<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------
PROPEL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 36-4291950
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
425 NORTH MARTINGALE ROAD
18TH FLOOR
SCHAUMBURG, ILLINOIS 60173
(847) 435-3700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
J. MICHAEL NORRIS
PROPEL, INC.
425 NORTH MARTINGALE ROAD
18TH FLOOR
SCHAUMBURG, ILLINOIS 60173
(847) 435-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C> <C>
THOMAS P. HOLDEN MICHELLE M. WARNER GERALD T. NOWAK ANDREW R. SCHLEIDER
PROPEL, INC. MOTOROLA, INC. KIRKLAND & ELLIS SHEARMAN & STERLING
425 NORTH MARTINGALE ROAD 1303 EAST ALGONQUIN ROAD 200 EAST RANDOLPH DRIVE 599 LEXINGTON AVENUE
18TH FLOOR SCHAUMBURG, ILLINOIS 60196 CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10022
SCHAUMBURG, ILLINOIS 60173 (847) 576-5000 (312) 861-2000 (212) 848-4000
(847) 435-3700
</TABLE>
------------------------------
Approximate date of commencement of proposed sale to 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. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration 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 statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
Common Stock, $0.01 par value............... $500,000,000 $132,000
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) 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 EFFECTIVENESS 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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 27, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
------------------
Propel, Inc. is offering shares of its common stock. This prospectus
relates to an offering of shares in the United States. In addition,
shares are being offered outside the United States in an international offering.
Propel has granted the underwriters an option to purchase an additional
shares of common stock to cover over-allotments.
This is our initial public offering and no public market exists for our
shares. We estimate that the initial public offering price will be between $
and $ per share. We will apply for quotation of the common stock on the Nasdaq
National Market under the symbol "PRPL."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 10.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Propel........................ $ $
</TABLE>
The underwriters expect to deliver the shares of common stock to purchasers
on , 2000.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
JOINT BOOKRUNNING MANAGERS
GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER
------------------
Prospectus dated , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 10
Forward-Looking Statements........... 28
Our Separation from Motorola......... 29
Use of Proceeds...................... 32
Dividend Policy...................... 32
Capitalization....................... 33
Selected Financial and Other
Operating Data..................... 34
Unaudited Pro Forma Condensed
Combined Financial Statements...... 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 43
Industry Overview.................... 71
Business............................. 75
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management........................... 114
Our Relationship with Motorola....... 126
Our Relationships with Our Operating
Companies.......................... 136
Regulation........................... 150
Principal Stockholder................ 163
Description of Capital Stock......... 163
Shares Eligible for Future Sale...... 169
Material U.S. Federal Tax
Consequences to Non-U.S. Holders... 171
Underwriting......................... 175
Legal Matters........................ 177
Experts.............................. 177
Where You Can Find More Information.. 178
Index to Financial Statements........ F-1
</TABLE>
------------------------
In this prospectus, "Propel," the "company," "we," "us" and "our" each
refers to Propel, Inc., "Motorola" refers to Motorola, Inc. and "operating
companies" refers to the wireless communications operating companies in which we
hold an interest, except our 1.9% equity investment in Korea Telecom Freetel.
When we refer to our proportionate share of an operating company's licensed
population or subscribers, that number is calculated by multiplying the licensed
population or subscriber information for that operating company by our economic
ownership interest in that operating company at the end of the applicable
reporting period. When we refer to our proportionate share of an operating
company's revenues or EBITDA, that number is calculated by multiplying the U.S.
dollar and U.S. GAAP-reconciled revenue or EBITDA information by our weighted
average economic ownership interest in that operating company during the
applicable reporting period and, in the cases of our operating companies in
Mexico, Chile and Israel, eliminating the effects of accounting for the impact
of price level changes, or inflationary accounting.
------------------------
Propel's financial statements used in this prospectus have been prepared in
accordance with U.S. GAAP. The financial statements included in this prospectus
for some operating companies have been prepared in local generally accepted
accounting principles or international accounting standards. A reconciliation to
U.S. GAAP is included in each such operating company's financial statements. Our
operating companies in Mexico, Chile and Israel have presented their financial
statements reflecting the impact of price level changes as allowed under
applicable SEC rules. We have eliminated the effects of inflationary accounting
when including the results of operations of these operating companies in the
line item "Share of earnings (losses) of affiliates" of our consolidated
financial statements and in the proportionate data of our operating companies.
For more information, see the consolidated financial statements and notes
included elsewhere in this prospectus.
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
Tables and other data presented in this prospectus may not total due to
rounding.
Unless we specifically state otherwise, the information in this prospectus
does not take into account the possible issuance of up to shares of common
stock which the underwriters have the option to purchase solely to cover
over-allotments.
------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
WE URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" SECTION AND THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
PROPEL
Propel, through its operating companies, is a leading international provider
of wireless communication services. We develop, operate and own interests in
wireless communications businesses in targeted markets throughout the world. Our
operating companies serve many of the world's fastest growing wireless markets.
Over the past 15 years, we have grown our wireless communications business by
rapidly adding subscribers and extending our geographic footprint across Latin
America, Europe/ Middle East and Asia. Our operating companies currently offer
wireless services in Mexico, Israel, Hong Kong, Egypt, Argentina, Brazil,
Lithuania, Jordan, Chile, the Dominican Republic, Pakistan, Uruguay and
Azerbaijan. Many of our operating companies hold leading positions in their
licensed territories.
Our operating companies are located primarily in markets where rapid
economic development is creating significant demand for communications services
and the availability of wireline telephone services is often inadequate to meet
this demand. We established an early presence in these markets by teaming with
prominent local partners and, in many instances, international
telecommunications companies.
We take an active role in the management of our operating companies and have
representatives on the board of directors of each of them. In addition, we have
an operations manager for each of the operating companies who is responsible for
day-to-day interaction with operating company management. By leveraging our
knowledge and experience, we assist the operating company's management in
assessing and improving current operations and developing and implementing
growth initiatives. Our operations managers also facilitate the sharing of
experience and knowledge across our operating companies and capitalize on the
knowledge of our engineering, marketing, human resources and finance specialists
to assist our operating companies. We have also assigned a number of our
employees to executive positions in our operating companies. We will continue to
leverage our international wireless operating expertise to increase subscriber
growth and enhance both the revenues and EBITDA of our operating companies.
At December 31, 1999, our operating companies operated under wireless
licenses that covered over 350 million people and provided cellular services to
approximately 6.8 million subscribers, an increase of 2.7 million subscribers,
or 66%, from December 31, 1998. At March 31, 2000, our operating companies
provided cellular services to approximately 7.6 million subscribers. Based on
our ownership percentages, we had approximately 2.8 million proportionate
subscribers as of March 31, 2000. Our proportionate share of the aggregate
revenues and EBITDA of our operating companies was $1.2 billion and
$202.5 million, respectively, for the year ended December 31, 1999.
3
<PAGE>
Except as otherwise indicated, the following table summarizes pertinent
information for each of our operating companies as of and for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
OPERATING ESTIMATED TOTAL OPERATING SYSTEM
COMPANY CURRENT PROPEL LICENSED CELLULAR COMPANY PROPORTIONATE START-UP
NAME OWNERSHIP(1) POPULATION SUBSCRIBERS REVENUE REVENUE(2) DATE
---- ------------ ---------- ----------- ------- ---------- ----
(%) (THOUSANDS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
LATIN AMERICA
NORTHERN MEXICO............. Bajacel 48.9 2,850 252 $ 92.7 $ 45.3 1990
Movitel 55.2 4,741 299 91.3 50.4 1990
Norcel 100.0 5,423 168 48.4 48.4 1990
Cedetel 100.0 8,162 362 106.1 106.1 1990
ARGENTINA................... Movicom Argentina 25.0 36,580 1,171 830.0 207.5 1989
BRAZIL...................... Global Telecom 35.5 14,470 162 44.7 12.1 1998
CHILE....................... ETP 25.0 15,010 656 190.6 47.7 1991
DOMINICAN REPUBLIC.......... Tricom 26.5 8,250 176 170.8 52.6 1992
URUGUAY..................... Movicom Uruguay 32.0 1,529 116 86.4 27.6 1991
SOUTHERN MEXICO............. Portatel 21.7 19,606 88 34.9 7.6 1990
EUROPE/MIDDLE EAST
ISRAEL...................... Pelephone 50.0 6,122 1,110 709.4 354.7 1986
EGYPT....................... MobiNil 18.0 64,520 507 360.3 64.8 1995
LITHUANIA................... Omnitel 35.0 3,700 198 88.6 31.0 1995
JORDAN...................... Fastlink 26.1 6,150 94 99.3 25.9 1995
AZERBAIJAN(3)............... Bakcell 25.0 7,620 14 13.9 3.4 1994
ASIA
HONG KONG................... HTCL 25.1 6,840 1,353 524.5 151.6 1985
PAKISTAN.................... Mobilink 30.0 145,750 94 34.9 10.5 1994
------- ----- -------- ---------
TOTAL............... 357,323 6,820 $3,526.8 $ 1,247.3
======= ===== ======== =========
</TABLE>
------------------------------
(1) Reflects our direct and indirect economic ownership at June 15, 2000. For
more information about the nature of our ownership in these operating
companies, see "Business." In May 2000, we entered into agreements with
shareholders of Bajacel to purchase their interests in Bajacel, which will
result in our direct economic ownership of Bajacel increasing to 100% and
our direct and indirect economic ownership of Movitel increasing to 90% upon
the completion of this acquisition.
(2) Proportionate revenue is computed by multiplying operating company U.S.
dollar and U.S. GAAP-reconciled revenues by our average ownership percentage
throughout the period and, in the cases of Mexico, Chile and Israel,
eliminating the effects of inflationary accounting. During 1999, our
ownership percentage changed in each of Global Telecom and HTCL. Our
weighted average ownership interests in those companies for the year ended
December 31, 1999 was 27.1% and 28.9%, respectively.
(3) Total operating company revenue and proportionate revenue for Azerbaijan
reflects the results of operations for GTIB 1996, Ltd., or GTIB, a holding
company which purchases cellular infrastructure and handsets and sells this
equipment to Bakcell and provides management services to Bakcell for a fee.
Because it did not own a majority of Bakcell during the period presented,
GTIB's results of operations do not reflect Bakcell's revenues associated
with wireless services. Subsequent to December 31, 1999, GTIB acquired an
additional 26% ownership in Bakcell. GTIB will begin to consolidate the
financial results of Bakcell in the second quarter of 2000.
COMPLEMENTARY BUSINESSES
In addition to our actively managed operating companies, we have a 1.9%
equity investment in Korea Telecom Freetel, a wireless operator whose stock
trades on the South Korean KOSDAQ market. We also operate a handset distribution
business in Israel, through our wholly owned Israeli subsidiary, called Wireless
Distribution Services, or WDS. For the year ended December 31, 1999, WDS
generated revenues and EBITDA of $228.4 million and $8.1 million, respectively.
In addition, we recently acquired approximately 16.8% of Zephyr
Telecommunications, Inc. on a fully diluted basis. Zephyr operates an
international Internet protocol based communications platform, providing
international and national long distance telecommunications, broadband Internet
access and Web hosting in selected countries.
4
<PAGE>
COMPETITIVE STRENGTHS
We believe the combination of the following strengths distinguishes us from
our competitors:
- EXPERIENCED MANAGEMENT TEAM. Our culturally diverse and multilingual team
of professionals has more than 15 years of experience in wireless
communications operations and business development.
- STRONG STRATEGIC RELATIONSHIPS. We have forged strategic relationships
with prominent local and regional partners and, in many instances,
international telecommunications companies, including Hutchison Whampoa,
NTT DoCoMo, France Telecom, Telia, Sonera, Bezeq, DDI, Telecom Italia
Mobile and BellSouth.
- REGIONAL FOCUS. Our operating companies are concentrated in Latin America,
the Middle East and Asia, which provides us with a strong regional
platform to leverage our strategic relationships and operational expertise
and positions us for future expansion.
- ESTABLISHED PRESENCE AND RAPIDLY GROWING BASE OF SUBSCRIBERS. Our
operating companies serve many of the fastest growing wireless markets in
the world. We believe our operating companies' existing network
infrastructure and, in most cases, large and rapidly growing subscriber
bases provide them with sufficient scale to introduce new services and
broad platforms for entering new lines of communications business.
- TECHNOLOGY LEADERS. We intend to continue our tradition of promoting and
encouraging innovation among our operating companies to position them to
be among the early adopters of new technology platforms.
BUSINESS STRATEGY
Our goal is to become the leading provider of wireless communications
services in each of our operating regions. Key elements of our strategy are to:
- MAXIMIZE PERFORMANCE OF EXISTING OPERATIONS. We believe there continue to
be considerable opportunities for the long-term growth of our operating
companies in their existing markets. To achieve this growth, we will
continue to actively participate on their boards of directors, leverage
our technical and managerial knowledge across our operating companies and
selectively assign our employees to our operating companies.
- IMPLEMENT NEW SERVICES. We plan to assist our operating companies in
complementing their current wireless communications offerings with
additional services to create new revenue opportunities and allow them to
provide bundled services, which will better position them against their
competitors.
- CAPITALIZE ON WIRELESS DATA OPPORTUNITIES. We expect wireless data
services to stimulate subscriber growth, increase usage and enhance
revenue growth. All of our operating companies are either operating or
installing digital networks which have been or can be upgraded to
accommodate these data services. We expect many of our operating companies
to introduce or enhance their wireless data services with mobile Internet
access, e-mail, e-commerce applications and personalized information
delivery services, which can be provided through a mobile phone. We are
aggressively pursuing relationships with Internet service providers,
wireless data application service providers, local language portals and
content companies and related hardware and software companies to develop
and enhance the wireless data offerings of our operating companies.
- EXPAND AND STRENGTHEN OUR GEOGRAPHIC FOOTPRINT. We intend to selectively
pursue new licenses and business combinations in our targeted regions to
complement our existing operations. In particular, we will initially
target Latin America, the Middle East/North Africa and China. As
opportunities arise, we may also increase our ownership in our existing
operating companies by acquiring the interests of their other
shareholders.
5
<PAGE>
OUR RELATIONSHIP WITH MOTOROLA
We are currently a wholly owned subsidiary of Motorola. After the completion
of this offering, Motorola will own approximately % of the outstanding
shares of our common stock, or approximately % if the underwriters
exercise their over-allotment option in full. At the time of this offering, two
of our four directors will be Motorola officers. Shortly after the completion of
this offering, we expect to add five independent directors to our board. Until
Motorola divests itself of a substantial portion of our common stock, Motorola
will be able to determine the vote on all matters submitted to stockholders,
including the election of directors and the approval of extraordinary corporate
transactions, such as mergers.
Motorola has informed us that it currently expects to divest its entire
interest in our company, which we refer to as a divestiture. Motorola may
complete a divestiture by distributing all of its shares of our common stock to
its stockholders, which we refer to as a distribution. Motorola has informed us
that it currently expects to complete a distribution during the 12 months
following this offering. A distribution may be accomplished through one of the
following methods:
- SPLIT-OFF--an exchange offer by Motorola in which holders of its common
stock would be offered the option of tendering some or all of their
Motorola shares in exchange for shares of our common stock,
- SPIN-OFF--a pro rata dividend by Motorola of its shares of our common
stock to holders of its common stock, or
- COMBINED SPLIT-OFF/SPIN-OFF--a combination of the above transactions.
Motorola has the sole discretion to determine the timing, structure and all
terms of a distribution of its shares of our stock to Motorola stockholders. A
distribution is conditioned upon receipt of a tax ruling that a distribution can
be effected on a tax-free basis, for which Motorola has not yet applied.
Motorola may also choose to divest its shares of our common stock through a
means other than a distribution. These other means may include the sale of all
or any portion of Motorola's remaining shares of our common stock in one or more
private sales or through subsequent public offerings. Motorola is not obligated
to complete a distribution or other form of divestiture, and we cannot assure
you as to whether or when a divestiture will occur. See "Our Separation from
Motorola."
Most of the operating company shareholders agreements to which we or our
subsidiaries are a party contain rights of first refusal that could allow the
other shareholders in these operating companies to purchase our equity interests
at their fair market value if Motorola were to complete a divestiture of our
common stock. We have received waivers of these provisions from most operating
company shareholders which would allow Motorola to complete a distribution
without triggering the rights of first refusal. These waivers may not apply to
other forms of divestitures, however, including a sale by Motorola of our common
stock to a third party. We are currently seeking the remaining waivers from the
operating company shareholders in Argentina, Hong Kong and Uruguay. See "Our
Relationships with Our Operating Companies."
We believe that this offering and our separation from Motorola will enhance
our ability to pursue our business strategy free of conflicting business
objectives of Motorola, allow us to better incentivize our management team,
improve our capital financing flexibility and simplify our internal structure.
Prior to the completion of this offering, we will enter into agreements with
Motorola that provide for the separation of our business operations and the
provision of transitional services from Motorola. Some of these agreements may
have the effect of limiting the conduct of our business and our ability to
pursue our business objectives. For further information about these agreements,
see "Our Relationship with Motorola."
------------------------
Our principal executive offices are located at 425 North Martingale Road,
18th Floor, Schaumburg, Illinois 60173 and our telephone number is
(847) 435-3700.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
Shares offered by Propel:
U.S. offering...................................... shares
International offering............................. shares
--------
Total............................................ shares
Over-allotment option.............................. shares
Shares to be outstanding after
this offering...................................... shares
Shares to be held by Motorola after
this offering...................................... shares
Use of proceeds...................................... We intend to use the net proceeds of the
offering to fund ongoing operations, for
acquisitions to expand our portfolio of assets,
to invest in the expansion of our existing
operating companies, to repay a small portion
of our indebtedness to Motorola and for general
corporate purposes. For more information on the
use of the proceeds from this offering, see
"Use of Proceeds."
Proposed Nasdaq National Market symbol............... "PRPL"
</TABLE>
The number of shares of our common stock to be outstanding after the
offering does not take into account up to additional shares of our common
stock that are reserved for issuance under our stock incentive plan, including
an estimated shares of our common stock that will be issuable upon
exercise by our employees of stock options granted in connection with the
offering and an estimated shares of restricted stock that will be granted
to our employees in connection with this offering. The actual number of options
and shares of restricted stock will be determined at the time of the offering.
For a description of these stock options and shares of restricted stock, see
"Management--Incentive Plan."
All the information in this prospectus assumes that the underwriters have
not exercised their over-allotment option.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER OPERATING DATA
The following table presents our summary historical and pro forma condensed
combined financial and other operating data. The historical statement of
operations and cash flow data for 1997, 1998 and 1999 are derived from our
audited consolidated financial statements included elsewhere in this prospectus,
which were audited by KPMG LLP, whose report indicated a reliance on other
auditors with respect to financial statements of some affiliates of Propel that
are accounted for in Propel's consolidated financial statements using the equity
method of accounting, as indicated in their report. The statement of operations
and cash flow data for the three months ended March 31, 1999 and 2000 and the
balance sheet data as of March 31, 2000 are derived from our unaudited
consolidated financial statements also included elsewhere in this prospectus. In
the opinion of management, such unaudited financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial data for such periods and as of such dates. Results for any
interim period are not necessarily indicative of the results to be expected for
the entire year.
We prepared the summary pro forma financial data to illustrate the estimated
effects of our increased economic ownership interest in Bajacel, which owns a
68% interest in Movitel, and related transactions. The pro forma statement of
operations data for the year ended December 31, 1999 and for the three months
ended March 31, 2000 give effect to this acquisition and related transactions as
if those transactions had occurred on January 1, 1999 and January 1, 2000,
respectively. The pro forma balance sheet data is presented as if those
transactions had occurred on March 31, 2000. We believe that the assumptions
used provide a reasonable basis for presenting the significant effects directly
attributable to our increased economic ownership interest in Bajacel and its
subsidiary Movitel. The pro forma data do not purport to represent what our
results of operations or financial condition would actually have been if such
transactions had in fact occurred on such dates or to project our results of
operations or financial condition for any future period. The pro forma, as
adjusted balance sheet data give effect to the transactions described above and
the sale of shares of our common stock in this offering at an assumed
initial public offering price of $ per share.
The data in the following table primarily reflect the results of operations
and financial position of Propel and its consolidated subsidiaries. The results
of operations and financial condition of our nonconsolidated operating companies
are reflected in our statement of operations data under "Share of earnings
(losses) of affiliates" and in our balance sheet data under "Investments in and
advances to affiliates." Norcel, Cedetel and WDS are currently our only
consolidated businesses. For more information about the performance of our
operating companies on a proportionate basis, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Proportionate Results
of Operations." You should read the information set forth below in conjunction
with "Unaudited Pro Forma Condensed Combined Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this prospectus.
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- --------------------------------
HISTORICAL HISTORICAL
------------------------------ PRO FORMA ------------------- PRO FORMA
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS; EXCEPT SUBSCRIBERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $160.9 $ 226.3 $ 382.9 $ 565.7 $121.6 $ 86.5 $135.0
Costs of services and products................. 120.1 167.8 297.0 391.7 101.3 60.7 80.3
Selling, general, and administrative
expenses..................................... 52.6 54.9 79.0 113.8 20.3 22.7 34.5
Depreciation and amortization.................. 28.2 33.0 37.6 78.5 9.6 11.0 19.9
------ -------- -------- -------- ------ ------ ------
Operating income (loss)........................ (40.0) (29.4) (30.7) (18.3) (9.6) (7.8) 0.3
Share of earnings (losses) of affiliates....... 44.2 47.6 (32.0) (44.3) (6.3) (2.3) (10.6)
Interest expense............................... 6.6 14.6 12.5 50.1 4.3 4.5 13.7
Other (income) expense......................... (50.2) (25.4) (48.8) (49.5) (5.4) (5.2) (5.8)
------ -------- -------- -------- ------ ------ ------
Earnings (loss) before income taxes............ 47.8 28.9 (26.4) (63.2) (14.8) (9.4) (18.2)
Income tax expense (benefit)................... 7.7 (1.0) 16.6 7.7 2.0 (1.7) (7.6)
------ -------- -------- -------- ------ ------ ------
Net earnings (loss)............................ $ 40.2 $ 29.9 $ (43.0) $ (70.8) $(16.8) $ (7.7) $(10.7)
====== ======== ======== ======== ====== ====== ======
Unaudited pro forma net earnings (loss) per
common share(1).............................. $ $ $ $ $
Weighted average shares outstanding............
CASH FLOW DATA:
Cash provided by (used in):
Operating activities......................... $(19.8) $ (10.3) $ 1.1 $(16.4) $ 0.2
Investing activities......................... (145.3) (162.7) (121.1) (9.7) (21.5)
Financing activities......................... 172.3 173.2 124.9 20.1 16.1
OTHER DATA:
EBITDA(2)...................................... $(11.8) $ 3.6 $ 6.9 $ 60.2 $ (0.1) $ 3.1 $ 20.2
Proportionate subscribers(3)................... 1,050 1,574 2,554 2,786 1,771 2,805 3,051
Proportionate revenues(3)...................... $880.6 $1,058.7 $1,247.3 $1,326.5 $289.5 $362.3 $386.2
Proportionate EBITDA(3)........................ 254.8 302.1 202.5 225.2 62.3 79.3 86.1
Proportionate net debt (at period end)(3)...... 441.8 720.5 1,035.4 1,381.1 * * *
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 2000
-----------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 13.7 $ 31.8
Investments in and advances to affiliates................... 674.7 629.7
Total assets................................................ 1,449.5 2,030.0
Notes payable and long-term debt, including related parties
and current maturities.................................... 152.3 519.8
Stockholder's equity........................................ 982.2 982.2
</TABLE>
------------------------------
* Data not available.
(1) Pro forma net earnings (loss) per share was calculated by dividing the net
earnings (loss) for each period by the shares of our common stock to
be outstanding at the time of the offering.
(2) "EBITDA" is defined as operating income before depreciation and amortization
expense. EBITDA is an indicator used by management to measure our
performance and ability to generate cash flow. EBITDA does not represent
cash flows for the period and is not an alternative to operating or net
income as an indicator of operating performance. You should not consider it
alone or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles. Our computation of EBITDA may
not be comparable to the computation of similarly titled measures reported
by other companies.
(3) For more information regarding the calculation of proportionate data, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Proportionate Results of Operations."
9
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER EACH OF THE FOLLOWING RISKS AND UNCERTAINTIES
AND ALL OF THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO
INVEST IN SHARES OF OUR COMMON STOCK. WE HAVE SEPARATED THE FOLLOWING RISKS INTO
THREE CATEGORIES:
- RISKS RELATING TO OUR RELATIONSHIP WITH MOTOROLA,
- RISKS RELATING TO US AND OUR INDUSTRY AND
- RISKS RELATING TO THIS OFFERING AND OUR COMMON STOCK.
MANY OF THE RISKS DESCRIBED IN THESE RISK FACTORS MAY DIRECTLY AFFECT OUR
OPERATING COMPANIES AND MAY THEREFORE AFFECT US TO THE EXTENT OF OUR OWNERSHIP
IN THE AFFECTED OPERATING COMPANIES. IF ANY ONE OF OUR OPERATING COMPANIES IS
HARMED OR FAILS AS A RESULT OF ANY OF THESE RISKS, OUR BUSINESS WILL BE
ADVERSELY AFFECTED, AND THIS EFFECT COULD BE MATERIAL. ANY ADVERSE IMPACT ON US
WILL BE MAGNIFIED TO THE EXTENT THAT MORE THAN ONE OPERATING COMPANY IS HARMED
OR FAILS.
IF ANY OF THE FOLLOWING RISKS AND UNCERTAINTIES OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR RELATIONSHIP WITH MOTOROLA
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF MOTOROLA DOES NOT COMPLETE ITS
DIVESTITURE OF OUR COMPANY
If Motorola fails to complete a divestiture of its entire interest in our
company within the time it has contemplated, or at all, our business may be
adversely affected. Specifically, we may not realize, among other things, the
operating flexibility and removal of competing Motorola business objectives we
expect to achieve in connection with a divestiture, all of which we expect to
play an integral role in pursuing our business strategy. Although Motorola has
advised us that it currently expects to complete a distribution within the
12 months following this offering, it is not obligated to do so and we cannot
assure you as to whether or when a distribution or other form of divestiture
will occur. Moreover, a distribution of our common stock to Motorola
stockholders is contingent upon Motorola's receiving a favorable tax ruling as
well as general market conditions, neither of which we can control. In addition,
we must repay some of the indebtedness owed to Motorola and its affiliates in
order for Motorola to complete a distribution. On a pro forma basis, after
giving effect to the Bajacel acquisition, this indebtedness totaled
approximately $490 million. We cannot assure you we will have the funds in place
to repay such indebtedness within the time frame contemplated to complete a
distribution, or at all. This means that we cannot assure you that we will
obtain the expected benefits or as to the timing of any such benefits, if
realized, from a distribution or other form of divestiture. For more information
about Motorola's plan to divest Propel, see "Our Separation from Motorola."
Until a divestiture occurs, the risks discussed below relating to Motorola's
control of our company, the potential conflicts of interest between our company
and Motorola and the potential conflicts of interest of the two members of our
board of directors who are also officers of Motorola will continue to be
relevant to our stockholders.
WE ARE, AND MAY CONTINUE TO BE, CONTROLLED BY MOTOROLA AND OUR OTHER
STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING
DURING THAT TIME
After the completion of this offering, Motorola will own about % of our
outstanding shares of common stock, or about % if the underwriters exercise
their over-allotment option in full. As long as Motorola owns a majority of our
outstanding common stock, it will generally be able to determine the outcome of
all corporate actions requiring stockholder approval. As a result, Motorola
could amend our organizational documents and elect our entire board of directors
and remove any director, with or
10
<PAGE>
without cause. Therefore, Motorola could be in a position to control matters
affecting us that require board approval, including:
- any determination with respect to our business strategy and policies;
- mergers or other business combinations involving our company;
- our acquisition or disposition of assets;
- future issuances of common stock or other securities by us;
- our incurrence of debt; and
- the payment of dividends on our common stock.
In addition, as long as Motorola holds a significant interest in our common
stock, it may be able to exercise a significant amount of influence over many
matters, even when it ceases to own a majority of our common stock. For more
information, see "Description of Capital Stock--Material Provisions of the
Restated Certificate of Incorporation and Bylaws."
Motorola will continue to have a significant ownership interest in our
company after this offering, and conflicts of interest may arise between us and
Motorola in a number of areas relating to our past and ongoing relationships,
including:
- the nature, availability and pricing of products and services provided by
Motorola to us and our operating companies;
- the nature of our relationships with our operating companies and their
other shareholders;
- the nature of our competition with Motorola and its customers;
- the allocation of future business opportunities between us and Motorola;
- tax and employee benefit matters and other matters arising from our
separation from Motorola; and
- sales or distributions by Motorola of all or any portion of its ownership
interest in our company.
Despite our contractual arrangements with Motorola, we cannot assure you
that we will be able to resolve any potential conflicts with Motorola, or that,
if resolved, we would not have been able to receive a more favorable resolution
if we were dealing with an unaffiliated third party. For more information
regarding our relationship with Motorola, see "Our Relationship with Motorola."
WE MAY BE EXPOSED TO SIGNIFICANT TAX LIABILITY IN CONNECTION WITH OUR
SEPARATION FROM MOTOROLA
If Motorola completes a distribution of its shares of our common stock to
Motorola stockholders which is held to be taxable for U.S. income tax purposes
or Motorola's division of Israeli assets related to our business from assets
unrelated to our business is held to be taxable for U.S. or Israeli income tax
purposes, we and Motorola could be subject to a material amount of taxes. We
will be liable to Motorola for any corporate level taxes incurred by Motorola if
those taxes are attributable to actions we take or fail to take in violation of
our agreements with Motorola. For a description of Motorola's and our
obligations in connection with a distribution of its shares of our common stock
to Motorola stockholders or in connection with the separation of Israeli assets,
see "Our Relationship with Motorola--IPO and Distribution Agreement."
11
<PAGE>
WE ARE SUBJECT TO CONTRACTUAL LIMITATIONS BY MOTOROLA THAT COULD LIMIT THE
CONDUCT OF OUR BUSINESS AND OUR ABILITY TO PURSUE OUR BUSINESS OBJECTIVES
AND BUSINESS OPPORTUNITIES
In connection with our separation from Motorola, we have entered into
agreements with Motorola that contain a number of restrictive covenants that,
individually or in the aggregate, could materially limit the way in which we
will conduct our business and our ability to pursue our business objectives.
Consequently, our future financial results may be adversely affected, and we may
be unable to meet our business and growth objectives. Covenants in our various
agreements with Motorola will, among other things, limit our ability to complete
business combinations, incur debt or issue capital stock. Except in connection
with the separation of Israeli assets related to our business, these covenants
will not expire until the earlier of two years after Motorola completes the last
distribution of its shares of our common stock to its stockholders or the date
Motorola elects not to proceed with a distribution. For more information about
these agreements, see "Our Relationship with Motorola--IPO and Distribution
Agreement."
OUR OPERATING COMPANIES MAY BE ADVERSELY AFFECTED BY COMPETITION FROM
MOTOROLA AND AFFILIATES OF MOTOROLA IN THOSE MARKETS WHERE THEY OFFER
COMPETING WIRELESS COMMUNICATIONS SERVICES
Motorola will retain its interests in wireless operating companies which we
previously managed in Japan and Honduras due to adverse restrictions associated
with their transfer. In addition, Motorola currently has direct investments in
specialized mobile radio, or SMR, and enhanced specialized mobile radio, or
ESMR, operators in Israel, as well as Australia, China, Colombia, Costa Rica,
the Czech Republic, Ecuador, Germany, India, Japan, Poland and Turkey. These
investments were made and are managed by business units within Motorola other
than Propel, as they are not cellular operations. However, SMR and ESMR
operators may compete against our operating companies, as is the case with
Motorola's ESMR business in Israel. Motorola also owns approximately 15% of
Nextel Communications, Inc. Nextel Communications, through its wholly owned
subsidiary, Nextel International, Inc., has ESMR operations and investments in
many countries around the world, including Argentina, Mexico and Brazil.
Motorola's ownership of interests in companies that directly or indirectly
compete with our operating companies may result in conflicts of interest.
Furthermore, there is no contractual or legal prohibition preventing Motorola or
any of its affiliates from competing with us in bidding for new licenses or
entering markets in which we compete or intend to compete. In the event current
and potential subscribers choose wireless communications services from other
wireless operators in which Motorola has investments, our competing operating
companies' revenues and results of operations could be adversely affected.
AFTER THIS OFFERING OR A DIVESTITURE, WE WILL HAVE REDUCED ACCESS TO
MOTOROLA RESOURCES
We have in the past obtained access to significant technical, financial and
other resources from Motorola. For example, our capital needs have been
satisfied by Motorola's corporate-wide cash management policies. We believe this
access has provided us with a competitive advantage. Except as otherwise
provided in the agreements governing our separation from Motorola, we will not
have access to these resources after this offering or a divestiture of our
common stock by Motorola. In addition, we believe that our affiliation with
Motorola has, in many cases, provided us with a competitive advantage in
identifying, qualifying for and participating in international
telecommunications opportunities and attracting partners. Our ability to
identify, qualify for and participate in future opportunities for our existing,
and any new, operating companies may be adversely affected by our separation
from Motorola. For more information regarding our separation and relationship
with Motorola, see "Our Separation from Motorola" and "Our Relationship with
Motorola."
12
<PAGE>
BECAUSE THE HISTORICAL FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS
RELATES TO PERIODS DURING WHICH WE WERE WHOLLY OWNED BY MOTOROLA, THIS
INFORMATION MAY NOT BE INDICATIVE OF HOW WE WOULD HAVE PERFORMED OR HOW WE
WILL PERFORM AS AN INDEPENDENT PUBLIC COMPANY
The historical financial information we have included in this prospectus may
not reflect what our results of operations, financial position and cash flows
would have been had we been a separate, stand-alone entity during the periods
presented or what our results of operations, financial position and cash flows
will be in the future. Therefore:
- we have made assumptions and allocations because Motorola did not account
for us, and we were not operated as, a single stand-alone business for any
of the periods presented; and
- the information does not reflect many significant changes that will occur
in our funding and operations as a result of our separation from Motorola.
We cannot assure you that the assumptions and allocations we have made in
preparing our historical financial statements are accurate or appropriately
reflect our operations during the applicable period as if we had in fact
operated as a stand-alone company. As a result, we cannot assure you that our
historical results of operations are indicative of our future operating or
financial performance. For additional information, see "Selected Financial and
Other Operating Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
THE TRANSITIONAL AND OTHER SERVICES BEING PROVIDED TO US BY MOTOROLA MAY NOT
BE SUFFICIENT TO MEET OUR NEEDS WHICH MAY REQUIRE US TO INCUR ADDITIONAL
COSTS
We currently have, and after the offering and any divestiture by Motorola of
our common stock will continue to have, a variety of contractual relationships
with Motorola and its affiliates, including agreements under which Motorola will
provide various transitional services to us. These services include:
- treasury, accounting and payroll services;
- information systems services; and
- human resources services.
While Motorola is contractually obligated to provide us with these
transitional services for a limited period of time, we cannot assure you that
these services will be provided at the same level, or that we will obtain the
same benefits, as when we were operated as a division of Motorola. Because
Motorola is only required to provide these services for a limited period of
time, we will be required to find a third-party source for these services or
begin to provide them for ourselves. Because these agreements with Motorola were
negotiated in the context of a parent-subsidiary relationship, the prices
charged to us under these agreements may be lower than the prices that may be
charged by unaffiliated third parties for similar services. We cannot assure you
that, after these agreements expire or are terminated, we will be able to
replace these services in a timely manner or on terms and conditions, including
cost, as favorable as those we received from Motorola. Additional expenses
incurred in replacing these services or the failure to replace these services
could adversely affect our results of operations.
TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
OFFICERS OF MOTOROLA
At the time of this offering, two of our four directors will be Motorola
officers. Shortly after the completion of this offering, we intend to increase
the size of our board to nine members, two of whom are expected to be Motorola
officers. Our directors who are also officers of Motorola may have conflicts of
interest in connection with matters potentially or actually involving or
affecting us, including
13
<PAGE>
acquisitions, financings and other corporate opportunities that may be suitable
for both us and Motorola. Although our directors have fiduciary duties to us
under Delaware corporate law and our certificate of incorporation contains
procedures for resolving these potential conflicts, we cannot assure you that
any conflicts will be resolved in our favor. In addition, as majority
stockholder, Motorola could change these procedures or elect additional
designees of Motorola to our board. For more information about the relevant
provisions of our certificate of incorporation, see "Description of Capital
Stock--Material Provisions of the Restated Certificate of Incorporation and
Bylaws."
In addition, some of our directors and a number of our executive officers
own substantial amounts of Motorola's common stock and options to acquire
Motorola stock. This ownership could create, or appear to create, conflicts of
interest when directors and executive officers are faced with decisions that
could have different implications for us and Motorola. For details of this
ownership, see "Management--Stock Ownership of Directors and Executive
Officers."
IF MOTOROLA FAILS TO SUPPLY OUR HANDSET DISTRIBUTION BUSINESS WITH ADEQUATE
QUANTITIES OF HANDSETS, THIS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
In connection with our separation from Motorola, we and our wholly owned
Israeli subsidiary will enter into a handset distribution agreement with
Motorola for the benefit of WDS, our Israeli handset distribution business. This
distribution agreement will contain provisions for handset sales in Israel which
preclude WDS from procuring handsets from other manufacturers. In the event
Motorola has an inadequate supply of handsets or chooses to allocate its supply
to other distributors, WDS may be unable to meet the demands of its customers,
which could have a material adverse effect on our business, financial condition
and results of operations. For example, in the first quarter of 2000, WDS
experienced severe product supply shortages from Motorola, which had a material
adverse effect on its results of operations. For more information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Consolidated Results of Operations."
CHANGES IN TAX LAW MAY PREVENT MOTOROLA FROM PURSUING A DISTRIBUTION WHICH
COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
The Clinton administration, in its fiscal year 2001 budget, has proposed to
change the definition of "control" for purposes of effecting a transaction such
as a distribution of our common stock to Motorola stockholders under
Section 355 of the Internal Revenue Code of 1986. As proposed, the change would
apply to transactions entered into on or after the date of enactment. If this or
any similar proposal were enacted, Motorola may not be able to make a
distribution in a tax efficient manner. If there are adverse tax consequences to
Motorola in connection with a distribution of our common stock to Motorola
stockholders, Motorola may decide not to make a distribution. This could impair
the value of your investment in our company. We cannot predict whether the
Clinton administration's proposal eventually will be enacted by the U.S.
Congress and, if enacted, whether it will be in the form proposed or whether it
will apply to a distribution of Motorola's shares of our stock to its
stockholders.
A DIVESTITURE BY MOTOROLA OF OUR COMMON STOCK COULD HAVE ADVERSE CONTRACTUAL
AND REGULATORY IMPLICATIONS FOR US
Most of the operating company shareholders agreements to which we or our
subsidiaries are a party contain rights of first refusal that may require us to
sell our interests in these operating companies if we undergo a change of
control. Upon a divestiture of our common stock by Motorola, a change of control
may be deemed to occur under the terms of these shareholders agreements. These
rights could allow the other shareholders in these operating companies to
purchase our equity interests at fair market value upon completion of a
distribution of our common stock to Motorola stockholders or any other form of
divestiture by Motorola. Although we have received waivers of these rights of
first
14
<PAGE>
refusal from the other shareholders of most of our operating companies in
connection with a distribution of our common stock to Motorola stockholders,
these waivers may not apply to other forms of a divestiture. In addition, we
have not received waivers for our operating companies in Argentina, Hong Kong
and Uruguay. If we are unable to obtain these waivers, it is possible that the
other shareholders in those operating companies could exercise their rights of
first refusal to purchase our interests in those operating companies at fair
market value upon a distribution. If Motorola elects to effect a divestiture
that is not a distribution, we may be required to obtain new waivers or be
subject to the exercise of the rights of first refusal from most of the other
shareholders in our operating companies. In addition, in the event we are unable
to amend the organizational documents of Tricom, our operating company in the
Dominican Republic, prior to a distribution or other form of divestiture, we
could lose the enhanced voting rights of our Tricom shares and the minority
protections under the Tricom shareholders agreement.
Motorola's contribution of Pelephone, our Israeli operating company, to us,
this offering and a distribution of our common stock to Motorola stockholders or
any other form of divestiture may violate provisions of the license under which
Pelephone operates. We are currently seeking the approval of the Israeli
government of the contribution, this offering and a distribution. In addition,
the license under which our operating company in Brazil conducts business
contains restrictions on Motorola's ability to divest our common stock through
means other than a distribution without governmental approval.
RISK FACTORS RELATING TO US AND OUR INDUSTRY
OUR OPERATING COMPANIES FACE SUBSTANTIAL COMPETITION
As a result of increased competition, the prices for wireless services have
significantly declined over the past few years. We expect that the prices that
our operating companies charge for their products and services will continue to
decline over the next few years as competition intensifies in the markets in
which they operate. Because of competition for subscribers, many of our
operating companies, in order to gain or maintain market share and grow their
subscriber bases, offer significant handset subsidies and match their
competitors' rate discounts. In some markets, including Hong Kong, competition
for subscribers has resulted in our operating companies offering free handsets
to remain competitive. In other markets, such as Israel, our operating companies
use CDMA technology, which requires relatively expensive handsets compared to
the GSM handsets of their competitors. The higher cost of these handsets
requires our operating companies to subsidize a larger portion of handset costs
in order to offer competitive prices, which may adversely affect their
profitability or put them at a competitive disadvantage.
In addition, the wireless communications industry has experienced a
significant amount of consolidation. Multinational communications companies have
been entering into mergers and joint ventures with each other and with smaller,
regional wireless service providers. We believe that this consolidation and
expansion is creating large, well capitalized competitors with substantial
financial, technical, marketing and other resources that will compete against
our operating companies. Many of these competitors will compete with us for the
acquisition of new licenses. As a result, licenses in many markets have become
more expensive. Also, these competitors may be able to offer services more
quickly and economically than our operating companies, which could have a
material adverse effect on our operating companies' market share, revenues and
results of operations.
We also believe our operating companies will continue to face competition
from new technologies and services that will be introduced in the future.
Although our operating companies intend to employ the newest technologies, there
will be a continuing competitive threat from even newer, more advanced
technologies that may render older technologies less competitive and require our
operating companies to invest significant amounts of capital in these new
technologies. We cannot assure you that we or our operating companies will be
able to compete successfully or that new technologies and products that
15
<PAGE>
are more commercially effective than our operating companies' products and
services will not be offered by their competitors.
THE FINANCIAL RESULTS OF OUR OPERATING COMPANIES MAY BE DIFFICULT TO OBTAIN
ON A TIMELY BASIS
We do not control most of our operating companies, and therefore we may have
difficulty obtaining audited financial results from them in a timely manner, or
at all. In addition, financial data obtained from our operating companies may
not be prepared on a comparable basis, as a result of local practices and
peculiarities unique to a particular operating company or other reasons. The
failure to obtain and disclose financial information in a timely manner could
subject us to penalties under federal securities laws and cause a default under
financing arrangements and other agreements we may enter into from time to time,
including the IPO and Distribution Agreement with Motorola. As a result, our
ability to access capital markets may be limited, which would have a material
adverse impact on us and the market price of our common stock.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL AND LIQUIDITY REQUIREMENTS WHICH
COULD IMPAIR OUR ABILITY TO INCREASE OUR REVENUES AND PROFITABILITY
In the past, our capital needs have been satisfied by Motorola's
corporate-wide cash management policies. However, Motorola has informed us that
it no longer intends to provide additional funds to finance our operations or to
guarantee new borrowings to generate such funds. After this offering, our
primary source of cash, other than the proceeds of this offering, to fund our
operations, fund our operating companies and make additional investments, will
be from future issuances of equity or debt securities, sales of our ownership
interests in our operating companies and dividends provided to us by our
operating companies. In addition, some of our operating companies may require
additional financing to meet their capital expenditure, working capital and debt
service obligations. For example, in Brazil, current funding obligations of
Global Telecom exceed funding commitments and available capital in 2000. We have
not historically received, and do not currently expect to receive in the near
future, significant dividends from our operating companies. We expect that our
credit rating after this offering will be lower than Motorola's and thus, we do
not believe we will be able to obtain financing with interest rates and terms as
favorable as those received by Motorola. As a result, we expect that our cost of
capital in the future will be higher than that reflected in our historical
financial statements. Additionally, the sale of our interests in our existing
operating companies is subject to contractual and other restrictions and then
existing market conditions. As of result of the foregoing, we may be unable to
meet future capital and liquidity requirements, which may limit our ability to
implement our business strategy and grow our business.
BECAUSE WE ARE UNABLE TO CONTROL THE ACTIVITIES OF MANY OF OUR OPERATING
COMPANIES, WE DEPEND ON THE COOPERATION OF THOSE OPERATING COMPANIES AND
THEIR OTHER SHAREHOLDERS, SOME OF WHOM COMPETE WITH US IN OTHER MARKETS
We do not own a majority interest in most of our operating companies.
Although we are actively involved in the management of their businesses, we are
precluded in many cases from independently controlling them. Moreover, many of
the shareholders agreements to which we are a party contain significant blocking
rights under which a minority shareholder may prohibit an operating company from
engaging in activities that are approved by a majority of its shareholders. As a
result, we are generally unable to cause our operating companies to implement
strategies that we may favor or to cause dividends or other distributions to be
made without the consent of the other shareholders. In addition, the refusal or
inability of other shareholders to approve borrowings, to guarantee third-party
financing, or to fund their share of capital contributions could result in a
deadlock or could adversely affect the viability of an operating company if we
do not contribute to it on a disproportionate basis. Our
16
<PAGE>
partners in some of our operating companies are investors in competitors of our
operating companies in other markets.
As a result, we cannot assure you that all of our relations with the other
shareholders in our operating companies will be harmonious and successful.
Disagreements with them could impede the execution of our strategy and work to
the favor of our operating companies' competitors which could adversely affect
our operating companies' results of operations. For more information, see "Our
Relationships with Our Operating Companies."
PROVISIONS IN THE ORGANIZATIONAL DOCUMENTS, THE SHAREHOLDERS AND FINANCING
AGREEMENTS OF MANY OF OUR OPERATING COMPANIES AND IN AGREEMENTS RELATING TO
OUR SEPARATION FROM MOTOROLA MAY IMPAIR OUR ABILITY TO FREELY TRANSFER OUR
INTERESTS IN OUR OPERATING COMPANIES
The organizational documents and shareholders and financing agreements of
many of our operating companies include limitations on our ability to transfer
our equity interests in those operating companies. These limitations include
rights of first refusal of other shareholders on any transfer, which may impede
the timely sale of such interests and impact amounts we may receive upon a sale.
In addition, our ability to dispose of interests in our operating companies
could be restricted by:
- various provisions in the agreements relating to our separation from
Motorola;
- terms and conditions of our operating companies' licenses and local
government regulations; and
- the significant size of our equity interests in some of our operating
companies and, in many cases, the absence of public or private markets for
the equity of our operating companies.
Although our operating companies seek to obtain financing on a nonrecourse
basis to their shareholders, we and our other shareholders have been, and in the
future may be, asked to provide guarantees, pledge our interests or enter into
project completion agreements to secure borrowings by our operating companies.
For example, we have pledged approximately 63% of our interests in HTCL, our
Hong Kong operating company, to Commerz (East Asia) Limited in relation to
financing agreements. Creditors could prohibit a sale of our interest or impose
conditions on such a sale that could result in less favorable terms for us. In
addition, many of our shareholders agreements contain provisions which may limit
our ability to transfer interests in our operating companies to competitors of
those operating companies or competitors of the other shareholders of those
operating companies, or prohibit us from competing against those operating
companies in a similar venture subsequent to a sale of our interest. As a
result, there can be no assurance that we will be able to realize the economic
benefit of our ownership interests in those operating companies through their
sale or otherwise. For more information, see "Our Relationships with Our
Operating Companies."
THE PRICES REALIZED ON THE SALES OF OUR INTERESTS IN OUR OPERATING COMPANIES
MAY BE LESS THAN OUR INITIAL INVESTMENT
Our management regularly evaluates our strategic investments to ensure that
each of them supports our overall business strategy. In the event our management
determines that any investment is no longer consistent with our business
objectives, we may seek to sell our ownership interest in that operating
company. In the event we are able to complete a sale of our interest in an
operating company, the price realized on any sale could be less than our overall
investment. In addition, there may be substantial restrictions on our ability to
repatriate amounts realized upon the sale of investments in our operating
companies, including taxes on amounts we seek to repatriate, as well as
substantial taxes imposed on us in such a sale.
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WE AND SOME OF OUR OPERATING COMPANIES HAVE INCURRED OPERATING LOSSES AND
MAY CONTINUE TO DO SO FOR THE FORESEEABLE FUTURE
We incurred net losses of approximately $43.0 million for the year ended
December 31, 1999 and $7.7 million for the three months ended March 31, 2000.
Some of our operating companies, such as Global Telecom in Brazil are, and any
new company we form or invest in will likely be, in the early stages of
development and may incur losses for some time. Even successful wireless
communications companies typically generate significant losses while they grow.
As a result, the income, if any, generated by some of our operating companies
may be offset by the losses of other operating companies.
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS, MANY OF WHICH ARE LOCATED IN DEVELOPING COUNTRIES
All of our operating companies, as well as WDS, are located outside the
United States. International operations, particularly in developing countries,
are subject to a number of risks and uncertainties, including:
- difficulties and costs associated with complying with a wide variety of
complex laws, treaties and regulations, including the collection of
receivables through foreign legal systems;
- unexpected changes in regulatory environments;
- longer payment cycles;
- tax rates that may exceed those of the United States and earnings that may
be subject to withholding requirements or the imposition of tariffs,
exchange controls or other restrictions;
- political and economic instability;
- nationalization of properties by foreign governments; and
- war and civil disturbance.
As we continue to expand our business globally, our success will be
dependent, in part, on our ability to anticipate and effectively manage these
and other risks that our operating companies may face. Any of these factors
could impair our ability to expand into new markets and could prevent us from
increasing our revenues and our profitability and meeting our growth objectives.
WE MAY HAVE DIFFICULTY ENFORCING AGREEMENTS IN FOREIGN COUNTRIES
A number of the agreements we enter into with the other shareholders in our
operating companies are governed by the laws of, and are subject to dispute
resolution in the courts of or through arbitration proceedings in, the country
or region in which the operation is located or elsewhere outside the United
States. We cannot accurately predict whether such forums will provide us with an
effective and efficient means of resolving disputes that may arise in the
future. Even if we are able to obtain a satisfactory decision through
arbitration or a court proceeding, we could have difficulty enforcing any award
or judgment on a timely basis. Our ability to obtain or enforce relief is
therefore uncertain.
OUR OPERATING COMPANIES MAY HAVE TO PAY IMPORT DUTIES ON NETWORK EQUIPMENT
AND HANDSETS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS
Our operating companies are highly dependent upon the successful and
cost-efficient importation of infrastructure equipment and handsets from North
America, Europe and Asia. In the countries in which our operating companies
operate, network equipment and handsets may be subject to significant import
duties and other taxes. For example, in Brazil such duties and taxes are as high
as 42%.
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Significant import duties and other taxes imposed on our operating companies
could, in the aggregate, have a material adverse effect on their results of
operations.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES AND SHORTAGES IN FOREIGN CURRENCY
RESERVES COULD DIMINISH OUR OPERATING COMPANIES' REVENUES AND DEVALUE OUR
FOREIGN INVESTMENTS
Our reporting currency is the U.S. dollar. However, our operating companies
generally transact their day-to-day business in local currencies. A significant
weakening of the currencies in which our operating companies generate revenue
against the U.S. dollar may adversely impact the reported results of operations
of those operating companies. This weakening could also have a negative effect
on an operating company's ability to meet its obligations if it has significant
costs or obligations, including network infrastructure costs, other capital
expenditures, indebtedness or liabilities, that are not denominated in its local
currency.
Many of our operating companies, including MobiNil in Egypt, Mobilink in
Pakistan and Global Telecom in Brazil, are subject to tariff regulation by
government authorities and may not be permitted to increase tariffs in response
to a currency devaluation. Even if an operating company is permitted to increase
tariffs, devaluations in its local currency could affect the ability of its
subscribers to absorb those increases. In addition, many foreign economies have
experienced shortages in foreign currency reserves and restrictions on the
ability to expatriate local earnings and convert local currencies into U.S.
dollars. To the extent that any of our operating companies seek to make a
dividend or other distribution to us, or to the extent that we seek to liquidate
an investment in an operating company and repatriate monies from a relevant
country, these foreign exchange controls or other restrictions may effectively
prevent the transfer of funds to us or the exchange of local currency for U.S.
dollars. As a result, foreign exchange controls could also restrict the ability
of our operating companies to pay any debt that is not denominated in local
currency. These currency restrictions could limit our ability to deploy capital
effectively by using the excess cash flows of operating companies generating
excess cash to fund the capital needs of other operating companies.
Currency devaluations in one country may have adverse effects in another
country. For example, in late 1994 and 1995, several Latin American countries
were adversely affected by the devaluation of the Mexican peso following that
country's presidential elections. A new presidential term will begin in Mexico
in December 2000. The Asian and Russian economic crises of 1998 also had an
adverse effect on the financial and foreign exchange markets of other countries,
leading to increased pressures on local interest rates and currencies, including
those of Argentina and Brazil. These pressures, in turn, have inhibited the
ability of companies operating in some markets to obtain necessary financing and
increase prices for their services. Any devaluation of local currencies in the
countries where our operating companies operate, or restrictions on the
expatriation of earnings or capital from these countries, could have a material
adverse effect on their results of operations and financial condition.
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OUR OPERATING COMPANIES MAY FACE SIGNIFICANT DISADVANTAGES WHEN COMPETING
AGAINST GOVERNMENT-OWNED OR GOVERNMENT-AFFILIATED TELECOMMUNICATIONS
COMPANIES AND WIRELINE MONOPOLY OPERATORS
In markets where our operating companies compete against a government-owned
or government-affiliated telecommunications company, those operating companies
may be at a competitive disadvantage. Government-owned or government-affiliated
competitors may have:
- relationships with national regulatory authorities;
- control over connections to local telephone lines; and
- the ability to subsidize competitive services with revenues generated from
services they provide on a monopoly basis.
To the extent government-owned or government-affiliated telecommunications
companies are privatized or join with an established foreign telecommunications
company, competition from these companies may increase due to infusions of
capital and managerial and technical talent. In some cases, these companies may
also continue to enjoy the legacy of their pre-privatization privileges. Our
operating companies may encounter obstacles and setbacks if local governments
adopt policies favoring these competitors or otherwise afford them preferential
treatment.
Our operating companies compete indirectly against wireline companies,
nearly all of which are wireline monopolies in the markets in which they
operate. In some of these markets, the wireline provider is also a wireless
operator, such as Telmex in Mexico, competing directly against our operating
companies. Often, the monopoly wireline provider enjoys competitive advantages
similar to the advantages described above. As a result, our operating companies
may be at a competitive disadvantage to monopoly wireline providers who, because
of their affiliations, offer a cheaper and broader range of services,
particularly where our operating companies seek to offer new telecommunications
services, including domestic and international long distance service.
OUR OPERATING COMPANIES MAY NOT SUCCESSFULLY DEVELOP NEW COMMUNICATIONS
SERVICES ON A TIMELY BASIS OR AT ALL, WHICH COULD IMPEDE THEIR GROWTH
STRATEGIES AND CAUSE THE LOSS OF CAPITAL INVESTMENTS
An element of our operating companies' strategy is to provide new services,
including Internet services, wireless data and data network services. These
initiatives could fail for any number of reasons, including insufficient
capital, limited technical and managerial resources or competitive factors. In
addition, the ability to introduce new services depends on whether and on what
terms the new services are permitted by local laws and regulations. Even if
implemented, we cannot assure you that these services will be profitable. If
they are not, our operating companies' growth strategies could be impaired.
Furthermore, demand for some of these new communications services is
unproven, and we cannot guarantee that demand for these services will ever
develop. Our operating companies may incur significant rollout and deployment
costs to develop services for which there is less demand than they anticipated,
and the value of their investments in these new services could be lost. In
addition, even if there is significant demand for these services, it may be at
lower price levels than are anticipated and which do not allow an adequate
return on investment.
PROVIDING ADDITIONAL SERVICES MAY REQUIRE ADDITIONAL SPECTRUM, WHICH MAY NOT
BE AVAILABLE TO US AT A REASONABLE COST OR AT ALL
Our operating companies plan to introduce new wireless communications
services. However, many of them may have insufficient radio frequency spectrum
to provide these services and even where they do have spectrum capable of
carrying additional types of wireless communications services, they may not have
sufficient capacity due to existing traffic. Moreover, the cost of new licenses
is increasing in
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many markets, while availability of spectrum is limited. For example, the recent
auction price for third generation, or 3G, licenses, which allow for
significantly greater transmission capacity, for the United Kingdom was reported
to be ten times higher than the British government's expectations. Furthermore,
our operating companies may be prevented from bidding for additional spectrum
due to relationships with other shareholders and restrictions contained in the
shareholders agreements to which we or our subsidiaries are a party. For more
information, see "Our Relationships with Our Operating Companies." As a result,
we cannot assure you that our operating companies will be able to acquire
additional spectrum at a reasonable cost, or at all.
OUR OPERATING COMPANIES MAY NOT BE ABLE TO MAINTAIN LICENSES THAT THEY NEED
TO OPERATE THEIR BUSINESSES
The ability of our operating companies to retain and exploit their existing
telecommunications licenses and to renew licenses when they expire is essential
to our operations and profitability. Some of our operating companies' licenses
are due to expire in the near future. For example, two of the three licenses
under which HTCL provides services are scheduled to expire in 2002. Most of our
operating companies' wireless communications licenses have fixed terms and may
not be automatically renewed. In cases where license terms are fixed, there can
be no assurance that licenses will be renewed, or if renewed, that renewal will
be on acceptable economic or other terms.
WE AND MANY OF OUR OPERATING COMPANIES MAY GROW RAPIDLY AND MAY BE UNABLE TO
MANAGE
THAT GROWTH
We expect that we and our operating companies will grow rapidly. For
example, Movicom Argentina has recently been awarded a license to operate
wireless networks in the interior of that country. In order to capitalize on the
introduction of advanced data and long distance services in this market, Movicom
Argentina will be required to deploy a significant additional amount of capital
resources. Rapid growth often places considerable operational, managerial and
financial strain on a business. To successfully manage rapid growth, each of our
operating companies must accurately project their rate of growth and:
- rapidly improve, upgrade and expand their business infrastructure;
- deliver products and services on a timely basis;
- maintain levels of service expected by customers;
- recruit, hire and train additional qualified employees; and
- maintain adequate levels of liquidity;
Any failure by our operating companies to successfully manage growth could
result in cost overruns, inefficiencies, missed market opportunities, poor
subscriber relations and generally poor financial results.
WE MAY NOT BE SUCCESSFUL IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE
ADDITIONAL QUALIFIED PERSONNEL
Our future success depends on our ability to attract and retain highly
skilled professionals. The market for these employees is very competitive. If we
cannot continue to attract and retain quality personnel, our ability to compete,
grow our business and execute our operating strategies will be severely limited.
We do not presently have employment agreements with any of our key management or
other personnel, and we cannot assure you as to how long they will remain with
our organization. We also do not presently have any key person life insurance
policies for any of our personnel.
In addition, the success of our operating companies depends on their ability
to attract and retain managers, engineers and other highly skilled
professionals. The market for these employees varies by region, but in general
is very competitive. We cannot assure you that our operating companies will be
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able to attract and retain these personnel. If any of our operating companies
are unable to do so, their financial performance could suffer. For example, in
connection with the pending Bajacel acquisition, the president of our northern
Mexico operating companies is expected to step down.
IF OUR OPERATING COMPANIES CANNOT CONTINUE TO SUCCESSFULLY BUILD THEIR
NETWORKS, OR BUILD THEM
IN A TIMELY AND COST-EFFECTIVE BASIS, THEIR COMPETITIVE POSITIONS, LICENSES
AND REVENUES COULD BE
ADVERSELY AFFECTED
If our operating companies cannot satisfactorily complete the planned
build-out of their wireless networks, or do so in a timely manner, they could
lose potential and current customers to competitors, and their revenues could
consequently suffer. In addition, many of their licenses contain network
build-out and operating requirements as a condition to their retention. As our
operating companies continue to develop their networks, they must continue to:
- obtain additional cell and switch sites;
- obtain additional rights of way, government approvals and permits for
network construction;
- complete radio frequency design and updates;
- design and install additional switching systems, radio systems,
interconnection facilities and operating support systems;
- expand and maintain customer care, network management, billing and
management and administrative systems; and
- obtain additional radio spectrum.
We cannot guarantee that our operating companies will be able to develop and
build-out their networks as planned, as many elements of the network build-out
are not under their control. Our operating companies' ability to develop their
networks is also affected by other factors, including the availability of
capital, relations with capable suppliers and vendors, political or regulatory
factors and foreign currency fluctuations.
REGULATION OF THE WIRELESS INDUSTRY MAY RESULT IN THE LOSS OF OUR OPERATING
COMPANIES' LICENSES, CONCESSIONS OR MARKETS OR INCREASES IN COMPETITION,
COMPLIANCE COSTS OR CAPITAL EXPENDITURES FOR NETWORK DEVELOPMENTS
The ownership, construction, operation and interconnection arrangements of
wireless communications systems and the grant, maintenance and renewal of
applicable wireless licenses in each of the countries where our operating
companies offer services are regulated by governmental authorities. In some
cases, regulatory authorities also operate or control the operations of actual
or potential competitors. Changes in the current regulatory environment of, or
judicial intervention in, these markets could have a material adverse effect on
our operating companies. In addition, the regulatory framework in some of these
countries is relatively new and, therefore, the enforcement and interpretation
of regulations, the assessment of compliance and the degree of flexibility of
regulatory authorities are uncertain. A failure by one or more of our operating
companies to comply with applicable governmental regulations could result in the
loss of licenses or the assessment of penalties or fines or otherwise could have
a material adverse effect on our operating companies' results of operations. For
a more detailed description of the regulatory environment in each of the
countries in which our operating companies do business, see "Regulation."
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OUR OPERATING COMPANIES RELY ON A LIMITED NUMBER OF KEY SUPPLIERS AND
VENDORS FOR TIMELY SUPPLY OF EQUIPMENT AND SERVICES
Our operating companies depend on a limited number of suppliers and vendors
for handsets and network infrastructure. If these suppliers experience
interruptions or other problems delivering these products on a timely basis, the
business and results of operations of our operating companies could be adversely
affected. Our operating companies rely primarily on Motorola, Nokia, Ericsson
and Samsung to provide on a timely basis adequate quantities of wireless
handsets that feature the latest technological innovations favored by their
customers. These suppliers also supply handsets to the competitors of our
operating companies. To the extent our competitors have better relationships
with these suppliers, or are otherwise afforded preferential treatment, they may
obtain larger quantities of newer, more desirable handsets more quickly and at
better prices than our operating companies. Other than as provided in the
distribution agreement with WDS, Motorola is under no obligation to provide
handsets to us or our operating companies.
In addition, the initial choice of a network infrastructure supplier by our
operating companies can, where proprietary technology of the supplier is an
integral component of the network, cause the operating companies to be
effectively locked into one or a few suppliers for key network components.
Except in the case of GSM networks, substituting network infrastructure
suppliers could require significant expenditures. As a result, our operating
companies have become reliant upon a limited number of network equipment
manufacturers, including Motorola, Nokia, Ericsson, Alcatel, Nortel and Lucent.
We cannot assure you in the event it becomes necessary to seek alternative
suppliers and vendors that our operating companies would be able to obtain
satisfactory replacement suppliers or vendors on economically attractive terms,
on a timely basis, or at all. Motorola is under no obligation to provide
infrastructure equipment to us or our operating companies on a preferential
basis, or at all.
COMPETITION CAN INCREASE CUSTOMER CHURN, WHICH CAN IN TURN REDUCE REVENUES
AND PROFITS AND INCREASE OUR OPERATING COMPANIES' MARKETING, DISTRIBUTION
AND CUSTOMER ACQUISITION COSTS
Our operating companies incur significant costs when obtaining new
subscribers. The wireless industry, however, is characterized by a high rate of
subscriber cancellation of services, which is commonly referred to in the
industry as churn. Churn can be the result of several competitive factors,
including price, service offerings, network coverage and reliability issues and
customer care concerns. Churn is driven higher by additional competition, as new
market entrants offer attractive incentives to attract new subscribers.
Moreover, churn may be more prevalent in markets, like Hong Kong, that offer
number portability, which allows a subscriber to retain his or her cellular
telephone number when switching operators. Attempting to reduce churn increases
costs as incentives are offered to long-term subscribers to remain as customers.
Attempting to replace lost subscribers increases the marketing, distribution and
customer acquisition costs of our operating companies. As a result, churn may
reduce the revenues and increase the costs of our operating companies.
OUR OPERATING COMPANIES MAY BE UNABLE TO OBTAIN OR MAINTAIN FAVORABLE
ROAMING ARRANGEMENTS WITH ACCEPTABLE WIRELESS PROVIDERS WHICH COULD RESULT
IN A LOSS OF SUBSCRIBERS AND A LOSS OF ROAMING REVENUES
Roaming is an important feature to most of our operating companies'
subscribers. Subscribers can only access another domestic or international
provider's wireless system if that other provider allows them to roam on its
network. Our operating companies rely on agreements with other wireless
providers to provide roaming capability for their subscribers. Some of our
operating companies' competitors may have more extensive coverage through their
own networks and be less dependent on roaming arrangements. Furthermore, our
operating companies' competitors may be able to obtain roaming rates that are
lower than rates obtained by our operating companies, giving them a pricing
advantage. In addition, the quality of service when roaming may be inferior to
the quality of service that our operating companies provide, and our operating
companies' customers may not be able to use
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the advanced features that they enjoy when making calls on their home networks.
Any perceived or actual differences in the quality of service, extent of roaming
capability or cost of roaming of our operating companies as compared to their
competitors may result in a loss of subscribers for our operating companies,
which could adversely affect their results of operations.
Our operating companies are also dependent upon roaming agreements with
other providers as a source of revenues when the other providers' subscribers
roam in our operating companies' territories. If these roaming agreements were
to terminate and not be renewed, roaming revenues of those operating companies
would decrease, which could adversely affect their financial condition and
results of operations.
OUR OPERATING COMPANIES MAY NOT BE ABLE TO INTERCONNECT WITH THEIR PRIMARY
COMPETITORS AND LOCAL WIRELINE PROVIDERS
Our operating companies' ability to provide commercially viable wireless
communications services depends upon their ability to interconnect with the
communications networks of domestic and wireless and wireline operators in order
to complete calls between their subscribers and parties on wireline or other
wireless networks. The failure of these other communications providers to
provide reliable interconnections to our operating companies on a consistent
basis, or at similar costs as incurred by their competitors, could have a
material adverse effect on our operating companies' financial condition and
results of operations.
OUR OPERATING COMPANIES MAY NOT BE ABLE TO COLLECT AMOUNTS DUE FROM OTHER
COMMUNICATIONS CARRIERS
In many of the markets in which our operating companies offer services, the
calling party pays for the airtime on a call to a wireless number. In these
markets, if a caller places a call to one of our operating companies' wireless
customers, the caller's provider collects the charge for the wireless airtime
and pays our operating company for that airtime. From time to time, some of our
operating companies have encountered difficulties collecting these amounts. If
our operating companies cannot collect amounts due on a timely basis, or at all,
they could incur material revenue losses. Difficulties in collecting these
amounts could also increase administrative costs.
OUR OPERATING COMPANIES MAY INCUR SIGNIFICANT COSTS FROM WIRELESS FRAUD
Our operating companies may incur costs and revenue losses associated with
the unauthorized use of their wireless networks, including administrative and
capital costs associated with the unpaid use of their networks as well as with
detecting, monitoring and reducing the incidence of fraud. Fraud also impacts
interconnection costs, capacity costs, administrative costs and payments to
other carriers for unbillable fraudulent roaming charges.
Cloning, which is a form of wireless fraud, involves the use of scanners and
other electronic devices to illegally obtain telephone numbers and electronic
serial numbers during cellular transmission on analog networks. These stolen
number combinations can be programmed into a cellular phone, which is then used
to obtain unauthorized access to wireless networks. Wireless fraud occurs when a
handset programmed with a number stolen from one of our operating companies'
subscribers is used to place fraudulent calls, resulting in usage charges that
cannot be collected from the subscriber. Although our operating companies
attempt to combat this problem through the deployment of anti-fraud technologies
and other measures, we cannot guarantee that these efforts will be effective or
that fraud will not result in material costs for our operating companies in the
future. For example, the NAMPS network of Pelephone incurred approximately
$40 million in operating costs in connection with widespread cloning fraud in
1999. As a result, Pelephone expended approximately $15 million in
1999 upgrading its NAMPS network and installing authentication technology in an
attempt to reduce cloning in the future.
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IF THE ISRAELI MINISTRY OF COMMUNICATIONS IMPOSES TARIFF RESTRICTIONS ON
PELEPHONE, OUR OPERATING COMPANY IN ISRAEL, OUR RESULTS OF OPERATIONS COULD
BE MATERIALLY ADVERSELY AFFECTED
Pelephone is permitted to charge lower outgoing airtime charges for calls
placed by its subscribers and higher incoming airtime charges for calls
originating on other networks, which charge is paid by the caller. The Israeli
Ministry of Communications has proposed regulations that would require all
cellular operating companies in Israel to charge a specified equal rate for
incoming calls. If enacted, these regulations will require Pelephone to make the
largest reduction in tariff rates for incoming calls, compared to other cellular
operators in Israel. Pelephone's incoming airtime tariff revenues will be
reduced significantly, which could have a material adverse affect on its
business, financial condition or results of operations. Pelephone contributed
28.4% of our proportionate operating company revenues in 1999.
WE ARE SUBJECT TO THE FOREIGN CORRUPT PRACTICES ACT, AND COMPETE AGAINST
COMPANIES THAT ARE NOT SUBJECT TO IT, WHICH MAY GIVE THEM A COMPETITIVE
ADVANTAGE. IN ADDITION, WE MAY FACE LIABILITY FOR THE ACTS OF OUR OPERATING
COMPANIES AND THE OTHER SHAREHOLDERS IN THOSE OPERATING COMPANIES, OVER
WHICH WE MAY HAVE LITTLE OR NO CONTROL
As a U.S. company, we are subject to the Foreign Corrupt Practices Act, or
the FCPA, which generally prohibits U.S. companies and their intermediaries from
making improper payments to foreign officials for the purpose of obtaining or
keeping business. Many of the shareholders agreements related to our operating
companies contain provisions which require the parties to those agreements to
refrain from, and prevent our operating companies from, engaging in activities
that could violate the FCPA, including improper payments to government
officials. Some of our competitors and our operating companies' competitors,
however, are not subject to the FCPA. To the extent these competitors can use
improper payments to help secure licenses, concessions, preferential treatment
or other advantages, our ability to compete may suffer.
Although we will make every effort to comply with the FCPA, there can be no
assurance that the precautions we employ will protect us against liability under
the FCPA, particularly as a result of actions which may have been taken in the
past or which may be taken in the future by agents and other intermediaries for
whom we may have exposure under the FCPA. Although the application of the law in
this context is uncertain, it is possible that we may be held responsible for
actions taken by our operating companies or by other shareholders in our
operating companies even though we may have little or no ability to control
them. Any determination that we have violated the FCPA can result in substantial
fines and penalties and could have a material adverse effect on us.
CONCERNS THAT THE USE OF WIRELESS TELEPHONES MAY POSE HEALTH AND SAFETY
RISKS MAY DISCOURAGE THE USE OF OUR OPERATING COMPANIES' WIRELESS SERVICES
Media reports have suggested that, and studies have been and are currently
being undertaken to determine whether, radio frequency emissions from wireless
communications devices may be linked with health risks, including cancer, and
may interfere with various electronic medical devices, including hearing aids
and pacemakers. Other media reports have suggested that wireless communications
devices may pose fire hazards under some circumstances. These and other actual
or perceived risks from wireless communications devices could materially
adversely affect our operating companies' results of operations and financial
condition through litigation, a reduced subscriber growth rate, a reduction in
subscribers, reduced network usage per subscriber or through reduced financing
available to the wireless communications industry as a whole.
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IF WE ARE DEEMED TO BE AN INVESTMENT COMPANY, WE WOULD BE SUBJECT TO
PROVISIONS OF THE INVESTMENT COMPANY ACT WHICH COULD HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS
A significant portion of our assets consist of equity interests in our
operating companies that are not majority owned. Significant investments in
entities that are not majority owned by us could subject us to the registration
requirements of the Investment Company Act of 1940, as amended, and the related
rules and regulations. The Investment Company Act requires registration of, and
imposes substantial operating restrictions on, companies that engage, or propose
to engage, primarily in the business of investing, reinvesting, owning, holding,
or trading in securities, or that fail certain statistical tests concerning a
company's asset composition and sources of income.
Because our existing operating companies are engaged in telecommunications
business operations and because we actively participate in the management of our
operating companies, consistent with applicable laws, contractual arrangements
and other requirements, and we intend the same to be true of all future
operating companies, we believe that we are primarily engaged in a business
other than investing, reinvesting, owning, holding, or trading in securities. We
intend to monitor and adjust the nature of our interests in, and involvement
with, our operating companies in order to avoid becoming subject to the
registration requirements of the Investment Company Act. In order to clarify our
status under the Investment Company Act, we have filed a request for an
exemptive order from the SEC finding and declaring us to be exempt from the
provisions of the Investment Company Act. However, even if we receive that
order, there can be no assurance that our business activities will not
ultimately subject us to regulation under the Investment Company Act. If we were
required to register as an investment company under the Investment Company Act,
we would become subject to regulations that would severely limit our ability to
pursue our operating strategies and have a material adverse effect on our
business.
RISKS RELATING TO THE OFFERING AND OUR COMMON STOCK
WE ARE SUBJECT TO VARIOUS PROVISIONS THAT COULD DISCOURAGE A CHANGE OF
CONTROL OF OUR COMPANY
We are subject to a variety of restrictions that could delay or prevent a
change in control of our company that stockholders may consider favorable. These
include:
- provisions in our certificate of incorporation and bylaws that may make
the acquisition of control of our company more difficult, including some
relating to the nomination, election and removal of directors and
limitations on actions by our stockholders;
- rights of first refusal contained in shareholders agreements relating to
our operating companies may be triggered in the event we are acquired by a
third party;
- change of control provisions in our operating companies' credit agreements
which could be triggered by a sale to a third party;
- covenants contained in the IPO and Distribution Agreement that are
designed to preserve the tax-free status of a distribution prohibit an
acquisition of a controlling interest in us within two years following a
distribution of our common stock to Motorola stockholders without
triggering substantial indemnification obligations on our part; and
- provisions in Delaware corporate law and our certificate of incorporation
which will impose some restrictions on mergers and other business
combinations between us and any holder of 15% or more of our outstanding
common stock after Motorola reduces its ownership of our common stock.
Each of the above restrictions could reduce the market price of our common
stock. For a description of these provisions and agreements, see "Our
Relationship with Motorola--IPO and Distribution Agreement," "Our Relationships
with Our Operating Companies," "Description of Capital Stock--
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Material Provisions of the Restated Certificate of Incorporation and Bylaws" and
"Description of Capital Stock--Section 203 of the Delaware General Corporation
Law."
THE MARKET PRICE OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED BY SALES OF
SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC MARKETS
Sales of substantial amounts of our common stock in the public market, or
the perception that these sales might occur, could depress the price of our
common stock. In addition to the adverse effect a price decline could have on
holders of our common stock, that decline would likely impede our ability to
raise capital through the issuance of additional shares of our common stock or
other equity securities and lessen our ability to use our stock as currency in
future acquisitions. In addition, Motorola has the sole discretion to determine
the timing, structure and all terms of a distribution or other form of
divestiture, each of which could affect the trading of our common stock.
Furthermore, Motorola and its transferees have the right to require us to
register their shares of our common stock under the U.S. federal securities laws
for sale into the public market. We cannot predict whether substantial amounts
of our common stock will be sold in the open market in anticipation of, or
following, a divestiture of our common stock by Motorola. For a description of
these registration rights, see "Our Relationship with Motorola--Registration
Rights Agreement."
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE OFFERING AND YOU
COULD LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT
The market price of our common stock could be subject to significant
fluctuations in response to our operating results, changes in earnings estimated
by securities analysts or our ability to meet those estimates, publicity
regarding the telecommunications industry in general or any of our operating
companies and other factors. In particular, the risks described in this section,
including the possibility of substantial sales of our common stock and the
timing, structure and terms of Motorola's divestiture of its shares of our
common stock, could have a significant and adverse impact on the market price of
our common stock. In addition, the stock market in general, and the market for
the stock of telecommunications companies in particular, has experienced extreme
volatility that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
trading price of our common stock. In particular, we cannot assure you that you
will be able to resell your shares at or above the initial public offering
price, which will be determined through negotiations among us, Motorola and the
underwriters. You should read the "Underwriting" section of this prospectus for
a more complete discussion of the factors that we, Motorola and the underwriters
will consider in determining the initial public offering price.
We will apply for quotation on the Nasdaq National Market. Approval for
quotation on Nasdaq does not, however, guarantee that a trading market for our
common stock will develop or, if a market does develop, the depth of the trading
market for our common stock or the prices at which our common stock will trade
in such market.
After completion of the offering, and prior to any divestiture of our common
stock, Motorola will own at least 80% of our common stock. The liquidity of an
investment in our common stock could be adversely affected by repurchases of
outstanding common stock by us or Motorola.
27
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Forward-looking
statements do not relate strictly to historical or current facts.
Forward-looking statements may be identified by the use of forward-looking words
or phrases such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning. Forward-looking
statements are based on our current expectations and are subject to risks and
uncertainties.
A number of important factors, including those risks and uncertainties
described under "Risk Factors," could affect future operating results and our
financial position and cause actual results to differ materially from those
expressed in the forward-looking statements. The risks and uncertainties
described under "Risk Factors" are not exhaustive. These and other developments
could cause our actual results to differ materially from those forecast or
implied in the forward-looking statements. You are cautioned not to place undue
reliance on these forward-looking statements. We have no obligations, and we do
not intend, to publicly release the results of any revisions to these
forward-looking statements to reflect subsequent events or circumstances.
28
<PAGE>
OUR SEPARATION FROM MOTOROLA
PROPEL
Propel, a corporation formed under the laws of the State of Delaware, was
created in 1999 to succeed to a substantial portion of the business conducted by
the Network Management Group, or NMG, a division of Motorola. NMG originated
within Motorola as a vehicle for accelerating the worldwide development of the
wireless communications market. One of Motorola's core businesses is and has
been as a global supplier of wireless communications infrastructure equipment.
Motorola's participation in the wireless industry as a developer, operator and
owner of wireless communications businesses was undertaken with a view toward
creating new infrastructure customers and further developing relationships with
its existing customers. As the worldwide market for wireless communications has
matured, this business purpose has created conflicts with Motorola's
infrastructure equipment business, as its customers increasingly found
themselves competing with Motorola's NMG business and its operating companies.
Motorola has advised us that this is a significant factor in its decision to
separate this portion of the NMG business through Propel. In the process of
managing NMG, our management team developed significant expertise in bidding for
wireless communication licenses and developing, operating and owning wireless
communications networks in Latin America, Europe/Middle East and Asia. This
expertise and our operating companies form the core of our business.
CONTRIBUTION OF ASSETS. Our assets will consist primarily of voting
securities in our operating companies. These securities are owned by Motorola
and various direct and indirect subsidiaries of Motorola. Motorola has already
initiated the process of separating Propel by transferring to us some of the
assets and liabilities that constitute our business. The transfer of
substantially all of these assets and liabilities will be completed before the
closing of the offering. The information presented in this prospectus, including
our financial statements, assumes the completion of these transfers.
ASSETS NOT CONTRIBUTED. Motorola will retain its interests in wireless
operating companies which we previously managed in Japan and Honduras due to
restrictions associated with their transfer. In addition, Motorola currently has
direct investments in specialized mobile radio, or SMR, and enhanced specialized
mobile radio, or ESMR, operators in Israel, as well as Australia, China,
Colombia, Costa Rica, the Czech Republic, Ecuador, Germany, India, Japan, Poland
and Turkey. These investments were made and are managed by business units within
Motorola other than NMG, as they are not cellular operations. However, SMR and
ESMR operators may compete against our operating companies, as is the case with
Motorola's ESMR business in Israel. Motorola also owns approximately 15% of
Nextel Communications. Nextel Communications, through its wholly owned
subsidiary, Nextel International, Inc., has ESMR operations and investments in
many countries around the world, including Argentina, Mexico and Brazil.
SEPARATION FROM MOTOROLA
MOTOROLA'S PLAN TO DIVEST PROPEL. After completion of this offering,
Motorola will own about % of the outstanding shares of our common stock, or
about % if the underwriters exercise their over-allotment option in full.
