets have been computed
are not deductible for income tax purposes until the provision for inventory
obsolescence and provision for uncollectible trade
F-61
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
22. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP (CONTINUED)
receivable are written-off. The differences between the book and tax bases of
gain on disposal of network assets, property and equipment and network assets
are due to the differing recognition methods for Income Tax and financial
reporting purposes.
The Income Tax provision reported under U.S. GAAP differs from the expected
provision due to certain permanent differences which are detailed below:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ----------------- ---------------------------------
RP RP RP U.S.$ (NOTE 3)
----------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Approximate loss before Income Tax in
accordance with U.S. GAAP............ (1,822,295,000) (2,374,817,221) (4,072,633,830) (1,764,573)
Effect of permanent differences:
Donation............................. 18,540,000 106,605,000 2,090,349,100 905,697
Expenses incurred during preoperating
stage of Mobisel................... -- -- 762,417,085 330,337
Employees' benefits in kind.......... 704,497,000 865,755,000 599,499,987 259,749
Entertainment........................ 87,821,000 446,774,000 461,698,721 200,043
Interest expense..................... -- -- 206,746,361 89,578
Tax penalty and interest............. -- -- 17,415,989 7,546
Interest income which was already
subjected to
final tax.......................... -- -- (368,942,024) (159,854)
Taxes, other than income tax......... (2,745,464,000) 975,934,000 -- --
Others............................... 2,473,158,000 1,292,362,000 -- --
----------------- ----------------- ----------------- --------------
538,552,000 3,687,430,000 3,769,185,219 1,633,096
----------------- ----------------- ----------------- --------------
Approximate income (loss) before Income
Tax in accordance with U.S. GAAP..... (1,283,743,000) 1,312,612,779 (303,448,611) (131,477)
----------------- ----------------- ----------------- --------------
Provision for Income Tax on taxable
income in accordance with U.S. GAAP
before adjustment.................... (455,310,050) 453,414,200 (99,784,400) (43,234)
Increase (decrease) in valuation
allowance............................ 2,430,991,019 (1,549,006,694) 4,273,271,721 1,851,504
Adjustment for prior years
overaccrual.......................... (441,603,050) -- -- --
----------------- ----------------- ----------------- --------------
Provision for income tax on taxable
income in accordance with U.S. GAAP
after adjustment..................... 1,534,077,919 (1,095,592,764) 4,173,487,321 1,808,270
----------------- ----------------- ----------------- --------------
</TABLE>
F-62
<PAGE>
PT RAJASA HAZANAH PERKASA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
22. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP (CONTINUED)
Donations amounting to Rp 2,079,486,000 were given to Yayasan Dana Pensiun
Pegawai (YDPP) Telkom (Pension Fund of Telkom) as YDPP Telkom's contribution in
Mobisel.
b. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts for the years
ended December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS BALANCE AT
PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
---------------- -------------- ---------------- ----------------
FOR THE YEARS ENDED RP RP RP RP
- ----------------------------------------- ---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1993........................ 5,869,622,000 39,239,000 -- 5,908,861,000
December 31, 1994........................ 5,908,861,000 469,876,000 5,872,992,171 505,744,829
December 31, 1995........................ 505,744,829 62,739,169 -- 568,483,998
</TABLE>
Activity in the Company's allowance for inventory obsolescence for the years
ended December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED TO COSTS BALANCE AT
PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
-------------- ---------------- ---------------- ----------------
FOR THE YEARS ENDED RP RP RP RP
- ----------------------------------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1994........................ -- 891,089,416 -- 891,089,416
December 31, 1995........................ 891,089,416 2,967,643,196 -- 3,858,732,612
</TABLE>
23. RECLASSIFICATION OF ACCOUNTS
Certain accounts in 1993 and 1994 financial statements have been
reclassified to conform with the presentation of accounts in the 1995 financial
statements.
F-63
<PAGE>
ATTACHMENT I
PT RAJASA HAZANAH PERKASA
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
CAPITAL STOCK RECEIVABLES FROM STOCKHOLDERS' EQUITY
DESCRIPTION NOTES (ISSUED AND FULLY PAID) STOCKHOLDERS DEFICIT (CAPITAL DEFICIENCY)
- -------------------------- ----------- ----------------------- ----------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1,
1993.................... Rp 1,000,000,000 Rp -- Rp (3,235,788,832) Rp (2,235,788,832)
Addition in receivables
from stockholders....... -- (1,689,479,000) -- (1,689,479,000)
Net loss for 1993......... -- -- (2,917,745,000) (2,917,745,000)
----------------------- ----------------- ------------------ --------------------
Balance as of December 31,
1993.................... 1,000,000,000 (1,689,479,000) (6,153,533,832) (6,843,012,832)
Addition in receivables
from stockholders....... -- (2,352,285,800) -- (2,352,285,800)
Net loss for 1994......... -- -- (3,909,205,371) (3,909,205,371)
----------------------- ----------------- ------------------ --------------------
Balance as of December 31,
1994.................... 1,000,000,000 (4,041,764,800) (10,062,739,203) (13,104,504,003)
Approved during the
Extraordinary General
Meeting of the
Stockholders on November
9, 1995:
Increase in the issued
and fully paid-up
capital from RP
1,000,000,000 to RP
25,000,000,000...... 15 24,000,000,000 -- -- 24,000,000,000
Settlement of receivables
from stockholders....... -- 4,041,764,800 -- 4,041,764,800
Net income for 1995....... -- -- 3,483,786,783 3,483,786,783
----------------------- ----------------- ------------------ --------------------
Balance as of December 31,
1995.................... Rp 25,000,000,000 -- Rp (6,578,952,420) Rp 18,421,047,580
----------------------- ----------------- ------------------ --------------------
----------------------- ----------------- ------------------ --------------------
</TABLE>
F-64
<PAGE>
PT RAJASA HAZANAH PERKASA
CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
(UNAUDITED)
F-65
<PAGE>
PT RAJASA HAZANAH PERKASA
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30, 1996*
DECEMBER 31, 1995* (UNAUDITED)
-------------------- --------------- US$
NOTES RP RP (NOTE 3)
---------- -------------------- --------------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................... 2,4,8,12 5,543,708,243 39,398,217,400 16,822,467
Accounts receivable
Trade--net of allowance for doubtful accounts
of Rp 568,483,998 in 1995 and Rp
1,252,235,660 in 1996....................... 2,5,8,12 2,617,547,345 4,997,214,005 2,133,738
Others........................................ 59,039,898 457,780,875 195,466
Inventories--net of allowance for obsolescence
of Rp 3,858,732,612 in 1995 and 1996.......... 2,6,8 3,462,954,359 2,788,426,126 1,190,617
Prepaid taxes................................... 63,564,058 76,760,079 32,775
Prepaid expenses................................ 2 153,282,855 3,419,388,669 1,460,030
Advances........................................ -- 8,508,746,039 3,633,111
-------------------- --------------- ----------
Total Current Assets............................ 16 11,900,096,758 59,646,533,193 25,468,204
-------------------- --------------- ----------
DUE FROM AN AFFILIATE........................... 2 8,210,270,047 -- --
-------------------- --------------- ----------
ADVANCE FOR INVESTMENT IN SHARES OF STOCK....... 29,112,810,000 -- --
-------------------- --------------- ----------
PROPERTY AND EQUIPMENT
Cost............................................ 2,7,8,12,17 3,915,182,447 59,694,416,816 25,488,649
Accumulated depreciation........................ (2,454,803,666) (5,006,606,340) (2,137,748)
-------------------- --------------- ----------
Net Book Value.................................. 1,460,378,781 54,687,810,476 23,350,901
-------------------- --------------- ----------
OTHER ASSETS
Long-term prepaid rent.......................... 2 -- 3,496,383,778 1,492,905
Deferred charges................................ 2 -- 239,709,283 102,352
Refundable deposits............................. 2 -- 670,066,643 286,109
Preoperating expenses........................... 2 -- 50,750,002 21,670
-------------------- --------------- ----------
TOTAL OTHER ASSETS.............................. -- 4,456,909,706 1,903,036
-------------------- --------------- ----------
-------------------- --------------- ----------
TOTAL ASSETS.................................... 50,683,555,586 118,791,253,375 50,722,141
-------------------- --------------- ----------
-------------------- --------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans................................ 8 9,475,366,558 9,475,000,000 4,045,687
Accounts payable
Trade......................................... 9 564,424,841 6,869,946,229 2,933,367
Affiliate..................................... 2 327,000,000 -- --
Others........................................ 10 12,759,468,992 5,027,983,698 2,146,876
Taxes payable................................... 2,11 4,920,000,182 5,020,615,192 2,143,730
Accrued expenses................................ 1,366,099,168 1,506,987,684 643,462
Current maturities of long-term debts........... 12 2,714,491,758 4,747,385,517 2,027,065
-------------------- --------------- ----------
Total Current Liabilities....................... 32,126,851,499 32,647,918,320 13,940,187
-------------------- --------------- ----------
LONG-TERM DEBTS--net of current maturities...... 12 135,656,507 60,839,193,541 25,977,452
-------------------- --------------- ----------
DUE TO STOCKHOLDERS............................. 2 -- 7,049,326,002 3,009,960
-------------------- --------------- ----------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED
SUBSIDIARY.................................... 2 -- 12,579,678,715 5,371,340
-------------------- --------------- ----------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock--Rp 1,000,000 par value
Authorized and issued--25,000 shares in
1995........................................ 13 25,000,000,000 25,000,000,000 10,674,638
Deficit....................................... (6,578,952,420) (19,324,863,203) (8,251,436)
-------------------- --------------- ----------
Total Stockholders' Equity.................... 18,421,047,580 5,675,136,797 2,423,202
-------------------- --------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... 50,683,555,586 118,791,253,375 50,722,141
-------------------- --------------- ----------
-------------------- --------------- ----------
</TABLE>
- ------------------------------
* Balance sheet as of December 31, 1995 is not consolidated since Mobisel, a
subsidiary has no legal existence yet as of that date.
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-66
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(WITH COMPARATIVE FIGURES FOR THE SIX MONTHS ENDED JUNE 30, 1995)
<TABLE>
<CAPTION>
JUNE 30, 1995 * JUNE 30, 1996
------------------ ----------------------------------
NOTES RP RP U.S.$ (NOTE 3)
----------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
REVENUES........................................ 2,14 7,714,286,374 11,458,331,062 4,892,541
COST OF REVENUES................................ 2,15 1,888,918,368 4,435,863,310 1,894,049
------------------ ------------------ --------------
GROSS PROFIT.................................... 5,825,368,006 7,022,467,752 2,998,492
OPERATING EXPENSES
Selling....................................... 818,346,475 769,492,476 328,562
General and administrative.................... 1,861,185,422 3,691,530,304 1,576,230
------------------ ------------------ --------------
Total Operating Expenses.................... 2,679,531,897 4,461,022,780 1,904,792
------------------ ------------------ --------------
INCOME FROM OPERATIONS.......................... 3,145,836,109 2,561,444,972 1,093,700
------------------ ------------------ --------------
OTHER INCOME (CHARGES)
Interest income............................... 217,948,600 210,978,524 90,085
Gain on disposals of property and
equipment--net.............................. 2 -- 21,622,223 9,232
Interest expense.............................. (2,734,841,059) (2,305,644,318) (984,477)
Loss on foreign exchange--net................. 2 (323,929,360) (166,717,433) (71,186)
Miscellaneous--net............................ (242,635,602) (908,176,244) (387,778)
------------------ ------------------ --------------
Other Charges--Net............................ (3,083,457,421) (3,147,937,248) (1,344,124)
------------------ ------------------ --------------
INCOME (LOSS) BEFORE MINORITY INTEREST IN NET
INCOME OF CONSOLIDATED SUBSIDIARY............. 62,378,688 (586,492,276) (250,424)
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED
SUBSIDIARY.................................... 2 -- (429,510,894) (183,395)
------------------ ------------------ --------------
NET INCOME (LOSS)............................... 62,378,688 (1,016,003,170) (433,819)
DEFICIT AT BEGINNING OF PERIOD.................. (10,062,739,203) (18,308,860,033) (7,817,617)
------------------ ------------------ --------------
DEFICIT AT END OF PERIOD........................ (10,000,360,515) (19,324,863,203) (8,251,436)
------------------ ------------------ --------------
------------------ ------------------ --------------
</TABLE>
- ------------------------
* Statement of Income and Deficit for the six months ended June 30, 1995 is not
consolidated since Mobisel, a subsidiary, has no legal existence yet as of
that date.