Motorola has informed us that it currently expects to divest itself of its
entire interest in our common stock sometime during the 12 months following this
offering by distributing to the holders of its common stock all of the shares of
our common stock which it owns. Motorola expects to accomplish a distribution by
means of either an exchange offer in which its stockholders would be invited to
tender their shares of Motorola common stock in exchange for shares of our
common stock or a pro rata distribution of Motorola's shares of our common stock
to its stockholders, or by some combination of both transactions. Motorola is
free, however, to divest itself of shares of our common stock through other
means, which may include the sale of all or any portion of
29
<PAGE>
Motorola's remaining interest in shares of our common stock in one or more
private sales or through subsequent public offerings.
Motorola has also informed us that it will not complete a distribution of
our common stock to its stockholders if its board of directors determines that a
distribution is not in the best interests of Motorola and its stockholders.
Motorola has further advised us that the principal factors that it would
consider in making this determination, including the determination as to the
timing, structure and terms of a distribution or other form of divestiture,
include:
- receipt of a ruling from the IRS to the effect that a distribution would
be tax-free to Motorola, its affiliates and its stockholders and as to the
other tax consequences of the transactions. Motorola has not yet applied
for such a ruling;
- the market price of our common stock;
- the market price of Motorola's common stock;
- the absence of any court orders or regulations prohibiting or restricting
the completion of a distribution;
- other conditions affecting our businesses or those of Motorola; and
- the availability and advisability of other strategic alternatives,
including a sale by Motorola of its shares of our common stock through
means other than a distribution.
Motorola has the sole discretion to determine the timing, structure and all
terms of a distribution or other form of divestiture. We have agreed to
cooperate with Motorola in all respects to complete a distribution or other form
of divestiture. However, Motorola is not obligated to complete a distribution or
other form of divestiture within the 12 months following this offering or at
all.
Most of the operating company shareholders agreements to which we or our
subsidiaries are a party contain rights of first refusal that may require us to
sell our interests in these operating companies if we undergo a change of
control. Upon a divestiture of our common stock by Motorola, a change of control
may be deemed to occur under the terms of these shareholders agreements. These
rights could allow the other shareholders in these operating companies to
purchase our equity interests at fair market value upon completion of a
distribution of our common stock to Motorola stockholders or any other form of
divestiture by Motorola. Although we have received waivers of these rights of
first refusal from the other shareholders of most of our operating companies in
connection with a distribution of our common stock to Motorola stockholders,
these waivers may not apply to other forms of a divestiture. In addition, we
have not received waivers for our operating companies in Argentina, Hong Kong
and Uruguay. If we are unable to obtain these waivers, it is possible that the
other shareholders in those operating companies could exercise their rights of
first refusal to purchase our interests in those operating companies at fair
market value upon a distribution. If Motorola elects to effect a divestiture
that is not a distribution, we may be required to obtain new waivers or be
subject to the exercise of the rights of first refusal from most of the other
shareholders in our operating companies. In addition, in the event we are unable
to amend the organizational documents of Tricom, our operating company in the
Dominican Republic, prior to a distribution or other form of divestiture, we
could lose the enhanced voting rights of our Tricom shares and the minority
protections under the Tricom shareholders agreement.
Motorola's contribution of Pelephone to us, this offering and a distribution
of our common stock to Motorola stockholders or any other form of divestiture
may violate provisions of the license under which Pelephone operates. We are
currently seeking the approval of the Israeli government of the contribution,
this offering and a distribution. In addition, the license under which our
operating company in Brazil conducts business contains restrictions on
Motorola's ability to divest our common stock through means other than a
distribution without governmental approval.
30
<PAGE>
Prior to a distribution of our common stock to Motorola stockholders, we
must repay all of our non-ordinary course indebtedness to Motorola and its
affiliates. On a pro forma basis, after giving effect to the Bajacel
acquisition, this indebtedness totaled approximately $490 million, as of
March 31, 2000. We cannot assure you that we will have the funds in place to
repay such indebtedness within the time frame contemplated for a distribution,
or at all.
BENEFITS OF THE SEPARATION FOR PROPEL. We believe that we will realize
benefits from this offering and our complete separation from Motorola. We
believe that our separation from Motorola will:
- permit us to adopt aggressive investment and acquisition programs,
unencumbered by conflicting business objectives of Motorola;
- allow us to offer incentives to our employees that are more closely linked
to our market performance, thereby seeking to improve employee performance
and retention;
- create an organizational structure through which we will have more direct
access to capital markets;
- allow us to focus on our core business strengths as an independent
company; and
- result in a simplified internal structure.
BENEFITS OF THE SEPARATION FOR MOTOROLA. As the worldwide market for
wireless communications has matured, Motorola, through NMG and its operating
companies, has increasingly found itself competing against many of its
infrastructure equipment customers for wireless licenses in international
markets and in the operation of wireless communications businesses. In addition,
Motorola encountered difficulties in selling its network infrastructure
equipment to our operating companies' competitors. A distribution of our common
stock to Motorola stockholders or other divestiture will allow Motorola
stockholders to realize the value of our business, while freeing Motorola from
many potential conflicts with customers for its wireless communications
infrastructure equipment.
SEPARATION AND TRANSITIONAL ARRANGEMENTS. We and Motorola, and, in some
cases, our and their affiliates, have entered into or will, prior to the
completion of this offering, enter into various agreements providing for the
separation of our company from Motorola. These agreements generally will become
effective at the time of this offering and provide for, among other things, the
transfer from Motorola to us of those assets comprising our business and the
assumption by us of those liabilities relating to our business. These agreements
also govern various transitional and ongoing relationships between the parties,
including agreements by Motorola to provide various transitional services to us.
We believe that these services will generally be provided on terms and
conditions comparable to those granted to an unaffiliated third party for
similar services. However, because these agreements were negotiated in the
context of a parent-subsidiary relationship, the prices charged to us under
these agreements may be higher or lower than the prices that may be charged by
unaffiliated third parties for similar services. In addition, our certificate of
incorporation provides mechanisms through which we and Motorola may allocate
future corporate opportunities that may be suitable for each of us.
For more information regarding the separation process and the agreements to
be entered into by us and Motorola, see "Our Relationship with Motorola."
31
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the offering of about $
million, or about $ million if the underwriters exercise their
over-allotment option in full, after deducting underwriting discounts and other
offering expenses payable by Propel. For purposes of this calculation, we have
assumed an initial public offering price of $ per share, the midpoint of
the range contained on the cover of this prospectus. We intend to use the
proceeds from this offering to fund ongoing operations, for acquisitions to
expand our portfolio of assets, to invest in the expansion of our existing
operating companies, to repay a small portion of our indebtedness to Motorola
and for general corporate purposes. We have not determined the amount of net
proceeds that we will use for each of these purposes. Accordingly, we will have
a broad discretion to use the proceeds as we see fit. Pending these uses we will
invest the net proceeds we receive from this offering in interest-bearing,
investment-grade securities. For more information, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
We do not expect to pay dividends on our common stock for the foreseeable
future. We anticipate that all of our future earnings, if any, will be used for
the expansion and operation of our business. Our board of directors has the sole
discretion to declare any dividends based upon our financial condition, results
of operations, cash flow, dividends paid to us by our operating companies, if
any, the level of our capital expenditures, our future business prospects and
other factors. In addition, we may be restricted in our ability to declare and
pay dividends by the terms of any credit facility or other financial instrument
that we elect to enter into from time to time. We are not currently subject to
any such restriction but we cannot assure that this will continue to be
the case.
The extent to which dividends can be paid to us by some of our operating
companies is dependent on local regulatory restrictions and on the terms of any
credit facility or other financial instrument that they elect to enter into from
time to time, which may restrict payment of dividends. Our operating companies
in Azerbaijan, Brazil, the Dominican Republic, Egypt, Hong Kong, Lithuania,
Mexico and Pakistan are currently subject to such contractual restrictions. For
more information, see "Our Relationships with Our Operating Companies" and
"Regulation."
32
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis, reflecting our acquisition of the remaining
ownership interest in Bajacel, which owns a 68% interest in its subsidiary
Movitel, and related transactions; and
- on a pro forma, as adjusted basis, reflecting our acquisition of the
remaining ownership interest in Bajacel, which owns a 68% interest in its
subsidiary Movitel, and related transactions and giving effect to the sale
of shares of common stock in this offering at an assumed initial
public offering price of $ per share, the midpoint of the range set
forth on the cover of this prospectus, and the application of the net
proceeds from such sale.
You should read this information in conjunction with "Unaudited Pro Forma
Condensed Combined Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 13.7 $ 31.8 $
========= ========= =========
DEBT:
Notes payable and long-term debt, including related
parties and current maturities(1)................... $ 152.3 $ 519.8 $
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, no shares authorized,
issued or outstanding on an actual and pro forma
basis, shares authorized and no shares issued and
outstanding on a pro forma, as adjusted basis....... -- -- --
Common stock, $.01 par value, shares authorized
and shares issued and outstanding on an actual
and pro forma basis, shares authorized and
shares issued and outstanding on an as adjusted
basis...............................................
Additional paid-in capital............................ -- --
Stockholder's net equity.............................. 1,083.7 1,083.7
Accumulated other comprehensive income (loss), net of
tax................................................. (101.5) (101.5)
--------- --------- ---------
Total stockholder's equity (deficit)................ 982.2 982.2
--------- --------- ---------
Total capitalization.............................. $ 1,134.5 $ 1,502.0 $
========= ========= =========
</TABLE>
------------------------
(1) We are required to refinance the related party portion of this indebtedness,
which as of March 31, 2000 on a pro forma basis totaled $489.2 million,
prior to a distribution of our common stock to Motorola stockholders. We
cannot assure you that we will be able to refinance this indebtedness on
similar terms and conditions or at all. Our inability to refinance this
indebtedness could delay or prevent a distribution or other form of
divestiture.
33
<PAGE>
SELECTED FINANCIAL AND OTHER OPERATING DATA
The following table presents our selected historical consolidated financial
and other operating data. The historical statement of operations and cash flow
data for 1997, 1998 and 1999 and balance sheet data as of December 31, 1998 and
1999 are derived from our audited consolidated financial statements included
elsewhere in this prospectus, which were audited by KPMG LLP, whose report
indicated a reliance on other auditors with respect to financial statements of
some affiliates of Propel that are accounted for in Propel's consolidated
financial statements using the equity method of accounting, as indicated in
their report. The statement of operations and cash flow data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from our unaudited consolidated financial statements,
which in the opinion of our management reflect all adjustments necessary to
present fairly the financial data for such periods and as of such dates. In
addition, the statement of operations and cash flow data for the three months
ended March 31, 1999 and 2000 and the balance sheet data as of March 31, 2000
are derived from our unaudited consolidated financial statements included
elsewhere in this prospectus. In the opinion of Propel's management, such
unaudited financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial data for such
periods and as of such date. Results for any interim period are not necessarily
indicative of the results to be expected for the entire year. The data in this
table primarily reflect the results of operations and financial position of
Propel and our consolidated subsidiaries. The results of operations of our
nonconsolidated operating companies are reflected in our statement of operations
data under "Share of earnings (losses) of affiliates" and in our balance sheet
data under "Investments in and advances to affiliates." Norcel, Cedetel and our
wholly owned Israeli subsidiary that operates WDS are our only consolidated
businesses.
For more information about the performance of our operating companies on a
proportionate basis, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Proportionate Results of Operations." You
should read the information set forth below in conjunction with "Unaudited Pro
Forma Condensed Combined Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this prospectus.
34
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS; EXCEPT SUBSCRIBERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $152.8 $167.9 $ 160.9 $ 226.3 $ 382.9 $121.6 $ 86.5
Cost of services and products....................... 116.7 144.5 120.1 167.8 297.0 101.3 60.7
Selling, general, and administrative expenses....... 45.9 46.6 52.6 54.9 79.0 20.3 22.7
Depreciation and amortization....................... 20.0 21.3 28.2 33.0 37.6 9.6 11.0
------ ------ ------- -------- -------- ------ --------
Operating income (loss)............................. (29.8) (44.5) (40.0) (29.4) (30.7) (9.6) (7.8)
Share of earnings (losses) of affiliates............ 55.9 55.7 44.2 47.6 (32.0) (6.3) (2.3)
Interest expense.................................... 8.4 6.8 6.6 14.6 12.5 4.3 4.5
Other (income) expense.............................. 9.9 (17.2) (50.2) (25.4) (48.8) (5.4) (5.2)
------ ------ ------- -------- -------- ------ --------
Earnings (loss) before income taxes................. 7.8 21.5 47.8 28.9 (26.4) (14.8) (9.4)
Income tax expense (benefit)........................ (9.4) (10.7) 7.7 (1.0) 16.6 2.0 (1.7)
------ ------ ------- -------- -------- ------ --------
Net earnings (loss)................................. $ 17.2 $ 32.2 $ 40.2 $ 29.9 $ (43.0) $(16.8) $ (7.7)
====== ====== ======= ======== ======== ====== ========
Unaudited pro forma net earnings (loss) per common
share(1).......................................... $ $
Weighted average shares outstanding.................
CASH FLOW DATA:
Cash provided by (used in):
Operating activities.............................. $ 7.4 $ 13.3 $ (19.8) $ (10.3) $ 1.1 $(16.4) $ 0.2
Investing activities.............................. (36.1) (34.4) (145.3) (162.7) (121.1) (9.7) (21.5)
Financing activities.............................. 28.8 21.1 172.3 173.2 124.9 20.1 16.1
OTHER DATA:
EBITDA(2)........................................... $ (9.8) $(23.2) $ (11.8) $ 3.6 $ 6.9 $ (0.1) $ 3.1
Proportionate subscribers(3)........................ 287 566 1,050 1,574 2,554 1,771 2,805
Proportionate revenues(3)........................... 413.5 660.6 $ 880.6 $1,058.7 $1,247.3 $289.5 $ 362.3
Proportionate EBITDA(3)............................. 160.5 199.6 254.8 302.1 202.5 62.3 79.3
Proportionate debt (at period end)(3)............... * * 441.8 720.5 1,035.4 * *
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents........................... $ 2.6 $ 9.2 $ 16.3 $ 13.5 $ 18.8 $ 13.7
Investments in and advances to affiliates........... 275.2 360.6 467.8 645.1 667.9 674.7
Total assets........................................ 580.1 655.4 925.9 1,130.4 1,895.3 1,449.5
Notes payable and long-term debt, including related
parties and current maturities.................... 69.3 81.0 88.7 94.1 152.3 152.3
Stockholder's equity................................ 384.4 467.4 676.3 844.2 1,248.5 982.2
</TABLE>
------------------------------
* Data not available.
(1) Pro forma net earnings (loss) per share was calculated by dividing the net
earnings (loss) for each period by the shares of our common stock to be
outstanding at the time of the offering.
(2) "EBITDA" is defined as operating income before depreciation and amortization
expense. EBITDA is an indicator used by management to measure our
performance and ability to generate cash flow. EBITDA does not represent
cash flows for the period and is not an alternative to operating or net
income as an indicator of operating performance. You should not consider it
alone or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles. Our computation of EBITDA may
not be comparable to the computation of similarly titled measures reported
by other companies.
(3) For more information regarding the calculation of proportionate data, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Proportionate Results of Operations."
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
In May 2000, Network Ventures II, Inc., a wholly owned subsidiary of
Motorola which will be contributed to Propel prior to the closing of this
offering, entered into multiple agreements to acquire the remaining interest it
did not already own in Baja Celular Mexicana S.A. de C.V., or Bajacel, for a
total purchase price of $321.9 million. In addition, Telefonia Celular Del
Norte S.A. de C.V., or Norcel, and Celular de Telefonia S.A. de C.V., or
Cedetel, Propel's wholly owned northern Mexico operating companies, entered into
agreements with entities related to Bajacel's selling shareholders to purchase
other assets and services valued at approximately $15.0 million as a separate
component of the Bajacel acquisition. Accordingly, for purposes of this pro
forma presentation, the total purchase price is assumed to be $336.9 million.
Bajacel owns a 68% interest in Movitel del Noroeste, MoviCelular, and
MoviServicios, which collectively we call Movitel, and accordingly consolidates
Movitel for accounting purposes. Prior to the acquisition, Propel also owned a
22% direct interest in Movitel. As a result of the acquisition, Propel will own
100% of Bajacel and its total direct and indirect ownership interest in Movitel
will be 90%. Prior to the acquisition, Propel accounted for its interests in
Bajacel and Movitel using the equity method of accounting. Upon completion of
the acquisition, Bajacel and Movitel will be consolidated subsidiaries of
Propel.
The unaudited pro forma condensed combined statements of operations assume
the acquisition was completed at the beginning of the periods presented. The
unaudited pro forma condensed combined balance sheet assumes the acquisition was
completed as of March 31, 2000. The acquisition will be accounted for under the
purchase method of accounting. These unaudited pro forma condensed combined
financial statements also give effect to the purchase accounting adjustments
resulting from the acquisition.
We are providing the unaudited pro forma condensed combined financial
information for illustrative purposes only. You should not rely on the unaudited
pro forma condensed combined financial information as being indicative of the
results that would have been achieved had these companies always been combined
or of the future results or financial condition that these combined companies
will experience. This information should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in conjunction with the financial statements and related notes
included elsewhere in this prospectus.
36
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
PROPEL BAJACEL
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
NOTE 1 NOTE 1
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 13.7 $ 18.2 $ -- $ 31.8
Accounts receivable................................... 54.7 43.8 (5.2) (2a) 93.2
Inventory............................................. 24.7 25.7 -- 50.5
Other current assets.................................. 4.0 1.4 -- 5.4
-------- ------ ------- --------
TOTAL CURRENT ASSETS................................ 97.1 89.1 (5.2) 180.9
Property and equipment, net........................... 122.3 91.2 -- 213.5
Investment securities................................. 222.2 -- -- 222.2
Investments in and advances to affiliates............. 674.7 -- (10.1) (2b) 629.7
(34.9) (3a)
Intangible assets, net................................ 323.1 25.6 (12.3) (3a) 773.5
(0.8) (3a)
313.5 (3b)
124.4 (3d)
Other assets.......................................... 10.2 -- -- 10.2
-------- ------ ------- --------
TOTAL ASSETS...................................... $1,449.5 $205.8 $ 374.6 $2,030.0
======== ====== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... 45.5 70.5 (5.2) (2a) 110.7
Accrued liabilities................................... 38.0 -- -- 38.0
Notes payable and current portion of long-term debt... 152.3 4.9 336.9 (4) 494.1
Other current liabilities............................. 2.5 -- -- 2.5
-------- ------ ------- --------
TOTAL CURRENT LIABILITIES........................... 238.4 75.4 331.7 645.4
LONG-TERM LIABILITIES:
Long term debt, less current portion.................. -- 25.7 -- 25.7
Deferred tax liabilities.............................. 218.9 18.6 124.4 (3c) 362.0
Other noncurrent liabilities.......................... 10.1 14.7 (10.1) (2b) 14.7
-------- ------ ------- --------
TOTAL LIABILITIES....................................... $ 467.3 $134.5 $ 446.0 $1,047.8
-------- ------ ------- --------
STOCKHOLDER'S EQUITY:
Common stock............................................ $ -- $ 45.3 $ (45.3) (3a) $ --
Stockholder's net equity................................ 1,083.7 1,083.7
Accumulated other comprehensive income (loss),
net of tax............................................ (101.5) 26.1 (26.1) (3a) (101.5)
-------- ------ ------- --------
TOTAL STOCKHOLDER'S EQUITY.............................. 982.2 71.3 (71.3) 982.2
-------- ------ ------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $1,449.5 $205.8 $ 374.6 $2,030.0
======== ====== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
37
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
PROPEL BAJACEL
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
NOTE 1 NOTE 1
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 86.5 $ 55.3 $ (6.8) (2a) $ 135.0
Operating expenses:
Cost of services and products........... 60.7 26.5 (6.8) (2a) 80.3
Selling, general, and administrative.... 22.7 11.8 -- 34.5
Depreciation and amortization........... 11.0 3.7 5.2 (5) 19.9
------- ------- -------- --------
Total operating expenses.................. 94.4 41.9 (1.6) 134.7
------- ------- -------- --------
Operating income (loss)................... (7.8) 13.4 (5.2) 0.3
Share of earnings (losses) of
affiliates.............................. (2.3) -- (8.3) (6) (10.6)
Interest expense.......................... 4.5 -- 9.3 (7) 13.7
Other (income) expense, net............... (5.2) 1.6 (2.2) (8) (5.8)
------- ------- -------- --------
Earnings (loss) before income taxes....... (9.4) 11.8 (20.6) (18.2)
Income tax expense (benefit).............. (1.7) (0.7) (5.1) (9) (7.6)
------- ------- -------- --------
Net earnings (loss)....................... $ (7.7) $ 12.5 $ (15.5) $ (10.7)
======= ======= ======== ========
Pro forma earnings (loss) per share....... $ (10)
========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
38
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
PROPEL BAJACEL
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
NOTE 1 NOTE 1
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 382.9 $ 184.0 $ (1.1) (2a) $ 565.7
Operating expenses:
Cost of services and products........... 297.0 95.9 (1.1) (2a) 391.7
Selling, general, and administrative.... 79.0 34.8 -- 113.8
Depreciation and amortization........... 37.6 20.0 20.9 (5) 78.5
-------- -------- -------- --------
Total operating expenses.................. 413.6 150.7 19.8 584.0
-------- -------- -------- --------
Operating income (loss)................... (30.7) 33.3 (20.9) (18.3)
Share of earnings (losses) of
affiliates.............................. (32.0) -- (12.3) (6) (44.3)
Interest expense.......................... 12.5 0.5 37.1 (7) 50.1
Other (income) expense, net............... (48.8) 2.5 (3.1) (8) (49.5)
-------- -------- -------- --------
Earnings (loss) before income taxes....... (26.4) 30.3 (67.1) (63.2)
Income tax expense (benefit).............. 16.6 11.6 (20.5) (9) 7.7
-------- -------- -------- --------
Net earnings (loss)....................... $ (43.0) $ 18.7 $ (46.5) $ (70.8)
======== ======== ======== ========
Pro forma earnings (loss) per share....... $ (10)
========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
39
<PAGE>
PROPEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. HISTORICAL FINANCIAL STATEMENTS
Represents the historical consolidated balance sheet and statements of
operations of Propel and Bajacel consolidated with Movitel adjusted to U.S.
generally accepted accounting principles, presented in U.S. dollars and
eliminating the effects of inflationary accounting.
2. INTERCOMPANY ELIMINATION
a. Eliminates intercompany balances and activity between consolidated
Bajacel and Propel.
b. Eliminates Propel direct investment in Movitel and Bajacel minority
interest reflecting Propel's direct investment.
3. ACQUISITION
The acquisition will be accounted for under the purchase method of
accounting. The purchase price for the acquisition will be determined based on
the cash paid, liabilities assumed and acquisition related costs to the extent
of the increase in ownership acquired in Bajacel consolidated with Movitel. The
purchase price will be allocated to the assets acquired based on the estimated
fair values as determined by a valuation services company. The excess of the
purchase price over the assets acquired will be recorded as goodwill and
amortized over 20 years. The allocation of the purchase price reflects the
estimated fair value of the portion of the assets and liabilities acquired based
upon information available at the date of the preparation of the accompanying
unaudited pro forma condensed combined financial statements. Such allocations
will be adjusted upon final determination of such fair values.
It is anticipated that a portion of the purchase price will be allocated to
certain intangible assets such as customer base, workforce, trade name and
license cost. The amortization period for customer base and workforce will be
substantially shorter than tradename and license cost and is estimated to be
three to five years. The trade name and license cost amortization periods are
anticipated to be 20 years. For purposes of these unaudited pro forma condensed
combined financial statements an amortization period of 20 years has been used
for all intangible assets acquired pending the final purchase price allocation.
These amounts have not yet been determined. Actual amortization subsequent to
the acquisition will be higher in the first three to five years due to the
shorter lives for customer base and workforce intangibles. In addition for
purposes of this pro forma presentation property, plant and equipment as well as
other assets and liabilities of Bajacel consolidated with Movitel have been
assigned their historical book value pending final allocation of the purchase
price.
Allocation of purchase price:
<TABLE>
<S> <C>
Carrying value of Bajacel net assets acquired excluding
Propel share of goodwill and other intangibles............ $ 23,406 (a)
Fair value of licenses acquired............................. 313,473 (b)
Deferred income taxes....................................... (124,449)(c)
Goodwill.................................................... 124,449 (d)
---------
Total purchase price........................................ $ 336,879
=========
</TABLE>
40
<PAGE>
PROPEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. ACQUISITION (CONTINUED)
a. Fair value of assets of Bajacel acquired consists of the net assets of
Bajacel as follows:
<TABLE>
<S> <C>
Net assets of Bajacel....................................... $ 71,344
Net assets applicable to Propel ownership prior to the
acquisition............................................... (34,872)
--------
Carrying value of Bajacel net assets acquired............... 36,472
Less goodwill of Bajacel applicable to Propel interest
acquired.................................................. (12,285)
Less other intangible assets of Bajacel applicable to Propel
interest acquired......................................... (781)
--------
Bajacel net assets acquired excluding goodwill and other
intangible assets......................................... $ 23,406
========
In addition, this entry eliminates the historical equity of
Bajacel.
</TABLE>
b. Excess of purchase price over fair value of net assets of Bajacel is
being allocated to license costs for purposes of these unaudited pro
forma condensed combined financial statements pending final determination
as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $336,879
Fair value of Bajacel net assets acquired excluding Propel
share of goodwill and other intangibles................... (23,406)
--------
Value assigned to other intangible assets................... $313,473
========
</TABLE>
c. Represents deferred tax on the excess of the book basis over the tax
basis of the identifiable intangible assets computed at a income tax rate
of 39.7%.
d. Goodwill results from the excess of the purchase price over the fair
value of the net assets acquired.
4. ACQUISITION FINANCING
Propel intends to finance the acquisition through a credit facility provided
by Motorola at an estimated annual interest rate of 11%. At this time, the
actual interest rate has not been determined. Incidental costs related to the
acquisition are not expected to be material.
41
<PAGE>
PROPEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. AMORTIZATION EXPENSE ON INTANGIBLES
Records amortization expense on fair value of license cost. Amortization
period is 20 years as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1999 MARCH 31, 2000
---- --------------
<S> <C> <C>
Amortization of license cost................. $15,674 $3,918
Amortization of goodwill..................... 6,222 1,556
Less amortization of goodwill and other
intangible assets recorded by Bajacel
applicable to Propel's
ownership interest......................... (1,006) (258)
------- ------
Amortization expense......................... $20,890 $5,216
======= ======
</TABLE>
6. EQUITY IN EARNINGS
Eliminates Propel's equity in earnings of Bajacel, which was formerly
accounted for under the equity method and after the acquisition will be
accounted for as a consolidated subsidiary of Propel.
7. INTEREST EXPENSE ON CREDIT FACILITY
Records interest expense on $336.9 million of acquisition debt assuming an
11% interest rate. Annual interest expense equals $37,057 and quarterly interest
equals $9,264. If the interest rate were to vary by 1/8%, interest expense would
change by $421 per year or $105 per quarter.
8. MINORITY INTERESTS
The minority interest related to Propel's direct investment in Movitel is
eliminated as it was included under the line item "Share of earnings (losses) of
affiliates" in Propel's consolidated financial statements prior to the
acquisition.
9. INCOME TAXES
Records tax benefit for pro forma adjustments for interest and amortization
of other identifiable intangible assets using a tax rate of 39.7%.
10. PRO FORMA EARNINGS (LOSS) PER SHARE
Pro forma earnings (loss) per share is calculated using weighted
average shares outstanding.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW OF OPERATIONS
We, through our operating companies, are a leading international provider of
wireless communication services. We develop, operate and own interests in
wireless communications services businesses in targeted markets throughout the
world. Our operating companies serve many of the world's fastest growing
wireless markets. Over the past 15 years, we have grown our wireless
communications business rapidly by adding subscribers and extending our
geographic footprint across Latin America, Europe/Middle East and Asia. Our
operating companies currently offer wireless services in Mexico, Israel, Hong
Kong, Egypt, Argentina, Brazil, Lithuania, Jordan, Chile, the Dominican
Republic, Pakistan, Uruguay and Azerbaijan. Many of our operating companies hold
leading positions in their licensed territories.
BASIS OF PRESENTATION
The consolidated financial statements of Propel reflect a calendar fiscal
year. In accordance with generally accepted accounting principles, we
consolidate the revenues and expenses of our controlled subsidiaries. We use the
equity method of accounting to record the operating results of entities over
which we exercise significant influence, but do not have a controlling interest.
The following table sets out our direct and indirect equity ownership
percentages in our operating companies and complementary businesses as of
March 31, 2000 and the accounting method we use to account for them, by region:
<TABLE>
<CAPTION>
PROPEL ACCOUNTING
OPERATING COMPANY NAME OWNERSHIP METHOD
---------------------- --------- ------
<S> <C> <C>
LATIN AMERICA
NORTHERN MEXICO
Bajacel(1)............................................... 48.9% Equity Method
Movitel(1)(2)............................................ 55.2% Equity Method
Norcel................................................... 100.0% Consolidated
Cedetel.................................................. 100.0% Consolidated
ARGENTINA--Movicom Argentina............................... 25.0% Equity Method
BRAZIL--Global Telecom..................................... 35.5% Equity Method
CHILE--ETP................................................. 25.0% Equity Method
DOMINICAN REPUBLIC--Tricom................................. 26.5% Equity Method
URUGUAY--Movicom Uruguay................................... 32.0% Equity Method
SOUTHERN MEXICO--Portatel.................................. 21.7% Equity Method
EUROPE/MIDDLE EAST
ISRAEL--Pelephone.......................................... 50.0% Equity Method
EGYPT--MobiNil(2).......................................... 18.0% Equity Method
LITHUANIA--Omnitel......................................... 35.0% Equity Method
JORDAN--Fastlink(2)........................................ 26.1% Equity Method
AZERBAIJAN--Bakcell(2)..................................... 25.0% Equity Method
ASIA
HONG KONG--HTCL............................................ 25.1% Equity Method
PAKISTAN--Mobilink......................................... 30.0% Equity Method
COMPLEMENTARY BUSINESSES
WIRELESS DISTRIBUTION SERVICES............................. 100.0% Consolidated
KOREA TELECOM FREETEL...................................... 1.9% Cost Basis
ZEPHYR TELECOMMUNICATIONS(3)............................... 16.8% Cost Basis
</TABLE>
--------------------------
(1) In May 2000, we entered into agreements with shareholders of Bajacel to
purchase their interests in Bajacel, which will result in our direct
ownership of Bajacel increasing to 100% and our direct and indirect
ownership of Movitel increasing to 90% upon completion of this acquisition.
We will begin to consolidate the financial results of Bajacel and Movitel in
the third quarter of 2000.
(2) Reflects our economic, rather than direct, ownership percentage. For more
information about the nature of our ownership in these operating companies,
see "Business."
(3) On a fully diluted basis.
43
<PAGE>
After this offering, we intend to record our share of equity earnings of
non-U.S. affiliates on a one-month lag in order to facilitate timely financial
reporting.
OPERATING REVENUES AND EXPENSES
The following section discusses sources of our revenue and those of our
operating companies. Our consolidated financial statements contain consolidated
revenues from Norcel, Cedetel and WDS. Our remaining operating company revenue
is accounted for under "Share of earnings (losses) of affiliates" in our
financial statements.
Operating revenues of our operating companies primarily consist of:
- SERVICE REVENUES. Service revenues consist primarily of wireless service
revenues, which include charges for incoming and outgoing airtime use,
monthly network access fees, activation fees, long distance, roaming
charges, value-added services, including call waiting and caller
identification, and Internet and other complementary services.
- SUBSCRIBER EQUIPMENT REVENUES. Subscriber equipment revenues consist of
revenues from sales of wireless handsets and related accessories. Our
operating companies' sale of this equipment is ancillary to the sale of
wireless service. Most of our operating companies often sell wireless
handsets at subsidized prices, either at or below cost, as an incentive to
attract new subscribers. Some of our operating companies require these
subscribers to sign long-term contracts in an attempt to offset the
subsidized portion of their handset costs.
GTIB, the holding company through which we own our interest in Bakcell,
derives its revenue through sales of cellular infrastructure and handsets to
Bakcell and provides management services to Bakcell for a fee. GTIB will begin
to consolidate the financial results of Bakcell in the second quarter of 2000.
Our operating revenues also include revenues of WDS, which primarily consist
of revenues from handset and accessory sales and its warranty repair service to
wireless operators and consumers in Israel.
Our operating companies have two basic types of wireless subscribers:
postpaid and prepaid. Postpaid subscribers usually incur a one-time connection
fee and a fixed monthly access charge for wireless service. In general, a
postpaid subscriber's monthly bill also includes charges for airtime used,
roaming, long distance and value-added services. Prepaid subscribers purchase
service in advance, through the use of calling cards or by other means,
entitling them to airtime without fixed monthly charges. Unlike postpaid
service, prepaid service does not require contracts or the need for credit
reference checks. Revenue associated with the sale of prepaid service is
deferred and recognized as the prepaid airtime is used or any unused balance
expires. We expect significant growth in prepaid subscribers in all our markets
as a result of subscriber demand, especially as our operating companies have
expanded their marketing for the mass consumer market segment.
Deeper penetration into the mass market has historically decreased monthly
average minutes of use, and therefore monthly average revenue per user, or ARPU,
because these additional subscribers, whether postpaid or prepaid, generally use
fewer minutes. However, the decline in ARPU as a result of the increase in
prepaid subscribers is in part offset by higher per-minute prices, reduced bad
debt, lower subscriber acquisition costs such as lower handset subsidies,
reduced billing expense and lower subscriber service expenses, all of which are
associated with prepaid services.
44
<PAGE>
Operating expenses, both for us and our operating companies, include cost of
services and products, selling, general and administrative expenses and
depreciation and amortization expenses. These expenses include:
- COST OF SERVICES AND PRODUCTS. Cost of services and products primarily
consists of wireless network operating costs, interconnection fees
assessed by wireline and wireless providers, royalties paid to government
entities, leased transport capacity and the cost of handsets and
accessories sold.
- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses primarily consist of costs associated with sales
and marketing activities, customer service, subscriber acquisition and
retention, and general and administrative functions. On an historical
basis, Propel's consolidated selling, general and administrative expenses
also include an allocation of Motorola's shared corporate services costs.
Following the offering, our selling, general and administrative expenses
will no longer be determined by an allocation from Motorola. However, we
will be charged for some administrative services provided to us under the
transitional services agreements with Motorola.
- DEPRECIATION AND AMORTIZATION CHARGES. Depreciation and amortization
charges primarily consist of depreciation recorded for our operating
companies' wireless networks and equipment, and amortization of
intangibles such as wireless license costs, goodwill and other
intangibles.
Subscriber acquisition costs, other than advertising and other promotions,
which primarily consist of the cost of handset subsidies and sales commissions,
are recognized in the period in which we acquire a new subscriber. Substantially
all of our operating companies have undertaken handset subsidization programs to
attract subscribers. Accordingly, in periods of high subscriber growth,
significant cash operating expenses precede the recognition of the associated
revenue.
ACCOUNTING CHARGES FOR RESTRICTED STOCK GRANTS AND OPTION GRANTS
Three of our executive officers who participated in Motorola's supplementary
executive retirement plan will be granted shares of restricted stock at the time
of this offering, valued at the initial public offering price, to compensate
them for the loss of potential cash benefits under this plan. Three other
executive officers will be granted shares of restricted stock at the time of the
offering in connection with their employment with us, valued at the initial
public offering price. We will incur compensation expense for financial
reporting purposes equal to the aggregate value of the restricted shares
granted, which we estimate will be approximately $9.7 million and $0.3 million,
respectively, which will be expensed over the vesting period of the restricted
stock granted. For more information, see "Management--Incentive Plan--Restricted
Stock Awards" and "Management--Retirement Plans."
In addition, our employees who hold unvested Motorola options at the time of
this offering will be granted shares of our restricted stock at the time of the
offering, valued at the initial public offering price, to compensate them for
the possibility that their unvested Motorola options will expire prior to the
time that they can be exercised or exchanged for Propel options as described
below. We will incur compensation expense for financial reporting purposes equal
to the aggregate value of the restricted shares granted. We currently estimate
that the aggregate amount of the compensation expense will be approximately
$7.0 million. The actual amount of the accounting charge may be higher or lower.
The amount of this charge will also be expensed over the vesting period of the
restricted stock granted. For more information, see "Management--Incentive
Plan--Substitute Awards."
Our employees who hold vested and unvested Motorola options will retain them
after the time of this offering and may exercise them in accordance with the
terms of Motorola's option plans. Once Motorola holds less than 50% of our
common stock, however, all unvested Motorola options held by our employees will
expire and our employees holding vested Motorola options will be offered a
one-time right to cancel all or a portion of those options in exchange for newly
issued vested options to
45
<PAGE>
purchase Propel common stock with similar exercise prices on a relative basis
and expiration dates. To the extent the exercise prices of the options we issue
are less than the then-current market price of our common stock, we will incur
additional compensation expense for financial reporting purposes equal to the
aggregate value of this difference, which expense will be recognized in the
period incurred.
Some of our employees who will not have the same or similar pension benefits
after this offering and some of our senior managers will receive retention
bonuses in connection with the transfer of their employment to Propel. We will
incur compensation expense for financial reporting purposes equal to the total
retention bonuses paid. We currently expect the aggregate compensation expense
related to these retention bonuses to be approximately $7.4 million.
ACCOUNTING FOR INFLATION
Our operating companies in Mexico, Chile and Israel are required under local
generally accepted accounting principles to prepare financial statements
reflecting the impact of price level changes, which seek to adjust for the
impact of inflation in preparing the company's financial statements. However, we
have removed such effects when including the results of operations of these
operating companies in the line item "Share of earnings (losses) of affiliates"
of our consolidated financial statements and in the proportionate data of our
operating companies. While inflation, and in some cases significant inflation,
is present in many other countries in which our operating companies do business,
in accordance with local generally accepted accounting principles, these
operating companies do not prepare their financial statements reflecting the
impact of price level changes, which may affect the comparability of their
results of operations.
FOREIGN CURRENCY
We report our financial statements in U.S. dollars. Our operating companies
generally transact business in local currencies. Consequently, fluctuations in
currency exchange rates between the U.S. dollar and the applicable local
currency will affect our results of operations as well as the value of our
ownership interests in the operating companies.
Generally, our operating companies generate revenues that are paid in their
local currency. However, at least a portion of the operating expenses and
liabilities of most of our operating companies are denominated in U.S. dollars
or other non-local currencies. As a result, a significant devaluation of local
currency, such as occurred in Brazil in 1999, could result in a significant
impact on the relevant operating company's operating expenses and asset values
and could have a material adverse effect on our financial condition and results
of operations. To the extent an operating company has debt or other obligations
denominated in U.S. dollars or other non-local currencies, any devaluation may
make it more difficult to meet these obligations and will result in an
accounting charge based on the increase in such dollar-denominated liabilities
and obligations when converted into the local currency. Fluctuations in currency
exchange rates also result in adjustments to investments in our consolidated
entities and equity affiliates, which could negatively impact the book value of
our ownership interests in the operating companies.
Argentina, Hong Kong, Lithuania, Egypt and Jordan have exchange rate regimes
that are linked to the U.S. dollar. The remaining countries' exchange rates are
determined by a floating, managed floating or indexed/composite regime. The
following table presents the average exchange rates for local
46
<PAGE>
currencies per U.S. dollar in the countries in which we operate, with the
percentage change based on the change in U.S. dollars per unit of foreign
currency.
<TABLE>
<CAPTION>
1998 V. 1997 1999 V. 1998
1997 % CHANGE 1998 % CHANGE 1999
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
ARGENTINE PESO.......................... 1.00 -- 1.00 -- 1.00
AZERI MANAT............................. 3,987.00 3.0 3,869.00 (6.1) 4,118.00
BRAZILIAN REAL.......................... 1.08 (7.0) 1.16 (36.1) 1.82
CHILEAN PESO............................ 419.3 (8.9) 460.50 (9.5) 508.60
DOMINICAN PESO.......................... 14.21 (6.5) 15.19 (4.6) 15.93
EGYPTIAN POUND.......................... 3.40 (0.3) 3.41 (0.3) 3.42
HONG KONG DOLLAR........................ 7.74 (0.1) 7.75 (0.1) 7.76
NEW ISRAELI SHEKEL...................... 3.45 (9.4) 3.81 (8.0) 4.14
JORDANIAN DINAR......................... 0.71 -- 0.71 -- 0.71
LITHUANIAN LITAS........................ 4.00 -- 4.00 -- 4.00
MEXICAN PESO............................ 7.92 (14.4) 9.25 (3.1) 9.55
PAKISTANI RUPEE......................... 41.10 (16.0) 48.93 (4.7) 51.37
URUGUAYAN PESO.......................... 9.46 (9.7) 10.48 (7.6) 11.34
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
The information in this section describes our consolidated results of
operations, which reflects the results of operations at Norcel, Cedetel and WDS
on a consolidated basis and of our other operating companies indirectly through
the line item "Share of earnings (losses) of affiliates." For more information
on the results of operations of our operating companies that are not
consolidated subsidiaries, see "--Proportionate Results of Operations."
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Our total revenues decreased $35.1 million, or 28.8%, from
$121.6 million for the three months ended March 31, 1999 to $86.5 million for
the three months ended March 31, 2000.
Service revenues for our wholly owned northern Mexico operating subsidiaries
increased by $13.6 million, or 49.5%, from $27.6 million for the three months
ended March 31, 1999 to $41.2 million for the three months ended March 31, 2000.
The increase was primarily the result of a 95.1% and 83.7% subscriber increase
in Norcel and Cedetel, respectively. The growth in subscribers and overall
minutes of use was predominantly related to rapid market acceptance of prepaid
services. Additionally, calling party pays revenue contributed to the increase
for Cedetel.
Subscriber equipment revenues decreased by $48.7 million, or 51.8%, from
$94.0 million for the three months ended March 31, 1999 to $45.3 million for the
three months ended March 31, 2000. Of the decrease, $48.7 million was
attributable to WDS, whose sole handset supplier was unable to provide adequate
quantities of TDMA and CDMA handsets. Additionally, average unit prices declined
by approximately 29.8% due to increased competition, and revenues for WDS during
the comparable first quarter of 1999 were unusually high due to initial handset
sales to a new wireless operator in the Israeli market.
COST OF SERVICES AND PRODUCTS. Cost of services and products decreased by
$40.7 million, or 40.1%, from $101.3 million for the three months ended
March 31, 1999 to $60.7 million for the three months ended March 31, 2000. The
decrease was primarily attributable to a $47.3 million decrease in WDS equipment
costs relating to the lower unit volumes in the first quarter of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.4 million, or 11.8%, from $20.3 million
for the three months ended March 31, 1999 to
47
<PAGE>
$22.7 million for the three months ended March 31, 2000. This increase was
attributable to a $3.7 million increase in employee-related costs, advertising
expenses, and expenses relating to establishing additional distribution outlets
in Mexico. As a percentage of revenues, these costs showed a slight increase
from 27.1% for the three months ended March 31, 1999 to 27.6% for the three
months ended March 31, 2000. Selling, general and administrative expenses for
WDS decreased by $1.2 million, due to reduced cooperative advertising expenses,
which are accrued based on a percentage of sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.4 million, or 14.8%, from $9.6 million for the three months ended March 31,
1999 to $11.0 million for the three months ended March 31, 2000. The increase
was related to additional capital expenditures made by our operating companies
in northern Mexico for wireless equipment necessary to expand the network and
infrastructure in order to support continued growth.
SHARE OF EARNINGS (LOSSES) OF AFFILIATES. Share of losses of affiliates
decreased by $4.0 million, from $(6.3) million for the three months ended
March 31, 1999 to $(2.3) million for the three months ended March 31, 2000.
Of the improvement, $4.7 million was related to Latin America, where our
share of profits increased by $5.2 million for the northern Mexico equity
investments, Bajacel and Movitel; and Chile and Brazil where our share of losses
decreased by $3.1 million and $2.3 million, respectively. These improvements
were partially offset by a decrease in our share of profitability of
$6.0 million in Argentina due to factors discussed in "--Proportionate Results
of Operations."
Our share of earnings of affiliates for the Europe/Middle East region
decreased by $0.6 million, where subscriber and revenue growth in Egypt resulted
in a $4.8 million increase in our share of profitability, which was offset by
decreases in our share of profitability in Israel and Lithuania of $4.7 million
and $1.3 million, respectively. The decrease in Israel was primarily related to
handset subsidies and a $3.5 million increase in our share of depreciation and
amortization relating to investments in the CDMA network, and an increase in our
share of interest expense of $2.5 million largely due to our share of servicing
additional bank debt totaling $164.7 million. The decrease in Lithuania resulted
primarily from a decrease in our share of revenue.
In Asia, our share of profitability remained substantially unchanged due to
shareholders' equity of our Hong Kong investment falling below zero in 1997
reducing our carrying value in this investment to zero for accounting purposes.
INTEREST EXPENSE. Interest expense in the periods presented was allocated
by Motorola to Propel based on Propel's proportionate share of Motorola's
worldwide net assets. Fluctuations in interest expense are attributable to
either changes in Propel's proportionate share of Motorola's net assets, or
Motorola's overall relationship of interest expense to net assets. After the
offering, Propel's interest expense will no longer be allocated interest expense
from Motorola.
OTHER INCOME (EXPENSE). Other income decreased by $0.2 million, from
$5.4 million for the three months ended March 31, 1999 to $5.2 million for the
three months ended March 31, 2000.
INCOME TAX EXPENSE (BENEFIT). Income tax expense decreased by
$3.6 million, from $1.9 million to ($1.7) million. The decrease was primarily
related to Mexico, where changes in operating loss carryforwards resulted in a
decrease in tax expense of $4.2 million.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Our total revenues increased $156.6 million, or 69.2%, from
$226.3 million in 1998 to $382.9 million in 1999.
48
<PAGE>
Service revenues for our wholly owned northern Mexico operating subsidiaries
increased by $45.8 million, or 63.4%, from $72.3 million in 1998 to
$118.0 million in 1999. The increase was primarily the result of 124.0% and
105.7% subscriber growth for Norcel and Cedetel, respectively, reflecting the
continued rapid growth in market penetration for these regions. Growth in
prepaid subscribers accounted for a significant portion of the revenue increase
for Norcel and Cedetel, respectively, and calling party pays contributed further
to a revenue increase for Cedetel.
Subscriber equipment revenues increased by $110.8 million, or 71.9%, from
$154.1 million in 1998 to $264.9 million in 1999. Of the increase,
$99.4 million was attributable to WDS, which benefitted from handset sales to a
new wireless operator in the Israeli market in the fourth quarter of 1998, as
well as a product mix shift toward CDMA which caused overall average unit prices
to increase. The remaining $11.3 million in increased subscriber equipment
revenue was attributable to our wholly owned northern Mexico subsidiaries'
subscriber growth.
COST OF SERVICES AND PRODUCTS. Cost of services and products increased
$129.2 million, or 77.0%, from $167.8 million in 1998 to $297.0 million in 1999.
Of the increase, $94.8 million was attributable to increased volumes for the WDS
equipment business, as well as an increase in product costs due to a product mix
shift. As a result, WDS's cost of products as a percent of sales increased from
87.0% in 1998 to 90.6% in 1999. The remaining $34.4 million increase is
attributable to higher volumes of traffic on the network for our wholly owned
northern Mexico subsidiaries resulting from customer growth.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $24.1 million, or 43.9%, from
$54.9 million in 1998 to $79.0 million in 1999. Of the increase, $20.2 million
relates to Norcel and Cedetel, which incurred additional expenses in order to
support subscriber increases of more than 100%. These expense increases were
approximately $5.9 million for advertising, $7.6 million for selling, general
and administrative, and $6.7 million for employee-related costs. The remaining
$3.5 million increase was primarily attributable to WDS, where cooperative
advertising expenses increased by $1.7 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$4.6 million, or 13.8%, from $33.0 million in 1998 to $37.6 million in 1999. The
increase was primarily attributable to a $5.1 million increase in depreciation
related to additional capital expenditures made by Norcel and Cedetel for
wireless equipment necessary to expand the network and infrastructure in order
to support continued growth.
SHARE OF EARNINGS (LOSSES) OF AFFILIATES. Share of earnings of affiliates
decreased by $79.6 million, or 167.2%, from $47.6 million in 1998 to $(32.0)
million in 1999.
Of the decrease, $32.4 million was attributable to Latin America, where our
share of losses in Brazil increased by $57.1 million relating to having
initiated service in the third quarter of 1998 and incurring significant
subscriber acquisition costs, as well as our share of increased interest expense
and foreign exchange losses of $20.7 million and $7.2 million, respectively. In
Chile, our share of earnings increased by $13.1 million. Of the increase,
$9.6 million related to our share of revenue growth, and $16.9 million related
to gains on the sale of ETP's 800 MHz licenses in 1999. These increases in Chile
were partially offset by $8.1 million in higher subscriber acquisition costs and
approximately $3.2 million in increased tax and interest expense. In addition,
our share of losses in Brazil were partially offset by northern Mexico, where
our share of profitability increased by $7.8 million resulting primarily from
revenue growth.
Share of earnings (losses) of affiliates decreased by $47.4 million in the
Europe/Middle East region, where our share of profitability in Israel decreased
by $60.3 million primarily due to increased operating costs resulting from
competitive pressure and network fraud, which were partially offset by an
$18.3 million tax benefit. The losses in Israel were partially offset by our
share of reduced losses in
49
<PAGE>
Egypt of $7.0 million, resulting primarily from revenue growth, and by increased
profitability in Lithuania of $4.0 million.
In Asia, our share of profitability remained largely unchanged due to the
shareholders' equity of our Hong Kong investment falling below zero in 1997,
reducing our carrying value in this investment to zero for accounting purposes.
INTEREST EXPENSE. Interest expense was allocated by Motorola to Propel
based on Propel's proportionate share of Motorola's worldwide net assets.
Fluctuations in interest expense are attributable to either changes in Propel's
proportionate share of Motorola's net assets, or Motorola's overall relationship
of interest expense to net assets.
OTHER INCOME (EXPENSE). Other income increased by $23.5 million, from
$25.4 million in 1998 to $48.8 million in 1999. Of the increase, $6.0 million
was related to a foreign exchange gain from the appreciation of the Mexican
peso, and a change in functional currency from the U.S. dollar to the Mexican
peso. Corporate other income increased by $17.6 million, from $25.7 million in
1998 to $43.3 million in 1999. Of the increase, $7.6 million related to the
excess of the $39.1 million gain on the sale of part of our investment in Korea
in 1999 that reduced our interest from 2.8% to 1.9% over the $31.5 million in
gain that was realized from a sale of part of our ownership in Lithuania in 1998
that reduced our interest from 45.4% to 35.0%. Additionally, other income
(expense) was favorably impacted due to the 1998 results having included an
impairment write-down attributable to our investment in Korea of $7.3 million.
INCOME TAX EXPENSE (BENEFIT). Income taxes expense increased by
$17.6 million from $(1.0) million to $16.6 million. Of this increase,
$7.8 million was related to an increase in corporate income as discussed in
"Other Income (Expense)"; and $4.7 million was related to an increase in
deferred taxes on unrepatriated earnings in certain of our equity affiliates.
Additionally, changes in Mexico's operating loss carryforwards resulted in an
increase of $3.9 million in tax expense.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Our total revenues increased by $65.4 million, or 40.7%, from
$160.9 million in 1997 to $226.3 million in 1998.
Service revenues for the controlled northern Mexico operating subsidiaries
increased by $16.1 million, or 28.7%, from $56.1 million in 1997 to
$72.3 million in 1998. The increase was primarily the result of a 177.8% and
198.3% increase in subscribers for Norcel and Cedetel, respectively. This
subscriber increase reflected the rapid increase in overall market penetration
for these regions of Mexico.
Subscriber equipment revenues increased by $49.3 million, or 47.1%, from
$104.8 million in 1997 to $154.1 million in 1998. Of the increase,
$34.6 million was related to WDS, which benefitted from an approximate 35%
growth in wireless penetration in Israel. Additionally, incentives were provided
by Israeli operators in anticipation of the introduction of a third competitor
in the fourth quarter of 1998, and a product mix shift occurred toward more
expensive analog and digital products which caused average unit prices to
increase. The remaining $14.7 million in increased subscriber equipment revenue
was attributable to the controlled northern Mexico subsidiaries resulting from
customer growth.
COST OF SERVICES AND PRODUCTS. Cost of services and products increased by
$47.8 million, or 39.8%, from $120.1 million in 1997 to $167.8 million in 1998.
Of the increase, $27.6 million was attributable to higher handset unit volumes
for WDS, and $20.2 million was related to higher network volumes for the
controlled Mexican subsidiaries resulting from subscriber growth.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.3 million, or 4.3%, from $52.6 million
in 1997 to $54.9 million in 1998. Of the increase,
50
<PAGE>
$2.4 million was related to employee-related expenses in Mexico. Selling,
general and administrative expenses for WDS increased by $1.7 million primarily
due to the effect of the revenue increase on cooperative advertising expenses,
which are accrued as a percentage of sales. Corporate selling, general and
administrative expenses decreased by $1.8 million primarily resulting from a
decrease in employee and travel related costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$4.9 million, or 17.4%, from $28.2 million in 1997 to $33.0 million in 1998. Of
the increase, $2.5 million was attributable to amortization of intangibles and
$1.9 million was attributable to additional capital expenditures made by our
northern Mexico operating companies for wireless equipment necessary to expand
the network and infrastructure in order to support continued growth. Corporate
depreciation increased by $0.4 million due to increased leasehold improvements.
SHARE OF EARNINGS (LOSSES) OF AFFILIATES. Share of earnings of affiliates
increased by $3.4 million, or 7.7%, from $44.2 million in 1997 to $47.6 million
in 1998.
Our share of Latin America net earnings increased by $6.0 million from
$7.4 million to $13.4 million. Our share of earnings decreased in Chile by
$7.7 million due primarily to an increase in depreciation and interest expenses.
Our share of earnings decreased by $4.8 million in Brazil due to the launch of
service in the third quarter of 1998. These decreases were offset by increases
of $7.1 million in the Dominican Republic and $6.4 million in Argentina
attributable primarily to revenue growth.
Our share of Europe/Middle East earnings decreased $7.9 million from
$42.4 million to $34.5 million. Egypt was acquired in 1998 and we recorded our
share of negative earnings of $14.1 million, which was partially offset by an
increase in our share of earnings of $5.5 million in Lithuania due to revenue
growth.
Our share of Asian losses decreased by $5.3 million. Our share of losses
decreased in Hong Kong by $3.1 million as a result of shareholders' equity of
that company falling below zero in 1997 reducing our carrying value in this
investment to zero for accounting purposes, and in Pakistan our share of losses
decreased by $2.2 million due to reduced operating costs.
INTEREST EXPENSE. Interest expense was allocated by Motorola to Propel
based on Propel's proportionate share of Motorola's worldwide net assets.
Fluctuations in interest expense are attributable to either changes in Propel's
proportionate share of Motorola's net assets, or Motorola's overall relationship
of interest expense to net assets.
OTHER INCOME (EXPENSE). Other income (expense) decreased by $23.9 million,
from $49.2 million in 1997 to $25.3 million in 1998. Of the decrease,
$4.0 million was attributable to Mexico and relates primarily to foreign
exchange losses. Corporate other income decreased by $19.9 million, of which
$22.3 million relates to the difference between the $31.5 million gain on the
sale of a portion of our investment in Lithuania, reducing our ownership
interest from 45.4% to 35.0%, and the $44.2 million net gain that was realized
from the sale of a portion of our ownership in Pakistan in 1997, reducing our
ownership percentage from 74.0% to 30.0%. Additionally, a $7.3 million asset
impairment loss was taken on our investment in Korea in 1998.
INCOME TAX EXPENSE (BENEFIT). Income taxes expense decreased by
$8.7 million, from $7.7 million in 1997 to $(1.0) million in 1998. The decrease
primarily relates to a reduction in corporate income, as discussed in "Other
Income (Expense)," which decreased taxes by $10.5 million. Changes in an
operating loss carryforward relating to Mexico resulted in a decrease of
$4.5 million in tax expense. The decreases were offset by increases in deferred
taxes on unrepatriated earnings in certain of our equity affiliates of
$4.0 million, and by an increase in taxes of $2.0 million for WDS is related to
increased profitability.
51
<PAGE>
PROPORTIONATE RESULTS OF OPERATIONS
The proportionate information in this section describes our proportional
share in the results of operations of our operating companies, including our
wholly owned subsidiaries. When we refer to our proportionate share of an
operating company's subscribers, that number is calculated by multiplying the
subscriber information of that operating company by our economic ownership
interest in that operating company at the end of the reporting period. When we
refer to our proportionate share of an operating company's revenues or EBITDA,
that number is calculated by multiplying U.S. dollar and U.S. GAAP-reconciled
revenue or EBITDA information and, in the cases of Mexico, Chile and Israel,
eliminating the effects of inflationary accounting, from that operating company,
as the case may be, by our weighted average economic ownership interest in that
operating company during the reporting period. This presentation does not, and
is not intended to, replace the discussion of our consolidated results of
operations as calculated in accordance with generally accepted accounting
principles that appears above. For more information on our consolidated results
of operations, see "--Consolidated Results of Operations."
The following table sets forth each of our operating companies'
proportionate revenue, EBITDA and subscribers for each of the three years in the
period ended December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997
OPERATING -------------------------------------------------
REGION/COUNTRY COMPANY NAME SUBSCRIBERS REVENUE EBITDA
-------------- ------------ ----------- ------- ------
(IN MILLIONS, EXCEPT SUBSCRIBER DATA IN THOUSANDS)
<S> <C> <C> <C> <C>
LATIN AMERICA
NORTHERN MEXICO...... Bajacel 27 $ 19.8 $ 6.2
Movitel 33 20.3 7.6
Norcel 27 17.2 1.5
Cedetel 59 45.5 9.0
ARGENTINA............ Movicom Argentina 157 149.5 54.1
BRAZIL............... Global Telecom -- -- --
CHILE................ ETP 16 20.1 1.0
DOMINICAN REPUBLIC... Tricom 16 36.0 12.6
URUGUAY.............. Movicom Uruguay 12 14.4 6.9
SOUTHERN MEXICO...... Portatel 7 4.4 0.7
----- -------- ------
TOTAL LATIN AMERICA............................. 355 $ 327.2 $ 99.6
===== ======== ======
EUROPE/MIDDLE EAST
ISRAEL............... Pelephone 447 $ 340.4 $132.8
EGYPT................ MobiNil -- -- --
LITHUANIA............ Omnitel 36 21.9 4.5
JORDAN............... Fastlink 11 12.0 4.6
AZERBAIJAN(1)........ Bakcell 6 7.7 2.0
----- -------- ------
TOTAL EUROPE/MIDDLE EAST........................ 500 $ 382.0 $143.9
===== ======== ======
ASIA
HONG KONG............ HTCL 179 $ 162.2 $ 9.6
PAKISTAN............. Mobilink 16 9.2 1.8
----- -------- ------
TOTAL ASIA...................................... 195 $ 171.4 $ 11.3
===== ======== ======
TOTAL PROPORTIONATE............................... 1,050 $ 880.6 $254.8
===== ======== ======
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
1998 1999
------------------------------------------------- -------------------------------------------------
REGION/COUNTRY SUBSCRIBERS REVENUE EBITDA SUBSCRIBERS REVENUE EBITDA
-------------- ----------- ------- ------ ----------- ------- ------
(IN MILLIONS, EXCEPT SUBSCRIBER DATA IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
LATIN AMERICA
NORTHERN MEXICO...... 56 $ 26.7 $ 7.0 123 $ 45.3 $ 12.6
69 29.8 9.4 165 50.4 15.2
75 29.4 7.2 168 48.4 8.7
176 68.0 12.0 362 106.1 13.0
ARGENTINA............ 221 187.2 76.0 293 207.5 76.7
BRAZIL............... -- 0.3 (4.3) 57 12.1 (20.4)
CHILE................ 46 18.9 (1.9) 164 47.7 7.7
DOMINICAN REPUBLIC... 33 42.7 18.3 54 52.6 23.2
URUGUAY.............. 17 18.9 8.7 37 27.6 11.3
SOUTHERN MEXICO...... 14 6.0 1.2 19 7.6 1.4
----- -------- ------ ----- -------- ------
TOTAL LATIN AMERICA 707 $ 428.0 $133.5 1,443 $ 605.3 $149.4
===== ======== ====== ===== ======== ======
EUROPE/MIDDLE EAST
ISRAEL............... 466 $ 370.9 $134.2 555 $ 354.7 $ 44.6
EGYPT................ 29 17.7 (4.1) 91 64.8 14.2
LITHUANIA............ 51 36.9 11.9 69 31.0 16.6
JORDAN............... 18 21.3 8.8 25 25.9 11.9
AZERBAIJAN(1)........ 9 18.0 6.8 3 3.4 0.3
----- -------- ------ ----- -------- ------
TOTAL EUROPE/MIDDLE 573 $ 464.8 $157.7 743 $ 479.9 $ 87.6
===== ======== ====== ===== ======== ======
ASIA
HONG KONG............ 268 $ 156.8 $ 7.0 340 $ 151.6 $(38.9)
PAKISTAN............. 26 9.2 3.9 28 10.5 4.4
----- -------- ------ ----- -------- ------
TOTAL ASIA......... 294 $ 166.0 $ 11.0 368 $ 162.1 $(34.5)
===== ======== ====== ===== ======== ======
TOTAL PROPORTIONATE.. 1,574 $1,058.7 $302.1 2,554 $1,247.3 $202.5
===== ======== ====== ===== ======== ======
</TABLE>
----------------------------------
(1) Operating company revenues and EBITDA for Azerbaijan reflect the results of
operations for GTIB, a holding company which purchases cellular
infrastructure and handsets and sells this equipment to Bakcell and provides
management services to Bakcell for a fee. Because it did not own a majority
of Bakcell during the periods presented, GTIB's results of operations do not
reflect Bakcell's revenues and EBITDA associated with wireless services.
GTIB will begin to consolidate the financial results of Bakcell in the
second quarter of 2000.
52
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
1999 2000
OPERATING --------------------------------- ---------------------------------
REGION/COUNTRY COMPANY NAME SUBSCRIBERS REVENUE EBITDA SUBSCRIBERS REVENUE EBITDA
-------------- ------------ ----------- ------- ------ ----------- ------- ------
(IN MILLIONS, EXCEPT SUBSCRIBER DATA, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
LATIN AMERICA
NORTHERN MEXICO........... Bajacel 67 $ 8.9 $ 3.1 132 $ 13.9 $ 2.9
Movitel 88 10.6 3.9 173 14.8 6.2
Norcel 95 9.8 1.7 185 12.4 2.3
Cedetel 215 22.3 4.3 395 33.3 7.0
ARGENTINA................. Movicom Argentina 241 50.5 19.4 332 51.9 11.6
BRAZIL.................... Global Telecom 3 0.7 (2.5) 65 8.3 (3.0)
CHILE..................... ETP 58 7.5 -- 196 18.7 4.5
DOMINICAN REPUBLIC........ Tricom 39 10.7 4.9 59 15.7 6.8
URUGUAY................... Movicom Uruguay 27 7.4 3.4 45 7.6 3.3
SOUTHERN MEXICO........... Portatel 16 1.7 0.3 21 2.2 0.4
----- ------ ----- ----- ------ -----
TOTAL LATIN AMERICA......................... 848 $130.1 $38.6 1,603 $178.8 $41.9
===== ====== ===== ===== ====== =====
EUROPE/MIDDLE EAST............................
ISRAEL Pelephone 480 $ 91.8 $18.4 586 $101.2 $17.9
EGYPT..................... MobiNil 41 10.4 (0.3) 112 24.0 7.1
LITHUANIA................. Omnitel 52 7.3 3.9 74 6.3 2.7
JORDAN.................... Fastlink 20 5.6 2.7 33 6.6 3.5
AZERBAIJAN(1)............. Bakcell 6 0.9 (0.1) 6 0.3 0.1
----- ------ ----- ----- ------ -----
TOTAL EUROPE/MIDDLE EAST.................... 598 $116.1 $24.6 811 $138.4 $31.4
===== ====== ===== ===== ====== =====
ASIA
HONG KONG................. HTCL 299 $ 40.7 $(2.1) 360 $ 41.9 $ 4.5
PAKISTAN.................. Mobilink 27 2.6 1.2 31 3.2 1.5
----- ------ ----- ----- ------ -----
TOTAL ASIA.................................. 325 $ 43.3 $(0.9) 390 $ 45.2 $ 6.0
===== ====== ===== ===== ====== =====
TOTAL PROPORTIONATE........................... 1,771 $289.5 $62.3 2,805 $362.3 $79.3
===== ====== ===== ===== ====== =====
</TABLE>
------------------------------
(1) Operating company revenues and EBITDA for Azerbaijan reflect the results of
operations for GTIB, a holding company which purchases cellular
infrastructure and handsets and sells this equipment to Bakcell and provides
management services to Bakcell for a fee. Because it did not own a majority
of Bakcell during the periods presented, GTIB's results of operations do not
reflect Bakcell's revenues and EBITDA associated with wireless services.
GTIB will begin to consolidate the financial results of Bakcell in the
second quarter of 2000.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
PROPORTIONATE REVENUES
TOTAL PROPORTIONATE REVENUES. Total proportionate operating company
revenues increased by $72.8 million, or 25.2%, from $289.5 million for the three
months ended March 31, 1999 to $362.3 million for the three months ended
March 31, 2000.
LATIN AMERICA. Proportionate Latin American revenues increased
$48.7 million, or 37.4%, from $130.1 million for the three months ended
March 31, 1999 to $178.8 million for the three months ended March 31, 2000. The
increase was primarily the result of an 89.0% increase in proportionate
subscribers, from 848,000 for the three months ended March 31, 1999 to
1.60 million for the three months ended March 31, 2000, which was offset by
lower ARPU primarily related to the rapid growth of prepaid subscribers. The
proportionate subscriber increase was most pronounced in northern Mexico, which
increased by 420,000, or 90.4%, and Chile, which increased by 138,000, or
237.7%, and in Brazil which only began offering its service in December 1998.
Proportionate revenues from our operating companies in northern Mexico increased
by $22.8 million to $74.4 million for the three months ended March 31, 2000
primarily due to the benefits from the introduction of calling party pays in the
second quarter of 1999 as well as an increase in prepaid services. Proportionate
revenues in
53
<PAGE>
Chile increased by $11.2 million to $18.7 million for the three months ended
March 31, 2000 due to the rapid market acceptance of prepaid services.
Proportionate revenues in Brazil increased by $7.6 million to $8.3 million for
the three months ended March 31, 2000, due to a significant increase in
subscribers and an increase in our ownership of Global Telecom from 22% to 35.5%
during 1999.
EUROPE/MIDDLE EAST. Proportionate Europe/Middle East revenues increased by
$22.3 million, or 19.2%, from $116.1 million for the three months ended
March 31, 1999 to $138.4 million for the three months ended March 31, 2000. The
increase in proportionate revenues was primarily the result of a 35.8% increase
in proportionate subscribers, from 598,000 to 811,000, and partially offset by
lower ARPU. This proportionate subscriber increase occurred primarily in Egypt
and Israel, which increased proportionate subscribers by 71,000, or 174.2%, and
106,000, or 22.1%, respectively. In addition to the Egyptian subscriber increase
and corresponding airtime revenue growth, interconnect revenues increased
rapidly due to the expansion in prepaid customers, who generally receive more
calls than they make. In Lithuania, proportionate revenues decreased by
$1.1 million, resulting primarily from the effects of Lithuania's economic
recession brought on by the Russian financial crisis.
ASIA. Proportionate Asian revenues increased $1.8 million, or 4.3%, from
$43.3 million for the three months ended March 31, 1999 to $45.2 million for the
three months ended March 31, 2000. The increase resulted primarily from growth
in proportionate subscribers in Hong Kong, which increased 20.6%, from 299,000
at March 31, 1999 to 360,000 at March 31, 2000, despite a reduction in our
ownership percentage from 30% to 25.1%, which occurred in December 1999. The
proportionate subscriber increase was partially offset by price reductions,
resulting in a decline in ARPU, due to the competitive environment.
PROPORTIONATE EBITDA
TOTAL PROPORTIONATE EBITDA. Total proportionate operating company EBITDA
increased by $17.0 million, or 27.2%, from $62.3 million to $79.3 million for
the three months ended March 31, 2000.
LATIN AMERICA. Proportionate Latin American EBITDA increased $3.3 million,
or 8.5%, from $38.6 million for the three months ended March 31, 1999 to
$41.9 million for the three months ended March 31, 2000. The increase is
primarily related to northern Mexico and Chile, where proportionate EBITDA
improved by $5.2 million and $4.5 million, respectively, resulting from revenue
growth generated by increased subscribers. The increases were mostly offset by a
$7.8 million erosion in proportionate EBITDA and a decline in EBITDA margin in
Argentina, which was attributable to price reductions and increased acquisition
costs to support the 38.1% increase in proportionate subscribers, as well as
additional expenses related to the commencement of long distance and PCS
services scheduled for mid 2000. Proportionate EBITDA in the Dominican Republic
increased $1.9 million, or 39.4%, to $6.8 million for the three months ended
March 31, 2000, resulting primarily from revenue growth across its
service offerings except paging.
EUROPE/MIDDLE EAST. Proportionate Europe/Middle East EBITDA increased by
$6.8 million, or 27.7%, from $24.6 million for the three months ended March 31,
1999 to $31.4 million for the three months ended March 31, 2000. The increase
was primarily related to Egypt, where proportionate EBITDA increased
$7.4 million to $7.1 million for the three months ended March 31, 2000, which
resulted in an EBITDA margin of 30% as compared to (3)% for the three months
ended March 31, 1999. This increase was primarily due to a 130.6% increase in
proportionate revenues. The Egyptian increase was partially offset by a decrease
in proportionate EBITDA in Lithuania of $1.2 million to $2.7 million for the
three months ended March 31, 2000 resulting from a decrease in revenues. While
proportionate subscribers in Israel increased by 22.1%, increased competitive
pressures resulted in higher marketing expenses, including handset subsidies,
dealer commissions, and advertising, resulting in a decrease in proportionate
EBITDA of $0.5 million to $17.9 million for the three months ended
54
<PAGE>
March 31, 2000. EBITDA margin in Israel was 18% for the three months ended
March 31, 2000, as compared to 20% for the three months ended March 31, 1999 and
13% for the year ended December 31, 1999.
ASIA. Proportionate Asian EBITDA increased $6.9 million, from
$(0.9) million for the three months ended March 31, 1999 to $6.0 million for the
three months ended March 31, 2000. EBITDA margin in Hong Kong improved to 11%
for the three months ended March 31, 2000 from (5)% for the three months ended
March 31, 1999 and from (26)% for the year ended December 31, 1999. The
improvement was primarily the result of reduction in handset subsidies and the
implementation of operational cost controls in Hong Kong.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
PROPORTIONATE REVENUE
TOTAL PROPORTIONATE REVENUE. Total proportionate operating company revenue
increased by $188.6 million, or 17.8%, from $1,058.7 million in 1998 to
$1,247.3 million in 1999.
LATIN AMERICA. Proportionate Latin American revenues increased
$177.3 million, or 41.4%, from $428.0 million in 1998 to $605.3 million in 1999.
The increase was primarily the result of an increase in proportionate
subscribers of 736,000, or 104.0%, from 707,000 in 1998 to 1.4 million in 1999,
which was offset by lower ARPU related to the rapid growth of prepaid
subscribers. The proportionate subscriber increase was most pronounced in
northern Mexico, which increased by 443,000, or 117.8%, and Chile, which
increased by 118,000, or 254.6%. Proportionate revenues from our operating
companies in northern Mexico increased by $96.3 million, or 62.5%, benefitting
from the introduction of calling party pays service in the second quarter of
1999, as well as rapid market acceptance of prepaid services during 1999, which
were introduced in 1998. Proportionate revenues in Chile increased
$28.8 million, or 152.4%, primarily due to the accelerated deployment of prepaid
services. Proportionate revenues from Brazil increased by $11.8 million to
$12.1 million in 1999, the first full year of operation of Global Telecom.
EUROPE/MIDDLE EAST. Proportionate Europe/Middle East revenues increased
$15.1 million, or 3.3%, from $464.8 million in 1998 to $479.9 million in 1999.
The increase in proportionate revenues was primarily a result of a 29.8%
increase in proportionate subscribers from 573,000 in 1998 to 743,000 in 1999,
which was offset by lower ARPU related to the rapid growth of prepaid
subscribers. The largest subscriber increase occurred in Egypt, which in
July 1998 relaunched operations that were acquired earlier in the year from the
Egyptian government and for which 1999 was the first full year of operations.
Our proportionate revenues in Egypt increased $47.1 million, or 265.7%, from
$17.7 million in 1998 to $64.8 million in 1999. The increase was primarily the
result of a 216.9% increase in our proportionate subscribers and of increased
roaming revenues reflecting increased roaming traffic from a more than ten-fold
increase in the number of roaming agreements in 1999. Proportionate revenues
also increased in Jordan by $4.6 million, or 21.4%, primarily resulting from a
34% increase in subscribers and increased roaming revenues. However,
proportionate revenues in Israel decreased $16.2 million, or 4.4%, from
$370.9 million in 1998 to $354.7 million in 1999 despite a 19.1% increase in
subscibers. This decrease was the result of difficulties encountered stabilizing
the new CDMA network, airtime credits issued to the NAMPS network customers as a
result of wireless fraud, and pricing pressure resulting from the introduction
of a new GSM competitor to the market in January 1999. Also, Lithuanian
proportionate revenues decreased by $5.8 million, or 15.9%, due to the economic
recession brought on by the Russian financial crisis, and a decline in our
ownership from 45.4% to 35% that occurred in September 1998. Proportionate
revenues in Azerbaijan decreased by $14.6 million due to difficulties in
importing wireless infrastructure equipment which were resolved only in the
latter part of 1999. Azeri revenues represent the results of the business
activities of the holding company, GTIB, which, in
55
<PAGE>
addition to its investment in Bakcell, purchases cellular infrastructure and
handsets and sells this equipment to Bakcell and provides management services to
Bakcell for a fee.
ASIA. Proportionate Asian revenues decreased $3.9 million, or 2.3%, from
$166.0 million in 1998 to $162.1 million in 1999. The decrease was primarily the
result of a $5.2 million decrease in our proportionate Hong Kong revenues as a
result of price reductions to increase market share beginning in March 1999.
Hong Kong's proportionate subscribers increased 26.9%, from 268,000 in 1998 to
340,000 in 1999. Additionally, our ownership interest in Hong Kong was diluted
from 30.0% to 25.1% in December 1999.
PROPORTIONATE EBITDA
TOTAL PROPORTIONATE EBITDA. Total proportionate operating company EBITDA
decreased by $99.6 million, or 33.0%, from $302.1 million in 1998 to
$202.5 million in 1999.
LATIN AMERICA. Proportionate Latin American EBITDA increased by
$15.9 million, or 11.9%, from $133.5 million in 1998 to $149.4 million in 1999.
EBITDA growth in 1999 was adversely affected by Brazil, whose proportionate
EBITDA decreased $16.1 million, from $(4.3) million in 1998 to $(20.4) million
in 1999 primarily as a result of efforts to increase market share requiring CDMA
handset subsidies to achieve similar pricing as Global Telecom's competitor, who
operates a TDMA network that generally requires less expensive handsets.
Proportionate EBITDA from our operating companies in northern Mexico increased
$13.9 million, or 39.3%, resulting primarily from revenue growth which was
somewhat offset by higher operating costs including dealer commissions, handset
subsidies, and interconnection costs, as well as administrative and support
costs resulting in a decline in EBITDA margin from 23% to 20%. Proportionate
EBITDA from our operating companies in Chile and the Dominican Republic
increased by $9.6 million and $4.9 million, respectively, mainly due to
increased revenues. EBITDA margin in Chile increased to 16% in 1999 from (10)%
in 1998.
EUROPE/MIDDLE EAST. Proportionate Europe/Middle East EBITDA decreased by
$70.1 million, or 44.4%, from $157.7 million in 1998 to $87.6 million in 1999.
The decrease in proportionate EBITDA was primarily related to Israel, where
proportionate EBITDA decreased by $89.6 million, or 66.8%, due to a decline in
proportionate revenues of $16.2 million and increased operating costs, including
handset subsidies initiated in 1999, a brand positioning campaign, and network
fraud related costs. EBITDA margin in Israel declined to 13% in 1999 from 36% in
1998. Proportionate Egyptian EBITDA increased $18.3 million, from
$(4.1) million in 1998 to $14.2 million in 1999 as growth in proportionate
subscribers and revenue from connection fees outpaced growth in operating costs.
Lithuanian proportionate EBITDA increased $4.7 million, or 39.3%, resulting
primarily from a shift in the marketplace toward prepaid service, and the
corresponding lower average acquisition costs, as well as lower bad debt and
billing expenses.
ASIA. Proportionate Asian EBITDA decreased by $45.5 million, from
$11.0 million in 1998 to $(34.5) million in 1999. The decrease was primarily the
result of the launch of mobile number portability in Hong Kong, which allows
subscribers to keep their phone numbers when switching operators. This resulted
in intense price competition which drove down revenue and increased handset
subsidies. EBITDA margin in Hong Kong declined to (26)% in 1999 from 4% in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
PROPORTIONATE REVENUES
TOTAL PROPORTIONATE REVENUES. Total proportionate operating company
revenues increased by $178.2 million, or 20.2%, from $880.6 million in 1997 to
$1,058.7 million in 1998.
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<PAGE>
LATIN AMERICA. Proportionate Latin American revenues increased by
$100.8 million, or 30.8%, from $327.2 million in 1997 to $428.0 million in 1998.
The revenue increase was primarily the result of a 99.5% increase in
proportionate subscribers, from 355,000 in 1997 to 707,000 in 1998 that was
offset by lower ARPU related to the rapid growth of prepaid subscribers. The
proportionate subscriber increase occurred mainly in northern Mexico, where
mass-market penetration increased primarily through prepaid offerings, resulting
in a proportionate revenue increase of $51.2 million, or 49.8%. Proportionate
revenues in Argentina increased by $37.7 million, or 25.3%, due to a 40.7%
increase in subscribers and the increased deployment of value-added services
such as roaming and voice mail that resulted in airtime increases, and detailed
billing. Proportionate revenues in the Dominican Republic increased by
$6.7 million due to increases in local and international volumes, as well as
growth in cellular airtime minutes generated by the prepaid program. This
proportionate revenue increase occurred in spite of our ownership percentage
decreasing from 40% to 30.8% resulting from the operating company's public
offering of American Depository Shares in the second quarter of 1998.
EUROPE/MIDDLE EAST. Proportionate Europe/Middle East revenues increased
$82.8 million, or 21.7%, from $382.0 million in 1997 to $464.8 million in 1998.
The increase in proportionate revenues was primarily the result of a 14.5%
increase in proportionate subscribers. MobiNil purchased its license in
April 1998 from the Egyptian government and assumed ownership of an existing GSM
network with approximately 80,000 subscribers from Telecom Egypt. MobiNil began
adding new subscribers to its network in July 1998 after stabilizing the network
and adding capacity. Proportionate Egyptian revenues in 1998 were
$17.7 million. Proportionate Israeli revenues increased $30.5 million, or 8.9%,
primarily as a result of price increases. In addition, Lithuanian proportionate
revenues increase $15.0 million primarily as a result of a 42.5% increase in
proportionate subscribers from 36,000 to 51,000 in spite of a sell-down of our
ownership from 45.5% to 35%. Proportionate revenues in Azerbaijan increased by
$10.3 million due to a sale of a new GSM system from our holding company, GTIB,
to the operating company, Bakcell.
ASIA. Proportionate Asian revenues decreased by $5.4 million, or 3.2%, from
$171.4 million in 1997 to $166.0 million in 1998. The decrease was primarily the
result of aggressive competition to increase market share in Hong Kong, where
proportionate subscriber growth of 49.4% was outpaced by price reductions.
PROPORTIONATE EBITDA
TOTAL PROPORTIONATE EBITDA. Total proportionate operating company EBITDA
increased by $47.3 million, or 18.6%, from $254.8 million in 1997 to
$302.1 million in 1998.
LATIN AMERICA. Proportionate Latin American EBITDA increased by
$33.9 million, or 34.0%, from $99.6 million in 1997 to $133.5 million in 1998.
The increase occurred primarily in Argentina, where proportionate EBITDA
increased by $21.9 million, mainly related to revenue growth. Proportionate
EBITDA from our operating companies in northern Mexico increased $11.2 million,
or 45.8%, primarily due to increased revenues. Our operating company in Brazil
commenced operations in the third quarter of 1998, resulting in proportionate
EBITDA of $(4.3) million.
EUROPE/MIDDLE EAST. Proportionate Europe/Middle East EBITDA increased by
$13.8 million, or 9.6%, from $143.9 million in 1997 to $157.7 million in 1998.
Of the increase, $7.5 million was related to Lithuania, where 68.6% revenue
growth outpaced growth in operating expenses. Additionally, proportionate EBITDA
increased by $4.2 million and $1.4 million in Jordan and Israel, respectively,
primarily due to increases in subscribers and revenue. These increases were
partially offset by Egyptian EBITDA of $(4.1) resulting from the network's July
1998 relaunch subsequent to its acquisition from the Egyptian government in
April 1998.
ASIA. Proportionate Asian EBITDA decreased by $350,000, or 3.1%, from
$11.3 million in 1997 to $11.0 million in 1998. This decrease was primarily the
result of a $2.5 million decrease in
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<PAGE>
proportionate Hong Kong EBITDA due to higher subscriber acquisition costs. This
was offset by a $2.2 million increase in Pakistan EBITDA that resulted from cost
reductions.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth our consolidated cash flows from operating,
investing and financing activities for each of the three years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 1999
and 2000.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ -------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash provided by (used in):
Operating activities.............. $ (19.8) $ (10.3) $ 1.1 $(16.4) $ 0.2
Investing activities.............. (145.3) (162.7) (121.1) (9.7) (21.5)
Financing activities.............. 172.3 173.2 124.9 20.1 16.1
</TABLE>
CASH AND CASH EQUIVALENTS
At March 31, 2000 cash and cash equivalents totaled $13.7 million, as
compared to $18.8 million at December 31, 1999, $13.5 million at December 31,
1998 and $16.3 million at December 31, 1997.
Total cash and cash equivalents of our non-consolidated operating companies
was $244.4 million as of December 31, 1999, as compared to $229.9 million as of
December 31, 1998 and $101.2 million at December 31, 1997. Our proportionate
share of cash and cash equivalents of our non-consolidated operating companies
was $58.9 million as of December 31, 1999 and $55.7 million as of December 31,
1998 and $42.5 million at December 31, 1997.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $0.2 million for the quarter
ended March 31, 2000 as compared to net cash used in operating activities of
$16.4 million for the quarter ended March 31, 1999. The increase in cash from
operations reflects $5.5 million from operating earnings offset by $5.2 million
use of funds for working capital. Net cash from operating activities was
$1.1 million for the year ended December 31, 1999. The increase in cash from
operations reflects $3.1 million used by operating activities offset by
$4.2 million from working capital and deferred taxes. Net cash used in operating
activities was $10.3 million for the year ended December 31, 1998. Operating
activities used $12.8 million of cash which was partially offset by
$2.4 million cash generated by working capital and deferred taxes. Net cash used
in operating activities was $19.8 million for the year ended December 31, 1997.
Operating activities used $26.5 million which was partially offset by
$6.7 million in cash generated by working capital and deferred taxes.
NET CASH USED IN INVESTING ACTIVITIES
For the quarter ended March 31, 2000 we expended $21.5 million in investing
activities, of this amount, $11.9 million was used for capital expenditures to
expand, support and improve our consolidated operating companies' wireless
networks, promote the introduction of new products and services and to increase
operating efficiency and productivity, and $9.6 million was used to increase our
investment in our non-consolidated operating companies. For the quarter ended
March 31, 1999, we expended $9.7 million in investing activities, of this
$8.9 million was used for capital expenditures and $0.7 million to increase our
investment in our non-consolidated operating companies.
For the years ended December 31, 1999, we expended $121.1 million in
investing activities. We spent $58.3 million in 1999 on capital expenditures to
expand, support and improve our consolidated
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operating companies' wireless networks, promote the introduction of new products
and services and to increase operating efficiency and productivity. In addition,
we increased our ownership percentage in Brazil by 13.5% to 35.5% through an
investment of $76 million. Additionally, we acquired a 16.1% ownership interest,
on a fully diluted basis, of Zephyr through an investment of $4 million.
Proceeds from the sale of cost investments yielded $42 million.
For the year ended December 31, 1998 we expended $162.7 million in investing
activities. Of this amount $18.9 million was used for capital expenditures to
expand, support and improve our consolidated operating companies' wireless
networks, promote the introduction of new products and services and to increase
operating efficiencies and productivity. We expended $143.7 million to increase
our investments in our non-consolidated operating companies.
For the year ended December 31, 1997 we expended $145.3 million in investing
activities. Of this amount, $24.2 million was used for capital expenditures to
expand, support and improve our operating companies' wireless networks, promote
the introduction of new products and services and to increase operating
efficiencies and productivity. We spent $121.1 million to increase our
investments in our non-consolidated operating companies.
We expect to incur capital expenditures of $70 to $75 million for the year
ended December 31, 2000. A majority of these expenditures will be allocated to
expand and modernize the wireless networks of our consolidated operating
companies in Mexico. On May 19, 2000 and May 24, 2000, we entered into
agreements for an aggregate consideration of approximately $337 million to
acquire the remaining interest in Bajacel, which owns a 68% interest in Movitel,
a transaction we expect to complete in July 2000. In addition, in April 2000, we
invested an additional $45 million in our Brazilian operating company, Global
Telecom. We also increased our ownership in Zephyr from 16.1% to 16.8% in
January 2000 for $2 million. At this time, we do not anticipate any required
capital calls in 2000 for our non-consolidated operating companies, although we
cannot assure you that this will be the case. We currently expect the
shareholders to invest approximately $50 million in Movicom Argentina in 2001,
of which our share would be approximately $12.5 million.
Some of our non-consolidated operating companies that we account for under
the equity method of accounting have debt covenants that restrict the payment of
cash dividends.
NET CASH FROM FINANCING ACTIVITIES
Historically, the initial source of funding for the capital requirements of
our consolidated entities has been cash provided by Motorola. During 1997, 1998,
1999 and the first quarter of 2000, Motorola provided financing of
$172.3 million, $173.2 million, $124.9 million and $16.1 million, respectively.
Motorola has informed us that after this offering it will no longer make
additional capital available to us.
Motorola has provided debt financing to many of the consolidated entities
through shareholder loans. In addition, Motorola and its subsidiaries have
provided vendor financing and guarantees for third-party credit facilities for
some of our operating companies. Motorola has also informed us that it will no
longer make additional capital available to our operating companies and
complementary businesses, except for vendor financing in connection with network
infrastructure equipment purchases. This financing would be made available at
Motorola's discretion and on arms'-length terms.
We generally expect to meet our current and future capital requirements,
including any additional investments in operating companies and complementary
businesses and possible new investments through the proceeds of this offering,
sales of our ownership interests in our operating companies and dividends
provided to us by our operating companies, although we have not historically
received, and do not currently expect to receive in the near future, significant
dividends from our operating companies. We may also access the capital markets
from time to time. We believe these sources of funds will be sufficient to meet
the needs of our businesses for the foreseeable future.
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<PAGE>
PROPEL AND ITS CONSOLIDATED ENTITIES
Our consolidated total debt at March 31, 2000 was $152.3 million, all of
which was provided by subsidiaries of Motorola. On a pro forma basis, after
giving effect to the Bajacel acquisition, we would have had approximately
$520 million of consolidated total debt. In connection with our separation from
Motorola, we have entered into an agreement which limits the amount of equity we
may issue or debt we may incur to finance our ongoing operations. For more
information, see "Our Relationship with Motorola--IPO and Distribution
Agreement." We have agreed, prior to a distribution of our common stock to
Motorola stockholders or other form of divestiture, to repay our debt owing to
Motorola. We will not incur repayment penalties in connection with
such repayment.
We currently anticipate that approximately $490 million of external funds
may be required to replace indebtedness owed to Motorola.The cost and terms of
any new credit agreements may not be as favorable as those currently in place
under arrangements we have with Motorola. To the extent we require further
capital, we may need to secure additional bank financing, issue additional
stock, subject to restrictions contained in the agreements relating to our
separation from Motorola, or reduce our holdings in our equity- and cost-based
investments. We believe that we will have access to additional funding, if
necessary, on acceptable terms and conditions, although we cannot assure you
that this will be the case.
GUARANTEED OBLIGATIONS
Motorola has provided guarantees in support of certain non-consolidated
operating companies. Guaranteed obligations at December 31, 1999 were up to
$250 million, of which $150 million were outstanding. Prior to a distribution of
our common stock to Motorola stockholders or other form of divestiture, we will
take all steps necessary to relieve Motorola of the commitments related to the
guarantees. To the extent we undertake to guarantee these obligations, there can
be no assurance that lenders to our operating companies will be willing to
maintain the guaranteed facilities under the same terms and conditions as were
available when Motorola was an obligor under such guarantees. This may result in
additional funding needs and higher financing costs that cannot be determined at
this time. In the event we are unable to substitute our guarantee for that of
Motorola's, we have agreed to indemnify Motorola for any losses it may incur as
a result of one of our operating companies breaching its obligations under its
financing agreements.
FINANCIAL CONDITION
Our operating companies generally fund their operations and expansion needs
from operating cash flow, third-party and related-party debt arrangements,
including vendor financing, and when necessary, from equity contributions by
shareholders. We cannot assure you that our operating companies will be able to
access sufficient capital at a reasonable cost, if at all. In the event they are
unable to do so, we may be asked to provide our operating companies with
additional equity capital. In the event we do not choose to provide such equity
capital, and other shareholders do, our interest in those companies may be
diluted. We and our operating companies expect to require access to capital
markets for debt and equity.
We intend to use the proceeds from this offering to fund our ongoing
operations, for acquisitions to expand our portfolio of assets, to invest in the
expansion of our operating companies, to repay a small portion of our
indebtedness to Motorola and for general corporate purposes.
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The capital structure of each of our operating companies has a debt
component. The following table shows the outstanding cash, short and long term
debt and net debt for each of our operating companies at December 31, 1999 and
our proportionate share of such net debt.
<TABLE>
<CAPTION>
SHORT AND LONG PROPORTIONATE
CASH TERM DEBT(1) NET DEBT(2) NET DEBT
---- ------------ ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
LATIN AMERICA
Northern Mexico
Bajacel............................... $ 4.4 $ 12.6 $ 8.2 $ 4.0
Movitel............................... 5.8 19.0 13.3 7.4
Norcel................................ 5.2 43.9 38.7 38.7
Cedetel............................... 10.2 75.9 65.7 65.7
Argentina............................... 22.4 337.7 315.4 78.8
Brazil.................................. 13.2 547.1 533.9 189.8
Chile................................... 1.1 112.3 111.2 27.8
Dominican Republic...................... 13.5 336.5 323.0 99.6
Uruguay................................. 2.2 10.0 7.8 2.5
Southern Mexico......................... 2.3 4.2 1.9 0.4
EUROPE/MIDDLE EAST
Israel.................................. 1.2 340.4 339.2 169.6
Egypt................................... 140.5 778.8 638.3 114.9
Lithuania............................... 18.9 29.0 10.1 3.5
Jordan.................................. 4.7 28.0 23.3 6.1
Azerbaijan(3)........................... -- 19.1 19.1 9.6
ASIA
Hong Kong............................... 1.7 786.5 784.8 197.0
Pakistan................................ 12.5 79.9 67.4 20.2
</TABLE>
------------------------
(1) Includes capitalized leases and license fee obligations and approximately
$262.3 million owing to Motorola's finance subsidiary, Motorola Credit
Corporation, outstanding for the purchase of infrastructure equipment.
(2) Net debt is calculated by subtracting cash and cash equivalents from total
indebtedness.
(3) Data in the table represent capital structure of the holding company GTIB.
Subsequent to December 31, 1999, GTIB acquired an additional 26% ownership
in Bakcell. GTIB will begin to consolidate the financial results of Bakcell
in the second quarter of 2000.
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<PAGE>
The following table shows the scheduled maturities of the short- and
long-term debt for each of our operating companies.
<TABLE>
<CAPTION>
SCHEDULED DEBT MATURITIES
------------------------------------------------------------
DUE 2003 AND
DUE 2000 DUE 2001 DUE 2002 THEREAFTER TOTAL
-------- -------- -------- ---------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
LATIN AMERICA
Northern Mexico
Bajacel............................ $ 4.0 $ 4.0 $ 2.1 $ 2.5 $ 12.6
Movitel............................ 2.6 12.5 1.8 2.1 19.0
Norcel............................. 43.9 -- -- -- 43.9
Cedetel............................ -- 75.9 -- -- 75.9
Argentina............................ 115.4 72.3 -- 150.0 337.7
Brazil............................... 137.9 137.9 42.6 228.8 547.1
Chile................................ 19.5 90.4 2.0 0.4 112.3
Dominican Republic................... 96.1 4.7 29.3 206.4 336.5
Uruguay.............................. -- -- 3.0 7.0 10.0
Southern Mexico...................... 2.1 2.1 -- -- 4.2
EUROPE/MIDDLE EAST
Israel............................... 163.3 47.6 34.6 94.9 340.4
Egypt................................ 170.4 -- 77.8 530.6 778.8
Lithuania............................ 7.5 7.5 9.8 4.3 29.0
Jordan............................... 5.0 6.5 3.0 13.5 28.0
Azerbaijan(1)........................ 9.4 2.1 -- 7.7 19.1
ASIA
Hong Kong............................ 14.8 15.4 16.2 740.1 786.5
Pakistan............................. 9.4 20.5 19.2 30.8 79.9
</TABLE>
------------------------
(1) Represents scheduled maturities for GTIB.
CONSOLIDATED OPERATING COMPANIES
NORTHERN MEXICO--CEDETEL AND NORCEL. At December 31, 1999, Cedetel and
Norcel had debt totaling $120 million, which consisted of unsecured loans from
an affiliate of Motorola at a rate of LIBOR plus 0.25%. We have agreed to repay
these loans prior to a distribution of our common stock to Motorola stockholders
or other form of divestiture and replace them with a committed, medium- to
long-term credit facility from unaffiliated third parties.
During 2000, Cedetel and Norcel anticipate making capital expenditures
totaling approximately $70 to $80 million to expand, support and improve their
wireless networks, to promote the introduction of new products and services and
to increase operating efficiency and productivity. Approximately $44 million in
indebtedness owed to related parties matures during 2000. We currently expect
our operating companies in northern Mexico will jointly pursue lines of credit
subsequent to our acquisition of the remaining interest in Bajacel, which owns
68% of its subsidiary Movitel.
NON-CONSOLIDATED OPERATING COMPANIES
The following discussion relates to some of those operating companies we
account for under the equity method of accounting. We use the equity method of
accounting to record the operating results of entities over which we exercise
significant influence, but do not have a controlling interest.
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ARGENTINA. At December 31, 1999, Movicom Argentina had total indebtedness
of $338 million. Movicom Argentina has issued $150 million under a Euro
medium-term notes program which matures in 2008 at an annual interest rate of
9.25%. Issuances under this program are authorized for up to $350 million. In
connection with the acquisition of its PCS licenses in 1999, Movicom Argentina
issued $150 million in notes with $78 million due June 2000, and the remaining
$72 million in June 2001. These notes pay interest at an annual rate of 7%.
Movicom Argentina has commitments for working capital bank loans of up to
$359 million. At December 31, 1999, $38 million was outstanding under these
facilities at interest rates varying from 6% to 9%.
During 2000, we anticipate that Movicom Argentina will invest approximately
$220 to $240 million to fund capital equipment to expand, support and improve
its wireless networks, to promote the introduction of new products and services
and to increase operating efficiency and productivity, and will retire
$77 million of notes payable related to its PCS license acquisition. In the
event that Movicom Argentina encounters difficulties in satisfying its funding
requirements through other means, it plans to issue additional long-term debt
through its Euro medium-term notes program. We expect that Movicom Argentina
will request a capital contribution of $50 million from its shareholders in 2001
to maintain its debt-to-equity ratio, of which our share would be
$12.5 million. Motorola has provided guarantees totaling $42 million in support
of debt and promissory notes of Movicom Argentina.
BRAZIL. At December 31, 1999, Global Telecom had $547 million of
indebtedness, including license fee obligations. During 1999, Global Telecom
entered into a U.S. dollar credit facility with the Japan Bank for International
Cooperation for up to $220 million to finance capital equipment purchases. This
facility is currently guaranteed jointly and severally by Motorola and DDI
Corporation, Global Telecom's largest shareholder. Borrowings bear interest at
LIBOR plus 0.125%. The facility will be repaid in ten equal semi-annual
installments beginning in 2002. As of December 31, 1999, Global Telecom had
borrowed $40 million under this facility.
In addition, Global Telecom has entered into a U.S. dollar vendor financing
agreement with Motorola Credit Corporation for up to $330 million. A tranche
consisting of $220 million will be used to finance equipment purchases. A second
tranche of $110 million will be used for general working capital purposes. Both
tranches bear interest at a rate of LIBOR plus 4.00%. Payments under this vendor
financing agreement begin in 2002 and end in 2007. As of March 31, 2000, Global
Telecom was in compliance with all covenants of this financing agreement, except
for the maintenance of minimum quarterly levels of net revenue and levels of
subscribers for each quarter during 1999 and for the first quarter of 2000.
Global Telecom received waivers for each of these instances of noncompliance
from Motorola. Although Global Telecom has received such waivers in the past, we
cannot assure you that it will continue to receive these waivers on a
going-forward basis or that it will have access to additional funds under this
financing agreement should its noncompliance with these or other covenants
continue. As of December 31, 1999, Global Telecom's obligations under this
vendor financing arrangement totaled $231 million. Under the terms of the
financing agreement, Global Telecom is restricted in its ability to pay
dividends and incur additional indebtedness.
Global Telecom's wireless license, which it acquired in 1998 at a cost of
$792 million, is payable in four annual installments. Global Telecom paid
$138 million in April 2000, with the remaining $138 million due in April 2001
plus interest which accrues at IGP-DI, a local inflation index, plus 1% per
month. The license has been financed primarily through capital contributions of
the shareholders.
During 2000, Global Telecom anticipates capital funding needs of
approximately $425 to $450 million, including the license fee paid in April,
$150 to $175 million to invest in capital equipment and $150 to $165 million to
fund operating cash flow deficits. In April 2000, Global Telecom received a
$120 million equity contribution from its shareholders to fund a portion of the
license installment. Current funding obligations of Global Telecom exceed
funding commitments and available capital by an
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estimated $30 to $40 million in 2000. In order to fund its future capital needs,
Global Telecom expects to access additional working capital lines or enter into
long term debt arrangements with banks.
DOMINICAN REPUBLIC. At December 31, 1999, Tricom had $336 million of
outstanding indebtedness, including $200 million of 11 3/8% Senior Notes due in
2004.
Tricom currently has several Dominican Republic peso-denominated bank loans
totaling approximately $12 million with interest rates ranging from 20% to 30%.
The company also has $18 million in peso-denominated short term credit from an
affiliate.
Tricom had $81 million of debt under lines of credit from local and
international banks outstanding at December 31, 1999 at interest rates ranging
from 9% to 12%.
Capital leases totaling $26 million were outstanding at December 31, 1999
with $14 million due in the year 2000.
During 2000, Tricom anticipates capital expenditures of approximately $175
to $200 million to expand, support and improve its wireless networks, to promote
the introduction of new products and services, to increase operating efficiency
and productivity and make capital lease payments. Funding is expected to be
provided by cash flow from operations, equity issuances and increases in
short-term bank facilities. On January 19, 2000, Tricom obtained an approval of
credit guarantee totaling $47 million from the Export-Import Bank of the United
States. The credit guarantees will be disbursed by the International Bank of
Miami to fund purchases of communications equipment from Motorola and other U.S.
suppliers. The credits will be available for disbursement over a twelve-month
period, will initially bear interest at floating rates which later will be
converted to fixed interest rates and will have five-year repayment schedules.
On April 17, 2000, Tricom issued American Depository Shares for net proceeds of
$68 million.
EGYPT. At December 31, 1999, MobiNil had $778 million in outstanding
indebtedness. It has a senior secured long-term credit facility denominated in
Egyptian pounds which is equivalent to approximately $570 million to finance
capital expenditures and working capital. The facility consists of a
$220 million, 6.5-year international tranche and a 7.5 year Egyptian
pound-denominated domestic tranche totaling approximately $350 million, of which
$320 million is a term loan and $30 million is in the form of revolving credit.
The interest rate for the international tranche is LIBOR plus 1.6% and the
interest rate for the domestic tranche was fixed at 11.25%. Approximately
$220 million of the international tranche and $288 million of the domestic
tranche were outstanding as of December 31, 1999. The facilities are secured by
a pledge of 51% of the total shares outstanding of MobiNil and an assignment of
subordinated shareholder loans.
At December 31, 1999, shareholders had provided loans totaling $150 million
with no fixed maturity or repayment schedule. In addition, during 1999, MobiNil
issued Egyptian pound-denominated bonds equivalent to approximately
$100 million with a fixed interest rate of 12.25% to finance ongoing network
expansion. These bonds mature in 2007.
MobiNil had working capital loans with local banks totaling approximately
$20 million at December 31, 1999.
During 2000, MobiNil anticipates investing approximately $360 to
$380 million in capital equipment to expand, support and improve its wireless
networks, promote the introduction of new products and services and increase
operating efficiency and productivity. It is expected that these activities will
be financed through cash flow from operations and additional borrowings under
the domestic tranche of its senior secured facility. We anticipate that MobiNil
will be able to satisfy its remaining needs through an increase of its
uncommitted working capital loans, as well as continued use of vendor financing,
for a portion of additional capital expenditures.
HONG KONG. As of December 31, 1999, HTCL had $787 million of outstanding
indebtedness, of which $413 million in long-term loans were provided by
companies related to the controlling
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shareholder, Hutchison Whampoa Limited. These loans are unsecured, bear interest
at prevailing market rates (HKIBOR plus 1.3%) and have no fixed repayment terms.
Capital leases of telecommunication equipment totaling $374 million were
outstanding at December 31, 1999, with $15 million due in 2000.
During 2000, HTCL anticipates making capital expenditures totaling
approximately $160 to $180 million to expand, support and improve its wireless
networks, promote the introduction of new products and services and increase
operating efficiency and productivity. In addition, $15 million is due under a
capital lease commitment. Cash flows from operations are not expected to be
sufficient to provide funding for anticipated capital expenditures and maturing
capital lease commitments. On March 31, 2000, HTCL completed an agreement with a
syndicate of financial institutions for a Hong Kong dollar-denominated credit
facility equivalent to approximately $516 million. The facility bears interest
at the HKIBOR rate plus 1.2%. Portions of the facility expire on various dates
from 2005 to 2007. The facility is secured by a fixed and floating charge over
the assets of the company and a fixed charge over the telecommunications
licenses.
ISRAEL. At December 31, 1999, Pelephone had outstanding bank loans of
approximately $340 million. These include a $50 million U.S. dollar-denominated
long-term line of credit which was committed and fully drawn and an
approximately $160 million New Israeli shekel-denominated long-term line which
was fully drawn. Both facilities have maturities ranging from 2000 to 2006. The
interest rate on the U.S. dollar-denominated facility is LIBOR plus 0.50%, while
the interest rate on the New Israeli shekel facility has a range of between 3.6%
and 5.75%. Approximately $33 million of the New Israeli shekel-denominated
facility matures in 2000. At December 31, 1999, Pelephone had $131 million of
indebtedness outstanding under short-term unsecured credit lines with
$135 million remaining available and unused. The average interest rate at
December 31, 1999 was 10.95%.
During 2000, Pelephone anticipates investing approximately $280 to
$300 million in capital equipment to expand, support and improve its wireless
networks, promote the introduction of new products and services and increase
operating efficiency and productivity. There is $135 million of additional
short-term unsecured credit that is currently available and we expect that
additional borrowing capacity will be available when required.
NORTHERN MEXICO--BAJACEL AND MOVITEL. At December 31, 1999, Bajacel and
Movitel had combined indebtedness outstanding of $32 million. This debt is
composed of the following facilities:
- a $3 million revolving loan from Banco Nacional de Comercio Exterior at an
interest rate of LIBOR plus 0.625%;
- a $3 million industrial mortgage loan denominated in U.S. dollars from
Banco Bilbao Vizcaya repayable through 2002 at interest rates ranging from
8% to 10%;
- a $10 million revolving loan from Citibank at an interest rate of 9.1225%;
- a $3 million revolving loan from Citibank at an interest rate of LIBOR
plus 2.25%; and
- a $14 million five-year loan from ABN AMRO at an interest rate of LIBOR
plus 2%, which is repayable over ten semi-annual installments.
The Citibank loans are guaranteed by Motorola and secured by a pledge of the
stock of Bajacel and Movitel.
During 2000, Bajacel and Movitel anticipate investing approximately $70 to
$75 million in capital equipment to expand, support and improve wireless
networks, promote the introduction of new products and services and increase
operating efficiency and productivity. Funding will be provided by cash flow
from operations and additional use of the existing revolving bank facilities.
Should the bank facilities be insufficient or unavailable we will endeavor to
secure alternative long-term bank or vendor financing.
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The actual amount and timing of future capital requirements of our operating
companies may differ materially from our estimates as a result of a variety of
factors including:
- the costs of the development and expansion of each of our operating
companies' networks;
- a change of the development plans of our operating companies;
- the demand for the services of our operating companies and the extent of
competition;
- regulatory and technological developments; and
- the completion of acquisitions.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our variable-rate long-term debt in our operating companies. The general
level of LIBOR rates affects the interest expense that we recognize on our
variable-rate debt. A 1% increase in LIBOR rates would result in $18.6 million
additional interest expense on our operating companies' variable-rate debt, or
$6.7 million based on our proportionate ownership. In some cases, a change in
the sovereign risk rating of a country in which our operating company does
business could cause an increase in interest rates even if LIBOR rates remain
unchanged.
Our operating companies have fixed-rate debt with maturities ranging from
one year to eight years. To the extent our operating companies rely on local
currency cash flow to service interest and principal and such currency remains
stable relative to the U.S. dollar, there is no interest rate risk. However, in
the event that the U.S. dollar strengthens, the amount of local currency needed
to be converted to service the principal and interest will increase, making it
more difficult to meet scheduled repayments.
<TABLE>
<CAPTION>
VARIABLE-RATE INTEREST
SHORT- AND LONG-TERM DEBT COST AT 1% PER YEAR
-------------------------------------- -------------------------
WITH FIXED
INTEREST WITH VARIABLE OPERATING
RATES INTEREST RATES TOTAL COMPANY PROPORTIONATE
----- -------------- ----- ------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
LATIN AMERICA
Northern Mexico
Bajacel............................... $ -- $ 12.6 $ 12.6 $0.1 $0.1
Movitel............................... -- 19.0 19.0 0.2 0.1
Norcel................................ -- 43.9 43.9 0.4 0.4
Cedetel............................... -- 75.9 75.9 0.8 0.8
Argentina............................... 299.7 38.1 337.7 0.4 0.1
Brazil.................................. -- 547.1 547.1 5.5 1.9
Chile................................... 27.0 85.4 112.3 0.9 0.2
Dominican Republic...................... 265.5 71.0 336.5 0.7 0.2
Uruguay................................. -- 10.0 10.0 0.1 --
Southern Mexico......................... -- 4.2 4.2 -- --
EUROPE/MIDDLE EAST
Israel.................................. 130.5 209.8 340.4 2.1 1.0
Egypt................................... 558.8 220.0 778.8 2.2 0.4
Lithuania............................... 20.0 9.0 29.0 0.1 0.0
Jordan.................................. 2.8 25.3 28.0 0.3 0.1
Azerbaijan(1)........................... 19.1 -- 19.1 -- --
ASIA
Hong Kong............................... 360.9 425.6 786.5 4.3 1.1
Pakistan................................ 17.3 62.6 79.9 0.6 0.2
</TABLE>
--------------------------
(1) Represents indebtedness of GTIB.
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FOREIGN EXCHANGE MARKET RISKS
We are subject to risks from currency fluctuations from operating companies
that conduct business in local currencies, but whose results of operations are
translated to U.S. dollars. Such changes result in cumulative translation
adjustments which are included in equity. Our major currency exposure is to
fluctuations in the rate of exchange for the Mexican peso and New Israeli
shekel. For our consolidated operations, the effects of remeasuring the
nonfunctional currency assets or liabilities into the functional currency, as
well as the gains and losses on hedges of existing assets or liabilities, are
marked-to-market, and the result is recorded in our consolidated income
statement. A significant portion of the debt held by our consolidated businesses
is denominated in U.S. dollars, and is therefore subject to the effects of
currency fluctuations, which may affect our reported earnings. As of March 31,
2000, short- and long-term debt issued by our consolidated entities, which is
denominated in U.S. dollars amounted to $152.3 million. A 10% appreciation of
the U.S. dollar relative to the functional currency of those entities could
result in a significant reduction of our reported earnings.
Our policy is to hedge currency risks at our consolidated subsidiaries where
the costs and the availability of hedging instruments provide an economic
benefit. At December 31, 1999, $10 million of foreign currency forward contracts
were outstanding.
Except in Azerbaijan, all of our nonconsolidated operating companies that we
account for as equity investments transact business primarily in the applicable
local currency. Certain entities operate in countries whose exchange rates are
either fixed, pegged or strongly correlated to the U.S. dollar, including
Argentina, Hong Kong, Lithuania, Egypt and Jordan, which results in relatively
insignificant currency volatility. The largest translation exposures we have are
in our operating companies in Brazil, Chile, Mexico and Pakistan, where local
currencies have been historically volatile. Local currency results, when
translated to U.S. dollars, would impact that operating company's cumulative
translation account in the equity section in proportion to our ownership. The
effects of remeasuring the nonfunctional current assets or liabilities into the
functional currency at marked-to-market rates is reflected in proportion to the
net income or loss recognized by the company from the equity investment. Due to
significant U.S. dollar-denominated debt, an adverse impact in local currency
earnings and cash flow of our operating companies as a result of exchange rate
volatility could be significant, especially in Brazil. There are no material
hedging programs in place at any of our equity affiliates, other than in Chile
and Egypt, to mitigate the impact of a change in currency rates.
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The following table sets forth the U.S. and other non-local
dollar-denominated debt for each of our operating companies at December 31,
1999.
<TABLE>
<CAPTION>
SHORT- AND
LONG-TERM DEBT
------------------------------
U.S. DOLLAR AND
OTHER NON-LOCAL CURRENCY
------------------------------
TOTAL PROPORTIONATE
----- -------------
(IN MILLIONS)
<S> <C> <C>
LATIN AMERICA
Northern Mexico
Bajacel................................................... $ 12.6 $ 6.2
Movitel................................................... 19.0 10.6
Norcel.................................................... 43.9 43.9
Cedetel................................................... 75.9 75.9
Argentina................................................... 188.1 47.0
Brazil...................................................... 271.4 96.4
Chile....................................................... 26.9 6.7
Dominican Republic.......................................... 281.0 86.6
Uruguay..................................................... 10.0 3.2
Southern Mexico............................................. 4.2 0.9
EUROPE/MIDDLE EAST
Israel...................................................... 50.0 25.0
Egypt....................................................... 220.0 39.6
Lithuania................................................... 29.0 10.2
Jordan...................................................... 0 0.0
Azerbaijan(1)............................................... 19.1 9.6
ASIA
Hong Kong................................................... -- --
Pakistan.................................................... 50.6 15.2
</TABLE>
------------------------
(1) Represents indebtedness of GTIB.
FOREIGN CURRENCY TRANSLATION
Our consolidated subsidiaries, use their respective local currencies as the
functional currency, except for WDS, which uses the U.S. dollar as its
functional currency. The effects of translating the financial position and
results of operations of local functional currency operations into U.S. dollars
are included as a separate component of stockholder's equity.
A majority of our operating companies which we account for as equity
investments use their respective local currencies as the functional currency.
The effects of translating the financial position and results of operations of
local functional currency operations into U.S. dollars are included in a
separate component of our stockholder's equity and in proportion to our
ownership in each of the operating companies.
FOREIGN CURRENCY TRANSACTIONS
For our consolidated entities, the effects of remeasuring the nonfunctional
currency assets or liabilities into the functional currency, as well as the
gains and losses on hedges of existing assets or liabilities are marked to
market, and the results are recorded within the line item "Other income
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(expense)" in our consolidated income statement. Gains and losses on financial
instruments that hedge firm commitments are deferred until such time as the
underlying transactions are recognized, or recorded immediately when the
transaction is no longer expected to occur. Other gains or losses on financial
instruments that do not qualify as hedges are recognized as income or expense.
For our operating companies that we account for as equity investments, the
effect of remeasuring the nonfunctional currency assets or liabilities into the
functional currency, as well as the gains and losses on hedges of existing
assets or liabilities, are marked to market. The result is recorded in the
income statement of that entity. These amounts are recognized by us in
proportion to our ownership interest in that operating company.
DERIVATIVE FINANCIAL INSTRUMENTS
As a company with worldwide operations, our transactions are denominated in
a variety of currencies. We may use financial instruments to hedge exposures,
when available, in order to reduce our overall exposure to the effects of
currency fluctuations on cash flows. Our policy is to not engage in derivative
transactions in order to profit on the exchange rate price fluctuations, trade
in currencies for which there are no underlying exposures or enter into trades
for any currency to intentionally increase the underlying exposure. Instruments
used as a hedge must be effective at reducing the risks associated with the
exposure being hedged. In addition, such instruments must be designated as a
hedge at the inception of the contract. Accordingly, changes in market values of
hedge instruments must be highly correlated with changes in market values of the
underlying exposures hedged, both at inception, and over the life, of the
contract.
Our strategy in foreign exchange exposure is to offset the gains or losses
of the financial instruments against losses or gains on the underlying
operational cash flows, based on the operating company's assessment of risk.
Except in Chile and Egypt, none of our operating companies engage in any
material hedging activity at this time due to costs and, in some cases, the
unavailability of hedge instruments. These operating companies routinely
evaluate their exposure to cash flow risk in determining whether financial
instruments should be used. We expect to hedge firm commitments, including
assets and liabilities, currently on the balance sheet. At this time, we do not
hedge anticipated transactions.
When hedges are placed, both forward contracts and options may be used. To
the extent possible, we attempt to hedge our currency position naturally by
having equal and offsetting assets and liabilities in the same currencies
mitigate the impact of rate movements of nonfunctional currencies. We do not
hedge our investments or accrued income in those operating companies we account
for as equity investments.
At December 31, 1999, we had net outstanding foreign exchange contracts
totaling $10 million. Most of the hedge contracts had maturities of three months
or less, with the longest maturity extending six months. We believe that these
financial instruments should not subject us to undue risk due to foreign
exchange movements because gains and losses on these contracts should offset
losses and gains on the assets and liabilities and transactions being hedged. At
December 31, 1999, there were no deferred gains or losses with respect to these
contracts.
We rely on each of the operating companies we account for as equity
investments to evaluate their exposure to currency risk and the instruments
available to them to mitigate their cash flow risk. During 1999, MobiNil entered
into a number of contracts to swap Egyptian pounds for U.S. dollars to allow for
settlement of expected U.S. dollar liabilities. At December 31, 1999,
$102 million was outstanding and all of the swaps mature during 2000.
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INFLATION
Inflation has had and may continue to have negative effects on the economies
and securities markets of emerging market countries and has had negative effects
on our operating companies. In general, inflation impacts companies in two ways.
First, an entity may not be able to increase prices at the same rate as
increases in operating costs and secondly, the government may introduce programs
to slow economic growth to reduce inflation that lead to a decrease in demand
for products and services as the economy slows. Our operating companies, where
permitted and subject to competitive pressures, intend to increase prices to
mitigate for the effects of inflation. However, in those jurisdictions where
prices are regulated or specified in the wireless license, our operating
companies may not be able to successfully mitigate the impact of inflation on
their operations. Some of our operating companies have experienced negative
impacts of inflation as their licenses contain terms that prevent them from
immediately raising prices to offset increasing costs.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was subsequently amended by SFAS
No. 137, which we are required to adopt in the first quarter of 2001. SFAS 133
will require us to record all derivatives on balance sheet at fair value.
Changes in derivative fair value will either be recognized in earnings as an
offset to changes in fair value of related hedged assets, liabilities and firm
commitments or, for forecasted transactions, deferred and recorded as a
component of non-owner changes to equity until the hedged transactions occur and
are recognized in earnings. The impact of SFAS 133 on our consolidated financial
position, liquidity and results of operations will depend upon a variety of
factors, including future interpretive guidance from the FASB and the extent of
our hedging activities. However, we do not expect the adoption of SFAS 133 to
materially affect our consolidated financial position, liquidity or results of
operations. We are in the process of evaluating the effect of SFAS 133 on the
results of operations or financial position of our operating companies.
In December 1999, the SEC issued Staff Accounting Bulletin Number 101,
"Revenue Recognition in Financial Statements," (SAB 101). SAB 101 requires that
revenues and costs of revenues derived from services rendered at the beginning
of a contract or business relationship be deferred and recognized over the life
of the related contract or relationship. The guidelines in SAB 101 must be
adopted during the second quarter 2000. We do not expect the adoption of these
guidelines to have a material impact on our results of operations and financial
position.
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INDUSTRY OVERVIEW
WIRELESS TECHNOLOGY. Wireless communications systems are capable of
providing high quality, high capacity voice and data communications to and from
handheld and vehicle-mounted radio telephones. Wireless networks are generally
capable of handling thousands of calls at any one time and providing service to
millions of subscribers in any particular area.
Wireless communications systems use radio frequencies to transmit voice and
data signals. Wireless telephone technology is based upon the division of a
given geographical area into a number of cells and the simultaneous re-use of
radio channels in non-contiguous cells within the system. Each cell contains a
transmitter and receiver, or base station, a tower, antenna and signaling
equipment, all of which are collectively known as a cell site, that communicates
by radio signal with wireless telephones in that cell. The cell site is
connected by microwave or landline telephone circuits, known as a backbone, to a
switch that uses computers to control the operation of the wireless systems for
the entire service area. The system controls the transfer of calls from cell to
cell as a subscriber moves between cells, coordinates calls to and from
handsets, allocates calls among the cells within the system and connects calls
to the local wireline telephone system or to a long distance carrier. Wireless
communications subscribers can send and receive local, long-distance and
international calls from their wireless telephones. Wireless system operators
therefore require interconnect arrangements with local wireline telephone
companies.
Wireless system operators normally agree to provide service to subscribers
from other technologically compatible wireless systems who are temporarily
located in or traveling through their service areas in a practice called
roaming. Agreements among wireless system operators provide that the roaming
subscriber's home carrier pays the serving carrier at rates prescribed by the
serving carrier. The introduction of multi-mode phones increases the likelihood
that a subscriber's handset will be able to find a compatible technology when
roaming.
Early wireless networks employed analog technology, which uses one
continuous electronic signal that varies in amplitude or frequency over a single
radio channel. Examples of analog technology include Advanced Mobile Phone
System, or AMPS, Narrowband AMPS, or NAMPS, Total Access Communications System,
or TACS, and Extended TACS, or ETACS. These technologies are still in use today.
Increasingly, wireless operators have deployed or are deploying digital wireless
technology, which is commonly referred to as digital cellular or personal
communications services, or PCS. Digital systems convert voice signals into a
stream of digits that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions, increasing network
capacity. Digital-based wireless technologies allow greater call privacy and new
and enhanced services, such as caller identification, call forwarding and short
messaging service, or SMS. These services are often referred to as value-added
services. Digital technology also allows more complex data transmission
features, including facsimile, electronic mail, Internet and data network
access.
There is no single standard international digital technology, and various
distinct technologies have been deployed in digital wireless systems:
- TDMA--TIME DIVISION MULTIPLE ACCESS. TDMA increases capacity by placing
three or more calls on one radio channel separated by time. This
technology operates in the 800 and 1900 MHz band and is known as TDMA 800
and TDMA 1900, respectively.
- CDMA--CODE DIVISION MULTIPLE ACCESS. CDMA increases capacity by coding
transmissions and spreading information over many channels. This
technology generally operates in the 800 and 1900 MHz bands and is known
as CDMA 800 and CDMA 1900, respectively.
- GSM--GLOBAL SYSTEM FOR MOBILE COMMUNICATIONS. GSM, a variation of TDMA,
originated in Europe and has been widely deployed internationally in the
900, 1800 and 1900 MHz frequency bands, known as GSM 900, GSM 1800 and GSM
1900, respectively.
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Another digital technology being deployed in many markets is enhanced
specialized mobile radio, also known as ESMR or digital trunked radio, which
allows two-way radio communication within the network and also allows
interconnection to the wireline telephone network. In some markets this
technology is marketed as an alternative to cellular, although they are not
cellular technologies. In other markets, capacity issues or regulatory
constraints limit ESMR's current viability as a functional alternative to
cellular.
THE WIRELESS COMMUNICATIONS MARKET. The global telecommunications industry
continues to undergo rapid change resulting from privatization, deregulation,
increased competition, the expansion of wireless services, the decrease in
network infrastructure and handset costs, the growth of the Internet, the
increased use of data-intensive applications and the deployment of
high-bandwidth digital networks. Worldwide cellular subscribers have grown from
16.8 million at the end of 1991 to 474.8 million at the end of 1999, which
represented a compound annual growth rate of 51.8%.
Wireline penetration rates in less developed countries in regions such as
Latin America, the Middle East and Asia remain significantly below the levels of
more developed countries, and we believe use of wireless communications in these
regions has the potential to grow at a faster rate than in the global wireless
communications industry overall. We expect that the low penetration and long
waiting lists for wireline communications service in developing countries will
continue to contribute to the rapid growth in wireless services. In some
countries, the wireless communications network provides significantly improved
access to the local and international wireline network as compared to the
existing wireline service. Continued growth of wireless services is expected to
result from increased penetration and usage as service costs decline, wireless
network coverage and capacity expand, service functionality, such as the calling
party pays and prepaid service offerings, increases and demand grows from users
wanting the convenience of wireless service.
Wireline networks require the construction of extensive infrastructure in
the form of buried or overhead cable networks, while wireless communications
systems generally require significantly less construction. For developing
countries, wireless communications systems can represent a more cost-effective
and faster method of expanding telecommunications infrastructure than
traditional wireline networks. These factors, together with the ongoing
liberalization of telecommunications regulatory environments, are expected to
stimulate future growth in communications services revenue in developing
countries.
GROWTH TRENDS. Growth in the telecommunications industry, and particularly
wireless communications, has been shaped by a number of underlying trends that
are likely to cause this growth to continue.
OPENING MARKETS INCREASES PENETRATION. The opening of
telecommunications markets to private operators has resulted in increased
competition for substantially all telecommunications products and services.
This competition has attracted capital investment and technical talent and
has facilitated the availability of advanced telecommunications services and
generally reduced prices, all of which has resulted in mass-market
availability of wireless communication services.
EXPANDING PENETRATION LOWERS UNIT COSTS. The number of wireless
subscribers and levels of wireless penetration have increased throughout the
world. Increased subscriber numbers allow wireless providers to distribute
the fixed costs of wireless networks over greater numbers of users, thereby
reducing the unit costs of providing wireless service. Lower costs in turn
tend to attract more subscribers and higher usage, which in turn may further
lower unit costs.
EMPLOYING DIGITAL TECHNOLOGY LOWERS COSTS AND INCREASES UTILITY AND
FUNCTIONALITY. Wireless telecommunications providers are increasingly
employing digital technology in their networks. Digital wireless systems
achieve greater capacity, allowing additional subscribers to use a given
amount of spectrum, and therefore reduce network costs per subscriber more
than analog systems.
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Digital wireless systems offer improved call privacy and security, extended
handset battery life, value-added services and more robust data transmission
features. We believe the combination of lower unit costs, increased
functionality and expanded wireless Internet and data services should
produce continuing growth of digital wireless communications services
revenues.
OFFERING PREPAID BILLING PLANS EXPANDS ADDRESSABLE MARKET. In addition
to traditional postpaid plans, in which customers are billed monthly for use
after it occurs, many wireless communications service providers now offer
prepaid service plans. Prepaid customers purchase minutes of use in advance,
typically by purchasing calling cards that are available in various
denominations. Prepaid service plans expand the addressable market by making
it easier to initiate subscription for wireless service, and offer benefits
both for customers and service providers. From a customer perspective, and
particularly for cost conscious customers without ready access to credit,
prepaid service is attractive because it does not require any fixed-term
contract, monthly fee or credit reference check. Prepaid service also offers
a number of benefits for wireless system operators, including reduced bad
debt exposure, minimal levels of accounts receivable, higher per-minute
charges, lower customer acquisition costs and lower billing expenses.
OFFERING CALLING PARTY PAYS BILLING INCREASES WIRELESS SERVICE
USAGE. Regulators in many markets are increasingly providing for calling
party pays billing systems, under which wireless service charges associated
with a call are billed to the person who initiates the call. Calling party
pays billing systems increase wireless service usage, because subscribers
tend to leave their wireless handsets powered on and encourage others to
call them, as they do not pay for incoming calls. Through a combination of
prepaid service plans and calling party pays billing, prepaid customers can
enjoy the convenience of receiving calls on a mobile handset without having
to pay for incoming calls or fixed monthly charges.
DEVELOPING DATA APPLICATIONS EXPANDS WIRELESS SERVICE UTILITY. The
convergence of personal computing, the Internet and wireless communications
is expanding the utility of wireless services. The introduction of wireless
portals and web services for corporate and consumer users is beginning to
allow access to e-mail, news, entertainment, sports, weather, travel
services, stock quotes, banking services, electronic commerce,
location-based services, database access and comparison shopping
applications through mobile phones. Specially designed mobile phones enable
subscribers to access Internet sites that have been modified to permit the
use of wireless access protocol, or WAP, or other technologies, and provide
an environment that encourages developers to create innovative data services
for wireless networks. We believe wireless telecommunications devices may be
the primary means by which users will access the Internet in countries with
low wireline and personal computer penetration.
We believe that offering wireless data services will increase subscriber
growth and create potential new revenue sources for operators including
e-commerce transactions, micro-payments, which include purchases from vending
machines, content access and advertising. We believe wireless data services will
increase network traffic, including voice traffic. Furthermore, the provision of
wireless data is expected to lower churn rates as subscribers will be reluctant
to switch from their favorite configured Web sites and services to new ones.
NEW WIRELESS TECHNOLOGY. The first generation of cellular systems used
analog technologies including TACS, AMPS and NAMPS networks. Present day digital
technologies, including GSM, CDMA and TDMA, are termed second generation, or 2G,
systems. The next generation of wireless technology, known as 3G, should
increase data transmission capacity by at least a factor of ten. Faster data
transmission rates allow cellular subscribers to access the Internet, receive
e-mail and engage in e-commerce transactions in a more efficient manner.
Standards for 3G are still evolving, and equipment manufacturers are not
expected to deploy commercial systems until 2002. New 3G networks are likely
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<PAGE>
to require additional spectrum allocation which, in most jurisdictions, may
require payment of significant additional license fees.
With customer interest in receiving data by wireless handsets already
growing, some wireless communications operators have shown an interest in
introducing high-performance data services, before the implementation of 3G
technology, through minor modifications to existing 2G networks. These networks,
possessing capabilities between 2G technology and 3G technology, have become
known as 2.5G networks. Networks for 2G, based on CDMA technology, are therefore
being introduced which allow 2.5G capability through upgrades to 2G software and
handsets. GSM equipment manufacturers are also upgrading existing systems to
allow for 2.5G service through General Packet Radio Service, or GPRS, networks,
which are expected to allow for the evolution to the higher speed Enhanced Data
for GSM Evolution, or EDGE, standard.
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<PAGE>
BUSINESS
Propel, through its operating companies, is a leading international provider
of wireless communication services. We develop, operate and own interests in
wireless communications businesses in targeted markets throughout the world. Our
operating companies serve many of the world's fastest growing wireless markets.
Over the past 15 years, we have grown our wireless communications business by
rapidly adding subscribers and extending our geographic footprint across Latin
America, Europe/ Middle East and Asia. Our operating companies currently offer
wireless services in Mexico, Israel, Hong Kong, Egypt, Argentina, Brazil,
Lithuania, Jordan, Chile, the Dominican Republic, Pakistan, Uruguay and
Azerbaijan. Many of our operating companies hold leading positions in their
licensed territories.
Our operating companies are located primarily in markets where rapid
economic development is creating significant demand for communications services
and the availability of wireline telephone services is often inadequate to meet
this demand. We established an early presence in these markets by teaming with
prominent local partners and, in many instances, international
telecommunications companies.
We take an active role in the management of our operating companies and have
representatives on the board of directors of each of them. In addition, we have
an operations manager for each of the operating companies who is responsible for
day-to-day interaction with operating company management. By leveraging our
knowledge and experience, we assist the operating company's management in
assessing and improving current operations and developing and implementing
growth initiatives. Our operations managers also facilitate the sharing of
experience and knowledge across our operating companies and capitalize on the
knowledge of our engineering, marketing, human resources and finance specialists
to assist our operating companies. We have also assigned a number of our
employees to executive positions in our operating companies. We will continue to
leverage our international wireless operating expertise to increase subscriber
growth and enhance both the revenues and EBITDA of our operating companies.
At December 31, 1999, our operating companies operated under wireless
licenses that covered over 350 million people and provided cellular services to
approximately 6.8 million subscribers, an increase of 2.7 million subscribers,
or 66%, from December 31, 1998. At March 31, 2000, our operating companies
provided cellular services to approximately 7.6 million subscribers. Based on
our ownership percentages, we had approximately 2.8 million proportionate
subscribers as of March 31, 2000. Our proportionate share of the aggregate
revenues and EBITDA of our operating companies was $1.2 billion and
$202.5 million, respectively, for the year ended December 31, 1999.
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Except as otherwise indicated, the following table summarizes pertinent
information for each of our operating companies as of and for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
OPERATING CURRENT ESTIMATED TOTAL OPERATING SYSTEM
COMPANY PROPEL LICENSED CELLULAR COMPANY PROPORTIONATE START-UP
NAME OWNERSHIP(1) POPULATION SUBSCRIBERS REVENUE REVENUE(2) DATE
---- ------------ ---------- ----------- ------- ---------- ----
(%) (THOUSANDS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
LATIN AMERICA
NORTHERN MEXICO...... Bajacel 48.9 2,850 252 $ 92.7 $ 45.3 1990
Movitel 55.2 4,741 299 91.3 50.4 1990
Norcel 100.0 5,423 168 48.4 48.4 1990
Cedetel 100.0 8,162 362 106.1 106.1 1990
ARGENTINA............ Movicom Argentina 25.0 36,580 1,171 830.0 207.5 1989
BRAZIL............... Global Telecom 35.5 14,470 162 44.7 12.1 1998
CHILE................ ETP 25.0 15,010 656 190.6 47.7 1991
DOMINICAN REPUBLIC... Tricom 26.5 8,250 176 170.8 52.6 1992
URUGUAY.............. Movicom Uruguay 32.0 1,529 116 86.4 27.6 1991
SOUTHERN MEXICO...... Portatel 21.7 19,606 88 34.9 7.6 1990
EUROPE\MIDDLE EAST
ISRAEL............... Pelephone 50.0 6,122 1,110 709.4 354.7 1986
EGYPT................ MobiNil 18.0 64,520 507 360.3 64.8 1995
LITHUANIA............ Omnitel 35.0 3,700 198 88.6 31.0 1995
JORDAN............... Fastlink 26.1 6,150 94 99.3 25.9 1995
AZERBAIJAN(3)........ Bakcell 25.0 7,620 14 13.9 3.4 1994
ASIA
HONG KONG............ HTCL 25.1 6,840 1,353 524.5 151.6 1985
PAKISTAN............. Mobilink 30.0 145,750 94 34.9 10.5 1994
------- ----- -------- --------
TOTAL.............. 357,323 6,820 $3,526.8 $1,247.3
======= ===== ======== ========
</TABLE>
------------------------------
(1) Reflects our direct and indirect ownership at June 15, 2000. For more
information about the nature of our ownership in these operating companies,
see "Business." In May 2000, we entered into agreements with shareholders of
Bajacel to purchase their interests in Bajacel, which will result in our
direct ownership of Bajacel increasing to 100% and our direct and indirect
economic ownership of Movitel increasing to 90% upon the completion of this
acquisition.
(2) Proportionate revenue is computed by multiplying operating company U.S.
dollar and U.S. GAAP-reconciled revenues by our average ownership percentage
throughout the period and, in the cases of Mexico, Chile and Israel,
eliminating the effects of inflationary accounting. During 1999, our
ownership percentage changed in each of Global Telecom and HTCL. Our
weighted average ownership interests in those companies for the year ended
December 31, 1999 was 27.1% and 28.9%, respectively.
(3) Total operating company revenue and proportionate revenue for Azerbaijan
reflects the results of operations for GTIB, a holding company which
purchases cellular infrastructure and handsets and sells this equipment to
Bakcell and provides management services to Bakcell for a fee. Because it
did not own a majority of Bakcell during the period presented, GTIB's
results of operations do not reflect Bakcell's revenues associated with
wireless services. Subsequent to December 31, 1999, GTIB acquired an
additional 26% ownership in Bakcell. GTIB will begin to consolidate the
financial results of Bakcell in the second quarter of 2000.
COMPLEMENTARY BUSINESSES
In addition to our actively managed operating companies, we have a 1.9%
equity investment in Korea Telecom Freetel, a wireless operator whose stock
trades on the South Korean KOSDAQ market. We also operate a handset distribution
business in Israel, through our wholly owned Israeli subsidiary, called Wireless
Distribution Services, or WDS. For the year ended December 31, 1999, WDS
generated revenues and EBITDA of $228.4 million and $8.1 million, respectively.
In addition, we recently acquired approximately 16.8% of Zephyr
Telecommunications, Inc. on a fully diluted basis. Zephyr operates an
international Internet protocol based communications platform, providing
international and national long distance telecommunications, broadband Internet
access and Web hosting in selected
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countries. Zephyr, which commenced operations in the third quarter of 1998,
generated revenues and EBITDA of $3.7 million and $(4.8) million, respectively,
for the year ended December 31, 1999.
COMPETITIVE STRENGTHS
We believe the combination of the following strengths distinguishes us from
our competitors:
- EXPERIENCED MANAGEMENT TEAM. We have developed, operated and owned
interests in wireless communications businesses for more than 15 years,
and we have successfully managed these businesses in challenging economic
and political environments. As a result, we have gained considerable
experience in entering and operating in developing markets and launching
new products and services. Our team of professionals is culturally
diverse, multilingual and have extensive experience in wireless
communications operations and business development.
- STRONG STRATEGIC RELATIONSHIPS. We have forged strategic relationships
with prominent local and regional partners and, in many instances,
international telecommunications companies. Aligning with local and
regional partners has afforded our operating companies competitive
advantages and helped us identify new business opportunities at an early
stage. Working with international telecommunications companies, including
Hutchison Whampoa, NTT DoCoMo, France Telecom, Telia, Sonera, Bezeq, DDI,
Telecom Italia Mobile and BellSouth, complements our experience in
developing and operating wireless communications companies.
- REGIONAL FOCUS. Our operating companies are concentrated in Latin America,
the Middle East and Asia. This regional presence provides us with a strong
regional platform to leverage our strategic relationships and operational
expertise and positions us for future expansion. For example, in Latin
America where prepaid service is an important market driver, we shared the
experience of our operating companies in northern Mexico as the first
providers of prepaid service in Latin America with our operating companies
in Argentina, Brazil, Chile and Uruguay. In addition, we believe that the
geographic diversity of our operations across all three regions helps
reduce the impact of economic or political instability in any one
geographic region.
- ESTABLISHED PRESENCE AND RAPIDLY GROWING BASE OF SUBSCRIBERS. Our
operating companies serve many of the fastest growing wireless markets in
the world. Our early entry into these markets has allowed us to build, in
most cases, large and rapidly growing subscriber bases. During 1999, our
operating companies grew their combined subscriber base by 2.7 million to
approximately 6.8 million, an increase of approximately 66%, from
December 31, 1998. We believe our operating companies' existing network
infrastructure and subscriber bases provide them with several competitive
advantages, including sufficient scale to introduce new services and broad
platforms for entering new lines of communications business.
- TECHNOLOGY LEADERS. Our operating companies are early adopters of new
technology platforms. For example, Movicom Argentina introduced one of the
world's first NAMPS networks in 1993, and HTCL deployed the world's first
commercial CDMA system in 1995. Today, all of our operating companies are
operating or installing GSM or CDMA digital networks, which allow them to
offer advanced wireless services and better position them to rapidly
implement new technologies and grow their subscriber bases. Additionally,
several of our operating companies are testing or implementing new
technologies for providing advanced wireless data services. For example,
HTCL has leveraged the experience of our partner, NTT DoCoMo, the leading
provider of wireless data services in Japan, in developing and offering
wireless data services. We intend to continue our tradition of promoting
and encouraging innovation among our operating companies to position them
to be among the first to implement new technologies.
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<PAGE>
BUSINESS STRATEGY
Our goal is to become the leading provider of wireless communications
services in each of our operating regions. Key elements of our strategy are to:
- MAXIMIZE PERFORMANCE OF EXISTING OPERATIONS. We believe there continue to
be considerable opportunities for the long-term growth of our operating
companies in their existing markets. Our operating companies serve many of
the fastest growing wireless communications markets in the world, and we
believe they are well positioned to benefit from this growth. In order to
maximize our operating companies' operating and financial performance, we
will continue to:
- actively participate on each of their boards of directors, advise
management and leverage our knowledge and experience across all of our
operating companies;
- designate operations managers to contribute technical and managerial
knowledge to help them optimize their networks and manage their
operating and capital costs; and
- assign our employees to them where appropriate.
To achieve further growth, we will continue to help our operating
companies implement innovative advertising programs, pricing plans and
other sales and marketing initiatives designed to appeal to additional
market segments.
- IMPLEMENT NEW SERVICES. We plan to assist our operating companies in
complementing their current wireless communications offerings with
additional services. For example, our operating companies in Argentina,
Lithuania and the Dominican Republic have already added to their wireless
communications offerings by providing new services, including fixed local
and long distance telephony, corporate data services, Internet service,
paging and trunked radio. We believe that these service offerings will
create new revenue opportunities and allow our operating companies to
provide bundled services, which will better position them against
competing wireline and wireless communications operators.
- CAPITALIZE ON WIRELESS DATA OPPORTUNITIES. We expect wireless data
services to stimulate subscriber growth, increase usage and enhance
revenue growth throughout the world. We believe our operating companies
are well positioned to benefit from these trends. All of our operating
companies are either operating or installing digital networks which have
been or can be upgraded to accommodate these new and enhanced data
services. We expect many of our operating companies to introduce or
enhance their wireless data services with mobile Internet access, e-mail,
e-commerce applications and personalized information delivery services,
which can be provided through a mobile phone. Our operating companies in
Hong Kong, Israel, Brazil, Mexico and Argentina are either testing or have
recently introduced wireless data services. We believe we can leverage the
experience of these operating companies to develop and implement wireless
data services by our other operating companies. We are aggressively
pursuing relationships with Internet service providers, wireless data
application service providers, local language portals and content
companies and related hardware and software companies to develop and
enhance the wireless data offerings of our operating companies.
- EXPAND AND STRENGTHEN OUR GEOGRAPHIC FOOTPRINT. We intend to selectively
pursue new license acquisitions and business combinations in our targeted
regions to complement our existing operations. In particular, we will
initially target Latin America, the Middle East/North Africa and China. We
believe our established regional presence, strategic affiliations and our
extensive experience in competitive license bidding and local operations
will enable us to capitalize on opportunities in our targeted regions. As
opportunities arise, we may also increase our ownership in our existing
operating companies by acquiring the interests of their other
shareholders.
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<PAGE>
LATIN AMERICAN OPERATIONS
NORTHERN MEXICO
Our operating companies in northern Mexico are:
- Baja Celular Mexicana S.A. de C.V., which operates under the name Bajacel;
- Movitel Del Noroeste S.A. de C.V., which operates under the name Movitel;
- Telefonia Celular Del Norte S.A. de C.V., which operates under the name
Norcel; and
- Celular de Telefonia S.A. de C.V., which operates under the name Cedetel.
Each of these companies operates in one of four regions of northern Mexico,
which border the southern United States, and which include the rapidly
developing industrial cities of Monterrey, Tijuana and Juarez and their
surrounding areas. Each of our northern Mexico operating companies initiated
service in 1990. As of December 31, 1999, these operating companies served an
aggregate of approximately 1.1 million wireless subscribers. From 1997 through
1999, their aggregate subscriber base grew at a compound annual growth rate of
approximately 132%.
Our northern Mexico operating companies are currently licensed to serve
21.2 million persons. Bajacel, the leader in its licensed area in terms of
market share, was one of the first wireless communications operators in the
world, and the first in Mexico, to offer prepaid wireless services. Each of our
northern Mexico operating companies offers the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, information services and detailed billing; and
- usage limit plans.
As of December 31, 1999, our northern Mexico operating companies employed a
total of approximately 3,400 people.
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<PAGE>
The following table shows several key statistics for these operating
companies as a group for their three fiscal years ended December 31, 1999, and
for the three months ended March 31, 1999 and 2000, and nationwide wireless
penetration and real GDP growth in Mexico for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Companies(1):
Licensed POPs............................... 20,003 20,764 21,176 N/A N/A
Wireless subscribers........................ 200 490 1,081 606 1,163
Net revenues................................ $ 143.7 $ 206.3 $ 338.5 $69.4 $100.9
EBITDA...................................... 37.4 50.5 74.9 19.5 26.3
EBITDA margin............................... 26.0% 24.5% 22.1% 28.1% 26.1%
Capital expenditures(2)..................... 41.1 55.7 113.2 63.7 11.8
Proportionate:
Licensed POPs............................... 16,645 17,249 17,598 N/A N/A
Wireless subscribers........................ 145 376 818 465 885
Net revenues................................ $ 102.8 $ 154.0 $ 250.3 $51.6 $ 74.4
EBITDA...................................... 24.4 35.5 49.5 13.1 18.4
Wireless penetration (all carriers)(3)........ 1.7% 3.2% 7.2% N/A N/A
Real GDP growth............................... 6.8% 4.8% 3.7% N/A N/A
</TABLE>
------------------------
(1) Bajacel and Movitel's financial statements included elsewhere in this
prospectus have been prepared using inflationary accounting. The data in
this table remove the effects of such accounting practice.
(2) For Bajacel and Movitel, data represent change in gross property, plant and
equipment.
(3) While this relates to wireless penetration in Mexico as a whole, we believe
that the wireless penetration for the regions in which our northern Mexico
operating companies operate is higher than the national figure.
OWNERSHIP. We own 100% of the outstanding common stock of Norcel and
Cedetel. We currently own directly 48.9% of the outstanding common stock of
Bajacel and directly and indirectly own 55.2% of the outstanding common stock of
Movitel. In May 2000, we entered into agreements with the shareholders of
Bajacel to purchase their interests in Bajacel, which will result in our direct
economic ownership of Bajacel increasing to 100% and our direct and indirect
ownership interest of Movitel increasing to 90%. GTE Wireless will own the
remaining common stock of Movitel.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. As the 100% owner of Norcel and
Cedetel, we directly control each of these operating companies. Bajacel and
Movitel are operated by the same management team as Norcel and Cedetel. In
connection with the transactions described above, the current president of our
northern Mexico operating companies will step down. We have formed a committee
to appoint his successor. In addition, we have an operations manager who is
responsible for day-to-day interaction with these companies' management. We also
contribute substantial technical and managerial knowledge to help them optimize
their networks and manage their businesses. Bajacel and Movitel are currently
being managed through powers of attorney granted by their respective boards of
directors.
MARKET DEMOGRAPHICS. Mexico is one of Latin America's largest countries
with a population of approximately 97.4 million people, of which approximately
21.2 million are covered by our northern
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Mexico operating companies' licenses. Mexico is also one of Latin America's
largest economies with a 1999 GDP of $479 billion, or approximately $4,910 per
person. The Mexican economy benefits from its proximity to the United States and
the free trade principles established by the North American Free Trade
Agreement. This has been particularly true in the industrialized northern
regions in which we operate. At December 31, 1999, nationwide wireline
penetration was approximately 11.0%, and wireless penetration was approximately
7.2%. We believe wireless penetration can exceed wireline penetration in Mexico
due to speed of system deployment, greater functionality of wireless offerings,
decreasing relative cost of wireless communications and a difficulty in some
areas of obtaining wireline phone service promptly, or at all.
NETWORK OVERVIEW. Our northern Mexico operating companies offer both
digital and analog cellular services using CDMA and AMPS technology. As of
December 31, 1999, their digital networks consisted of over 80 cell sites and
four digital switches, and their analog networks consisted of over 275 cell
sites and ten switches. Their regional networks are supported by a microwave and
leased fiber optic backbone network.
SALES AND MARKETING. Our northern Mexico operating companies focus their
direct sales and marketing strategies on corporate accounts and other high-use
subscribers. They have also had success in penetrating the mass market with the
introduction of prepaid cellular products and calling party pays. Our northern
Mexico operating companies market their services through direct and indirect
sales agents, including some of the largest retail outlets in northern Mexico.
At December 31, 1999, they had 235 service and sales centers, 80 distributors
and over 4,000 points of sale for prepaid cards.
Our northern Mexico operating companies have designed multiple pricing
strategies to appeal to specifically targeted market segments. Their digital,
postpaid, enhanced service offerings appeal to higher income heavy users while
their prepaid plans appeal to more cost-conscious subscribers who might not
otherwise have access to wireless communications services. The introduction of
calling party pays in 1999 has had a positive impact on our northern Mexico
operating companies' sales. In order to enhance their market share and
profitability, those operating companies are concentrating their efforts on
building a portfolio of advanced value-added services, which they may use to
both attract potential customers and retain existing subscribers. We expect some
of these services to include national and international roaming for prepaid
customers, personalized information services, wireless Internet and e-mail and
the provision of fax mail.
COMPETITION. Our northern Mexico operating companies compete with a variety
of telecommunications providers, most of which are affiliated with international
telecommunications companies. Their principal competitor is Radiomovil Dipsa,
S.A. de C.V., or Telcel, a subsidiary of the nationwide wireline telephone
operator. Their competitors currently offer, or are expected to offer, similar
services to those provided by our northern Mexico operating companies. In
addition, our northern Mexico operating companies compete indirectly with ESMR
providers, long distance providers and wireline providers.
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LICENSES. Our northern Mexico operating companies' licenses are described
in the table below:
<TABLE>
<CAPTION>
NETWORK
OPERATING COMPANY FREQUENCY SPECTRUM TERM LICENSED TERRITORY TECHNOLOGY
----------------- --------- -------- ---- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Bajacel................ 800 MHz 2 X 10 MHz 1990--2010 Baja California, Baja CDMA/AMPS
California Sur and
portions of Sonora
Movitel................ 800 MHz 2 X 10 MHz 1990--2010 Sinaloa and portions of CDMA/AMPS
Sonora
Norcel................. 800 MHz 2 X 10 MHz 1990--2010 Chihuahua, Durango and CDMA/AMPS
portions of Coahuila
Cedetel................ 800 MHz 2 X 10 MHz 1990--2010 Nuevo Leon, Tamaulipas CDMA/AMPS
and portions of
Coahuila
</TABLE>
All of the licenses of our northern Mexican operating companies require
adherence to various conditions, including network build-out requirements and
quality standards. We expect these licenses to be renewed upon expiration
without payment of material additional fees.
We do not expect any significant additional spectrum to be offered by the
Mexican government in regions in which our northern Mexican operating companies
operate for the foreseeable future, other than an auction for spectrum to be
allocated in the 28 GHz frequency range for the purposes of Local Multipoint
Distribution Service, or LMDS, applications. We expect this auction to occur in
the last half of 2000 or early in 2001, and we are currently exploring whether
to participate in this auction. LMDS is a wireless, two-way broadband technology
designed to allow communications service providers to bring a wide range of
high-value, quality services, including the transmission of voice, high-speed
data and video, to businesses as an alternative to fixed wireline services. For
more information regarding our northern Mexico operating companies' licenses,
see "Regulation--Mexico--Licenses."
ARGENTINA
Our operating company in Argentina is Compania de Radiocomunicaciones
Moviles, S.A., which operates under the name Movicom and which we refer to as
Movicom Argentina. Movicom Argentina launched Argentina's first cellular network
in 1989 in Buenos Aires and is a leading wireless communications services
provider in Argentina and in terms of market share is the leading wireless
communication service provider in greater metropolitan Buenos Aires. As of
December 31, 1999, Movicom Argentina served 1.2 million wireless subscribers in
Buenos Aires. From 1997 through 1999, Movicom Argentina's subscriber base grew
at a compound annual growth rate of approximately 36%.
Movicom Argentina was awarded a permit to provide wireless services in
Buenos Aires in 1988. Movicom Argentina launched the first NAMPS network in
Latin America in 1992. In 1995, the cellular permit was converted to a license.
In 1999, Movicom Argentina acquired three PCS licenses permitting it to extend
its wireless service nationwide, for which it committed to pay approximately
$263 million in license fees. In addition, a subsidiary of Movicom Argentina has
a basic telephone service license that allows it to provide both local and long
distance wireless and wireline services. Movicom Argentina currently offers PCS
service in Buenos Aires, and expects to offer PCS service outside of Buenos
Aires by mid-2000. We expect that this PCS coverage will include all major
cities in Argentina. Movicom Argentina offers the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing:
- basic telephony;
- national roaming;
- international roaming;
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- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
- usage limit plans;
- wireless data;
- facilities-based national long distance;
- facilities-based international long distance;
- data transmission by leased lines or microwave;
- Internet service provision;
- digital trunked radio or enhanced specialized mobile radio; and
- paging.
In addition, Movicom Argentina has recently launched the first wireless
Internet service in Argentina, allowing news, weather, sports and entertainment
content to be delivered to its subscribers in Buenos Aires. As of December 31,
1999, Movicom Argentina employed approximately 1,800 people.
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Argentina for 1997, 1998
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs........................... 12,650 12,820 36,580 N/A N/A
Wireless subscribers.................... 629 885 1,171 962 1,328
Net revenues............................ $ 597.9 $ 748.9 $ 830.0 $202.0 $207.7
EBITDA.................................. 216.4 304.1 306.8 77.5 46.2
EBITDA margin........................... 36.2% 40.6% 37.0% 38.4% 22.3%
Capital expenditures.................... 162.4 167.0 183.4 8.8 124.4
Proportionate:
Licensed POPs........................... 3,163 3,205 9,145 N/A N/A
Wireless subscribers.................... 157 221 293 241 332
Net revenues............................ $ 149.5 $ 187.2 $ 207.5 $ 50.5 $ 51.9
EBITDA.................................. 54.1 76.0 76.7 19.4 11.6
Capital expenditures.................... 40.6 41.7 45.9 2.2 31.1
Wireless penetration (all carriers)....... 5.6% 7.9% 11.9% N/A N/A
Real GDP growth........................... 8.1% 3.9% (3.0)% N/A N/A
</TABLE>
OWNERSHIP. We own 25.0% of the outstanding common stock of Movicom
Argentina. Our primary partner in Movicom Argentina is BellSouth, which
indirectly holds 65.0% of the outstanding common stock. In addition, Telper
S.A., an Argentine telecommunications equipment distributor, holds 10.0% of the
outstanding common stock. Under our shareholders agreement, the other
shareholders have the right to purchase our interest in Movicom Argentina at
fair market value if Motorola's ownership of our common stock falls below 75.0%.
We are currently negotiating for the right of Motorola to divest itself of all
of our common stock without triggering this right of first refusal under the
shareholders agreement. For more information regarding our rights under this
shareholders agreement and this negotiation, see "Our Relationships with Our
Operating Companies--Argentina."
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the nine
members of Movicom Argentina's board of directors and nominate the company's
chief technical officer. Along with
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<PAGE>
BellSouth, we possess joint control over the business plan, capital expenditures
and strategic direction of Movicom Argentina. In addition to actively
participating on its board of directors, we have an operations manager who is
responsible for day-to-day interaction with Movicom Argentina's management. We
also contribute substantial technical and managerial knowledge to assist Movicom
Argentina in developing its network and managing its business. For example, we
recently contributed to the development of the international long distance
business plan with advice on call center methods and procedures, automatic call
distribution and review of the business case prior to board approval. For more
information regarding our operational and managerial influence over Movicom
Argentina and our other rights as a shareholder of Movicom Argentina, see "Our
Relationships with Our Operating Companies--Argentina."
MARKET DEMOGRAPHICS. Argentina is one of Latin America's largest countries
with a population of approximately 36.6 million people, all of whom are now
covered by Movicom Argentina's licenses. Argentina is also one of Latin
America's largest economies with a 1999 GDP of approximately $289 billion, or
approximately $7,910 per person, the highest in Latin America. We believe that
the Buenos Aires metropolitan area, Movicom Argentina's current primary service
area, is one of the most affluent urban areas of Latin America. At December 31,
1999, nationwide wireline penetration was approximately 20.7% and wireless
penetration was approximately 11.9%.
NETWORK OVERVIEW. Movicom Argentina offers both digital and analog cellular
services using CDMA and NAMPS technology in Buenos Aires and CDMA technology in
the Argentine interior. As of December 31, 1999, Movicom Argentina's digital
network consisted of approximately 550 cell sites and 11 switches, and its
analog network consisted of approximately 350 cell sites and seven switches.
Each of these networks is supported by a microwave and fiber optic backbone
network.
SALES AND MARKETING. Movicom Argentina focuses its sales and marketing
efforts on corporate accounts and other high-use subscribers, but has also had
success in penetrating the mass market with the introduction of prepaid cellular
products and calling party pays. Movicom Argentina markets its services through
direct and indirect sales agents, including some of the largest retail outlets
in Buenos Aires. At December 31, 1999, Movicom Argentina had 11 service and
sales centers, a direct sales force of 250 salespersons, approximately 600
third-party distribution points, including retail stores and sales agents, and
over 6,000 points of sale for prepaid cards.
We believe the launch of Movicom Argentina's PCS service in the Argentine
interior represents a substantial opportunity to grow its wireless subscriber
base. Moreover, with both wireline and wireless penetration in the interior
remaining low, we believe opportunities for growth are present throughout
Argentina.
We believe Movicom Argentina's strong market position, well known brand and
reputation for high-quality service position it well to market new services to
its customers and to become an integrated communications provider where it can
effectively leverage its wireless business. To capitalize on this opportunity,
Movicom Argentina launched an Internet service provider and, during the third
quarter of 1999, a data transmission operation. Additionally, Movicom Argentina
is exploring opportunities to facilitate wireless e-commerce transactions and
provide dedicated call center solutions for its corporate customers. Finally,
with Argentina opening its local and long-distance markets to competition,
Movicom Argentina has begun marketing these services as well. Accordingly, in
1999, a subsidiary of Movicom Argentina received a license to offer local basic
telephone service as well as domestic and international long distance services.
COMPETITION. Movicom Argentina competes with a variety of
telecommunications providers, most of which are affiliated with international
telecommunications companies. Movicom Argentina's principal competitors are
Telefonica Argentina, a nationwide provider of wireless services, Telecom
Argentina, which is owned through a consortium controlled by France Telecom and
Telecom Italia, and CTI Movil
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<PAGE>
S.A., which is a consortium principally owned by GTE. Many of Movicom
Argentina's competitors currently offer, or are expected to offer, similar
services as those provided by Movicom Argentina. In addition, Movicom Argentina
competes directly and indirectly with other ESMR providers, long distance
providers and wireline providers.
LICENSES. Movicom Argentina's licenses are described in the table below:
<TABLE>
<CAPTION>
NETWORK
USE SPECTRUM TERM LICENSED TERRITORY TECHNOLOGY
--- -------- --------------------- ------------------ ----------
<S> <C> <C> <C> <C>
Cellular at 800 MHz.............. 2 X 12.5 MHz 1988 - Indefinite Buenos Aires NAMPS
Basic telephone.................. N/A 1999 - 2004 (review) Nationwide and N/A
International
Trunking......................... 2 X 18 MHz 1994 - Indefinite Nationwide ESMR
National data transmission....... N/A 1992 - Indefinite Nationwide N/A
International data N/A 1999 - Indefinite International N/A
transmission...................
PCS at 1900 MHz.................. 2 X 20 MHz 1999 - Indefinite Rural North CDMA
PCS at 1900 MHz.................. 2 X 20 MHz 1999 - Indefinite Rural South CDMA
PCS at 1900 MHz.................. 2 X 10 MHz 1999 - Indefinite Buenos Aires CDMA
Paging........................... N/A 1994 - Indefinite Nationwide N/A
Value-added services allowing for
national and international long
distance....................... N/A 1995 - Indefinite Nationwide N/A
</TABLE>
All of the licenses require adherence to various conditions, including
network build-out requirements and quality standards. We expect these licenses
to be renewed, where applicable, upon expiration without payment of material
additional fees. For more information regarding Movicom Argentina's licenses,
see "Regulation--Argentina--Licenses."
BRAZIL
Our operating company in Brazil is Global Telecom, S.A. Global Telecom,
which initiated service in December 1998, holds a license to provide wireless
services in the states of Parana and Santa Catarina, located in southern Brazil.
At December 31, 1999, Global Telecom had approximately 162,000 subscribers.
Global Telecom offers the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
- usage limit plans; and
- wireless data service.
As of December 31, 1999, Global Telecom had approximately 660 employees.
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<PAGE>
The following table shows several key statistics for the two years ended
December 31, 1998 and 1999 and for the three months ended March 31, 1999 and
2000, wireless penetration in the states of Parana and Santa Catarina, and
nationwide real GDP growth in Brazil for 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------
1998 1999 1999 2000
---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS
IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs.................................... 14,042 14,470 N/A N/A
Wireless subscribers............................. 2 162 13 183
Net revenues..................................... $ 1.2 $ 44.7 $ 3.2 $ 23.4
EBITDA........................................... (19.7) (75.4) (11.6) (8.6)
EBITDA margin.................................... (1,683.2)% (168.8)% (365.4)% (36.5)%
Capital expenditures............................. 24.0 138.1 4.8 53.1
Proportionate:
Licensed POPs.................................... 3,089 5,137 N/A N/A
Wireless subscribers............................. 0.4 57 3 65
Net revenues..................................... $ 0.3 $ 12.1 $ 0.7 $ 8.3
EBITDA........................................... (4.3) (20.4) (2.5) (3.0)
Capital expenditures............................. 5.3 37.3 1.0 18.8
Wireless penetration (all carriers)................ 4.3% 8.0% N/A N/A
Real GDP growth.................................... (0.1)% 0.8% N/A N/A
</TABLE>
OWNERSHIP. We own 35.5% of the outstanding common stock of Global Telecom.
Other shareholders in Global Telecom include DDI Corporation, the second largest
cellular operator in Japan, which owns 46.9% of the outstanding common stock,
Nissho Iwai, a Japanese trading company, which owns 10.0% of the outstanding
common stock, Inepar, the largest Brazilian energy equipment manufacturer, which
owns 5.9% of the outstanding common stock and Suzano, a Brazilian company, which
owns 1.7% of the outstanding common stock.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint three of the nine
members of Global Telecom's board of directors. Moreover, we nominated the new
chief financial officer and we are actively involved in the current search for a
new chief marketing officer. Along with the other shareholders except Suzano, we
possess joint control over the business plan, capital expenditures and strategic
direction of Global Telecom. In addition to actively participating on its board
of directors, we have an operations manager who is responsible for day-to-day
interaction with Global Telecom's management. We also contribute substantial
technical and managerial knowledge to help Global Telecom to optimize its
network and manage its business. For more information regarding our operational
and managerial influence over Global Telecom and our rights as a shareholder of
Global Telecom, see "Our Relationships with Our Operating Companies--Brazil."
MARKET DEMOGRAPHICS. Brazil has a total population of approximately
163.8 million people, of which approximately 14.5 million are covered by Global
Telecom's license. Major population centers covered by its license include
Curitiba, Londrina, and Florianopolis. Brazil had a 1999 GDP of $556.2 billion,
or approximately $3,400 per person. At December 31, 1999, nationwide wireline
penetration was approximately 15.5%, and wireless penetration in the regions in
which Global Telecom operates was approximately 8.0%.
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<PAGE>
NETWORK OVERVIEW. Global Telecom offers digital wireless services using
CDMA 800 technology. At December 31, 1999, Global Telecom's CDMA network
consisted of 226 cell sites and four switches. In addition, Global Telecom's
network has certain channels dedicated to AMPS to allow roaming. The network is
supported by microwave and fiber optic backbone network.
SALES AND MARKETING. As a recent entrant competing against an incumbent
provider, Global Telecom's initial strategy has been to compete on the basis of
price in order to gain market share. We believe Global Telecom's CDMA network
technology will eventually result in lower network costs, but it also requires
the use of more expensive handsets. To date, this has resulted in the need to
offer significant handset subsidies. In the future, however, we expect those
subsidies to decrease as the cost of CDMA handsets declines. Global Telecom
distributes a majority of its products and services through over 340 combined
indirect sales channels, including chain stores and supermarkets. The remainder
are sold through 14 of its own stores. Global Telecom intends to add a direct
sales force in order to better serve corporate and other high-end subscribers.
Global Telecom has recently launched a prepaid program in response to
similar offerings by its competitor. We believe that Global Telecom's
introduction of this service will help it gain market share in this competitive
environment.
COMPETITION. Brazil's wireless communications market is structured as a
duopoly, with two wireless service providers licensed in each of the country's
ten regions. Global Telecom's principal competitor in its region is Tele Celular
Sul, the incumbent provider which is owned by Telecom Italia. It had over
1.1 million subscribers at December 31, 1999. In addition, Global Telecom
competes indirectly with ESMR providers, long distance providers and wireline
providers.