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-67
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(WITH COMPARATIVE FIGURES FOR THE SIX MONTHS ENDED JUNE 30, 1995)
<TABLE>
<CAPTION>
JUNE 30, 1995* JUNE 30, 1996
------------------ ----------------------------------
RP RP U.S.$ (NOTE 3)
------------------ ------------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... 62,378,688 (1,016,003,170) (433,819)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................ 510,744,403 2,746,326,043 1,172,641
Provision for doubtful accounts..................... (7,583,329) 683,751,662 291,952
Minority interest in net income of consolidated
subsidiary........................................ -- 429,510,894 183,395
Amortization of deferred charges.................... -- 107,941,840 46,090
Amortization of preoperating expenses............... -- 7,249,998 3,096
Gain on disposals of property and equipment......... (48,279,931) (21,622,223) (9,232)
Change in assets and liabilities:
Accounts receivable............................... 463,985,758 (3,442,159,299) (1,469,752)
Inventories....................................... 528,633,605 675,528,233 288,441
Prepaid taxes..................................... 310,202,783 252,630,955 107,870
Prepaid expenses.................................. 18,422,334 (6,639,675,050) (2,835,045)
Advances.......................................... -- (8,508,746,039) (3,633,111)
Refundable deposits............................... -- (509,665,259) (217,620)
Pledged cash and deposits......................... 1,084,193,204 -- --
Accounts payable.................................. (2,360,732,111) (1,752,963,906) (748,490)
Taxes payable..................................... (87,126,063) 100,615,010 42,961
Accrued expenses.................................. 4,424,994,458 (155,117,138) (66,233)
------------------ ------------------ --------------
Net Cash Provided by (Used in) Operating Activities..... 4,899,833,799 (17,042,397,449) (7,276,856)
------------------ ------------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of property and equipment....... 108,097,212 63,861,024 27,268
Acquisitions of property and equipment.................. (222,240,076) (8,861,190,273) (3,783,600)
Addition in preoperating expenses....................... -- (3,000,000) (1,281)
Addition in deferred charges............................ (54,393,821) -- --
------------------ ------------------ --------------
Net Cash Used in Investing Activities................... (168,536,685) (8,800,329,249) (3,757,613)
------------------ ------------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in long-term debts.................. (18,895,370,848) 54,657,258,789 23,337,856
Increase in due to stockholders......................... -- 5,040,343,624 2,152,154
Increase (decrease) in short-term loan.................. 15,021,139,212 (366,558) (157)
------------------ ------------------ --------------
Net Cash Provided by (Used in) Financing Activities..... (3,874,231,636) 59,697,235,855 25,489,853
------------------ ------------------ --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 857,065,478 33,854,509,157 14,455,384
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 775,147,011 5,543,708,243 2,367,083
------------------ ------------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. 1,632,212,489 39,398,217,400 16,822,467
------------------ ------------------ --------------
------------------ ------------------ --------------
</TABLE>
- --------------------------
* Statement of Cash Flows for the six months ended June 30, 1995 is not
consolidated since Mobisel, a subsidiary, has no legal existence yet as of
that date.
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-68
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PT Rajasa Hazanah Perkasa (the Company) was established on December 17, 1984
based on notarial deed No. 22 of Pariwondo Soekarno SH. The deed of
establishment was approved by the Ministry of Justice (MOJ) in its decision
letter No. C2-2666-HT.01.01.TH'85 dated May 8, 1985, registered at the South
Jakarta Court of Justice under No. 503/Not/1985/PN.JKT.SEL on July 24, 1985 and
was published in the State Gazette No. 82, Supplement No. 1199 dated October 14,
1986. The Company's articles of association have been amended from time to time,
most recently by notarial deed No. 41 of Sinta Susikto SH dated November 9,
1995.
According to Article No. 2 of the Company's articles of association, the
Company is engaged in various business activities.
The Company changed its status to foreign capital investment based on the
approval of Investment Coordinating Board No. 22/V/PMA/1995 dated May 26,1995
and No. 1226/A.6/1995 dated September 28, 1995.
On November 30, 1995 as covered by notarial deed No. 210 dated November 30,
1995 of Sinta Susikto SH, the Company, PT Telekomunikasi Indonesia (Telkom) and
Yayasan Dana Pensiun Pegawai Telkom (YDPP Telkom) established a joint venture
company named PT Mobile Selular Indonesia (Mobisel). In accordance with the
joint venture agreement, the Company transferred network assets to Mobisel as
capital contribution.
Under existing regulation, Mobisel can only operate upon the approval of its
articles of associations by MOJ. As such, the following arrangements and
conditions are adopted with respect to the transfer and assumption of the
operations of, and recognition and sharing of revenues being generated from, the
above-mentioned assets transferred to Mobisel:
a. The operations of the network assets will be transferred to and
assumed by Mobisel effective on the 20th day of the month of approval of its
articles of association by MOJ, with the condition that if the approval is
made exactly on the 20th day of the said month, then the transfer shall be
effective on that date.
b. Revenues generated from the operations of the transferred assets can
only be recognized by Mobisel starting from the effectivity date of the
transfer being referred to in point (a). Prior to the said date, all
revenues generated are recognized by the Company.
c. The revenue sharing agreement between Telkom and the Company
covering the transferred assets is still valid as long as the condition in
point (a) is not yet fulfilled.
Mobisel's deed of establishment was approved by MOJ in its decision letter
No. C2-1238.HT.01.01-TH'96 dated January 31, 1996. Accordingly, the Company is
still entitled to the pulse sharing revenue until February 20, 1996.
As of December 31, 1995, the Company recorded the network assets transferred
as a capital contribution to Mobisel as "Advance for Investment in Shares of
Stock".
F-69
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared on the historical
cost basis of accounting, except for inventory which are valued at the lower of
cost or net realizable value (market).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for June 30, 1996 include the accounts
of the Company and its 70% owned subsidiary, PT Mobile Selular Indonesia
(Mobisel). The December 31, 1995 and June 30, 1995 accounts do not include
Mobisel's accounts since it was legally established on January 31, 1996.
All significant intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS
Time deposits and other short-term investments with maturities of three
months or less at the time of placement or purchase are considered as "Cash
Equivalents".
ALLOWANCE FOR DOUBT ACCOUNTS
The Company and its Subsidiary provide allowance for doubtful accounts based
on a review of the status of the individual receivable accounts at the end of
the period.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value
(market). Cost is determined by the first-in, first-out method. The Company
provides an allowance for obsolescence on inventories based on a periodic review
of their conditions.
TRANSACTIONS WITH RELATED PARTIES
The Company and its Subsidiary have transactions with entities which are
regarded as having special relationship as defined under Statement of Financial
Accounting Standards No. 7, "Related Party Disclosures".
F-70
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. The
Company and its Subsidiary use double-declining balance method and straight-line
method, respectively, for computing the depreciation, based on the estimated
useful lives of the assets as follows:
<TABLE>
<CAPTION>
COMPANY YEARS
- ---------------------------------------- -----------
<S> <C>
Vehicles................................ 2
Furniture and fixtures.................. 2-4
Building improvements................... 2
Computer equipment...................... 2
Cellular mobile telephones.............. 4
Machinery and equipment................. 4
<CAPTION>
SUBSIDIARY YEARS
- ---------------------------------------- -----------
<S> <C>
Vehicles................................ 4
Furniture and fixtures.................. 4
Telecommunication network:
Radio base station equipment.......... 7
Switching equipment................... 7
Test and miscellaneous equipment...... 7
Real estate and civil works........... 7
Network miscellaneous equipment....... 7
</TABLE>
Telecommunication network represents capitalized system costs for the
development of the Subsidiary's cellular mobile telephone systems. This includes
the costs of the construction, direct labor cost spent on the construction, and
interest on loans used to finance the construction. Capitalization of interest
ceases when the construction is completed and ready for its intended use.
Construction in progress is stated at cost. The accumulated costs will be
reclassified to the appropriate property and equipment accounts when the
construction is completed and ready for its intended use.
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, their costs and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in income
for the period.
PREPAID EXPENSES
Prepaid expenses are amortized over the periods benefited using the
straight-line method. Prepaid rent expenses which benefited more than one year
is classified in "Other Assets".
DEFERRED CHARGES
Certain expenditures of which the benefits extend over one year are deferred
and amortized over their estimated useful lives using the straight-line method.
F-71
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREOPERATING EXPENSES
Preoperating expenses are amortized over three years up to 1998, in
accordance with the Statement of Financial Accounting Standards No. 6,
"Accounting and Reporting for a Development Stage Company".
REVENUE AND EXPENSE RECOGNITION
Revenue is recorded as earned when products are delivered to the customers
or when services are rendered. Expenses are recognized when these are incurred.
Revenue is obtained from three primary sources:
--connection charge for each new line sold
--pulse-sharing
--sales, repair, maintenance and rental of outstations and accessories
FOREIGN CURRENCY TRANSACTIONS AND BALANCES
Transactions involving foreign currencies are recorded at the rates of
exchange prevailing at the time the transactions are made. At the balance sheet
date, assets and liabilities denominated in foreign currencies are adjusted to
reflect the middle rate of Bank Indonesia prevailing at such date and the
resulting gains or losses are credited or charged to operations of the current
period.
PROVISION FOR INCOME TAX
Provision for income tax is determined on the basis of estimated taxable
income for the year. No deferred tax is provided for the timing differences in
the recognition of income and expenses in the financial statements for financial
reporting and income tax purposes.
3. TRANSLATIONS OF INDONESIAN RUPIAH AMOUNTS INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Indonesian rupiah. The translations
of the Indonesian rupiah amounts into United States dollars are included solely
for the convenience of the readers, using the average buying and selling rates
published by Bank Indonesia (Central Bank) on June 30, 1996 of Rp 2,342 to U.S.$
1. The convenience translations should not be construed as representations that
the Indonesian rupiah amounts have been, could have been, or could in the future
be, converted into United States dollars at this or any other rate of exchange.
F-72
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 1995 and June 30, 1996 consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- ---------------------
<S> <C> <C>
Cash on hand...................................... Rp 22,438,597 Rp 42,683,016
Cash in bank...................................... 830,916,549 4,149,437,337
Cash equivalents Time deposits, with annual
interest at 4.5%--6.06%......................... 4,690,353,097 35,206,097,047
------------------- ---------------------
Total............................................. Rp 5,543,708,243 Rp 39,398,217,400
------------------- ---------------------
------------------- ---------------------
</TABLE>
A portion of cash and cash equivalents amounting to Rp 4,740,770,937 and Rp
4,818,873,911 as of December 31, 1995 and June 30, 1996, respectively, are used
as collateral for the short-term loans and long-term debts (see Notes 8 and 12).
5. ACCOUNTS RECEIVABLE-TRADE
The details of this account are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Pulse revenue receivables......................... Rp 2,579,752,929 Rp 5,648,164,424
Outstation receivables............................ 606,278,414 601,285,241
------------------- -------------------
Total............................................. 3,186,031,343 6,249,449,665
Less allowance for doubtful accounts.............. 568,483,998 1,252,235,660
------------------- -------------------
Net............................................... Rp 2,617,547,345 Rp 4,997,214,005
------------------- -------------------
------------------- -------------------
</TABLE>
Trade receivables are used as collateral for short-term loans and long-term
debts (see Notes 8 and 12).
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Cellular mobile telephones........................ Rp 5,009,533,582 Rp 4,322,999,657
Optional equipment................................ 2,286,941,570 2,298,947,262
Mobile telephones in transit...................... 25,211,819 25,211,819
------------------- -------------------
Total............................................. 7,321,686,971 6,647,158,738
Less allowance for obsolescence................... 3,858,732,612 3,858,732,612
------------------- -------------------
Net............................................... Rp 3,462,954,359 Rp 2,788,426,126
------------------- -------------------
------------------- -------------------
</TABLE>
Certain inventories are used as collateral for certain short-term loans (see
Note 8).
Allowance for inventory obsolescence is made for non-moving inventory of old
and out-modelled mobile telephone equipment.