LICENSES. Global Telecom holds the license described in the following
table:
<TABLE>
<CAPTION>
FREQUENCY SPECTRUM TERM LICENSED TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- ------------------ ------------------
<S> <C> <C> <C> <C>
800 MHz.............. 2 X 12.5 MHz 1998 - 2013 Parana and CDMA
Santa Catarina
</TABLE>
Global Telecom's license requires adherence to various conditions, including
network build-out requirements and quality standards. We expect this license to
be renewed upon expiration without payment of material additional fees. We
currently expect that, by the end of 2000, the government will auction PCS
licenses. In addition, the license under which Global Telecom conducts business
contains restrictions on Motorola's ability to transfer its interest in Global
Telecom without government approval. It is possible that, without such approval,
a divestiture of our common stock by Motorola other than by means of a
distribution may violate the Brazilian license. For more information regarding
Global Telecom's license, see "Regulation--Brazil--Licenses."
CHILE
Our operating company in Chile is Entel Telefonia Personal S.A., or ETP,
which currently operates through its subsidiaries Entel PCS Telecomunicaciones
S.A., or Entel PCS, and Entel Telefonia Movil, S.A., or Entel Movil. ETP began
providing wireless AMPS analog service nationwide outside of Santiago and the
surrounding metropolitan region in 1991 under the name Telecom. ETP initiated
nationwide digital service using GSM 1900 technology in March 1998 through Entel
PCS and Entel Movil, and subsequently sold its analog license to BellSouth. As
of December 31, 1999, Entel PCS and Entel Movil had approximately 656,000
subscribers. Entel PCS and Entel Movil offer the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
and
- wireless data.
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<PAGE>
ETP's other shareholder, Empresa Nacional de Telecomunicaciones S.A., or
Entel S.A., provides wireline, long distance and Internet services throughout
the country. Therefore, the ability of ETP and its subsidiaries Entel PCS and
Entel Movil to provide these services is limited.
As of December 31, 1999, ETP and its subsidiaries employed approximately
1,400 people.
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Chile for 1997, 1998 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company(1):
Licensed POPs............................... 14,620 14,820 15,010 N/A N/A
Wireless subscribers........................ 62 185 656 232 784
Net revenues................................ $ 56.6 $ 75.5 $ 190.6 $ 30.0 $74.8
EBITDA...................................... 2.7 (7.6) 30.7 0.0 17.9
EBITDA margin............................... 4.8% (10.1)% 16.1% 0.1% 24.0%
Capital expenditures........................ 17.3 190.6 83.1 3.3 14.2
Proportionate:
Licensed POPs............................... 3,655 3,705 3,753 N/A N/A
Wireless subscribers........................ 16 46 164 58 196
Net revenues................................ $ 20.1 $ 18.9 $ 47.6 $ 7.5 $18.7
EBITDA...................................... 1.0 (1.9) 7.7 0.0 4.5
Capital expenditures........................ 6.2 47.7 20.8 0.8 3.5
Wireless penetration (all carriers)........... 2.8% 6.1% 14.5% N/A N/A
Real GDP growth............................... 7.6% 3.4% (1.1)% N/A N/A
</TABLE>
------------------------
(1) ETP's financial statements included elsewhere in this prospectus have been
prepared using inflationary accounting. The data in the table removes the
effects of such accounting practice.
OWNERSHIP. We currently own 25.001% of the outstanding common stock of ETP.
Entel S.A., directly or through its subsidiary Entel Inversiones S.A., owns the
remaining 74.999%. Prior to 1997, we owned 40.8% of ETP and Entel S.A. owned
59.2%. ETP owns 99.9% of its operating subsidiaries, Entel PCS and Entel Movil.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the seven
members of ETP's, Entel PCS's and Entel Movil's boards of directors. In
addition, we have an operations manager who is responsible for day-to-day
interaction with ETP's management. We also contribute substantial technical and
managerial knowledge to help ETP and its subsidiaries optimize their networks
and manage their businesses. For example, our personnel have assisted in the
development and implementation of methods and procedures for direct, indirect
and retail sales channels and the overhaul of the customer service and call
center organizations to improve efficiency and reduce employee headcount. We
contributed to network implementation design review and schedule management for
the construction of the PCS network and helped with a training program for
internal and external distributors prior to the introduction of PCS services.
For more information regarding our operational and managerial influence over ETP
and our rights as a shareholder of ETP, see "Our Relationships with Our
Operating Companies--Chile."
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<PAGE>
MARKET DEMOGRAPHICS. Chile has a population of approximately 15.0 million
people, all of whom are covered by Entel PCS's and Entel Movil's licenses.
Chile's GDP for 1999 was approximately $68.9 billion, or $4,590 per person. At
December 31, 1999, nationwide wireline penetration was approximately 22.7%, and
wireless penetration was approximately 14.5%.
NETWORK OVERVIEW. Entel PCS and Entel Movil offer digital cellular services
using GSM 1900 technology. At December 31, 1999, their network consisted of 620
cell sites and five switches, supported by a microwave backbone network.
SALES AND MARKETING. Entel PCS and Entel Movil benefit from the recognition
of the Entel name in Chile. Entel S.A., the largest shareholder of ETP, is a
well recognized participant in the long distance telecommunications market in
Chile.
Entel PCS and Entel Movil employ multiple pricing strategies in order to
appeal to various segments of the wireless communications market. They focus
their sales and marketing efforts on corporate accounts and other high-use
customers with postpaid plans, but have also had success in penetrating the mass
market with the introduction of prepaid cellular products and a calling party
pays service. Entel PCS and Entel Movil distribute their products and services
through direct sales forces, indirect distributors and large retail chain
stores.
COMPETITION. Entel PCS and Entel Movil compete with a variety of
telecommunications providers throughout Chile, most of which are affiliated with
international telecommunications companies. Their principal competitors are CTC
Comunicaciones Moviles S.A., which is owned by Telefonica, BellSouth
Comunicaciones S.A., which is controlled by BellSouth International, and
Smartcom PCS S.A., which is owned by Endesa, a Spanish utility. Many of these
competitors currently offer, or are expected to offer, similar services as those
provided by Entel PCS and Entel Movil. In addition, Entel PCS and Entel Movil
compete directly and indirectly with ESMR providers, and long distance and
wireline providers, which include ETPs' largest shareholder, Entel S.A.
LICENSES. Entel PCS's and Entel Movil's licenses are described in the table
below:
<TABLE>
<CAPTION>
NETWORK
FREQUENCY SPECTRUM TERM LICENSED TERRITORY TECHNOLOGY
--------- -------- ---- ------------------ ----------
<S> <C> <C> <C> <C>
1900 MHz............. 2 X 15 MHz 1997 - 2027 Nationwide GSM
1900 MHz............. 2 X 15 MHz 1997 - 2027 Nationwide GSM
</TABLE>
Entel PCS's and Entel Movil's licenses require adherence to various
conditions, including network build-out requirements and quality standards. We
expect these licenses to be renewed upon expiration without payment of material
additional fees. For more information regarding Entel PCS's and Entel Movil's
licenses, see "Regulation--Chile--Licenses."
DOMINICAN REPUBLIC
Our operating company in the Dominican Republic is Tricom S.A. Tricom
initiated service in 1992 and operates nationwide cellular, international long
distance, paging and wireless local loop networks in the Dominican Republic.
Tricom receives a significant portion of its revenues from the provision of
services other than cellular, including revenues from international
long-distance and toll services. Tricom is the largest publicly held company in
the Dominican Republic and is listed on the New York Stock Exchange under the
symbol TDR. Recently, Tricom began offering fixed wireline service to its
subscribers. At December 31, 1999, Tricom had approximately 176,500 cellular and
PCS subscribers and 29,000 paging subscribers. Tricom offers the following
services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
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<PAGE>
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
- usage limit plans;
- basic telephony;
- wireless data;
- facilities-based national long distance;
- facilities-based international long distance;
- wireless local loop;
- data transmission by leased lines or microwave;
- Internet service provision; and
- paging.
As of December 31, 1999, Tricom employed approximately 1,500 people.
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in the Dominican Republic
for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS
IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs................................... 7,941 8,100 8,250 N/A N/A
Wireless subscribers............................ 41 109 176 127 190
Net revenues.................................... $ 90.1 $125.5 $170.8 $34.8 $51.0
EBITDA.......................................... 31.5 53.7 75.3 15.8 22.0
EBITDA margin................................... 35.0% 42.8% 44.1% 45.3% 43.2%
Capital expenditures............................ 92.7 142.1 121.0 25.8 22.5
Proportionate:
Licensed POPs................................... 3,176 2,495 2,541 N/A N/A
Wireless subscribers............................ 16 33 54 39 59
Net revenues.................................... $ 36.0 $ 42.7 $ 52.6 $10.7 $15.7
EBITDA.......................................... 12.6 18.3 23.2 4.9 6.8
Capital expenditures............................ 37.1 48.4 37.3 7.9 6.9
Wireless penetration (all carriers)............... 1.6% 2.6% 5.0% N/A N/A
Real GDP growth................................... 8.2% 7.3% 8.3% N/A N/A
</TABLE>
OWNERSHIP. We currently own 26.5% of the outstanding stock of Tricom,
which, because of its disproportionate voting rights, equals a 38.1% voting
interest. Oleander Holdings, which is affiliated with GFN Corporation Ltd., owns
39.8% of the outstanding stock of Tricom, which equals a 57.1% voting interest.
The remaining 33.7% of the outstanding stock, or 4.8% voting interest, of Tricom
is held by public shareholders.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint five of the 12 members
of Tricom's board of directors. In addition, we have an operations manager who
is responsible for day-to-day interaction with Tricom's management. We also
contribute substantial technical and managerial knowledge to help Tricom
optimize its network and manage its business. For example, Propel compensation
and benefits personnel helped Tricom design a stock option plan, a performance
management system and incentive plans and assisted in the implementation of
human resource training programs. For more information regarding our operational
and managerial influence and our rights as a shareholder of Tricom, see "Our
Relationships with Our Operating Companies--Dominican Republic."
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<PAGE>
MARKET DEMOGRAPHICS. The Dominican Republic's total population is
approximately 8.3 million people, all of whom are covered by Tricom's licenses.
The Dominican Republic's GDP for 1999 was approximately $17.4 billion, or $2,110
per person. At December 31, 1999 the Dominican Republic's wireline penetration
was approximately 9.8% and wireless penetration was approximately 5.0%.
NETWORK OVERVIEW. Tricom offers digital and analog wireless services using
CDMA and NAMPS technologies. Tricom also offers wireless local loop services at
1900 MHz. At December 31, 1999 Tricom's regional network consisted of over 60
digital cell sites and two digital switches, over 70 analog cell sites and two
analog switches, and seven switches for international long distance, local
wireline, wireless local loop and PCS. These networks are supported by a series
of microwave backbone networks.
SALES AND MARKETING. Tricom's goal is to become a full service
telecommunications provider. Tricom employs multiple pricing strategies in order
to appeal to various segments of the wireless communications market in the
Dominican Republic. Except for its corporate accounts, Tricom does not
distribute handsets directly, and thus has not been required to fund handset
subsidies as part of its customer acquisition costs. Through a wholly owned
subsidiary, Tricom owns a switching facility in New York and is one of the few
Latin American long distance carriers licensed in the United States. We believe
Tricom carried a significant portion of the southbound voice and data traffic
from the United States to the Dominican Republic in 1998.
COMPETITION. Tricom competes with a variety of telecommunications providers
throughout the Dominican Republic, most of which are affiliated with
international telecommunications companies. Tricom's principal competitor is
Compania Dominicana de Telefonos C. por A., or Codetel, which is owned by GTE.
In addition, new market entrants France Telecom and Centennial Cellular have
purchased companies that hold PCS licenses. Many of Tricom's competitors
currently offer, or are expected to offer, similar services as those provided by
Tricom. In addition, Tricom competes directly and indirectly with ESMR
providers, long distance providers and wireline providers.
LICENSES. Tricom holds a concession to provide the services described in
the table below:
<TABLE>
<CAPTION>
LICENSED NETWORK
FREQUENCY/USE SPECTRUM TERM TERRITORY TECHNOLOGY
------------- -------- ---- --------- ----------
<S> <C> <C> <C> <C>
Cellular at 800 MHz....... 2 X 12.5 MHz 1990 - 2010 Nationwide NAMPS
Cellular at 1900 MHz...... 2 X 12.5 MHz 1996 - 2010 Nationwide CDMA
Telegraphy................ N/A 1990 - 2010 Nationwide N/A
Paging at 929.7625 MHz.... N/A 1990 - 2010 Nationwide N/A
Basic Telephone........... N/A 1990 - 2010 Nationwide N/A
</TABLE>
All of the licenses require adherence to various conditions, including
network build-out requirements and quality standards. We expect the concession
and the licenses to be renewed upon expiration without payment of material
additional fees. For more information regarding Tricom's concession and
licenses, see "Regulation--Dominican Republic--Licenses."
URUGUAY
Our operating company in Uruguay is Abiatar, S.A., which operates under the
name Movicom and which we refer to as Movicom Uruguay. Movicom Uruguay operates
in the capital city of Montevideo and its surrounding areas. Movicom Uruguay
initiated service in 1991, and as of December 31, 1999, had approximately
116,000 subscribers. Movicom Uruguay offers the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
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<PAGE>
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
information services and detailed billing;
- usage limit plans; and
- Internet service provision.
As of December 31, 1999, Movicom Uruguay employed approximately 335 people.
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Uruguay for 1997, 1998
and 1999:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLION; POPS AND SUBSCRIBERS
IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs................................... N/A N/A 1,529 N/A N/A
Wireless subscribers............................ 39 52 116 85 141
Net revenues.................................... $ 45.0 $ 59.1 $ 86.4 $23.2 $23.7
EBITDA.......................................... 21.5 27.2 35.5 10.7 10.3
EBITDA margin................................... 47.8% 45.9% 41.1% 46.2% 43.4%
Capital expenditures............................ 10.5 12.3 20.7 3.7 3.3
Proportionate:
Licensed POPs................................... N/A N/A 489 N/A N/A
Wireless subscribers............................ 12 17 37 27 45
Net revenues.................................... $ 14.4 $ 18.9 $ 27.6 $ 7.4 $ 7.6
EBITDA.......................................... 6.9 8.7 11.3 3.4 3.3
Capital expenditures............................ 3.4 3.9 6.6 1.2 1.1
Wireless penetration (all carriers)............... 3.1% 4.6% 10.8% N/A N/A
Real GDP growth................................... 5.1% 4.5% (3.0)% N/A N/A
</TABLE>
OWNERSHIP. We own 32.0% of the outstanding common stock of Movicom Uruguay.
The largest shareholder of Movicom Uruguay is BellSouth, which owns 46.0% of the
outstanding common stock. The remainder of Movicom Uruguay's common stock is
owned by local investors. Under the shareholders agreement we have entered into
with the other shareholders in Movicom Uruguay, the parties have the right to
purchase our interest in Movicom Uruguay at fair market value if Motorola's
ownership of our common stock falls below 65.0%. We are currently negotiating
for the right of Motorola to divest itself of our common stock without
triggering the rights of first refusal under this agreement. For more
information regarding our rights under the shareholders agreement and this
negotiation, see "Our Relationships with Our Operating Companies--Uruguay."
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the nine
members of Movicom Uruguay's board of directors. Along with the other
shareholders, we possess veto rights over the business plan, capital
expenditures and strategic direction of Movicom Uruguay. In addition to actively
participating on its board of directors, we have an operations manager who is
responsible for day-to-day interaction with Movicom Uruguay's management. We
also contribute substantial technical and managerial knowledge to help Movicom
Uruguay optimize its network and manage its business. For more information
regarding our operational and managerial influence over Movicom Uruguay and
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<PAGE>
our rights as a shareholder of Movicom Uruguay, see "Our Relationships with Our
Operating Companies--Uruguay."
MARKET DEMOGRAPHICS. Uruguay's total population is approximately
3.3 million people, a significant number of whom are covered by Movicom
Uruguay's contract with ANTEL. Uruguay's GDP for 1999 was approximately
$20.7 billion, or $6,360 per person. At December 31, 1999 Uruguay's wireline
penetration was approximately 27.5%, and wireless penetration was approximately
10.8%.
NETWORK OVERVIEW. Movicom Uruguay offers analog cellular services using
NAMPS technology. At December 31, 1999, Movicom Uruguay's regional network
consisted of 67 cell sites and two switches, which are supported by a series of
microwave backbone networks. Movicom Uruguay is in the process of constructing a
new digital network at 1900 MHz using CDMA technology. ANTEL authorized the
construction of Movicom Uruguay's new digital network using the CDMA technology
by granting authorization to Movicom Uruguay to enlarge and extend its services.
The CDMA network is expected to be launched in mid-2000.
SALES AND MARKETING. Movicom Uruguay employs multiple pricing strategies in
order to appeal to various segments of the Uruguayan wireless communications
market. Movicom Uruguay seeks to position itself as the premier provider of
wireless services and prices its services at a slight premium over its
competitor. Movicom Uruguay's postpaid, enhanced service offerings appeal to
higher-income heavy users while its prepaid plans appeal to more cost-conscious
consumers who might not otherwise have access to wireless communications
services.
COMPETITION. Movicom Uruguay's primary competitor is ANCEL S.A., a
government-owned entity which provides both wireless and wireline service. ANCEL
is owned by ANTEL, the government telecommunications regulator. Basic telephone
services are provided by ANTEL.
LICENSES. Movicom Uruguay has a contract with Antel to build and operate
wireless networks with the following characteristics:
<TABLE>
<CAPTION>
NETWORK
FREQUENCY SPECTRUM TERM LICENSED TERRITORY TECHNOLOGY
--------- -------- ---- ------------------ ----------
<S> <C> <C> <C> <C>
800 MHz.............. 2 X 12.5 MHz 1991 - 2006 Colonia, San Jose, NAMPS
Canelones, Montevideo,
Maldonado and Rocha
1900 MHz............. 2 X 5 MHz 1999 - 2006 Colonia, San Jose, CDMA
Canelones, Montevideo,
Maldonado and Rocha
</TABLE>
Movicom Uruguay's contract expires in 2006 and may be renewed for an
additional five-year period, provided that ANTEL does not oppose its renewal.
The contract requires adherence to various conditions, including network
build-out requirements and quality standards. We expect this contract to be
renewed upon expiration without payment of material additional fees. For more
information regarding Movicom Uruguay's licenses, see
"Regulation--Uruguay--Licenses."
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<PAGE>
SOUTHERN MEXICO
Our operating company in southern Mexico is Grupo Portatel S.A. de C.V,
which operates under the name Portatel. Portatel initiated service in 1990 in
the states of Chiapas, Tabasco, Yucatan, Campeche and Quintana Roo, which
includes the resort area of Cancun in southern Mexico. As of December 31, 1999,
Portatel had approximately 88,000 wireless subscribers. Portatel offers the
following cellular services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and forwarding, voice mail, and detailed billing;
and
- usage limit plans.
As of December 31, 1999, Portatel employed approximately 230 people.
The following table shows several key statistics for three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Mexico for 1997, 1998 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs........................... 18,807 19,211 19,606 N/A N/A
Wireless subscribers.................... 34 63 88 72 96
Net revenues............................ $ 20.4 $ 27.9 $ 34.9 $ 7.9 $ 9.9
EBITDA.................................. 3.1 5.7 6.5 1.5 2.0
EBITDA margin........................... 15.3% 20.4% 18.7% 19.2% 19.8%
Capital expenditures, net............... 0.5 2.3 1.9 0.3 0.7
Proportionate:
Licensed POPs........................... 4,081 4,169 4,255 N/A N/A
Wireless subscribers.................... 7 14 19 16 21
Net revenues............................ $ 4.4 $ 6.0 $ 7.6 $ 1.7 $ 2.2
EBITDA.................................. 0.7 1.2 1.4 0.3 0.4
Capital expenditures.................... 0.1 0.5 0.4 0.1 0.1
Wireless penetration (all carriers)(1).... 1.7% 3.2% 7.2% N/A N/A
Real GDP growth........................... 6.8% 4.8% 3.7% N/A N/A
</TABLE>
------------------------
(1) While this relates to wireless penetration in Mexico, we believe that the
wireless penetration for the region in which Portatel operates is lower than
the national figure.
OWNERSHIP. We own 21.7% of the outstanding common stock of Portatel. Other
Portatel shareholders include Ernesto Warnholtz, who owns 32.4% of the
outstanding common stock, Associated Communications of Mexico, Inc., a wholly
owned subsidiary of Liberty Media, an affiliate of AT&T, which owns 23.6% of the
outstanding common stock, LCC of Mexico, which owns 14.8% of the outstanding
common stock and local shareholders, who own 7.5% of the outstanding common
stock.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. One of the seven members of
Portatel's board of directors is a Propel employee who may be removed by a vote
of the majority shareholders at any time. In addition, we have an operations
manager who is responsible for day-to-day interaction with Portatel's
management.
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<PAGE>
MARKET DEMOGRAPHICS. Mexico is one of Latin America's largest countries
with a population of approximately 97.4 million people, of which approximately
19.6 million are covered by Portatel's license. Mexico is also one of Latin
America's largest economies with an estimated 1999 GDP of $478.5 billion, or
approximately $4,910 per person. At December 31, 1999 Mexico's wireline
penetration was approximately 11.0%, and wireless penetration was approximately
7.2%.
NETWORK OVERVIEW. Portatel offers analog cellular services using AMPS
technology, and is currently in the process of constructing a digital CDMA
network. As of December 31, 1999, Portatel's analog network consisted of 35 cell
sites and eight switches. Their regional network is supported by a series of
microwave and leased fiber optic backbone networks.
SALES AND MARKETING. Portatel employs multiple pricing strategies in order
to appeal to various segments of the wireless communications market. It seeks to
position itself as the premier provider of wireless services. Its postpaid and
value-added service offerings appeal to higher-income heavy users while its
prepaid plans appeal to more cost-conscious customers who might not otherwise
have access to wireless communications services.
COMPETITION. Portatel's principal competitor in its region is Radiomovil
Dipsa, S.A. de C.V., or Telcel, a subsidiary of the nationwide wireline
telephone operator. Its competitors currently offer, or are expected to offer,
similar services to those provided by Portatel. In addition, Portatel competes
indirectly with long distance and wireline providers.
LICENSES. Portatel's license is described in the table below:
<TABLE>
<CAPTION>
FREQUENCY SPECTRUM TERM LICENSED TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- ------------------ ------------------
<S> <C> <C> <C> <C>
800 MHz.............. 2 X 10 MHz 1990 - 2010 Chiapas, Tabasco, Yucatan, CDMA/AMPS
Campeche and Quintana Roo
</TABLE>
Portatel's license requires adherence to various conditions, including
network build-out requirements and quality standards. We expect this license to
be renewed upon expiration without payment of material additional fees. For more
information regarding Portatel's license, see "Regulation--Mexico--Licenses."
EUROPE/MIDDLE EAST OPERATIONS
ISRAEL
Our operating company in Israel is Pelephone Communications Ltd., which
operates under the name Pelephone. Pelephone launched one of the world's first
cellular networks in 1986. Pelephone served over 1.1 million wireless
subscribers as of December 31, 1999. From 1997 to 1999, Pelephone's subscriber
base grew at a compound annual growth rate of approximately 11%. Pelephone
offers the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
Hebrew language text messaging, e-mail, fax, information services and
detailed billing;
- usage limit plans; and
- wireless data.
In the future, Pelephone plans to add to its existing service offerings with
the addition of wireless data services through higher speed 2.5G technologies.
As of December 31, 1999, Pelephone had approximately 1,750 employees.
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<PAGE>
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Israel for 1997, 1998 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND
SUBSCRIBERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company(1):
Licensed POPs..................................... 5,830 5,970 6,122 N/A N/A
Wireless subscribers.............................. 894 932 1,110 959 1,171
Net revenues...................................... $680.8 $741.7 $709.4 $183.6 $202.4
EBITDA............................................ 265.6 268.4 89.2 36.9 35.9
EBITDA margin..................................... 39.0% 36.2% 12.6% 20.1% 17.7%
Capital expenditures.............................. 166.0 274.3 233.1 59.2 52.8
Proportionate:
Licensed POPs..................................... 2,915 2,985 3,061 N/A N/A
Wireless subscribers.............................. 447 466 555 480 586
Net revenues...................................... $340.4 $370.9 $354.7 $ 91.8 $101.2
EBITDA............................................ 132.8 134.2 44.6 18.4 17.9
Capital expenditures.............................. 83.0 137.1 116.6 29.6 26.4
Wireless penetration (all carriers)................. 28.6% 35.2% 44.1% N/A N/A
Real GDP growth..................................... 2.9% 2.2% 2.2% N/A N/A
</TABLE>
------------------------
(1) Pelephone's financial statements included elsewhere in this prospectus have
been prepared using inflationary accounting. The data in the table removes
the effects of such accounting practice.
OWNERSHIP. We own 50.0% of the outstanding common stock of Pelephone. Our
sole partner in Pelephone is the Israel Telecommunication Corp. Limited, known
as Bezeq, Israel's majority-government-owned telecommunications provider.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint five of the ten
members of Pelephone's board of directors, and two individuals who serve on the
four-member executive committee. As is our right under the shareholders
agreement, we have nominated the vice president--marketing and the vice
president--engineering. In addition, we have nominated the chief executive
officer. Several other senior officers of Pelephone are former Motorola
employees. In addition to actively participating on its board of directors, we
have an operations manager who is responsible for day-to-day interaction with
Pelephone's management. We also contribute substantial technical and managerial
knowledge to help Pelephone optimize its network and manage its business. For
example, our employees helped in addressing the technical issues that faced
Pelephone in 1999, as a result of widespread fraud on its analog NAMPS network.
For more information regarding our operational and managerial influence over
Pelephone and our rights as a shareholder of Pelephone see "Our Relationships
with Our Operating Companies--Israel."
MARKET DEMOGRAPHICS. Israel has a population of approximately 6.1 million
people, all of whom are covered by Pelephone's license. Israel had a 1999 GDP of
$98.9 billion, or approximately $16,147 per person. Israel is one of the most
affluent countries in the Middle East and the Israeli market has relatively high
overall usage and penetration rates for wireless communications products. At
December 31, 1999, Israel's wireline penetration was approximately 47.0% and
wireless penetration was approximately 44.1%.
NETWORK OVERVIEW. Pelephone currently manages both a digital CDMA network,
which was launched in 1998, and an analog NAMPS network. At December 31, 1999,
Pelephone's nationwide
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<PAGE>
CDMA network consisted of over 630 cell sites and four switches, and its
nationwide NAMPS network consisted of over 750 cell sites and ten switches, each
of which is supported by a leased microwave and fiber optic backbone network.
Pelephone has encountered some difficulties in building out its networks. For
example, zoning problems have adversely affected the deployment of existing and
additional antenna towers, and Pelephone has experienced incremental
interference difficulties as its primary competitors have increased their
network coverage.
In 1999, Pelephone experienced a decline in financial performance, largely
as a result of widespread fraud in its NAMPS network and significant handset
subsidies. With our help, the fraud was remedied by implementing authentication
technology. Also, in February 1999 for several hours over a three-day period
Pelephone experienced intermittent failures in its CDMA network due to a
software problem that was also remedied with our help. As a consequence of these
operational problems, Pelephone's subscriber base, reputation and results of
operations were adversely affected. For more information regarding the impact of
the fraud on Pelephone's 1999 financial performance, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Proportionate Results of Operations."
SALES AND MARKETING. Pelephone is a leading participant in the wireless
telecommunications market in Israel and targets all segments of the Israeli
market with competitive pricing packages. In 1999, Pelephone employed a new
advertising agency to relaunch its brand following the intermittent CDMA network
failures and the NAMPS fraud. As a result, its CDMA services have been
repositioned as a digital platform for advanced mobile services under the Next
brand, and future innovations in high-speed data and Internet will fall under
the GoNext brand. In addition to focusing on the value of its products and
services, Pelephone seeks to market its quality of service, focusing on its
broad product offerings, superior network technology and high level of customer
service. A majority of Pelephone's sales are made through its 177 authorized
dealers. Pelephone also employs 80 direct sales personnel who, with the
assistance of telemarketers and customer care centers, account for a substantial
portion of its sales. In addition, chain stores account for the remainder of
Pelephone's sales volume.
We believe that Pelephone is the best prepared wireless operator in Israel
in terms of readiness to introduce the next stage of high-speed data
technologies and the closest to possessing the ability to migrate toward 3G
technologies. In addition, Pelephone, through a joint venture with Suny.com, a
subsidiary of the Samsung distributor in Israel, intends to introduce GoNext
this year, which will offer a Hebrew language wireless data portal for the
Israeli market that will be accessible by customers of any service provider.
Subscribers to this service will be able to engage in various e-commerce
activities, including retail banking transactions.
COMPETITION. Pelephone competes with two wireless telecommunications
providers in Israel, both of which are also affiliated with international
telecommunications companies. These two providers are Cellcom Israel Ltd., or
Cellcom, which is owned in part by BellSouth, and Partner Communications
Company Ltd., which operates under the Orange brand and is owned in part by
Hutchison Whampoa. Cellcom, the largest wireless communications provider in
Israel with over 1.4 million subscribers, began operations in 1994 using TDMA
technology. It traditionally offers lower prices than Pelephone. Partner, which
launched service in December 1998, operates a GSM network. Because of
significant price competition in the Israeli wireless communications market,
Pelephone matches its competitors' rate discounts and handset subsidies.
Pelephone's CDMA networks require the use of relatively expensive handsets as
compared to the GSM and TDMA handsets which our competitors use. The additional
cost of these CDMA handsets may place Pelephone at a competitive disadvantage.
For more information regarding these costs and their impact on Pelephone's
financial performance, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Proportionate Results of Operations."
Pelephone's competitors currently offer, or are expected to offer, similar
services to those it provides. In addition, the Palestinian Authority has been
allocated spectrum to offer wireless communications services in the Palestinian
Territories where Israeli wireless operators, including Pelephone, provided
service. Services have been offered in that area by a Palestinian
Authority-licensed company since 1999. In addition, Pelephone competes directly
and indirectly with an ESMR operator
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controlled by Motorola, long distance providers and fixed wireline providers,
including our partner Bezeq.
LICENSES. Pelephone's license is described in the table below:
<TABLE>
<CAPTION>
FREQUENCY SPECTRUM TERM LICENSED TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- ------------------ ------------------
<S> <C> <C> <C> <C>
800 MHz............... 2 X 12 MHz 1994 - 2004 Nationwide CDMA/NAMPS
</TABLE>
Pelephone's license requires adherence to various conditions, including
network build-out requirements and quality standards. We expect this license to
be renewed upon expiration without payment of material additional fees. In
addition, the license under which Pelephone conducts business contains
restrictions on Motorola's ability to transfer its interests in Pelephone
without governmental approval. Motorola's contribution of our Israeli business
to us, this offering and a distribution of our common stock to Motorola
stockholders or any other form of divestiture would violate the provisions of
the Israeli license. We are currently seeking the approval of the Israeli
government for the transfer of Pelephone to us, the offering and a distribution.
If we are unable to obtain that approval, it is possible that we would have to
sell our interest in Pelephone back to Motorola, or that Pelephone could lose
its license. For more information, see "Regulation--Israel--Licenses."
Mobile telephone subscribers in Israel are not charged for incoming calls,
except while roaming. Rather, the charge for incoming domestic calls is borne by
the Israeli network on which the call originated or from which the call was
transferred. This is referred to as calling party pays. The Israeli Ministry of
Communications has recently proposed regulations that would eventually require
all cellular operators to charge the same tariff for incoming calls. If enacted,
this regulation would require Pelephone to make the largest reduction in
incoming call tariffs, compared to other operators in Israel, which may have a
material adverse effect on Pelephone's results of operations. For more
information regarding Pelephone's licenses, see "Regulation--Israel--Licenses."
We currently anticipate that, by the end of 2002, the government will have
granted another license to a fourth operator. We currently anticipate that the
government will begin to auction 3G licenses sometime in late 2001 or the
beginning of 2002, and Pelephone is currently exploring whether to participate
in this auction.
EGYPT
Our operating company in Egypt is The Egyptian Company for Mobile Services,
which operates under the name MobiNil, and which was acquired in 1998 from
Arento, the telecommunications agency of the Egyptian government. MobiNil, which
relaunched service in July 1998, is the largest wireless communications services
provider in Egypt and operates principally in the cities of Cairo, Alexandria,
Luxor and in the Nile River delta. MobiNil is one of the largest publicly traded
companies in Egypt as measured by market capitalization and is traded on the
Cairo and Alexandria Stock Exchanges under the symbol MOBN. As of December 31,
1999, MobiNil served over 507,000 subscribers. MobiNil offers the following
services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
- usage limit plans; and
- wireless data.
At December 31, 1999, MobiNil employed approximately 1,170 people.
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<PAGE>
The following table shows several key statistics for the two years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Egypt for 1998 and 1999:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------
1998(1) 1999 1999 2000
------- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND
SUBSCRIBERS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs............................................. 63,250 64,520 N/A N/A
Wireless subscribers...................................... 160 507 227 622
Net revenues.............................................. $ 98.5 $360.3 $57.9 $133.6
EBITDA.................................................... (22.6) 78.8 (1.8) 39.5
EBITDA margin............................................. (23.0)% 21.9% (3.1)% 29.6%
Capital expenditures...................................... 151.4 217.2 15.6 90.5
Proportionate:
Licensed POPs............................................. 11,385 11,614 N/A N/A
Wireless subscribers...................................... 29 91 41 112
Net revenues.............................................. $ 17.7 $ 64.8 $10.4 $ 24.0
EBITDA.................................................... (4.1) 14.2 (0.3) 7.1
Capital expenditures...................................... 27.2 39.1 2.8 16.3
Wireless penetration (all carriers)......................... 0.3% 1.3% N/A N/A
Real GDP growth............................................. 5.6% 5.0% N/A N/A
</TABLE>
------------------------
(1) Reflects information from May 5, 1998, the day on which MobiNil was acquired
from Arento, through December 31, 1998.
OWNERSHIP. We currently own an 18.0% economic interest in MobiNil through
our 35.3% interest in MobiNil for Telecommunications SAE, a holding company
which we refer to as MFT and which owns 51.0% of the outstanding common stock of
MobiNil. Our partners in MFT include France Telecom Mobiles International, and
Orascom Telecom SAE, a large Egyptian conglomerate. France Telecom owns a 23.5%
economic interest in MobiNil through MFT, while Orascom directly and indirectly
owns approximately a 22.5% economic interest in MobiNil. The remaining 36.0% of
the outstanding common stock of MobiNil is owned by public shareholders.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the seven
members of MFT's board of directors. Each of these directors, in turn, serves on
MobiNil's 11-member board. In addition, we, France Telecom and Orascom each
appoint one individual to serve on a three-member strategic committee which
advises both MobiNil's and MFT's boards of directors on management proposals.
The chief financial officer and leaders of the customer service and regulatory
relations divisions are our employees that we have assigned to MobiNil. In
addition to actively participating on its board of directors and through our
assigned employees, we have an operations manager who is responsible for
day-to-day interaction with MobiNil's management. We also contribute substantial
technical and managerial knowledge to help MobiNil optimize its network and
manage its business. For example, when MobiNil launched its prepaid service we
advised it, based on our experiences in other markets, to issue its prepaid
cards in lower denominations than its competitors, which we believe has
contributed significantly to MobiNil's achieving a leading market share in
prepaid services. For more information regarding our operational and managerial
influence over MobiNil and our rights as a shareholder of MFT, see "Our
Relationships with Our Operating Companies--Egypt."
MARKET DEMOGRAPHICS. Egypt has a population of approximately 64.5 million
people, all of whom are covered by MobiNil's license, and nearly all of whom are
located within a small percentage of its overall land area. Egypt had a 1999 GDP
of $89.0 billion, or approximately $1,380 per person. At December 31, 1999,
Egypt's wireline penetration was 8.8%, and wireless penetration was 1.3%.
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<PAGE>
NETWORK OVERVIEW. At December 31, 1999, MobiNil's GSM 900 network included
630 cell sites and five switches. MobiNil has relied on leased lines from
Telecom Egypt for backbone, but is planning to reduce this dependence. To this
end, MobiNil has invested significantly in microwave and bandwidth-management
equipment.
SALES AND MARKETING. MobiNil possesses a strong brand image, with a high
degree of brand awareness among prospective cellular subscribers. MobiNil
employs a two-tier branding strategy in order to more effectively target the
needs of different market segments and inhibit dilution of its name and market
share. The MobiNil brand targets corporate and other high-end postpaid users,
while its ALO brand targets the more cost-conscious consumer in the market. The
majority of both postpaid and prepaid sales are made through MobiNil
distributors and dealers. In addition, MobiNil employs a direct sales force to
target corporate and government accounts, and MobiNil also owns ten retail
outlets which target individual consumers.
MobiNil expects to enter into a strategic alliance with a local Internet
service provider to create an Arabic wireless data portal to provide advanced
data services using WAP.
COMPETITION. Currently, MobiNil's only direct competitor is MisrFone SAE,
which is marketed under the Click GSM name, a joint venture of Vodafone/Airtouch
and local partners, which began operations in November 1998. Existing wireless
licenses provide MobiNil and Click with exclusivity in the wireless
communications market until December 2002. MobiNil's competitor currently offers
similar services to those it provides. In addition, MobiNil also competes
indirectly with the long distance and wireline provider.
LICENSES. MobiNil's license is described in the table below:
<TABLE>
<CAPTION>
LICENSED
FREQUENCY SPECTRUM TERM TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- --------- ------------------
<S> <C> <C> <C> <C>
900 MHz................ 2 x 12.5 MHz 1998 - 2013 Nationwide GSM
</TABLE>
MobiNil's license requires adherence to various conditions, including
network build-out requirements and quality standards. We expect this license to
be renewed without the payment of material additional fees. We currently
anticipate that, by the end of 2002, the Egyptian government will have granted
another license to a third operator. For more information regarding MobiNil's
license, see "Regulation--Egypt--Licenses."
LITHUANIA
Our operating company in Lithuania is UAB Omnitel, which operates under the
name Omnitel. Omnitel, which initiated GSM service in 1995, operates nationwide
and had approximately 198,000 wireless subscribers as of December 31, 1999.
Omnitel offers the following service:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
- usage limit plans;
- facilities-based international long distance;
- data transmission by leased lines or microwave;
- Internet service provision;
- fixed wireless;
- vehicle location services; and
- paging.
Omnitel plans to introduce wireless data services in the near future. As of
December 31, 1999, Omnitel employed approximately 400 people.
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The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Lithuania for 1997, 1998
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND
SUBSCRIBERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs..................................... 3,710 3,700 3,700 N/A N/A
Wireless subscribers.............................. 79 146 198 148 212
Net revenues...................................... $50.4 $91.7 $88.6 $21.0 $18.0
EBITDA............................................ 10.3 29.7 47.5 11.0 7.6
EBITDA margin..................................... 20.4% 32.4% 53.6% 52.5% 42.6%
Capital expenditures.............................. 24.3 32.9 10.2 3.0 4.3
Proportionate:
Licensed POPs..................................... 1,684 1,295 1,295 N/A N/A
Wireless subscribers.............................. 36 51 69 52 74
Net revenues...................................... $21.9 $36.9 $31.0 $ 7.3 $ 6.3
EBITDA............................................ 4.5 11.9 16.6 3.9 2.7
Capital expenditures.............................. 10.6 13.2 3.6 1.0 1.5
Wireless penetration (all carriers)................. 3.7% 6.4% 9.3% N/A N/A
Real GDP growth..................................... 7.3% 5.1% (4.1)% N/A N/A
</TABLE>
OWNERSHIP. We own 35.0% of the outstanding common stock of Omnitel. The
other shareholders are Amber Mobile Teleholding AB, a joint venture of Telia AB
and Sonera Corporation, with 55.0% of the outstanding common stock, and the
Kazickas family with 10.0% of the outstanding common stock.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the seven
members of Omnitel's board of directors. In addition, the president and chief
financial officer are nominated in consultation with us. Along with our
operating partners, we have joint control over the business plan, capital
expenditures and strategic direction of Omnitel. In addition to actively
participating on its board of directors, we have an operations manager who is
responsible for day-to-day interaction with Omnitel's management. We also
contribute substantial technical and managerial knowledge to help Omnitel
develop its network and manage its business. For example, two Propel employees,
who served as our Lithuania operations manager and one of our Omnitel board
members, visited Bajacel in Mexico to learn about prepaid branding, pricing and
usage in order to facilitate Omnitel's introduction of prepaid services in
Lithuania. For more information regarding our operational and managerial
influence over Omnitel and our rights as a shareholder of Omnitel, see "Our
Relationships with Our Operating Companies--Lithuania."
MARKET DEMOGRAPHICS. Lithuania has a total population of approximately
3.7 million people, all of whom are covered by Omnitel's licenses. Lithuania's
GDP for 1999 was approximately $10.6 billion, or $2,880 per person. At
December 31, 1999, Lithuania's wireline penetration was approximately 31.1% and
wireless penetration was approximately 9.3%.
NETWORK OVERVIEW. Omnitel offers digital cellular services using GSM 900
and GSM1800 technology. Omnitel has an extensive network of switches and cell
sites that covers substantially all of Lithuania's population and is
interconnected to a microwave and leased fiber optic backbone network.
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<PAGE>
SALES AND MARKETING. Omnitel employs multiple pricing strategies in order
to appeal to various segments of the wireless communications market. Omnitel's
postpaid pricing plans appeal to high-end users of wireless services. Omnitel's
prepaid pricing plans appeal to more cost conscious consumers of cellular
services. Handset subsidies are offered to all new subscribers at differing
rates depending on the level of service purchased.
COMPETITION. Omnitel competes with a variety of telecommunications
providers, most of which are also affiliated with international
telecommunications companies. Omnitel's primary competitor is UAB Bite GSM,
which is owned by Tele Danmark A/S. In addition, Omnitel competes against a new
PCS provider, UAB Tele2, which is owned by NetCom A.B., and initiated operations
in December 1999. In addition, Omnitel competes indirectly with long distance
providers and the wireline provider, Lietuvos Telekomas, which is owned in part
by our partner Amber.
LICENSES. Omnitel's licenses are described in the table below:
<TABLE>
<CAPTION>
LICENSED
FREQUENCY SPECTRUM TERM TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- --------- ------------------
<S> <C> <C> <C> <C>
900 MHz.............. 2 x 8 MHz 1995 - 2005 Nationwide GSM
1800 MHz............. 2 x 7.5 MHz 1998 - 2008 Nationwide GSM
</TABLE>
Omnitel also has additional licenses for providing paging services, data
transmission services, Trans-European trunked radio, mobile satellite services
and facilities-based international long distance. Omnitel's licenses require
adherence to various conditions, including network build-out requirements and
quality standards. We expect these licenses to be renewed upon expiration
without payment of material additional fees. For more information regarding
Omnitel's license, see "Regulation--Lithuania--Licenses."
The Lithuanian government had announced its intention to tender a third GSM
900 license sometime during 2000. The existing operators initiated a complaint
though an administrative proceeding, opposing the grant of any new GSM 900
license. In March 2000, the administrative tribunal elected to postpone any
tender indefinitely so that additional information and facts could be gathered.
JORDAN
Our operating company in Jordan is Jordan Mobile Telephone Services
Company Ltd, which operates under the name Fastlink. Fastlink, which initiated
service in 1995, operates in selected areas of Jordan, including the rapidly
developing cities of Amman, Irbid and Aqaba. As of December 31, 1999, Fastlink
had approximately 94,000 subscribers. Fastlink offers the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
- usage limit plans; and
- wireless data.
At December 31, 1999, Fastlink employed approximately 280 people.
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<PAGE>
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Jordan for 1997, 1998 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND
SUBSCRIBERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs..................................... 5,770 5,960 6,150 N/A N/A
Wireless subscribers.............................. 42 70 94 75 128
Net revenues...................................... $47.5 $83.5 $99.3 $21.4 $25.2
EBITDA............................................ 18.3 34.6 45.5 10.2 13.5
EBITDA margin..................................... 38.5% 41.4% 45.8% 47.8% 53.6%
Capital expenditures.............................. 19.2 31.4 31.9 1.2 0.8
Proportionate:
Licensed POPs..................................... 1,454 1,556 1,605 N/A N/A
Wireless subscribers.............................. 11 18 25 20 33
Net revenues...................................... $12.0 $21.3 $25.9 $ 5.6 $ 6.6
EBITDA............................................ 4.6 8.8 11.9 2.7 3.5
Capital expenditures.............................. 4.8 8.0 8.3 0.3 0.2
Wireless penetration (all carriers)................. 0.8% 1.3% 1.6% N/A N/A
GDP Growth.......................................... 1.3% (1.0)% 1.3% N/A N/A
</TABLE>
OWNERSHIP. We have a 26.1% economic ownership interest in Fastlink, through
our 26.1% ownership in Pella Investment Company, a holding company which holds
all of the outstanding common stock of Fastlink. Other shareholders include
Pioneers for Investment, owned by Orascom, which owns a 65.5% economic interest,
Mobile Telecommunications Company, which owns a 4.9% economic interest, and an
individual shareholder, who owns a 3.5% economic interest.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the five
members of Pella Investment Company's board of directors and two of Fastlink's
five board members, including one who is Fastlink's chief executive officer and
our employee. We also nominate the company's controller, technical, marketing
and operations managers. Along with Pioneers for Investment, we possess joint
control over the business plan, capital expenditures and strategic direction of
Fastlink. We also contribute substantial technical and managerial knowledge to
help Fastlink optimize its network and manage its business. For example, two of
our employees, who served as the chief executive officer and chief financial
officer of Fastlink, frequently visited Pelephone in Israel to learn about
Pelephone's customer service centers, call centers, dealer facilities and credit
and collection operations. Fastlink subsequently based its call center on
Pelephone's model. In addition, Propel's human resources personnel also helped
Fastlink design and implement a job evaluation program. For more information
regarding our managerial and operational control over Fastlink and our rights as
a shareholder of Fastlink, see "Our Relationships with Our Operating
Companies--Jordan."
MARKET DEMOGRAPHICS. Jordan has a population of approximately 6.2 million
people, all of whom are covered by Fastlink's license. Jordan's GDP for 1999 was
approximately $7.6 billion, or $1,240 per person. At December 31, 1999 Jordan's
wireline penetration was approximately 11.5%, and wireless penetration was
approximately 1.6%.
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NETWORK OVERVIEW. Fastlink offers digital cellular services using GSM 900
technology. At December 31, 1999, Fastlink's nationwide network consisted of
over 220 cell sites and two switches supported by a microwave backbone network.
SALES AND MARKETING. Fastlink employs multiple pricing strategies in order
to appeal to various segments of the Jordanian wireless communications market.
Fastlink's postpaid plans appeal to high-end users of wireless services,
particularly the business or commercial user. Fastlink's launch in August 1999
of the Keep Close postpaid bundled minute plans has driven market growth and has
enabled Fastlink to grow to over 128,000 subscribers in the first quarter of
2000, matching its growth for the entire 1999 fiscal year. As in our other
operating companies' markets, the availability of prepaid service has opened up
the market in Jordan to the cost-conscious consumer.
COMPETITION. Fastlink is currently the only mobile operator in Jordan. A
new market entrant, which will be owned in part by the government and France
Telecom, is expected to start operations in the third quarter of 2000. In
addition, Fastlink indirectly competes with the government-owned long distance
and wireline provider.
LICENSES. Fastlink's license is described in the table below:
<TABLE>
<CAPTION>
LICENSED
FREQUENCY SPECTRUM TERM TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- --------- ------------------
<S> <C> <C> <C> <C>
900 MHz.............. 2 X 10 MHz 1994 - 2009 Nationwide GSM
</TABLE>
Fastlink's license requires adherence to various conditions, including
network build-out requirements and quality standards. We expect this license to
be renewed upon expiration without payment of material additional fees. For more
information regarding Fastlink's license, see "Regulation--Jordan--Licenses."
AZERBAIJAN
Our operating company in Azerbaijan is Bakcell II, which operates under the
name Bakcell. Bakcell initiated wireless service in 1994 and operates in
selected areas of Azerbaijan, including the capitol city of Baku. As of
December 31, 1999, Bakcell had approximately 14,000 subscribers. In 1999, its
subscriber base decreased as a result of switch problems related to the launch
of its GSM network and interconnected problems, both of which have since been
resolved. Bakcell offers the following services:
- postpaid wireless;
- prepaid wireless;
- calling party pays billing;
- national roaming;
- international roaming;
- value-added services, including three-party conference calling, call
barring, call waiting and transfer, voice mail, caller identification,
text messaging, fax, information services and detailed billing; and
- usage limit plans.
As of December 31, 1999, Bakcell employed approximately 240 people.
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The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Azerbaijan for 1997, 1998
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND
SUBSCRIBERS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:(1)
Licensed POPs.................................... 7,607 7,630 7,620 N/A N/A
Wireless subscribers............................. 26 35 14 24 25
Net revenues..................................... $31.5 $73.3 $13.9 $ 3.8 $ 1.1
EBITDA........................................... 8.4 27.7 1.2 (0.3) 0.5
EBITDA margin.................................... 26.5% 37.8% 8.9% (8.3)% 45.1%
Capital expenditures............................. 4.0 4.6 .6 -- --
Proportionate:
Licensed POPs.................................... 1,864 1,869 1,867 N/A N/A
Wireless subscribers............................. 6 9 3 6 6
Net revenues..................................... $ 7.7 $18.0 $ 3.4 $ 0.9 $ 0.3
EBITDA........................................... 2.0 6.8 0.3 (0.1) 0.1
Capital expenditures............................. 1.0 1.1 0.1 -- --
Wireless penetration (all carriers)................ 0.4% 1.1% 2.8% N/A N/A
Real GDP growth.................................... 5.8% 10.0% 7.4% N/A N/A
</TABLE>
------------------------
(1) Net Revenues and EBITDA represent the results of the business activities of
the holding company GTIB, which purchases cellular infrastructure and
handsets and sells this equipment to Bakcell and provides management
services to Bakcell for a fee. Because it did not own a majority of Bakcell
during the periods presented, GTIB's results of operations do not reflect
Bakcell's revenue and EBITDA associated with its wireless services.
Subsequent to December 31, 1999, GTIB acquired an additional 26% ownership
in Bakcell. GTIB will begin to consolidate the financial results of Bakcell
in the second quarter of 2000.
OWNERSHIP. We currently have a 25.0% economic ownership interest in Bakcell
through our 33.3% interest in GTIB 1996, Ltd., or GTIB, a British Virgin Islands
holding company that owns 75.0% of Bakcell. Other shareholders in GTIB are
Havacom and Alfa Telcom N.V. The Azeri Ministry of Communications owns the
remaining 25.0% of Bakcell.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the six members
of GTIB's board of directors. At this time, the chairman of the board of GTIB is
our employee. GTIB, in turn, appoints three individuals to serve on Bakcell's
four-member board of directors. We currently occupy one Bakcell board seat. We
are also consulted in the selection of many of the key operating executives of
Bakcell. The shareholders of GTIB possess joint control over the business plan,
capital expenditures and strategic direction of Bakcell. In addition to actively
participating on these boards of directors, we have an operations manager who is
responsible for day-to-day interaction with Bakcell's management. We also
contribute substantial technical and managerial knowledge to help Bakcell
optimize its network and manage its business. For example, we facilitated the
visit of Bakcell engineers to Fastlink and Omnitel in order to learn about
roaming services, pricing, clearing houses and operator account settlements
prior to Bakcell launching its GSM service. For more information regarding our
managerial and operational control over GTIB and our rights as a shareholder of
GTIB, see "Our Relationships with Our Operating Companies--Azerbaijan."
105
<PAGE>
MARKET DEMOGRAPHICS. Azerbaijan has a population of approximately
7.6 million people, all of whom are covered by Bakcell's license. Azerbaijan's
GDP for 1999 was approximately $4.8 billion, or $630 per person. At
December 31, 1999 Azerbaijan's wireline penetration was approximately 9.2%, and
wireless penetration was approximately 2.8%. We believe Azerbaijan represents an
attractive market opportunity in part because its large oil and gas resources
are attracting significant foreign investment.
NETWORK OVERVIEW. Bakcell offers digital and analog cellular services using
GSM and ETACS technology. At December 31, 1999, Bakcell's nationwide network
consisted of over 85 digital cell sites, one digital switch, over 35 analog cell
sites and one analog switch, each of which is supported by a microwave and fiber
optic backbone network. Its digital switching platform has been upgraded to
address the switch issues encountered in 1999.
SALES AND MARKETING. Bakcell's marketing strategy is to target all market
segments. Bakcell has placed a special emphasis on building a new prepaid brand
to increase sales in the consumer market and expanding distribution through
agreements with new dealers. In 1999, dealers and a direct sales force accounted
for a significant portion of its sales, while the remainder were made through
its own stores.
COMPETITION. Bakcell's only competitor is Azercell Telekom B.M., which also
is owned, in part, by the Ministry of Communications, a Bakcell shareholder.
Bakcell's competitor currently offers similar services to those it provides. In
addition, Bakcell indirectly competes with the government-owned long distance
and wireline provider.
LICENSES. Bakcell's license is described in the table below:
<TABLE>
<CAPTION>
LICENSED
FREQUENCY SPECTRUM TERM TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- --------- ------------------
<S> <C> <C> <C> <C>
900 MHz.............. 2 x 20.5 MHz 1996 - 2016 Nationwide GSM/ETACS
</TABLE>
Bakcell's license requires adherence to various conditions, including
network build-out requirements and quality standards. We expect this license to
be renewed upon expiration without payment of material additional fees. For more
information regarding Bakcell's license, see "Regulation--Azerbaijan--Licenses."
ASIA PACIFIC OPERATIONS
HONG KONG
Our operating company in Hong Kong is Hutchison Telephone Company Ltd.,
which we refer to as HTCL. HTCL launched one of the world's first cellular
networks in 1985. HTCL is a leading wireless communications services provider in
Hong Kong, serving approximately 1.4 million wireless subscribers as of
December 31, 1999. From 1997 through 1999, HTCL's subscriber base grew at a
compound annual growth rate of approximately 50.5%.
HTCL has over 15 years of experience as an operator of wireless
communications networks. HTCL currently manages a dual band GSM/PCS network and
the world's first commercial CDMA network under the widely recognized Orange
brand. HTCL offers the following services:
- postpaid wireless;
- prepaid wireless;
- international roaming;
- value-added services, including call waiting, call forwarding,
international outgoing, call barring, voice mail, caller identification,
text messaging, e-mail, fax, information services and detailed billing;
- usage limit plans; and
- wireless data service, including mobile banking and financial information.
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<PAGE>
HTCL has introduced a wireless data service, referred to as Orangeworld, to
provide wireless Internet and mobile commerce on their networks. Later this
year, HTCL plans to offer a high-speed wireless data service using 2.5G
technology on both its CDMA and dual band networks.
As of December 31, 1999, approximately 1,540 people were dedicated to HTCL's
operations.
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
wireless penetration and real GDP growth in Hong Kong for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs............................... 6,502 6,687 6,840 N/A N/A
Wireless subscribers........................ 597 892 1,353 995 1,434
Net revenues................................ $540.8 $522.7 $524.5 $135.6 $167.0
EBITDA...................................... 31.9 23.4 (134.5) (6.9) 17.9
EBITDA margin............................... 5.9% 4.5% (25.6)% (5.1)% 10.7%
Capital expenditures........................ 198.7 67.4 100.5 17.8 17.4
Proportionate:
Licensed POPs............................... 1,951 2,006 1,717 N/A N/A
Wireless subscribers........................ 179 268 340 299 360
Net revenues................................ $162.2 $156.8 $151.6 $ 40.7 $ 41.9
EBITDA...................................... 9.6 7.0 (38.9) (2.1) 4.5
Capital expenditures........................ 59.6 20.2 29.1 5.3 4.4
Wireless penetration (all carriers)........... 30.6% 40.9% 54.9% N/A N/A
Real GDP growth............................... 5.0% (5.1)% 2.9% N/A N/A
</TABLE>
OWNERSHIP. We own 25.1% of the outstanding common stock of HTCL. Hutchison
Whampoa Ltd., a leading Hong Kong conglomerate, holds 55.9% of the outstanding
common stock of HTCL. In addition, NTT DoCoMo, Japan's largest wireless
communications service provider by market share, has recently purchased HTCL
Holdings, formerly known as Distacom, which owns 19.0% of the outstanding common
stock of HTCL.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint two of the seven
members of HTCL's board of directors. In addition, we have an operations manager
who is responsible for day-to-day interaction with HTCL's management. Some
significant corporate actions, including the appointment of senior management
and the approval of annual business plans and capital expenditures, must be
approved unanimously by the shareholders. We also contribute substantial
technical and managerial knowledge to help HTCL to optimize its network and
manage its business. For more information regarding our operational and
managerial influence over HTCL and our rights as a shareholder of HTCL, see "Our
Relationships with Our Operating Companies--Hong Kong."
MARKET DEMOGRAPHICS. Hong Kong has a population of approximately
6.8 million people, all of whom are covered by HTCL's licenses. Hong Kong is one
of Asia's largest economies relative to the size of its population with a 1999
GDP of $158.6 billion, or approximately $23,179 per person. At December 31,
1999, wireline penetration in Hong Kong was approximately 56.7% and wireless
penetration was approximately 54.9%.
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<PAGE>
NETWORK OVERVIEW. HTCL's original TACS and AMPS analog networks were
transitioned to GSM and CDMA digital networks in 1995. Its dual band GSM/PCS
network is highly concentrated, with its busiest one square kilometer area
containing 58 radio base stations. HTCL's CDMA network was the world's first
commercial CDMA network. As of December 31, 1999, HTCL had 871 cell site
locations, 15 switches and 2,338 radio base stations, which is supported by a
leased fiber optic backbone network.
SALES AND MARKETING. HTCL focuses its sales and marketing efforts on two
discrete market segments. The Orange brand targets business and
quality-conscious subscribers. Postpaid plans currently dominate the Hong Kong
wireless telecommunications market. HTCL has repositioned its CDMA network under
the Orange brand to portray a clear, unified image of its service offerings in
order to meet the needs of mass market and leisure subscribers. HTCL markets its
products and services through Hutchison Whampoa's exclusive retail shops,
electronics stores and drug stores. HTCL also markets its products and services
through a direct sales force, independent dealers and franchisees. In addition,
HTCL plans to exploit the Internet as a means of expanding its sales and
distribution channels, which we expect will reduce costs and attract a younger
segment of the market. At December 31, 1999, HTCL had a direct sales force of
approximately 160 people and approximately 280 additional points of
distribution.
We believe that HTCL's introduction of high-speed wireless data service
using 2.5G technology represents a key opportunity to grow its mobile subscriber
base and increase profitability. HTCL plans to leverage the experience of its
newest shareholder, NTT DoCoMo, the leading provider of specialized wireless
data services in Japan, in providing high-speed wireless data service to Hong
Kong residents. This high-speed wireless data service will allow HTCL to augment
its current data service capabilities by providing a broad range of content and
mobile commerce offerings. We expect that if HTCL is the first to bring these
services to market, its revenue per subscriber and subscriber retention rate
will increase. We believe HTCL's strong market position, well known Orange brand
and reputation for high-quality service position it well to market these new
lines of business to its subscribers.
COMPETITION. HTCL competes with five other digital mobile operators who are
licensed to provide wireless communications services. These five operators are
Cable & Wireless HKT Limited, SmarTone Telecommunications Holdings Limited,
Peoples Telephone Company Limited, New World Telephone Limited and SUNDAY
Communications Limited. Many of these wireless communications providers are
affiliated with international telecommunications companies. These competitors
currently offer, or are expected to offer, similar services to those HTCL
provides. In addition, HTCL competes indirectly with trunked radio, long
distance and wireline providers.
LICENSES. HTCL holds the various licenses described in the table below:
<TABLE>
<CAPTION>
LICENSED
FREQUENCY SPECTRUM TERM TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- --------- ------------------
<S> <C> <C> <C> <C>
1800 MHz............. 2 x 7.5 MHz 1996 - 2006 Hong Kong GSM
900 MHz.............. 2 x 7.5 MHz 1992 - 2002 Hong Kong GSM (formerly TACS)
800 MHz.............. 2 x 7.5 MHz 1992 - 2002 Hong Kong CDMA (formerly AMPS)
</TABLE>
All of the licenses require adherence to various conditions, including
network build-out requirements and quality standards. We expect these licenses
to be renewed upon expiration without payment of material additional fees. The
Hong Kong government is expected to decide how to award its 3G licenses by the
end of 2000. We believe HTCL will pursue one of these licenses in order to
maintain its technologically advanced service offerings. For more information
regarding HTCL's licenses, see "Regulation--Hong Kong--Licenses."
108
<PAGE>
PAKISTAN
Our operating company in Pakistan is Pakistan Mobile Communications (Pvt)
Limited, which operates under the name Mobilink. Mobilink has a national license
for GSM services. As of December 31, 1999, its network coverage extended across
14 cities with a 1998 population of approximately 24.3 million inhabitants,
including the three major population centers of Karachi, Lahore and
Islamabad/Rawalpindi. Mobilink, which initiated operations in 1994, had
approximately 94,000 subscribers as of December 31, 1999. Mobilink offers the
following:
- postpaid wireless;
- prepaid wireless;
- international roaming;
- value-added services, including call barring, call waiting and transfer,
voice mail, caller identification, text messaging, e-mail, fax,
information services and detailed billing; and
- usage limit plans.
At December 31, 1999, Mobilink employed approximately 560 people.
The following table shows several key statistics for the three years ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000, and
nationwide wireless penetration and real GDP growth in Pakistan for 1997, 1998
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS; POPS AND SUBSCRIBERS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Operating Company:
Licensed POPs......................... 138,160 141,900 145,750 N/A N/A
Wireless subscribers.................. 53 87 94 89 102
Net revenues.......................... $ 15.9 $ 30.5 $ 34.9 $ 8.8 $ 10.8
EBITDA................................ 3.1 13.1 14.6 4.0 5.1
EBITDA margin......................... 19.2% 43.0% 41.7% 45.9% 47.6%
Capital expenditures.................. 21.9 33.8 16.7 2.9 0.1
Proportionate:
Licensed POPs......................... 41,448 42,570 43,725 N/A N/A
Wireless subscribers.................. 16 26 28 27 31
Net revenues.......................... $ 9.2 $ 9.2 $ 10.5 $ 2.6 $ 3.2
EBITDA................................ 1.8 3.9 4.4 1.2 1.5
Capital expenditures.................. 12.6 10.1 5.0 0.9 0.0
Wireless penetration (all carriers)..... 0.1% 0.2% 0.2% N/A N/A
Real GDP growth......................... 1.2% 3.3% 3.9% N/A N/A
</TABLE>
OWNERSHIP. We currently own 30.0% of the outstanding common stock of
Mobilink. International Wireless Communications Pakistan Ltd., a holding company
in which Orascom owns a significant interest, owns 58.7% of the outstanding
common stock. Rayshield, an entity which is wholly owned by Saif Telecom, owns
11.3% of Mobilink's outstanding common stock.
OUR OPERATIONAL AND MANAGERIAL INFLUENCE. We appoint three of the ten
members of Mobilink's board of directors. Our operations manager serves on the
three-member executive committee of the board of directors. In addition, our
employees have served as Mobilink's general manager and chief financial officer,
and we continue to play an influential role in selecting its general manager. We
109
<PAGE>
possess joint control over the business plan, capital expenditures and the
strategic direction of Mobilink. In addition to actively participating on its
board of directors, we have an operations manager who is responsible for
day-to-day interaction with Mobilink's management. We also contribute
substantial technical and managerial knowledge to help Mobilink optimize its
network and manage its business. For example, we facilitated the visit of
Mobilink executives to Egypt to gain knowledge of distribution channels,
branding and reward programs, and prepaid service, each of which have
subsequently been implemented by Mobilink in Pakistan. For more information
regarding our operational and managerial influence over Mobilink and our rights
as a shareholder of Mobilink, see "Our Relationships with Our Operating
Companies--Pakistan."
MARKET DEMOGRAPHICS. Pakistan has a total population of approximately
145.8 million people. Mobilink has a nationwide license, however, it has only
built out its network to cover the major economic centers. Pakistan's GDP for
1999 was approximately $65.2 billion, or $486 per person. At December 31, 1999,
Pakistan's wireline penetration was approximately 2.2%, and wireless penetration
was approximately 0.2%.
NETWORK OVERVIEW. Mobilink offers digital cellular services using GSM 900
technology. At December 31, 1999, Mobilink's network consisted of 132 cell sites
and two switches supported by a leased microwave and fiber optic backbone.
SALES AND MARKETING. Mobilink offers a range of postpaid pricing plans that
primarily appeal to high end users especially business users. Prepaid service
was launched by Mobilink in May 2000, which we believe will appeal to a wider
number of potential subscribers, particularly those who are cost conscious.
Mobilink distributes its products and services through direct distributors,
dealers and various other retail outlets. In the future, Mobilink plans to add
SMS and provision of Internet service.
COMPETITION. Mobilink competes with a variety of telecommunications
providers, many of which are also affiliated with international
telecommunications companies. Mobilink's two principal competitors, both of
which are restricted to analog technologies under their licenses, are Paktel
Limited, which is owned by Cable & Wireless, and Instaphone, of which Millicom
is a large shareholder. PTML, a company wholly owned by Pakistan's fixed
wireline provider, is expected to enter the market as a GSM operator in 2001.
PTML is expected to offer similar services to those provided by Mobilink. In
addition, Mobilink competes indirectly with long distance providers and wireline
providers.
LICENSES. Mobilink's license is described in the table below:
<TABLE>
<CAPTION>
LICENSED
FREQUENCY SPECTRUM TERM TERRITORY NETWORK TECHNOLOGY
--------- -------- ---- --------- ------------------
<S> <C> <C> <C> <C>
900 MHz.............. 2 x 10 MHz 1994 - 2007 Nationwide GSM
</TABLE>
Mobilink's license requires adherence to various conditions, including
network build-out requirements and quality standards. Although renewal is at the
discretion of the Pakistan Telecommunication Authority, we expect this license
to be renewed upon expiration without payment of material additional fees. For
more information regarding Mobilink's license, see "Regulation--
Pakistan--Licenses."
COMPLEMENTARY BUSINESSES
WIRELESS DISTRIBUTION SERVICE
Wireless Distribution Service, or WDS, which is operated through our wholly
owned subsidiary in Israel, is responsible for the sale, distribution and
warranty repair service of Motorola wireless handsets and accessories in Israel.
WDS started operations in 1986 as a wholly owned distribution arm for
110
<PAGE>
Motorola handset sales in Israel and is the supplier to wireless operators
Pelephone, Cellcom and Partner, and other dealers in Israel.
As of December 31, 1999, WDS employed 23 people.
The following table shows several key statistics for WDS's operations for
the three years ended December 31, 1999 and for the three months ended
March 31, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenues..................................... $94.4 $129.0 $228.4 $89.5 $40.9
EBITDA(1)........................................ 1.8 7.0 8.1 0.5 0.3
EBITDA margin.................................... 1.9% 5.4% 3.5% 0.5% 0.8%
</TABLE>
------------------------
(1) Includes general and administrative costs associated with support of our
Israeli wholly owned subsidiary but unrelated to the operations of WDS.
As one of our business units, WDS will be an independent distributor for
Motorola.
MARKET DEMOGRAPHICS. At December 31, 1999, Israel had a population of
approximately 6.1 million people and a 1999 GDP of $98.9 billion, or
approximately $16,147 per person. At December 31, 1999, wireline penetration was
47.0% and wireless penetration was 44.1%. We believe that based on our estimates
of subscriber market growth and handset replacements, the size of the Israeli
market for handsets in 1998 and 1999 was approximately 900,000 and 1,750,000
units sold, respectively. The reasons for this increase in market size was the
first full year of operation for Partner, the continued migration of Pelephone
subscribers from NAMPS to CDMA networks, and Cellcom upgrading its
subscribers' handsets.
OPERATIONS. The WDS employees have expertise in the cellular phone
distribution business, and the WDS business is expected to be an important
strategic asset for Propel. We plan to use that expertise to improve the terms
under which our operating companies will purchase cellular phones. For example,
we expect key employees from the WDS distribution business to negotiate and
administer global pricing agreements with Motorola and other cellular phone
manufacturers. We believe that this will provide an important benefit to our
operating companies. For more information regarding WDS's agreement with
Motorola, see "Our Relationship with Motorola--Wireless Products Distribution
Agreement."
WDS has distributed Motorola wireless handset products in Israel for
14 years. Under the terms of the Wireless Products Distribution Agreement, WDS
is permited to sell only Motorola handsets in Israel. WDS has separate account
managers for each of the cellular operators in Israel.
COMPETITION. In Israel, Nokia's distributor, Eurocom, is WDS's major
competitor for TDMA and GSM handsets while Samsung's distributor, Suny
Electronics, is the major competitor for CDMA handsets.
KOREA TELECOM FREETEL
Korea Telecom Freetel is a publicly traded company on the South Korean
KOSDAQ stock exchange, under the symbol "32390." We own 1.9%, or 2,719,428
shares, of Korea Telecom Freetel, a wireless operator in Korea. As of June 21,
2000, the closing price of Korea Telecom Freetel's shares was $69.08, assuming
an exchange rate of 1,119 Korean won to the U.S. dollar, and the market value of
our holdings was approximately $187.9 million.
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<PAGE>
ZEPHYR TELECOMMUNICATIONS
We currently hold a 16.8% fully diluted equity interest in Zephyr
Telecommunications, Inc. Zephyr is in the business of establishing and operating
an international voice and data Internet Protocol, or IP, based communications
platform. This platform provides a variety of IP-based telecommunications
services, including domestic and international IP-based telecommunications,
broadband Internet access and Web hosting within and between selected markets
and the rest of the world, particularly the United States. Zephyr's service area
currently includes Poland, the Czech Republic, Ukraine, Russia and South Korea.
Unlike many of its competitors, Zephyr does not use the Internet as its
backbone for IP-based telecommunication but provides its services through the
following:
- leased high-bandwidth circuits between key country locations;
- company-owned, installed and operated IP-based switching and
interconnection facilities;
- local interconnection, co-location and termination agreements with
telephone companies, cable companies and wireless operating companies, and
- outsourced operations support systems that provide network management,
billing and customer care functions.
Using this network allows Zephyr to exercise greater control over call quality
and security, and results in competitive cost advantages.
At December 31, 1999, Zephyr maintained a staff of 17 people in the United
States. Zephyr conducts its business through joint ventures in each country in
which it operates. Its joint ventures perform local sales, operations, billing
and collections functions.
Zephyr's primary customers are long distance carriers and large businesses.
Because no special terminals, dialing procedures or access codes are required to
use Zephyr's service, Zephyr's IP telecommunications services are transparent to
people placing telephone calls. We believe Zephyr will gain a competitive
advantage by becoming the first operator of its kind to partner with qualified
local telecommunications service providers. This will provide Zephyr with secure
backbone network facilities, hosting locations and interconnection agreements
with pricing and volume benefits.
Zephyr, which commenced operations in the third quarter of 1998, generated
revenues and EBITDA of $3.7 million and $(4.8) million, respectively, for the
year ended December 31, 1999.
OUR EMPLOYEES
As of March 31, 2000, including our consolidated businesses, we had
approximately 1,850 employees, of whom 75 were employed directly by us at our
headquarters or one of our regional offices. None of our employees is
represented by a labor organization. We believe our relationships with our
employees are good.
OUR FACILITIES
Our principal executive offices are located in Schaumburg, Illinois in
approximately 20,000 square feet of office space which we sublease from
Motorola. In addition, we have smaller offices located in Boca Raton, Florida;
London, England; Tel Aviv, Israel; Hong Kong, China; and Beijing, China, each of
which is less than 7,000 square feet. Each of these facilities is also leased
directly or occupied under a sublease from Motorola. We are working with
Motorola to transfer these leases to us as soon as possible. In addition, our
consolidated subsidiaries have a number of facilities in northern Mexico and
Israel.
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<PAGE>
LEGAL PROCEEDINGS
We are not currently party to any legal proceedings, the outcome of which,
if determined adversely to us, would have a material adverse effect on our
business, financial condition or results of operations. Our operating companies
are involved in various legal proceedings arising in the ordinary course of
business. While it is not possible to determine the ultimate outcome of these
proceedings, we believe the outcomes, both individually and in the aggregate,
will not have a material adverse effect on their financial condition or results
of operations.
Movicom Argentina is currently the subject of an investigation by the
Argentine government relating to customs duties payable in connection with the
importation of wireless communications equipment from Motorola. Movicom
Argentina has already paid a fine in connection with this matter, for which it
was indemnified by Motorola. The investigation is continuing, and there can be
no assurance that additional fines or other penalties will not be imposed in
connection with this matter.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF PROPEL
Our board currently consists of four directors. We anticipate that five
additional independent directors will be elected to the board shortly following
this offering. Set out below is information concerning our directors and
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Michael Norris..................... 53 President, Chief Executive Officer and Director
Richard D. Haning..................... 49 Vice President, Chief Financial Officer and
Director
W. Craig Thomson...................... 55 Vice President and Chief Operating Officer
Robert S. Young....................... 50 Vice President and Director of Strategy and
Business Development
Michael E. Babka...................... 53 Vice President and Director of Human Resources
Thomas P. Holden...................... 51 Vice President and General Counsel
Theodore W. Schaffner................. 54 Director
Richard D. Severns.................... 54 Director
</TABLE>
Our board will be divided into three classes serving staggered terms.
Directors in each class will be elected to serve for three-year terms and until
their successors are elected and qualified. Each year, the directors of one
class will stand for election as their term of office expires. Messrs. Norris
and Severns will be designated as class I directors, with their initial terms of
office expiring at the annual meeting of stockholders in 2001. Messrs. Haning
and Schaffner will be designated as class II directors, with their initial terms
of office expiring at the annual meeting of stockholders in 2002. The five
additional directors that we anticipate appointing to our board will be
designated as classes I, II and III, such that each class will have three
directors.
J. MICHAEL NORRIS has served as our President and Chief Executive Officer
and as a director since June 2000. Mr. Norris was a senior vice president of
Motorola and general manager of Motorola's Network Management Group, the
predecessor of Propel, from 1984 to the time of this offering. He had
responsibility for Motorola's global cellular service operating joint ventures
worldwide, international satellite gateway operations and domestic wireless
reseller business. He joined Motorola in 1973 and has held numerous
international sales and operations positions for various Motorola businesses.
Mr. Norris is a director of Iridium LLC, and he also served on the board of
directors of Propel's operating companies in Argentina, Israel, Hong Kong,
Mexico, Chile and Uruguay.
RICHARD D. HANING has served as our Chief Financial Officer and a director
since June 2000. Mr. Haning was a senior vice president of Motorola and director
of finance for Motorola's Network Management Group from May 1999 to the time of
this offering. Mr. Haning became a vice president and director of finance for
Motorola's Cellular Subscriber Division in 1990 and also acted as its chief of
staff from 1997 to 1999. Since joining Motorola in 1977, Mr. Haning has held
numerous other financial positions within Motorola's cellular networks and
subscribers businesses. Mr. Haning is a director of Telular Corporation, a
participant in the fixed wireless telecommunications market.
W. CRAIG THOMSON has served as our Vice President and Chief Operating
Officer since June 2000. Mr. Thomson was a vice president of Motorola and
general manager of Motorola's Network Communications Division, or NCD, from July
1999 to the time of this offering. He joined Motorola in May 1997 as managing
director, operations for the Europe, Middle East and Africa, or EMEA, region of
NCD. He became managing director of the EMEA Region in December 1997 and was
promoted to EMEA vice president in August 1998. Before joining Motorola,
Mr. Thomson was senior vice president of Galileo International and managing
director of Galileo's operations in Europe, the Middle East and Africa.
Mr. Thomson serves on the board of directors of Propel's operating companies in
Brazil, Egypt, Israel and our holding company in Jordan.
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<PAGE>
ROBERT S. YOUNG has served as our Vice President and Director of Strategy
and Business Development since June 2000. Mr. Young was a corporate vice
president of Motorola and general manager for strategy and business development
for Motorola's Network Management Group from 1999 to the time of this offering.
From 1997 to 1999, Mr. Young served as vice president and general manager of
Motorola's Satellite Ventures Division. He joined Motorola in 1984 and held
various positions in corporate strategy, marketing and sales, operations and
business development in Motorola's cellular infrastructure systems and wireless
network operating businesses. Mr. Young is on the board of directors of HTCL,
our operating company in Hong Kong.
MICHAEL E. BABKA has served as our Vice President and Human Resources
Director since June 2000. Mr. Babka was a vice president of Motorola and
director of human resources for Motorola's Network Management Group from 1997 to
the time of this offering. From 1994 to 1997, Mr. Babka served as director of
strategic human resource programs for Motorola. Mr. Babka joined Motorola in
1969 and has held numerous human resources positions.
THOMAS P. HOLDEN has served as our Vice President and General Counsel since
June 2000. Mr. Holden was senior international counsel for Motorola's Network
Management Group from 1992 to the time of this offering, where he was involved
in all legal matters related to cellular joint ventures and operations
worldwide. From 1986 to 1992, Mr. Holden acted as in-house legal counsel for
Motorola's Asia/Pacific operations. Mr. Holden joined Motorola in 1982 and had
responsibility for providing advice to various business units on international
legal matters.
THEODORE W. SCHAFFNER has been one of our directors since June 2000.
Mr. Schaffner has been senior vice president and director of corporate
development for Motorola since October 1999. From June 1996 to October 1999,
Mr. Schaffner served as corporate vice president and director of corporate
development. From August 1991 to June 1996, he served as vice president,
corporate business development, and from October 1989 to August 1991 as director
of business development. Mr. Schaffner joined Motorola in 1987.
RICHARD D. SEVERNS has been one of our directors since June 2000.
Mr. Severns has served as senior vice president and director of finance for the
Communications Enterprise of Motorola since July 1998. From 1991 to July 1998,
he served as senior vice president, director of finance and general manager of
Motorola's Network Services and Strategy Group for the Land Mobile Products
Sector. Mr. Severns joined Motorola in 1971 as a senior auditor. Mr. Severns is
a director of Iridium LLC and Next Level Communications.
COMMITTEES OF THE BOARD OF DIRECTORS
We intend to have two standing committees of our board of directors, an
audit committee and a compensation committee. The audit committee will select
the independent public accountants to audit our annual financial statements and
will establish the scope of, and oversee, the annual audit of our financial
statements. The compensation committee will determine the compensation for our
employee directors and, after receiving and considering the recommendation of
our chief executive officer, all our officers and any other employee that the
compensation committee may designate from time to time and will approve and
administer employee benefit plans. The audit committee and the compensation
committee will each consist of three directors who meet all requirements imposed
by SEC rules and regulations or rules and regulations of any exchange or trading
system on which our securities are listed or quoted. The compensation committee
will be composed of persons at least a majority of whom will be "non-employee
directors," as that term is defined in Rule 16b-3 under the Exchange Act, and
"outside directors," as that term is defined in Section 162(m) of the Internal
Revenue Code of 1986, as amended, or the Code.
Our board may establish other committees from time to time to facilitate the
management of our business and affairs.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
We currently do not have a compensation committee. The historical
compensation arrangements for our executive officers were established by
Motorola's senior management in accordance with Motorola's compensation
policies, as established by its board of directors. Following this offering, any
changes in the compensation arrangements of our executive officers will be
determined by the compensation committee of our board of directors that we
intend to form promptly following the election of our additional five
independent directors.
COMPENSATION OF DIRECTORS
Directors who are also our employees or employees of Motorola receive no
compensation for serving as directors or committee members. Our non-employee
directors' compensation will consist of a cash retainer and stock options. Our
non-employee directors, other than our chairman, will each receive a one-time
award of $100,000 in stock options, and will receive annual compensation of
$35,000 cash and $100,000 in stock options. The non-employee chairman of our
board will receive a one-time award of $300,000 in stock options and will
receive annual compensation of $50,000 cash and $300,000 in stock options. The
non-employee directors will also receive fees of $3,000 per year for serving as
a chairperson of a board committee, $1,000 for each committee meeting and $1,500
for each board meeting. The non-employee directors may elect to receive all or a
part of their cash compensation in the form of stock options. The value of the
stock options granted to our directors will be calculated using the
Black-Scholes valuation methodology as of the date of the grant.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of our stock is currently owned by Motorola, so none of our officers or
directors currently owns any shares of our common stock. Effective as of the
closing of this offering, all of our employees will be granted founders' grant
options exercisable at the initial public offering price to purchase shares of
our common stock, which will vest as described below. In addition, some of our
employees will be granted restricted stock awards. For a description of these
option grants and restricted stock awards, see "--Incentive Plan." Motorola's
stock options held by our employees, including those reflected in the tables set
forth in the "--Grants of Stock Options" and "--Exercises of Stock Options,"
will be eligible to be converted into comparable stock options under our
incentive plans at the time that Motorola owns less than 50% of our common
stock. For a description of the terms of these substitute stock options, see
"--Incentive Plan--Substitute Awards."
The following table sets forth the number of shares of Motorola's common
stock beneficially owned as of March 31, 2000 by each of our directors, the
executive officers named in the Summary
116
<PAGE>
Compensation Table below and all our directors and executive officers as a
group. The shares listed in this table reflect the three-for-one stock split of
Motorola common stock on June 1, 2000.
<TABLE>
<CAPTION>
SHARES UNDER TOTAL SHARES
EXERCISABLE BENEFICIALLY
SHARES OWNED(1) OPTIONS(2) OWNED(3)
--------------- ---------- --------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
J. Michael Norris............................. -- 32,721 37,791
Richard D. Haning (4)......................... 19,287 27,840 48,228
W. Craig Thomson.............................. -- 24,450 24,450
Robert S. Young............................... -- 53,676 53,928
Michael E. Babka.............................. -- -- 6,000
Theodore W. Schaffner(5)...................... 27,402 104,900 133,502
Richard D. Severns (6)........................ 16,456 250,950 289,993
All directors and executive officers of Propel
as a group (8 persons)...................... 66,082 525,137 630,092
</TABLE>
------------------------
(1) Except as otherwise noted, includes shares over which the person currently
holds or shares voting and/or investment power but excludes interests, if
any, in shares held in the Motorola, Inc. 401(k) Profit Sharing Plan and the
shares listed under "Shares Under Exercisable Options."
(2) Includes shares under options exercisable on June 1, 2000 and options which
become exercisable within 60 days thereafter.
(3) These figures include the shares listed under "Shares Under Exercisable
Options" and interests, if any, in shares held in Motorola's profit sharing
plan, which is subject to some investment restrictions for: Mr. Norris
(5,070), Mr. Haning (1,101), Mr. Young (252), Mr. Babka (6,000) and
Mr. Severns (6,387). All Propel directors and executive officers as a group
own less than 1% of Motorola's outstanding common stock.
(4) Data for Mr. Haning include 17,814 shares owned in trust with his spouse and
630 shares owned in minor accounts of 210 shares for each of his three
children.
(5) Data for Mr. Schaffner include 1,200 shares owned in minor trust accounts of
300 shares for each of his two daughters, with his wife as trustee, for
which he disclaims beneficial ownership.
(6) Data for Mr. Severns include 5,100 shares owned in trust. In addition,
Mr. Severns disclaims beneficial ownership of 16,200 shares held in his
spouse's trust which are included for him under "Total Shares Beneficially
Owned."
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation information for our chief
executive officer and the four other executive officers of Propel who, based on
employment with Motorola and its subsidiaries, were our most highly compensated
officers for the year ended December 31, 1999. All information contained in this
table reflects compensation earned by the named individuals for services with
Motorola and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------------- -------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL UNDERLYING COMPENSATION
POSITION YEAR SALARY($)(2) BONUS($)(3) OPTIONS(#)(4) ($)(5)(6)
------------------------------------------------- -------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
J. Michael Norris................................ 1999 385,000 315,000 105,000 4,338
President, Chief Executive Officer and Director
Richard D. Haning................................ 1999 290,200 215,000 27,000 4,005
Vice President and Chief Financial Officer and
Director
W. Craig Thomson(7).............................. 1999 307,099 161,819 27,000 --
Vice President and Chief Operating Officer
Robert S. Young.................................. 1999 256,500 185,000 30,000 3,896
Vice President
Michael E. Babka................................. 1999 200,000 90,000 10,500 3,424
Vice President
</TABLE>
------------------------------
(1) The aggregate amount of perquisites and other personal benefits, securities
or property, given to each named executive officer valued on the basis of
aggregate incremental cost to Motorola, was less than either $50,000 or 10%
of the total of annual salary and bonus for that executive officer during
1999.
(2) Includes amounts deferred pursuant to salary reduction arrangements under
the Motorola profit sharing plan for 1999.
(3) These amounts were earned in 1999 under the Motorola Executive Incentive
Plan for performance during that year. Mr. Thomson's bonus figures also
include an annual holiday bonus of $11,819.
(4) Options granted for 1999 were at the fair market value at the time of the
grant. These options were granted on January 31, 2000 relating to
performance during 1999. The options vest and become exercisable over four
years. The number of options listed reflect the three-for-one Motorola stock
split on June 1, 2000.
(5) These figures for 1999 include the following amounts for the premiums paid
under the term life portion of the split-dollar life insurance for:
Mr. Norris ($964), Mr. Haning ($581) and Mr. Young ($472).
(6) These figures include the following contributions made by Motorola to the
profit sharing plan for 1999 for: Mr. Norris ($3,424), Mr. Haning ($3,424),
Mr. Young ($3,424) and Mr. Babka ($3,424).
(7) W. Craig Thompson is compensated in the United Kingdom. To calculate his
compensation in U.S. dollars a currency exchange rate of L1.00=U.S.$0.618694
has been used.
118
<PAGE>
STOCK OPTION GRANTS IN 1999
The following table shows all individual grants of options to acquire shares
of Motorola common stock granted to the executive officers named in the above
Summary Compensation Table under Motorola's Incentive Plan for the year ended
December 31, 1999. Options were granted on January 31, 2000 relating to
performance during 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK
UNDERLYING GRANTED PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM
(# OF EMPLOYEES BASE PRICE EXPIRATION ----------------------
NAME SHARES)(1) IN 1999 ($/SHARE)(2) DATE(3) 5%($)(4) 10%($)(4)
---- --------------- ---------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Norris............. 105,000 * $43.84 1/31/15 3,452,663 6,905,325
Richard D. Haning............. 27,000 * $43.84 1/31/15 887,828 1,775,655
W. Craig Thomson.............. 27,000 * $43.84 1/31/15 887,828 1,775,655
Robert S. Young............... 30,000 * $43.84 1/31/15 986,475 1,972,950
Michael E. Babka.............. 10,500 * $43.84 1/31/15 345,266 690,533
</TABLE>
------------------------------
* Less than one percent.
(1) These are options granted under the Motorola Incentive Plan of 1998 to
acquire shares of Motorola's common stock. These options were granted at
fair market value at the time of the grant, and carry with them the right to
elect to have shares withheld upon exercise and/or to deliver
previously-acquired shares of Motorola's common stock to satisfy tax
withholding requirements. The options vest and become exercisable over four
years. The number of options listed reflect the three-for-one stock split of
Motorola common stock on June 1, 2000.
(2) The exercise price of these options was originally $131.53; $43.84 reflects
the exercise price after the three-for-one stock split of Motorola common
stock on June 1, 2000.
(3) The option term is 15 years from the date of grant. Options could expire
earlier in certain circumstances. These Motorola options are subject to the
following terms when Motorola owns less than 50% of our common stock:
(a) all unvested Motorola options will expire immediately; (b) at the
election of the holder, vested Motorola options can be exchanged for options
to acquire shares of our common stock; and (c) vested Motorola options that
are not exchanged for Propel stock options can continue to be exercised to
acquire Motorola common stock for 12 months. For a description of this
conversion, see "--Incentive Plan--Substitute Awards."
(4) These hypothetical gains are based entirely on assumed annual growth rates
of 5% and 10% in the value of Motorola's stock price over the entire 15-year
life of these options. This equates to an increase in stock price of 108%
and 318%, respectively. These assumed rates of growth are selected by the
Securities and Exchange Commission for illustration purposes only and are
not intended to predict future stock prices, which will depend upon market
conditions and Motorola's future performance. This calculation does not take
into account any taxes or other expenses which might be owed.
119
<PAGE>
AGGREGATED OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
The following table shows aggregate exercises of options to purchase
Motorola common stock in the year ended December 31, 1999 by the executive
officers named in the Summary Compensation Table. The shares listed in this
table reflect the three-for-one stock split of Motorola common stock on June 1,
2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY (3) OPTIONS AT
SHARES ACQUIRED VALUE AT END OF 1999 (2) END OF 1999 ($)(4)
ON EXERCISE REALIZED ------------------------------ ------------------------------
NAME (# OF SHARES) ($)(1) EXERCISABLE UNEXERCISABLE(5) EXERCISABLE UNEXERCISABLE(5)
---- ------------- ------ ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Norris.... 81,000 $ 987,260 32,721 188,199 $1,606,056 $9,237,434
Richard D. Haning.... 62,940 1,283,759 27,840 27,000 1,366,480 1,325,250
W. Craig Thomson..... -- -- 24,450 41,700 1,200,088 2,046,775
Robert S. Young...... 6,000 171,280 53,676 54,999 2,634,597 2,699,534
Michael E. Babka..... 18,300 294,658 -- 10,500 -- 515,375
</TABLE>
------------------------------
(1) The "value realized" represents the difference between the base, or
exercise, price of the option shares and the market price of the option
shares on the date the option was exercised. The value realized was
determined without considering any taxes which may have been owed.
(2) The option term is either 10 years or 15 years from the date of grant
depending on the terms of the Motorola stock option plan under which they
were granted. Options could expire earlier in certain circumstances. All
Motorola options held by Propel employees are subject to the following terms
when Motorola owns less than 50% of our common stock: (a) all unvested
Motorola options will expire immediately; (b) at the election of the holder,
vested Motorola options can be exchanged for options to acquire shares of
our common stock; and (c) vested Motorola options that are not exchanged for
Propel stock options can continue to be exercised to acquire Motorola common
stock for up to 12 months depending on the terms of the Motorola stock
option plan under which they were granted. For a description of this
conversion, see "--Incentive Plan--Substitute Awards."
(3) "In-the-money" options are options whose base, or exercise, price was less
than the market price of Motorola common stock at December 31, 1999.
(4) Assuming a stock price of $49 1/12 per share, which reflects the closing
price of $147.25 per share of Motorola common stock reported for the New
York Stock Exchange--Composite Transactions on December 31, 1999, as
adjusted for the three-for-one stock split on June 1, 2000.
(5) Includes options granted on January 31, 2000 relating to performance during
1999.
RETIREMENT PLANS
The Motorola, Inc. Pension Plan, or the Pension Plan, may provide pension
benefits to our employees in the future. Most regular U.S. employees who have
completed one year of employment with Motorola or some of its subsidiaries are
eligible to participate in the Pension Plan. Motorola employees ordinarily
become vested after five years of service. However, our employees, whether or
not they have less than five years of service at the time when Motorola owns
less than 80% of our common stock, will become vested at such time.
The Pension Plan has been amended, effective July 1, 2000, to allow Motorola
employees to have the option to remain in the Pension Plan or select a portable
pension plan. Those of our employees who selected the portable pension plan will
receive a distribution of their benefits when Motorola owns less than 80% of our
common stock. Normal retirement under the Pension Plan and the portable pension
plan is age 65.
Motorola also maintains a supplementary executive retirement plan, or SERP,
for Motorola elected officers, including Mr. Norris, Mr. Haning and Mr. Young.
The Motorola SERP provides that if the benefit payable annually, computed on a
single life annuity basis, to any officer under the Pension Plan,
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which is generally based on varying percentages of specified amounts of final
average earnings, prorated for service, as described in the Pension Plan, is
less than the benefit calculated under the SERP, that officer will receive
supplementary payments upon retirement. Generally, the total annual payments to
such officer from both plans will aggregate a percentage of the sum of such
officer's rate of salary at retirement plus an amount equal to the highest
average of the Motorola Executive Incentive Plan, or MEIP, awards paid to such
officer for any five years within the last eight years preceding retirement.
Such percentage ranges from 40% to 45%, depending upon such officer's years of
service and other factors. However, the total annual pension payable on the
basis of a single life annuity to any named executive officer from the Pension
Plan and SERP is subject to a maximum of 70% of that officer's base salary prior
to retirement. If the officer is vested and retires at or after age 57 but prior
to age 60, he or she may elect to receive a deferred unreduced benefit when he
or she attains age 60, or an actuarially reduced benefit when that officer
retires contingent upon entering into an agreement not to compete with Motorola.
If a change in control of Motorola occurs, the right of each non-vested elected
officer to receive supplementary payments will become vested on the date of such
change in control.
Participants in the SERP generally become vested in the plan at age 55. At
the time of vesting Motorola makes a contribution to the trust for that plan.
Contributions for Messrs. Norris, Haning and Young have not been made because
they have not vested in this plan. The purpose of that contribution is to enable
the trust to make payments of the benefits under the SERP due to the participant
after retirement. Federal and state tax laws require that the participant
include in income the amount of any contribution in the year it was made even
though the participant receives no cash in connection with such contribution or
any payments from the retirement plan.
Based on salary levels at December 31, 1999, and the average of the MEIP
awards paid for the highest five years out of the last eight years, for Messrs.
Norris, Haning and Young, the estimated annual benefit payable upon retirement
at normal retirement age from the Pension Plan, as supplemented pursuant to the
officers' SERP described above and a previous retirement income plan, is as
follows: Mr. Norris, $337,695, Mr. Haning, $208,639, and Mr. Young, $140,372. In
connection with their transfer to Propel, Messrs. Norris, Haning and Young will
be forfeiting the right to potential future benefits under the SERP and in
compensation therefore will receive grants of restricted stock from Propel. See
"--Incentive Plan--Restricted Stock Awards."
CHANGE IN CONTROL AGREEMENTS
In connection with the offering, we intend to enter into change in control
agreements as described below. These agreements will generally provide monetary
compensation and other benefits upon the occurrence of specified triggering
events involving a change in control of our business.
The change in control agreements specify two events which must occur before
the change in control provisions are triggered:
(1) a change in control occurs within four years of this offering; and
(2) within two years after a change in control, one of the following events
occurs:
(a) the participant's employment is terminated without cause;
(b) a negative, material change or reduction is made in the participant's
duties, authorities
or responsibilities;
(c) the participant is required to materially relocate his or her
principal office location;
(d) the participant's annual aggregate compensation, including benefits
is materially decreased; or
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(e) any termination does not follow the notice of termination procedures.
Change in control is defined as:
- the acquisition by any person of more than 20% of the combined voting
power of our voting stock, other than by us, by an employee benefit plan,
or by any corporation owned, directly or indirectly, by our stockholders
in the same proportions as their ownership in us;
- the approval by our stockholders of a definitive agreement to merge,
consolidate, sell all or substantially all of our assets, or liquidate; or
- during any two consecutive year periods, a material change in the majority
of our board.
If a participant is part of a purchasing group who consummates the change in
control transaction, the transaction is not deemed a change in control event for
that participant.
Each of our executive officers will be entitled to the following benefits if
the change in control provisions are triggered for that executive officer:
- amount equal to three times base salary and three times target incentive
award;
- amount equal to unpaid base salary, accrued vacation pay and earned but
not taken vacation pay; and
- continuation of welfare benefits of health care, life and accidental death
and disability insurance for three years.
Two other senior employees will be entitled to receive two times their base
salaries and bonuses, their unpaid base salary, accrued and earned vacation pay,
and continuation of health care and other insurance for two years if the change
in control provisions are triggered for that employee.
All of our other employees will be entitled to receive two times their base
salaries and bonuses, their unpaid base salary, accrued and earned vacation pay,
and continuation of health care and other insurance for two years if they are
terminated within a specified period of time after a divestiture of our stock by
Motorola, other than through a distribution, in specified circumstances.
All change in control payments will be subject to all laws and other
arrangements regarding the payment of severance so that a terminated employee
will receive the greater of such legal or other guaranteed severance or the
applicable change of control payment. Where greater, the change of control
payments will be net of any severance obligations we may be obligated to pay.
INCENTIVE PLAN
We plan to adopt, with the approval of Motorola in its capacity as our sole
stockholder, the Propel, Inc. Incentive Compensation Plan, or the Incentive
Plan. This Incentive Plan will permit the grant of founder's grants, substitute
awards, incentive stock options, nonqualified stock options, stock appreciation
rights, restricted stock, performance shares, performance units and cash based
awards as described below. The Incentive Plan will be administered by our board
of directors or such committee to which the board delegates its administrative
authority pursuant to the terms of the Incentive Plan. Our Incentive Plan
provides for accelerated vesting of all awards granted under this plan upon a
change in control, as defined above.
FOUNDERS GRANTS. In connection with the offering, all officers,
non-employee directors, excluding our Motorola directors, and employees
worldwide will be awarded founders grant options to purchase shares of our
common stock. These stock options will vest over four years, with vesting on the
anniversary of the grant as follows: 10% vest in 2001; 20% vest in 2002; 30%
vest in 2003; and 40% vest in 2004. The exercise price per share of these stock
options will be equal to the offering price of our common stock. The options
will have a ten-year exercise period.
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A total of about shares, or %, of our common stock will be issuable
upon the exercise of these options.
SUBSTITUTE AWARDS. Our employees who hold unvested Motorola options at the
time of this offering will be granted shares of our restricted stock at the time
of this offering to compensate them for the possibility that their unvested
Motorola options will expire prior to the time that they can be exercised or
exchanged for Propel options as described below. The number of shares of our
restricted stock granted to each employee will be determined by taking the value
of these unvested Motorola options at the time of this offering and dividing
that number by the initial public offering price of shares of our common stock.
These restricted stock awards will be subject to the same vesting schedule and
terms, other than the exercise price, as the unvested Motorola options that
these awards are intended to replace. Our employees will continue to hold their
vested and unvested Motorola options after the time of this offering on the same
terms and conditions under which they were held prior to this offering.
At the time Motorola no longer owns 50% of our common stock, all our
employees holding vested Motorola stock options will have the right to elect to
exchange their options for vested Propel stock options. Any unvested Motorola
stock options held by our employees at that time will automatically expire. The
terms and conditions of each substitute award will be the same as those of the
replaced Motorola stock option, including, the time or times when, and the
manner in which, each substitute Propel stock option will be exercisable, the
duration of the exercise period, the permitted method of exercise, settlement
and payment and the rules that will apply in the event of termination of
employment of the employee. Any vested Motorola stock options held at this time
that are not exchanged for Propel stock options can continue to be exercised to
acquire Motorola common stock for up to twelve months depending on the terms of
the Motorola stock option plan they were granted under.
RESTRICTED STOCK AWARDS. Messrs. Norris, Haning and Young participated in
the Motorola SERP which could, under certain circumstances, provide for benefits
to those executives if they were to remain with Motorola. In connection with our
separation from Motorola those executives will no longer be eligible to
participate in this plan. For more information, see "--Retirement Plans."
In order to compensate these executives for the loss of potential cash
benefits under the Motorola SERP, we will grant them a number of shares of
restricted stock with vesting restrictions as described below. The dollar amount
of restricted stock, valued at the initial public offering price, to be issued
is as follows: Mr. Norris--$4,588,874; Mr. Haning--$2,882,594; and Mr.
Young--$2,233,602. These amounts were calculated by projecting the value of each
executive's unvested supplemental executive retirement as of December 31, 2000,
grossing up that value for any income taxes that would be payable thereon at the
maximum rate of applicable Federal and state taxes and applying a premium
associated with the additional risk they are assuming. Propel will guarantee a
minimum dollar value of these restricted shares at the time they vest, which
provides for a cash payment equal to the amount by which 50% of the initial
public offering price of the vested restricted shares exceeds the fair market
value of these vested shares on the vesting date. This test is applied only at
each vesting date for the restricted shares that vest on that date and does not
require any action on the part of these executive officers to sell their shares
or take any other action with respect to such shares. Motorola has agreed to
reimburse Propel for cash payments made under this guarantee. Mr. Norris'
restricted stock will vest 50% six months after the date of this offering and
50% on his 55th birthday. Messrs. Haning's and Young's restricted stock will
vest 33% six months after this offering, 33% 18 months after such date and 33%
30 months after this offering.
At the time of this offering three other executives will receive special
grants of our restricted stock in connection with their employment with us equal
to one-half their current Motorola base salary.
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ANNUAL STOCK OPTION AWARDS. All of our employees will be eligible to
receive annual stock options. The Incentive Plan provides for the grant of stock
options, restricted stock units or stock appreciation rights. An aggregate of
shares of our common stock will be reserved for issuance under the
Incentive Plan. Subject to adjustments as set forth in the Incentive Plan, the
maximum stock option grant to any individual in any calender year may not exceed
shares. The stock options will have a three-year vesting. Stock
appreciation rights will be granted in countries where stock options are
unavailable. Options granted under the Incentive Plan may be either incentive
stock options, or ISOs, or such other forms of non-qualified stock options, or
NQSOs, as our board of directors may determine. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Code. The
exercise price of any stock option generally shall not be less than 100% of the
fair market value of the common stock on the date the option is granted.
The term of any option will be determined by our board of directors, but no
ISO or NQSO may be exercised later than ten years after the date of grant. No
option shall become exercisable except in accordance with the terms and
conditions established by our board of directors at the time of the grant. The
Incentive Plan provides that our board of directors shall determine the extent
to which an employee may have the right to exercise an option following
termination of employment.
The board of directors may grant restricted stock units, or RSUs, to such
individuals, at such times, and in such amounts as it may determine. Each RSU
relates to one share of our common stock, subject to certain adjustments as
described in the Incentive Plan. RSUs shall vest, subject to the satisfaction of
certain conditions, at the time or times determined by our board of directors.
In addition, our board of directors may establish performance vesting criteria
with respect to all or any portion of a grant of RSUs based on certain business
criteria. The Incentive Plan provides that our board of directors shall
determine the extent to which an employee may have the right to receive the
unvested RSUs following termination of employment. Awards of RSUs to
participants subject to Section 162(m) of the Code are intended to qualify under
that section of the Internal Revenue Code and provisions of such awards will be
interpreted in a manner consistent with that intent to the extent appropriate.
Subject to adjustments as set forth in the Incentive Plan, the maximum number of
shares of common stock that may be granted to any individual in the form of RSUs
in any calendar year shall not exceed shares.
Our board of directors may grant stock appreciation rights, or SARs, to such
individuals, at such times, and in such amounts as it may determine. The
exercise price of any SAR generally shall not be less than 100% of the fair
market value of our common stock on the date the SAR is granted. The term of any
SAR will be determined by our board of directors, but such term shall not exceed
ten years. The Incentive Plan provides that our board of directors shall
determine the extent to which an employee may have the right to exercise the
SARs following termination of employment. Subject to adjustments as set forth in
the Incentive Plan, the maximum number of SARs that may be granted to any
individual in any calendar year shall not exceed SARs.
The board of directors generally will have the power and authority to amend
the Incentive Plan at any time without approval of our stockholders, subject to
applicable federal securities and tax laws limitations, including regulations of
the Nasdaq National Market.
ANNUAL INCENTIVE AWARDS. All of our employees will be eligible to receive
an annual incentive award. The Incentive Plan provides for the grant of
performance units, performance shares or cash awards based upon the achievement
of certain target levels of performance, both of our business as a whole and by
each employee's organizational level. Pursuant to the Incentive Plan, at the
beginning of each year, we will establish targeted performance levels for each
organizational level at which a target performance award may be earned, with a
threshold of minimum performance level below which no award will be paid, and a
maximum level beyond which no additional amounts will be paid, and we will
establish the corresponding minimum and maximum awards. In determining the
performance criteria
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applicable to any grant of awards, our board of directors may use one or more of
the business criteria set forth in the Incentive Plan. The percentage of each
target performance award which will become a final award and be paid to the
employee will be determined by our board of directors on the basis of the
performance goals established and the related performance achieved, as well as
the employee's individual performance during the period.
Final awards may be paid in the form of common stock, in cash, or partly in
common stock and partly in cash, as our board of directors may determine. Each
final award will be subject to a vesting schedule as determined by the board of
directors. In the event the employee's employment with us is terminated prior to
payment of the final award in full, such payment will be further contingent upon
satisfaction of certain conditions set forth in the Incentive Plan, unless such
conditions are waived by our board of directors.
TOTAL ANTICIPATED OPTION AND RESTRICTED STOCK GRANTS. The following table
sets forth the number of shares of our common stock that is expected to be
beneficially owned after the completion of this offering without giving effect
to vesting schedules by each of our directors, the executive officers named in
the Summary Compensation Table, all of our directors and executive officers as a
group and all employees as a group.
<TABLE>
<CAPTION>
TOTAL SHARES
RESTRICTED SHARES UNDER BENEFICIALLY
SHARES OPTION OWNED
NAME AND ADDRESS ---------------- ------------ ------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
J. Michael Norris.............................
Richard D. Haning.............................
W. Craig Thomson..............................
Robert S. Young...............................
Michael E. Babka..............................
Theodore W. Schaffner......................... -- -- --
Richard D. Severns............................ -- -- --
All directors and executive officers of Propel
as a group (8 persons)......................
All employees as a group......................
</TABLE>
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OUR RELATIONSHIP WITH MOTOROLA
Our separation from Motorola and related transactions are being completed
under a Master Separation Agreement between us and Motorola, which we refer to
as the Separation Agreement. In addition, as contemplated by the Separation
Agreement, we and Motorola have entered into or will enter into other agreements
which govern various interim and ongoing relationships between us, which,
together with the Separation Agreement, we collectively refer to as the Motorola
Agreements. The other Motorola Agreements to be entered into on or prior to the
closing of the offering include, agreements relating to employee matters, tax
matters, real estate matters, the provision of certain interim services and
various other commercial arrangements. The Motorola Agreements also provide
Motorola registration rights to require us to register its shares of our common
stock with the SEC upon Motorola's demand. In addition, the Motorola agreements
include an agreement to preserve the tax-free nature of a distribution of our
common stock to Motorola stockholders and the separation of our Israeli
operations from Motorola's operations in Israel. None of these agreements may be
amended without the approval of the majority vote of our non-Motorola directors.
WE HAVE SET FORTH BELOW A DESCRIPTION OF THE PERTINENT PROVISIONS OF THE
MOTOROLA AGREEMENTS. THIS DESCRIPTION, WHICH SUMMARIZES THE MATERIAL TERMS OF
THESE AGREEMENTS, DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE AGREEMENTS. THESE AGREEMENTS,
INCLUDING THE SEPARATION AGREEMENT, THE IPO AND DISTRIBUTION AGREEMENT, THE
REGISTRATION RIGHTS AGREEMENT, THE WIRELESS PRODUCTS DISTRIBUTION AGREEMENT, THE
EMPLOYEE MATTERS AGREEMENT, THE TAX SHARING AGREEMENT, THE TRANSITIONAL SERVICES
AGREEMENT AND THE ISRAEL TRANSITIONAL SERVICES AGREEMENT, WILL BE FILED WITH THE
SEC AS EXHIBITS TO THE REGISTRATION STATEMENT, OF WHICH THIS PROSPECTUS IS A
PART.
SEPARATION AGREEMENT
The Separation Agreement sets forth our arrangements with Motorola with
respect to corporate transactions required to effect the transfer of assets and
the assumption of liabilities necessary to separate us from Motorola.
We have assumed, and agreed to indemnify Motorola for, all liabilities and
all claims related to our business and Motorola has retained, and will indemnify
us for, all liabilities and all claims related to its business. We have agreed
to cooperate with each other in the defense of any and all claims covered by
these provisions of the Separation Agreement. We have also agreed to indemnify
Motorola for any losses it may incur in connection with its ongoing guarantees,
if any, of debt incurred by some of our operating companies. For more
information regarding these guarantees, see note 16 to our consolidated
financial statements.
The Separation Agreement also contains provisions that govern the resolution
of disputes, controversies or claims that may arise between us and Motorola. The
Separation Agreement provides that the parties will use all commercially
reasonable efforts to settle all disputes arising in connection with the
Separation Agreement without resorting to mediation, arbitration or otherwise.
If these efforts are unsuccessful, any party may submit the dispute for
non-binding mediation by delivering notice to the other party of the dispute and
expressly requesting mediation. If, after mediation, the parties disagree
regarding the mediator's recommendation, the dispute may be submitted to a court
in accordance with the terms of the Separation Agreement.
IPO AND DISTRIBUTION AGREEMENT
GENERAL. Propel and Motorola will enter into the Israeli Separation,
Initial Public Offering and Distribution Agreement, which we refer to as the IPO
and Distribution Agreement, to govern our respective rights and duties in
connection with our operations, this offering, a distribution of our common
stock to Motorola stockholders and the separation of our Israeli wholly owned
subsidiary,
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which includes WDS and which holds our shares of Pelephone, from Motorola's
Israeli operations. The IPO and Distribution Agreement contains covenants to
preserve the tax-free nature of:
- a distribution of Motorola's shares of our common stock to Motorola
stockholders,
- the separation of our interests in WDS and Pelephone from the remaining
Motorola businesses and assets in Israel, which we refer to as the Israeli
separation, and
- the contribution of assets to us by Motorola under the Separation
Agreement, which we refer to as the contribution.
THE DISTRIBUTION. We have agreed that we will cooperate with Motorola in
all respects to accomplish a distribution of Motorola's shares of our common
stock to Motorola's stockholders on a tax-free basis and, at Motorola's
direction, promptly take all actions necessary or desirable to effect a
distribution, including the registration under the Securities Act of Motorola's
shares of our capital stock. Motorola has the sole discretion to determine
whether to proceed with all or part of a distribution of its shares of our
common stock and all terms of a distribution, including the form, structure and
terms of any transactions or offerings to effect a distribution of our common
stock and the timing of and conditions to the consummation of a distribution. We
cannot assure you as to whether or when a distribution of our common stock will
occur. In the event that Motorola finally determines that it no longer intends
to proceed with or complete a distribution of our common stock, Motorola shall
provide us notice. For a discussion of certain risks relating to a distribution,
see "Risk Factors--Risks Relating to Our Relationship with Motorola--Our
business may be adversely affected if Motorola does not complete its divestiture
of our company."
PRESERVATION OF THE TAX-FREE STATUS OF A DISTRIBUTION, THE ISRAELI
SEPARATION AND THE CONTRIBUTION. Motorola currently intends that a distribution
of its shares of our common stock to its stockholders and the Israeli separation
each qualify as a tax-free distribution under Section 355 of the Code and that
the contribution qualifies for tax-free treatment under
Section 368(a)(1)(D) of the Code. We have agreed to covenants in the IPO and
Distribution Agreement that are intended to preserve the tax-free status of a
distribution, the Israeli separation and the contribution. We may take any
action otherwise prohibited by these covenants only if Motorola has determined,
in its sole and absolute discretion, that the action would not jeopardize the
tax-free status of any of a distribution, the Israeli separation or the
contribution. Some of these covenants are described in greater detail below:
- STOCK ISSUANCE. Prior to the completion of a distribution of our common
stock, we have agreed not to issue or agree to issue shares of our capital
stock in an amount that could result in Motorola owning less than 80% of
the total combined voting power of all outstanding shares of our voting
stock or less than 80% of any other class or series of our capital stock
on a fully diluted basis. This covenant may prohibit us from issuing stock
options and restricted stock awards to our employees without an IRS ruling
that such options and awards are not counted in calculating the required
80% ownership. Even with this ruling, we will be prohibited from issuing
options and awards that provide for exercise prior to the completion of a
distribution if such exercise could reduce Motorola's ownership of our
capital stock, as described above, to below 80%. This covenant may also
prohibit us from raising additional capital through equity issuances if
Motorola's ownership of our capital stock, as described above, could be
reduced below 80%.
- ACQUISITION TRANSACTIONS. Until two years after the completion of a
distribution of our common stock to Motorola stockholders, we have agreed
not to enter into or permit any transaction or series of transactions, or
enter into any agreement or understanding which contemplates a transaction
which would result in:
- a person or persons acquiring or having the right to acquire shares of
our capital stock that would comprise 50% or more of either the value
of all outstanding shares of our capital stock or the total combined
voting power of our outstanding voting stock, or
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- any sale or transfer of the stock of our Israeli subsidiary which will
operate the WDS business unit and which will hold the stock of
Pelephone following the Israeli separation.
- CONTINUATION OF ACTIVE TRADE OR BUSINESS. Until two years after the
completion of a distribution of our common stock to Motorola stockholders,
we have agreed to continue to conduct the active trade or business, within
the meaning of Section 355 of the Code, of our company and of WDS as
conducted immediately prior to the completion of a distribution. During
such time, we have agreed not to:
- liquidate, dispose of or otherwise discontinue any material portion of
our or WDS's active trade or business;
- liquidate, dispose of or otherwise discontinue any business or assets
that would cause our company or WDS to be operated in a manner
inconsistent in any material respect with the business purposes for a
distribution or the Israeli separation as described to the IRS, Israeli
tax authorities or tax counsel; or
- liquidate, dispose of, or otherwise discontinue the conduct of any
portion of our or WDS's active trade or business if such liquidation,
disposition or discontinuance would breach the covenant described below
regarding our continuity of business.
- CONTINUITY OF BUSINESS. Until after the completion of a distribution of
Motorola's shares of our common stock to Motorola stockholders, we have
agreed, among other things, that:
- we will not voluntarily dissolve or liquidate;
- neither we nor any of our direct or indirect affiliates will sell,
transfer, or otherwise dispose of or agree to dispose of assets,
including any shares of capital stock of our affiliates, that, in the
aggregate, constitute more than:
(x) 60% of our gross assets; or
(y) 60% of our consolidated gross assets and those of our operating
companies; and
- until two years after the Israeli separation, we have similarly agreed
to retain at least 40% of our Israeli subsidiary's gross assets.
- DISCHARGE OF INTRACOMPANY DEBT. Prior to the date on which Motorola first
distributes any of its shares of our common stock in connection with a
distribution, we have agreed to fully discharge and satisfy all debt that
we or our affiliates owe Motorola or its affiliates. Until two years after
the completion of a distribution of our common stock to its stockholders,
we will not be able to have any debt payable to Motorola. For this
purpose, debt does not include:
- payables and debt arising in the ordinary course of business, including
financing from Motorola Credit Corporation, or
- any other indebtedness disclosed to the IRS in reasonable detail as
part of an IRS ruling that the distribution is tax-free.
Until two years after the completion of a distribution of Motorola's shares
of our common stock to Motorola stockholders, we have also agreed not to take
any other action that would be reasonably likely to jeopardize the tax-free
status of a distribution, the Israeli separation or the contribution.
In the event that Motorola notifies us that it no longer intends to proceed
with or complete a distribution and Motorola has not yet distributed any of its
Propel common stock in a tax-free distribution, the covenants to preserve the
tax-free status of a distribution of our common stock to Motorola stockholders
will terminate, except those with respect to the Israeli separation.
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COOPERATION ON TAX MATTERS. We and Motorola have agreed to procedures with
respect to the tax-related covenants in the IPO and Distribution Agreement. We
are required to notify Motorola if we desire to take any action prohibited by
the tax-related covenants described above. Upon this notification, Motorola will
determine in its sole discretion whether the proposed action might jeopardize
the tax-free status of a distribution of our common stock, the Israeli
separation or the contribution. In the event Motorola makes such a
determination, Motorola has agreed to cooperate in good faith with us to obtain
a private letter ruling from the IRS or Israeli tax authority that would permit
us to take the desired action. Motorola and we must mutually agree on the form
and content of any request for a ruling from the IRS or Israeli tax authority
and the acceptability of any ruling prior to its implementation. We have agreed
to bear Motorola's reasonable costs and expenses of obtaining an IRS or Israeli
tax authority ruling.
INDEMNIFICATION FOR TAX LIABILITIES. We have generally agreed to indemnify
Motorola and its affiliates against any and all tax-related losses incurred by
Motorola in connection with any proposed tax assessment or tax controversy with
respect to a distribution of its shares of our common stock to Motorola
stockholders, the Israeli separation or the contribution caused by any breach by
us of any of our representations, warranties or covenants made in the IPO and
Distribution Agreement. This indemnification does not apply to actions that
Motorola permits us to take as a result of a determination under the tax-related
covenants as described above. In addition, Motorola will indemnify us in the
event we incur any liabilities as a result of the loss of the tax-free status of
the Israeli separation that is not caused in whole or in part by Propel.
OTHER PROPEL COVENANTS. After the offering, Motorola will continue to own a
significant portion of our common stock. As a result, Motorola will continue to
include us as a subsidiary for various financial reporting, accounting and other
purposes. Accordingly, we have agreed to additional covenants in the IPO and
Distribution Agreement, as described below:
- COVENANTS REGARDING THE INCURRENCE OF DEBT. For so long as Motorola
continues to own at least 50% of our outstanding common stock, the amount
of our indebtedness will affect Motorola's financial position. As a
result, this agreement will contain limitations on our and our
consolidated subsidiaries' ability to incur debt.
- OTHER COVENANTS. For so long as Motorola continues to own at least 50% of
our outstanding common stock, we have agreed that:
- we will not, without Motorola's prior written consent, which it may
withhold in its sole and absolute discretion, take any action which has
the effect of limiting Motorola's ability to freely sell, pledge or
otherwise dispose of shares of our common stock or limiting the legal
rights of or denying any benefit to Motorola as a Propel stockholder in
a manner not applicable to our stockholders generally;
- we will not, without Motorola's prior written consent, which it may
withhold in its sole and absolute discretion, issue any shares of
common stock or any rights, warrants or options to acquire our common
stock, if as a result, Motorola would own less than 50% of the
then-outstanding shares of our common stock; and
- to the extent that Motorola is a party to, or enters into, any
agreements providing that actions of its subsidiaries may result in its
being in breach or default under any agreement, and we have been
advised of the existence of these agreements, we will not take any
actions that may result in Motorola being in breach or default.
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- FINANCIAL INFORMATION. We have agreed that, for so long as Motorola is
required to consolidate our results of operations and financial position
or account for its investment in our company, we will:
- provide Motorola with financial information regarding us and our
subsidiaries;
- provide Motorola with copies of all quarterly and annual financial
information and other reports and documents we intend to file with the
SEC prior to such filings, as well as final copies upon filing;
- provide Motorola with copies of our budgets and financial projections,
as well as the opportunity to meet with our management to discuss such
budgets and projections;
- consult with Motorola regarding the timing and content of earnings
releases; and
- cooperate fully, and cause our accountants to cooperate fully, with
Motorola in connection with any of its public filings.
This covenant is subject to provisions intended to protect the
confidentiality commitments we have in place with the other shareholders of
our operating companies.
- AUDITORS AND AUDITS; ANNUAL STATEMENTS AND ACCOUNTING. We have agreed
that, for so long as Motorola is required to consolidate our results of
operations and financial position or account for its investment in our
company under the equity method of accounting in accordance with generally
accepted accounting principles, we will:
- not change our auditors without Motorola's prior written consent, which
will not be unreasonably withheld;
- provide to Motorola and its auditors all information required for
Motorola to meet its schedule for the filing and distribution of its
financial statements;
- make available to Motorola and its auditors work papers related to the
annual audit of our company as well as access to the personnel who
perform the annual audit of our and our subsidiaries' books and records
so that Motorola and its auditors may conduct reasonable audits
relating to our financial statements;
- adhere to specified accounting standards; and
- notify and consult with Motorola regarding any significant changes to
our accounting principles.
We have generally agreed to indemnify Motorola and its affiliates against
all liabilities arising out of any incorrect, inaccurate or incomplete
financial or other information we provide to Motorola pursuant to the terms
of the IPO and Distribution Agreement.
INDEMNIFICATION RELATING TO THE OFFERING AND A DISTRIBUTION. We have
generally agreed to indemnify Motorola and its affiliates against all
liabilities arising out of any material untrue statements and omissions in any
and all registration statements, including this prospectus, information
statements and/or other documents filed with the SEC and in connection with a
distribution. However, our indemnification obligations to Motorola do not apply
to information relating to Motorola, excluding information relating to us.
Motorola has agreed to indemnify us for this information.
EXPENSES. In general, unless otherwise provided for in the IPO and
Distribution Agreement or any other agreement, we and Motorola will pay our own
respective costs and expenses incurred in connection with the offering and a
distribution as described below.
- EXPENSES RELATING TO THE OFFERING. Motorola has generally agreed to pay
all costs and expenses relating to this offering, other than the costs of
our advisors. We will bear the underwriting
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discounts and commissions and our internal costs and expenses. In
addition, we have agreed that Motorola will be entitled to all amounts
received from the underwriters for reimbursement of offering expenses.
- EXPENSES RELATING TO A DISTRIBUTION. Motorola has generally agreed to pay
all costs and expenses relating to a distribution including all expenses
associated with the filing and printing of registration statements that we
file with the SEC. We will, however, pay for the costs and expenses of our
own financial, legal, accounting and other advisers, if any, incurred in
connection with a distribution. We will also pay for our internal costs
and expenses.
REGISTRATION RIGHTS AGREEMENT
In the event that Motorola desires to divest itself of all of its shares of
our common stock in a distribution or other offering, Motorola may not be able
to freely sell all of its shares without registration under the Securities Act.
Accordingly, we have entered into a Registration Rights Agreement with Motorola
to provide it with registration rights relating to the shares of our common
stock which it holds. These registration rights become effective at the time of
this offering.
DEMAND REGISTRATIONS. Motorola may request registration, which we refer to
as a demand registration, under the Securities Act of all or any portion of our
shares that it owns as of the date of this offering and we will be obligated to
register such shares as requested by Motorola.
- TERMS OF EACH OFFERING. Motorola will designate the terms of each offering
under a demand registration, which may take any form, including:
(1) an underwritten public offering;
(2) a shelf registration;
(3) a registration in connection with the registration by Motorola or a
subsidiary or affiliate thereof of securities convertible into,
exercisable for or otherwise related to shares of our common stock;
or
(4) a registration in connection with a distribution of, or exchange of
or offer to exchange, shares of our common stock to holders of debt
or equity securities of Motorola, a subsidiary or affiliate thereof
or any other person.
Except for an offering described in clauses (3) and (4) above, each demand
registration must meet a minimum aggregate expected offering price of
$200 million. Motorola may not elect to effect more than 20 demand
registrations.
- TIMING OF DEMAND REGISTRATIONS. We are not required to undertake a demand
registration within 90 days of the effective date of a previous demand
registration, other than a demand registration effected as a shelf
registration. Also, we have the right to postpone the filing or
effectiveness of any demand registration for up to 90 days if in the
reasonable judgment of our general counsel, confirmed by our board within
15 days, a demand registration would reasonably be expected to have a
material adverse effect on any currently active proposal by our company to
engage in material transactions. We may, however, exercise this right only
once in any 12-month period.
- PRIORITY ON DEMAND REGISTRATIONS. Other parties, including Propel, can
participate in any demand registration only if all of the securities
Motorola proposes to include in such registration are so included.
- SELECTION OF PROFESSIONALS. Motorola will select the investment bankers
and managers, subject to our reasonable objection in the event Motorola
selects investment bankers other than Goldman, Sachs & Co. and Morgan
Stanley Dean Witter, as well as any financial printer, solicitation
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and/or exchange agent and counsel for the offering. We will select our own
outside counsel and independent auditors.
PIGGYBACK REGISTRATIONS. The Registration Rights Agreement also provides
for piggyback registration rights for Motorola. Whenever we propose to register
any of our securities under the Securities Act for ourselves or others, subject
to customary exceptions, we must provide prompt notice to Motorola and include
in such registration all shares of our stock that Motorola requests to be
included, each of which we refer to as a piggyback registration.
- PRIORITY ON PIGGYBACK REGISTRATIONS. If a piggyback registration is being
made on our behalf and the underwriters advise us that cutbacks are
necessary, we must include in such registration:
- first, the securities we propose to offer;
- second, the securities requested to be included by Motorola; and
- third, any other securities requested to be included in such
registration.
If a piggyback registration is being made on behalf of other holders of our
securities and the underwriters advise us that cutbacks are necessary, we
must include in such registration:
- first, the securities requested to be included therein by the holders
requesting such registration;
- second, the securities requested to be included therein by Motorola;
and
- third, any other securities requested to be included in such
registration,
in each case, pro rata among these holders and Motorola on the basis of
the number of securities owned by each applicable holder
- SELECTION OF UNDERWRITERS. In many circumstances, Motorola has the right
to reasonably object to our selection of any investment bankers and
managers in connection with a piggyback registration.
HOLDBACKS. The Registration Rights Agreement contains customary holdback
provisions, including covenants by us not to effect a public sale or
distribution of our securities during periods prior to and following the date of
any registration statement filed in connection with a demand registration or a
piggyback registration.
REGISTRATION PROCEDURES AND EXPENSES. The Registration Rights Agreement
sets forth customary registration procedures, including a covenant by us to make
available our senior management for road show presentations. Except in
connection with a distribution, we will be obligated to pay all registration
expenses incurred in connection with the Registration Rights Agreement,
including all filing fees, fees and expenses of compliance with securities and
blue-sky laws, financial printing expenses, fees and disbursements of
custodians, transfer agents, exchange agents and information agents, as well as
fees and disbursements of counsel for our company and the fees of all
independent certified public accountants, underwriters, excluding discounts and
commissions, and other persons retained by us. In addition, we must reimburse
Motorola for the fees and disbursements of its outside counsel as well as
out-of-pocket expenses incurred in connection with any such registration.
INDEMNIFICATION. The Registration Rights Agreement contains customary
indemnification and contribution provisions by us for the benefit of Motorola
and any underwriters. Motorola has agreed to indemnify us and any underwriter
solely with respect to information provided by Motorola.
TRANSFER. Motorola may transfer shares covered by the Registration Rights
Agreement and the holders of such transferred shares will be entitled to the
benefits of the Registration Rights Agreement as long as each such transferee
agrees to be bound by its terms. These transferees will be entitled to
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the rights available to Motorola described above. However, the holder or holders
of a majority of the shares covered by the Registration Rights Agreement will be
entitled to exercise these rights. Any successor entities to our company will be
bound by the terms of the Registration Rights Agreement.
DURATION. The registration rights under the Registration Rights Agreement
will remain in effect with respect to any shares of our common stock until:
- the applicable shares have been sold pursuant to an effective registration
statement under the Securities Act;
- the applicable shares have been sold to the public under Rule 144 under
the Securities Act, or any successor provision;
- the applicable shares have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer have been
delivered by us and subsequent public distribution of them will not
require registration of them under the Securities Act or any similar state
law;
- the applicable shares cease to be outstanding; or
- in the case of shares held by a transferee of Motorola, when those shares
become eligible for sale under Rule 144(k) under the Securities Act, or
any successor provision.
WIRELESS PRODUCTS DISTRIBUTION AGREEMENT
We, our Israeli subsidiary and Motorola have entered into an agreement under
which WDS will continue to distribute in Israel wireless subscriber products
manufactured by Motorola's Personal Communication Sector. Under this agreement,
WDS may sell only Motorola-manufactured wireless subscriber units, parts and
accessories in Israel. WDS may distribute any complementary products, such as
car kits, not manufactured by Motorola. WDS has agreed not to ship any
Motorola-manufactured wireless subscriber products outside of Israel.
Motorola will make available to WDS, at Motorola's cost, technical support,
field engineering support, sales support and promotional materials that it
provides to wholly owned Motorola Personal Communications Sector business units.
The agreement is effective as of the closing of this offering. The original term
of the agreement is five years, with automatic one-year renewals, unless either
Motorola or Propel gives six months' written notice of its intent to terminate
the agreement.
EMPLOYEE MATTERS AGREEMENT
We will enter into an agreement, the Employee Matters Agreement, with
Motorola to allocate responsibility and liability for certain employee related
matters. The Employee Matters Agreement generally provides for the following:
EMPLOYEE TRANSFERS. As of the closing of this offering, we will hire or
employ U.S. and non-U.S. employees of Motorola and its affiliates as named in
the Employee Matters Agreement.
EMPLOYEE BENEFITS. We will establish our own employee benefit plans before
the completion of this offering, including specific benefit plans for our
non-U.S. employees. Our plans generally will be similar to Motorola's employee
benefit plans. From the date of this offering, we will assume all employment,
compensation and employee benefit liabilities of Motorola relating to our
employees that occur on or after the date of this offering, except with respect
to options to acquire Motorola stock. Some Motorola 401(k) plan assets will be
transferred from trusts associated with the Motorola 401(k) plan to the
corresponding trusts for our 401(k) plan. As of this offering, our U.S.
employees will cease to actively participate in substantially all of Motorola's
benefit plans, except with respect to options to acquire Motorola stock. The
accrued benefits of our employees in Motorola's pension plan
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will become fully vested and nonforfeitable at the time at which Motorola owns
directly or indirectly less than 80% of our common stock.
POST-RETIREMENT HEALTH BENEFITS. Motorola provides certain health care
insurance benefits for retired employees. Motorola has agreed that certain of
our employees who meet certain eligibility standards will be eligible to enroll
in the Motorola retiree medical insurance plan on their date of retirement or
termination of employment from Propel, provided they have met the eligibility
standards. Service with Propel will be counted for purposes of meeting these
eligibility standards. Motorola will retain all liability for the cost of
providing these benefits to our eligible employees, subject to payment of the
applicable premium by the covered employee. In addition, Motorola will make a
one-time lump-sum payment, in lieu of future retiree medical coverage, to
certain of our employees who meet other eligibility standards.
INCENTIVE COMPENSATION PLANS. Motorola maintains certain incentive
compensation plans in which our employees participated prior to this offering.
Motorola has agreed to pay our employees their pro rata portion of any bonus
that is payable to participating employees for the 2000 calendar year under the
terms of these plans. Determination of amounts payable, if any, under such plans
is in the sole discretion of Motorola. We have agreed to adopt an incentive
compensation plan for our employees commencing on the date of this offering.
CASH RETENTION BONUSES. Certain of our employees who will not have the same
or similar pension benefits available after the date of this offering will be
eligible for a cash retention bonus, payable one-half on the one-year
anniversary of this offering and the remainder on the two-year anniversary of
this offering, subject to continued employment with us or our subsidiaries. The
total bonus is equal to either 100%, 75% or 50% of the eligible employee's
current Motorola annual base salary at the time of this offering, based on the
employee's grade level. Motorola has agreed to reimburse us for the payment of
this bonus, which we estimate to be approximately $5.6 million. In addition,
Motorola has entered into cash retention bonus agreements with a number of our
senior managers which will entitle them to a cash retention bonus equal to their
current Motorola annual base salary at the time of this offering which is
payable 50% within 30 days of the date of this offering and the remainder within
30 days of the one year anniversary of this offering, subject to continued
employment with Propel on those dates. Although Propel will assume these
obligations, it will be reimbursed by Motorola for the payment of these bonuses,
which we estimate to be approximately $1.8 million.
FREEZE ON MOVEMENT. For two years following the date of this offering,
except as may be mutually agreed in writing, we have agreed with Motorola not to
employ any employee of the other or of the other's subsidiaries or affiliates.
NON-U.S. PROPEL EMPLOYEES. We have agreed to cause our applicable
affiliates to provide each of our non-U.S. employees with terms and conditions
of employment, including employee benefit plans and programs, that are
substantially similar, in the aggregate, to the terms and conditions of
employment provided by the applicable Motorola affiliates immediately prior to
the date of this offering. Where applicable law requires our affiliates to offer
specific terms and conditions of employment that are determined by comparison to
the terms and conditions provided by the applicable Motorola affiliate in order
to avoid liability for severance or other termination compensation or damages,
and any of our non-U.S. employees becomes entitled to severance, other
termination compensation or benefits for which Motorola or any of its affiliates
is held liable or is subject to damages, we will be responsible for, and will
indemnify Motorola and its affiliates for, such severance compensation, benefits
or damages.
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TAX SHARING AGREEMENT
In addition to the tax provisions contained in the IPO and Distribution
Agreement, we will enter into a Tax Sharing Agreement with Motorola to govern
the allocation of tax liabilities between Motorola and us and to set forth our
agreements with respect to certain other tax matters following this offering.
Following this offering, we will still be included within Motorola's
consolidated tax group for certain tax filing purposes, and, thus, the results
from our operations will be included with Motorola in such tax filings. Under
the Tax Sharing Agreement, we will generally be liable to Motorola for the
amount of taxes we would have paid had we been our own separate consolidated
group and not been included in Motorola's consolidated group. In addition,
Motorola will generally have the responsibility for making all tax filings for
which we are included within the Motorola consolidated group. We generally will
have responsibility for filing all other tax returns that we are required to
file. Also, the party that has the obligation under the Tax Sharing Agreement to
pay a particular tax generally will be allowed to control any tax audit or tax
contest related to such tax.
REAL ESTATE AGREEMENTS
We will enter into subleases with Motorola related to the office space used
by Propel, consisting of leased property located in Schaumburg, Illinois;
London, England; Tel Aviv, Israel; and Beijing, China.
TRANSITIONAL SERVICES AGREEMENTS
Under the Transitional Services Agreement and Israel Transitional Services
Agreement, Motorola will furnish us and our subsidiaries, including our Israeli
subsidiary, with a number of transitional services. These services will
generally be provided to us for an amount that is reasonably related to
Motorola's cost of delivering these services. These services will include, among
other things:
- treasury, accounting, and payroll services;
- information systems services, including financial, engineering, human
resources, manufacturing, communications, logistics, purchasing and
warranty and service systems;
- a variety of employee-related administrative support services, including
loss prevention, expatriate administration and employee assistance
services; and
- audit services.
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OUR RELATIONSHIPS WITH OUR OPERATING COMPANIES
The following is a description of the material provisions of the
shareholders agreements that govern our relationships with our operating
companies and other significant shareholders.
LATIN AMERICAN OPERATIONS
ARGENTINA
GENERAL. We are party to a shareholders agreement relating to our 25.0%
ownership of Movicom Argentina. The other parties to that agreement are B.A.
Celular Inversora S.A., or BACI, a wholly owned subsidiary of BellSouth, with
65.0%, and Telper S.A., a wholly owned subsidiary of Boris Garfunkel and Hojman
S.A., with 10.0%.
MANAGEMENT. Under the terms of the shareholders agreement, Movicom
Argentina's board is composed of nine members, including six directors nominated
by BACI, two directors nominated by us and one director nominated by Telper.
The approval of eight board members is required to:
- approve the business plan or capital structure;
- enter into significant corporate transactions;
- enter into a new business;
- amend the shareholders agreement;
- enter into material agreements with shareholders or affiliates;
- approve material personnel, labor policies and contracts;
- appoint or remove accountants or attorneys; and
- appoint the president, chief operating officer or chief technical officer.
The vote of 90% of Movicom Argentina's outstanding shares is required for
its liquidation, dissolution or merger, sale or issuance of additional stock,
other than for capital calls, and amendment of its articles of incorporation or
bylaws.
DIVIDENDS. Under the shareholders agreement and subject to the requirements
of applicable laws and board approval, the board of Movicom Argentina may
declare an annual dividend equal to 50% of Movicom Argentina's consolidated
after tax income, payable to the shareholders in Argentine currency. However, no
dividend may be declared if the company has exceeded its then applicable
targeted leverage ratio or it no longer has an investment grade rating of at
least "BBB." In addition, any dividends would be reduced by the amounts
necessary to fully fund any reserves created within 24 months of the maturity of
any long-term, third-party indebtedness, to pay off 50% of the amount due at
maturity under such loan.
NONCOMPETITION. Under the shareholders agreement, the shareholders agree
that neither they nor any of their shareholders or affiliates will compete with
Movicom Argentina by having a direct or indirect interest in any cellular system
in the same areas that Movicom Argentina operates. This noncompete provision
applies for two years after the shareholder ceases to be a shareholder in
Movicom Argentina.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes various
restrictions with respect to the sale, transfer or other disposition of Movicom
Argentina's capital stock. Under the shareholders agreement, other shareholders
have the right to purchase our interest in Movicom Argentina at fair market
value if Motorola's ownership of our common stock falls below 75.0%. Motorola is
currently
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negotiating for the right to divest itself of our common stock without
triggering this right of first refusal. We cannot assure you that we will obtain
this waiver prior to the offering if at all. Even if received, the transfer
restrictions apply to any future sale of our interest in Movicom Argentina. If
the right of first refusal provisions are triggered, the other shareholders have
the option to buy our shares of Movicom Argentina at fair market value. The
remaining shareholders have agreed to negotiate in good faith to buy out the
transferring shareholder. If the shareholders are unable to agree, each
remaining shareholder then may deliver a list of not more than 15 persons to
whom the remaining shareholders would object as a buyer of the shares because
such persons are actual competitors of the remaining shareholders or an entity
which the remaining shareholders have had or may have a conflicting business
relationship. Sales to persons on these lists could be prohibited. If the
transferring shareholder has received a third-party offer from a person not on
these lists, it shall give notice of such offer to the other shareholders who
have the option to buy the shares at the price and upon the terms set forth by
the proposed buyer. If a remaining shareholder believes that the price contained
in a third-party offer by a person listed on its objection notice is higher than
the fair market value of the stock, that shareholder may request an appraisal of
the fair market value of the shares, and such appraisal price will then be the
sale price to the other shareholders. In no event may any shareholder sell its
Movicom Argentina shares to any person who is an actual competitor of Movicom in
Argentina.
BRAZIL
GENERAL. We are parties to a shareholders agreement relating to our 35.5%
ownership of Global Telecom. The other parties to that agreement are DDI do
Brasil Ltda., with 46.9% and which is owned by DDI Corporation; Globaltelecom
Telecomunicacoes Ltda., with 10.0% and which is owned by Nissho Iwai
Corporation; Inepar Telecom Ltda., with 5.9% and which is owned by Inepar S.A.
Industria e Construcoes; and Suzano Telecom Ltda., with 1.7% and which is owned
by Cia. Suzano de Papel e Celulose.
MANAGEMENT. Under the terms of the shareholders agreement, Global Telecom's
board of directors is composed of nine members, including three directors
nominated by us, three directors nominated by DDI, one director nominated by
Nissho Iwai and one director nominated by Inepar. At this time, one board seat
is vacant.
The approval of at least eight directors, including our and DDI's nominees,
is required to:
- incur significant indebtedness or guarantees;
- agree to shareholder loans, other than loans from Nissho Iwai;
- approve Global Telecom's five year business strategy and any objectives
and significant expenditures that are not included in Global Telecom's
five-year business plan;
- approve related party transactions;
- grant or amend powers of attorney other than in the ordinary course of
business;
- approve collective bargaining contracts; and
- elect and remove officers.
In addition, Global Telecom's bylaws require the approval of holders of 91%
of the shares then outstanding to:
- enter into significant corporate transactions;
- amend the by-laws or effect changes in corporate purpose;
- change its headquarters;
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- change capital structure;
- wind up or liquidate Global Telecom;
- change the number of board members;
- redeem or cancel any of its securities; and
- acquire or incorporate any subsidiary entity or joint venture.
DIVIDENDS. Under the shareholders agreement and subject to the projected
financing requirements of Global Telecom over the 12 month period following the
date at which a dividend payment is being considered, including investment and
expansion plans, and the possible prepayment of project financing, all funds
reasonably available for distribution are to be distributed by way of a
dividend, or such other form of distribution approved by the shareholders. Any
such distributions require approval by at least eight directors.
NONCOMPETITION. Under the shareholders agreement, the parties agree that
neither they nor their affiliates, directors or officers will engage in any
business which operates cellular radiotelephony networks in Parana and Santa
Catarina states in Brazil in bands A or B in competition with Global Telecom.
Shareholders and their affiliates and their directors and officers are subject
to this provision for two years after they cease to be shareholders for any
reason other than liquidation of Global Telecom.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes various
restrictions with respect to the sale, transfer or other disposition of Global
Telecom's capital stock. Under the shareholders agreement, other shareholders
have the right to purchase our interest in Global Telecom at fair market value
if we undergo a change in control. No transfer of shares is allowed to any
competitor or any of its shareholders. The shareholders, other than Suzano, have
waived their rights of first refusal with respect to this offering and a
divestiture by Motorola of our common stock. Subject to regulatory approval, we
and DDI have a binding commitment to purchase Suzano's interest in Global
Telecom. If we wish to sell our shares in Global Telecom to an unaffiliated
third party, we must give the other shareholders written notice of our
intention, the name of the prospective buyer, if any, the selling price, the
number of shares we propose to sell and the other terms of the sale. The other
shareholders have the option to buy our shares at the price stated in the offer
notice. We may not transfer our shares in Global Telecom to any competitor of
Global Telecom or any shareholder of a competitor unless such shareholder owns
less than 10% of a publicly traded competitor and is a passive investor.
Competitor is defined as any entity operating a cellular telephone service in
Parana and Santa Catarina states in Brazil. No transfer is allowed to any person
who is prohibited by law or regulation from being a participant in the holder of
the license granted to Global Telecom or if the transfer would result in grounds
for revocation of this license.
CHILE
GENERAL. We are party to a shareholders agreement relating to our ownership
of 25.001% of ETP. The other party to that agreement is Empresa Nacional de
Telecomunicaciones S.A., or Entel S.A., with 74.999%.
MANAGEMENT. Under the shareholders agreement, ETP's board is composed of
seven members and seven alternates, allocated approximately according to the
proportionate ownership of its shareholders. Based on our ownership percentage,
we currently appoint two of the seven directors.
The approval of holders of 75% of the shares outstanding is required to:
- amend the bylaws to change corporate object(s), reduce number of directors
or reduce equity;
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- approve business combinations, including mergers, early liquidation or
transfer of assets;
- declare insolvency; and
- sell all or substantially all of its assets.
DIVIDENDS. Subject to the contemplated investment and expansion plans of
ETP and board approval, all funds reasonably available for distribution to its
shareholders are to be distributed by way of a dividend.
NONCOMPETITION. Under the shareholders agreement, the parties agree that
they and their associates will not compete directly or indirectly with ETP in
Chile by providing, maintaining or operating a public wireless mobile telephony
service on the 800 and 1900 MHz bands. This noncompete provision applies to
former shareholders and their associates for one year following the date on
which they cease to be shareholders for any reason other than liquidation of
ETP.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes restrictions
with respect to the sale, transfer or other disposition of the capital stock of
ETP. Under the shareholders agreement, Entel S.A. has the right to purchase our
interest in ETP if we seek to transfer those shares to a third party, except
when the transferee is a subsidiary of ours. Thus, if we wish to sell our shares
in ETP to an unaffiliated third party, we would be required to give Entel S.A.
written notice of our intention, the name of the prospective buyer, the selling
price, the number of shares we propose to sell and the other terms of the sale.
In such an event, Entel S.A. would have the option to buy our shares in ETP on
identical terms offered by the third party. If Entel S.A. does not exercise this
option to purchase the shares within the following 90 days, we will be
authorized to sell our shares in ETP at the notified terms to the third party.
Notwithstanding the foregoing, we may not transfer our shares in ETP to a
competitor of ETP without approval of Entel S.A. Motorola has received a waiver
from Entel S.A. of any right it may have to purchase our shares in ETP that
might be triggered by this offering or may be triggered by a distribution of our
common stock, provided that no more than 26% of our holdings are held by a
competitor of ETP and its subsidiaries.
Additionally, Entel S.A. has the right to purchase our interest in ETP at an
equitable price unanimously agreed to by the parties if:
- a competitor of ETP in Chile acquires more than 26% of our shares,
- if we have interest in a competitor of ETP that allows us to appoint at
least one of its directors, or
- if we undergo a change in control in which our acquiror is a competitor of
ETP.
If the parties are unable to reach agreement, an arbitrator shall determine
the price for the shares. Competitor is defined to mean any concessionaire of
mobile or cellular telephony or a shareholder of any such company operating in
all or part of Chile.
DOMINICAN REPUBLIC
GENERAL. We are party to a shareholders agreement relating to our 26.5%
ownership of Tricom. The other party to that agreement is Oleander Holdings, an
affiliate of GFN Corporation Ltd., with 39.8%. Public shareholders hold 33.7% of
the outstanding stock. We and GFN own Class B stock, which carries ten votes per
share. The public shareholders hold Class A stock, which carries one vote per
share. As a result, we have 38.1% of the outstanding voting power of Tricom's
stock, GFN has 57.1% of the voting power and public shareholders have 4.8%.
MANAGEMENT. Under the terms of the shareholders agreement, Tricom's board
is composed of six directors nominated by GFN, four directors nominated by us
and two independent directors. Each of
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GFN and ourselves are entitled to nominate one independent director. If either
we or GFN own more than 75% of the issued and outstanding shares of Class B
stock, we or GFN, as the case may be, would have the right to nominate both
independent directors.
Until such time as either we or GFN own less than 25% of the outstanding
shares of Class B stock, the approval of nine directors is required to:
- acquire or invest in another entity;
- incur indebtedness to the extent that Tricom's ratio of indebtedness to
shareholders' equity would be greater than three to one;
- approve annual budgets; and
- issue or redeem Class A common stock or other securities exercisable for
or convertible into Class A common stock.
In addition, approval by the independent directors is required for any
transaction that has a fair market value exceeding $1.0 million that Tricom
enters into with GFN or us. The vote of a majority of the directors present at a
duly convened meeting of the board of directors is required for all other board
actions.
We have customary registration rights regarding our Tricom common stock
under the shareholders agreement.
DIVIDENDS. Subject to the provisions of applicable law, including mandatory
payments to a legal reserve fund of five percent of Tricom's total net profits
for the fiscal year until the aggregate amount of such legal reserve amounts to
10% of the paid-in capital of Tricom, and Tricom's corporate funding
requirements for the next 12 months, including any investments and expansion
plans, Tricom may declare dividends or other distributions out of its profits
upon approval of the holders of two-thirds of its voting stock.
NONCOMPETITION. Under the shareholders agreement, the parties agree that
they, their affiliates, and their officers, directors and key employees and
those of their affiliates, will not engage in any business in the Dominican
Republic which operates cellular services, paging services, basic local
telephone services or national or international long-distance telephone
services. This noncompete provision continues for two years from the date a
shareholder or any of its affiliates ceases to own an interest in Tricom for a
reason other than liquidation or dissolution of Tricom.
RESTRICTIONS ON TRANSFER. Tricom's bylaws impose restrictions with respect
to the sale, transfer or other disposition of its Class B stock. Other than a
transfer to GFN or a permitted transferee or to one of Motorola's affiliates, a
transfer of our shares of Tricom would result in the loss of our Class B voting
rights. We are currently negotiating for the right of Motorola to divest itself
of our common stock without triggering the loss of Class B voting rights. We
cannot assure you this waiver will be obtained prior to the offering, if at all.
URUGUAY
GENERAL. We are party to a shareholders agreement relating to our 32.0%
ownership of Movicom Uruguay. The other parties to that agreement are Redanil,
S.A., a wholly owned subsidiary of BellSouth, with 46.0%, Curtiembre
Latinoamericana S.A., with 11%, and Lemincor S.A., with 11%.
MANAGEMENT. Under the terms of the shareholders agreement, Movicom
Uruguay's board is composed of nine members, including two directors nominated
by us and seven directors nominated by Redanil, Curtiembre Latinoamericano and
Lemincor voting together.
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Unanimous approval of the board is required to:
- enter into significant corporate transactions;
- enter into a new business;
- approve the business plan, budgets and capital structure;
- amend the shareholders agreement;
- enter into material agreements with shareholders or affiliates;
- approve material personnel, labor policies and contracts;
- appoint or remove accountants or attorneys; and
- appoint the president, chief operating officer or chief technical officer.
The vote of 90% of Movicom Uruguay's then outstanding shares is required for
its liquidation, dissolution or merger, sale or issuance of additional stock,
other than for capital calls, and amendment of its articles of incorporation or
bylaws.
DIVIDENDS. Subject to the requirements of applicable law, 100% of Movicom
Uruguay's cash or cash equivalents in excess of reasonably anticipated cash
needs for the next three months can be distributed as a cash dividend to Movicom
Uruguay's shareholders.
NONCOMPETITION. Under the shareholders agreement, the parties agree that
neither they nor any of their shareholders or affiliates will compete with
Movicom Uruguay by having a direct or indirect interest in any cellular system
in Uruguay. Cellular system is defined to mean a cellular radio-communications
mobile service system operating in the 870 to 890 MHz frequency bands. This
noncompete provision applies for two years after a shareholder ceases to be a
shareholder in Movicom Uruguay.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes various
restrictions with respect to the sale, transfer or other disposition of Movicom
Uruguay's capital stock. Under the shareholders agreement, other shareholders
have the right to purchase our interest in Movicom Uruguay at fair market value
if Motorola's ownership of the holding company which holds our interest in
Movicom Uruguay falls below 65.0%. Motorola is currently negotiating for the
right to divest itself of our common stock without triggering this right of
first refusal. We cannot assure you that this waiver will be obtained prior to
the offering, if at all. Even if received, the transfer will apply to any future
sale of our interest in Movicom Uruguay. If the right of first refusal
provisions are triggered, the other shareholders have the option to buy our
shares of Movicom Uruguay at fair market value. The remaining shareholders have
agreed to negotiate in good faith to buy out the transferring shareholder. If
the shareholders are unable to agree, each remaining shareholder then may
deliver a list of not more than 15 persons to whom the remaining shareholders
would object as a buyer of the shares as such persons are actual competitors of
the remaining shareholders or a person which the remaining shareholders have had
or may have a conflicting business relationship. Sales to persons on these lists
could be prohibited. If the transferring shareholder has received a third-party
offer from a person not on these lists, it shall give notice of such offer to
the other shareholders who have the option to buy the shares at the price and
upon the terms set forth by the proposed buyer. If a remaining shareholder
believes that the price contained in a third-party offer by a person listed on
its objection notice is higher than the fair market value of the stock, that
shareholder may request an appraisal of the fair market value of the shares, and
such appraisal price will then be the sale price to the other shareholders. In
no event may any shareholder sell its Movicom Uruguay shares to any person who
is an actual competitor of Movicom in Uruguay.
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SOUTHERN MEXICO
There is no shareholders agreement governing our rights as a Portatel
shareholder. We own 21.7% of the outstanding common stock and have one
representative on the seven-member board who may be removed by a vote of the
majority shareholders at any time.
EUROPE/MIDDLE EAST OPERATIONS
ISRAEL
GENERAL. We are party to a shareholders agreement relating to our 50.0%
ownership of Pelephone. The other party to that agreement is The Israel
Telecommunications Corp. Ltd., or Bezeq, which owns the remaining 50.0%.
MANAGEMENT. The terms of the shareholders agreement provide for a board of
directors composed of 12 members. The shareholders, however, have agreed to a
ten-member board, including five directors nominated by us and five nominated by
Bezeq. Through our board representation, we and Bezeq jointly control
Pelephone's business plan, capital expenditures and strategic direction.
DIVIDENDS. Under Pelephone's shareholders agreement and articles of
incorporation, dividends may be paid out of Pelephone's profits by unanimous
resolution of its board of directors.
NONCOMPETITION. We and Bezeq may not compete with Pelephone or with each
other in providing mobile cellular radio-telephone service in Israel. Except as
provided in the shareholders agreement regarding competition with each other and
Pelephone, the parties are free to continue operations in businesses in which
they operated prior to signing the shareholders agreement.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes restrictions
with respect to the sale, transfer or other disposition of Pelephone's capital
stock. If we wish to sell our Pelephone shares, we must first give notice to
Bezeq of our intention and include the price and terms for the shares. Bezeq
then has the option to buy our shares on the conditions offered, indicate its
wish to purchase the shares on different terms, indicate its consent to the sale
to the proposed third party, on the same or different terms, or propose an
alternative buyer of the shares. If we and Bezeq are unable to agree, the matter
is first referred to the chief executive officers of our companies and then to
the chairmen of their respective boards of directors. If the parties are still
unable to reach agreement, no sale or transfer shall be effected. We may not
sell or transfer our shares to a competitor of Pelephone or to an entity
prevented by law from receiving or holding a license to provide Pelephone's
services. The shareholders agreement has been amended, however, to permit this
offering and a divestiture by Motorola of our common stock in a tax-free
distribution.
EGYPT
GENERAL. We are party to a shareholders agreement relating to our 35.3%
ownership of MFT. The other parties to that agreement are France Telecom Mobiles
International, with 46.1% and Orascom Technologies SAE, with 18.6%. MFT is a
holding company that owns 51% of The Egyptian Company for Mobile Services, or
MobiNil. MobiNil is our licensed operating company in Egypt. The remaining
direct interests in MobiNil are owned by public shareholders, with approximately
36.0%, and by Orascom, with approximately 13.0%.
MANAGEMENT. Under the terms of the MFT shareholders agreement, MFT's board
is composed of seven members, including two directors nominated by us, four
directors nominated by France Telecom, including one who must be an independent
third party, and one director nominated by Orascom.
The shareholders agreement also controls how the MFT members of MobiNil's
board of directors vote. Under the shareholders agreement, MobiNil's board of
directors is composed of 11 members,
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including two directors nominated by us, four directors nominated by France
Telecom, two directors nominated by Orascom and three directors to be nominated
by the other shareholders.
With respect to MFT, the approval of Propel, France Telecom and Orascom is
required to:
- enter into significant corporate transactions;
- incur indebtedness;
- voluntarily wind up or liquidate;
- declare dividends;
- redeem and cancel any securities;
- vote the shares in MobiNil; and
- approve the five-year business strategy.
Propel's and France Telecom's approval is also required to:
- approve contracts in excess of $1 million;
- approve agreements longer than one year and with expenditures in excess of
$1 million over the full term;
- approve material related party transactions, material personnel policies
and intellectual property licenses and agreement; and
- approve initiation of material claims and lawsuits where the value of the
claim is in excess of $1 million.
DIVIDENDS. Under the shareholders agreement, dividends and other cash
distributions may be made from net profits and not out of capital or capital
surplus if MFT and MobiNil have positive net worth and provided there are
reasonably adequate amounts of cash and working capital for their operations and
anticipated growth as well as legal reserves required under applicable laws and
regulations.
NONCOMPETITION. As long as the shareholders agreement is in place, the
parties and their affiliates agree not to engage in activities that directly
compete with the business of MFT or the operation of a GSM cellular system in
competition with MobiNil in Egypt. This provision does not restrict the parties
or their affiliates equipment or services businesses from offering their
products or services for sale to competing businesses.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes restrictions
with respect to the sale, transfer or other disposition of MFT's capital stock.
Although the change of control of a shareholder does not expressly trigger a
right of first refusal, Orascom and France Telecom have waived their rights of
first refusal with respect to this offering and a divestiture by Motorola of our
common stock. If we wish to sell our MFT shares, we must give written notice to
the other shareholders including the number of shares and the proposed purchase
price. The other shareholders have the option to either purchase their pro rata
share of the shares offered or refuse the offer. MFT shareholders may also sell
their proportionate MobiNil shares upon the same notification procedures. If the
proposed sale is through an offering on a recognized stock exchange, then the
MobiNil per share sale price is the average median sale price of the MobiNil
shares on the stock exchange for the six days immediately proceeding the
proposed sale of the MobiNil shares or if the proposed sale is to a third party,
then the sale price is the price offered by such third party.
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LITHUANIA
GENERAL. We are party to a shareholders agreement relating to our 35.0%
ownership of Omnitel. The other parties to that agreement are Amber Mobile
Teleholding AB, a joint venture of Telia AB and Sonera Corporation, with 55.0%,
and members of the Kazickas family with 10.0%.
MANAGEMENT. Under the terms of the shareholders agreement, Omnitel's board
of directors is composed of seven members, including two directors nominated by
us, as long as we own at least 25% of Omnitel, four directors nominated by Amber
and one director nominated by the other shareholders, as long as they own 5% of
Omnitel.
The approval of five directors, which includes the vote of at least one
director nominated by us for so long as we own at least 25% of Omnitel, is
required to:
- enter into significant corporate transactions;
- approve the capital structure;
- incur indebtedness or guarantees not provided for in the five-year
business plan;
- approve agreements with significant expenditures;
- approve any public offering of Omnitel's shares;
- voluntarily wind up or liquidate Omnitel;
- establish the financial and business objectives, annual budgets and
approve the five-year business plan;
- delegate board authority and grant powers of attorney;
- approve any material change in the powers or duties of the president or
chief financial officer; and
- redeem, purchase, cancel or issue any securities.
DIVIDENDS. Subject to the projected financing requirements of Omnitel over
the 12-month period following the proposed dividend date, including investment
and expansion plans, the parties to the shareholders agreement agree that all
funds reasonably available for distribution to shareholders shall be distributed
by way of a dividend, or other form of distribution approved by the board. No
such dividend or distribution may be declared or paid any time at which Omnitel
has outstanding any loans from third parties except in compliance with the terms
of any loan agreement between Omnitel and such third-party lender.
NONCOMPETITION. Under the shareholders agreement, the parties and their
affiliates, and their respective directors, officers and key employees and those
of their affiliates are not to invest in any company that is a competitor of
Omnitel in Lithuania. Competitor is defined to include the operation of a
cellular radio telephone voice and data network, provision of international
gateway services, operation of a wired public data network, operation of a radio
paging system, offering of services providing customer access to satellite
communications networks, provision of international private line services and
provision of satellite earth station services. No person is considered a
competitor solely by virtue of the fact that such person manufactures or sells
telecommunications infrastructure equipment or subscriber units in Lithuania.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes restrictions
with respect to the sale, transfer or other disposition of Omnitel's capital
stock. The shareholders have waived their rights of first refusal with respect
to this offering and a divestiture by Motorola of our common stock. However, a
transfer of either Propel shares or our shares in Omnitel to a competitor of
Telia or Sonera triggers rights of first refusal. If the rights of first refusal
are triggered, we must give the other shareholders written notice of our
intention to sell, along with a copy of the third-party offer. The remaining
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shareholders have the option to buy our shares at the price proposed by the
third-party offer or as otherwise agreed. If there is no good faith third party
offer for the Omnitel shares because the triggering sale is of Propel shares, we
must deliver notice to the other shareholders and include the proposed sale
price of our shares. The remaining shareholders may accept the offered price or
call for an appraisal of the shares. No transfer is allowed to any competitor of
Omnitel in Lithuania, and any transfer is subject to government and regulatory
approvals.
JORDAN
GENERAL. We are party to a shareholders agreement relating to our ownership
of 26.1% of Pella Investment Company, a holding company which holds all of the
outstanding common stock of Fastlink. The other parties to that agreement are
Pioneers for Investment, which is owned by Orascom, with 65.5%, Sulaiman Abdul
Abanami, with 3.5%, and Mobile Telecommunications Company, with 4.9%.
MANAGEMENT. Under the terms of the shareholders agreement among the
shareholders of Pella Investment Company, Pella's board of directors is composed
of five members. Two directors are appointed by us and three by the other
shareholders. Fastlink's five-member board of directors is appointed by Pella.
We control two board seats, Orascom controls two board seats and there is one
director-at-large.
The approval of four Pella directors is required for Fastlink or Pella to:
- declare dividends;
- approve the annual business strategy and form of capital structure;
- approve agreements with terms of one year or more and with significant
expenditures and intellectual property licenses and contracts;
- approve material personnel policies, including labor discussions or
contracts;
- incur significant indebtedness or guarantees;
- approve the general manager and elect the chairman of the board;
- redeem or cancel securities;
- delegate board authority and grant powers of attorney; and
- change powers of officers, and approve material transactions with
officers, directors or affiliates.
The approval of holders of 83% of Pella shares then outstanding is required
for Fastlink or Pella to:
- amend its memorandum of association or articles or change the size of the
board;
- change its nationality or corporate purpose;
- decrease its share capital;
- appoint auditors or change its fiscal year;
- change its principal office; and
- voluntarily windup or liquidate or enter into significant corporate
transactions;
DIVIDENDS. Subject to the projected financing requirements of Pella over
the 12-month period following the proposed dividend date, including repayment of
debt, investment and expansion plans, the shareholders agree that all funds
reasonably available for distribution to shareholders are to be distributed by
way of a dividend, or other form of distribution approved by the shareholders.
NONCOMPETITION. Under the shareholders agreement, the shareholders, their
affiliates, and all of their directors, officers and key employees agree not to
engage in any business in Jordan which
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operates a cellular radio-telephone system in the 800 or 900 MHz bands. This
noncompete provision remains in effect for two years after a shareholder or any
of its affiliates ceases to be a shareholder of Pella other than by virtue of a
liquidation of Pella. Notwithstanding this provision, each shareholder is
authorized to manufacture or sell cellular radio-telephone infrastructure
equipment or subscriber units in Jordan. Cellular radio-telephone system is
defined as a telecommunications system that provides mobile telephone service
using radio frequencies and cellular technology, composed of cellular switching
offices, base stations, a means of transmission, mobile subscriber units and
other technical elements.
RESTRICTIONS ON TRANSFER. If we wish to sell our Pella shares to a third
party, we must give written notice to the board of directors, indicating the
proposed price. If the other shareholders believe that the price offered is more
than the fair price for our shares, the board of directors may object to the
sale and the controller may appoint an expert committee to estimate the value of
the shares. No transfer is allowed to any competitor or to any person who is
prohibited by law or regulation from being a participant in the holder of the
license or if the transfer would result in grounds for revocation of the
license. A competitor is defined as any entity operating a cellular
radio-telephone system or manufacturing cellular radio telephone equipment. The
shareholders of Pella have waived the restrictions imposed by the shareholders
agreement and their rights of first refusal so that neither the trading of our
shares on any public market, nor the acquisition, by any legal means, of any or
all of our shares by any person or entity, will trigger any right or option on
the part of any shareholder, to purchase our shares of Pella, regardless of the
diminishing ownership interest of Motorola in us.
AZERBAIJAN
GENERAL. Our operating company, Bakcell, is owned 25% by the Azeri Ministry
of Communications and 75% by a British Virgin Islands holding company, GTIB, in
which we, Havacom and Alfa Telecom each own a 33.33% interest.
MANAGEMENT. Under the terms of the Bakcell Statutes and Joint Venture
Charter, the board of directors of Bakcell is composed of six members. By
agreement of the owners, however, the Bakcell board of directors is currently
composed of four members, with one member nominated by each of Propel, Havacom,
Alfa Telecom and the Azeri Ministry of Communications. Under the terms of the
amended shareholders agreement of GTIB, the board of directors of GTIB is to be
composed of six members, two nominated by each of Propel, Havacom and Alfa
Telecom. A simple majority is required on all matters brought before both the
Bakcell and GTIB boards of directors.