F-73
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1996 consist of the following:
<TABLE>
<CAPTION>
BEGINNING BALANCE
--------------------------------- ADDITIONS DISPOSALS ENDING BALANCE
MOBISEL --------------- ------------- ----------------
---------------- RP RP RP
COMPANY RP
---------------
RP
<S> <C> <C> <C> <C> <C>
COST
Vehicles........................ 2,174,917,480 306,500,000 755,200,000 272,600,000 2,964,017,480
Furniture and fixtures.......... 400,832,057 251,235,224 175,334,106 -- 827,401,387
Building improvements........... 474,708,473 -- -- -- 474,708,473
Computer equipment.............. 480,101,200 -- 115,653,950 -- 595,755,150
Cellular mobile telephones...... 179,637,111 -- -- 1,950,000 177,687,111
Machinery and equipment......... 204,986,126 -- -- -- 204,986,126
RBS equipment................... -- 25,081,160,980 -- -- 25,081,160,980
Switching equipment............. -- 9,306,319,059 -- -- 9,306,319,059
Microwave equipment............. -- 3,807,752,324 -- -- 3,807,752,324
Test and miscellaneous
equipment..................... -- 3,571,581,875 -- -- 3,571,581,875
Network miscellaneous
equipment..................... -- 2,442,286,271 -- -- 2,442,286,271
Real estate and civil works..... -- 2,035,473,416 14,037,181 -- 2,049,510,597
Construction in progress........ -- 390,284,947 7,800,965,036 -- 8,191,249,983
--------------- ---------------- --------------- ------------- ----------------
Total........................... 3,915,182,447 47,192,594,096 8,861,190,273 274,550,000 59,694,416,816
--------------- ---------------- --------------- ------------- ----------------
ACCUMULATED DEPRECIATION
Vehicles........................ 1,477,499,663 19,156,251 230,642,379 230,361,199 1,496,937,094
Furniture and fixtures.......... 277,518,817 17,631,579 44,369,055 -- 339,519,451
Building improvements........... 314,682,123 -- 20,003,294 -- 334,685,417
Computer equipment.............. 227,617,819 -- 65,534,561 -- 293,152,380
Cellular mobile telephones...... 41,576,179 -- 1,334,603 950,000 41,960,782
Machinery and equipment......... 115,909,065 -- 11,134,638 -- 127,043,703
RBS equipment................... -- -- 1,286,794,099 -- 1,286,794,099
Switching equipment............. -- -- 477,462,605 -- 477,462,605
Microwave equipment............. -- -- 195,357,513 -- 195,357,513
Test and miscellaneous
equipment..................... -- -- 183,240,738 -- 183,240,738
Network miscellaneous
equipment..................... -- -- 125,301,997 -- 125,301,997
Real estate and civil works..... -- -- 105,150,561 -- 105,150,561
--------------- ---------------- --------------- ------------- ----------------
Total........................... 2,454,803,666 36,787,830 2,746,326,043 231,311,199 5,006,606,340
--------------- ---------------- --------------- ------------- ----------------
Net Book Value.................. 1,460,378,781 47,155,806,266 54,687,810,476
--------------- ---------------- ----------------
--------------- ---------------- ----------------
</TABLE>
Depreciation charged to operations amounted to Rp 510,744,403 for the six
months period ended June 30, 1995 and Rp 2,746,326,043 for the six months period
ended June 30, 1996. The Company's property and equipment are used as collateral
to the short-term loans and long-term debts (see Notes 8 and 12).
F-74
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SHORT-TERM LOANS
This account represents loans obtained from the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
PT Bank Utama...................................... Rp 9,475,000,000 Rp 9,475,000,000
PT Lippobank....................................... 366,558 --
------------------- -------------------
Total.............................................. Rp 9,475,366,558 Rp 9,475,000,000
------------------- -------------------
------------------- -------------------
</TABLE>
The credit facility obtained from PT Bank Utama bears annual interest
ranging from 20% to 24%. The loan is collateralized with certain cash,
receivables, inventories, property and equipment, and corporate guarantee from
PT Bina Reksa Perdana, a stockholder, and certain property and equipment of
affiliates.
9. ACCOUNTS PAYABLE--TRADE
This account represents liabilities to:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Nokia Telecommunications Oy........................ Rp -- Rp 2,265,628,902
Ericsson Radio System AB........................... -- 2,093,452,328
PT Indosat (Persero)............................... -- 806,964,837
SEMA Group Consulting Ltd.......................... -- 702,600,000
PT Alvarid Mas..................................... -- 376,668,544
EDS Management Consulting.......................... -- 141,875,000
Others (below Rp 100 million each)................. 564,424,841 482,756,618
------------------- -------------------
Total.............................................. Rp 564,424,841 Rp 6,869,946,229
------------------- -------------------
------------------- -------------------
</TABLE>
10. ACCOUNTS PAYABLE--OTHERS
As of December 31, 1995, this account mainly represents due to former
stockholder and PT Telekomunikasi Indonesia (Telkom) amounting to Rp 6,145
million and Rp 6,610 million, respectively. The amount due to Telkom represents
the difference between the agreed price of the network assets transferred to
Mobisel and Telkom's share of the capital contribution in Mobisel. As of June
30, 1996, a portion of the above liabilities have been settled.
11. TAXES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Estimated income tax payable (less tax prepayment
of Rp 97,784,316 in 1995)........................ Rp 4,075,702,684 Rp --
Income tax Article 21.............................. 268,692,322 300,101,040
Article 23......................................... 357,878,479 434,554,786
Article 25......................................... 43,107,840 4,072,473,731
Article 26......................................... 174,618,857 213,485,635
------------------- -------------------
Total.............................................. Rp 4,920,000,182 Rp 5,020,615,192
------------------- -------------------
------------------- -------------------
</TABLE>
F-75
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. TAXES PAYABLE (CONTINUED)
No provision for income tax for the six months period ended June 30, 1996
since the Company and its Subsidiary are in a fiscal loss position.
The provision for income tax and computation of the estimated corporate
income tax payable for the year ended December 31,1995 are as follows:
<TABLE>
<S> <C>
Estimated taxable income (rounded-off)................... Rp 13,940,790,000
-----------------
Provision for income tax................................. 4,173,487,000
-----------------
Prepayments of income tax Article 22..................... 52,898,433
Article 23............................................. 1,350,000
Article 25............................................. 43,535,883
-----------------
97,784,316
-----------------
Estimated corporate income tax payable................... 4,075,702,684
-----------------
-----------------
</TABLE>
12. LONG-TERM DEBTS
This account represents long-term debts with details as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- ---------------------
<S> <C> <C>
Rupiah PT Bank Indonesia Raya.................... Rp 1,718,555,179 Rp 1,718,555,179
PT Bank Tamara................................... 676,853,686 --
PT Lippobank..................................... 243,565,458 --
Others (below Rp 100 million each)............... 211,173,942 165,853,351
U.S. Dollar Nissho Iwai International Pte. Ltd.,
Singapore...................................... -- 58,550,000,000
Svenska Handelsbanken, Singapore................. -- 5,152,170,528
------------------- ---------------------
2,850,148,265 65,586,579,058
Less current maturities.......................... 2,714,491,758 4,747,385,517
------------------- ---------------------
Long-term portion................................ Rp 135,656,507 Rp 60,839,193,541
------------------- ---------------------
------------------- ---------------------
</TABLE>
On March 12, 1996, Mobisel obtained a loan from Nissho Iwai International
(Singapore) Pte. Ltd. (Nissho Iwai) with a maximum facility amounting to U.S.$
60,000,000 to finance the construction and implementation of the NMT-450 Network
in Bandar Lampung in Sumatra, Java, Bali and Lombok. The loan, which term is
five years and inclusive of a two years grace period on principal payment, is
repayable in six equal semi-annual installments. Proceeds from collections of
Mobisel's receivables are deposited directly into escrow accounts maintain with
certain banks as chosen and agreed-upon by both parties.
The above loans are collateralized with 3,000 lines cellular telephone
network, cash and cash equivalents, receivables, and property and equipment of
the Company and Subsidiary and property and equipment of an affiliate, corporate
guarantee from the Company and shares of Mobisel. The Rupiah
F-76
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. LONG-TERM DEBTS (CONTINUED)
loans bear interest at rates ranging from 20% to 23% per annum. The loan from
Svenska Handelsbanken, Singapore bears interest at 0.55% above one month SIBOR,
while the loan from Nissho Iwai bears interest at an annual rate of 2.5% above
LIBOR.
Certain loan agreements contain terms and conditions restricting the Company
and Subsidiary from, such as, without prior consent from the lenders, taking
additional loans, entering into any investment, merger, consolidation,
reorganization and changing ownership. In addition, the Company has to maintain
certain financial ratios.
13. CAPITAL STOCK
The stockholders and their respective stockholdings as of June 30, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT
- ---------------------------------------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
PT Bina Reksa Perdana............................... 12,500 50% Rp 12,500,000,000
International Wireless Communications, Inc.......... 6,250 25 6,250,000,000
PT Deltona Satya Dinamika........................... 6,250 25 6,250,000,000
------- --- ---------------------
Total............................................... 25,000 100% Rp 25,000,000,000
------- --- ---------------------
------- --- ---------------------
</TABLE>
14. REVENUES
The details of revenues are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------------- ---------------------
<S> <C> <C>
Pulse sharing.................................... Rp 4,520,566,279 Rp 10,605,884,008
Sales of outstations............................. 2,761,705,440 378,801,952
Connecting charges............................... 126,500,000 367,200,000
Repair, maintenance and others................... 305,514,655 106,445,102
------------------- ---------------------
Total............................................ Rp 7,714,286,374 Rp 11,458,331,062
------------------- ---------------------
------------------- ---------------------
</TABLE>
15. COST OF REVENUES
The details of cost of revenues are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Pulse sharing...................................... Rp 360,773,061 Rp 3,725,588,682
Cost of outstations................................ 1,368,873,578 700,137,165
Repair, maintenance and others..................... 159,271,729 10,137,463
------------------- -------------------
Total.............................................. Rp 1,888,918,368 Rp 4,435,863,310
------------------- -------------------
------------------- -------------------
</TABLE>
F-77
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. CONTINGENT LIABILITY
The Company is in a dispute with PT Larikerindo relating to the settlement
of loan. On August 9, 1994, the court dismissed the claims against the Company.
However, PT Larikerindo filed an appeal concerning the court decision. On
December 29, 1995, the higher court again dismissed the claims.
17. CONSULTANCY AGREEMENTS
Mobisel had agreements with several parties in connection with the
installation and development of infrastructure of the STKB-C (Cellular mobile
telephone network) project. The agreements, made prior to the approval of
Mobisel's articles of association by MOJ, were entered into by the Company on
behalf of Mobisel. These agreements are as follows:
a. Consultancy service agreements with Telecon Ltd. (Telecon), Finland,
whereby Telecon agreed to provide a technical expert to work in Jakarta as a
technical manager for a period of 24 months starting from May 1995. The
expert shall work as a member management and shall, as an advisor, be
responsible for the further network build-up and for the operative technical
functions. The expert may also, on request, advise management on business
related issues.
b. Another consultancy agreement service with Telecon whereby Telecon
agreed to provide an expert to work in Jakarta as an installation supervisor
and testing and commissioning consultant for the RS 4000 Radio Base Station
equipment in the Final Fix project. The work started in October 1995 and has
a duration of three months.
c. Consultancy agreement with Broadcast Communications Limited (BCL),
New Zealand, whereby BCL agreed to send one expert to work in Jakarta as a
project manager for the Final Fix project. The work started in October 1995
and has a duration of three months.
d. Supply contract and service contract with Nokia Telecommunications
Oy, Finland, amounted U.S.$ 19.3 million and Nokia Telecommunications Pte.
Ltd., Singapore, amounted U.S.$ 4.37 million, respectively, in connection
with NMT-470 Network Expansion and Transmission System in order to provide
new network coverage for NMT mobile telephone system. These contracts were
made on January 19, 1996 and an advance payment amounted to U.S.$ 3.34
million has been made and recorded under "Advances" in the consolidated
balance sheet.
e. Billing process service agreement with Telkom whereby Telkom will
provide billing process, interconnection data, claim and detail of billing
process. As compensation, Mobisel is charged Rp 3,720 per station per month
(excluding 10% VAT). The agreement will mature on February 19, 1997.
f. Service agreement with Telkom whereby Telkom will provide billing
collection service to Mobisel. As compensation Mobisel will pay 1% of its
revenue to Telkom. The agreement will mature on March 31, 1997.
All consultancy fees related to the installation and development of
infrastructure of STKB-C are capitalized and recorded under "Property and
Equipment" in the consolidated balance sheet.
18. OTHER
All transactions and agreements made prior to the approval of Mobisel's
articles of association by MOJ were entered into by the Company on behalf of the
Mobisel.
F-78
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY
THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with Indonesian
GAAP which differ in certain aspects from U.S. GAAP.
The differences are reflected in the approximations provided in Note 20 and
arise due to the items discussed in the following paragraphs:
a. INCOME TAXES
Under Indonesian GAAP, it is acceptable to recognize Income Tax expense
based upon the estimated current Income Tax liability on the current year's
earnings. When income and expense recognition for Income Tax purposes does
not occur in the same year as income and expense recognition for financial
reporting purposes, the resulting temporary differences are not considered
in the computation of Income Tax expense for the year.
Under U.S. GAAP, the liability method is used to calculate the Income
Tax provision. Under the liability method, deferred tax asses or liabilities
are recognized for differences between the financial reporting and tax bases
of assets and liabilities at each reporting date.
b. REGULATION
The Company provides telephone service in Indonesia and therefore is
subject to the regulatory control of the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia. Rates for services are
tariff-regulated. Although changes in rates for services are authorized and
computed based on a decree issued by the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia, these are not based on a
fixed rate of return and are not designed to provide for the recovery of the
Company's cost of services. Accordingly, the requirements of U.S. GAAP
related to a business whose rates are regulated on the basis of its actual
costs are not applicable to the Companies' financial statements.
c. PRESENTATION OF THE STATEMENTS OF STOCKHOLDERS' EQUITY
Under Indonesian GAAP, except for public companies, it is not required
to present statements of retained earnings. Under US. GAAP, the Companies
are required to present statements of stockholders' equity.