DIVIDENDS. Under the GTIB shareholders agreement and subject to the
projected financial requirements of GTIB over the 12-month period following the
date at which a dividend payment is being considered, including investment and
expansion plans, all funds reasonably available will be distributed by way of a
dividend or other form of distribution approved by the shareholders. The GTIB
board must approve the dividend. Havacom is entitled to a preferential dividend
of up to $15.3 million. We believe, to date, GTIB has declared and paid a
dividend to Havacom totaling $7.65 million. After the payment in full of this
preferential amount, future dividends will be apportioned pro rata among the
shareholders.
NONCOMPETITION. Under the GTIB shareholders agreement, the parties agree
that neither they nor their affiliates, directors, officer or key employees or
those of their affiliates will engage in any business which operates a
terrestrial-based cellular phone service in Azerbaijan. Shareholders and their
affiliates, directors and officers are subject to this provision for two years
after they cease to be shareholders for any reason other than liquidation of
GTIB.
RESTRICTIONS ON TRANSFER. The amended shareholders agreement of GTIB
imposes various restrictions on the transfer of shares. However, this agreement
includes a provision allowing the disposition by Motorola of its interest in
GTIB without triggering any of the transfer restrictions. If we
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wish to sell our GTIB shares to an unaffiliated third party, we must deliver
written notice to the other shareholders of our intention, along with a copy of
a bona fide offer, if any. The remaining shareholders have the option to buy our
shares at the price proposed by the prospective buyer or the price proposed by
us if no good faith offer is received. If the remaining shareholders disagree
with the price proposed by us, they may have the shares appraised. Under the
GTIB shareholders agreement, no transfer is allowed to any competitor of GTIB in
Azerbaijan who operates a cellular radio telephone service in Azerbaijan or
manufacturers cellular or paging equipment. No transfer is allowed to any person
who is prohibited by law or regulation from being a participant in the holder of
the license or if the transfer would result in grounds for revocation of the
license. The Bakcell Joint Venture Charter agreements impose various
restrictions on the transfer of ownership by its owners, GTIB and the Ministry
of Communications.
ASIAN OPERATIONS
HONG KONG
GENERAL. We are party to a shareholders agreement relating to our 25.1%
ownership of HTCL common stock. The other parties to that agreement are
Hutchison International Limited, a wholly owned subsidiary of Hutchison Whampoa,
with 55.9% and HTCL Holdings, formerly known as Distacom, with 19.0%. NTT DoCoMo
recently purchased HTCL Holdings.
MANAGEMENT. Under the terms of the shareholders agreement, HTCL's board is
composed of seven members, including two directors appointed by us, three
directors appointed by Hutchison, one director appointed by NTT DoCoMo and one
director appointed by the board.
Unanimous approval of the board is required to:
- approve the business plan;
- approve contracts with significant expenditures;
- approve agreements longer than three years; and
- approve employment contracts with any general manager, financial
controller or technical manager.
A majority of the board members must approve recommendations to:
- declare or pay dividends;
- delegate board powers, unless reserved to shareholders or unanimous board;
- approve ordinary course of business matters and transactions not reserved
to the shareholders or unanimous board resolution; and
- approve agreements with officers, directors, or affiliates of officers and
directors other than senior management.
Unanimous approval of the shareholders is required to:
- enter into significant corporate transactions;
- declare and pay dividends;
- amend HTCL's memorandum or articles of association;
- make loans to shareholders or affiliates;
- appoint or remove auditors;
- voluntarily windup or liquidate HTCL; and
- decide capital structure.
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DIVIDENDS. Under the shareholders agreement, if HTCL's cash or cash
equivalents exceed its net anticipated cash requirements by more than
HK$25,000,000 for the three months following a proposed dividend date, all
profits of HTCL available for distribution to the shareholders are to be
distributed by way of a dividend, or if such dividends cannot be paid by HTCL
due to legal requirements, by such other legal means as its board of directors
unanimously agree.
NONCOMPETITION. Under the shareholders agreement, the parties agree that
they will not and their affiliates, directors, officers and employees will not
directly or indirectly carry on or be interested in any business in Hong Kong
competitive with the business of HTCL. This prohibition remains in effect for
two years after a shareholder or any of its affiliates ceases, for any reason
other than a liquidation, to be a shareholder of HTCL. HTCL's business is
defined as operating a public mobile radio-telephone service in Hong Kong.
RESTRICTIONS ON TRANSFER. Although the shareholders agreement does not
prohibit indirect transfers of our interest in HTCL, it does impose restrictions
with respect to the sale, transfer or other disposition of the capital stock of
HTCL. A transfer of shares to a third party triggers preemption provisions under
HTCL's articles of association. If we wish to sell our shares in HTCL, we must
notify the other shareholders of our intention and include a copy of a bona fide
offer. The remaining shareholders have the option to purchase the shares at the
price prescribed in the bona fide offer, agree to the terms of the transfer to
the proposed buyer or locate an acceptable buyer for the shares. If the
remaining shareholders do not buy the shares, do not reach agreement regarding
the proposed buyer or do not locate an alternative buyer, the shareholders agree
to use their best efforts to find a purchaser for all HTCL's shares who is
willing to pay a price that reflects the value of HTCL as a going concern.
Although we believe no waiver is required for us to effect this offering or for
Motorola to effect a divestiture of our common stock, we are seeking
confirmation of this from the other shareholders.
PAKISTAN
GENERAL. We are party to a shareholders agreement relating to our 30.0%
ownership of Mobilink. The other parties to that agreement are Saif Telecom
(PVT) Ltd., with 11.3% ownership through Rayshield Investments, and
International Wireless Communications Pakistan Limited, which is partially owned
by Orascom, with 58.7%.
MANAGEMENT. Under the terms of the shareholders agreement, Mobilink's board
of directors is composed of ten members, including three directors appointed by
us, six directors appointed by International Wireless Communications Pakistan
Limited and one director appointed by Saif Telecom (PVT) Ltd.
An affirmative vote of 80% of the board is required to elect the chairman.
Approval of shareholders holding 80% of outstanding shares is required to:
- enter into significant corporate transactions;
- voluntarily wind up or liquidate Mobilink;
- publicly offer shares of Mobilink;
- decide capital structure;
- approve agreements with terms of one year or more and significant
expenditures;
- incur indebtedness and guarantees;
- settle any excess claims;
- annually approve the five-year business plan;
- approve significant related party transactions;
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- delegate shareholder authority and grant powers of attorney;
- approve negotiations relating to labor relations, collective bargaining
and personnel policies;
- make significant loans;
- change the number of directors and appointment the president and executive
director of finance;
- redeem, offer or cancel any securities and declare and pay dividends or
distributions; and
- amend the articles of association.
DIVIDENDS. Subject to any agreement or restriction binding Mobilink to the
contrary and applicable laws, and provided that Mobilink has paid down any
third-party debt that is supported by shareholder guarantees not proportional to
any guaranteeing shareholder's equity interest in Mobilink and repaid all
outstanding shareholder loans, the shareholders agree that Mobilink is to
distribute all of its surplus cash. The board recommends the amount of surplus
cash available for distribution based upon the board's analysis of future
funding needs and a formula provided in the agreement.
NONCOMPETITION. Under the shareholders agreements, the shareholders agree
that they and their associates will not, and will use reasonable endeavors to
ensure that their directors and their associates, officers and key employees,
shareholders and associates of shareholders will not, engage in any business in
Pakistan which provides, or participates in providing, telecommunications
services directly competitive with the businesses undertaken by Mobilink. This
noncompete provision remains in effect for two years after a shareholders ceases
to be a shareholder for any reason other than liquidation of Mobilink. Business
directly competitive with Mobilink includes GSM, PCN, PCS, CDMA, AMPS and other
forms of cellular wireless technology, long distance services related to mobile
telephony and any other mobile telephony services. The supply of cellular,
two-way radio, both conventional and trunking, and radio paging equipment,
either infrastructure or subscriber units are not considered competitive with
the business of Mobilink.
RESTRICTIONS ON TRANSFER. The shareholders agreement imposes numerous
restrictions with respect to the sale, transfer or other disposition of
Mobilink's capital stock. A change of a control of a shareholder triggers a
right of first refusal. However under a side agreement, the other shareholders
have waived the right of first refusal in connection with this or any other
public offering and a divestiture by Motorola of our common stock as well as any
private placement by any shareholder of Mobilink's shares, provided it is to a
strategic investor. Strategic investor is defined as a person or entity that is
directly or indirectly engaged in the provision of telecommunications services
for profit or an associate of one which regularly invests in telecommunications
in other similar infrastructure projects. All other dispositions of stock would
trigger the right of first refusal. If we wish to sell our shares in Mobilink,
we must notify the other shareholders of our intention, the price at which we
wish to privately sell our shares and a copy of any good faith offer for the
shares. If the remaining shareholders disagree with the prescribed price, either
the third-party offer price or our proposed price, they may have the shares
appraised. Unless all the shareholders agree, no transfer of shares is allowed
to any competitor of Mobilink. No transfer is allowed to any person who is
prohibited by law or regulation from being a participant in the holder of the
license held by Mobilink or if the transfer would result in grounds for
revocation of this license.
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REGULATION
The following is a summary of the regulatory environment under which each of
our operating companies offers services.
LATIN AMERICAN OPERATIONS
MEXICO
OVERVIEW. The Mexican cellular telephony service market was opened in 1990
with the privatization of Telmex, the state owned telecommunications monopoly.
As a result, Telcel was granted a nationwide cellular license. In addition, the
country was divided into nine regions and a bidding process took place for a
second cellular license in each region. Our operating companies in Mexico,
Bajacel, Movitel, Norcel, Cedetel and Portatel, obtained their cellular licenses
in this process.
REGULATORY BODIES AND ENFORCEMENT. The Secretary of Communications and
Transportation and the Federal Telecommunications Commission, or Cofetel, are
the government agencies in charge of regulating the wireless communications
companies in Mexico.
LICENSES. We have been granted licenses to provide wireless telephony in
five regions in Mexico. The terms of the licenses are 20 years, which can be
extended by the submission of an application by the licensee. The license can be
revoked for frequent breaches of the conditions set forth in the license,
including suspending service without just cause, bankruptcy of the licensee or
for not paying license fees. Under the terms of their licenses, our operating
companies in Mexico are required to pay a royalty in semi-annual installments in
an amount equal to five percent to ten percent of revenues.
INTERCONNECTION. The Mexican telecommunications law obligates all
telecommunications network licensees to execute interconnection agreements when
requested by other licensees.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. Mexican law places restrictions on
foreign participation in certain telecommunications industries. In the case of
cellular telephony, foreign investment is limited to 49%, subject to waiver by
the Mexican Foreign Investments Commission. The terms of our licenses provide,
among other things, that foreign investment in voting stock cannot be higher
than 49% and that the assignment of the license requires the approval of the
Secretary of Communications and Transportation. We have received an approval
from the Foreign Investments Commission permitting our direct ownership of
greater than 49% of Norcel and Cedetel. In May 2000, we entered into agreements
with shareholders of Bajacel to purchase their interests in Bajacel, which will
result in our direct economic ownership of Bajacel increasing to 100% and our
direct and indirect economic ownership in Movitel increasing to 90.0% upon the
completion of this transaction. We are waiting approval for this acquisition
from the Secretary of Communications and Transportation.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. A Mexican company may remit
dividends and profits outside of Mexico if it meets certain distribution and
legal reserve requirements. Dividends paid by our Mexican operating companies to
their U.S. shareholders are subject to a 10% withholding tax unless the
companies chose to pay Mexican corporate income tax on the net earnings from
which the dividends are being paid. Interest paid by the companies to U.S.
residents is also subject to a 10% withholding tax. For more restrictions on our
ability to receive dividends, see "Dividend Policy."
ARGENTINA
OVERVIEW. Argentina privatized its national telephone monopoly, ENTEL, in
1990. Movicom Argentina operated under a permit granted in 1988 as the only
private sector telecommunications company in Argentina prior to ENTEL'S
privatization. Since 1990, licenses have been granted to providers of a wide
range of telecommunication services. Currently, public telephony and rural
telephony are each in full competition. A subsidiary of Movicom Argentina holds
one of four existing
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basic telephony licenses for local and long distance national and international
services. Twenty more basic regional telephony licenses have been granted which
will allow the holders to start providing service as of November 2000.
REGULATORY BODIES/ENFORCEMENT. Argentine telecommunications providers
operate under the supervision of the Communications Secretary, the office
responsible for rulemaking, and the Comision Nacional de Comunicaciones, which
interprets and implements the rules established by the Communications Secretary.
LICENSES. In 1995, Movicom Argentina's permit was converted to a licence to
operate its wireless telecommunications network in Buenos Aires. Movicom
Argentina also acquired a license in June 1999 to build and operate a PCS
network nationwide. The PCS license may not be revoked unless Movicom Argentina
fails to meet certain operational performance targets. Movicom Argentina also
has licenses to provide trunking, paging and data transmission services.
Movicom Argentina is subject to special telecommunications and spectrum use
monthly fees equal to 0.5% of Movicom Argentina's monthly cellular service gross
revenues. In addition, Movicom Argentina pays a monthly fee per subscriber,
depending upon the service plan the subscriber selects. Other taxes are paid for
microwave and cell sites.
INTERCONNECTION. Under Argentine law, operators of mobile telephone
services have the right to enter calls into the networks of other operators at
any point, and allow such operators to interconnect directly with the other
mobile telephone services operators.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. We believe there are no government
restrictions on our ability to transfer our ownership interests in Movicom
Argentina and there are no significant restrictions on foreign ownership of
telecommunications companies or the repatriation of earnings from
such ownership.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. Under current law, Argentine
currency is freely convertible into U.S. dollars, and Argentina has a free
exchange market for all foreign currency transactions. Under applicable
Argentine corporate law, dividends may be paid only from liquid and realized
profits as shown on the company's financial statements prepared in accordance
with Argentine generally accepted accounting principles. Five percent of such
profits must be set aside until a reserve equal to 20% of the company's capital
stock has been established. Subject to these requirements, the balance of
profits may be declared as dividends and paid in cash pursuant to a majority
vote of the shareholders. Under current law, there is a 15.05% withholding tax
on interest payments which arise from loans obtained abroad from banks which are
included on the list of countries following the banking supervision
rules established by the Basilea Bank Committee or where the borrowers are
regulated financial entities. In other cases, there is a 35% withholding tax on
interest payments. There is no withholding tax on dividends. For more
restrictions on our ability to receive dividends, see "Our Relationships with
Our Operating Companies--Argentina--Dividends."
RECENT REGULATORY DEVELOPMENTS. On June 23, 1999, the Communications
Secretary enacted new regulations regarding telecommunications licenses. Under
these regulations, in order to obtain a general license for basic telephony
service:
- the applicant must evidence a net worth equivalent to US$100,000,000; and
- the applicant must have, directly or indirectly, as a shareholder, a local
partner with a minimum shareholding of 10% of the company's capital stock.
This local partner must evidence certain technical and economic
qualifications.
On June 9, 2000, a Presidential Instruction was issued, under which the
telecommunications regulations in Argentina are expected to be changed. The
purpose of the instruction is to guarantee the
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complete deregulation and free competition of telecommunications services in
Argentina beginning November 9, 2000. The instruction sets forth a maximum term
of 30 days to comply with all administrative procedures. It is contemplated that
the rules to be enacted will cover the following:
- licenses of telecommunications services;
- national interconnection;
- universal service; and
- administration of the spectrum.
BRAZIL
OVERVIEW. The privatization of the Brazilian telecommunications sector
started in 1997 with the issuance of ten cellular licenses in the B band,
covering all of Brazil, auctioned to wireless operators who were to compete
against the eight incumbent providers, who were privatized in 1998, and three
other independent providers, all of which operate in the A band.
REGULATORY BODIES/ENFORCEMENT. Brazilian telecommunications law is
administered by the National Telecommunications Agency, known as ANATEL, which
operates in conjunction with the Ministry of Communications, but has its own
administrative independence and financial autonomy.
LICENSES. Global Telecom has a license to provide wireless
telecommunications services in the 800 MHz frequency range. The license was
granted in 1998 for $792 million and expires in 2013.
INTERCONNECTION. Licensees and incumbent providers are obliged by law to
grant interconnection between their network and the mobile phone network. ANATEL
must approve the interconnection agreements and also is empowered to resolve any
disputes arising from the interconnection agreements.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. Under the terms of Global
Telecom's license, holders of at least 51% of Global Telecom's voting shares
must be Brazilian persons or entities. According to ANATEL's interpretation of
the applicable regulations, there is no restriction on indirect foreign
ownership of those shares. All of Global Telecom's shares are held by or through
Brazilian companies. Therefore, Global Telecom is currently deemed to be 100%
owned by Brazilian persons or entities.
Under Brazilian law, if a company owns more than 20% of the shares of a
cellular service provider, or otherwise participates in control of such
concessionaire, it may not hold 20% of the shares or participate in the control
of another licensed cellular telephone concessionaire in the same area.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. The purchase and sale of foreign
currency in Brazil is subject to governmental control. In order to repatriate
capital in foreign currency, a Brazilian company must register the foreign
investment with the Central Bank of Brazil within 30 days of the date which the
funds are exchanged in Brazil for local currency. The Central Bank of Brazil, in
turn, issues a confirming Certificate of Registration, which allows the
Brazilian company to remit dividends to the foreign investor and to repatriate
capital in foreign currency. The majority of the capital of our Brazilian
subsidiary through which any dividends are expected to be transferred is under
registration with the Brazilian monetary authorities, and Global Telecom intends
to structure future capital contributions to Brazilian subsidiaries to maximize
the amount of share capital and dividends that can be repatriated through the
commercial financial exchange market. There can be no assurance that the
shareholders of Global Telecom can repatriate share capital and dividends on
foreign investments, through the commercial financial exchange market, if they
have not been registered with the Central Bank of Brazil for that purpose.
Brazilian law provides that whenever there is a material imbalance or a
serious risk of a material imbalance in Brazil's balance of payments, the
Brazilian government may, for a limited period of time,
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impose restrictions on the remittance by Brazilian companies of the proceeds of
investments in Brazil to foreign investors. The Brazilian government may also
impose restrictions on the conversion of Brazilian currency into foreign
currency. Any such restrictions may hinder or prevent Global Telecom from
purchasing equipment required to be paid for in any currency other than
Brazilian reals. Under current law, dividends are currently not subject to
withholding tax and remittances of interest payments to nonresidents are subject
to withholding tax rates varying from 12.5% to 25% depending on applicable tax
treaties. The standard withholding rate is 15%. For more restrictions on our
ability to receive dividends, see "Our Relationships with Our Operating
Companies--Brazil--Dividends" and "Dividend Policy."
CHILE
OVERVIEW. Chile privatized its public local telephone company in 1986 and
its public long distance carrier in 1987. In 1997, three 1900 MHz PCS mobile
telephone service concessions were granted. ETP, our operating company in Chile,
has two subsidiaries who each hold one of these national 1900 MHz PCS mobile
telephone service concessions.
REGULATORY BODIES/ENFORCEMENT. The main regulatory agencies of the Chilean
telecommunication sector are the Ministry of Transportation and
Telecommunication and the Under-Secretary of Telecommunications.
LICENSES. As a general rule, telecommunication concessions are granted in
Chile without a fee. However, wireless operators are subject to an annual duty
based on the size of their system, spectrum used and authorized service area.
Wireless operators may freely determine the tariffs or fees charged to their
subscribers. Concessions for the provision of mobile telephone service are
granted for a 30-year period, renewable for identical periods if requested by
the concessionaire.
INTERCONNECTION. Wireless and long distance operators are obliged to
establish and accept interconnections according to the technical rules,
procedures and terms established by the Under-Secretary of Telecommunications on
a fixed-fee basis.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. Mobile telephone concessions may
be assigned, transferred or leased only with the prior authorization of the
Under-Secretary of Telecommunications, which cannot be denied without reasonable
cause. Licensees may only be legal entities incorporated and domiciled in Chile.
However, there is no restriction or limitation on the participation or ownership
of foreign investors in Chilean telecommunications companies.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. Chilean pesos are freely convertible
into U.S. dollars through the foreign exchange market provided the transferee
has registered with the Chilean Central Bank according to Chapter XIV of the
Foreign Exchange Regulations or has executed a foreign investment agreement with
the State of Chile according to the foreign investment statute. Under that
statute, capital invested in Chile may not be remitted outside of Chile earlier
than one year after the investment, although earnings may be remitted at any
time. No restrictions on time to remit investment outside Chile are currently in
place. Dividends may only be paid out of earned income as determined in
accordance with Chilean generally accepted accounting principles. For more
restrictions on our ability to receive dividends, see "Our Relationships with
Our Operating Companies--Chile--Dividends."
RECENT REGULATORY DEVELOPMENTS. The Under-Secretary of Telecommunications
has issued a new technical rule to distribute additional spectrum of 30 MHz
among the current licensed operators that are limited in their subscriber
loading capacities, such as CTC Comunicaciones Moviles S.A., which is owned by
Telefonica BellSouth Comunicaciones S.A., which is controlled by BellSouth
International, and eventually Smartcom PCS S.A., which is owned by Endesa.
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DOMINICAN REPUBLIC
OVERVIEW. The Dominican government adopted a policy of liberalization of
the telecommunications sector beginning in the late 1980s. In 1990, the
Dominican government granted Tricom a concession to provide a full range of
national and international telecommunications services. The Dominican
telecommunications sector is currently regulated by a law enacted in May 1998.
REGULATORY BODIES/ENFORCEMENT. The Dominican telecommunications industry is
regulated by the Dominican Institute of Telecommunications (INDOTEL).
LICENSES. Tricom has entered into a concession agreement with the Dominican
government under which Tricom holds a nonexclusive license to establish,
maintain and operate a national and international telecommunications system.
Licensed services include telegraphy, radio communications, paging, cellular and
local, domestic and international telephone services. The concession agreement
and the license granted under it last until June 30, 2010 and are renewable
automatically, at no charge, for 20-year periods unless, at least three years
prior to the end of the then existing term, either Tricom or the Dominican
government advises each other of its intention not to renew.
Under the terms of its concession agreement, Tricom makes payments to the
Dominican government in lieu of income tax of RD $18 million (approximately U.S.
$1.2 million) or 10% of its net revenues whichever is greater. These
arrangements are based on a 1996 agreement with the Dominican government, which
has not been validated by the Dominican Congress. The Dominican Constitution
requires all agreements related to tax exemptions to be approved by Congress. If
those provisions are not approved by the Dominican Congress, the Dominican
Congress could invalidate those provisions relating to taxes and may require the
payment of a tax of 25% on its adjusted net income, the current rate generally
applicable to Dominican corporate taxpayers.
INTERCONNECTION. Dominican law encourages competition in all
telecommunications services by enforcing the right to interconnect with existing
participants and protecting against monopolistic practices. In May 1994, Tricom
entered into an interconnection agreement with Codetel, the Dominican national
telecommunications provider, which has an indefinite term and requires each of
the parties to provide access to the other party's network on equal,
nondiscriminatory and transparent terms, and obligates each party to provide to
the other any terms or conditions more favorable that it subsequently provides
to any other telecommunications entity. This interconnection agreement has in
the past been the subject of extensive litigation between Codetel and Tricom.
However on January 2, 1998, Tricom and Codetel signed an addendum to the
interconnection agreement which resolved all disputes between Tricom and Codetel
that were then being arbitrated.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no government
restrictions on our ability to transfer our ownership interests in Tricom. There
are no significant restrictions on foreign ownership of telecommunications
companies or the repatriation of earnings from such ownership.
FOREIGN EXCHANGE/DIVIDENDS. Under Dominican law, Dominican pesos are
convertible into U.S. dollars at one of the following two rates:
- The official rate is the rate at which companies in certain strategic
industries, including the telecommunications industry, are required to
surrender revenues received in foreign currency to the Central Bank for
Dominican pesos. Accordingly, every U.S. dollar Tricom receives as
revenues must be surrendered to the Central Bank at the official rate
unless otherwise authorized by the Central Bank.
- The private market rate is the rate at which Tricom purchases the foreign
currency it needs to pay foreign suppliers or otherwise to meet its
obligations abroad. According to current regulations, all purchases of
foreign currency from private commercial banks must be reported daily to
the Central Bank. This requirement permits the Central Bank to supervise
and keep
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statistics on the private market rate but does not give the Central Bank
direct control over the private exchange rate. The Central Bank is
entitled to receive a 5% commission on all purchases of foreign currency
to be remitted abroad.
Under Dominican law, only shareholders may authorize the declaration and
payment of dividends. Shareholders are entitled to receive dividends in
proportion to their respective capital participation, subject to adjustment as
provided in the bylaws. Dividends are payable only from after-tax profits, and
only after Tricom has set aside at least 5% of its annual profits as a legal
reserve until such reserve equals 10% of paid-in capital. For more restrictions
on our ability to receive dividends, see "Our Relationships with Our Operating
Companies--Dominican Republic--Dividends" and "Dividend Policy."
U.S. TELECOMMUNICATIONS REGULATION. Tricom is subject to extensive
regulation by the U.S. Federal Communications Commission in connection with its
international long distance services. This regulation covers, among other
things, accounting rates or settlement rates, which are the amount of payment
negotiated between carriers for the termination of international telephone
calls. Tricom is authorized by the FCC to provide facilities-based voice, data
and private line services between the United States and various international
points, including the Dominican Republic and has been approved by the FCC to
communicate from the United States with 186 countries via satellite and with 28
countries via fiber optic submarine cables.
URUGUAY
OVERVIEW. Uruguay does not have a comprehensive system of
telecommunications regulation. The minimal regulations that do exist relate to
assignment of radioelectric frequencies, which falls under the jurisdiction of
the National Communications Office and the National Telecommunications
Administrator, or ANTEL.
Over the last two years, the Executive Branch has authorized a broad range
of data telecommunication services, including data networks in the 1900 MHz and
10.5 GHz bands and LMDS and teleports for data services.
Until recently, the Uruguayan telecommunications market was monopolized by
ANTEL. Movicom Uruguay's entry into the market was through a contract with
ANTEL.
REGULATORY BODIES/ENFORCEMENT. Uruguayan telecommunication providers
operate under the supervision of the National Communications Commission. ANTEL
also plays a regulatory role with respect to interconnection terms and
conditions to the fixed network.
LICENSES. In 1989, Movicom Uruguay entered into a contract with ANTEL to
provide mobile cellular telephony services to the southern region of Uruguay. In
1990, ANTEL assigned to Movicom Uruguay spectrum in the 800 MHz band to provide
mobile cellular telephony.
Movicom Uruguay has been granted additional frequency for the supply of
mobile cellular telephony services in the 1900 MHz band. The expected launch of
the CDMA 1900 network is mid-2000.
In 1999, Movicom Uruguay was authorized to provide wireless data
transmission services nationwide. At the end of 1999, Movicom Uruguay also was
awarded an LMDS block of frequencies in the 26-27 GHz band.
Finally, under a contract with ANTEL, Movicom Uruguay operates an Internet
service provider.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no government
restrictions on our ability to transfer our ownership interest in Movicom
Uruguay. There are no significant restrictions on foreign ownership of
telecommunications companies or the repatriation of earnings from such
ownership.
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FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. There are no government restrictions
on converting Uruguayan pesos into U.S. dollars. Under Uruguayan law, 5% of the
annual profits reported in statutory financial statements must be allocated to a
legal reserve until it equals 20% of the issued capital. The reserve is not
available for distribution. In addition, dividends are limited to the profits
reported in the statutory financial statements expressed in Uruguayan pesos. For
more information on our ability to receive dividends, see "Our Relationships
with Our Operating Companies--Uruguay--Dividends."
RECENT REGULATORY DEVELOPMENTS. Under new regulations, the National
Communications Office is currently auctioning two blocks of frequencies for
trunking services. Bid conditions have not yet determined.
EUROPE/MIDDLE EAST OPERATIONS
ISRAEL
OVERVIEW. The Israeli telecommunications market is in a state of
transition, moving to a more liberalized environment in which various markets,
such as the mobile, international long distance services, domestic markets and
infrastructure are gradually being opened to competition and in which
government-owned monopolies are anticipated to be privatized.
REGULATORY BODIES/ENFORCEMENT. The Israeli telecommunications industry is
regulated by the Ministry of Communications and is governed by the
Telecommunications Law and related regulations.
LICENSE. Beginning in 1986, Pelephone provided wireless services under a
build, operate and transfer agreement with Bezeq. On February 7, 1996, the
Ministry of Communications granted Pelephone a revised license to establish and
operate a mobile telephone network in Israel. The license is valid for a period
of ten years from January 1, 1994. It may be extended for additional six-year
periods upon Pelephone's request to the Ministry of Communications and review by
the Ministry of Communications to determine that Pelephone has met specified
performance requirements. The renewal of the license is subject to the
discretion of the Ministry of Communications, which may elect to change,
restrict, suspend or terminate the license.
Pelephone must pay royalties to the government of Israel every quarter at
the rate of eight percent of Pelephone's service revenues net of interconnect
charges. Under the license, Pelephone's standard agreement with subscribers must
receive Ministry of Communications approval. Pelephone has submitted its
standard agreement to the Ministry of Communications for approval. The agreement
is still under review by the Ministry of Communications. Pelephone has been
using this standard agreement with its subscribers for several years.
The license requires Pelephone to submit to the Ministry of Communications
its tariffs and any changes in its existing tariffs, but it does not require
approval of those tariffs or changes to tariffs. The Ministry of Communications,
however, may intervene if it finds that Pelephone tariffs unreasonably harm
consumers or competition. The license specifies fees Pelephone may charge its
subscribers for one-time installation, fixed monthly payments, airtime, payments
for the use of other telecommunication systems, payments for handset maintenance
and payments for additional services.
Mobile telephone subscribers in Israel are not charged for incoming calls,
except while roaming. Rather, the charge for incoming domestic calls is borne by
the Israeli network on which the call originated or from which the call was
transferred. This is referred to as "calling party pays." Pelephone is currently
permitted to charge higher tariffs for calls that originate on other networks
than for calls placed by its own subscribers. The Ministry of Communications has
recently proposed regulations that would set the tariff to be charged by all
operators in Israel for incoming calls. If enacted, these new regulations would
require Pelephone to reduce the amount it charges for incoming airtime, which
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would have a material adverse effect on Pelephone's results of operations. This
proposed regulation replaces the previous proposal for all operators to charge
equal tariffs for incoming and outgoing calls.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. Pelephone's license provides that
no direct or indirect control of Pelephone may be acquired or transferred
without the consent of the Ministry of Communications. Furthermore, no direct or
indirect holding of 10% or more of the means of control of Pelephone may be
transferred or acquired at any one time or through a series of transactions,
without the consent of the Ministry of Communications. We are currently seeking
the approval of the Israeli government for the initial contribution of our
Israeli businesses to us from Motorola, as well as for this offering and
Motorola's planned distribution of our common stock to Motorola stockholders.
There can be no assurance that we will receive this approval. Pelephone, any
officer of Pelephone, or any person that holds more than 5% of Pelephone's
voting stock is not allowed to hold more than 1% of the voting stock, directly
or indirectly, in another wireless operator in Israel. In addition, Pelephone
may not be part of any agreement, arrangement or understanding with another
operator in Israel, which tends to or may cause a limitation or a decrease in
competition of mobile telephone services.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. New Israeli shekels are now freely
exchangeable for U.S. dollars, subject to a reporting obligation to the Bank of
Israel. Under current law, dividends may be freely repatriated subject to
payment of applicable Israeli taxes. For more restrictions on our ability to
receive dividends, see "Our Relationships with Our Operating
Companies--Israel--Dividends."
OTHER REGULATORY ISSUES. Pelephone and the other operators are subject to
extensive regulation in the placement and operation of its wireless
communications equipment, including antennas and cell towers, by the Ministry of
the Environment and local building committees and authorities. These regulations
and regulatory bodies make the placement of antennas and cell towers
significantly more complicated than in countries where such matters are less
highly regulated.
Pelephone has erected a significant number of antennas without securing
proper building permits from local authorities. This has resulted in the filing
of criminal charges and civil proceedings by some Israeli municipalities against
Pelephone and its officers and directors.
EGYPT
OVERVIEW. Telecom Egypt, the government-owned one-time monopoly provider of
telecommunications services, launched its GSM 900 service in November 1996. In
November 1997, the Egyptian government began a program to privatize Telecom
Egypt's GSM business and created the Egyptian Company for Mobile Services, or
MobiNil. In March 1998, the government offered 30% of MobiNil's shares on the
Cairo and Alexandria Stock Exchange, and sold another 68% of MobiNil to our
consortium, MFT. This transaction was completed in May 1998. MobiNil has a
five-year tax holiday which expires in 2003.
REGULATORY BODIES/ENFORCEMENT. The National Telecommunications Organisation
of the Arab Republic of Egypt, or ARENTO, is both the monopoly wireline
telecommunications operator and regulator. It focuses on technical targets for
expanding wireless network coverage and quality. Telecom Egypt, together with
other government entities, is responsible for designing policies and development
plans for the telecommunications sector.
LICENSES. A GSM license was issued to MobiNil in April 1998 for an up-front
license fee of U.S. $516 million. At the same time, a second GSM license was
awarded to an international consortium called Misrfone which paid the same
initial license fee. Each of the licenses has a term of 15 years and is
extendable for an additional five years without payment of material additional
fees. The licenses allow for a duopoly period until December 2002. Any new
license issued must be on broadly the same terms as the existing two licences,
including an annual license fee payment and an initial fee indexed to inflation.
We anticipate that a license may be issued to a third operator by the end of
2002.
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INTERCONNECTION. MobiNil has interconnection agreements with all
significant telecommunications operators in Egypt.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no government
restrictions on our ability to transfer our ownership interests in MobiNil.
There are no significant restrictions on foreign ownership of telecommunications
companies or the repatriation of earnings from such ownership.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. There are no significant government
restrictions on converting Egyptian pounds into U.S. dollars, however there are
occasional shortages of U.S. dollars in Egypt. For more restrictions on our
ability to receive dividends, see "Our Relationships with Our Operating
Companies--Egypt--Dividends" and "Dividend Policy."
LITHUANIA
OVERVIEW. The Republic of Lithuania Telecommunications Law applies to both
fixed and mobile telecommunications and grants the monopoly fixed
telecommunications operator, Lietuvos Telekomas, exclusive rights to operate a
general fixed phone communication network, and provide services using this
network, until December 31, 2002. Lietuvos Telekomas is 90% privatized. The
first licenses to provide GSM service were granted in 1995.
REGULATORY BODIES/ENFORCEMENT. The primary Lithuanian telecommunications
regulatory body is the Ministry of Communications. We expect that, in the near
future, all principal regulatory functions will be transferred to the
Communications Regulatory Authority.
LICENSES. Telecommunications licenses are generally issued by way of
tender. The license itself regulates various aspects of the telecommunications
activity in question, including scope of activity, technical and quality
requirements, pricing and procedure for certification of equipment. Licenses are
issued for a period of no longer than ten years and may be extended with
government approval. Omnitel has a ten-year license to provide GSM services
until 2005. In addition, Omnitel has a GSM 1800 license which was granted in
1998. Any of Omnitel's licenses may be renewed under the license's existing
terms and conditions or other terms mutually agreed to by the Ministry of
Communications and Omnitel, if at least 15 months prior to the expiration of the
license, Omnitel applies to the Ministry of Communications for renewal of the
license and no grounds exist that may prevent the license renewal. Grounds which
would prevent license renewal include if the license terms and conditions have
been constantly violated, the stamp duty for renewal has not been paid prior to
the expiration of the existing license or if it has been decided to undertake
new international obligations, changing the technical requirements for licensed
telecommunications activities. The Ministry of Communications is to notify
Omnitel not less than one year prior to the expiration of the license of its
decision regarding license renewal.
INTERCONNECTION. Omnitel has interconnection agreements with all
significant telecommunications operators in Lithuania. Under the
Telecommunications Law, operators of general telecommunications networks are
obligated to connect other operators' networks to their own. This obligation
must be discharged within three months of an application for interconnection.
Terms of interconnection agreements may not conflict with general conditions of
connection of telecommunications networks.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no government
restrictions on our ability to transfer our ownership interests in Omnitel.
There are no significant restrictions on foreign ownership of telecommunications
companies or the repatriation of earnings from such ownership.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. There are no significant government
restrictions on converting Lithuanian litas into U.S. dollars. According to
Foreign Currency Purchase, Sale and Exchange Rules of 1993, as amended,
Lithuanian litas may be converted into U.S. dollars at a fixed rate.
Repatriation of dividends is subject to a 29% withholding tax, applicable to all
foreign legal
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entities. According to the U.S.-Lithuanian Double Taxation/Fiscal Violation
Treaty, this withholding tax, subject to limitations and qualifications
contained in the treaty, may not exceed five percent of the total sum of
dividends if paid to a holder of at least 10% of the outstanding voting shares
of the company paying the dividend, or 15% of the aggregate dividend paid, in
all other cases. Litas are currently pegged to the U.S. dollar at a rate of
four-to-one. For more restrictions on our ability to receive dividends, see "Our
Relationships with Our Operating Companies--Lithuania--Dividends" and
"Dividend Policy."
OTHER REGULATORY ISSUES. Omnitel benefits from a statutory tax holiday
under Lithuanian law. Under this law, Omnitel was exempt for five years from
Lithuanian income taxes until June 30, 1999, and after this date is only subject
to income taxes at half the regular rate of tax until June 30, 2002. Thereafter,
it is subject to the full regular rate.
JORDAN
OVERVIEW. Jordan began the privatization of its telecommunications sector
in 1995. The Jordanian telecommunications law contains the regulatory
rules governing telecommunications activities, including mobile telephone
services. The operations, rights and obligations of Fastlink are subject to and
regulated by the Jordanian telecommunications law.
REGULATORY BODIES/ENFORCEMENT. The Telecommunications Regulatory Commission
was established by the Jordanian telecommunications law to govern the provision
of telecommunications services including licensing.
LICENSES. The granting of telecommunication services licenses are through
public tender. The Jordanian telecommunications law allows the
Telecommunications Regulatory Commission to determine royalties, sharing of
revenues and fees to be paid by the licensees. Fastlink's license expires in
2009. The terms of renewal for Fastlink's license are subject to negotiations,
which may be called by either party two years prior to October 30, 2009. For the
year 2000, the operating license fee is JD 100,000, or approximately $140,000.
For subsequent years, the increase, if any, in the operating license fee shall
represent Fastlink's proportional share of the budgeted annual operating
expenses of the Telecommunications Regulatory Commission, plus amortized amounts
of capital expenditure, incurred by the Telecommunications Regulatory Commission
in regulatory operations related to the service provided by Fastlink, excluding
radio spectrum management costs.
INTERCONNECTION. Fastlink has an interconnection agreement with the
national wireline service provider in Jordan.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no government
restrictions on our ability to transfer our ownership interests in Fastlink.
There are no significant restrictions on foreign ownership of telecommunications
companies or the repatriation of earnings from such ownership.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. There are no significant government
restrictions on converting Jordanian dinar into U.S. dollars. For more
restrictions on our ability to receive dividends, see "Our Relationships with
Our Operating Companies--Jordan--Dividends."
AZERBAIJAN
OVERVIEW. Generally, the telecommunications industry in Azerbaijan remains
largely state controlled, although we believe privatization plans may be
developed later this year. However, the cellular communications sector of the
telecommunications industry is an exception to this rule. Currently, two
cellular communication providers operate in Azerbaijan, the first of which
commenced its operations in 1994.
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REGULATORY BODIES/ENFORCEMENT. The Ministry of Communications regulates
telecommunications in Azerbaijan. The Ministry of Communications administers
Azerbaijan's communications law and is responsible for issuing most types of
telecommunications licenses. In addition, the State Radio Frequencies Commission
is authorized to issue radio frequency use permits to telecommunication
businesses.
LICENSES. Bakcell has a license, issued by the Ministry of Communications,
to provide wireless telecommunications services in the 900 MHz frequency range.
The license was granted in May 1996 and is valid until January 1, 2016, and is
renewable for 20-year periods.
INTERCONNECTION. Bakcell has an interconnection agreement with the
state-owned telephone company, Aztelecom, which allows mutual network access,
including access to Aztelecom's international and inter-city switches and its
domestic subscribers.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no restrictions on
foreign ownership of telecommunications companies or the repatriation of
earnings from such ownership. The communications law recognizes the right of
foreign individuals and legal entities to own and operate telecommunication
facilities, networks and devices.
FOREIGN EXCHANGE/DIVIDENDS LIMITATIONS. Companies organized under
Azerbaijani law are subject to Azerbaijan's currency control law, which is
administered by Azerbaijan's central bank, the National Bank of Azerbaijan. The
currency control law allows the National Bank of Azerbaijan to place
restrictions on transactions involving payment in foreign currency on terms of
more than 180 days for orders placed abroad and on certain advance payments made
in foreign currency for goods ordered from abroad. There are also certain
restrictions on transfers of funds in foreign currency designated for the
purchase of foreign securities, direct foreign investment and ownership of
immovable property located abroad. At present, the National Bank of Azerbaijan
has not exercised its right to impose these restrictions. Payment of dividends
is not restricted by the currency control legislation or by the communications
law but dividend payments are generally subject to a 15% withholding tax rate
although this rate varies according to the terms of various double-taxation
treaties. For more restrictions on our ability to receive dividends, see "Our
Relationships with Our Operating Companies--Azerbaijan--Dividends" and
"Dividend Policy."
ASIA OPERATIONS
HONG KONG
OVERVIEW. Hong Kong was one of the first cities in the world to establish
wireless communications services. Hong Kong's wireless communications market has
been private from inception and is highly competitive, with six wireless
operators currently providing services.
REGULATORY BODIES/ENFORCEMENT. The Telecommunications Authority of Hong
Kong is the principal telecommunications regulator in Hong Kong and is
responsible for administering the Hong Kong telecommunication law.
The Office of the Telecommunications Authority, or OFTA, assists the
Telecommunications Authority in administering and enforcing the provisions of
the Hong Kong telecommunications law, including regulating and licensing
telecommunication network services. The Hong Kong Information Technology and
Broadcasting Bureau is responsible for providing the necessary regulatory
framework and setting standards for the telecommunications industry in Hong Kong
as well as promoting the information technology, Internet, broadcasting and film
industries.
LICENSES. Under the Hong Kong telecommunications law, companies that
establish and maintain a means of telecommunication in Hong Kong are, subject to
certain exemptions, required to obtain a
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licence from the Hong Kong Telecommunications Authority. Under the current Hong
Kong telecommunications regulatory regime, a mobile communications business
requires a Public Radiocommunications Services, or PRS, license.
A PRS licence is non-exclusive and the licensee must operate in a manner
satisfactory to the Hong Kong Telecommunications Authority in accordance with
the specifications contained in the license.
INTERCONNECTION. HTCL has interconnection agreements with all significant
telecommunications operators in Hong Kong.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no government
restrictions on our ability to transfer our ownership interests in HTCL. There
are no significant restrictions on foreign ownership of telecommunications
companies or the repatriation of earnings from such ownership.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. There are no significant government
restrictions on converting Hong Kong dollars into U.S. dollars or the payment or
repatriation of dividends. For more restrictions on our ability to receive
dividends, see "Our Relationships with Our Operating Companies--Hong
Kong--Dividends" and "Dividend Policy."
RECENT REGULATORY DEVELOPMENTS. The Legislative Council of Hong Kong has
passed the Telecommunication (Amendment) Ordinance 2000 which has been in force
since June 16, 2000. The ordinance aims to strengthen the pro-competition powers
of the Hong Kong Telecommunications Authority. The ordinance introduces, for the
first time, laws in the telecommunications sector prohibiting specified
anti-competitive practices, giving the Telecommunications Authority power to
regulate interconnection activity and regulating access rights to ensure the
ability of wireless communications companies to place the equipment necessary
for the operation of their networks. In March 2000, the Hong Kong
Telecommunications Authority issued an industry consultation paper seeking
public views on the future licensing and regulatory framework for 3G mobile
services in Hong Kong.
PAKISTAN
OVERVIEW. The government of Pakistan started the deregulation of the state
controlled telecommunication industry with the issuance in the early 1990s of
three cellular mobile licenses, including one to Mobilink. These licenses were
issued for initial periods of 15 years, subject to termination for violation of
license terms. The licenses provide that during the initial period, no other
cellular licenses would be issued by the government of Pakistan. This
exclusivity, however, was subsequently withdrawn through an amendment to the
law, and a fourth license was issued to a subsidiary of Pakistan
Telecommunication Company Limited, or PTCL, which has announced that it will
commence service sometime in early 2001. In 1996, the Pakistani government began
the privatization of the Pakistani fixed line national telecommunications
system.
REGULATORY BODIES/ENFORCEMENT. The Pakistan Telecommunication Authority
regulates telecommunication services in Pakistan and is required by the
Pakistani telecommunication law to ensure that the rights of the licensees and
consumers are duly protected.
LICENSE. Mobilink has been granted a license to establish, maintain and
operate a cellular mobile telephone system within the territory of Pakistan. The
license expires in 2007 and may be renewed at the discretion of the government
of Pakistan and the Pakistan Telecommunication Authority subject to satisfactory
performance. Mobilink has also been issued licenses to establish, maintain and
operate trunked radio service and voice mail service. We anticipate that a
license to provide SMS will be issued shortly. Mobilink is required by license,
and the applicable laws, to maintain confidentiality of communications, unless
the Government requires interception for reasons of national security. In
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addition, Mobilink is required to pay a royalty of approximately four percent of
its gross sales revenue and approximately four percent of net profit after tax.
INTERCONNECTION. Mobilink has entered into an interconnect agreement with
PTCL, the exclusive provider of wireline telephone services in Pakistan. This
agreement entitles Mobilink to the benefit of any more favorable terms which may
be agreed upon by PTCL and other operators. The interconnect agreement comes up
for renewal in September 2000. In the event that PTCL refuses to renew this
agreement, recourse can be made to the Pakistan Telecommunication Authority,
which is authorized by the terms of the telecommunications law to provide
guidelines for and to determine the terms of interconnection arrangements
between licensees.
TRANSFER RESTRICTIONS/FOREIGN OWNERSHIP. There are no government
restrictions on our ability to transfer our ownership interests in Mobilink. The
license in favor of Mobilink recognizes the fact that there is substantial
foreign investment involved in Mobilink and expressly permits repatriation of
foreign capital and remittance of profits under Pakistani laws, including the
Foreign Exchange Regulation Act 1947 and the Foreign Private Investment
Promotion and Protection Act 1976. Under those statutes and the regulations
issued by the State Bank of Pakistan, shares of Mobilink held by nonresidents
are issued on a repatriable basis and can be transferred to other nonresidents
on the same basis, subject to the condition that consideration should be paid in
foreign currency outside of Pakistan.
FOREIGN EXCHANGE/DIVIDEND LIMITATIONS. The nonresident shareholders of
Mobilink, including us, are entitled to repatriate the proceeds out of Pakistan
if their shares are sold, and the dividend payments received on their shares, by
obtaining foreign currency through the State Bank of Pakistan Authorized
Dealers. For a period of time, starting in May 1998, the State Bank of Pakistan
stopped offering this facility but has now restored the facility. Pakistan also
has an open foreign exchange market in which its currency can be freely
converted into foreign currency. However, foreign currency is generally traded
in this legal open foreign exchange market at a premium from the official
exchange rate fixed/sanctioned by the State Bank of Pakistan Authorized Dealers.
Companies, such as Mobilink, are permitted by the Companies Ordinance 1984
to declare dividends out of their profits. Dividends are recommended by the
board of directors and are approved or declared by the shareholders. The
shareholders may not declare dividends in excess of the amount recommended by
the directors. Dividends paid to U.S. residents are subject to withholding tax
of 15%. For more restrictions on our ability to receive dividends, see "Our
Relationships with Our Operating Companies--Pakistan--Dividends" and "Dividend
Policy."
MONOPOLIES RESTRICTION. Under the 1970 Monopolies and Restrictive Trade
Practices Ordinance, the Monopolies Control Authority can require a private
company, such as Mobilink, having assets in excess of certain specified limits,
to convert itself into a public company in which no individual controls 50% or
more of the shares. Generally, due to judgments by the High Courts and recent
policy of the Government of Pakistan, the Monopolies Control Authority does not
require companies having substantial foreign equity to convert themselves into
public companies.
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PRINCIPAL STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
will be owned by Motorola. After this offering, Motorola will own approximately
% of the outstanding shares of our common stock, or about % if the
underwriters exercise their over-allotment option in full. Except for Motorola,
we are not aware of any person or group that will beneficially own more than 5%
of the outstanding shares of our common stock following this offering.
Motorola's executive offices are located at 1303 East Algonquin Road,
Schaumburg, Illinois 60196. Its telephone number is (847) 576-5000.
DESCRIPTION OF CAPITAL STOCK
Under our restated certificate of incorporation, our authorized capital
stock is shares, of which shares are common stock, par
value $0.01 per share, and shares are preferred stock, par value
$0.01 per share.
The following descriptions are summaries of the material terms of our
restated certificate of incorporation and bylaws. Reference is made to the more
detailed provisions of, and these descriptions are qualified in their entirety
by reference to, our restated certificate of incorporation and bylaws, copies of
which are filed with the SEC as exhibits to the registration statement of which
this prospectus is a part.
COMMON STOCK
Holders of our common stock will be entitled to one vote per share held of
record with respect to each matter presented to our stockholders on which the
holders of our common stock are entitled to vote. Subject to preferences granted
to outstanding series of preferred stock, if any, or as may otherwise be
required by law or the restated certificate of incorporation, the common stock
will be the only capital stock we issue which is entitled to vote in the
election of directors. The common stock will not have cumulative voting rights.
Subject to preferences granted to outstanding series of preferred stock, if
any, holders of our common stock are entitled to receive any dividends as may be
lawfully declared by our board of directors. Upon our liquidation, dissolution
or winding up, whether voluntary or involuntary, holders of our common stock
will be entitled to receive any assets that are available for distribution to
stockholders after payment of the full amounts necessary to satisfy any
preferential or participating rights of holders of each outstanding series of
preferred stock, if any.
Our outstanding shares of common stock are, and the shares of common stock
being offered in this offering will be upon payment therefor, fully paid and
nonassessable. Holders of our common stock will have no preemptive, subscription
or conversion rights. Our board may issue additional shares of authorized common
stock from time to time, without approval of our stockholders, except as
required by applicable stock exchange requirements.
PREFERRED STOCK
Our board has the authority, without approval of our stockholders, to cause
shares of preferred stock to be issued from time to time in one or more series.
The board may also fix the numbers of shares of each series and the designation,
powers, privileges, preferences and rights of the shares of each such series,
which may differ by series.
The issuance of preferred stock, while providing the desired 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, or
discourage a third party from attempting to acquire, a majority of our
outstanding voting stock. For example, a business combination could be impeded
by the issuance of a series of preferred stock containing class voting rights
that would enable the holder or holders of that series to
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block any proposed transaction. In addition, under some circumstances, the
issuance of preferred stock could adversely affect the voting power of the
holders of the common stock. Although our board is required to make any
determination to issue any series of preferred stock based on its judgment as to
the best interests of our stockholders, it could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of our stockholders might believe to be in their best interests or in which our
stockholders might receive a premium for their stock over prevailing market
prices. Our board does not at present intend to seek stockholder approval prior
to any issuance of currently authorized stock, unless otherwise required by law
or applicable stock exchange requirements.
No shares of preferred stock are currently outstanding, and we have no
current plans to issue any shares of preferred stock.
LIMITATION ON LIABILITY OF DIRECTORS
Our restated certificate of incorporation provides, as authorized by
Section 102(b)(7) of the Delaware General Corporation Law, or DGCL, that a
director of Propel will not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability imposed by law, as in effect from time to time:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the restated certificate of incorporation
may have the effect of reducing the likelihood of derivative litigation against
our directors, and may discourage or deter our shareholders or management from
bringing a lawsuit against our directors for breach of their duty of care, even
though an action, if successful, might otherwise have benefited us and
our stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We have elected to be governed by the provisions of Section 203 of the DGCL
following the time when Motorola directly or indirectly ceases to be the owner,
in the aggregate, of voting stock representing 50% or more of the votes entitled
to be cast by the holders of all of our then outstanding shares of voting stock.
Generally, 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 time such stockholder became an interested stockholder,
unless:
- prior to that time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- at or subsequent to such time, the business combination is approved by the
board of directors and authorized by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
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Under Section 203 of the DGCL, a business combination includes:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of the corporation, to or with the interested stockholder of
assets of the corporation having an aggregate market value equal to 10% or
more of either the aggregate market value of all the assets of the
corporation or the aggregate market value of all the outstanding stock of
the corporation;
- specified transactions resulting in the issuance or transfer by the
corporation of stock of the corporation to the interested stockholder;
- specified transactions involving the corporation which have the effect of
increasing the proportionate share of the stock of any class or series of
the corporation which is owned by the interested stockholder; or
- specified transactions in which the interested stockholder receives
financial benefits provided by the corporation.
Under Section 203 of the DGCL, an interested stockholder generally is
- any person that owns 15% or more of the outstanding voting stock of the
corporation;
- any person that is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period prior to the date on
which it is sought to be determined whether such person is an interested
stockholder; and
- the affiliates or associates of any such person.
Motorola and its affiliates, however, are excluded from the definition of
interested stockholder under the terms of Section 203. Under some circumstances,
Section 203 makes it more difficult for a person who would be an interested
stockholder to effect various business combinations with a corporation for a
three-year period.
MATERIAL PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Our bylaws contain provisions requiring that advance notice be delivered to
us of any business to be brought by any stockholder before an annual meeting of
stockholders and providing for certain procedures to be followed by our
stockholders in nominating persons for election to our board. Generally, such
advance notice provisions provide that the stockholder must give written notice
to our secretary not less than 90 days nor more than 120 days before the
scheduled date of our annual meeting of stockholders. The notice must contain
specific information regarding the stockholder and the business desired to be
brought before the meeting or information regarding the proposed director
nominee, as described in the bylaws. This provision of our bylaws does not apply
to Motorola and its affiliates while it and its affiliates own more than a
majority of our common stock.
Our restated certificate of incorporation provides that, except as may be
provided therein or in the resolution or resolutions providing for the issuance
of any series of preferred stock, the number of directors shall be fixed from
time to time exclusively pursuant to a resolution adopted by a majority of the
whole board as that term is defined in our restated certificate of
incorporation, but shall not be less than three. Our restated certificate of
incorporation provides for a classified board of directors, consisting of three
classes as nearly equal in size as practicable. Each class holds office until
the third annual stockholders' meeting for election of directors following the
most recent election of such class, except that the initial terms of the three
classes expire at the annual meeting of stockholders in 2001, 2002 and 2003,
respectively. For more information regarding our directors, see "Management--
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Directors and Executive Officers of Propel." Until the time when Motorola and
its affiliates own less than a majority of our outstanding stock, which we refer
to as the trigger date, a director of Propel may be removed with or without
cause. After the trigger date a director may be removed only for cause.
Our restated certificate of incorporation provides that after the trigger
date stockholders may not act by written consent in lieu of a meeting. After the
trigger date, special meetings of our stockholders may be called only by the
board and may not be called by the stockholders. The bylaws may be amended by
the board or at any annual or special meeting of the stockholders by the
affirmative vote of the holders of at least a majority of the aggregate voting
power of our outstanding capital stock entitled to vote, provided that amendment
of specified provisions of the bylaws require the affirmative vote of the
holders of at least 66 2/3% of the voting power of our outstanding capital stock
entitled to vote in the election of directors, which we refer to as the voting
stock.
Our restated certificate of incorporation also contains a fair price
provision that applies to specified business combination transactions involving
any person or group that has announced or publicly disclosed a plan or intention
to become the beneficial owner of at least 10% of our outstanding voting stock,
other than Motorola until immediately following the date on which Motorola shall
cease to be a beneficial owner of 10% of the outstanding voting stock. The fair
price provision requires the affirmative vote of the holders of at least 66 2/3%
of the voting stock not beneficially owned by the interested stockholder or the
approval by a majority of our continuing directors, as defined in our restated
certificate of incorporation, to approve business combination transactions
between the interested stockholder and Propel or its subsidiaries, or approve
any agreement or other arrangement providing for such business combination
transactions, including:
- any merger or consolidation;
- any sale, lease, exchange, mortgage, pledge, transfer or other disposition
or other arrangement with or for the benefit of the interested shareholder
involving the assets of Propel or its subsidiaries having a fair market
value of $25 million or more;
- the adoption of any plan or proposal for our liquidation or dissolution or
any change to or exchange of our capital stock; and
- specified reclassifications of our securities or our recapitalization.
This voting requirement will not apply to transactions, including any
transaction involving the payment of consideration to holders of our outstanding
capital stock in which the following conditions, among others, are met:
- the consideration to be received by the holders of each class of our
capital stock is at least equal to the greater of:
(x) the highest per share price paid for shares of such class by the
interested stockholder in the two years prior to the proposed
business combination or in the transaction in which it became an
interested stockholder, whichever is higher; or
(y) the fair market value of the shares of such class on the date of the
announcement of the proposed business combination or the date on
which it became an interested stockholder, whichever is higher; and
- the consideration to be received by the holders of each class of our
capital stock is in the same form and amount as that paid by the
interested stockholder in connection with its acquisition of that class of
capital stock.
This provision could have the effect of delaying or preventing a change in
control of Propel in a transaction or series of transactions that did not
satisfy the fair price criteria.
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The provisions of our restated certificate of incorporation relating to our
board of directors, the limitation of actions by our stockholders taken by
written consent, the calling of special meetings and other stockholder actions
and proposals, and the amendment of specified provisions of our bylaws by our
stockholders may be amended only by the affirmative vote of the holders of at
least 80% of the voting stock. The "fair price" provisions may be amended by the
affirmative vote of the holders of at least 66 2/3% of the voting stock,
excluding the interested stockholder, unless such amendment is unanimously
recommended by our Board of Directors, a majority of whom are continuing
directors.
The foregoing provisions of our restated certificate of incorporation and
bylaws, together with the provisions of Section 203 of the DGCL, could have the
following effects, among others:
- delaying, deferring or preventing a change in control;
- delaying, deferring or preventing the removal of existing management;
- deterring potential acquirors from making an offer to our stockholders;
and
- limiting any opportunity of our stockholders to realize premiums over
prevailing market prices of our common stock in connection with offers by
potential acquirors.
This could be the case notwithstanding that a majority of our stockholders might
benefit from such a change in control or offer.
MATERIAL TRANSACTIONS AND CORPORATE OPPORTUNITIES
Our restated certificate of incorporation sets forth various provisions
which regulate and define the conduct of our specified business and affairs,
from the time of the completion of the offering until the time Motorola ceases
to be the owner of at least 5% of the voting power that may be exercised by all
the outstanding shares of our common stock. These provisions serve to determine
and delineate our and Motorola's respective rights and duties, including
Motorola's affiliated companies, and of our specified directors and officers, in
anticipation that:
- those directors, officers and employees of Motorola may serve as our
directors;
- Motorola engages in and is expected to continue to engage in lines of
business that are the same, similar or related to, overlap or compete with
our lines of business; and
- we and Motorola will engage in material business transactions, including
without limitation pursuant to the WDS distribution agreement.
We may, from time to time, enter into and perform agreements with Motorola
to engage in any transaction, to compete or not to compete with each other or to
allocate, or to cause each of our respective directors, officers and employees
to allocate, corporate opportunities between themselves. Our restated
certificate of incorporation provides that no such agreement, or the performance
of any such agreement, shall be considered contrary to any fiduciary duty of
Motorola, as our controlling shareholder, any of its affiliates or of any of our
or our affiliates' directors, officers or employees who is also a director,
officer or employee of Motorola or any of its affiliates, if:
- that agreement was entered into before we ceased to be a wholly owned
subsidiary of Motorola and is continued in effect after that time; or
- the agreement or transaction was approved, after being made aware of the
material facts of the relationship between us and Motorola and the
material terms and facts of the agreement or transaction, by:
- our board of directors, by affirmative vote of a majority of directors
who are not persons or entities with a material financial interest in
the transaction, an interested person;
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- by a committee of our board of directors consisting of members who are
not interested persons, by affirmative vote of a majority of those
members; or
- by one or more of our officers or employees who is not an interested
person and who was authorized by our board of directors or committee
thereof, as outlined in the above subparagraphs; or
- the agreement or transaction was fair to us as of the time we entered into
it; or
- the agreement or transaction was approved by the affirmative vote of the
holders of a majority of the shares of our common stock entitled to vote,
excluding Motorola, any of its affiliates and any interested person.
The provisions of our restated certificate of incorporation with regard to
these transactions or corporate opportunities shall terminate at such time as
when Motorola shall cease to be the owner of at least 5% of the voting power
that may be exercised by all the outstanding shares of our common stock;
provided, however, that any termination shall not terminate the effect of these
provisions with respect to:
- any agreement between us and Motorola or any affiliated company that was
entered into before that time or any transaction entered into in the
performance of the agreement, whether entered into before or after that
time; or
- any transaction entered into between us and Motorola or any affiliated
company or the allocation of any opportunity between us before that time.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
The shares of our common stock sold in the offering, or shares if
the underwriters exercise their over-allotment option in full, will be freely
tradeable without restriction under the Securities Act, except for any shares
which may be acquired by an "affiliate" of Propel as that term is defined in
Rule 144 under the Securities Act, which shares will remain subject to the
resale limitations of Rule 144.
The shares of our common stock that will continue to be held by Motorola
after the offering constitute "restricted securities" within the meaning of
Rule 144, and will be eligible for sale by Motorola in the open market after the
offering, subject to certain contractual lockup provisions and the applicable
requirements of Rule 144, both of which are described below. We have granted
registration rights to Motorola. For more information about these rights, see
"Our Relationship with Motorola--Registration Rights Agreement."
Generally, Rule 144 provides that a person who has beneficially owned
restricted securities for at least one year will be entitled to sell on the open
market in brokers' transactions within any three-month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain post-sale notice requirements
and the availability of current public information about us.
In the event that any person other than Motorola who is deemed to be an
affiliate purchases shares of our common stock pursuant to the offering or
acquires shares of our common stock pursuant to our employee benefit plan, those
shares are required under Rule 144 to be sold in brokers' transactions, subject
to the volume limitations described above. Shares properly sold in reliance upon
Rule 144 to persons who are not affiliates are thereafter freely tradable
without restriction or registration under the Securities Act.
Sales of substantial amounts of our common stock in the open market, or the
availability of shares for sale, could adversely affect the market price of our
common stock. Motorola has announced that it currently plans to complete our
divestiture by distributing all of the shares of our common stock which it owns
to the holders of its common stock. The shares to be distributed by Motorola
will be eligible for immediate resale in the public market without restrictions
by persons other than our affiliates who would be subject to the restrictions of
Rule 144 described above other than the one-year holding period requirement.
LOCKUP AGREEMENTS
We and Motorola and all of our executive officers and directors and our
employees holding shares of common stock or options exercisable following this
offering have signed agreements under which we and they have agreed not to
transfer, dispose of or hedge, any shares of common stock or any securities
convertible into, exercisable or exchangeable for shares of common stock, for a
period of 180 days after the date of this prospectus without the prior consent
of the representatives of the underwriters.
RULE 701
In general, under Rule 701 of the Securities Act, each of our employees,
consultants or advisors who purchases shares from us in connection with a
compensatory share plan or other written agreement is eligible to resell these
shares 90 days after the effective date of this offering in reliance on
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<PAGE>
Rule 144, but without compliance with some restrictions, including the holding
period, contained in Rule 144.
STOCK OPTION PLANS
Following the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of common
stock reserved for issuance under our stock option plans. We intend to file the
registration statement as soon as possible after the completion of this
offering. Accordingly, shares registered under the registration statement will,
subject to vesting provisions, Rule 144 volume limitations and lockup
agreements, in each case, as applicable, be available for sale in the open
market immediately after the consummation of this offering.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement, upon completion of this
offering, Motorola, the holder of approximately shares of our common
stock, is entitled to request that we register their shares under the Securities
Act or have their shares included in a future registration statement, which we
may file. After these shares are registered, they will become freely tradable
without restriction under the Securities Act. Motorola has informed us that it
currently intends to divest itself of the remaining shares of our common stock
that it owns by distributing these shares to the holders of its common stock. A
distribution of a substantial amount of our common stock by Motorola could
adversely affect the market price of our stock. For a description of these
rights, see "Our Relationship with Motorola--Registration Rights Agreement".
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MATERIAL U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
GENERAL
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common stock
by a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is defined as
any person or entity that is, for U.S. federal income tax purposes, a foreign
corporation, a nonresident alien individual, a foreign partnership or a foreign
estate or trust. This discussion is based on currently existing provisions of
the Code, existing, temporary and proposed Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect or proposed on the date hereof and all of which are subject to change,
possibly with retroactive effect, or different interpretations. This discussion
is limited to Non-U.S. Holders who hold shares of our common stock as capital
assets within the meaning of section 1221 of the Code. Moreover, this discussion
is for general information only and does not address all of the tax consequences
that may be relevant to particular Non-U.S. Holders in light of their personal
circumstances, nor does it discuss certain tax provisions which may apply to
individuals who relinquish their U.S. citizenship or residence.
An individual may, subject to certain exceptions, be deemed to be a resident
alien as to the United States, as opposed to a nonresident alien, by virtue of
being present in the United States for at least 31 days in the calendar year and
for an aggregate of at least 183 days during a three-year period ending in the
current calendar year. For such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year are counted. Resident
aliens are subject to U.S. federal income tax as if they were U.S. citizens.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION, OR NON-U.S. TAXING JURISDICTION.
DISTRIBUTIONS
We do not intend to pay dividends on our common stock in the foreseeable
future. See "Dividend Policy." However, if distributions are paid on shares of
common stock, these distributions generally will constitute dividends for U.S.
federal income tax purposes to the extent paid from our current or accumulated
earnings and profits, as determined under U.S. federal income tax principles. To
the extent these distributions exceed those earnings and profits, the
distributions will constitute a return of capital that is applied against, and
will reduce, your basis in our common stock, but not below zero, and then will
be treated as gain from the sale of our stock. Dividends paid to a Non-U.S.
Holder of our common stock will be subject to withholding of U.S. federal income
tax at a 30% rate or such lower rate as may be specified by an applicable income
tax treaty. To claim the benefit of a lower federal income tax rate under an
income tax treaty, a Non-U.S. Holder of common stock must properly file with the
payor an IRS Form 1001 or Form W-8 BEN, or substitute form, claiming or
certifying to an exemption from or reduction in withholding under such tax
treaty.
Currently, withholding is generally imposed on the gross amount of a
distribution, regardless of whether we have sufficient earnings and profits to
cause the distribution to be a dividend for U.S. federal income tax purposes.
However, withholding on distributions made after December 31, 2000 may be on
less than the gross amount of the distribution if the distribution exceeds a
reasonable estimate made by us of our accumulated and current earnings and
profits.
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Any dividends paid on shares of common stock to a Non-U.S. Holder will not
be subject to withholding tax, but instead are subject to U.S. federal income
tax on a net basis at applicable graduated individual or corporate rates if:
- dividends are effectively connected with the conduct of a trade or
business by the Non-U.S. Holder within the United States and, where a tax
treaty applies, are attributable to a U.S. permanent establishment of the
Non-U.S. Holder; and
- an IRS Form 4224 or Form W-8 ECI, or substitute form certifying the
exemption, is filed with the payor.
Any such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional United States "branch
profits tax" at a rate of 30% or such lower rate as may be specified by an
applicable income tax treaty.
Unless the payor has knowledge to the contrary, dividends paid prior to
January 1, 2001 to an address outside the United States are presumed to be paid
to a resident of such country for purposes of the withholding discussed above
and for purposes of determining the applicability of a tax treaty rate. For
dividends paid after December 31, 2000, however, a Non-U.S. Holder generally
will be subject to U.S. backup withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or a reduced rate
under an income tax treaty, as described above, unless the Non-U.S. Holder
complies with Internal Revenue Service certification procedures, or, in the case
of payments made outside the United States with respect to an offshore account,
certain documentary evidence procedures, directly or under specified
circumstances through an intermediary, to obtain the benefits of a reduced rate
under an income tax treaty with respect to dividends paid after December 31,
2000. Special rules also apply to dividend payments made after December 31, 2000
to foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the U.S., the applicable income tax treaty
jurisdiction, or both.
A Non-U.S. Holder of common stock eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing a claim for refund with the IRS provided the
required information is furnished in a timely manner.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of common stock
unless:
(1) the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the United States and, where a tax treaty applies, is
attributable to a U.S. permanent establishment of the Non-U.S. Holder;
(2) in the case of a Non-U.S. Holder who is an individual and holds the
common stock as a capital asset, such holder is present in United States
for 183 or more days in the taxable year of the sale or other disposition
and certain other conditions are met; or
(3) Propel is or has been a "U.S. real property holding corporation," or a
"USRPHC", for U.S. federal income tax purposes at any time during the
shorter of the five year period ending on the date of the disposition or
the period during which the Non-U.S. Holder held the common stock, as
discussed below.
An individual Non-U.S. Holder who falls under clause (1) above will, unless
an applicable treaty provides otherwise, be taxed on his or her net gain derived
from the sale under regular graduated U.S. federal income tax rates. An
individual Non-U.S. Holder who falls under clause (2) above will be subject to a
flat 30% tax on the gain derived from the sale, which may be offset by certain
U.S. capital losses.
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A Non-U.S. Holder that is a foreign corporation falling under
clause (1) above will be taxed on its gain under regular graduated U.S. federal
income tax rates and may be subject to an additional branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable income tax treaty.
A corporation is a USRPHC if the fair market value of the U.S. real property
interests held by the corporation is 50% or more of the aggregate fair market
value of its U.S. and foreign real property interests and any other assets used
or held for use by the corporation in a trade or business. Based on its current
and anticipated assets, Propel believes that it has never been, is not
currently, and is likely not to become, a USRPHC. However, since the
determination of USRPHC status is based upon the composition of the assets of
Propel from time to time, and because there are uncertainties in the application
of certain relevant rules, there can be no assurance that Propel will not become
a USRPHC in the future. If Propel were to become a USRPHC, then gain on the sale
or other disposition of common stock by a Non-U.S. Holder generally would be
subject to U.S. federal income tax unless both
- the common stock was "regularly traded" on an established securities
market within the meaning of applicable Treasury regulations; and
- the Non-U.S. Holder actually or constructively owned 5% or less of our
common stock during the shorter of the five-year period preceding such
disposition or the Non-U.S. Holder's holding period.
Non-U.S. Holders should consult their tax advisors concerning any U.S. tax
consequences that may arise if Propel were to become a USRPHC.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual that is not a U.S.
citizen or resident of the United States (as determined under U.S. federal
estate tax laws) at the time of death will be included in such holder's gross
estate for U.S. federal estate tax purposes, and may be subject to U.S. federal
estate tax unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Propel must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the U.S. tax withheld with respect
to such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty or certain other
agreements.
Backup withholding is imposed at the rate of 31% on certain payments to
persons that fail to furnish identifying information to the payer. Backup
withholding generally will not apply to dividends paid prior to January 1, 2001
to a Non-U.S. Holder at an address outside the United States unless the payer
has knowledge that the payee is a U.S. person. In the case of dividends paid
after December 31, 2000, the recently finalized Treasury Regulations pertaining
to U.S. federal withholding tax provide that a Non-U.S. Holder generally will be
subject to withholding tax at a 31% rate unless specified IRS certification
procedures, or, in the case of payments made outside the United States with
respect to an offshore account, documentary evidence procedures, are complied
with, directly or under certain circumstances through an intermediary. Backup
withholding and information reporting generally will also apply to dividends
paid on common stock at addresses inside the United States to Non-U.S. Holders
that fail to provide identifying information in the manner required. These
recently finalized Treasury regulations for withholding provide presumptions
under which a Non-U.S. Holder would be subject to backup withholding and
information reporting unless certification from the holder of its status
is provided.
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Payment of the proceeds of a sale of common stock effected by or through a
U.S. office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner provides the payer with its name and
address and certifies under penalties of perjury that it is a Non-U.S. Holder,
or otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
common stock by or through a foreign office of a broker. If, however, such
broker is, for U.S. federal income tax purposes, a U.S. person, a controlled
foreign corporation, or a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, or, in addition, for periods after December 31, 2000, a foreign
partnership that at any time during its tax year either is engaged in the
conduct of a trade or business in the United States or has as partners one or
more U.S. persons that, in the aggregate, hold more than 50% of the income or
capital interest in the partnership, such payments will be subject to
information reporting, but not backup withholding, unless such broker has
documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and other specified conditions are met or the beneficial owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against the Non-U.S. Holder's U.S. federal
income tax liability provided the required information is furnished in a timely
manner to the IRS.
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UNDERWRITING
Propel and the underwriters for the U.S. offering named below, the "U.S.
underwriters," have entered into an underwriting agreement with respect to the
shares being offered in the United States. Subject to certain conditions, each
U.S. underwriter has severally agreed to purchase the number of shares indicated
in the following table. Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated are the representatives of the U.S. underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co..............................
Morgan Stanley & Co. Incorporated................
Total..........................................
=================
</TABLE>
If the U.S. underwriters sell more shares than the total number set forth in
the table above, the U.S. underwriters have an option to buy up to an additional
shares from Propel to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the U.S.
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the U.S. underwriters by Propel. Such amounts are
shown assuming both no exercise and full exercise of the U.S. underwriters'
option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Propel
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................ $ $
Total............................ $ $
</TABLE>
Shares sold by the U.S. underwriters to the public will initially be offered
at the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the U.S. underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price.
Any such securities dealers may resell any shares purchased from the U.S.
underwriters to certain other brokers or dealers at a discount of up to
$ per share from the initial public offering price. If all the shares
are not sold at the initial offering price, the representatives may change the
offering price and the other selling terms.
Propel has entered into underwriting agreements with the underwriters for
the sale of shares outside of the United States. The terms and conditions
of both offerings are the same and the sale of shares in both offerings are
conditioned on each other. Goldman Sachs International and Morgan Stanley & Co.
International Limited are representatives of the underwriters for the
international offering outside the United States as the international
underwriters. Propel has granted the international underwriters a similar option
to purchase up to an aggregate of an additional shares.
The underwriters for both of the offerings have entered into an agreement in
which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a
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part of a distribution of the shares. The underwriters also have agreed that
they may sell shares among each of the underwriting groups.
Propel and Motorola have agreed with the underwriters not to dispose of or
hedge any of their common stock or securities convertible into or exchangeable
for shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of the representatives. This agreement does not
apply to any existing employee benefit plans. See "Shares Eligible for Future
Sale" for a discussion of certain transfer restrictions.
Prior to the offerings, there has been no public market for the shares. The
initial public offering price has been negotiated among Propel and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Propel's historical performance, estimates of the business
potential and earnings prospects of Propel, an assessment of Propel's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
We will apply for quotation of the common stock on the Nasdaq National
Market under the symbol "PRPL."
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from Propel in the offering. The
underwriters may close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the open market.
"Naked" short sales are any sales in excess of such option. The underwriters
must close out any naked short position by purchasing shares in the open market.
A naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of various bids for
or purchases of common stock made by the underwriters in the open market prior
to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of Propel's
stock, and together with the imposition of the penalty bid may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the Nasdaq, in
the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Propel estimates that its share of the total expenses of the offerings,
excluding underwriting discounts and commissions, will be approximately
$ .
Propel has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
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This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside of the
United States, to persons located in the United States.
From time to time, Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated have provided, and continue to provide, investment banking services
to Motorola, Propel and some of the operating companies for which they have
received customary fees and commissions.
LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters will be passed upon for Propel by Kirkland & Ellis, a partnership
including professional corporations, Chicago, Illinois. Certain legal matters
will be passed upon for the underwriters by Shearman & Sterling, New York,
New York.
EXPERTS
The consolidated financial statements of Propel, Inc. and subsidiaries as of
December 31, 1998 and 1999 and for each of the years in the three year period
ended December 31, 1999, have been included in the registration statement, of
which this prospectus forms a part, in reliance upon the report of KPMG LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG LLP indicates reliance on
other auditors with respect to financial statements of certain affiliates of
Propel that are accounted for in Propel's consolidated financial statements
using the equity method of accounting, as indicated in their report. Such report
indicates that it is subject to the consummation of the transaction described in
Note 18 of the notes to the consolidated financial statements.
The financial statements of Compania de Radiocomunicaciones Moviles S.A. as
of December 31, 1998 and 1999, and for each of the years in the three-year
period ended December 31, 1999, have been included in the registration statement
of which this prospectus forms a part in reliance upon the report of
PricewaterhouseCoopers, independent auditors, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Baja Celular Mexicana, S.A. de C.V. as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, have been included in the registration statement of
which this prospectus forms a part in reliance upon the report of
Mancera-Ernst & Young International, independent auditors, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Entel Telefonia Personal S.A. as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, have been included in the registration statement of
which this prospectus forms a part in reliance upon the report of
Deloitte & Touche, independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Tricom, S.A. as of December 31, 1998 and 1999,
and for each of the years in the three-year period ended December 31, 1999, have
been included in the registration statement of which this prospectus forms a
part in reliance upon the report of KPMG, independent auditors, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Global Telecom S.A. as of December 31, 1998 and
1999, and for the period from inception on April 8, 1998 and the year ended
December 31, 1999, have been included in the registration statement of which
this prospectus forms a part in reliance upon the report of KPMG Auditors
Independantes, independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
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The financial statements of Abiatar S.A. as of December 31, 1998 and 1999,
and for each of the years in the three-year period ended December 31, 1999, have
been included in the registration statement of which this prospectus forms a
part in reliance upon the report of PricewaterhouseCoopers, independent
accountants, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Pelephone Communications Ltd. as of
December 31, 1998 and 1999, and for the period from inception on May 5, 1998
through December 31, 1998 and the year ended December 31, 1999, have been
included in the registration statement of which this prospectus forms a part in
reliance upon the report of Somekh Chaikin (a member firm of KPMG
International), independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of MobiNil For Telecommunications as of
December 31, 1998 and 1999, and for each of the years in the two-year period
ended December 31, 1999, have been included in the registration statement of
which this prospectus forms a part in reliance upon the report of KPMG Hazem
Hassan, independent auditors, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of UAB Omnitel as of December 31, 1998 and 1999,
and for each of the years in the three-year period ended December 31, 1999, have
been included in the registration statement of which this prospectus forms a
part in reliance upon the report of KPMG Lietuva, independent auditors, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Pella Investment Company as of December 31, 1998
and 1999, and for each of the years in the three-year period ended December 31,
1999, have been included in the registration statement of which this prospectus
forms a part in reliance upon the report of Saba & Co., independent auditors,
and upon the authority of said firm as experts in accounting and auditing.
The financial statements of Hutchison Telephone Company Limited as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, have been included in the registration statement of
which this prospectus forms a part in reliance upon the report of
PricewaterhouseCoopers, independent auditors, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG indicates that
Tricom S.A. changed its method of accounting for reorganization costs effective
January 1, 1999.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement, of which this prospectus is a part, under the
Securities Act relating to the common stock we are offering. This prospectus
does not contain all of the information that is in the registration statement.
For further information with respect to the company and its common stock, you
should refer to the registration statement and its exhibits and schedules. You
may review and copy our registration statement, including its exhibits and
schedules at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Information on the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, such as us, that file electronically
with the SEC.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROPEL, INC. AND SUBSIDIARIES............................... F-1-1
Report of Independent Auditors............................ F-1-3
Consolidated Balance Sheets as of December 31, 1998 and
1999 and March 31, 2000 (unaudited)..................... F-1-4
Consolidated Statements of Operations for 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000
(unaudited)............................................. F-1-5
Consolidated Statements of Changes in Shareholder's Equity
(Deficit) for 1997, 1998 and 1999 and the three months
ended March 31, 1999 and 2000 (unaudited)............... F-1-6
Consolidated Statements of Cash Flows for 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000
(unaudited)............................................. F-1-7
Notes to Consolidated Financial Statements................ F-1-8
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A. AND
SUBSIDIARY................................................ F-2-1
Report of Independent Accountants......................... F-2-3
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-2-4
Consolidated Statements of Income for the years ended
December 31, 1997, 1998
and 1999................................................ F-2-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1998 and 1999.... F-2-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999........................ F-2-7
Notes to the Consolidated Financial Statements............ F-2-9
BAJA CELULAR MEXICANA, S.A. DE C.V.......................... F-3-1
Report of Independent Auditors............................ F-3-3
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-3-4
Consolidated Statements of Income for 1997, 1998 and
1999.................................................... F-3-6
Consolidated Statements of Changes in Stockholders' Equity
for 1997, 1998 and 1999................................. F-3-7
Consolidated Statements of Changes in Financial Position
for 1997, 1998 and 1999................................. F-3-8
Notes to Consolidated Financial Statements................ F-3-9
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES.............. F-4-1
Independent Auditors' Report.............................. F-4-3
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-4-4
Consolidated Statements of Income for 1997, 1998 and
1999.................................................... F-4-6
Consolidated Statements of Cash Flows for 1997, 1998 and
1999.................................................... F-4-7
Notes to the Consolidated Financial Statements............ F-4-9
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TRICOM, S.A. AND SUBSIDIARIES............................... F-5-1
Independent Auditors' Report.............................. F-5-3
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-5-4
Consolidated Statements of Operations for the Years ended
December 31, 1997,
1998 and 1999........................................... F-5-6
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1997, 1998 and 1999............ F-5-7
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997,
1998 and 1999........................................... F-5-8
Consolidated Balance Sheet as of December 31, 1999 and
March 31, 2000 (unaudited).............................. F-5-9
Consolidated Statement of Operations Three Months ended
March 31, 1999 and 2000 (unaudited)..................... F-5-11
Consolidated Statement of Cash Flows Three Months Ended
March 31, 1999 and 2000 (unaudited)..................... F-5-12
Notes to Consolidated Financial Statements (unaudited).... F-5-13
GLOBAL TELECOM S.A.......................................... F-6-1
Independent Auditors' Report.............................. F-6-3
Balance Sheets as of December 31, 1998 and 1999........... F-6-4
Statements of Operations for the period from inception on
April 8, 1998 to December 31, 1998 and the year ended
December 31, 1999....................................... F-6-5
Statements of Changes in Shareholders' Equity and
Comprehensive Income for the period from inception on
April 8, 1998 to December 31, 1998 and the year ended
December 31, 1999....................................... F-6-6
Statements of Cash Flows for the period from inception on
April 8, 1998 to December 31, 1998 and the year ended
December 31, 1999....................................... F-6-7
Notes to the Financial Statements......................... F-6-8-17
ABIATAR S.A................................................. F-7-1
Report of Independent Accountants......................... F-7-3
Balance Sheets at December 31, 1998 and 1999.............. F-7-4
Statements of Income for the years ended December 31,
1997, 1998 and 1999..................................... F-7-6
Statements of Changes in Stockholders' Equity for the
years ended
December 31, 1997, 1998 and 1999........................ F-7-7
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999..................................... F-7-8
Notes to the Financial Statements......................... F-7-9
PELEPHONE COMMUNICATIONS LTD................................ F-8-1
Independent Auditors' Report.............................. F-8-3
Balance Sheets as of December 31, 1998 and 1999........... F-8-4
Statements of Income--Consolidated and of the Company for
1997, 1998 and 1999..................................... F-8-6
Statement of Shareholders' Equity for 1997, 1998 and
1999.................................................... F-8-7
Statements of Cash Flows--Consolidated and of the
Company................................................. F-8-8
Notes to the Financial Statements......................... F-8-11
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MOBINIL FOR TELECOMMUNICATIONS AND SUBSIDIARIES............. F-9-1
Independent Auditors' Report.............................. F-9-3
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-9-4
Consolidated Statements of Income for the period May 5 to
December 31, 1998 and the year ended December 31,
1999.................................................... F-9-5
Consolidated Statements of Changes in Shareholders' Equity
for the period May 5 to December 31, 1998 and the year
ended December 31, 1999................................. F-9-6
Consolidated Statements of Cash Flows for the period
May 5 to December 31, 1998 and the year ended
December 31, 1999....................................... F-9-7
Notes to the Consolidated Financial Statements............ F-9-8
UAB OMNITEL................................................. F-10-1
Independent Auditors' Report.............................. F-10-3
Balance Sheets as of December 31, 1998 and 1999........... F-10-4
Statements of Income for the years ended December 31,
1997, 1998 and 1999..................................... F-10-5
Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended December 31,
1997, 1998 and 1999..................................... F-10-6
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999..................................... F-10-7
Notes to the Financial Statements......................... F-10-8
PELLA INVESTMENT COMPANY.................................... F-11-1
Independent Auditors' Report.............................. F-11-3
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-11-4
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999........................ F-11-6
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1998 and 1999.... F-11-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999........................ F-11-8
Notes to Consolidated Financial Statements................ F-11-9
HUTCHISON TELEPHONE COMPANY LIMITED AND SUBSIDIARY.......... F-12-1
Report of Independent Auditors............................ F-12-3
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-12-4
Consolidated Statements of Operations for the three years
ended December 31, 1997,
1998 and 1999........................................... F-12-5
Consolidated Statements of Changes in Shareholders'
Equity/(Deficit) for the three
years ended December 31, 1997, 1998 and 1999............ F-12-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997, 1998 and 1999.................. F-12-7
Notes to Consolidated Financial Statements................ F-12-9
</TABLE>
F-3
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998, and 1999
(With Independent Auditors' Report Thereon)
F-1-1
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-1-3
Consolidated Balance Sheets................................. F-1-4
Consolidated Statements of Operations....................... F-1-5
Consolidated Statements of Stockholder's Equity and
Comprehensive Income (Loss)............................... F-1-6
Consolidated Statements of Cash Flows....................... F-1-7
Notes to Consolidated Financial Statements.................. F-1-8
</TABLE>
F-1-2
<PAGE>
When the transaction described in Note 18 of the Notes to the Consolidated
Financial Statements
has been consummated, we will be in a position to render the following report.
/s/ KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Propel, Inc.:
We have audited the accompanying consolidated balance sheets of
Propel, Inc. and Subsidiaries, a wholly-owned subsidiary of Motorola, Inc. as of
December 31, 1998 and 1999 and the related consolidated statements of
operations, stockholder's equity and comprehensive income (loss), and cash flows
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
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 Compania de Radiocomunicaciones Moviles S.A. and Subsidiary, Baja
Celular Mexicana, S.A. de C.V., Entel Telefonia Personal S.A. and Subsidiaries,
Abiatar S.A., Pella Investment Company, and Hutchison Telephone Company Limited
and Subsidiary, all of which are affiliates that are reflected in the
accompanying consolidated financial statements using the equity method of
accounting. The Company's investment in and advances to these affiliates as of
December 31, 1998 and 1999, was $264,650,000 and $313,834,000, respectively, and
its share of earnings (losses) of these affiliates was $9,495,000, $18,736,000,
and $44,400,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, as reflected in Note 8. These financial statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for these companies, is based solely on
the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted 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 and the reports of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Propel, Inc. and Subsidiaries as of
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
Chicago, Illinois
June 21, 2000,
except as to Note 18,
which is as of .
F-1-3
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1998 1999 2000
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 13,480 $ 18,768 $ 13,653
Accounts receivable, net, including accounts receivable
from related parties of $19,720, and $14,051 as of
December 31, 1998 and 1999, respectively................ 42,904 51,164 54,657
Inventory, net............................................ 15,468 27,879 24,725
Other current assets...................................... 1,956 1,381 4,036
---------- ---------- ----------
TOTAL CURRENT ASSETS........................................ 73,808 99,192 97,071
Property and equipment, net................................. 65,515 113,772 122,303
Investment securities....................................... 13,285 684,156 222,209
Investments in and advances to affiliates................... 645,072 667,888 674,695
Intangible assets, net...................................... 328,348 319,851 323,058
Other assets................................................ 4,360 10,421 10,165
---------- ---------- ----------
TOTAL ASSETS................................................ $1,130,388 $1,895,280 $1,449,501
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade................................................... $ 13,641 $ 18,045 $ 15,373
Related parties......................................... 15,092 23,473 30,139
Accrued liabilities....................................... 18,638 38,775 38,040
Notes payable and current portion of long term debt -
related parties......................................... 22,592 76,363 152,303
Other current liabilities................................. 831 3,360 2,530
---------- ---------- ----------
TOTAL CURRENT LIABILITIES................................... 70,794 160,016 238,385
LONG-TERM LIABILITIES:
Long term debt - related parties, less current portion.... 71,500 75,940 --
Deferred tax liabilities.................................. 133,947 400,743 218,877
Other noncurrent liabilities.............................. 9,974 10,068 10,061
---------- ---------- ----------
TOTAL LIABILITIES........................................... $ 286,215 $ 646,767 $ 467,323
---------- ---------- ----------
STOCKHOLDER'S EQUITY:
Preferred stock, $ par value, shares
authorized, none issued and outstanding................. $ -- $ -- $ --
Common stock, $.01 par value 1,000 shares authorized,
issued, and outstanding as of December 31, 1999 and
March 31, 2000.......................................... -- -- --
Stockholder's net equity.................................. 1,055,073 1,078,940 1,083,682
Accumulated other comprehensive income (loss), net of
tax..................................................... (210,900) 169,573 (101,504)
---------- ---------- ----------
TOTAL STOCKHOLDER'S EQUITY.................................. 844,173 1,248,513 982,178
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $1,130,388 $1,895,280 $1,449,501
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1-4
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
AND THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, including sales to related
parties of $80,554, $121,897, and
$110,581 for the years ended
December 31, 1997, 1998, and 1999,
respectively............................. $160,903 $226,347 $382,898 $121,613 $86,530
Operating expenses:
Cost of services and products.............. 120,065 167,823 296,989 101,335 60,652
Selling, general, and administrative....... 52,613 54,880 78,980 20,333 22,741
Depreciation and amortization.............. 28,170 33,041 37,608 9,574 10,986
-------- -------- -------- -------- -------
Total operating expenses................... 200,848 255,744 413,577 131,242 94,379
-------- -------- -------- -------- -------
Operating income (loss).................... (39,945) (29,397) (30,679) (9,629) (7,849)
Share of earnings (losses) of affiliates... 44,168 47,578 (31,973) (6,278) (2,275)
Interest expense........................... 6,618 14,611 12,541 4,337 4,463
Other (income) expense, net................ (50,226) (25,360) (48,835) (5,418) (5,298)
-------- -------- -------- -------- -------
Earnings (loss) before income taxes........ 47,831 28,930 (26,358) (14,826) (9,389)
Income tax expense (benefit)............... 7,674 (1,001) 16,618 1,955 (1,678)
-------- -------- -------- -------- -------
Net earnings (loss)........................ $ 40,157 $ 29,931 $(42,976) $(16,781) $(7,711)
======== ======== ======== ======== =======
Pro forma earnings (loss) per share........ $ $
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-1-5
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
AND THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
--------------------------------
FOREIGN UNREALIZED
COMMON STOCK STOCKHOLDER'S CURRENCY GAINS (LOSSES) TOTAL
------------------- NET TRANSLATION ON AVAILABLE FOR STOCKHOLDER'S
SHARES AMOUNT EQUITY ADJUSTMENTS SALE SECURITIES EQUITY
-------- ------ ------ ----------- --------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............. -- -- $ 622,693 $(155,308) $ -- $ 467,385
Net earnings............................. -- -- 40,157 -- -- 40,157
Other comprehensive income (loss):
Foreign currency translation
adjustments.......................... -- -- -- (15,998) -- (15,998)
----------
Comprehensive income (loss)............ 24,159
Gains in connection with issuances of
stock by affiliates, net of tax of
$4,211................................. -- -- 6,381 -- -- 6,381
Transfers from Parent.................... -- -- 178,360 -- -- 178,360
----- ----- ---------- --------- --------- ----------
Balance at December 31, 1997............. -- -- 847,591 (171,306) -- 676,285
Net earnings............................. -- -- 29,931 -- -- 29,931
Other comprehensive income (loss):
Foreign currency translation
adjustments.......................... -- -- -- (39,594) -- (39,594)
----------
Comprehensive income (loss)............ (9,663)
Gains in connection with issuances of
stock by affiliates, net of tax of
$6,502................................. -- -- 9,857 -- -- 9,857
Transfers from Parent.................... -- -- 167,694 -- -- 167,694
----- ----- ---------- --------- --------- ----------
Balance at December 31, 1998............. -- -- 1,055,073 (210,900) -- 844,173
Issuance of common stock................. 1,000 -- --
Net loss................................. -- -- (42,976) -- -- (42,976)
Other comprehensive income:
Foreign currency translation
adjustments.......................... -- -- -- (21,179) -- (21,179)
Unrealized gains (losses) on available
for sale securities, net of tax of
$261,034............................. -- -- -- -- 401,652 401,652
----------
Comprehensive income (loss)............ 337,497
Gains in connection with issuances of
stock by affiliates, net of tax of
$34.................................... -- -- 121 -- -- 121
Transfers from Parent.................... -- -- 66,722 -- -- 66,722
----- ----- ---------- --------- --------- ----------
Balance at December 31, 1999............. 1,000 -- 1,078,940 (232,079) 401,652 1,248,513
Net loss (unaudited)..................... -- -- (7,711) -- -- (7,711)
Other comprehensive income:
Foreign currency translation
adjustments (unaudited).............. -- -- -- 8,474 -- 8,474
Unrealized gains (losses) on available
for sale securities, net of tax of
$184,396 (unaudited)................. -- -- -- -- (279,551) (279,551)
----------
Comprehensive income (loss)............ (278,788)
Transfers from Parent (unaudited)........ -- -- 12,453 -- -- 12,453
----- ----- ---------- --------- --------- ----------
Balance at March 31, 2000 (unaudited).... 1,000 -- $1,083,682 $(223,605) $ 122,101 $ 982,178
===== ===== ========== ========= ========= ==========
Three months ended March 31, 1999
(unaudited):
Comprehensive income (loss):
Net loss............................... $ (16,781)
Other comprehensive income (loss):
Foreign currency translation
adjustments........................ 9,101
----------
Comprehensive income (loss).......... $ (7,680)
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1-6
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
AND THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -----------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................ $ 40,157 $ 29,931 $(42,976) $(16,781) $ (7,711)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 28,170 33,041 37,608 9,574 10,986
Share of (earnings) losses of affiliates..... (44,168) (47,578) 31,973 6,278 2,275
Net gain on sale of interests in affiliates
and investment securities.................. (44,200) (31,500) (39,100) -- --
Write down of investment..................... -- 7,281 -- -- --
Deferred income taxes........................ (6,466) (3,934) 9,347 4,525 (71)
Changes in operating assets and liabilities:
Accounts receivable........................ 10,784 (15,231) (8,260) (44,325) (3,493)
Inventory.................................. (2,506) (4,458) (12,411) (8,744) 3,154
Other assets............................... 538 4,017 (5,527) (10,848) (4,469)
Accounts payable and accrued liabilities... (7,591) 18,955 32,932 43,916 (441)
Other liabilities.......................... 5,491 (864) (2,529) -- --
--------- --------- -------- -------- --------
Net cash provided by (used in) operating
activities............................. (19,791) (10,340) 1,057 (16,405) 230
--------- --------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures........................... (24,166) (18,939) (58,270) (8,906) (11,857)
Payment for investment securities.............. -- -- (10,492) -- (2,000)
Investments in and advances to affiliates...... (50,235) (152,730) (87,445) 3,215 (791)
Cash paid for acquisition of additional
interest in subsidiaries..................... (123,045) (22,661) -- -- --
Proceeds from sale of interest in affiliates
and investment securities.................... 51,280 33,514 41,625 -- --
Other investing activities, net................ 866 (1,839) (6,549) (3,964) (6,825)
--------- --------- -------- -------- --------
Net cash used in investing activities.... (145,300) (162,655) (121,131) (9,655) (21,473)
--------- --------- -------- -------- --------
Cash flows from financing activities:
Transfers from Parent, net..................... 178,360 167,694 66,722 14,816 12,453
Proceeds from notes payable and long-term debt-
related party, net........................... 74,942 5,460 58,211 5,294 3,668
Payments on bank loans......................... (80,978) -- -- -- --
--------- --------- -------- -------- --------
Net cash provided by financing
activities............................. 172,324 173,154 124,933 20,110 16,121
--------- --------- -------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents.................................... (194) (2,942) 429 197 7
--------- --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ 7,039 (2,783) 5,288 (5,753) (5,115)
Cash and cash equivalents at beginning of
period......................................... 9,224 16,263 13,480 13,480 18,768
--------- --------- -------- -------- --------
Cash and cash equivalents at end of period....... $ 16,263 $ 13,480 $ 18,768 $ 7,727 $ 13,653
========= ========= ======== ======== ========
Supplemental disclosure of cash flow information:
Taxes paid..................................... $ 132 $ 4,905 $ 728 $ 597 $ 301
</TABLE>
See accompanying notes to consolidated financial statements.
F-1-7
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 1--NATURE OF ORGANIZATION AND BUSINESS
Propel, Inc. and Subsidiaries (Propel or the Company) develops, operates,
and owns interests in wireless communications businesses throughout the world.
Propel is a wholly owned subsidiary of Motorola, Inc. (Motorola or the Parent).
Propel was incorporated as a Delaware corporation on February 24, 1999. It is
currently Motorola's intention to effect an initial public offering of Propel
common stock and ultimately divest its remaining interest in the Company. As
described in Note 18, Motorola intends to contribute its ownership interests in
the businesses that are included in these financial statements to Propel prior
to the consummation of the contemplated offering.
Propel's consolidated operations include the operations of two of its
wireless communication companies in Mexico (Norcel and Cedetel), its handset
distribution business in Israel (WDS), and corporate activities in the United
States. In addition Propel owns significant interests in fifteen wireless
operating companies located in Mexico, Israel, Hong Kong, Egypt, Argentina,
Brazil, Lithuania, Jordan, Chile, the Dominican Republic, Pakistan, Uruguay and
Azerbaijan.
NOTE 2--BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared using
Motorola's historical basis in the assets and liabilities of the Company and
give effect to the contribution of Motorola's ownership interest in the
businesses that will comprise Propel and the allocation policies described in
Note 4 as of and for the periods presented. The consolidated financial
statements reflect the results of operations, financial condition and cash flows
of the Company as a component of Motorola and may not be indicative of the
actual results of operations and financial position of the Company had it
operated autonomously or as an entity independent of Motorola. Management
believes the statements of operations include a reasonable allocation of
administrative costs, which are described in Note 4, incurred by Motorola on
behalf of Propel.
Propel's cash resources are managed under a centralized system wherein
receipts are deposited to the Parent's corporate accounts and disbursements are
centrally funded. Accordingly, settlement of certain assets and liabilities
arising from common services or activities provided by the Parent and certain
related-party transactions are reflected as transfers to Parent.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Propel, Inc.
and its majority-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-1-8
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid investments with
maturities at the date of purchase of less than three months.
INVENTORY AND WARRANTY COSTS
Inventories, which consist principally of wireless handsets and accessories,
are stated at the lower of cost or market. Cost is determined by the first-in,
first-out method. Inventory reserves are established where technology or other
reasons cause such items to have a reduction in value. Losses on sale of
subsidized handsets to wireless subscribers are recognized at the time of sale.
Provisions for estimated costs related to product warranties are made at the
time of sale.
PROPERTY AND EQUIPMENT
Property and equipment, including improvements that extend useful lives, are
recorded at cost, while maintenance and repairs are charged to operations as
incurred. Depreciation and amortization are calculated using the straight-line
method based on estimated useful lives of up to 40 years for buildings, five to
eight years for infrastructure and other equipment and three to ten years for
other assets. Leasehold improvements are amortized over the shorter of the
respective lives of the leases or the useful lives of the improvements.
INVESTMENT SECURITIES
Investment securities at December 31, 1998 and 1999 include
available-for-sale equity securities recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of other comprehensive income (loss) until realized. Realized gains and losses
from the sale of available-for-sale securities are determined on a specific
identification basis.
The cost method of accounting is applied to the Company's nonmarketable
investments in companies where the Company does not exert significant
influence--generally where the Company's voting interest is less than 20%. Under
the cost method, the investment is recorded at cost, and income is recognized
only to the extent distributed as dividends.
Write-downs to the carrying value of available-for-sale and cost method
investments are recognized when the Company believes that a permanent impairment
in value has occurred.
INVESTMENTS IN AFFILIATES
The equity method of accounting is applied to the Company's noncontrolled
investments in affiliates where the Company exerts significant
influence--generally where the Company's voting interest is 20% to 50%. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize the Company's share of earnings or losses of the affiliate, limited,
in the case of losses, to the extent of the Company's investment, loans and
guarantees related to the affiliate.
Goodwill and other intangibles resulting from the acquisition of increased
interests in affiliates are reflected as additional investment in affiliates.
Goodwill is amortized on a straight-line basis over
F-1-9
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
periods not exceeding twenty years and other intangibles are amortized generally
over three to five years on a straight-line basis. Amortization expense is
recorded as a reduction to the Company's share of earnings (losses) of
affiliates.
Write-downs to the carrying value of affiliates are recognized when the
Company believes that a permanent impairment in value has occurred.
ISSUANCES OF COMMON STOCK BY AFFILIATES
Changes in the Company's proportionate share of the underlying equity of an
affiliate which result from issuance of additional equity securities by the
affiliate are recognized as increases or decreases to stockholder's net equity.
INTANGIBLE ASSETS
The Company's two consolidated wireless operating companies in Mexico,
Norcel and Cedetel, hold licenses to provide wireless communications service.
The initial cost of the licenses together with costs allocated to such licenses
at the time of acquisition of increased interests in these companies are
included in intangible assets and are being amortized on a straight-line basis
over periods not exceeding 20 years. Licenses generally have provisions for
renewal upon expiration. In addition, costs of acquisitions were allocated to
customer base and workforce and are generally being amortized on a straight-line
basis over a three to five year period. Goodwill resulting from acquisitions of
increased interests in consolidated subsidiaries is also included in intangible
assets and is amortized over periods not exceeding 20 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets including intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
recognized when estimated future undiscounted cash flows expected to result from
the use of the asset and its eventual disposition are less than its carrying
amount. The amount of the loss is the difference between the fair value and
carrying value of the asset.
INCOME TAXES
The Company's results of operations are included in the consolidated income
tax return of Motorola. Current and deferred taxes are determined by the Company
as if taxes were computed on a stand-alone basis. Current income taxes are
settled through transfers from the Parent.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
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.
F-1-10
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
For consolidated businesses and affiliates outside the United States that
prepare financial statements in currencies other than the U.S. dollar, statement
of operations amounts are translated at average exchange rates for the year, and
assets and liabilities are translated at year-end exchange rates. These
translation adjustments are presented as a component of other comprehensive
income (loss). Gains and losses from foreign currency transactions and
translation of assets and liabilities of foreign businesses that use the
U.S. dollar as the functional currency (including those in countries with
hyperinflationary economies) are included in the results of operations within
other (income) expense.
REVENUE RECOGNITION
Wireless service revenues arise mainly from the provision of access to the
cellular network (network access fees), usage of the cellular network (incoming
and outgoing airtime and long distance revenues), activation fees, roaming usage
fees, and fees for value-added services. Access revenue is recognized over the
period provided. Airtime (including net roaming) and long distance revenues are
recognized when the services are rendered. Other service revenues are recognized
as the service is provided.
Revenue associated with the sale of prepaid calling cards is deferred and
recognized as the airtime is utilized or when the balances on the card expire.
CONCENTRATION OF CREDIT RISKS
The Company derives the majority of its revenues from individuals,
businesses, and telecommunication companies. A significant weakening of a local
economy, reflected in higher interest rates, higher inflation, or reduced
purchasing power of the local currency caused by currency devaluation, could
cause certain businesses and individuals to be unable to satisfy their
obligations to the Company. The Company's allowance for doubtful accounts is
based upon management's estimates and past experience.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company generally enters into derivative financial instruments only for
hedging purposes. The Company currently does not hedge anticipated transactions
nor its investments or accrued income in its affiliates. To the extent possible,
the Company attempts to hedge its currency position by having equal and
offsetting assets and liabilities in the same currencies to mitigate the impact
of rate movements of the nonfunctional currency and as a substitute for
financial instruments in markets where they are too expensive or not available.
At December 31, 1998 and 1999, the Company had net outstanding forward
exchange contracts totaling $3,000 and $10,000, respectively. Deferred gains
amounted to $16 and $0 as of December 31, 1998 and 1999, respectively.
F-1-11
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, and notes payable and long-term debt approximate fair value due to
their relatively short-term maturity or variable interest rates.
UNAUDITED INTERIM RESULTS
The accompanying unaudited interim consolidated financial statements as of
March 31, 2000 and for the three months ended March 31, 1999 and 2000, have been
prepared in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation have been included. Results for
an interim period are not necessarily indicative of expected results for the
full fiscal year.
NOTE 4--PARENT ALLOCATION POLICIES
Certain expenses reflected in the consolidated financial statements include
allocations of expenses from Motorola. Such expenses represent costs related to
treasury, legal, insurance, payroll administration, human resources, and other
services. In addition Motorola allocates a portion of its overhead costs related
to such services to the Company. Where it is possible to specifically identify
such expenses with the activities of the Company, these amounts have been
charged or credited directly to the Company without allocation or apportionment.
Allocation of all other such expenses is based on budgeted amounts applicable to
the respective activity.
Motorola has noncontributory defined benefit pension plans covering
substantially all of its employees, including employees of the Company. In
general, employees become vested after five years of service. Motorola also
sponsors other benefit plans, including profit sharing plans, incentive plans
and stock purchase plans in which Company employees participate. Costs related
to these plans are allocated to the Company based on the Company's total number
of participants in the respective plans.
Eligible employees of the Company participate in Motorola's stock option
plans. Each option granted has an exercise price of 100% of the market value of
the common stock on date of grant. The contractual life of each option is
generally ten to fifteen years and substantially all options vest in one to four
years. Motorola accounts for its stock options under the provisions of APB
Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for such stock option plans and therefore,
no amount of compensation cost has been allocated to the Company.
In management's opinion, the methods used in allocating expenses are
reasonable. However, resulting expenses may not represent the amounts that would
have been incurred had such transactions occurred with third parties at "arms
length."
Interest expense shown in the financial statements reflects interest expense
associated with the Company's share of the aggregate borrowings of Motorola for
each of the periods presented. Motorola allocates a percentage of total interest
expense to the Company based on an adjusted net assets amount calculated for the
Company as a percentage of the same adjusted net assets amount calculated for
Motorola. It is anticipated that subsequent to the offering discussed in
Note 18, the Company will incur interest expense on its direct debt then
outstanding and not be allocated interest by Motorola.
F-1-12
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 5--INVENTORY
Inventories consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- --------
<S> <C> <C>
Wireless handsets and accessories......................... $15,320 $25,335
Spare parts............................................... 1,165 3,819
------- -------
Subtotal................................................ 16,485 29,154
Less inventory reserves................................... (1,017) (1,275)
------- -------
Inventory, net.......................................... $15,468 $27,879
======= =======
</TABLE>
NOTE 6--PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
---- --------
<S> <C> <C>
Land.................................................... $ 338 $ 429
Buildings and improvements.............................. 5,188 9,175
Furniture and fixtures.................................. 2,675 3,963
Equipment............................................... 94,864 153,090
-------- --------
Subtotal.............................................. 103,065 166,657
Less accumulated depreciation........................... (37,550) (52,885)
-------- --------
Property and equipment, net........................... $ 65,515 $113,772
======== ========
</TABLE>
NOTE 7--INVESTMENT SECURITIES
The Company accounts for its investment in Korea Telecom Freetel Co. Ltd.
(Freetel) as an available for sale security at fair value. The carrying amount
of the investment was $13,300 at December 31, 1998. At the time of the
devaluation of the Korean won during 1998 the Company wrote down its investment
in Freetel by $7,281. During 1999, Freetel completed a public offering of its
common shares, and, as of December 31, 1999, the market value of the Company's
investment was $680,156. The unrealized holding gain of $662,686, net of
deferred income taxes of $261,034, is recorded as a component of accumulated
other comprehensive income (loss).
During 1999 the Company sold a portion of its shares owned in Freetel for
gross proceeds of $41,625 and realized a gain of $39,100 which is included in
other (income) expense.
As of March 31, 2000, the market value of the Company's investment in
Freetel decreased to approximately $216,209, reducing the remaining unrealized
gain to $198,739, net of deferred income taxes of $76,638, which is recorded as
a component of accumulated other comprehensive income (loss) as of March 31,
2000.
F-1-13
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 7--INVESTMENT SECURITIES (CONTINUED)
The Company uses the cost method of accounting for its investment in Zephyr
Telecommunications, Inc. The Company acquired ownership in this company in 1999.
As of December 31, 1999, the Company's ownership percentage was 19%, without
giving effect to dilution, and the carrying amount of the investment was $4,000.
NOTE 8--INVESTMENTS IN AFFILIATES
INVESTMENTS IN AFFILIATES
The Company holds investments in fifteen international affiliates that are
accounted for under the equity method. Investments and advances as of
December 31, 1998 and 1999, consist of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Investments in affiliates............................... $574,038 $596,513
Advances to affiliates.................................. 71,034 71,375
-------- --------
$645,072 $667,888
======== ========
</TABLE>
The following table represents a roll forward of the Company's investments
in affiliates for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Beginning of year....................................... $451,230 $574,038
Additional investments.................................. 98,965 87,104
Share of earnings (losses).............................. 47,578 (31,973)
Gain on affiliate stock issuances....................... 16,359 155
Reductions.............................................. (2,675) (6,400)
Currency translation adjustments........................ (37,419) (26,411)
-------- --------
End of year............................................. $574,038 $596,513
======== ========
</TABLE>
Several of the Company's affiliates are parties to debt agreements and to
some extent local regulatory restrictions which restrict the ability of these
affiliates to pay dividends.
F-1-14
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 8--INVESTMENTS IN AFFILIATES (CONTINUED)
The Company's investment in and advances to affiliates as of December 31,
1998 and 1999 and the Company's share of earnings (losses) of affiliates for the
years ended December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
INVESTMENT IN AND SHARE OF EARNINGS (LOSSES) OF
PERCENTAGE OF ADVANCES TO AFFILIATES
OWNERSHIP AFFILIATES YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ------------------- ------------------------------
COUNTRY AFFILIATED COMPANY 1998 1999 1998 1999 1997 1998 1999
------- ------------------ ---- ---- ---- ---- ---- ---- ----
% %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LATIN AMERICA
Mexico................ Baja Cellular Mexicana S.A 48.9 48.9 $ 63,020 $ 68,160 $(2,166) $ 73 $ 6,560
de C.V. (Bajacel)
Mexico................ Movitel Del Noroste, S.A. de 22.0 22.0 41,015 46,521 (2,037) (582) 753
C.V. (Movitel)
Argentina............. Compania de 25.0 25.0 87,260 107,834 13,119 19,499 20,573
Radiocommunicaciones Moviles
S.A. (CRM Argentina)
Brazil................ Global Telecom, S.A. (Global 22.0 35.5 61,770 53,575 -- (4,804) (61,903)
Telecom)
Chile................. Entel Telefonia Personal, 25.0 25.0 42,710 49,531 (850) (8,525) 4,580
S.A. (Entel Chile)
Dominican Republic.... Tricom, S.A. (Tricom) 30.8 30.8 41,169 46,160 (2,852) 4,213 4,906
Uruguay............... Abiatar, S.A. 32.0 32.0 14,875 15,040 3,512 4,852 6,565
Mexico................ Grupo Portatel, S.A. de C.V. 21.7 21.7 12,748 12,255 (1,344) (1,359) (1,021)
(Portatel)
EUROPE/MIDDLE EAST
Israel................ Pelephone Communications, 50.0 50.0 196,410 175,039 40,175 38,556 (21,782)
Ltd. (Pelephone)
Egypt................. MobiNil for 35.3 35.3 39,395 32,320 -- (14,147) (7,114)
Telecommunications (MobiNil)
Lithuania............. UAB Omnitel 35.0 35.0 17,370 28,015 1,150 6,656 10,650
Jordan................ Pella Investment Company 26.1 26.1 12,460 17,824 1,050 3,419 5,369
Azerbaijan............ G.T.I.B. 1996 Ltd. 50.0 50.0 8,310 8,924 -- -- --
(G.T.I.B.)
ASIA
Hong Kong............. Hutchison Telephone Company 30.0 25.1 -- -- (3,133) -- --
Ltd. (Hutchison)
Pakistan.............. Pakistan Mobile 30.0 30.0 6,560 6,690 (2,456) (273) (109)
Communications (Pvt) Limited
(Pakistan Mobile)
-------- -------- ------- -------- --------
Total $645,072 $667,888 $44,168 $ 47,578 $(31,973)
======== ======== ======= ======== ========
</TABLE>
At December 31, 1998 and 1999, the carrying value of affiliates accounted
for under the equity method exceeded the Company's share of the underlying net
assets by $80,738 and $92,099, respectively. Such excess is being amortized on a
straight-line basis over periods not exceeding twenty years. Amortization
expense of $9,694 in 1997, $9,587 in 1998, and $9,452 in 1999 is reflected in
the Company's share of earnings (losses) of affiliates.
F-1-15
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 8--INVESTMENTS IN AFFILIATES (CONTINUED)
The Company's affiliate Tricom, S.A. is a publicly traded company. As of
December 31, 1998 and 1999, the market value of this investment was $53,605 and
$168,472, respectively.
SUMMARY FINANCIAL INFORMATION OF AFFILIATES
A summary of unaudited combined financial information as reported by the
Company's affiliates is set forth below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
NET ASSETS....................................... $1,543,886 $1,512,628 $1,381,410
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
CONDENSED STATEMENT OF 1997 1998 1999 1999 2000
OPERATIONS INFORMATION: ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue..................... $2,238,294 $2,751,340 $3,365,235 $776,782 $1,008,757
Net income (loss)........... 91,842 30,778 (329,239) (73,832) (10,845)
</TABLE>
ACQUISITIONS AND DIVESTITURES
A summary of significant acquisitions and divestitures during 1997, 1998,
and 1999 is as follows:
1997
The Company invested $50 and advanced $7,650 in exchange for a 50% ownership
in G.T.I.B. G.T.I.B. is a holding company engaged in developing the
telecommunications business, providing various services to and investing in
Bakcell II (Bakcell) a legal entity registered in the Republic of Azerbaijan and
engaged in the operation of wireless telephone networks in Azerbaijan. G.T.I.B.
had a 49% ownership interest in Bakcell at the time of the Company's purchase.
The Company invested an additional $18,300 in Entel Chile in 1997 in
conjunction with a stock offering by Entel Chile. The stock offering resulted in
a reduction of the Company's ownership percentage to 25%. The Company recorded
an after-tax gain of $6,353 as an increase to stockholder's net equity, as a
result of the share issuance.
The Company sold a portion of its interest in Pakistan Mobile through a
series of transactions for proceeds totaling $48,400 in 1997. The Company
recognized gains of $44,615, which are included in other (income) expense.
The Company made payments aggregating $14,953 related to its guarantee of
third-party debt held by Portatel. In conjunction with the payments, the Company
entered into a subscription agreement whereby it acquired a 21.7% ownership
interest in Portatel in exchange for the payments. The excess of the amount paid
over the fair value of the assets acquired was $11,654.
F-1-16
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 8--INVESTMENTS IN AFFILIATES (CONTINUED)
1998
The Company invested $70,900 for a 22% ownership interest in Global Telecom.
Global Telecom commenced operations in 1998 and provides wireless communication
services under a license granted by the National Agency for Telecommunications
in accordance with Brazilian laws.
The Company invested $26 and advanced $53,375 in exchange for a 35.3%
ownership interest in MobiNil for Telecommunications. MobiNil for
Telecommunications manages, operates, develops and maintains digital wireless
telecommunication systems in the Arab Republic of Egypt through its
majority-owned subsidiary, The Egyptian Company for Mobile Services (ECMS).
MobiNil for Telecommunications was organized in 1998 for the purpose of
acquiring ECMS from an agency of the Arab Republic of Egypt.
During 1998, Tricom completed a public offering of 5.7 million common
shares. As a result, the Company's ownership in Tricom decreased to 30.8%. The
stock offering by Tricom resulted in the Company recording an after-tax gain of
$9,815 as an increase to stockholder's net equity.
The Company sold a portion of its interest in Omnitel in July 1998 in a
transaction resulting in cash proceeds aggregating $33,514. The Company
recognized a gain on the transaction of $31,500, which is included in other
(income) expense.
1999
The Company increased its ownership interest in Global Telecom through a
series of additional investments totaling $87,100 in 1999. These transactions
increased the Company's ownership percentage from 22% as of December 31, 1998 to
35.5% as of December 31, 1999. The excess of the purchase price over the fair
value of the assets acquired was $16,250.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- --------
<S> <C> <C>
Goodwill................................................ $111,194 $115,872
Wireless licenses....................................... 275,030 286,481
Subscriber base......................................... 10,307 10,741
Workforce............................................... 2,646 2,757
-------- --------
399,177 415,851
Less accumulated amortization........................... (70,829) (96,000)
-------- --------
Intangible assets, net................................ $328,348 $319,851
======== ========
</TABLE>
F-1-17
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 10--ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Accrued employee related costs.......................... $ 2,097 $ 1,537
Accrued warranties...................................... 4,213 6,205
Accrued facility and operating costs.................... 6,096 13,268
Accrued other........................................... 6,232 17,765
------- -------
Total accrued liabilities............................. $18,638 $38,775
======= =======
</TABLE>
NOTE 11--OTHER (INCOME) EXPENSE, NET
Other (income) expense, net consists of the following for the years ended
December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Gains from sales of interests in affiliates and
investments.................................. $(44,200) $(31,500) $(39,100)
Foreign currency (gain) loss................... 367 3,409 (2,229)
Other, net..................................... (6,393) 2,731 (7,506)
-------- -------- --------
Other (income) expense net................... $(50,226) $(25,360) $(48,835)
======== ======== ========
</TABLE>
F-1-18
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 12--INCOME TAXES
U.S. and non-U.S. components of earnings before income taxes as of
December 31, 1998 and 1999 are presented below:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
U.S............................................ $25,007 $ (1,211) $ 18,303
Non-U.S........................................ 22,824 30,141 (44,661)
------- -------- --------
$47,831 $ 28,930 $(26,358)
======= ======== ========
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1997, 1998 and
1999 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
Year Ended December 31, 1997 ------- -------- -----
<S> <C> <C> <C>
U.S. Federal................................. $10,008 $(3,250) $ 6,758
Non-U.S...................................... 1,681 (2,441) (760)
State and local.............................. 2,451 (775) 1,676
------- ------- --------
$14,140 $(6,466) $ 7,674
======= ======= ========
Year Ended December 31, 1998
U.S. Federal................................. $(1,389) $ 3,732 $ 2,343
Non-U.S...................................... 4,661 (7,786) (3,125)
State and local.............................. (339) 120 (219)
------- ------- --------
$ 2,933 $(3,934) $ (1,001)
======= ======= ========
Year Ended December 31, 1999
U.S. Federal................................. $ 3,541 $ 9,615 $ 13,156
Non-U.S...................................... 2,874 (902) 1,972
State and local.............................. 856 634 1,490
------- ------- --------
$ 7,271 $ 9,347 $ 16,618
======= ======= ========
</TABLE>
F-1-19
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 12--INCOME TAXES (CONTINUED)
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. Federal income tax rate of 35% for 1997, 1998 and 1999 as a result of
the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense................ $ 16,741 $ 10,126 $(9,225)
Increase (reduction) in income taxes resulting
from:
Goodwill amortization........................ 2,105 2,385 2,598
Equity in earnings of non-U.S. affiliates.... (10,997) (43,846) (8,654)
State tax, net of federal benefit............ 1,252 (61) 916
Net operating loss carryforward.............. (4,599) 26,610 25,385
Inflationary gains in non-U.S. locations..... 3,718 3,897 4,905
Other........................................ (546) (112) 693
-------- -------- -------
$ 7,674 $ (1,001) $16,618
======== ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Operating losses of non-U.S. affiliates............. $ 41,586 $ 69,573
Fixed assets........................................ 381 6,424
Foreign net operating loss carryforwards............ 16,827 12,858
Accrued expenses and other liabilities.............. 4,899 4,159
--------- ---------
63,693 93,014
Less: valuation allowance........................... (53,267) (84,381)
--------- ---------
Net deferred tax assets............................. 10,426 8,633
Deferred tax liabilities:
Inventories......................................... 1,623 5,000
Fixed assets........................................ 2,614 --
Unremitted earnings of non-U.S. affiliates.......... 21,238 29,992
Available for sale securities....................... -- 261,034
Intangible assets................................... 111,842 108,224
Other............................................... 7,056 5,126
--------- ---------
Gross deferred tax liabilities...................... 144,373 409,376
--------- ---------
Net deferred tax assets (liabilities)............... $(133,947) $(400,743)
========= =========
</TABLE>
The valuation allowance for deferred tax assets increased $29,736 and
$31,114 in 1998 and 1999.
F-1-20
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 12--INCOME TAXES (CONTINUED)
Except for earnings of non-U.S. subsidiaries and certain non-U.S. affiliates
in which the Company intends to reinvest earnings on an indefinite basis,
provisions have been made for the estimated U.S. income taxes applicable to
undistributed earnings of non-U.S. subsidiaries and non-U.S. affiliates.
Undistributed earnings for which no U.S. income tax has been provided aggregated
to $82,000 and $59,000 at December 31, 1998, and 1999, respectively. The
determination of the applicable deferred tax liability is not practicable at
this time. If these earnings are distributed to the Company, foreign tax credits
may reduce the U.S. income tax which would be payable on such distributions.
At December 31, 1999, certain non-U.S. subsidiaries had loss carryforwards
of approximately $30,000, expiring in varying amounts through 2008. In addition
as of December 31, 1999, certain non-U.S. subsidiaries had tax credits of
approximately $2,000, expiring in varying amounts through 2007. Net deferred tax
assets are considered realizable given past income and estimates of future
income.
NOTE 13--SEGMENT REPORTING
The Company's operating companies and affiliates operate primarily in the
telecommunications industry. Each of these businesses is generally separately
managed. The Company identifies its reportable segments as those businesses that
represent 10% or more of its consolidated revenue and those affiliates whose
share of earnings or losses represent 10% or more of its pre-tax earnings or
loss. A large number of the Company's affiliates qualify as separate segments.
In order to reduce the complexity of this disclosure the Company has limited the
number of segments reported to the following segments.
Sales to affiliates accounted for 50%, 54% and 29% of the Company's total
revenues in 1997, 1998 and 1999, respectively, as discussed in Note 15--Related
Party Transactions. Additionally, sales to one non-affiliate customer totaled
20% of the Company's total revenues in 1999.
WDS, the Company's handset distribution business, currently distributes only
handsets manufactured by Motorola. In connection with the proposed offering
discussed in Note 18, it is anticipated that WDS and the Company will enter into
an agreement with Motorola precluding WDS from selling handsets in Israel from
other manufacturers.
F-1-21
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 13--SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATED
BUSINESSES AFFILIATES
---------------------- -----------------------------------------------------------------------
CEDETEL AND BAJACEL AND CRM GLOBAL
NORCEL WDS MOVITEL ARGENTINA TELECOM PELEPHONE MOBINIL HUTCHISON
------ --- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Operating Revenues............. $ 66,532 94,371 77,209 597,908 * 680,821 * 540,830
Depreciation and
amortization................. 27,380 106 10,349 114,307 * 130,835 * 57,818
Operating income (loss)........ (16,532) 1,652 16,171 102,137 * 134,728 * (25,942)
Segment net earnings (loss).... (16,781) + 2,010 52,475 * 81,871 * (57,529)
Long lived assets, net......... 373,773 464 250,209 328,545 * 542,997 * 410,639
Investments in and advances to
affiliates................... -- -- -- -- * -- * --
Capital expenditures........... 22,703 150 18,038 162,415 * 165,974 * 198,385
Total segment assets........... 405,907 28,818 318,627 605,757 * 477,143 * 546,808
1998
Operating Revenues............. $ 97,397 128,950 108,919 748,903 1,171 741,739 98,507 522,731
Depreciation and
amortization................. 31,786 151 14,108 145,212 165 137,119 35,257 72,703
Operating income (loss)........ (12,624) 6,854 17,187 158,892 (19,875) 131,239 (37,888) (49,289)
Segment net earnings (loss).... (13,710) + 8,093 77,996 (21,835) 78,633 (78,592) (107,119)
Long lived assets, net......... 391,701 547 233,993 422,798 892,299 566,271 638,029 398,108
Investments in and advances to
affiliates................... -- -- -- -- -- -- -- --
Capital expenditures........... 18,057 234 35,150 166,978 23,969 274,257 151,379 67,378
Total segment assets........... 428,062 39,647 292,837 665,301 915,979 738,144 872,120 856,976
1999
Operating Revenues............. $154,500 228,398 183,968 830,039 44,665 709,432 360,262 524,494
Depreciation and
amortization................. 36,879 179 20,005 135,097 47,482 146,100 71,443 70,765
Operating income (loss)........ (15,230) 7,888 33,279 171,751 (122,898) (56,878) 7,353 (205,222)
Segment net earnings (loss).... (15,945) + 23,261 82,290 (228,193) (42,044) (39,522) (256,278)
Long lived assets, net......... 431,607 547 300,236 769,352 685,228 605,467 730,034 420,530
Investments in and advances to
affiliates................... -- -- -- -- -- -- -- --
Capital expenditures........... 57,687 179 55,779 183,423 138,126 233,139 217,165 100,389
Total segment assets........... 491,146 39,243 416,512 1,059,466 740,604 944,040 1,083,876 917,441
March 31, 1999
Operating revenues............. $ 32,089 89,524 37,314 201,950 3,166 183,552 57,935 135,576
Segment net earnings (loss).... (3,527) + 6,026 25,586 (68,918) 4,819 (26,665) (37,349)
March 31, 2000
Operating revenues............. $ 45,678 40,852 55,258 207,701 23,446 202,380 133,572 166,988
Segment net earnings (loss).... 625 + 5,683 1,488 (35,342) (4,483) 248 (6,368)
<CAPTION>
CORPORATE OTHER ELIMINATIONS TOTAL
--------- ----- ------------ -----
<S> <C> <C> <C> <C>
1997
Operating Revenues............. -- 357,363 (2,254,131) 160,903
Depreciation and
amortization................. 684 41,796 (355,105) 28,170
Operating income (loss)........ (25,065) 56,977 (284,071) (39,945)
Segment net earnings (loss).... 56,938 17,090 (95,917) 40,157
Long lived assets, net......... 2,071 500,700 (2,033,090) 376,308
Investments in and advances to
affiliates................... 467,837 -- -- 467,837
Capital expenditures........... 1,313 190,428 (735,240) 24,166
Total segment assets........... 491,129 1,015,524 (2,963,859) 925,854
1998
Operating Revenues............. -- 567,060 (2,789,030) 226,347
Depreciation and
amortization................. 1,104 71,447 (476,011) 33,041
Operating income (loss)........ (23,627) 112,583 (312,849) (29,397)
Segment net earnings (loss).... 43,641 41,671 1,153 29,931
Long lived assets, net......... 1,615 905,940 (4,057,438) 393,863
Investments in and advances to
affiliates................... 645,072 -- -- 645,072
Capital expenditures........... 648 450,001 (1,169,112) 18,939
Total segment assets........... 662,679 1,296,160 (5,637,517) 1,130,388
1999
Operating Revenues............. -- 719,480 (3,372,340) 382,898
Depreciation and
amortization................. 550 102,822 (593,714) 37,608
Operating income (loss)........ (23,337) 153,886 18,729 (30,679)
Segment net earnings (loss).... (27,031) 108,781 351,705 (42,976)
Long lived assets, net......... 1,469 1,897,519 (5,408,366) 433,623
Investments in and advances to
affiliates................... 667,888 -- -- 667,888
Capital expenditures........... 404 286,175 (1,214,196) 58,270
Total segment assets........... 1,364,891 1,559,524 (6,721,463) 1,895,280
March 31, 1999
Operating revenues............. -- 150,913 (770,406) 121,613
Segment net earnings (loss).... (13,254) 87,896 8,605 (16,781)
March 31, 2000
Operating revenues............. -- 214,452 (1,003,797) 86,530
Segment net earnings (loss).... (8,336) 16,697 22,077 (7,711)
</TABLE>
----------------------------------
* Not available
+ Not applicable
F-1-22
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 14--PROVISIONS AND ALLOWANCES
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING OF COSTS AND END OF
YEAR EXPENSES REDUCTIONS OTHER YEAR
---- -------- ---------- ----- ----
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts........................... $2,578 $ 904 $1,583 $(354) $1,545
Inventory valuation allowance............................. 654 3,529 3,046 (120) 1,017
Year ended December 31, 1999:
Allowance for doubtful accounts........................... $1,545 $1,085 $ 625 $ (50) $1,955
Inventory valuation allowance............................. 1,017 1,044 810 24 1,275
</TABLE>
NOTE 15--RELATED-PARTY TRANSACTIONS
The Company utilizes central cash management systems of Motorola to manage
its operations. Cash requirements are satisfied either by intercompany
transactions between the Motorola and the Company or by cash from operations.
Such intercompany transactions are included in net cash transfers from Parent in
the consolidated financial statements.
The Company engages in transactions with its Parent and the Parent's
subsidiaries in the normal course of its business. These transactions include
the purchase of handsets and infrastructure equipment. In addition certain
expenses are allocated to the Company by the Parent as discussed in Note 4.
Transactions with related parties for the years ended December 31, 1997,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Selling, general, and administrative........................ $15,200 $ 17,200 $ 21,800
Inventory purchases......................................... 77,371 125,562 122,707
Interest expense............................................ 6,618 14,611 12,541
Infrastructure equipment purchases.......................... 408 23,319 20,944
Other expenses.............................................. 760 1,678 4,424
</TABLE>
Sales to related parties reflected in the Statements of Operations primarily
represent the sale of wireless handsets and accessories to the Company's
affiliates.
F-1-23
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 15--RELATED-PARTY TRANSACTIONS (CONTINUED)
The Parent or its subsidiaries may make interest bearing loans to the
Company and its subsidiaries for equipment purchases or other purposes. As of
December 31, 1998 and 1999 the following loans were outstanding:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Motorola Asia Treasury Pte., Ltd--$100 million line of
credit, bearing interest as LIBOR plus 25 basis points
(6.23% at December 31, 1999), due in December 2000........ $28,300 $ 43,855
Motorola Asia Treasury Pte., Ltd--$100 million line of
credit, bearing interest as LIBOR plus 25 basis points
(6.23% at December 31, 1999), due in January 2001......... 43,200 75,940
Motorola Semiconductor Israel Ltd........................... 22,592 32,508
------- --------
94,092 152,303
Less current portion........................................ 22,592 76,363
------- --------
$71,500 $ 75,940
======= ========
</TABLE>
The loan received from Motorola Semiconductor Israel Ltd. fluctuates on a
daily basis depending on the cash needs of Wireless Distribution Services. The
loan is denominated in U.S. dollars and bears 5% interest per annum calculated
on a daily basis.
In management's opinion, the foregoing transactions were consummated based
on amounts agreed upon between the respective parties and are reasonable.
However, these amounts may not represent the amounts that would have been
incurred had these transactions occurred with third parties at "arms-length."
NOTE 16--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain facilities under various operating leases. Rent
expense under the noncancelable operating leases was $2,174, $2,844, and $4,457
for the years ended December 31, 1997, 1998, and 1999, respectively. Future
minimum rental payments required under the above operating leases as of
December 31, 1999 are as follows: 2000--$4,106; 2001--$3,129; 2002--$2,758;
2003--$2,354; and 2004 and thereafter--$3,819.
PURCHASE COMMITMENTS
In March 2000, the Company's operating subsidiaries in Mexico entered into a
contract to purchase wireless equipment with digital technology from Motorola.
The cost of the equipment was approximately $21,000.
F-1-24
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
DEBT OF AFFILIATES
Motorola and the Company may provide, from time to time, guarantees to third
parties to support borrowings by the Company's affiliates. At the time of the
offering discussed in Note 18, it is expected that the Company will indemnify
Motorola for losses it may incur in connection with its ongoing guarantees of
debt incurred by affiliates of Propel. Guarantees are generally issued in
proportion to the Company's ownership in the affiliate.
As of December 31, 1999, Motorola had guarantees totalling approximately
$250,000 oustanding for the benefit of certain of the Company's affiliates.
Approximately, $150,000 of affiliate debt was outstanding applicable to
Motorola's guarantees as of December 31, 1999.
In addition to the above, Motorola's finance subsidiary provides credit
facilities to certain affiliates of the Company primarily for the purchase of
infrastructure equipment. As of December 31, 1999, Motorola's finance subsidiary
had extended $262,316 to affiliates of the Company for such purposes.
NOTE 17--SUBSEQUENT EVENT (UNAUDITED)
In May 2000, Network Ventures II, Inc., a wholly-owned subsidiary of
Motorola which will be contributed to Propel prior to the closing of the
proposed offering discussed in Note 18, entered into multiple agreements to
acquire the remaining interest it did not already own in Bajacel, for a total
purchase price of $321.9 million. In addition, Norcel and Cedetel, Propel's
wholly owned northern Mexico operating companies, entered into agreements with
entities related to Bajacel's selling shareholders to purchase other assets and
services valued at approximately $15.0 million as a separate component of the
Bajacel acquisition. Bajacel owns a 68% interest in Movitel. Propel also owns a
22% direct interest in Movitel. As a result of the acquisition, Propel will own
100% of Bajacel and its total direct and indirect ownership interest in Movitel
will be 90%. Propel currently accounts for its interests in Bajacel and Movitel
using the equity method of accounting. Upon completion of the acquisition,
Bajacel and Movitel will be consolidated subsidiaries of Propel.
NOTE 18--PROPOSED PUBLIC OFFERING OF COMMON STOCK (UNAUDITED)
The Board of Directors of Motorola and the Company's Board of Directors have
authorized management of the Company to file a registration statement with the
Securities and Exchange Commission for an initial public offering of the
Company's common stock. Upon completion of the offering of shares of common
stock, Motorola will own % of the outstanding common shares of the Company,
exclusive of any shares which could be issued pursuant to the underwriters'
over-allotment option.
Prior to the proposed offering Motorola intends to contribute its ownership
interests in the businesses included in these financial statements to Propel.
These financial statements reflect the combined results of these businesses as
if they had been so contributed to Propel for all periods.
F-1-25
<PAGE>
PROPEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS OF US DOLLARS)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
NOTE 18--PROPOSED PUBLIC OFFERING OF COMMON STOCK (UNAUDITED) (CONTINUED)
In addition, it is anticipated that Propel will file amended articles of
incorporation to authorize shares of preferred stock and additional shares of
common stock. It is also anticipated that a stock split of currently outstanding
Propel common stock will also occur at or near the time of the offering.
Pro forma earnings per share for the year ended December 31, 1999 and the
three months ended March 31, 2000 have been calculated by dividing net earnings
(loss) by the weighted average shares outstanding as calculated in accordance
with Securities and Exchange Commission rules for initial public offerings. Such
rules require that the weighted average share calculation give retroactive
effect to any changes in the capital structure of the Company as well as the
number of shares whose proceeds will be used to pay any dividend or repay any
debt owed to the Parent. Therefore, weighted average shares of the Company for
the year ended December 31, 1999 and the three months ended March 31, 2000 are
comprised of shares of common stock currently outstanding and shares of
common stock included in the proposed offering, assuming all such shares are
outstanding as of the beginning of each period.
At the time of the proposed offering the Company plans to adopt an incentive
compensation plan which will provide for various incentive programs including
(1) founders grants of stock options, (2) awards of restricted stock relating to
unvested Motorola options, (3) restricted stock awards for certain officers,
(4) annual stock option awards and (5) annual incentive awards based on
performance of the Company and each employee's organizational level.
In connection with the restricted stock awards for certain officers, the
Company will incur compensation expense for financial reporting purposes equal
to the value of such restricted stock. It is currently estimated that
approximately $10,000 of expense will be recorded over the vesting period
related to such awards.
In addition it is currently estimated that an additional $5,000 of
restricted stock would be awarded relating to unvested Motorola options for
certain employees. Such amount would be charged to expense over the vesting
period.
It is anticipated that employees of the Company holding vested Motorola
stock options will have the right to elect to receive substitute awards relating
to the Company's common stock in exchange for Motorola common stock awards at
the time Motorola no longer owns greater than 50% of the Company. At that time
the Company will incur a one-time charge to expense for the value of such awards
that is in excess of the amount to be paid by the employee. Such amount can not
be determined at this time, however depending on the number of employees making
such election, the charge could be material.
F-1-26
<PAGE>
COMPANIA DE
RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-2-1
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
U.S. GAAP Audited Financial Statements ----
<S> <C>
Report of Independent Accountants........................... F-2-3
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-2-4
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999.......................... F-2-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1998 and 1999...... F-2-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-2-7
Notes to the Consolidated Financial Statements.............. F-2-9
</TABLE>
F-2-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the President and Board of Directors of
Compania de Radiocomunicaciones Moviles S.A.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and cash
flows, all expressed in U.S. dollars, present fairly, in all material respects,
the financial position of Compania de Radiocomunicaciones Moviles S.A. and
Subsidiary as of December 31, 1998 and 1999, and the results of their operations
and their cash flows for the years ended December 31, 1997, 1998 and 1999 in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers
Buenos Aires, Argentina
January 20, 2000
F-2-3
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF US DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 2,154 $ 22,373
Accounts receivable, net.................................... 157,455 185,159
Other receivables and prepaid expenses...................... 2,768 8,670
Inventories, net............................................ 10,514 9,912
Other current assets, net................................... 23,883 37,526
-------- ----------
TOTAL CURRENT ASSETS........................................ 196,774 263,640
-------- ----------
NON-CURRENT ASSETS
Other receivables and prepaid expenses...................... 12,521 9,902
Leased equipment, net....................................... 31,438 14,301
Property, plant and equipment, net.......................... 421,477 521,339
Intangible assets, net...................................... 1,321 248,013
Deferred charges, and other non-current assets.............. 1,770 2,271
-------- ----------
TOTAL NON-CURRENT ASSETS.................................... 468,527 795,826
-------- ----------
TOTAL ASSETS................................................ $665,301 $1,059,466
======== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable............................................ $108,554 $ 219,047
Debt maturing within one year............................... 1,391 115,424
Other current liabilities (Notes 13 and 17)................. 47,680 54,527
-------- ----------
TOTAL CURRENT LIABILITIES................................... 157,625 388,998
-------- ----------
NON-CURRENT LIABILITIES
Long term debt.............................................. 148,810 221,244
Other non-current liabilities (Note 13)..................... 9,819 17,879
-------- ----------
TOTAL NON-CURRENT LIABILITIES............................... 158,629 239,123
-------- ----------
TOTAL LIABILITIES........................................... 316,254 628,121
-------- ----------
COMMITMENTS AND CONTINGENCIES (Note 17)
MINORITY INTEREST (NOTE 20)................................. -- 8
-------- ----------
SHAREHOLDERS' EQUITY
Common stock, US$ 1 par value (2,000,000 shares authorized
and outstanding at December 31, 1998 and 1999) (Note
15)....................................................... 2,000 2,000
Additional paid-in-capital.................................. 33,022 33,022
Retained earnings........................................... 314,025 396,315
-------- ----------
TOTAL SHAREHOLDERS' EQUITY.................................. 349,047 431,337
-------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $665,301 $1,059,466
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2-4
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF US DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Services and Equipment Revenues.......................... $ 597,908 $ 748,903 $ 830,039
Costs of Services and Equipment.......................... (198,765) (223,328) (215,706)
---------- ---------- ----------
GROSS MARGIN........................................... 399,143 525,575 614,333
---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative (Note 18).......... (245,368) (293,691) (357,701)
Depreciation and amortization.......................... (51,638) (72,992) (84,881)
Taxes other than income tax............................ (24,344) (29,563) (32,702)
---------- ---------- ----------
TOTAL OPERATING EXPENSES............................... (321,350) (396,246) (475,284)
---------- ---------- ----------
OPERATING INCOME....................................... 77,793 129,329 139,049
---------- ---------- ----------
Interest income.......................................... 2,706 2,128 3,104
Interest expense......................................... (6,780) (13,978) (24,666)
Other income, net........................................ 4,443 1,945 1,434
---------- ---------- ----------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST........... 78,162 119,424 118,921
---------- ---------- ----------
Income tax (Note 14)..................................... (25,687) (41,428) (36,624)
---------- ---------- ----------
MINORITY INTEREST........................................ -- -- (7)
---------- ---------- ----------
NET INCOME............................................... $ 52,475 $ 77,996 $ 82,290
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2-5
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL LEGAL RETAINED
SHARES COMMON PAID IN RESERVE EARNINGS
DESCRIPTION (NOTE 15) STOCK CAPITAL (NOTE 22) (NOTE 22) TOTAL
----------- --------- ----- ------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997... 2,000,000 $2,000 $33,022 $444 $183,110 $218,576
--------- ------ ------- ---- -------- --------
Net income for the year......... -- -- -- -- 52,475 52,475
--------- ------ ------- ---- -------- --------
Balance as of December 31,
1997.......................... 2,000,000 2,000 33,022 444 235,585 271,051
--------- ------ ------- ---- -------- --------
Net income for the year......... -- -- -- -- 77,996 77,996
--------- ------ ------- ---- -------- --------
Balance as of December 31,
1998.......................... 2,000,000 2,000 33,022 444 313,581 349,047
--------- ------ ------- ---- -------- --------
Net income for the year......... -- -- -- -- 82,290 82,290
--------- ------ ------- ---- -------- --------
Balance as of December 31,
1999.......................... 2,000,000 $2,000 $33,022 $444 $395,871 $431,337
========= ====== ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2-6
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 52,475 $ 77,996 $ 82,290
Adjustments to reconcile net income to net cash flow
provided by/ (used in) operating activities:
Depreciation and amortization............................. 51,638 72,992 84,881
Allowance for doubtful accounts........................... 29,977 37,443 30,971
Reserve for lower of cost or market....................... 6,003 1,804 2,632
Minority interest in income of subsidiaries............... -- -- 7
Financial results......................................... -- -- 7,725
Deferred income tax....................................... 9,034 (6,126) 4,639
Changes in operating assets and liabilities:
Inventories and leased equipment, net..................... (44,938) 34,950 15,107
Accounts receivable....................................... (126,597) (39,768) (58,675)
Accounts payable.......................................... 52,631 24,869 110,493
Other receivables and prepaid expenses.................... (7,141) (1,750) (3,283)
Deferred charges and other assets......................... (30,522) 6,948 (11,199)
Other liabilities......................................... 24,345 (10,620) 7,141
--------- --------- ---------
TOTAL ADJUSTMENTS......................................... (35,570) 120,742 190,439
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 16,905 198,738 272,729
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures...................................... (162,415) (166,978) (183,423)
Proceeds from disposition of investments.................. 3,513 700 --
Purchase of PCS licenses and other intangible assets...... (50) (47) (105,752)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES..................... (158,952) (166,325) (289,175)
--------- --------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings (repayments) of short-term debt............ 139,583 (178,192) 36,665
Proceeds from long-term debt.............................. -- 148,725 --
Debt issuance cost........................................ -- (1,697) --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... 139,583 (31,164) 36,665
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS........ (2,464) 1,249 20,219
CASH AND CASH EQUIVALENTS, AS OF THE BEGINNING OF THE
YEAR...................................................... 3,369 905 2,154
--------- --------- ---------
CASH AND CASH EQUIVALENTS, AS OF THE END OF THE YEAR........ $ 905 $ 2,154 $ 22,373
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2-7
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 5,613 $ 13,181 $ 16,467
Income taxes.............................................. 21,735 44,269 33,903
NON CASH TRANSACTIONS
Purchase of PCS licenses through an increase in debt...... -- -- 157,050
Increase of current investment through a decrease in
non-current investments................................. 690 -- --
Decrease of investment in unconsolidated affiliates....... 24 -- --
Increase of leased equipment through a decrease in
inventories............................................. 92,981 77,480 36,270
Increase in short-term debt through a decrease in
long-term debt.......................................... 21,600 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2-8
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A. AND
SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS)
NOTE 1--ORGANIZATION
Compania de Radiocomunicaciones Moviles S.A. and Subsidiary (the "Company")
is a telecommunications company headquartered in Buenos Aires, Argentina and
provides different services: wireless (Cellular, trunking and paging), basic
telephony (local and long distance), internet and data transmission services. In
1999, the Company acquired licenses to operate Personal Communications Services
(PCS) throughout Argentina. In November 1999, the Company (through its
subsidiary Compania de Telefonos del Plata S.A. -CTP- ) also acquired a license
to provide local and long distance services.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which differ in
certain respects from the accounting principles applied by the Company in its
financial statements prepared in accordance with generally accepted accounting
principles in Argentina ("Argentine GAAP"). The U.S. dollar has been used as the
reporting currency.
The accompanying consolidated financial statements include the accounts of
Compania de Radiocomunicaciones Moviles S.A. and its subsidiary (CTP). All
significant intercompany accounts and transactions have been eliminated.
B. TRANSLATION OF FINANCIAL STATEMENTS
The functional currency of the Company is the US Dollar. The monetary assets
and liabilities are remeasured into US Dollars at the exchange rate in effect at
the balance sheet date. Revenues, expenses, gains and losses are translated at
the average exchange rate for the period, and non-monetary assets and
liabilities are translated at historical rates. Resulting re-measurement gains
or losses are recognized in the results of operations. Since that from April 1,
1991, the prevailing exchange rate has been 1 US$ = 1 Peso, no translation gains
or losses are reflected in the Consolidated Statements of Income.
C. USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Estimates are used when
accounting for the allowance for doubtful accounts, reserve for lower of cost or
market, depreciation and amortization, evaluation of the carrying value of
long-lived assets, income taxes and contingencies. Actual results could differ
from those estimates.
D. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with an
original maturity of three months or less to be cash equivalents. Interest
income on cash equivalents was $53 for 1997, $58 for 1998 and $1,340 for 1999.
F-2-9
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A. AND
SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable correspond to customer trade accounts in the normal
course of business, carriers related to Calling Party Pays system and carriers
related to roaming services provided.
The allowance for doubtful accounts is recorded against trade accounts
receivable based on the risk of uncollectibility as a reduction of the related
receivable balance. The allowance for such uncollectible accounts was $51,904
for 1998 and $56,646 for 1999.
F. INVENTORIES
Inventories are valued using the weighted average cost method and are stated
at the lower of cost or market value. Reserve for lower of cost or market have
been recorded to reduce the carrying value of obsolete or slow-moving inventory
to market value.
G. PROPERTY, PLANT END EQUIPMENT
Property, plant and equipment are stated at original cost, less accumulated
depreciation. Depreciation expense is computed using the straight-line method
over the estimated useful lives of the assets.
Gains or losses on disposal of other depreciable property, plant and
equipment are recognized in the year of disposition as an element of other
income, net.
H. LEASED EQUIPMENT
Leased equipment consist of handsets rented to users, out on demonstration,
lending and comodato (Argentine legal concept under which the property remains
with the Company while the use stays with the customer).
Leased equipment is recorded at cost, less accumulated depreciation.
Depreciation expense is computed by the straight-line method over a 2 year
period.
In cases where the related future revenue is not expected to recover the
equipment's value, the value of the equipment is fully written off when it is
delivered.
I. INTERNAL USE SOFTWARE
Effective January 1, 1999, the Company adopted SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". This
standard requires the capitalization of costs associated with software
development or obtained for internal use.
J. INTANGIBLE ASSETS
This caption mainly consists of the goodwill that resulted from the
acquisition of companies licensed to operate trunking services, as well as the
amounts paid for the acquisition of PCS licenses (I, II and III Areas).
Goodwill consist of the excess consideration paid over the fair value of net
tangible assets acquired in business combinations accounted for under the
purchase method.
F-2-10
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A. AND
SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The carrying value of these assets is periodically reviewed to determine
whether such intangibles are fully recoverable from projected net cash flows of
the related business unit.
Goodwill are recorded at cost and are being amortized by the straight-line
method over a 5 years period.
The amounts paid for the acquisition of PCS licenses are recorded at cost
net of discounted interest, and the Company expects to begin amortization at the
time service is launched (See Note 3).
Accumulated amortization on Intangible assets was $4,739 and $5,748 for 1998
and 1999 respectively.
Amortization expense on intangible assets was $1,200 for 1997, $1,167 for
1998 and $1,009 for 1999.
K. VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. For
assets that the Company intends to hold for use, if the total expected future
cash flow is less than the carrying amount of the assets, an impairment loss is
recognized for the difference between the fair value and carrying value of the
asset. For assets the Company intends to dispose of, a loss is recognized for
the amount that the estimated fair value, less selling costs, is less than the
carrying value of the assets. As of December 31, 1999, no impairment loss has
been recognized on long-lived assets.
L. DEFERRED CHARGES
Deferred charges represent debt issuance costs incurred in connection with
the issuance of the Euro-Medium-Term Note Program.
Debt issuance costs are being amortized on the straight-line method over the
life of the related debt.
Amortization expense on deferred charges was $220 for 1998 and $311 for
1999.
M. INCOME TAX
At each year end, the income tax has been estimated applying the statutory
tax rate (33%, 35% and 35% for the fiscal years ended December 31, 1997, 1998
and 1999, respectively) prevailing in each year.
The Company has recorded the deferred income tax based on temporary
differences between the carrying amounts of assets for financial reporting
purposes and their tax basis. Temporary differences primarily result from the
estimate of the allowance for doubtful account and the use of accelerated
methods and shorter lives in computing depreciation expense for tax purpose.
N. REVENUE RECOGNITION
Service revenues arise mainly from the provision of service plan, usage of
the cellular network (wireless airtime and long distance revenues), activation
services and roaming. Service plan revenue is
F-2-11
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A. AND
SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized as earned. Airtime (including roaming) and long distance revenues are
recognized when the services are rendered. Revenue associated with the sale of
pre-paid calling cards is deferred and recognized as the airtime is utilized.
Equipment sales and other services revenues are recognized when the products
are delivered and accepted by end-users and when services are provided. The
amount realized for cellular handset sales is influenced by the commercial
policy of reaching higher market penetration by reducing the access costs to the
cellular service for customers, while maintaining the overall profitability of
the business.
Allowances for uncollectible billed services are adjusted monthly.
O. MAINTENANCE AND REPAIRS
The cost of maintenance and repairs of plant, including the cost of
replacing minor items not resulting in substantial betterments, is charged to
operating expense.
P. ADVERTISING
The Company expenses advertising costs as the related services are provided.
The total advertising expense was $25,646 for 1997, $28,338 for 1998 and $45,393
for 1999.
Q. PENSION INFORMATION
The Company does not maintain any pension plans. Argentine laws provide for
pension benefits to be paid to retired employees from government pension plans
and/or privately managed funds plans to which employees may elect to contribute.
The Company does not sponsor any employee stock ownership plans, or any
other kind of stock option plan.
R. VACATION EXPENSES
Vacation expense is fully accrued in the fiscal year the employee renders
services to earn such vacation.
S. EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares
outstanding during the year, and related income amounts.
T. RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' financial
statements to conform to the current year presentation.
U. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" as
amended is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS 133 requires all derivative instruments to be recognized in
the financial statements as either assets or liabilities at their fair values.
Changes in fair value of derivative instruments are either recognized in income
or outside income as a
F-2-12
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A. AND
SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
component of other comprehensive income depending on their designation and
effectiveness as fair value hedges, cash flow hedges or foreign currency hedges.
The Company expects the adoption of the standard will not have a significant
effect on its financial statements. The Company has not used any derivative
instruments in the past.
NOTE 3--ACQUISITIONS OF BUSINESS
The Company completed various transactions to further its operations in
Argentina. A summary of significant transactions during 1999 are described as
follows:
PUBLIC BID FOR FREQUENCIES TO PROVIDE PCS SERVICES
In the public auction that took place in June, 1999, the Company was awarded
the licenses and related frequencies to render PCS services in Regions I (North
of Argentina) and III (South of Argentina), with a 40 MHz band width in each
case. In addition, the Company exercised the purchase option for a 20 MHz PCS
band in Region II (the extended AMBA area), consistent with the service offered
at that time by the Company's only cellular competitor in such area.
On June 22, 1999, the Company exercised its preferential option for 20 MHz
of the spectrum in Region II for $162.75 million, equal to 50% of the average
price of the 40 MHz awarded to each of the successful bidders. It paid 40%
($65.1 million) in cash and 60% in two non-interest bearing promissory notes
(Note 12) supported by bank guarantees, each for 30% of the total amount and
maturing in one and two years, respectively. The Company obtained the license to
provide personal communications services (PCS) in Region II, (the extended AMBA
area), and authorization to use the CC' Frequency Band.
In the auction for the PCS licenses in Regions I and III, held on June 22,
1999, the Company received the second license in the Northern region of
Argentina (area I), for a bid of $53 million, and the first license in the
Southern region (area III), for a bid of $46 million.
The payment terms were similar to those for area II, i.e. 40% of each bid
($21.2 million for area I and $18.4 for area III) in cash, and the remaining 60%
of each bid in four promissory notes guaranteed by the Company's shareholders
for 30% each ($15.9 million and $13.8 million for area I and III, respectively)
maturing on June 27, 2000 and 2001, respectively. The licenses to operate the
Personal Communications Service (PCS) in the interior of the country--regions I
and III--were awarded June 29, 1999, enabling the Company to provide the
services and begin commercial operations as from November 8, 1999.
F-2-13
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 3--ACQUISITIONS OF BUSINESS (CONTINUED)
PURCHASE OPTION FOR THE SHARES IN TELMELL S.A.
On December 1, 1999, the Company signed an option agreement for the
acquisition of 100% voting interest in Telmell S.A. for a total consideration of
$800. Although as of December 31, 1999 the option was not exercised the Company
paid the total consideration.
Telmell S.A. owns the frequencies to render fixed data and value added
transmission competitive services, granted by the National Telecommunications
Commission (CNC). The terms of the agreement provide that the Company is
entitled to exercise the option within 180 days from executing the agreement.
During 1999, legislation was enacted in Argentina that requires antitrust
commission approval for mergers and acquisitions in a variety of circumstances.
Approval for the Telmell acquisition has not yet occurred. Management believes
approval will occur during next fiscal year. It is the management intention to
exercise the option once approval is obtained.
NOTE 4--CASH AND CASH EQUIVALENTS
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Cash and bank............................................. $ 2,154 $ 3,028
Fixed term deposit........................................ -- 15,212
Other deposits............................................ -- 4,133
------- -------
$ 2,154 $22,373
======= =======
</TABLE>
F-2-14
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 5--OTHER RECEIVABLES AND PREPAID EXPENSES
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
CURRENT
Prepaid rent.............................................. $ 498 $ 3,646
Advances and loans to employees........................... 1,153 2,015
Advances of sales commissions............................. 1,004 1,334
Purchase option for future acquisition (Note 3)........... -- 800
Prepaid insurance......................................... 79 449
Prepaid advertising....................................... 34 419
Other..................................................... -- 7
------- -------
$ 2,768 $ 8,670
======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
NON CURRENT
Prepaid rent.............................................. $11,819 $ 9,208
Advances and loans to employees........................... 702 638
Prepaid advertising....................................... -- 56
------- -------
$12,521 $ 9,902
======= =======
</TABLE>
NOTE 6--INVENTORIES
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
New telephone equipment.................................... $ 7,267 $7,831
Used telephone equipment................................... 7,106 4,162
Accessories................................................ 1,687 1,772
Reserve for lower of cost or market........................ (5,546) (3,853)
------- ------
$10,514 $9,912
======= ======
</TABLE>
F-2-15
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 7--DEFERRED CHARGES AND OTHER ASSETS
As of December 31, 1998 and 1999, the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
CURRENT
Tax prepayments......................................... $ 5,631 $ 15,914
Avances to suppliers
-- non-affiliates..................................... 7,286 7,572
-- affiliates......................................... 43 --
Deferred income tax (Note 14)........................... 10,912 14,040
Deposits................................................ 11 --
-------- --------
$ 23,883 $ 37,526
======== ========
NON-CURRENT
Deferred charges, net................................... $ 1,562 $ 1,379
Deposits................................................ 194 892
Other................................................... 14 --
-------- --------
$ 1,770 $ 2,271
======== ========
</TABLE>
NOTE 8--LEASED EQUIPMENT
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Leased equipment (handsets)............................. $122,393 $120,965
Accumulated depreciation................................ (90,955) (106,664)
-------- --------
$ 31,438 $ 14,301
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Depreciation expenses (1)...................... $62,669 $ 72,220 $ 50,216
======= ======== ========
</TABLE>
------------------------
(1) The depreciation charges related to leased handset equipment were recognized
in the Consolidated Statements of income as a cost of services and
equipment.
F-2-16
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 9--PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
(MONTHS) 1998 1999
------------ --------- ---------
<S> <C> <C> <C>
Cell site equipment....................................... 48-120 $ 524,623 $ 667,332
Other equipment and furniture............................. 36-120 56,905 69,653
Buildings and Improvements................................ 60-180 53,231 61,574
Land...................................................... -- 3,739 4,237
Software.................................................. 60 -- 2,211
Fixed assets in transit................................... -- 40,661 52,979
Advances to fixed asset suppliers......................... -- 1,453 5,962
Less: Accumulated Depreciation............................ -- (259,135) (342,609)
--------- ---------
$ 421,477 $ 521,339
========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Depreciation expenses....................................... $50,438 $71,605 $83,561
======= ======= =======
</TABLE>
NOTE 10--INTANGIBLE ASSETS
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
(MONTHS) 1998 1999
------------ -------- --------
<S> <C> <C> <C>
PCS Licenses................................................ 240 $ -- $247,655
Goodwill.................................................... 60 5,584 5,584
Trade-Marks................................................. 60 476 522
Less Accumulated Amortization............................... -- (4,739) (5,748)
------- --------
$ 1,321 $248,013
======= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Amortization expense........................................ $1,200 $1,167 $1,009
====== ====== ======
</TABLE>
F-2-17
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 11--ACCOUNTS PAYABLE
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
a. Affiliates--trade:
- Motorola Inc........................................ $ 40,365 $ 42,973
- BGH S.A............................................. -- 5,955
- BellSouth International............................. 80 80
-------- --------
40,445 49,008
-------- --------
b. Non-affiliates--trade................................ 68,109 170,039
-------- --------
$108,554 $219,047
======== ========
</TABLE>
NOTE 12--DEBT
DEBT MATURING WITHIN ONE YEAR
As of December 31, 1998 and 1999, debt maturing within one year is
summarized as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Bank loans (*).......................................... $ -- $ 38,056
Bank overdrafts......................................... 1,391 --
Notes payable, net (**)(ii)............................. -- 77,368
-------- --------
$ 1,391 $115,424
======== ========
</TABLE>
------------------------
(*) Annual bank loans interest rates 6.0%-9.0%
(**) Includes unaccrued implicit interest of the Notes payable related to the
PCS License obtained for $1,157 (See Note 3).
The following table shows the breakdown of bank loans as of December 31,
1999 to mature in 2000:
<TABLE>
<CAPTION>
1999
----
<S> <C>
3rd quarter 2000............................................ $14,091
4th quarter 2000............................................ $23,965
-------
$38,056
=======
</TABLE>
F-2-18
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 12--DEBT (CONTINUED)
LONG-TERM DEBT
Long-term debt outstanding as of December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Euro-Medium-Term Note Program (i)....................... $148,810 $148,938
Notes payable, net (*)(ii).............................. -- 72,306
-------- --------
$148,810 $221,244
======== ========
</TABLE>
------------------------
(*) Includes unaccrued implicit interest of the Notes payable related to the PCS
License obtained for $6,219 (See Note 3).
(i) On February 9, 1998, the Argentine National Securities and Exchange
Commission authorized the Company to offer securities under a global simple
negotiable bond program for a maximum face value of $350 million.
On May 8, 1998, the Company issued the first series of notes for $150
million, maturing in 2008 and bearing interest at a 9.25% per annum at an
issue price of 99.155% of the principal amount. The net proceeds from the
issuance of this notes were used to repay financial loans.
(ii) The notes payable are related to the acquisition of the Personal
Communication Services (PCS) Licenses in the areas I, II and III, as
described in note 3. The notes are non-interest bearing and have a face
value of $157,050. Such notes were initially recorded at the discounted
value of $141,948 and imputed interest of 7% is being accrued over the life
of the debt. The maturities of the notes and the allocation to the different
PCS license regions is as follows:
<TABLE>
<CAPTION>
DUE 06.27.2000 DUE 06.27.2001
--------------------- -------------------------
IN THOUSANDS IN THOUSANDS
AREA OF US DOLLARS AREA OF US DOLLARS
---- ------------- ---- -------------
<S> <C> <C> <C>
I $15,900 I $15,900
II 48,825 II 48,825
III 13,800 III 13,800
------- -------
$78,525 $78,525
======= =======
</TABLE>
The Company has local credit lines of approximately $359,000 with various
banks. Borrowings under the committed credit lines totaled $38,056 at
December 31, 1999. There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
F-2-19
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 13--OTHER LIABILITIES
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
CURRENT
Accrued expenses.......................................... $ 5,705 $12,799
Accrued salaries and wages................................ 10,200 15,899
Accrued income tax........................................ 15,820 9,514
Other taxes accrued....................................... 9,956 7,993
Provision for contingencies (i)........................... 3,673 5,034
Accrued interest.......................................... 2,326 2,800
Other..................................................... -- 488
------- -------
$47,680 $54,527
======= =======
NON-CURRENT
Deferred income tax (Note 14)............................. $ 9,819 $17,586
Other..................................................... -- 293
------- -------
$ 9,819 $17,879
======= =======
</TABLE>
------------------------
(i) This reserve relates to: (a) labor lawsuits filed against the Company,
(b) tax matters related to differences in basis in the computation of
certain tax contributions, and, (c) other sundry claims. In the opinion of
management and based on consultation with external legal counsel, the
Company has established provisions for amounts which are probable of adverse
occurrence and which, according to estimates developed by the Company's
legal counsel, would meet all related contingencies and corresponding fees
relating to these claims. Management reassesses these matters as new facts
brought into management's attention.