F-79
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED UNDER
INDONESIAN AND U.S. GAAP
The following is a summary of the significant adjustments to net income for
the six months period ended June 30, 1996 and 1995 and to stockholders' equity
as of June 30, 1996 and 1995 which would be required if U.S. GAAP had been
applied instead of Indonesian GAAP in the financial statements:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------------ ---------------------------------
RP RP U.S.$ (NOTE 3)
------------------ ----------------- --------------
<S> <C> <C> <C>
Net income (loss) according to the consolidated financial
statements prepared under Indonesian GAAP.............. 62,378,688 (1,016,003,170) (433,819)
U.S. GAAP adjustment due to Income Tax (A)............... (128,272,721) (233,642,918) (99,762)
Valuation allowance...................................... 128,272,721 147,618,925 63,031
------------------ ----------------- --------------
Approximate net loss in accordance with U.S. GAAP........ 62,378,688 (1,102,027,163) (470,550)
------------------ ----------------- --------------
Stockholders' equity (deficit) according to the financial
statements prepared under Indonesian GAAP.............. (13,871,185,815) 5,675,136,797 2,423,201
U.S. GAAP adjustment due to Income Tax................... 753,711,334 4,795,615,137 2,047,658
Valuation Allowance...................................... (753,711,334) (4,881,639,129) (2,084,389)
------------------ ----------------- --------------
Approximate stockholders' equity (deficit) in accordance
with U.S. GAAP......................................... (13,871,185,815) 5,589,112,805 2,386,470
------------------ ----------------- --------------
------------------ ----------------- --------------
</TABLE>
With regard to the consolidated balance sheet and statement of income, the
following significant captions determined under U.S. GAAP would have been:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
------------------- ------------------------------------
RP RP U.S.$ (NOTE 3)
------------------- -------------------- --------------
<S> <C> <C> <C>
Balance sheet:
Current assets...................................... 12,270,504,214 59,646,533,193 25,468,204
Total assets........................................ 61,512,948,397 118,791,253,375 50,722,141
Current liabilities................................. 40,380,349,030 32,647,918,320 13,940,187
Total liabilities................................... 54,821,808,430 113,202,140,570 48,335,671
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------------- ------------------------------------
RP RP U.S.$ (NOTE 3)
------------------- -------------------- --------------
<S> <C> <C> <C>
Statement of income:
Operating income.................................... 3,145,836,109 2,561,444,972 1,093,700
</TABLE>
- ------------------------
(A) Reflects the tax effect solely due to the difference in accounting for taxes
under U.S. and Indonesian GAAP.
F-80
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP
The following information is presented on the basis of U.S. GAAP:
INCOME TAX
The tax effect on significant temporary differences is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
--------------- ---------------------------------
RP RP U.S.$ (NOTE 3)
--------------- ----------------- --------------
<S> <C> <C> <C>
Deferred tax assets--current................................. 416,775,275 1,533,290,482 654,693
Allowance for deferred tax assets--current................... (416,775,275) (1,533,290,482) (654,693)
Deferred tax assets--non-current............................. 336,936,059 3,348,348,647 1,429,696
Allowance for deferred tax asset-noncurrent.................. (336,936,059) (3,348,348,647) (1,429,696)
Deferred tax liabilities--non-current........................ -- (86,023,992) (36,731)
--------------- ----------------- --------------
Total deferred tax--net...................................... -- (86,023,992) (36,731)
--------------- ----------------- --------------
--------------- ----------------- --------------
</TABLE>
The temporary differences, on which deferred tax assets have been computed
are not deductible for income tax purposes until the provision for inventory
obsolescence and provision for uncollectible trade receivable are written-off.
The differences between the book and tax bases of gain on disposal of network
assets, property and equipment, and network assets are due to the differing
recognition methods for Income Tax and financial reporting purposes.
The Income Tax provision reported under U.S. GAAP differs from the expected
provision due to certain permanent differences which are detailed below:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
--------------- ---------------------------------
RP RP U.S.$ (NOTE 3)
--------------- ----------------- --------------
<S> <C> <C> <C>
Approximate income (loss) before Income Tax in accordance
with U.S. GAAP............................................. 62,378,688 (1,016,003,170) (433,819)
Effect of permanent differences:
Entertainment and donation................................... 17,418,873 7,439
Interest expense............................................. 72,825,199 31,095
Interest income which was already subjected to final tax..... (210,978,524) (90,085)
Others....................................................... (54,795,359) -- --
--------------- ----------------- --------------
Approximate income (loss) before Income Tax in accordance
with U.S. GAAP............................................. 7,583,329 (1,136,737,622) (485,370)
--------------- ----------------- --------------
Expected provision for income tax on taxable income in
accordance with U.S. GAAP.................................. 2,274,999 (349,771,100) (149,347)
Adjustment for enacted changes in tax rates.................. 125,997,722 -- --
Decreases in valuation allowance............................. (128,272,721) (147,618,925) (63,031)
--------------- ----------------- --------------
Provision for income two on taxable income in accordance with
U.S. GAAP.................................................. -- (497,390,025) (212,378)
--------------- ----------------- --------------
--------------- ----------------- --------------
</TABLE>
22. RECLASSIFICATIONS OF ACCOUNTS
Certain accounts in June 30, 1995 financial statements have been
reclassified to conform with the presentation of accounts in the June 30, 1996
financial statements.
F-81
<PAGE>
ATTACHMENT I
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(WITH COMPARATIVE FIGURES FOR THE SIX MONTHS ENDED JUNE 30, 1995)
<TABLE>
<CAPTION>
CAPITAL STOCK RECEIVABLES
(ISSUED AND FULLY FROM STOCKHOLDERS'
PAID) STOCKHOLDERS DEFICIT EQUITY
------------------ -------------- --------------- ---------------
DESCRIPTION RP RP RP RP
- ------------------------ ------------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance as of January 1,
1996.................. 25,000,000,000 -- (18,308,860,033) 6,691,139,967
Net loss for the
period................ -- -- (1,016,003,170) (1,016,003,170)
------------------ -------------- --------------- ---------------
Balance as of June 30,
1996.................. 25,000,000,000 -- (19,324,863,203) 5,675,136,797
------------------ -------------- --------------- ---------------
Balance as of January 1,
1995.................. 1,000,000,000 (4,041,764,800) (10,062,739,203) (13,104,504,003)
Addition in receivables
from stockholders..... -- (829,060,500) -- (829,060,500)
Net income for the
period................ -- -- 62,378,688 62,378,688
------------------ -------------- --------------- ---------------
Balance as of June 30,
1995.................. 1,000,000,000 (4,870,825,300) (10,000,360,515) (13,871,185,815)
------------------ -------------- --------------- ---------------
------------------ -------------- --------------- ---------------
</TABLE>
F-82
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-83
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
FINANCIAL STATEMENTS
FOR US REPORTING
THREE YEARS ENDED 31 DECEMBER 1995
F-84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Syarikat Telefon Wireless (M) Sdn Bhd
We have audited the consolidated balance sheets of Syarikat Telefon Wireless
(M) Sdn Bhd ("STW") as at 31 December 1994 and 1995 and the related consolidated
profit and loss accounts, statements of shareholders equity and cashflow
statements for the three years ended 31 December 1995 together with the notes,
set out on pages F-85 to F-96. These Consolidated Financial Statements are the
responsibility of STW's management. Our responsibility is to express an opinion
on these Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Malaysia which are essentially the same as United States generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects the financial position of STW and
subsidiary as of 31 December 1994 and 1995, and of the results of their
operations and cash flows for each of the years in the three year-period ended
31 December 1995, in conformity with generally accepted accounting principles in
Malaysia.
Generally accepted accounting principles in Malaysia vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected stockholders' equity as of 31 December 1993, 1994 and
1995 and results of operations for each of the years in the three year period
ended 31 December 1995 to the extent summarized in Note 16 to the Consolidated
Financial Statements.
KPMG Peat Marwick
Public Accountants
Kuala Lumpur
Date: 17 July 1996
F-85
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED BALANCE SHEETS
AT 31 DECEMBER 1994 AND 31 DECEMBER 1995
<TABLE>
<CAPTION>
1994 1995
------------- -------------- U.S.$
RM RM (NOTE 2.8)
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalent (Note 3)................................. 2,819,563 3,067,969 1,223,273
Trade debtors..................................................... 30,143 334,409 133,337
Other debtors (Note 4)............................................ 586,013 2,673,274 1,065,899
Deposits & prepayments............................................ 125,246 471,918 188,165
------------- -------------- -------------
Total current assets............................................ 3,560,965 6,547,570 2,610,674
Fixed assets, net of accumulated depreciation of RM666,631 (1994)
and RM5,993,049 (1995) (Note 6)................................... 29,046,193 80,383,813 32,050,962
License fee, net of accumulated amortisation of RM15,000 (1994) and
RM30,000 (1995)................................................... 285,000 270,000 107,656
Fixed deposit (Note 3).............................................. -- 1,000,000 398,724
------------- -------------- -------------
Total assets.................................................... 32,892,158 88,201,383 35,168,016
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................. 333,977 531,499 211,921
Customers deposits................................................ 34,800 233,471 93,091
Other creditors and accruals...................................... 495,417 257,381 102,624
Equipment supplier creditor....................................... -- 3,926,233 1,565,484
Consultancy fees payable.......................................... 639,626 392,573 156,528
Provision for compensation to former shareholder.................. -- 2,000,000 797,448
Term loan (secured) (Note 7)...................................... 679,292 -- --
Hire purchase creditors (Note 8).................................. 30,810 108,398 43,221
Taxes payable..................................................... 27,000 43,550 17,364
------------- -------------- -------------
Total current liabilities....................................... 2,240,922 7,493,105 2,987,681
Term loan (secured) (Note 7)........................................ 5,566,206 54,639,164 21,785,951
Hire purchase creditors (Note 8).................................... 81,171 349,477 139,345
Loans from shareholders............................................. 13,670,700 -- --
Shareholders' equity:
Common stock--RM1.00 par value, authorized 50,000,000 shares;
issued and fully paid-up 16,280,000 (1994) and 46,418,000 (1995)
shares (Note 9)................................................. 16,280,000 46,418,000 18,507,974
Revaluation reserve (Note 10)..................................... -- 2,971,432 1,184,782
Accumulated deficit............................................... (4,946,841) (23,669,795) (9,437,717)
------------- -------------- -------------
Total shareholders' equity...................................... 11,333,159 25,719,637 10,255,039
------------- -------------- -------------
Total liabilities and shareholders' equity...................... 32,892,158 88,201,383 35,168,016
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
The notes set out on pages F-89 to F-96 form an integral part of,
and should be read in conjunction with, these accounts.
F-86
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD. AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE THREE YEARS ENDED 31 DECEMBER 1995
<TABLE>
<CAPTION>
1993 1994 1995 U.S.$
--------- ------------ -------------- (NOTE 2.8)
------------
RM RM RM
--------- ------------ --------------
<S> <C> <C> <C> <C>
Revenue
Telecommunication revenues............................... -- 43,240 934,808 372,730
Income from property rentals............................. -- 191,258 944,485 376,589
--------- ------------ -------------- ------------
Total revenue.......................................... -- 234,498 1,879,293 749,319
Operating Expenses
Cost of telecommunication revenues....................... -- 288,959 1,045,086 416,701
Depreciation............................................. 4,592 662,039 5,669,938 2,260,741
General and administrative expenses...................... 5,334 3,787,420 10,235,999 4,081,339
Preliminary & preoperating expenses...................... -- 406,500 -- --
--------- ------------ -------------- ------------
Total Operating Expenses............................... 9,926 5,144,918 16,951,023 6,758,781
Operating loss............................................. (9,926) (4,910,420) (15,071,730) (6,009,462)
Other income/(expense)
Provision for compensation to former shareholder (Note
2)..................................................... -- -- (2,000,000) (797,448)
Interest income.......................................... 3,452 102,923 27,466 10,952
Interest expense......................................... -- (105,117) (1,661,690) (662,556)
--------- ------------ -------------- ------------
Net loss before income taxes............................... (6,474) (4,912,614) (18,705,954) (7,458,514)
Income taxes (Note 14)..................................... (1,000) (26,753) (17,000) (6,778)
--------- ------------ -------------- ------------
Net loss................................................... (7,474) (4,939,367) (18,722,954) 7,465,292
--------- ------------ -------------- ------------
--------- ------------ -------------- ------------
</TABLE>
The notes set out on pages F-89 to F-96 form an integral part of,
and should be read in conjunction with, these accounts.
F-87
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED 31 DECEMBER 1995
<TABLE>
<CAPTION>
ORDINARY SHARES REVALUATION
OF RM1 EACH DEFICIT RESERVE TOTAL
RM RM RM RM
---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
1993
Balance at 11 February 1993 (date of
incorporation).................................. 3 -- -- 3
Ordinary shares issued............................ 2,499,997 -- -- 2,499,997
Net loss for the period ended 31 December 1993.... (7,474) -- (7,474)
---------------- -------------- ------------ --------------
Balance at 31 December 1993....................... 2,500,000 (7,474) -- 2,492,526
1994
Ordinary shares issued............................ 13,780,000 -- -- 13,780,000
Net loss for the year ended 31 December 1994...... -- (4,939,367) -- (4,939,367)
---------------- -------------- ------------ --------------
Balance at 31 December 1994....................... 16,280,000 (4,946,841) -- 11,331,159
1995
Ordinary shares issued............................ 30,138,000 -- -- 30,138,000
Revaluation reserve............................... -- -- 2,971,432 2,971,432
Net loss for the year ended 31 December 1995...... -- (18,722,954) -- (18,722,954)
---------------- -------------- ------------ --------------
Balance at 31 December 1995....................... 46,418,000 (23,669,795) 2,971,432 25,719,637
---------------- -------------- ------------ --------------
---------------- -------------- ------------ --------------
</TABLE>
The notes set out on pages F-89 to F-96 form an integral part of,
and should be read in conjunction with, these accounts.
F-88
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
CONSOLIDATED CASH FLOW STATEMENT
FOR THE THREE YEARS ENDED 31 DECEMBER 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ------------- ------------- U.S.$
RM RM RM (NOTE 2.8)
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss........................................... (7,474) (4,939,367) (18,722,954) (7,465,292)
Adjustments to reconcile net loss to cash used in
operating activities
Depreciation....................................... 4,592 662,039 5,669,938 2,260,741
Loss on disposal of fixed assets................... -- -- 36,700 14,633
Provision for compensation to former shareholder... -- -- 2,000,000 797,448
Amortisation of license fee........................ -- 15,000 15,000 5,981
Increase in trade and other debtors................ (11,757) (604,399) (2,391,527) (953,560)
Increase in deposits and prepayments............... -- (125,246) (346,672) (138,227)
Increase in license fee............................ -- (300,000) -- --
Increase in equipment supplier creditor............ -- -- 3,926,233 1,565,484
(Decrease)/increase in other current liabilities... 76,439 1,454,381 (72,346) (28,846)
Increase in fixed deposits......................... -- -- (1,000,000) (398,724)
Decrease/(increase) in deferred expenses........... (404,000) 404,000 -- --
----------- ------------- ------------- -------------
Net cash used in operating activities................ (342,200) (3,433,592) (10,885,628) (4,340,362)
----------- ------------- ------------- -------------
CASHFLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets........................... (30,615) (29,690,572) (54,169,326) (21,598,615)
Proceeds from disposal of fixed assets............. -- 8,363 96,500 38,477
----------- ------------- ------------- -------------
Net cash used in investing activities.............. (30,615) (29,682,209) (54,072,826) (21,560,138)
----------- ------------- ------------- -------------
CASHFLOWS FROM FINANCING ACTIVITIES
Proceeds from term loan............................ -- 6,245,498 54,639,164 21,785,950
Repayment of term loan............................. -- -- (6,245,498) (2,490,230)
Loan (to)/from shareholders........................ -- 13,670,700 (13,670,700) (5,450,837)
Proceeds from issue of shares...................... 2,500,000 13,780,000 30,138,000 12,016,746
Increase in hire purchase.......................... 111,981 345,894 137,916
----------- ------------- ------------- -------------
Net cash from financing activities................. 2,500,000 33,808,179 65,206,860 25,999,545
----------- ------------- ------------- -------------
Net increase in cash and cash equivalents............ 2,127,185 692,378 248,406 99,045
Cash and cash equivalents at beginning of year....... -- 2,127,185 2,819,563 1,124,228
----------- ------------- ------------- -------------
Cash and cash equivalents at end of year............. 2,127,185 2,819,563 3,067,969 1,223,273
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
Supplemental information:
(i) Cash paid for:
Interest.......................................... -- 106,048 1,661,690 662,556
Income taxes...................................... -- 753 450 179
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
(ii) Supplemental schedules on non-cash investing
activities:
Revaluation of fixed assets....................... -- -- 2,971,432 1,184,781
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
</TABLE>
The notes set out on pages F-89 to F-96 form an integral part of,
and should be read in conjunction with, these accounts.
F-89
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS
1. PRINCIPAL ACTIVITIES
The principal activity of the Company is provision of telecommunication
services. The principal activities of the subsidiary is disclosed in Note 5.
These activities have remained unchanged during the period.
2. SIGNIFICANT ACCOUNTING POLICIES
2.1 BASIS OF PREPARATION
The accounts of the Company and its subsidiary have been prepared under the
historical cost convention modified to include the revaluation of certain
properties and in compliance with approved accounting standards.
2.2 BASIS OF CONSOLIDATION
The consolidated accounts incorporate the audited accounts of the Company
and its subsidiary made up to 31 December 1994 and 1995. The 1993 accounts
reflect the Company level only as the subsidiary was acquired in 1994.
Inter-company transactions are eliminated on consolidation and the
consolidated accounts reflect external transactions only.
2.3 FIXED ASSETS AND DEPRECIATION
Leasehold land and building will be amortised over the period of the lease.
Other fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight lines basis to
write off the cost of the assets over their expected useful lives.
The principal annual rates used are as follows:
<TABLE>
<CAPTION>
OVER THE PERIOD OF THE LEASE OF 80
LEASEHOLD LAND AND BUILDING YEARS
- ----------------------------------------------------- ---------------------------------------
<S> <C>
Furniture and fittings............................... 15%
Office equipment..................................... 15%
Telecommunication network equipment.................. 5%-15%
Plant and machinery.................................. 20%
Motor vehicles....................................... 20%
Renovation........................................... 15%
</TABLE>
2.4 DEFERRED TAXATION
Provision for deferred taxation is made on the liability method for all
timing differences except where no liability is expected to arise in the
foreseeable future. Deferred tax benefits are only recognised when there is a
reasonable expectation of realisation in the near future.
F-90
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.5 FOREIGN CURRENCY
Assets and liabilities in foreign currencies are translated into Ringgit
Malaysia at rates of exchange ruling at the balance sheet date and items in the
profit and loss account are converted at rates ruling on the transaction dates.
Exchange differences are dealt within the profit and loss account. There were no
significant exchange differences during the three years ended 31 December 1995.
2.6 LEASES
Fixed asset acquired under finance leases are capitalized in the accounts
and the corresponding obligation treated as a liability. Finance charges are
allocated to the profit and loss account over the lease periods to give a
constant periodic rate of interest on the remaining lease liabilities.
2.7 COMPENSATION TO FORMER SHAREHOLDER
The provision for compensation to a former shareholder resulted from a claim
by a former shareholder for RM 2.093 million which the Company settled. The
provision has been included in other expense on the accompanying consolidated
profit and loss accounts as the amount was derived from an event that was
distinct from the ordinary activities of the Company.
2.8TRANSLATIONS OF RINGGIT MALAYSIA AMOUNTS INTO UNITED STATES DOLLAR
AMOUNTS
The financial statements are stated in Ringgit Malaysia (RM). The
translations of the Ringgit Malaysia amounts into United States dollars are
included solely for the convenience of the readers, using the average exchange
rate for the twelve months ended December 31, 1995 of RM 2.5080 to U.S.$1. The
convenience translations should not be construed as representations that the
Ringgit Malaysia amounts have been, could have been, or could in the future be,
converted into United States dollars at this or any other rate of exchange.
3. CASH AND CASH EQUIVALENTS AND DEPOSITS
<TABLE>
<CAPTION>
1994 1995
----------- ------------
RM RM
----------- ------------
<S> <C> <C>
Cash and bank balances............................................ 2,819,563 267,969
Deposits with licensed banks...................................... -- 3,800,000
----------- ------------
2,819,563 4,067,969
Non-current deposits.............................................. -- (1,000,000)
----------- ------------
Cash and cash equivalents......................................... 2,819,563 3,067,969
----------- ------------
----------- ------------
</TABLE>
Non-current deposits with licensed banks comprise RM 1,000,000 (1994--RM
Nil) pledged as security for a syndicated term loan granted to the Company.
4. OTHER DEBTORS
Included in other debtors is RM2,564,000(1994--RM Nil) due from a director
of the Company.
F-91
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
5. SUBSIDIARY COMPANY
The subsidiary company, incorporated in Malaysia, is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF EQUITY HELD
-------------------------------------
NAME OF COMPANY PRINCIPAL ACTIVITIES 1993 1994 1995
- -------------------------------------------- -------------------------- ----- ----- -----
<S> <C> <C> <C> <C>
Segar Kasturi Sdn Bhd....................... Investment in property -- 100% 100%
</TABLE>
The investment in the subsidiary was acquired in 1994.
6. FIXED ASSETS
<TABLE>
<CAPTION>
DEPRECIATION
COST/ ACCUMULATED NET BOOK CHARGE FOR
VALUATION DEPRECIATION VALUE THE YEAR
1994 RM RM RM RM
- ----------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Freehold land--at cost............................... 104,755 -- 104,755 --
Leasehold land and building--at cost................. 12,408,788 155,110 12,253,678 155,110
Telecommunication network equipment.................. 16,522,855 390,548 16,132,307 390,548
Renovation........................................... 86,705 13,970 72,735 13,006
Furniture and fittings............................... 70,851 11,503 59,348 10,388
Office equipment..................................... 195,444 30,815 164,629 28,302
Motor vehicles....................................... 323,426 64,685 258,741 64,685
------------- ------------- ------------- -------------
29,712,824 666,631 29,046,193 662,039
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
COST/ ACCUMULATED NET BOOK CHARGE FOR
VALUATION DEPRECIATION VALUE THE YEAR
1995 RM RM RM RM
- ----------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Freehold land--at cost............................... 104,755 -- 104,755 --
Leasehold land and building--at valuation............ 15,070,000 -- 15,070,000 155,110
Telecommunication network equipment.................. 67,358,973 5,273,497 62,085,476 4,882,949
Renovation........................................... 1,582,727 251,379 1,331,348 237,409
Furniture and fittings............................... 380,322 68,552 311,770 57,049
Office equipment..................................... 771,929 146,605 625,324 115,790
Plant and machinery.................................. 302,270 60,454 241,816 60,454
Motor vehicles....................................... 805,886 192,562 613,324 161,177
------------- ------------- ------------- -------------
86,376,862 5,993,049 80,383,813 5,669,938
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
During the year ended 31 December 1995, the leasehold land and building of a
subsidiary company was revalued by a firm of professional valuers on a fair
market value basis (refer note 10).
The leasehold land and building are charged to a financial institution as
security for a syndicated term loan granted to the Company (refer note 7).
Included under fixed assets are motor vehicles amounting to RM667,977
(1994--RM156,926) at cost which are acquired under hire purchase agreements.
F-92
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
7. TERM LOAN (SECURED)
<TABLE>
<CAPTION>
1994 1995
----------- -------------
RM RM
----------- -------------
<S> <C> <C>
Amount outstanding............................................... 6,245,498 54,639,164
Less: Amount due and repayable and due within twelve months...... (679,292) --
----------- -------------
5,566,206 54,639,164
----------- -------------
----------- -------------
</TABLE>
The term loan is secured by way of fixed and floating amounts of certain
assets of the Group including leasehold land and building and fixed deposits
with licensed bank and are jointly and severally guaranteed by certain directors
of the Company and a corporate guarantee from the holding company. The loans are
subject to interest at 2.5% above the base lending rates of the participating
financial institutions. The loans are repayable in eleven installments, the
first installment of which is due on 8 October 1997 and subsequent installments
due on six monthly intervals thereafter.
8. HIRE PURCHASE CREDITORS
<TABLE>
<CAPTION>
1994 1995
--------- ---------
RM RM
--------- ---------
<S> <C> <C>
Amount outstanding..................................................... 147,450 603,361
Less: Unearned interest................................................ 35,469 145,486
--------- ---------
111,981 457,875
--------- ---------
--------- ---------
Amount due within twelve months........................................ 30,810 108,398
Amount due after twelve months......................................... 81,171 349,477
--------- ---------
111,981 457,875
--------- ---------
--------- ---------
</TABLE>
F-93
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--CONTINUED
9. SHARE CAPITAL
<TABLE>
<CAPTION>
1994 1995
------------- -------------
RM RM
------------- -------------
<S> <C> <C>
Authorized--Ordinary shares of RM1 each
At 1 January.................................................. 5,000,000 50,000,000
Increase during the year...................................... 45,000,000 --
------------- -------------
At 31 December................................................ 50,000,000 50,000,000
------------- -------------
------------- -------------
Issued and fully paid--Ordinary shares of RM1 each
At 1 January.................................................. 2,500,000 16,280,000
Add: Issue of ordinary shares at par.......................... 13,780,000 30,138,000
------------- -------------
At 31 December................................................ 16,280,000 46,418,000
------------- -------------
------------- -------------
</TABLE>
10. REVALUATION RESERVE
In 1995, leasehold land and building were re-appraised to give a valuation
of RM15,070,000 based on open market value by an independent firm of
professional valuers. This revaluation was incorporated in the accounts at 31
December 1995.
11. LOANS FROM SHAREHOLDERS
<TABLE>
<CAPTION>
1994 1995
------------- -------------
RM RM
------------- -------------
<S> <C> <C>
Loan from holding company....................................... 1,900,000 --
Loan from other shareholders.................................... 11,770,000 --
------------- -------------
13,670,000 --
------------- -------------
------------- -------------
</TABLE>
The loans from shareholders are unsecured, interest free with no fixed term
for repayment.
12. HOLDING COMPANY
The holding company is Shubila Holdings Sdn. Bhd., a company incorporated in
Malaysia.
13. TURNOVER
Turnover comprises gross billings in the provision of telecommunication
services and rental of office block.
F-94
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--CONTINUED
14. TAXATION
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
RM RM RM
--------- --------- ---------
<S> <C> <C> <C>
Current income tax provision.................................... 1,000 27,000 17,000
Overprovision of income taxes in the prior years................ -- (247) --
--------- --------- ---------
1,000 26,753 17,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income taxes of the Group mainly relates to rental income of the
subsidiary.
15. DEFERRED TAXATION
Subject to agreement by the Inland Revenue Department, the Group has
potential deferred tax benefit at 30% amounting to RM6,089,000,000
(1994--RM1,250,000) not taken up in the accounts as calculated under the
liability method in respect of the following items:--
<TABLE>
<CAPTION>
1994 1995
------------ --------------
RM RM
------------ --------------
<S> <C> <C>
Unabsorbed capital allowances.................................. 5,128,000 22,524,000
Excess of net book value on book basis over tax basis of fixed
assets....................................................... (4,652,000) (16,834,000)
------------ --------------
476,000 5,690,000
Unabsorbed tax losses.......................................... 3,691,000 14,606,000
------------ --------------
4,167,000 20,296,000
------------ --------------
------------ --------------
</TABLE>
16. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
The accompanying financial statements are prepared in accordance with
GAAP in Malaysia, which differ in certain significant respects to the GAAP
in the United States (US). The significant differences are described below.
Other differences do not have a significant effect on the consolidated net
loss after tax or shareholders' equity.
F-95
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--CONTINUED
16. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) (CONTINUED)
The estimated effects of the significant adjustments to the consolidated net
loss after tax and shareholders' equity which would be required if US GAAP were
applied instead of Malaysian GAAP are summarized as follows:--
<TABLE>
<CAPTION>
1995
1993 1994 -----------------------------
----------- ------------- U.S. $
NOTE RM RM RM (NOTE 2.8)
--------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net loss after tax--Malaysian GAAP............ (7,474) (4,939,367) (18,722,954) (7,465,292)
Adjustments:
Preliminary expenditure..................... (i) (6,591) 6,591 -- --
Pre-operating expenditure................... (i) (397,409) 397,409 -- --
Consultants fees............................ -- 1,110,705 2,124,087 846,924
Amortization of consultants fees............ (iii) -- (55,535) (106,205) (42,347)
Debt issuance costs......................... -- -- 2,413,712 962,405
Amortisation of debt issuance costs......... (iv) -- -- (344,816) (137,486)
Depreciation of leasehold land & building... (v) -- (155,110) (155,110) (61,846)
----------- ------------- -------------- -------------
Net loss after tax--US GAAP................. (411,474) (3,635,307) (14,791,286) (5,897,642)
----------- ------------- -------------- -------------
----------- ------------- -------------- -------------
Total shareholders equity--Malaysian GAAP..... 2,492,526 11,333,159 25,719,637 10,255,039
Adjustments:
Preliminary expenditure..................... (i) (6,591) 6,591 -- --
Pre-operating expenditure................... (i) (397,409) 397,409 -- --
Revaluation reserve......................... (ii) -- -- (2,971,432) (1,184,782)
Consultants fees--(cumulative).............. (iii) -- 1,110,705 3,234,792 1,289,789
Amortization of consultants fees--
(cumulative).............................. (iii) -- (55,535) (161,740) (64,490)
Debt issuance costs......................... (iv) -- -- 2,413,712 962,405
Amortisation of debt issuance costs......... (iv) -- -- (344,816) (137,486)
Depreciation of leasehold land &
building--(cumulative).................... (v) -- (155,110) (310,220) (123,692)
----------- ------------- -------------- -------------
Total shareholders equity--US GAAP............ 2,088,526 12,637,219 27,579,933 10,996,783
----------- ------------- -------------- -------------
----------- ------------- -------------- -------------
</TABLE>
- ------------------------
(i) Preliminary and pre-operating expenditure
Preliminary and pre-operating expenditure are deferred for Malaysian GAAP
and written off in the year the company commences operations. However, these
costs are normally expensed as incurred under US GAAP.
(ii) Revaluation reserve
Revaluation performed by professional valuers of fixed assets are taken up
in the accounts for Malaysian GAAP. However, this is not incorporated in the
accounts under US GAAP.
F-96
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--CONTINUED
16. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) (CONTINUED)
(iii) Consultants fees
Consultants fees in relation to the installation of telecommunication has
been written-off as incurred as allowed under Malaysian GAAP. However, these
costs are normally capitalised and amortised under US GAAP.
The amortisation rate used is 20 years consistent with the life of
telecommunication equipment.
(iv) Debt issuance costs
Debt issuance costs in relation to the term loan has been written-off as
incurred as allowed under Malaysian GAAP. However, these amounts are
normally capitalised and amortised under US GAAP.
The amortisation rate used in 7 years, consistent with the tenure of the
loan.
(v) Depreciation of leasehold land and buildings
Leasehold land and building have been depreciated over the lease period of
80 years as allowed under Malaysian GAAP. However, under US GAAP, assets may
be depreciated up to 40 years only.
F-97
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-98
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD.
AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
FINANCIAL STATEMENTS
30 JUNE 1996
(UNAUDITED)
F-99
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD. AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
1996 1996
RM USD
1995 -------------- --------------
RM
-------------- (UNAUDITED) (NOTE 4)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalent....................................... 3,067,969 1,415,803 568,596
Trade debtors.................................................. 334,409 1,020,278 409,750
Other debtors.................................................. 2,673,274 1,429,620 574,145
Deposits & prepayment.......................................... 471,918 24,557 9,862
-------------- -------------- --------------
Total current asset.............................................. 6,547,570 3,890,258 1,562,353
Fixed assets, net................................................ 80,383,813 103,329,331 41,497,723
License fee, net................................................. 270,000 270,000 108,434
Fixed deposit.................................................... 1,000,000 1,000,000 401,606
-------------- -------------- --------------
Total assets................................................. 88,201,383 108,489,589 43,570,116
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts Payable............................................... 531,499 3,502,531 1,406,639
Customers deposits............................................. 233,471 386,570 155,249
Other creditors and accruals................................... 257,381 -- --
Equipment supplier creditors................................... 3,926,233 -- --
Consultancy fees payables...................................... 392,573 -- --
Provision for compensation to former shareholders.............. 2,000,000 -- --
Hire purchase creditors........................................ 108,398 108,398 43,533
Taxes payables................................................. 43,550 44,000 17,671
-------------- -------------- --------------
Total current liabilities.................................... 7,493,105 4,041,499 1,623,092
Term loan (secured).............................................. 54,639,164 90,946,722 36,524,788
Hire purchase creditors.......................................... 349,477 473,048 189,979
Shareholders' equity:
Common stock--RM1.00 par value, authorized 50,000,000 shares;
issued and fully paid-up 46,418,000............................ 46,418,000 46,418,000 18,641,767
Revaluation reserves........................................... 2,971,432 2,971,432 1,193,346
Accumulated deficit............................................ (23,669,795) (36,361,112) (14,602,856)
-------------- -------------- --------------
Total shareholders' equity................................... 25,719,637 13,028,320 5,232,257
-------------- -------------- --------------
Total liabilities and shareholders' equity................... 88,201,383 108,489,589 43,570,116
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-100
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD. AND ITS SUBSIDIARY
(INCORPORATED IN MALAYSIA)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE SIX MONTHS ENDED 30 JUNE 1995 AND 1996
<TABLE>
<CAPTION>
1996 1996
RM USD
1995 -------------- ------------
RM
------------ (UNAUDITED) (NOTE 4)
<S> <C> <C> <C>
REVENUE
Telecommunication revenues......................................... 374,355 1,056,743 424,395
Income from property rentals....................................... 553,124 498,185 200,074
------------ -------------- ------------
Total revenue.................................................... 927,479 1,554,928 624,469
Operating Expenses
Cost of telecommunication revenue.................................. 61,020 1,287,973 517,258
Depreciation....................................................... 263,570 3,968,373 1,593,724
General and administrative expenses................................ 2,978,798 4,988,156 2,003,275
------------ -------------- ------------
Total Operating Expenses......................................... 3,303,388 10,244,502 4,114,257
Operating loss....................................................... (2,375,909) (8,689,574) (3,489,788)
Other income/(expense)
Interest income.................................................... 13,185 97,101 38,996
Interest expense................................................... -- (4,098,844) (1,646,122)
------------ -------------- ------------
Net loss before income taxes......................................... (2,362,724) (12,691,317) (5,096,914)
Income taxes......................................................... -- -- --
------------ -------------- ------------
Net loss............................................................. (2,362,724) (12,691,317) (5,096,914)
------------ -------------- ------------
------------ -------------- ------------
</TABLE>
F-101
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN.BHD.
(INCORPORATED IN MALAYSIA)
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED 30 JUNE 1995 AND 1996
<TABLE>
<CAPTION>
1996 1996
RM USD
1995 -------------- --------------
RM
-------------- (UNAUDITED) (NOTE 4)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss........................................................ (2,362,724) (12,691,317) (5,096,914)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation.................................................... 263,570 3,968,373 1,593,724
Decrease/(Increase) in trade and other debtors.................. (1,803,311) 557,785 224,010
Decrease/(Increase) in deposits and prepayments................. (55,339) 447,361 179,663
(Decrease)/Increase in other current liabilities................ 611,934 (5,071,783) (2,036,861)
(Increase) in stocks............................................ (93,707) -- --
-------------- -------------- --------------
Net cash used in operating activities........................... (3,439,577) (12,789,581) (5,136,378)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets........................................ (563,066) (26,913,891) (10,808,792)
-------------- -------------- --------------
Net cash used in investing activities........................... (563,066) (26,913,891) (10,808,792)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term loan......................................... 6,626,746 37,927,735 15,232,022
Loan (to) shareholders.......................................... (13,670,700) -- --
Proceeds from issue of shares................................... 22,750,000 -- --
Increase in hire purchase....................................... (19,780) 123,571 49,627
-------------- -------------- --------------
Net cash from financing activities.............................. 15,686,266 38,051,306 15,281,649
-------------- -------------- --------------
Net (decrease)/increase in cash and cash equivalents.............. 11,683,623 (1,652,166) (663,521)
Cash and cash equivalents at beginning of period.................. 2,819,563 3,067,969 1,232,116
-------------- -------------- --------------
Cash and cash equivalents at end of period........................ 14,503,186 1,415,803 568,595
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental information:
(i) Cash paid for:
Interest...................................................... -- 4,089,844 1,646,122
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-102
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS
1. PRINCIPAL ACTIVITIES
The principal activity of the Company is provision of telecommunication
services. These activities have remained unchanged during the period.
2. SIGNIFICANT ACCOUNTING POLICIES
2.1 BASIS OF PREPARATION
The accounts of the Company and its subsidiary have been prepared under the
historical cost convention modified to include the revaluation of certain
properties and in compliance with approved accounting standards.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition, results of operations, and cash flows for the periods presented.
These interim financial statements should be read in conjunction with the
Company's audited financial statements as at December 31, 1995, including the
notes thereto. The results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
2.2 BASIS OF CONSOLIDATION
The consolidated accounts incorporate the accounts of the Company and its
subsidiary made up to 31 December 1995 and June 30, 1996. All intercompany
transactions have been eliminated.
Inter-company transactions are eliminated on consolidation and the
consolidated accounts reflect external transactions only.
2.3 FIXED ASSETS AND DEPRECIATION
Leasehold land and building is amortised over the period of the lease. Other
fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight line basis to
write off the cost of the assets over their expected useful lives.
The principal annual rates used are as follows:
<TABLE>
<CAPTION>
OVER THE PERIOD OF THE LEASE OF 80
YEARS
---------------------------------------
<S> <C>
Furniture and fittings............................... 15%
Office equipment..................................... 15%
Telecommunication network equipment.................. 5%-15%
Plant and machinery.................................. 20%
Motor vehicles....................................... 20%
Renovation........................................... 15%
</TABLE>
2.4 DEFERRED TAXATION
Provision for deferred taxation is made on the liability method for all
timing differences except where no liability is expected to arise in the
foreseeable future. Deferred tax benefits are only recognised when there is a
reasonable expectation of realisation in the near future.
F-103
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.5 FOREIGN CURRENCY
Assets and liabilities in foreign currencies are translated into Ringgit
Malaysia at rates of exchange ruling at the balance sheet date and items in the
profit and loss account are converted at rates ruling on the transaction dates.
Exchange differences are dealt within the profit and loss account.
3. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
The accompanying financial statements are prepared in accordance with GAAP
in Malaysia, which differ in certain significant respects to the GAAP in the
United States (US). The significant differences are described below. Other
differences do not have a significant effect on the consolidated net loss after
tax or shareholders' equity.
The estimated effects of the significant adjustments to the consolidated net
loss after tax and shareholders' equity which would be required if US GAAP were
applied instead of Malaysian GAAP are summarized as follows:--
<TABLE>
<CAPTION>
NOTE 1995 RM 1996 RM
--------- ------------- --------------
<S> <C> <C> <C>
Net loss after tax--Malaysian GAAP......................................... (2,362,724) (12,691,317)
Adjustments:--
Consultants fees......................................................... (ii) 1,225,379 1,096,216
Amortization of consultants fees......................................... (ii) (59,152) (101,878)
Debt issuance costs......................................................
Amortization of debt issuance costs...................................... (iii) -- (172,408)
Depreciation of leasehold land & building................................ (iv) (38,777) (77,554)
Depreciation relating to surplus on revalued leasehold land & building... (v) -- 16,632
------------- --------------
Net loss after tax--US GAAP................................................ (1,235,274) (11,930,309)
------------- --------------
------------- --------------
<CAPTION>
NOTE 1995 RM 1996 RM
--------- ------------- --------------
<S> <C> <C> <C>
Total shareholders equity--Malaysian GAAP................................. 25,719,637 13,028,320
Adjustments:--
Revaluation reserve...................................................... (i) (2,971,432) (2,971,432)
Consultants fees--(cumulative)........................................... (ii) 3,234,792 4,331,008
Amortization of consultants fees--(cumulative)........................... (ii) (161,740) (263,618)
Debt issuance costs...................................................... (iii) 2,413,712 2,413,712
Amortization of debt issuance costs...................................... (iii) (344,816) (517,224)
Depreciation of leasehold land & building---(cumulative)................. (iv) (310,220) (387,774)
Depreciation relating to surplus on revalued leasehold land & building... (v) -- 16,632
------------- --------------
Total shareholders equity--US GAAP......................................... 27,579,933 15,649,624
------------- --------------
------------- --------------
</TABLE>
- ------------------------
(i) Revaluation reserve
Revaluation performed by professional valuers of fixed assets are taken up
in the accounts for Malaysian GAAP. However, this is not incorporated in the
accounts under US GAAP.
F-104
<PAGE>
SYARIKAT TELEFON WIRELESS (M) SDN. BHD
(INCORPORATED IN MALAYSIA)
NOTES TO THE ACCOUNTS--(CONTINUED)
3. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) (CONTINUED)
(ii) Consultants fees
Consultants fees in relation to the installation of telecommunication has
been written-off as incurred as allowed under Malaysian GAAP. However, these
costs are normally capitalized and amortized under US GAAP.
The amortization rate used is 20 years consistent with the life of
telecommunication equipment.
(iii) Debt issuance costs
Debt issuance costs in relation to the term loan has been written-off as
incurred as allowed under Malaysian GAAP. However, these amounts are
normally capitalized and amortized over the life of the loan under US GAAP.
(iv) Depreciation of leasehold land and buildings
Leasehold land and building have been depreciated over the lease period of
80 years as allowed under Malaysian GAAP. However, under US GAAP, assets may
be depreciated up to 40 years only.
(v) Depreciation on the revalued amount of leasehold land and buildings
Revalued leasehold land and building have been depreciated on the revalued
amounts as allowed under Malaysian GAAP. However, under US GAAP, revaluation
may not be incorporated into the accounts hence the depreciation effect are
also correspondingly adjusted.
4. TRANSLATIONS OF MALAYSIAN RINGGIT AMOUNT INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Malaysian Ringgit (MR). The
translations of the MR amounts into United States dollars (US$) are included
solely for the convenience of the readers, using the standard average buying and
selling rates used by the Group for 30 June 1996 of MR2.49 to US$1. The
convenience translations should not be construed as representations that the MR
amounts have been, could have been, or could in the future be, converted into
US$ at this or any other rate of exchange.
F-105
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-106
<PAGE>
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR, BY ANY OF THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
--------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary........................................................ 3
Risk Factors.............................................................. 17
Use of Proceeds........................................................... 33
Dividend Policy........................................................... 34
Capitalization............................................................ 35
Dilution.................................................................. 36
Unaudited Pro Forma Consolidated Condensed Financial Statements........... 37
Consolidated Selected Financial Data...................................... 44
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 45
Business.................................................................. 50
Management................................................................ 81
Certain Transactions...................................................... 92
Principal Stockholders.................................................... 100
Description of Capital Stock.............................................. 103
Shares Eligible for Future Sale........................................... 106
Underwriting.............................................................. 108
Experts................................................................... 110
Legal Matters............................................................. 110
Available Information..................................................... 110
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF THE
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
[LOGO]
PROSPECTUS
DATED , 1997
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
FEBRUARY , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
SHARES
INTERNATIONAL WIRELESS
COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
All of the shares of common stock, $.01 par value per share (the "Common
Stock"), of International Wireless Communications Holdings, Inc. ("IWC Holdings"
or the "Company") being offered hereby are being issued and sold by the Company.
Of the shares of Common Stock offered, shares are being offered
by the U.S. Underwriters (as defined herein) in the United States and Canada
(the "U.S. Offering") and shares are being offered by the International
Underwriters (as defined herein), in a concurrent offering outside the United
States and Canada (the "International Offering" and together with the U.S.
Offering, the "Offerings"), subject to transfers between the U.S. Underwriters
and the International Underwriters (collectively, the "Underwriters"). The
initial public offering price and the underwriting discount per share will be
identical for the Offerings. See "Underwriting." The closings of the U.S.
Offering and the International Offering are conditioned upon each other.
Prior to the Offerings, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "IWCH."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
Per Share......................... $ $ $
Total(2).......................... $ $ $
- -------------------------------------------------------------------------------------------
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(1) Before deducting offering expenses payable by the Company estimated to be
$ .
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of additional shares of Common Stock at the Price to
Public, less Underwriting Discount, solely to cover over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Common Stock will be made through the
facilities of The Depository Trust Company, on or about , 1997.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the International Underwriters (the "International
Underwriting Agreement"), the Company will agree to sell to each of the
International Underwriters to be named later (the "International Underwriters"),
and each of the International Underwriters, will severally agree to purchase
from the Company, the number of shares of Common Stock set forth opposite its
name below:
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NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- -----------
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.................................................................................
.................................................................................
.................................................................................
.................................................................................
-----------
Total..........................................................................
-----------
-----------
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The Company has been advised by the International Representatives that the
several International Underwriters initially propose to offer such shares of
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $ per share of Common Stock. The International Underwriters
may allow, and such dealers may re-allow, a concession not in excess of $
per share of Common Stock to other dealers. After the Offerings, the public
offering price and such concessions may be changed.
The Company has granted to the International Underwriters and the U.S.
underwriters to be named later (the "U.S. Underwriters" and, collectively with
the International Underwriters, the "Underwriters") an option, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to
additional shares of Common Stock from the Company at the price to
public less the underwriting discount, solely to cover over-allotments. To the
extent that the International Underwriters and the U.S. Underwriters exercise
such option, each of the International Underwriters and the U.S. Underwriters,
as the case may be, will be committed, subject to certain conditions, to
purchase a number of option shares proportionate to such International
Underwriter's or U.S. Underwriter's initial commitment.
The Company has entered into a U.S. Underwriting Agreement with the U.S.
Underwriters named therein, for whom and are acting as the
representatives (the "U.S. Representatives," and together with the International
Representatives, the "Representatives"), providing for the concurrent offer and
sale of shares of Common Stock (in addition to the shares covered by
the over-allotment option described above) in the United States and Canada. Both
the International Underwriting Agreement and the U.S. Underwriting Agreement
provide that the obligations of the International Underwriters and the U.S.
Underwriters are such that if any of the shares of Common Stock are purchased by
the International Underwriters pursuant to the International Underwriting
Agreement, or by the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement, all the shares of Common Stock agreed to be purchased by either the
International Underwriters or the U.S. Underwriters, as the case may be,
pursuant to their respective agreements must be so purchased. The price to
public and underwriting discount per share of Common Stock for the International
Offering and the U.S. Offering will be identical. The closing of the U.S.
Offering is a condition to the closing of the International Offering and the
closing of the International Offering is a condition to the closing of the U.S.
Offering.
108
<PAGE>
Each International Underwriter has severally agreed that, as part of the
distribution of the shares of Common Stock offered by the
International Underwriters, (i) it is not purchasing any shares of Common Stock
for the account of anyone other than a United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any shares of Common Stock or distribute this Prospectus to any person within
the United States or Canada or to any United States or Canadian Person. Each
U.S. Underwriter has severally agreed that, as part of the distribution of the
shares of Common Stock by the U.S. Underwriters, (i) it is not
purchasing any shares of Common Stock for the account of anyone other than a
United States or Canadian Person, and (ii) it has not offered or sold, and will
not offer or sell, directly or indirectly, any shares of Common Stock or
distribute any Prospectus relating to the U.S. Offering to any person outside
the United States or Canada or to anyone other than a United States or Canadian
Person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States or Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust which is subject to United States or Canadian federal income
taxation, regardless of the source of its income (other than the foreign branch
of any United States or Canadian Person), and includes any United States or
Canadian branch of a person other than a United States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the International Underwriters and the
U.S. Underwriters of such number of shares of Common Stock as may be mutually
agreed. The price of any shares of Common Stock so sold shall be the public
offering price, less an amount not greater than the concession to securities
dealers. To the extent that there are sales between the International
Underwriters and the U.S. Underwriters pursuant to the Agreement Between
International Underwriters and U.S. Underwriters, the number of shares of Common
Stock initially available for sale by the International Underwriters or by the
U.S. Underwriters may be more or less than the amount specified on the cover
page of this Prospectus.
Each International Underwriter has severally represented and agreed that:
(i) it has not offered or sold and, prior to the date six months after the
closing date of the Offerings, will not offer to sell any shares of Common Stock
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"); (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 and the
Regulations with respect to anything done by it in relation to the shares of
Common Stock in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on or will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the shares of Common
Stock, to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996, or is a
person to whom the document may otherwise lawfully be issued or passed on.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page thereof.
The International Underwriting Agreement provides that the Company will
indemnify the several International Underwriters against certain liabilities and
expenses, including liabilities under the Securities Act, or contribute to
payments the International Underwriters may be required to make in respect
thereof.
109
<PAGE>
The Company, its directors, officers and stockholders, and certain holders
of outstanding options issued by the Company have each agreed with the
Underwriters not to offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, or announce the offering of, or file or cause to be
filed a registration statement under the Securities Act with respect to any
shares of Common Stock, including any such shares beneficially or indirectly
owned or controlled by the Company, or any securities or options convertible
into, or exchangeable or exercisable for, shares of Common Stock, for a period
of 180 days from the date of this Prospectus, without prior written consent,
except for (i) shares of Common Stock issued under the 1996 Stock Option/Stock
Issuance Plan, (ii) shares issued in respect of obligations existing before the
date of this Prospectus and (iii) shares issued in connection with the
Offerings.
The International Representatives do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the shares of Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price
included the information set forth in this Prospectus and otherwise available to
the Representatives, the history of and future prospects for the industry in
which the Company competes, the ability of the Company's management, the general
conditions of the securities market at the time of the Offerings and the market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. There can be no
assurance, however, that the prices at which the Common Stock will sell in the
public market after the Offerings will not be lower than the price at which they
are sold in the Offerings by the Underwriters.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995 and the related consolidated statements of operations, of stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1995 included herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their report appearing herein, which
report indicates a reliance on other auditors relative to certain amounts
relating to the Company's investment in PT Rajasa Hazanah Perkasa ("RHP") as of
and for the year ended December 31, 1995, and have been included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The balance sheet of RHP as of December 31, 1995 and the related statements of
income, deficit and cash flows for the year then ended included herein have been
audited by Prasetio, Utomo & Co., independent accountants, as stated in their
report appearing herein, and have been included herein in reliance upon the
authority of said firm as experts in accounting and auditing. The balance sheet
of RHP as of December 31, 1994 and the related statements of loss, deficit and
cash flows for the two years ended December 31, 1994 included herein have been
audited by Siddharta Siddharta & Harsono, registered public accountants, as
stated in their report appearing herein, and have been included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of STW as of December 31, 1994 and 1995 and the
related consolidated profit and loss accounts, statements of shareholders equity
and cash flows for the three years ended December 31, 1995 included herein have
been audited by KPMG Peat Marwick LLP, independent accountants, as stated in
their report appearing herein, and have been included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Palo Alto, California. A partner of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP owns 6,720 shares of Preferred Stock and
warrants to purchase 120 shares of Preferred Stock.
110
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in that Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and its Common Stock, reference
is hereby made to such Registration Statement, exhibits and schedules.
Statements contained in this Prospectus as to the contents of any contract or
any other document are not necessarily complete and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects to
such reference. The Registration Statement, including the exhibits and schedules
thereto, can be inspected and copied at the Commission's Public Reference Room,
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the following Regional Offices of the Commission: Los Angeles Regional
Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California,
90036-3648; and New York Regional Office, Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material can also be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site (www.sec.gov.) that contains reports, proxy and information statements and
other information regarding registrants that submit electronic filings to the
Commission. The Registration Statement, including all exhibits thereto and
amendments thereof, has been filed with the Commission through EDGAR. Copies of
the Registration Statement, periodic reports, proxy statements and other
information also can be obtained from the Company upon request. Any such request
should be addressed to the Company's principal office at 400 South El Camino
Real, Suite 1275, San Mateo, California, 94402, attention: Secretary (telephone
number (415) 548-0808).
The Company, in accordance with the Exchange Act, is required to file
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and information may be inspected and copied at the
public reference facilities maintained by the Commission referenced above. The
Company intends to furnish holders of Common Stock with annual reports that
include audited annual consolidated financial statements and a report thereon by
its independent certified public accountants and quarterly reports containing
unaudited consolidated financial information for each of the first three
quarters of each fiscal year.
111
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR, BY ANY OF THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
--------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary............................. 3
Risk Factors................................... 17
Use of Proceeds................................ 33
Dividend Policy................................ 34
Capitalization................................. 35
Dilution....................................... 36
Unaudited Pro Forma Consolidated Condensed
Financial Statements.......................... 37
Consolidated Selected Financial Data........... 44
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 45
Business....................................... 50
Management..................................... 81
Certain Transactions........................... 92
Principal Stockholders......................... 100
Description of Capital Stock................... 103
Shares Eligible for Future Sale................ 106
Underwriting................................... 108
Experts........................................ 110
Legal Matters.................................. 110
Available Information.......................... 110
Index to Consolidated Financial Statements..... F-1
</TABLE>
--------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF THE
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
[LOGO]
PROSPECTUS
DATED , 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses payable by the
Registrant in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
of such expenses, except the SEC filing fee, the NASD filing fee and the Nasdaq
National Market listing fee are estimated.
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SEC filing fee................................................. $ 16,667
NASD filing fee................................................
Nasdaq filing fee..............................................
Legal fees and expenses........................................
Accounting fees and expenses...................................
Printing and engraving expenses................................
Trustee and exchange agent fees and expenses...................
Blue Sky fees and expenses.....................................
Transfer agent and registrar fees..............................
Miscellaneous..................................................
----------
Total...................................................... $1,150,000
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The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by Section 145 of the DGCL, each director and officer of the
Registrant may be indemnified by the respective Registrant against expenses
(including attorney's fees, judgments, fines and amounts paid in settlement)
actually and reasonably incurred in connection with the defense or settlement of
any threatened, pending or completed legal proceedings in which he is involved
by reason of the fact that he is or was a director or officer of that Registrant
if he acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of that Registrant, and, with respect to
any criminal action or proceeding, if he had no reasonable cause to believe that
his conduct was unlawful. If the legal proceeding, however, is by or in the
right of the respective Registrant, the director or officer may not be
indemnified in respect to any claim, issue or matters as to which he shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to that Registrant unless a court determines otherwise.
Article IX of the Certificate of Incorporation of the Company, a copy of
which is filed as Exhibit 3.1 to this Registration Statement, provides that no
director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for any breach of his fiduciary duty as a
director to the fullest extent permitted by Delaware Law. In addition, Article
VII of the By-Laws of the Company, a copy of which is filed as Exhibit 3.2
hereto, provides for the indemnification of the Registrant's officers and
directors.
In addition, the Registrant has entered into an Indemnification Agreement
with each of its directors and officers which provides for indemnification to
the fullest extent available under Delaware Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On August 15, 1996, the Company sold 196,720 Units (the "Units"), each
consisting of a $1,000 principal amount 14% Senior Secured Discount Note due
2001 (collectively, the "Old Notes") and one
II-1
<PAGE>
Warrant (collectively, the Warrants) 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. Each Warrant provides that if the Company does not complete a Threshold
Initial Public Offering (as defined) or a Qualified Reorganization (as defined)
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. Such transaction
was exempt from the registration requirements of the Securities Act in reliance
on Section 4(2) of the Securities Act and Rule 144A promulgated under the
Securities Act on the basis that such transaction did not involve a public
offering. In accordance with the agreement pursuant to which the Initial
Purchasers purchased the Units, the Initial Purchasers agreed to offer and sell
the Units only to "qualified institutional buyers" (as defined in Rule 144A
under the Securities Act) or a limited number of institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under
the Securities Act) or outside the United States in compliance with Regulation S
under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
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EXHIBIT NO. EXHIBIT
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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
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
10.1* Warrant Agreement dated August 15, 1996 between Registrant and Bankers Trust
Company, as Warrant Agent
</TABLE>
II-2
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EXHIBIT NO. EXHIBIT
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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.
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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <S>
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 Telekom 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
11.1 Computation of Pro Forma Net Loss Per Share
23.1+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
(included in Exhibit 5.1)
23.3 Consent of KPMG Peat Marwick LLP regarding the Registrant [Form]
23.4 Consent of KPMG Peat Marwick regarding STW [Form]
23.5 Consent of Prasetio Utomo & Co. regarding RHP [Form]
23.6 Consent of Siddharta Siddharta & Harsono regarding RHP [Form]
24.1 Power of Attorney (page II-6)
</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).
+ To be filed by amendment.
++ 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).
(b) Financial Statement Schedule
No financial statement schedules have been attached as they are not
required.
ITEM 17. UNDERTAKINGS
1. The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by them is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
3. The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
4. The undersigned Registrant hereby further undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(2) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Mateo,
State of California, on February 12, 1997.
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS,
INC.
By: /s/ JOHN D. LOCKTON
-----------------------------------------
John D. Lockton
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, John D. Lockton, Douglas S. Sinclair, and each
of them his true and lawful attorneys-in-fact and agents, with full power of
substitution, 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 Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JOHN D. LOCKTON
- ------------------------------ President, Chief Executive February 12, 1997
John D. Lockton Officer and Director
/s/ DOUGLAS S. SINCLAIR Chief Financial Officer
- ------------------------------ (Principal Financial February 12, 1997
Douglas S. Sinclair Officer)
/s/ KEITH D. TAYLOR
- ------------------------------ Controller (Principal February 12, 1997
Keith D. Taylor Accounting Officer)
/s/ HAYNES G. GRIFFIN
- ------------------------------ Chairman of the Board February 12, 1997
Haynes G. Griffin
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ SANFORD L. ANTIGNAS
- ------------------------------ Director February 12, 1997
Sanford L. Antignas
/s/ CARL C. CORDOVA III
- ------------------------------ Director February 12, 1997
Carl C. Cordova III
/s/ STEPHEN R. LEEOLOU
- ------------------------------ Director February 12, 1997
Stephen R. Leeolou
/s/ JOHN S. MCCARTHY
- ------------------------------ Director February 12, 1997
John S. McCarthy
/s/ HUGH B. L. MCCLUNG
- ------------------------------ Director February 12, 1997
Hugh B. L. McClung
/s/ CARL F. PASCARELLA
- ------------------------------ Director February 12, 1997
Carl F. Pascarella
/s/ BRIAN RICH
- ------------------------------ Director February 12, 1997
Brian Rich
/s/ VAN SNOWDON
- ------------------------------ Director February 12, 1997
Van Snowdon
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------- ----
<C> <S> <C>
1.1* Purchase Agreement dated August 9, 1996, among Registrant, BT Securities Corpo-
ration, 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
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
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 Regis-
trant 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------- ----
<C> <S> <C>
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 Commu-
nications, Inc., dated November 15, 1996.
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 Agree-
ment between Permata and International Wireless Communications, Inc., dated
October 2, 1995; Collateral Agreement among International Wireless Communica-
tions, 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 Telekom 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 Interna-
tional Wireless Communications, Inc., dated August 31, 1995
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------- ----
<C> <S> <C>
10.15* Shareholders' Agreement among Mainstream Limited, International Wireless Com-
munications, Inc. and STHL, dated August 30, 1996
10.16A* Shareholders' Agreement among SDL, STHL and International Wireless Communica-
tions, Inc., dated November 7, 1996
11.1 Computation of Pro Forma Net Loss Per Share
23.1+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
(included in Exhibit 5.1)
23.3 Consent of KPMG Peat Marwick LLP regarding the Registrant [Form]
23.4 Consent of KPMG Peat Marwick regarding STW [Form]
23.5 Consent of Prasetio Utomo & Co. regarding RHP [Form]
23.6 Consent of Siddharta Siddharta & Harsono regarding RHP [Form]
24.1 Power of Attorney (page II-6)
</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).
+ To be filed by amendment.
++ 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>
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
1
<PAGE>
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.
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.
<TABLE>
<CAPTION>
MONTHS BASE RENT
- -------------------------------------------------------------------- ------------------------
<S> <C>
(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
</TABLE>
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
2
<PAGE>
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.
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.
3
<PAGE>
12. RATIFICATION. The Lease as amended by this Second Amendment is hereby
ratified and shall remain in full force and effect.
<TABLE>
<S> <C>
LANDLORD TENANT
THE PRUDENTIAL INSURANCE INTERNATIONAL WIRELESS COMMUNICATIONS
COMPANY OF AMERICA, a Deleware corporation
a New Jersey corporation
By VOIT MANAGEMENT COMPANY, L.P., By /s/ Aarti C. Gurnani
its managing agent -------------------------------------------
By /s/ Its VP, Legal Affairs
-------------------------------------------
----------------------------------------
Its
----------------------------------------
</TABLE>
4
<PAGE>
EXHIBIT SA-1
<TABLE>
<S> <C> <C>
[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
</TABLE>
<PAGE>
EXHIBIT SA-2
COMMENCEMENT DATE MEMORANDUM
<TABLE>
<S> <C>
LANDLORD: The Prudential Insurance Company of America
TENANT: International Wireless Communications
SECOND AMENDMENT DATE: November 15, 1996
PREMISES: Suite 580
</TABLE>
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>
EXHIBIT 11.1
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- --------------------
<S> <C> <C>
Net loss............................................................... $ (11,271) $ (17,851)
-------- --------
-------- --------
Weighted average common stock outstanding.............................. 85 383
Staff Accounting Bulletin No. 83 issuances and grants(1)............... 4,140 4,140
Weighted average common shares issuable upon conversion of preferred
stock outstanding(2)................................................. 7,235 16,844
-------- --------
Pro forma weighted average shares outstanding...................... 11,460 21,367
-------- --------
-------- --------
Pro forma net loss per share........................................... $ (0.98) $ (0.84)
-------- --------
-------- --------
</TABLE>
- ------------------------
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and preferred stock issued during the 12-month period preceding
the date of the initial filing of the Registration Statement, have been
included in the calculation of common equivalent shares.
(2) Reflects the conversion of the Company's preferred stock to common stock on
an "as-if" converted basis, from the time of issuance.
<PAGE>
EXHIBIT 23.3
[FORM OF]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
International Wireless Communications Holdings, Inc.:
We consent to the use of our report dated July 12, 1996, except for note 1,
as to which the date is August 8, 1996, on the consolidated balance sheets of
International Wireless Communications Holdings, Inc. (IWC Holdings) and
subsidiary as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1995, included
herein, and to the reference to our firm under the heading "Experts" in the
Registration Statement (Form S-1) and related prospectus.
KPMG Peat Marwick LLP
San Francisco, California
February , 1997
<PAGE>
EXHIBIT 23.4
[FORM OF]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
International Wireless Communications Holdings, Inc.:
We consent to the use of our report dated July 17, 1996, on the consolidated
balance sheets of Syarikat Telefon Wireless (M) Sdn Bhd as of December 31, 1994
and 1995, and the related consolidated profit and loss accounts, statements of
shareholders' equity and cash flow for each of the years in the three-year
period ended December 31, 1995, included herein, and to the reference to our
firm in the form and context in which they are contained in the Prospectus.
KPMG Peat Marwick
KPMG Peat Marwick
Public Accountants
Kuala Lumpur
February , 1997
<PAGE>
EXHIBIT 23.5
[FORM OF]
CONSENT OF INDEPENDENT AUDITORS
(ART)
, 1996
Letter No. UO-
The Board of Directors and Stockholders
PT Rajasa Hazanah Perkasa
Wishta Pejaten
JI. Pejaten Earat No. 6
Jakarta
Indonesia
Dear Sirs,
We refer to the registration statement on Form S-1 of International Wireless
Communications Holdings, Inc. dated February 12, 1997, relating to the
registration of Common Stock to be issued by International Wireless
Communications, Inc.
We hereby consent to the inclusion of our report and the references to our
name in such registration statement on Form S-1.
Very truly yours,
PRASETIO, UTOMO & CO.
(ART)
Dr. M.P. Sibarani
PARTNER
<PAGE>
EXHIBIT 23.6
[FORM OF]
CONSENT OF INDEPENDENT AUDITOR
We consent to the inclusion in this registration statement on Form S-1 of
our report dated June 2, 1995, except for notes 12 and 15 as to which the date
is November 7, 1996, on our audits of the financial statements of PT RHP for the
years 1994 and 1993. We also consent to the reference to our firm under the
caption "experts".
Siddharta Siddharta & Harsono
Registered Public Accountants
Jakarta, February , 1997