NOTE 14--INCOME TAXES
ACCOUNTING FOR INCOME TAXES
As of December 31, 1997, 1998 and 1999, the provision for income taxes
consists of:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Estimated amounts payable........................ $16,653 $47,554 $31,985
Deferred tax expense from temporary
differences.................................... 9,034 (6,126) 4,639
------- ------- -------
$25,687 $41,428 $36,624
======= ======= =======
</TABLE>
Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory tax rates, applicable to future
years, and to differences between the financial reporting and the tax basis of
existing assets and liabilities.
F-2-20
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 14--INCOME TAXES (CONTINUED)
The tax effect of temporary differences is as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
(ASSETS) LIABILITIES
---------------------
1998 1999
---- ----
<S> <C> <C>
Timing differences (tax effect)
Difference in fixed assets depreciation charges........
$ 9,819 $ 17,586
Allowance for doubtful accounts, reserve for lower of
cost or market and non deductible expenses...........
(10,912) (14,040)
--------- ---------
Net Deferred Tax (Assets)/Liability....................
$ (1,093) $ 3,546
========= =========
</TABLE>
A reconciliation of the federal statutory income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate............................ $25,793 $41,798 $41,622
Other items, net................................. (106) (370) (4,998)
------- ------- -------
Reported tax expense............................. $25,687 $41,428 $36,624
======= ======= =======
</TABLE>
NOTE 15--SHAREHOLDERS' CONTRIBUTIONS
As of December 31, 1998 and 1999 the Common stock of the Company consisted
of 2,000,000 ordinary, subscribed, paid up, registered, non-endorsable, single
vote shares with a face value of $1 each.
NOTE 16--CONCENTRATION OF CREDIT RISK
Financial instruments that are potentially subject to credit risk consist
principally of trade accounts receivable. The Company provides
telecommunications services to a broad range of commercial, residential and
public sector clients and provides credit, in accordance with the regulations of
the service rendered, generally with no guarantees.
Concentrations of credit risk with respect to these receivables, other than
those from other carriers (related to roaming services) and long distance
carriers (mainly related to calling party pays system), are limited due to the
composition of the customer base, which includes a large number of individuals
and businesses. At December 31, 1998 and 1999, approximately $34,241 and
$55,523, respectively, of trade accounts receivable were from other carriers and
long distance carriers.
F-2-21
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 17--COMMITMENTS AND CONTINGENCIES
LEASES
The Company entered into operating leases for facilities and equipment used
in operations. Rental expense under operating leases was $9,496, $5,648 and
$4,776 for the three years ended December 31, 1999. Capital leases currently in
effect are not significant.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 1999:
<TABLE>
<CAPTION>
MINIMUM
RENTALS
-------
<S> <C>
2000........................................................ $2,105
2001........................................................ 1,114
2002........................................................ 911
2003........................................................ 601
2004........................................................ 234
Thereafter.................................................. 250
------
Total minimum obligations................................... $5,215
======
</TABLE>
OTHER CLAIMS
The Company is subject to claims arising in the ordinary course of business
involving allegations of personal injury, breach of contract, employment law
issues, regulatory matters and other actions.
While complete assurance cannot be given as to the outcome of any legal
claims, the Company believes that any financial impact would not be material to
its results of operations, financial position or cash flows.
PROMISSORY NOTES
The Company has delivered three promissory notes as performance bonds for
the license of Personal Communications Services (PCS) (see Note 3), which may be
enforced by the Government if the obligations involving network deployment
foreseen in the regulations and terms and conditions for the bid are not
complied with. The notes delivered as performance bonds amount to $15 million
each, one for Area II maturing in 16 months (2000), and the other two (for Areas
I and III) maturing within two years (2001).
F-2-22
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 18--SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
As of December 31, 1997, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Salaries, pension and benefits................ $ 55,093 $ 77,406 $ 99,647
Sales commissions............................. 80,603 75,096 74,879
CPP collection commissions.................... 13,193 21,133 47,468
Advertising................................... 25,646 28,338 45,393
Bad debts..................................... 29,977 37,443 30,971
Administration................................ 6,521 8,880 11,498
Fees.......................................... 5,283 9,070 9,703
Billing, printing and distribution............ 6,906 8,067 8,567
Bank commissions.............................. 4,290 5,860 6,492
Office supplies and deliveries................ 5,077 5,593 4,852
Software and hardware......................... 3,797 4,213 4,682
Credit card commissions....................... 2,255 3,749 4,038
Rental........................................ 3,444 3,160 3,673
Other......................................... 3,283 5,683 5,838
-------- -------- --------
$245,368 $293,691 $357,701
======== ======== ========
</TABLE>
F-2-23
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 19--TRANSACTIONS WITH RELATED PARTIES
The principal transactions carried out by the Company during the year with
its related companies are summarized below:
<TABLE>
<CAPTION>
COMPANY RELATION TYPE OF TRANSACTION 1997 1998 1999
------- -------- ------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Motorola Inc................ Shareholder (i) Purchase of Telecommunication $ 89,873 150,762 145,591
Equipment/MIRS
BGH S.A..................... Shareholder (i) Purchase of equipment and accessories $113,362 35,794 59,310
BellSouth International..... Shareholder (i) Provision of Technical Services/ $ 467 132 762
Expatriate expenses
BellSouth Mobility.......... Common Purchase of roaming services $ 185 339 277
Shareholder
Abiatar (Uruguay)........... Common Purchase of roaming services $ 4,698 5,919 6,336
Shareholder
Abiatar (Uruguay)........... Common Provision of roaming services $ 1,363 2,616 2,627
Shareholder
Telecel (Paraguay).......... Common Purchase of roaming services $ -- -- 29
Shareholder
Telecel (Paraguay).......... Common Provision of roaming services $ -- 41 245
Shareholder
BellSouth Chile............. Common Purchase of roaming services $ 295 748 528
Shareholder
BellSouth Chile............. Common Provision of roaming services $ 271 511 760
Shareholder
BSWIS....................... Common Purchase of roaming services $ -- -- 36
Shareholder
</TABLE>
------------------------------
(i) Direct or indirect shareholder.
F-2-24
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 19--TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Intercompany Balances as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Assets
Accounts Receivables
Abiatar S.A. (Uruguay)................................ $ 142 $ 25
BellSouth Comunicaciones S.A. (Chile)................. 21 121
Telecel (Paraguay).................................... 41 257
------- -------
204 403
Liabilities
Accounts payable
Motorola Inc.......................................... 40,365 42,973
BGH S.A............................................... -- 5,955
BellSouth International............................... 80 80
------- -------
$40,445 $49,008
</TABLE>
NOTE 20--TELECOMMUNICATIONS DEREGULATION PLAN
Current Argentina telecommunications legislation includes provisions for the
granting of basic telephony service licenses with national coverage for the two
existing telephone companies and two new ones, which will be operated by the two
independent companies rendering cellular telephone services. During first
quarter of 1999, the Company formed, jointly with two other companies, Compania
de Telefonos del Plata S.A. (CTP) in order to render such basic telephony
services, and CTP has signed a related license contract with the National
Government. The Company owns a 91% stock interest of CTP. As a consequence of
this formation, there has been no recognition of goodwill. Minority interest
represents the remaining 9% of CTP's stock interest belonging to Fecosur S.A.
and Compania de Cables Inversora S.A.
NOTE 21--DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107 "Disclosure about fair value of financial
statements", the Company is required to disclose the fair value of financial
instruments, including off-balance sheet financial statements when fair value
can be reasonably estimated. The values provided are representative of the fair
values as of December 31, 1998 and 1999 except otherwise indicated, and do not
reflect subsequent changes in the economy, interest and tax rates and other
variables that may impair fair value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The fair value amounts disclosed represents management's best estimates of fair
value.
F-2-25
<PAGE>
COMPANIA DE RADIOCOMUNICACIONES MOVILES S.A.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 21--DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The recorded amounts of cash and cash equivalents and bank loans approximate
fair value due to the short-term nature of these instruments.
Fair value estimates for long-term debt is estimated based on quotes from
dealers for each issue at December 31, 1998 and 1999. Since judgment is required
to develop the estimates, the estimated amounts presented herein may not be
indicative of the amounts that we could realize in a current market exchange.
As of December 31, 1998 and 1999, fair value of long term debt did not
differ significantly from the carrying amounts.
NOTE 22--RESTRICTIONS ON THE DISTRIBUTION OF EARNINGS
A. DIVIDEND PAYMENTS
Argentine Law requires that, financial statements prepared in accordance
with Argentine GAAP are to be used as a basis for any dividend payment.
Accordingly, the amounts available for dividend distribution purposes are
calculated based upon the Company's Argentine GAAP financial statements (not
presented herein) and not the figures reported in the accompanying consolidated
financial statements. As of December 31, 1999, the retained earnings available
for dividend distribution were approximately $404,000. Dividends of the Company
are declared in Argentine pesos.
B. LEGAL RESERVES
Under Argentine Federal Law, a minimum of 5% of net income for each year
calculated in accordance with Argentine GAAP must be appropriated by resolution
of the shareholders to a legal reserve until such reserve reaches 20% of the
outstanding capital. This legal reserve may be used only to absorb deficits.
NOTE 23--SEGMENT INFORMATION
The Company provides different types of services, including wireless
(cellular, trunking and paging), basic telephony (local and long distance), and
internet and data transmission services. Through December 31, 1999,
substantially all of the Company's revenues are from its cellular business. The
Company started providing basic telephony and data transmission by the end of
1999, while the remaining non-cellular services are, on an aggregate basis, less
than 5% of total revenues.
F-2-26
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1998 and 1999
with Report of Independent Auditors
F-3-1
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
CONTENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-3-3
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-3-4
Consolidated Statements of Income......................... F-3-6
Consolidated Statements of Changes in Stockholders'
Equity.................................................. F-3-7
Consolidated Statements of Changes in Financial
Position................................................ F-3-8
Notes to Consolidated Financial Statements................ F-3-9
</TABLE>
F-3-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders of
Baja Celular Mexicana, S.A. de C.V.
We have audited the accompanying consolidated balance sheets of Baja Celular
Mexicana, S.A. de C.V. as of December 31, 1998 and 1999, and the related
consolidated statements of income, changes in stockholders' equity, and changes
in financial position for the years ended as of December 31, 1997, 1998 and
1999. 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 auditing standards generally
accepted in Mexico which are the same as those followed 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 and are prepared in accordance with accounting principles generally
accepted in Mexico. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 consolidated financial position of
Baja Celular Mexicana, S.A. de C.V. as of December 31, 1998 and 1999, and the
consolidated results of their operations, and changes in their financial
position for the years ended as of December 31, 1997, 1998 and 1999, in
conformity with accounting principles generally accepted in Mexico, which differ
in certain significant respects from those followed in the United States of
America (see Note 15 to the Consolidated Financial Statements).
Mancera, S.C.
Member of Ernst & Young International
Diego J. Romero
Tijuana, B.C., Mexico
April 28, 2000, except for the restatement to
constant Mexican Pesos as of March 31, 2000
(Note 2), which note is presented as of
May 22, 2000
F-3-3
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DECEMBER 31, (NOTE 2)
----------------------------- -----------
1998 1999 1999
---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 10).............. PS. 92,873 PS. 99,642 10,478
Accounts receivable:
Trade (Note 10)................................ 123,089 188,085 19,778
Sundry debtors................................. 2,387 3,052 321
Recoverable taxes.............................. 67,940 76,368 8,030
Related parties (Note 7)....................... 11,242 3,176 334
Other.......................................... 14,410 65,366 6,873
------------- ------------- -------
219,068 336,047 35,336
Allowance for doubtful accounts................ (10,619) (20,410) (2,146)
------------- ------------- -------
208,449 315,637 33,190
Inventories, net (Note 3).......................... 136,978 334,628 35,187
------------- ------------- -------
Total current assets............................... 438,300 749,907 78,855
Property and equipment, net (Note 4)............... 893,352 1,319,678 138,767
Goodwill, net (Note 5)............................. 688,143 628,306 66,068
Other assets, net (Note 6)......................... 64,244 60,663 6,379
------------- ------------- -------
Total assets....................................... PS. 2,084,039 PS. 2,758,554 290,069
============= ============= =======
</TABLE>
F-3-4
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DECEMBER 31, (NOTE 2)
----------------------------- -----------
1998 1999 1999
---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Notes 8 and
10)............................................ PS. 42,885 PS. 68,492 7,202
Suppliers (Note 10).............................. 136,038 298,108 31,347
Related parties (Note 7)......................... 72,327 190,234 3,639
Taxes payable.................................... 21,061 34,608 3,499
Ministry of Communications and Transportation and
long-distance carrier companies................ 52,112 33,272 10,106
Other accounts payable........................... 35,123 96,115 20,004
------------- ------------- -------
Total current liabilities.......................... 359,546 720,829 75,797
Long-term debt (Note 8)............................ 199,204 240,586 25,298
Labor obligations.................................. 247 740 78
------------- ------------- -------
Total liabilities.................................. 558,997 962,155 101,173
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY (NOTES 9 AND 13)
Capital stock.................................... 1,164,916 1,164,916 122,494
Retained earnings................................ 118,634 258,788 27,212
Net income....................................... 140,154 204,433 21,497
------------- ------------- -------
Majority stockholders' equity...................... 1,423,704 1,628,137 171,203
Minority interest.................................. 101,338 168,262 17,693
------------- ------------- -------
Total stockholders' equity......................... 1,525,042 1,796,399 188,896
------------- ------------- -------
Total liabilities and stockholders' equity......... PS. 2,084,039 PS. 2,758,554 290,069
============= ============= =======
</TABLE>
See accompanying notes.
F-3-5
<PAGE>
BAJA CELULAR MEXICANA, S. A. DE C.V.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
YEARS ENDED DECEMBER 31, (NOTE 2)
------------------------------------------- -----------
1997 1998 1999 1999
---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
Revenues (Note 2):
Connection and rent.................. Ps. 153,750 PS. 228,518 PS. 351,211 36,931
Air time............................. 402,111 549,317 946,458 99,522
Roaming.............................. 118,460 157,679 193,296 20,326
Other................................ 196,929 272,386 392,516 41,274
-------
198,053
Costs and expenses:
Costs of revenues.................... 342,406 544,510 979,557 103,003
Selling expenses..................... 124,650 200,469 237,664 24,991
Administrative expenses.............. 67,197 83,432 122,190 12,849
Depreciation......................... 82,980 90,397 132,768 13,961
Amortization......................... 5,713 6,850 7,041 740
Goodwill amortization................ 59,837 59,837 59,837 6,292
----------- ------------- ------------- -------
682,783 985,495 1,539,057 161,836
----------- ------------- ------------- -------
Operating income....................... 188,467 222,405 344,424 36,217
Comprehensive financing income
(expense) (Note 2)
Interest expense..................... (31,348) (26,286) (30,295) (3,186)
Interest income...................... 50,430 27,236 13,673 1,438
Foreign exchange gain (loss)......... (4,545) (59,698) 14,241 1,497
Gain (loss) in net monetary
position........................... (2,740) (15,319) (7,978) (839)
----------- ------------- ------------- -------
11,797 (74,067) (10,359) (1,090)
Other income (expenses), net........... 20,020 20,043 7,689 809
----------- ------------- ------------- -------
Income before income tax, asset tax and
minority interest income............. 220,284 168,381 341,754 35,936
Income tax (Note 12)................... 27,643 123 70,196 7,381
Asset tax (Note 12).................... -- -- 201 21
----------- ------------- ------------- -------
Income before minority interest........ 192,641 168,258 271,357 28,534
Minority interest income............... 34,527 28,104 66,924 7,037
----------- ------------- ------------- -------
Net income............................. Ps. 158,114 PS. 140,154 PS. 204,433 21,497
=========== ============= ============= =======
</TABLE>
See accompanying notes.
F-3-6
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
<TABLE>
<CAPTION>
RETAINED
EARNINGS MAJORITY TOTAL
CAPITAL (ACCUMULATED STOCKHOLDERS' MINORITY STOCKHOLDERS'
STOCK DEFICIT) EQUITY INTEREST EQUITY
------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996............. Ps. 1,164,916 PS. (39,480) PS.1,125,436 PS. 38,707 PS. 1,164,143
Net income...................... -- 158,114 158,114 -- 158,114
Minority interest income........ 34,527 34,527
------------- ----------- ------------- ----------- -------------
Balance at
December 31, 1997............. 1,164,916 118,634 1,283,550 73,234 1,356,784
Net income...................... 140,154 140,154 -- 140,154
Minority interest income........ 28,104 28,104
------------- ----------- ------------- ----------- -------------
Balance at
December 31, 1998............. 1,164,916 258,788 1,423,704 101,338 1,525,042
Net income...................... 204,433 204,433 -- 204,433
Minority interest income........ 66,924 66,924
------------- ----------- ------------- ----------- -------------
BALANCE AT
DECEMBER 31, 1999............. PS. 1,164,916 PS. 463,221 PS.1,628,137 PS. 168,262 1,796,399
============= =========== ============= =========== =============
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
(UNAUDITED)
U.S. $
CONVENIENCE TRANSLATION (NOTE 2) (000S)
-------------------------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1998.......................................................................... $ 160,362
Net income................................................................................... 21,497
Minority interest income..................................................................... 7,037
-------------
BALANCE AT
DECEMBER 31, 1999.......................................................................... $ 188,896
=============
</TABLE>
See accompanying notes.
F-3-7
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
YEARS ENDED DECEMBER 31 (NOTE 2)
------------------------------------------ -----------
1997 1998 1999 1999
---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................. Ps. 158,114 PS. 140,154 PS. 204,433 21,497
Items not requiring use of resources:
Depreciation.......................... 82,980 90,397 132,768 13,961
Amortization.......................... 5,714 6,850 7,041 740
Goodwill amortization................. 59,837 59,837 59,837 6,292
------------ ------------ ------------ -------
306,645 297,238 404,079 42,490
(Increase) decrease in:
Trade receivables..................... (25,993) (40,085) (55,204) (5,805)
Sundry debtors........................ 8,746 (930) (665) (70)
Recoverable taxes..................... (5,290) (39,869) (8,428) (886)
Other accounts receivable............. (9,346) 3,149 (50,956) (5,358)
Inventories........................... (25,025) (67,311) (197,650) (20,783)
Related parties....................... (8,815) (10,362) 8,066 848
Other assets.......................... 953 1,270 3,582 377
Increase (decrease) in:
Suppliers............................. (22,844) (45,127) 89,783 9,441
Due to related parties................ 75,184 77,115 190,194 19,998
Other accounts and taxes payable...... (19,411) 44,598 55,697 5,857
Labor obligations..................... (32) 69 493 52
------------ ------------ ------------ -------
Resources provided by operating
activities............................ 274,772 219,755 438,991 46,161
FINANCING ACTIVITIES
Proceeds from issuance long-term debt... 35,702 -- 141,733 14,904
Repayment of long-term debt............. (31,438) (36,040) (40,588) (4,268)
Inflation effect and foreign exchange
from long-term debt................... (32,172) (279) (34,156) (3,592)
Minority interest....................... 34,527 28,104 66,924 7,037
------------ ------------ ------------ -------
Resources provided by (used in)
financing activities.................. 6,619 (8,215) 133,913 14,081
INVESTING ACTIVITIES
Purchase of fixed assets................ (252,216) (378,583) (566,135) (59,530)
------------ ------------ ------------ -------
Resources (used in) investing
activities............................ (252,216) (378,583) (566,135) (59,530)
Net increase (decrease) in cash and cash
equivalents........................... 29,175 (167,043) 6,769 712
Cash and cash equivalents at beginning
of year............................... 230,741 259,916 92,873 9,766
------------ ------------ ------------ -------
Cash and cash equivalents at end of
year.................................. Ps. 259,916 PS. 92,873 PS. 99,642 10,478
============ ============ ============ =======
</TABLE>
See accompanying notes.
F-3-8
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 1--DESCRIPTION OF THE BUSINESS
Baja Celular Mexicana, S.A. de C.V. (the Company or Baja Celular) is a
variable capital corporation incorporated under the laws of Mexico on June 6,
1990, primarily to install, operate and provide cellular mobile radiotelephone
service for a period of twenty years under a concession from the Ministry of
Communications and Transportation, in the states of Baja California, Baja
California Sur, Sonora and Sinaloa, Mexico.
NOTE 2--ACCOUNTING POLICIES AND PRACTICES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Baja Celular and its subsidiaries, Baja Celular Servicios Corporativos, S.A. de
C.V. and Tamcel, S.A. de C.V. (hereinafter Baja Celular Servicios Corporativos
and Tamcel), which since October 1990 and June 1994 have been 99.90% and 99.99%
owned subsidiaries of Baja Celular, respectively. Also, during 1994, Tamcel
acquired a 25% equity interest in Movitel del Noroeste, S.A. de C.V.(Movitel),
Moviservicios, S.A. de C.V. and Movicelular, S.A. de C.V., companies in which
Tamcel already held a 43% equity interest so that Tamcel's total equity interest
in this group of companies was increased to 68%. All intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in Mexico requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from these estimates.
CONCENTRATION OF RISK
The Company invests a portion of its excess cash in cash deposits in
financial institutions with strong credit ratings and has established guidelines
relating to diversification and maturities that maintain safely and liquidity.
The Company has not experienced any losses in its cash equivalents. The Company
does not believe it has significant concentrations of credit risks in its
accounts receivable, because the Company's customers structure includes a lot of
minimum balances, which spreads the trade credit risk.
RECOGNITION OF THE EFFECTS OF INFLATION
The Company recognizes the effects of inflation on financial information as
required by Mexican accounting Bulletin B-10 (ACCOUNTING RECOGNITION OF THE
EFFECTS OF INFLATION ON FINANCIAL INFORMATION), as amended, issued by the
Mexican Institute of Certified Public Accountants (IMCP). Consequently, the
amounts shown in the accompanying financial statements and in these notes are
expressed in Mexican pesos with purchasing power as of the most recent
consolidated balance sheets presented, in this case, March 31, 2000.
F-3-9
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 2--ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
The significant inflation accounting concepts and procedures are described
below:
The net monetary position represents the effect of inflation on monetary
assets and liabilities. The related amounts are included in the consolidated
statements of income as part of the caption Comprehensive financing expense
(income).
The caption Comprehensive financing expense (income) represents the total
cost of financing which, in inflationary periods, includes not only interest but
also the net monetary position and exchange gains and losses.
CASH EQUIVALENTS
Cash and cash equivalents are stated at cost plus accrued interest, which
approximates market value.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is increased monthly at a percentage
ranging from 1.5% to 2.5% of total credit sales for the respective month. The
allowance is reviewed periodically based on the probability of collection in the
different categories in the aged listing of accounts receivable.
INVENTORIES AND COST OF SALES
Inventories are valued at the lower of cost or market and are restated based
on the Mexican National Consumer Price Index (NCPI) published by Banco de Mexico
(Mexico's central bank).
The allowance for obsolete and slow-moving inventories is determined based
on the decline in market prices due primarily to technological advances in
equipment.
Cost of sales represents historical operating costs at the time the related
sales were made. Such costs have been restated based on the NCPI.
PROPERTY AND EQUIPMENT
Property and equipment are restated based on the NCPI. Depreciation on both
historical cost and the restatement increment are computed using the
straight-line method based on the estimated useful lives of the related assets,
which are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Cellular equipment........................................ 5 to 10
Leasehold improvements.................................... 20 to 10
Furniture and equipment................................... 10
Automotive equipment...................................... 5
Access roads.............................................. 10
</TABLE>
F-3-10
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 2--ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
GOODWILL
Goodwill consists of the excess cost of shares of subsidiaries over the fair
value of the acquired net assets, restated based on the NCPI. Amortization is
computed using the straight-line method over sixteen years, beginning in 1994
(see note 5).
OTHER ASSETS
Other assets are restated by applying the NCPI to historical costs.
Amortization was computed using the straight-line method based on the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Mexican government concession............................... 20
Preoperating expenses....................................... 10
Installation expenses....................................... 5
</TABLE>
STOCKHOLDERS' EQUITY
Capital accounts and retained earnings were restated based on the NCPI.
TRANSACTIONS IN FOREIGN CURRENCY
The Company keeps its accounting records in Mexican pesos. Transactions
denominated in foreign currency are translated to Mexican pesos using the
prevailing exchange rate on the day of the related transactions. Balances
denominated in foreign currency at December 31, 1997, 1998 and 1999 were
translated at the prevailing exchange rate at such dates (see Note 10). All
translation adjustments have been included in comprehensive financing expense
(income).
REVENUES RECOGNITION
Revenues are obtained from initial service activation, basic monthly rental
charges, measured service charges based on the number of minutes and seconds the
service is used, visitor mobile subscriber service charges, and other additional
visitor service charges. All services are billed monthly, at rates authorized by
the Ministry of Communications and Transportation. Revenues are recognized when
such services are rendered.
LABOR OBLIGATIONS
Under Mexican labor law, employees are entitled to compensation ("seniority
premium") upon death, dismissal or at retirement after 15 or more years of
service. The Company accounts for this obligation in accordance with Bulletin
D-3 ("Labor Obligations") issued by the IMCP; consequently, seniority premium
costs are recognized periodically during the years of service by employees,
based on actuarial computations.
F-3-11
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 2--ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Also, in accordance with Mexican labor law, the Company is contingently
liable for severance payments to employees who are unjustifiably dismissed. Such
payments are charged to income in the year in which the decision to dismiss an
employee is made, if such dismissal is considered to be unjustified.
V. PRESENTATION IN DOLLARS FOR THE CONVENIENCE OF THE READER
For the convenience of the reader (not for US GAAP purposes), the adjusted
Mexican Pesos on the Company's statements as at December 31, 1999 and for the
year then ended have been presented in U.S. dollars, using the representative
exchange rate of December 31, 1999 (U.S.$ 1 = 9.51 Mexican Pesos). The dollar
amounts presented in the financial statements should not be construed as
representing amounts receivable, payable or convertible into dollars, unless
otherwise indicated.
INCOME TAX AND EMPLOYEES' STATUTORY PROFIT SHARING
Income tax and employee statutory profit sharing provisions are recognized
in operations for the year in which they are incurred and are adjusted for the
effects of certain non-recurring temporary items that are reported for tax
purposes in years other than those in which they are recognized for accounting
purposes. Tax on assets in excess of income tax is recognized in operations in
the year in which incurred.
The Company provides for income tax using the liability method as required
by Bulletin D-4 issued by the IMCP, which requires that deferred taxes be
provided for identifiable non-recurring temporary differences with a known
turnaround time, using the statutory tax rates at the end of the reporting
period. For the years ended December 31, 1997, 1998 and 1999, Baja Celular
Mexicana, S.A. de C.V. and each of its subsidiaries filed separate tax returns.
Employees' profit sharing is an obligation under the Mexican Labor Law. It
is determined based on each of the consolidated companies' pretax income and
adjusted on the basis of Mexican Labor Law. During the periods presented, there
were no non-recurring items that would have generated a deferred income tax or
employees' profit sharing provision, as prescribed by Bulletin D-4.
See Note 12 regarding revisions to Bulletin D-4 that became effective on
January 1, 2000.
NOTE 3--INVENTORIES
Inventories consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Cellular telephones and accessories......................... PS. 137,713 PS. 355,132
In transit inventories...................................... 75 1,026
----------- -----------
137,788 356,158
Reserve for obsolete and slow moving inventories............ (810) (21,530)
----------- -----------
PS. 136,978 PS. 334,628
=========== ===========
</TABLE>
F-3-12
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 4--PROPERTY AND EQUIPMENT
An analysis of property and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1999
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION INVESTMENT DEPRECIATION
------------ ---------- ------------
<S> <C> <C> <C> <C>
Land................................. PS. 6,042 PS. 6,042
Cellular equipment................... 1,198,432 PS. 497,389 1,343,097 PS. 602,167
Leasehold improvements............... 98,623 24,434 143,388 31,129
Furniture and equipment.............. 107,076 49,697 138,640 67,878
Automotive equipment................. 20,570 9,992 23,183 13,633
------------- ----------- ------------- -----------
1,430,743 PS. 581,512 1,654,350 PS. 714,807
=========== ===========
Accumulated depreciation............. (581,512) (714,807)
------------- -------------
849,231 939,543
Construction in progress............. 44,121 380,135
------------- -------------
Net.................................. PS. 893,352 PS. 1,319,678
============= =============
</TABLE>
NOTE 5--GOODWILL
During 1994, the Company acquired a 99.99% equity interest in Tamcel, a
holding company. Then, Tamcel acquired an additional 25% equity interest in
other companies (see Note 2). As a result of these transactions, the Company
recognized goodwill for the difference between the amount paid for these equity
investments and the fair value of the shares acquired. This goodwill is being
amortized over a period of sixteen years based on the remaining term of the
concession granted by the Ministry of Communications and Transportation.
An analysis of goodwill is as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
-------------------------- --------------------------
ACCUMULATED ACCUMULATED
GOODWILL AMORTIZATION GOODWILL AMORTIZATION
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Baja Celular Mexicana................... PS. 605,446 PS. 170,309 PS. 605,446 PS. 208,147
Tamcel.................................. 352,005 98,999 352,005 120,998
----------- ----------- ----------- -----------
957,451 PS. 269,308 957,451 PS. 329,145
----------- =========== ----------- ===========
Net..................................... PS. 688,143 PS. 628,306
=========== ===========
</TABLE>
F-3-13
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 6--OTHER ASSETS
An analysis of other assets is as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Mexican government concession............................... PS. 95,905 PS. 95,905
Preoperating expenses....................................... 12,073 12,073
Installation expenses....................................... 3,878 --
Security deposits........................................... 191 5,002
AMCEL....................................................... 2,143 3,152
Other....................................................... 698 1,095
----------- -----------
114,888 117,227
Accumulated amortization.................................... (50,644) (56,564)
----------- -----------
Net......................................................... PS. 64,244 PS. 60,663
=========== ===========
</TABLE>
NOTE 7--RELATED PARTIES
An analysis of transactions with related parties is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Rental expense derived from lease signed with Vac
Industrial, S.A. de C.V............................... Ps. 2,038 PS. 2,222 PS. 1,896
Rental expense derived from leases signed with certain
stockholders.......................................... 2,353 2,617 3,057
Administrative services provided by Vac Industrial, S.A.
de C.V................................................ 2,947 4,399 5,242
Sale of telephones to Cedetel and Norcel................ 7,173 7,384 --
Purchase of telephones and Cellular equipment from
Motorola International................................ 95,940 220,478 324,312
</TABLE>
F-3-14
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 7--RELATED PARTIES (CONTINUED)
An analysis of balances due from/to related parties is as follows at
December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Receivables from affiliated companies:
Vac Industrial.............................................. PS. -- PS. 46
Cedetel..................................................... 9,282 973
Norcel...................................................... 1,960 2,157
Motorola International...................................... -- --
----------- -----------
PS. 11,242 PS. 3,176
=========== ===========
Payables to affiliated companies:
Vac Industrial.............................................. PS. 40 PS. --
Cedetel..................................................... -- 4,955
Motorola International...................................... 72,287 185,279
----------- -----------
PS. 72,327 PS. 190,234
=========== ===========
</TABLE>
F-3-15
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 8--ANALYSIS OF LONG-TERM DEBT
All long-term debt corresponds to bank loans, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Revolving line of credit in U.S. dollars from Citibank,
N.A., Bahamas branch at LIBOR rate plus 6 points interest
paid. One of the Company's shareholders (Motorola) acts as
a guarantor for this line of credit....................... PS. 6,108 PS. 3,499
Revolving line of credit in U.S. dollars from Banco Nacional
de Comercio Exterior, S.N.C. at LIBOR rate plus .625%,
semi-annually............................................. 43,789 25,088
Industrial mortgage loan on cellular equipment in U.S.
dollars from Banco Bilbao Vizcaya, repayable in
semi-annual installments through 2002. Annual interest
ranges from 8% to 10%..................................... 43,058 24,696
Revolving line of credit in U.S. dollars from Citibank, at
9.1225% annual interest. One of the Company's shareholders
(Motorola) acts as a guarantor for this line of credit.... 113,916 101,106
Revolving line of credit in U.S. dollars from Citibank, at
LIBOR rate plus 2.25%, interest payable semi-annually
interest, due 2002. One of the Company's shareholders
(Motorola) acts as a guarantor for this line of credit.... 30,895 18,965
Loan from ABN AMRO Bank N.V. at interest rate LIBOR plus 2%
repayable in 10 semi-annual installments, due 2004.
According to loan covenants, Tamcel will not declare or
pay any dividends on any class of capital stock and will
not purchase, redeem or acquire any of its capital stock.
In the case of Baja Celular, the Company shall not permit
the stockholders to authorize the payment of dividends on
its capital stock for any amount higher than 50% of net
income of the previous fiscal year........................ -- 133,070
Revolving line of credit in U.S. dollars from Citibank, at
LIBOR rate plus 2.50% multiplied by a gross-up factor,
interest payable semi-annually, due 2002. One of the
Company's stockholders (Motorola) acts as a guarantor for
this line of credit....................................... 4,323 2,654
----------- -----------
Total....................................................... PS. 242,089 PS. 309,078
Less current portion........................................ (42,885) (68,492)
----------- -----------
Total long-term debt........................................ PS. 199,204 PS. 240,586
=========== ===========
</TABLE>
Motorola Inc. acts as the guarantor of the revolving lines of credit
obtained from Citibank. The Company pledged, as security to Motorola, its stock
certificates representing 23% of its capital stock (see Note 9).
Annual maturities on long-term debt are as follows at December 31, 1999:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2001.................................................... Ps. 158,753
2002.................................................... 37,328
2003.................................................... 29,817
2004.................................................... 14,688
-----------
Total................................................... Ps. 240,586
===========
</TABLE>
F-3-16
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 9--STOCKHOLDERS' EQUITY
a) Capital stock at December 31, 1998 and 1999 is Ps. 365,580, of which Ps.
5,000 constitutes fixed capital and Ps. 360,437, variable capital. Capital stock
is represented by 131,034 shares with no par value, 15,828 series "A" shares and
15,206 series "B" shares. Restated capital stock at December 31, 1998 and 1999
is Ps. 1,164,916.
b) The Company is legally required to appropriate at least 5% of its net
income of each year to increase the legal reserve. This practice must be
continued until the legal reserve is equal to 20% of capital issued and
outstanding. During 1999, the Company increased its legal reserve in the amount
of Ps. 23,118, as a part of retained earnings.
c) In conformity with Mexican income tax law, cash dividends paid and
received by companies within the same consolidating group are tax exempt. Cash
dividends paid to stockholders outside the group from the so-called "net tax
profit account" (i.e., from earnings on which Mexican corporate income taxes
have already been paid) are also tax exempt. Any distribution in excess of this
amount is subject to taxation.
d) Effective January 1, 1999, the corporate income tax rate was increased
from 34% to 35%. However, corporate taxpayers have the option of deferring a
portion of this increase so that the tax payable will represent 30% of taxable
income (32% in 1999). The earnings on which there is a deferral of taxes must be
controlled in a so-called "net reinvested tax profit account" ("CUFINRE"). This
is to clearly identify the earnings on which the taxpayer has opted to defer
payment of corporate income tax.
If the Company opts for this tax deferral, in 2000, earnings will be
considered to be distributed first from the "CUFINRE" and any excess will be
paid from the "net tax profit account" ("CUFIN") so as to pay the 5% deferred
tax (3% for 1999).
Any distribution of earnings in excess of the above-mentioned account
balances will be subject to payment of 35% corporate income tax.
In addition, effective January 1, 1999, cash dividends obtained by
individuals or residents abroad will be subject to a 5% withholding tax on the
amount of the dividend multiplied by 1.5385 (1.515 for dividends paid from the
determined balance of the "CUFIN" account at December 31, 1998). The accumulated
balance of the net tax profit account (CUFIN) at December 31, 1999 was Ps.
131,121. See dividends restrictions in Notes 8 and 13.
F-3-17
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 10--FOREIGN CURRENCY POSITION
The consolidated financial statements at December 31, 1998 and 1999 include
the following U.S. dollar denominated assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1999
---- ----
(EXPRESSED IN
THOUSANDS OF
U.S. DOLLARS)
<S> <C> <C>
Assets:
Cash...................................................... $ 5,162 $ 4,968
Trade receivables......................................... 924 738
Other..................................................... 127 2,923
-------- ---------
6,213 8,629
Liabilities:
Current portion of long-term debt......................... 3,764 5,651
Suppliers................................................. 16,011 47,392
Long-term debt............................................ 17,487 25,920
Accrued interest.......................................... 536 187
-------- ---------
37,798 79,150
-------- ---------
Net short position.......................................... $(31,585) $ (70,521)
======== =========
</TABLE>
The exchange rates used to translate the above-mentioned U.S. dollar
denominated balances at December 31, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
(MEXICAN PESOS FOR
ONE U.S. DOLLAR)
<S> <C>
PS. 9.8650 PS. 9.5222
</TABLE>
At April 28, 2000, the exchange rate was Ps. 9.4521 per U.S. dollar.
NOTE 11--ADVERTISING AND LEASING EXPENSES
The advertising expenses were Ps. 30,456 and Ps. 44,378, and the leasing
expenses were Ps. 17,549 and Ps. 21,950 in 1998 and 1999 respectively.
NOTE 12--INCOME TAX AND ASSET TAX
The Company is subject to payment of both income tax and asset tax. Since
the beginning of 1997, these taxes have been computed on a consolidated basis.
The 1.8% asset tax (which is a minimum income tax) is payable on the average
value of most assets net of certain liabilities. Since asset tax may be credited
against income tax, the former is actually payable only to the extent that it
exceeds income tax.
F-3-18
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 12--INCOME TAX AND ASSET TAX (CONTINUED)
Book and tax results are not the same due to temporary differences in income
for financial and tax reporting purposes, as well as permanent differences. At
December 31, 1999, there were net temporary differences amounting to Ps. 603,091
that were deducted for tax purposes although no corresponding deferred tax
liability has been recorded because such items are considered recurring or will
not reverse in a definite period of time, principally for inventories, property
and equipment and tax loss carryforwards:
<TABLE>
<S> <C>
Inventories................................................. Ps. 334,575
Property and equipment...................................... 345,072
Allowance for doubtful accounts............................. (20,413)
Advances from customers..................................... (2,769)
Tax loss carryforwards...................................... (53,374)
-----------
Ps. 603,091
===========
</TABLE>
A new version of Mexican Accounting Bulletin D-4, "Deferred Income Tax",
became effective on January 1, 2000. Under new Bulletin D-4, all deferred income
taxes, including those arising from recurring temporary differences between book
and taxable income, and the tax effects of tax loss carryforwards, will have to
be recognized in the financial statements. Such deferred income taxes will be
calculated under the asset and liability method that compares the book and tax
values of the Company's assets and liabilities. From this comparison temporary
differences are determined, to which the tax rate effective at the end of the
year end is applied.
The cumulative effect of the adoption of this new bulletin in January 1,
2000 will reduce stockholders' equity by approximately Ps. 211,082 and results
in the registration of a deferred tax liability of Ps. 211,082. Subsequent
effects derived from deferred income taxes, will be recognized in the
consolidated statements of income or stockholders' equity, as appropriate.
NOTE 13--APPROVAL OF FINANCIAL STATEMENTS
The consolidated financial statements for the years ended December 31, 1994
through 1999 have not been approved by the Company since no stockholders'
meetings have been held as required by Article 172 of the Mexican Corporations
Act and the Company's by laws. No dividends may be distributed until these
meetings are held.
NOTE 14--COMMITMENTS AND CONTINGENCIES
a) The Company is required to pay the Mexican government semiannually the
equivalent of 5% and 6% of gross revenues obtained by Baja Celular and Movitel,
respectively, from services provided in terms of the concession. These payments
are made in addition to the amount paid for the government concession (Note 6).
b) Federal and state taxes are open to review by the authorities for a
period of five years.
F-3-19
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 15-- DIFFERENCES BETWEEN MEXICAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Mexico ("Mexican GAAP"), which
differ in certain significant respects from United States generally accepted
accounting principles ("U.S. GAAP").
The following reconciliation to U.S. GAAP does not include the reversal of
the adjustments to the consolidated financial statements for the effects of
inflation required under Bulletin B-10, as amended. The application of Bulletin
B-10 represents a comprehensive measure of the effect of price level changes in
the inflationary Mexican economy and, as such, is considered a more meaningful
presentation than financial reporting based on historical cost for both Mexican
and United States accounting purposes.
The principal differences between Mexican GAAP and U.S. GAAP, as they relate
to the Company, are listed below, with an explanation, where appropriate, of the
adjustments that affect consolidated operating income, net income, stockholders'
equity and resources provided by operating and financing activities for each of
the years ended December 31, 1997 ,1998 and 1999.
DEFERRED INCOME TAXES
Under Mexican GAAP, through December 31, 1999 deferred income taxes were
provided for identifiable non-recurring temporary differences (those expected to
reverse over a known period of time) at rates in effect at the end of the period
covered by the financial statements. Benefits from loss carryforwards were not
recognized before the period in which the carryforward was utilized. For
purposes of this reconciliation, the Company has applied Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), for
all periods presented, which requires that deferred income taxes be determined
using the liability method for all temporary differences between financial
reporting amounts and the tax basis of assets and liabilities, and that deferred
taxes on such differences be measured at the enacted income tax rates for the
year in which such taxes are expected to be payable or refundable.
It is assumed that all retained earnings will be distributed to the
stockholders' and, accordingly, will give rise to income tax under the general
regime. Under Mexican tax legislation until 1999, income tax paid on dividends
was a corporate tax and not an individual tax. Effective January 1, 1999, in
addition to the corporate tax, cash dividends paid to the Company's stockholders
will be subject to an individual tax withholding of approximately 7.60%.
Under Mexican GAAP the deferred tax provision must always be classified as a
current liability. Under the US GAAP criteria the deferred tax provision could
be presented both as a current or as a long-term liability, based on the type of
temporary difference that originated it.
New Bulletin D-4 became effective January 1, 2000 (see Note 12).
CAPITALIZED FINANCING COST
Under Mexican GAAP, capitalization of comprehensive financing cost on assets
under construction or in the pre-operating stage is allowed but not required.
The Company has elected not to capitalize
F-3-20
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 15-- DIFFERENCES BETWEEN MEXICAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
such comprehensive financing cost. Under U.S. GAAP, interest expense incurred
during the construction period on qualifying expenditures must be capitalized.
For U.S. GAAP purposes, and since the Company is financed in U.S. dollars,
interest cost is capitalized.
MINORITY INTEREST
For U.S. GAAP purposes, minority interest of Ps. 101,338 and, Ps. 168,262 at
December 31, 1998 and 1999 respectively, has been excluded from stockholders'
equity.
EFFECT OF INFLATION ACCOUNTING ON U.S. GAAP ADJUSTMENTS
To determine the net effect on the consolidated financial statements of
recognizing U.S. GAAP adjustments, it is necessary to recognize the effects of
applying Mexican GAAP inflation accounting provisions (described in Note 2) to
the U.S. GAAP adjustments. As of December 31, 1997, 1998 and 1999, the monetary
gain on deferred taxes has been included in income for U.S. GAAP reconciliation
purposes.
COMPREHENSIVE INCOME
Effective January 1, 1999, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
disclosure of comprehensive income and its components. Comprehensive income is
the change during a period in an enterprise's equity from transactions and other
events and circumstances arising from non-owner sources. The Company has not
presented a U.S. GAAP statement of comprehensive income as there have been no
qualifying comprehensive income transactions.
CASH FLOW INFORMATION
Under Mexican GAAP, the Company presents statements of changes in financial
position, as described in Note 2.
The change in the financial statement balances included in these statements
constitute cash flow activity stated in constant Mexican pesos (including
monetary and foreign exchange gains and losses).
In accordance with Mexican GAAP, the change in current and long-term debt
due to restatements in constant Mexican pesos, including the effect of foreign
exchange differences, is presented in the statements of changes in financial
position in the financing activities section.
Under Mexican GAAP the gain from monetary position and the exchange gain or
loss are not presented in the operating activities section as reconciling
adjustments, as they are included in the respective monetary asset or liability
line. Statement of Financial Accounting Standards No. 95 ("SFAS 95"), "Statement
of Cash Flows," however, does not provide guidance with respect to price-level
restated financial statements. For U.S. GAAP purposes, the gain from monetary
position and the devaluation loss related to debt are reclassified to the
operating activities section. The totals of the
F-3-21
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 15-- DIFFERENCES BETWEEN MEXICAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
consolidated statements of changes in financial position under U.S. GAAP would
be changed as follows:
PREOPERATING EXPENSES
Under Mexican GAAP preoperating expenses are amortized to the income
statement over a period of twenty years. For U.S. GAAP purposes, starting after
December 15, 1998, these expenses must be expensed when incurred. Previously
deferred costs are written off in the year the statement is first applied as a
cumulative catch up adjustment.
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................... Ps. 106,452 Ps. 90,411 Ps. 204,389
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 83,083 90,727 133,717
Amortization....................................... 5,713 6,850 5,932
Goodwill amortization.............................. 59,837 59,837 59,837
Deferred income tax................................ 72,031 81,543 43,455
Minority interest.................................. 24,909 22,031 52,481
Preoperating expenses.............................. -- -- 2,791
------------ ------------ ------------
352,025 351,399 502,602
Changes in assets and liabilities:
Trade receivables.................................... (25,993) (40,085) (55,204)
Sundry debtors....................................... 8,746 (930) (665)
Recoverable taxes.................................... (5,290) (39,869) (8,428)
Other accounts receivable............................ (9,346) 3,149 (50,956)
Inventories.......................................... (25,025) (67,311) (197,650)
Related parties...................................... (8,815) (10,362) 8,066
Other assets......................................... 953 1,270 3,582
Supliers............................................. 51,335 27,159 275,062
Due to related parties............................... 1,005 4,829 4,915
Taxes payable and other accruals..................... (19,441) 44,667 56,190
Inflation effect and foreign exchange on financing
activities......................................... (40,751) (20,143) (54,808)
------------ ------------ ------------
Resources provided by operating activities........... 279,403 253,773 482,706
</TABLE>
F-3-22
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 15-- DIFFERENCES BETWEEN MEXICAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............. 35,702 -- 141,733
Repayment of long-term debt.......................... (31,438) (36,040) (40,588)
------------ ------------ ------------
Net cash provided by (used in) financing
activities......................................... 4,264 (36,040) 101,145
INVESTING ACTIVITIES:
Purchase of fixed assets............................. (254,492) (384,776) (577,082)
------------ ------------ ------------
Net cash used in investing activities................ (254,492) (384,776) (577,082)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 29,175 (167,043) 6,769
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 230,741 259,916 92,873
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............. Ps. 259,916 Ps. 92,873 Ps. 99,642
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest paid.............................................. Ps. 31,165 Ps. 22,854 Ps. 24,440
Income tax paid............................................ -- -- --
</TABLE>
F-3-23
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 15-- DIFFERENCES BETWEEN MEXICAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
SUMMARY OF ADJUSTMENTS TO RECONCILE MEXICAN AND U.S. GAAP
The following is a summary of net income adjusted to take into account
certain material differences between Mexican GAAP and U.S. GAAP.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income as reported under Mexican GAAP............... Ps. 158,114 Ps. 140,154 Ps. 204,433
Approximate adjustments to reconcile net income to U.S.
GAAP:
Deferred income taxes................................... (72,031) (81,543) (43,455)
Net monetary position related to deferred income
taxes................................................. 8,579 19,865 20,652
Capitalized interest.................................... 2,276 6,192 10,946
Depreciation on capitalized interest.................... (103) (330) (949)
Preoperating expenses................................... -- -- (39,899)
Accumulated amortization at beginning of the year on the
preoperating expenses................................. -- -- 37,108
Amortization on preoperating expenses................... -- -- 1,110
----------- ----------- -----------
96,835 84,338 189,946
Minority interest from the above effects................ 9,617 6,073 14,443
----------- ----------- -----------
Approximate net income under U.S. GAAP.................. Ps. 106,452 Ps. 90,411 Ps. 204,389
=========== =========== ===========
</TABLE>
After the foregoing approximate adjustment for depreciation on capitalized
interest and amortization of preoperating expenses, operating income under U.S.
GAAP would be Ps. 188,362, Ps. 222,075 and Ps. 344,585 in 1997, 1998 and 1999,
respectively.
Total assets under U.S. GAAP were Ps. 2,093,062 in 1998 and Ps. 2,776,891 in
1999. The difference in total assets between Mexican and U.S. GAAP is comprised
of the foreign exchange loss and the monetary gain on financing in U.S. dollars
capitalized in assets under construction and preoperating expenses net of
accumulated depreciation.
F-3-24
<PAGE>
BAJA CELULAR MEXICANA, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF MEXICAN PESOS WITH PURCHASING POWER AT MARCH 31, 2000)
NOTE 15-- DIFFERENCES BETWEEN MEXICAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
The following is a summary of stockholders' equity adjusted to take into
account the aforementioned differences between Mexican and U.S. GAAP:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Majority stockholders' equity as reported under
Mexican GAAP..................................... Ps. 1,283,550 Ps. 1,423,704 Ps. 1,628,137
Approximate adjustments to reconcile stockholders'
equity to U.S. GAAP:
Preoperating expenses.............................. -- -- (39,899)
Accumulated amortization on preoperating
expenses......................................... -- -- 38,219
Capitalized interest............................... 3,307 9,500 20,444
Accumulated depreciation on capitalized interest... (147) (477) (1,427)
Deferred income taxes.............................. (126,602) (188,281) (211,082)
------------- ------------- -------------
1,160,108 1,244,446 1,434,392
Minority interest from the above effects........... 14,314 20,387 34,830
------------- ------------- -------------
Approximate stockholders' equity under U.S. GAAP... Ps. 1,174,422 Ps. 1,264,833 Ps. 1,469,222
============= ============= =============
</TABLE>
The following is a summary of the consolidated statements of changes in
stockholders' equity in accordance with U.S. GAAP:
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
(ACCUMULATED STOCKHOLDERS'
CAPITAL STOCK DEFICIT) EQUITY
------------- -------- ------
<S> <C> <C> <C>
Balance at December 31, 1996..................... Ps. 1,164,916 Ps. (96,946) Ps. 1,067,970
Net income of 1997............................... 106,452 106,452
------------- ----------- -------------
Balance at December 31, 1997..................... 1,164,916 9,506 1,174,422
Net income of 1998............................... 90,411 90,411
------------- ----------- -------------
Balance at December 31, 1998..................... 1,164,916 99,917 1,264,833
Net income of 1999............................... 204,389 204,389
------------- ----------- -------------
Balance at December 31, 1999..................... PS. 1,164,916 PS. 304,306 PS. 1,469,222
============= =========== =============
</TABLE>
F-3-25
<PAGE>
ENTEL TELEFONIA PERSONAL S.A.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-4-1
<PAGE>
ENTEL TELEFONIA PERSONAL S.A.
AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-4-3
Consolidated Balance Sheets................................. F-4-4
Consolidated Statements of Income........................... F-4-6
Consolidated Statements of Cash Flows....................... F-4-7
Notes to the Consolidated Financial Statements.............. F-4-9
</TABLE>
F-4-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Entel Telefonia Personal S.A.:
We have audited the accompanying consolidated balance sheets of Entel
Telefonia Personal S.A. and Subsidiaries as of December 31, 1998 and 1999 and
the related consolidated statements of income and cash flows for each of the
three years in the period ended December 31, 1999, all expressed in thousands of
constant Chilean pesos. These consolidated 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 auditing standards generally
accepted in Chile and in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Entel
Telefonia Personal S.A. and subsidiaries as of December 31, 1998 and 1999 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles in Chile.
Accounting principles generally accepted in Chile vary in certain
significant respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of net income for each of the three years in the period ended
December 31, 1999 and of shareholders' equity as of December 31, 1998 and 1999
to the extent summarized in Note 29 to the consolidated financial statements.
Deloitte & Touche
Santiago, Chile
January 21, 2000, except for note 29, as to which the date is April 24, 2000
F-4-3
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DECEMBER 31, (NOTE 3T)
------------------------------------- -----------
NOTES 1998 1999 1999
----- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................. ThCh $ 489,809 ThCh $ 572,911 1,081
Marketable securities............ 6 74,969 1,302,354 2,458
Trade accounts receivable, net... 7 10,988,709 32,899,980 62,082
Notes receivable, net............ 8 726,848 1,696,617 3,202
Other accounts receivable........ 9 1,120,413 2,982,523 5,628
Due from related companies....... 10 2,250,925 4,771,185 9,004
Inventories...................... 11 14,612,463 11,104,200 20,954
Recoverable taxes................ 12 12,230,118 20,414,731 38,522
Prepaid expenses................. 992,864 736,761 1,390
Other current assets............. 13 2,311,780 18,731,193 35,346
----------------- ----------------- -------
Total current assets............. 45,798,898 95,212,455 179,667
----------------- ----------------- -------
Property, plant and equipment: 14
Land............................. 1,446,374 1,695,595 3,200
Buildings and infrastructure..... 32,567,925 92,311,032 174,191
Machinery and equipment.......... 81,767,541 74,931,819 141,396
Others........................... 33,722,710 50,032,745 94,412
----------------- ----------------- -------
149,504,550 218,971,191 413,199
Less: Accumulated depreciation... (12,370,668) (26,992,513) (50,935)
----------------- ----------------- -------
Net property, plant and
equipment...................... 137,133,882 191,978,678 362,264
----------------- ----------------- -------
Other assets:
Investment in related
companies...................... 15 862,528 -- --
Goodwill, net.................... 15 2,731,008 2,371,055 4,474
Prepaid expenses, long-term...... 659,520 1,111,903 2,098
Intangibles other than
goodwill....................... 1,247,464 1,279,002 2,412
Accumulated amortization of
intangibles.................... (31,540) (137,553) (259)
Others........................... 79,194 76,445 144
----------------- ----------------- -------
Total other assets............... 5,548,174 4,700,852 8,869
----------------- ----------------- -------
Total assets..................... ThCh $188,480,954 ThCh $291,891,985 550,800
================= ================= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4-4
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DECEMBER 31, (NOTE 3T)
------------------------------------- -----------
NOTES 1998 1999 1999
----- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Banks and financial institutions..... 16 ThCh $ 5,539,106 ThCh $ 59,289 112
Current portion of long-term
liabilities with banks and other
financial institutions............. 16 2,013,952 2,726,847 5,146
Current portion of notes payable and
other long-term liabilities........ 16 1,326,143 4,009,047 7,565
Accounts payable..................... 17 10,799,564 18,218,526 34,378
Notes payable........................ 11,375,845 3,470,711 6,549
Due to related companies............. 10 20,157,982 102,692,532 193,781
Accruals............................. 18 548,061 951,979 1,796
Withholdings......................... 336,120 383,241 723
Income taxes......................... 20 -- 3,957,080 7,467
Other current liabilities............ -- 452,345 854
----------------- ----------------- -------
Total current liabilities............ 52,096,773 136,921,597 258,371
----------------- ----------------- -------
Long-term liabilities: 16
Due to banks and other financial
institutions....................... 4,415,312 1,325,175 2,500
Notes payable and other
liabilities........................ 5,779,395 3,169,005 5,980
Due to related companies............. 10 41,040,000 44,706,781 84,362
----------------- ----------------- -------
Total long-term liabilities.......... 51,234,707 49,200,961 92,842
----------------- ----------------- -------
Commitments and contingencies........ 25 -- -- --
----------------- ----------------- -------
Minority interest.................... 73,553 65,568 124
----------------- ----------------- -------
Shareholders' Equity: 19
Common stock, no par value
authorized, subscribed and paid-in;
85,272 shares in 1998 and 1999..... 114,456,051 114,456,051 215,979
Additional paid-in capital........... 995,183 995,183 1,878
Accumulated deficit of subsidiaries
in development stage............... (2,066,675) (2,066,675) (3,901)
Accumulated loss..................... (10,795,361) (28,308,638) (53,418)
Income (loss) for the year........... (17,513,277) 20,627,938 38,925
----------------- ----------------- -------
Total shareholders' equity........... 85,075,921 105,703,859 199,463
----------------- ----------------- -------
Total liabilities and shareholders'
equity............................. ThCh $188,480,954 ThCh $291,891,985 550,800
================= ================= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4-5
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
FOR THE YEAR ENDED DECEMBER 31, (NOTE 3T)
--------------------------------------------------------- -----------
1997 1998 1999 1999
NOTES ---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C> <C>
Net sales.......................... ThCh $ 23,730,575 ThCh $ 34,822,732 ThCh $ 97,731,732 184,420
Cost of sales...................... (12,715,263) (22,255,992) (55,006,184) (103,797)
----------------- ----------------- ----------------- --------
Gross profit....................... 11,015,312 12,566,740 42,725,548 80,623
Selling and administrative
expenses......................... (11,070,155) (24,287,022) (42,632,952) (80,448)
----------------- ----------------- ----------------- --------
Operating (loss) income............ (54,843) (11,720,282) 92,596 175
----------------- ----------------- ----------------- --------
Other income (expenses):
Interest income.................... 433,286 1,280,114 332,011 627
Equity in income of related
companies........................ 5,079 11,068 12,762 24
Other income....................... 24 57,403 891 36,232,334 68,370
Amortization of goodwill........... 15 (36,563) (167,952) (359,953) (679)
Interest expense................... (1,276,089) (7,749,886) (10,211,134) (19,268)
Other expense...................... (78,238) (224,279) (483,264) (912)
Price-level restatement............ 5 (126,765) 1,042,046 (1,038,319) (1,960)
----------------- ----------------- ----------------- --------
Other income (expenses), net....... (1,021,887) (5,807,998) 24,484,437 46,202
----------------- ----------------- ----------------- --------
Income (loss) before income taxes,
minority interest and
extraordinary item............... (1,076,730) (17,528,280) 24,577,033 46,377
Income taxes....................... 20 -- -- (5,731,455) (10,815)
----------------- ----------------- ----------------- --------
Income (loss) before minority
interest and extraordinary
item............................. (1,076,730) (17,528,280) 18,845,578 35,562
Minority interest.................. 312 15,003 7,985 15
----------------- ----------------- ----------------- --------
Income (loss) before extraordinary
item............................. (1,076,418) (17,513,277) 18,853,563 35,577
Extraordinary item:
Application of tax loss
carryforward from prior
years............................ 20 -- -- 1,774,375 3,348
----------------- ----------------- ----------------- --------
Net income (loss) for the
year............................. ThCh $ (1,076,418) ThCh $(17,513,277) ThCh $ 20,627,938 38,925
================= ================= ================= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4-6
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
FOR THE YEAR ENDED DECEMBER 31, (NOTE 3T)
----------------------------------------------------------- -----------
1997 1998 1999 1999
---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.................. ThCh $ 26,350,616 ThCh $ 35,901,253 ThCh $ 84,014,504 158,535
Interest income received...................... 638,139 2,857,069 144,379 272
Payment to suppliers and personnel............ (22,807,154) (49,700,509) (115,338,518) (217,643)
Interest paid................................. (465,683) (5,443,266) (1,632,277) (3,080)
Other expenses paid........................... (568,469) (25,388,004) (87,916) (166)
VAT and others paid........................... (591,099) (1,470,944) (570,171) (1,076)
Other income received......................... -- -- 6,458,816 12,188
----------------- ------------------ ------------------ --------
Net cash provided by (used in) operating
activities.................................. 2,556,350 (43,244,401) (27,011,183) (50,970)
----------------- ------------------ ------------------ --------
Cash flows from financing activities:
Proceeds from issuance of capital stock....... 52,417,333 48,670,811 -- --
Proceeds from loans........................... 3,797,710 16,733,484 204,657 386
Proceeds from loans from related
companies................................... 6,963,156 130,646,948 100,178,848 189,037
Other sources of financing.................... 362,055 11,763,130 35,514 67
Repayments of loans........................... (7,046,725) (11,405,796) (10,889,354) (20,548)
Repayments of other loans from related
companies................................... (4,957,258) (100,452,729) (58,843,954) (111,038)
----------------- ------------------ ------------------ --------
Net cash provided by financing activities..... 51,536,271 95,955,848 30,685,711 57,904
----------------- ------------------ ------------------ --------
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment................................... 481,860 5,081,614 32,721 62
Proceeds from sale of long-term investments... 4,700,525 7,695,000 2,238,921 4,225
Proceeds from other investments............... -- 26,184,350 47,602,773 89,826
Purchases of property, plant and equipment.... (7,259,837) (87,787,951) (42,258,211) (79,741)
Permanent investments......................... -- (4,119,442) -- --
Investments in marketable securities.......... (8,530,030) (45,536) (2,237,100) (4,221)
Other loans to related companies.............. (40,113,037) -- (6,930,301) (13,078)
Other disbursements for investments........... (3,917,179) -- (828,724) (1,564)
----------------- ------------------ ------------------ --------
Net cash used in investing activities......... (54,637,698) (52,991,965) (2,379,921) (4,491)
----------------- ------------------ ------------------ --------
Total net cash provided (used) for the year... (545,077) (280,518) 1,294,607 2,443
Effect of changes in the purchasing power of
the Chilean peso on cash and cash
equivalents................................. 50,652 419,792 (40,476) (76)
----------------- ------------------ ------------------ --------
Net increase (decrease) in cash and cash
equivalents................................. (494,425) 139,274 1,254,131 2,367
Cash and cash equivalents at beginning of the
year........................................ 919,929 425,504 564,778 1,065
----------------- ------------------ ------------------ --------
Cash and cash equivalents at end of the
year........................................ ThCh $ 425,504 ThCh $ 564,778 ThCh $ 1,818,909 3,433
================= ================== ================== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4-7
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
FOR THE YEAR ENDED DECEMBER 31, (NOTE 3T)
-------------------------------------------------------- -----------
1997 1998 1999 1999
---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
Reconciliation of net cash
provided by operating
activities to net (loss)
income:
Net (loss) income for the year... ThCh $(1,076,418) ThCh $(17,513,277) ThCh $ 20,627,938 38,925
Loss (gain) on sale of property,
plant and equipment............ (30,933) -- 38,221 72
Charges (credits) to income which
do not represent cash flows:
Depreciation for the year...... 1,375,093 8,983,407 18,366,112 34,657
Amortization of intangibles.... 130,487 351,663 81,385 154
Write-offs and accruals........ 1,864,054 1,003,745 10,275,246 19,389
Equity in income of related
companies.................... (5,079) (11,068) (12,762) (24)
Amortization of goodwill....... 36,563 167,952 359,953 679
Net price-level restatement.... 126,765 (1,042,046) 1,038,319 1,959
Other credits to income which
do not represent cash
flows........................ (69,696) (3,980,493) (20,494,916) (38,674)
Other charges to income which
do not represent cash
flows........................ 1,055,752 9,574,185 22,090,444 41,684
Proceeds from sale of licenses
(Note 24).................... -- -- (34,794,243) (65,657)
Changes in assets which affect
cash flows:
(Increase) decrease in trade
accounts receivable.......... (1,331,885) 3,453,271 (11,984,624) (22,615)
(Increase) decrease in
inventory.................... 187,106 (13,706,705) (18,528,026) (34,962)
Increase in other assets....... (842,183) (2,848,690) (16,852,939) (31,801)
Changes in liabilities, which
affect cash flows:
Increase in accounts payable
related to operating
income....................... 1,108,303 3,850,648 2,792,765 5,270
Decrease in other accounts
payable related to
non-operating results........ -- (96,909) -- --
Net (decrease) increase of
value-added tax and other
taxes payable................ 28,733 (31,415,081) (6,071) (11)
Loss of minority interest...... (312) (15,003) (7,985) (15)
---------------- ----------------- ----------------- -------
Net cash provided by (used in)
operating activities........... ThCh $ 2,556,350 ThCh $(43,244,401) ThCh $(27,011,183) (50,970)
================ ================= ================= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4-8
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 1--INCORPORATION AND COMPANY NAME
The Company was formed on September 21, 1981 as "Telecomunicaciones del
Maipo Ltda.", a limited liability partnership. On August 16, 1988, the Company
changed its legal structure to that of a corporation and adopted the name of
Telecom Chile S.A. On June 2, 1992, its name was changed to Telecom Celular S.A.
On August 14, 1996, the Company's name was changed to Entel Celular S.A.
On February 25, 1997 the Company changed its name from Entel Celular S.A. to
Entel Telefonia Personal S.A.
NOTE 2--OPERATIONS AND SALE OF LICENSE
The Company provides cellular telephone services, distributes equipment and
may enter into any other business related to telecommunications.
By Supreme Decree No. 223 of October 13, 1989 of the Undersecretary of
Telecommunications of the Ministry of Transport and Telecommunication, the
Company was granted the license to provide public mobile cellular telephony
services in the 800 Mhz frequency in Chile's administrative regions I to IV and
VI to X. Later, on December 23, 1996, through a contract entered into with
CTC-VTR Comunicaciones Moviles S.A., and authorized on September 9, 1997 by
Supreme Decree No. 341 of the Undersecretary of Telecommunications of the
Ministry of Transport and Telecommunication, the Company acquired the license to
operate in the same frequency in regions XI and XII.
On December 28, 1990, the Company entered into an agreement with Telefonica
Celular de Chile S.A., an entity that also holds a license to operate a mobile
telephone system in the areas referred to above, whereby the infrastructure
required to operate the system of both companies was acquired by Buenaventura
S.A. Each Company has a 50% holding in this joint venture. In 1991, the Company
transferred, as a capital contribution, certain plant items to Buenaventura S.A.
As a result of the above licenses, the Company has rendered cell mobile
telephone services in twelve of the thirteen regions of the country up to
December 1, 1999, when, due to the sale of such licenses to Bellsouth
Comunicaciones S.A., it ceased rendering such services.
The sale of the licenses took place on April 20, 1999 and was authorized by
Supreme Decree No. 217 of May 24, 1999 of the Undersecretary of
Telecommunications of the Ministry of Transport and Telecommunication, with
effect from December 1, 1999.
Because of the sale of these licenses, the Company ceased rendering mobile
cellular telephone services on December 1, 1999; therefore, the Company's 1999
sales for ThCh$6,002,557 and costs of sales for ThCh$5,339,230, included in the
consolidated income statement, correspond to services rendered up to that date.
Subsequently, the Company has maintained investments in its subsidiaries and has
not generated sales or costs of sales.
The effects and proceeds from the sale of licenses are stated in Note 24.
Currently the Company holds investments in Entel PCS Telecomunicaciones S.A.
and Entel Telefonia Movil S.A., subsidiaries that are licensed to operate and
are operating mobile digital telephony of 1900 frequency with GSM technology.
F-4-9
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(A) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Chile ("Chilean GAAP"), and the
standards of the Chilean Superintendency of Securities and Insurance
(hereinafter, the "Superintendency"), as the Company is a subsidiary of Entel
Chile S.A. For the convenience of readers outside Chile, the consolidated
financial statements have been translated into English, certain
reclassifications have been made and certain clarifying account descriptions
have been added.
(B) BASIS OF CONSOLIDATION
The consolidated group comprises Entel Telefonia Personal S.A. (the Company)
and the following direct subsidiaries:
<TABLE>
<CAPTION>
OWNERSHIP
-------------------
1998 1999
---- ----
% %
<S> <C> <C>
Entel PCS Telecomunicaciones S.A............................ 99.90 99.90
Entel Telefonia Movil S.A................................... 99.92 99.92
Empresa de Radiocomunicaciones Insta Beep Limitada.......... 99.99 99.99
</TABLE>
All significant intercompany transactions have been eliminated in
consolidation and the minority interest in the subsidiaries has been recognized.
(C) REPORTING PERIOD
The financial statements comprise the periods between January 1 and
December 31, 1997, 1998 and 1999.
(D) PRICE-LEVEL RESTATEMENT (MONETARY CORRECTION)
The consolidated financial statements are prepared on the basis of general
price-level accounting in order to reflect the effect of changes which are
expressed in Chilean pesos, in the purchasing power of the Chilean peso during
each year. At the end of each reporting period, the consolidated financial
statements are stated in terms of the general purchasing power of the Chilean
peso using changes in the Chilean consumer price index ("CPI") as follows:
- Nonmonetary assets, liabilities, and shareholders' equity accounts are
restated in terms of year-end purchasing power.
- Monetary items are not restated as such items are, by their nature, stated
in terms of current purchasing power in the financial statements.
- The price-level restatement credit or charge in the income statement
represents the monetary gain or loss in purchasing power from holding
monetary assets and liabilities exposed to the effects of inflation.
- All the accompanying consolidated financial statements have been restated
in constant Chilean pesos of general purchasing power of December 31, 1999
("constant pesos") applied under the
F-4-10
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
"prior month rule", as described below, to reflect changes in the CPI from
the financial statement dates to December 31, 1999. This updating does not
change the prior years' statements of information in any way except to
update the amounts to constant pesos of similar purchasing power.
The general price-level restatements are calculated using the official
consumer price index of the Chilean Instituto Nacional de Estadisticas (National
Statistics Institute) and are based on the prior month rule, in which the
inflation adjustment is based on the consumer price index at the close of the
month preceding the close of the respective period or transaction. The CPI index
is considered by the business community, the accounting profession and the
Chilean government to be the index which most closely complies with the
technical requirement to reflect the variation in the general level of prices in
the country and, consequently, is widely used for financial reporting purposes
in Chile.
The values of the Chilean CPI used for price-level restatement purposes are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
CHANGE IN
YEAR INDEX* INDEX
---- -------- ---------
<S> <C> <C>
1997.................................................... 95.44 6.3%
1998.................................................... 99.49 4.3%
1999.................................................... 102.04 2.6%
</TABLE>
------------------------
* Index as of November 30 of each year, under prior month rule described
above.
The price-level restated consolidated financial statements do not purport to
represent appraised values, replacement cost, or any other current value of
assets at which transactions would take place currently and are only intended to
restate all nonmonetary financial statement components in terms of local
currency of a single purchasing power and to include in the net result for each
year the gain or loss in purchasing power arising from the holding of monetary
assets and liabilities exposed to the effects to inflation.
For comparison purposes, the financial statements and their respective notes
are restated by the percentage changes in the Chilean consumer price index from
each year end to December 31, 1999 as follows:
<TABLE>
<CAPTION>
YEAR CHANGE IN INDEX
---- ---------------
<S> <C>
1997....................................................... 7.0%
1998....................................................... 2.6%
</TABLE>
F-4-11
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
(E) FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currency or expressed in
inflation index-linked units of account are translated into Chilean pesos at the
rates of exchange prevailing at each year end. The following rates were
applicable at December 31, of each year:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
US dollar reported by Banco Central............ Ch $ 439.18 Ch $ 472.41 Ch $ 530.07
Unidad de Fomento*............................. 14,096.93 14,685.39 15,066.96
US dollar for customs duties................... 430.71 466.36 545.83
</TABLE>
------------------------
(*) Unidad de Fomento (UF)--Inflation index-linked units of account.
(F) MARKETABLE SECURITIES
Mutual fund units are carried at year-end unit value.
Other marketable investments are carried at the lower of cost plus
price-level restatement or market value.
(G) INVENTORIES
Inventories, which comprise hand sets and accessories are carried at
price-level restated cost, on a weighted-average-cost basis. The cost of
inventories does not exceed their net realizable value.
(H) DEFERRED SALE COMMISSIONS AND SUBSCRIBER ACQUISITION COSTS
In order to properly correlate revenues and expenses, disbursements for new
clients are deferred and amortized over twelve months. The unamortized balance
is presented in current assets as "Other current assets".
(I) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost plus price-level
restatement. Depreciation is computed, using the straight line method,
considering the estimated useful life of assets.
In 1999, an obsolescence allowance was created for the technical equipment
of the analogical network to reflect the expected realization value of these
assets, which are not operational.
Assets acquired under finance leases, are accounted for in the same manner
as the purchase of a property, plant and equipment. Their value equals the
present value of the agreed installments and the amount payable for the purchase
option, which are price-level restated and depreciated based on their useful
life.
(J) INVESTMENTS IN RELATED COMPANIES
Corresponds to ownership in a related company, which is recorded using the
equity method of accounting at December 31, 1998 and 1999.
F-4-12
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
The goodwill (excess of cost over book value) from the acquisition of 99.9%
of Empresa de Radiocomunicaciones Insta Beep Ltda. in 1995 was amortized over
ten years. In 1999, the outstanding balance was written off.
The goodwill from the acquisition of 99.9% of Entel PCS Telecomunicaciones
S.A. and 99.2% of Entel Movil S.A., is amortized over 20 years starting in 1998,
according to Circular No. 368 of the Superintendency.
(K) INTANGIBLES
Easements are amortized over the term of the contract with a maximum period
of 20 years. In 1998, the Company acquired licenses for mobile cellular
telephone services in Regions XI and XII. The costs were price-level restated
and amortized over 10 years. These rights were written off in 1999 with the sale
of the licenses (Note 24).
(L) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Trade accounts and notes receivable are presented net of the allowance for
uncollectible accounts, which is determined based on aging of balances and on an
estimate of doubtful accounts receivable.
(M) TELEPHONE SERVICES RENDERED AND NOT BILLED
In order to determine and estimate services rendered but not billed, the
Company uses computer processes and systems that allow agreement, validation and
rating of the traffic of affiliates from the records of their computer centers.
In order to determine an estimate of income (15 days delay) a projection is
applied, based on subscriber data and traffic at the closing date.
(N) EMPLOYEE VACATION EXPENSE
The Company and its Subsidiaries have accrued vacation expense based on
Technical Bulletin No. 47 of the Colegio de Contadores de Chile A.G.
(O) INCOME TAX AND DEFERRED TAXES
In accordance with current laws, at December 31, 1998, the Company did not
accrue a provision for income tax as it had tax losses. At December 31, 1999,
the Company accrued an income tax provision as it had net taxable profits. The
Company recognizes in the financial statement the effect of deferred taxes
resulting from significant timing differences that would reverse in the near
future without being offset by new timing differences. Timing differences whose
reversal is excepted to be offset by future differences for the same item, are
treated as permanent differences. Notwithstanding, as stipulated in Circular
No. 1450 of the Superintendency, the criteria of Technical Bulletins No. 60 and
No. 61 of the Colegio de Contadores de Chile A.G. have been applied for
information purposes only.
(P) FORWARD EXCHANGE CONTRACTS
At December 31, 1999, the Company has entered into foreign exchange forward
contracts with financial institutions. They have been contracted and assigned as
hedges against changes in the US dollar exchange rate. Only net differences
between rights and obligations from contracts are recorded
F-4-13
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
in the balance sheet, having been valued according to Technical
Bulletin No. 57 of the Colegio de Contadores de Chile A.G.
(Q) CASH AND CASH EQUIVALENTS
In preparing the cash flow statements, the Company and its subsidiaries
consider as cash and cash equivalents, cash on hand, in banks and fixed income
mutual funds according to Technical Bulletin No. 50 of the Colegio de Contadores
de Chile A.G.
For classification purposes, the Company has defined as operating
activities, cellular telephone services along with sale and rental of equipment
related to these services. Operating cash flows correspond mainly to recovery of
accounts receivable from sales and payment to suppliers and related companies.
The additional income from the sale of the analogical cell phone license is
included in cash flows from investment activities.
(R) ACCOUNTING ESTIMATES
The preparation of financial statements require management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(S) REVENUE RECOGNITION
The Company recognizes revenues from cellular telephone services activities
based upon the minutes of traffic processed and established rates.
(T) TRANSLATION TO U.S. DOLLARS (UNAUDITED)
The Company maintains its accounting records and prepares its financial
statements in Chilean pesos. The U.S. dollar amounts disclosed in the
accompanying consolidated financial statements are presented solely for the
convenience of the reader at the December 31, 1999. Representative Exchange Rate
of Ch$529.95 per US$1.00. This translation should not be construed as a
representation that the Chilean peso amounts actually represented U.S. dollars
or have been, could have been or could in the future be converted into U.S.
dollars at the or any other rate.
NOTE 4--ACCOUNTING CHANGES
The accounting principles described in Note 3 have been applied consistently
in 1997, 1998 and 1999.
F-4-14
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 5--PRICE-LEVEL RESTATEMENT
The application of the price-level accounting principles described in
Note 3d, produced the following effects on income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Credit (charges) for restatement of:
Current assets.............................. ThCh $ 42,935 ThCh $ (1,956) ThCh $ 46,147
Property, plant and equipment............... 490,506 3,733,707 4,147,820
Other assets................................ 85,403 208,742 139,217
Long-term liabilities....................... -- -- (39)
Shareholders' equity, net................... (158,370) (2,881,801) (2,155,920)
Minority interest........................... (8) 26,522 (1,864)
-------------- ---------------- ----------------
Gain from restatement of assets and
liabilities............................... 460,466 1,085,214 2,175,361
Exchange differences, net................... (850,633) (1,395,815) (1,150,068)
Indexation, net............................. 215,683 1,019,475 (1,931,647)
-------------- ---------------- ----------------
Net credit (charge) to income............... (174,484) 708,874 (906,354)
Price-level restatement of income statement
amounts................................... 47,719 333,172 (131,965)
-------------- ---------------- ----------------
Balance of price-level restatement amount... (126,765) 1,042,046 (1,038,319)
============== ================ ================
</TABLE>
F-4-15
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 6--MARKETABLE SECURITIES
Marketable securities correspond to short-term investments in shares and
mutual funds valued according to Note 3f:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
MUTUAL FUND UNITS
Fondo Mutuo Banchile............................. ThCh $44,134 ThCh $ 95,825
Fondo Mutuo Santiago............................. -- 465,145
Fondo Mutuo Santander Interes.................... -- 307,216
Fondo Mutuo Bancredito Conveniencia.............. 30,835 80,361
Fondo Mutuo Bancredito Competitivo............... -- 20,000
Fondo Mutuo CorpBanca............................ -- 26,157
Fondo Mutuo Santander Rentamas................... -- 251,294
------------ ---------------
Subtotal......................................... 74,969 1,245,998
------------ ---------------
SHARES:
Chilectra S.A.................................... -- 50,162
Cia. Electrica del Rio Maipo S.A................. -- 6,194
------------ ---------------
Subtotal......................................... -- 56,356
------------ ---------------
Total............................................ ThCh $74,969 ThCh $1,302,354
============ ===============
</TABLE>
NOTE 7--TRADE ACCOUNTS RECEIVABLE
This heading includes accounts receivable from clients and services rendered
and not invoiced as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
---- ----
<S> <C> <C>
Clients for services........................ ThCh $ 9,615,459 ThCh $18,634,856
Clients for services to be billed........... 3,255,846 13,100,605
Clients for sales........................... 157,417 6,531,165
Clients for Roaming......................... 488,358 113,063
Clients for Roaming to be billed............ 96,869 --
---------------- ----------------
Subtotal.................................... 13,613,949 38,379,689
Estimate of uncollectible accounts
(Note 24)................................. (2,625,240) (5,479,709)
---------------- ----------------
Total net................................... ThCh $10,988,709 ThCh $32,899,980
================ ================
</TABLE>
Estimate of uncollectible accounts amounts to ThCh$2,276,867 in 1997.
F-4-16
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 8--NOTES RECEIVABLE
Notes receivable are analyzed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1999
---- ----
<S> <C> <C>
Postdated checks................................ ThCh $432,287 ThCh $ 905,693
Protested checks and under litigation, net...... 276,826 607,616
Other notes receivable.......................... 82,901 189,308
------------- ---------------
Subtotal........................................ 792,014 1,702,617
Estimate of uncollectible notes................. (65,166) (6,000)
------------- ---------------
Total........................................... ThCh $726,848 ThCh $1,696,617
============= ===============
</TABLE>
Estimate of uncollectible notes amounts to ThCh$178,355 in 1997.
NOTE 9--OTHER RECEIVABLES
The following items are included in this heading:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1999
---- ----
<S> <C> <C>
Carrier contract receivables.................. ThCh $ 167,758 ThCh $ 192,942
Advance payments to suppliers................. 605,871 2,521,316
Employee and other accounts................... 346,784 61,019
Other receivables............................. -- 207,246
--------------- ---------------
Total......................................... ThCh $1,120,413 ThCh $2,982,523
=============== ===============
</TABLE>
NOTE 10-- ACCOUNTS RECEIVABLE FROM AND PAYABLE TO RELATED COMPANIES
(A) ACCOUNTS RECEIVABLE, SHORT-TERM
The detail of outstanding balances is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
COMPANY RELATIONSHIP 1998 1999
------- ------------ ---- ----
<S> <C> <C> <C>
Buenaventura S.A................... Investee ThCh $1,617,500 ThCh $ --
Motorola Inc....................... Shareholder 8,712 4,585
Entel Servicios Telefonicos S.A.... Indirect 624,713 4,634,328
Entel Phone S.A.................... Indirect -- 132,203
Red de Transacciones Electronicas
S.A.............................. Indirect -- 69
--------------- ---------------
Total................................................ ThCh $2,250,925 ThCh $4,771,185
=============== ===============
</TABLE>
F-4-17
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 10-- ACCOUNTS RECEIVABLE FROM AND PAYABLE TO RELATED COMPANIES (CONTINUED)
These balances correspond to expenses, services rendered and transfer of
funds paid by Entel Telefonia Personal S.A.
(B) ACCOUNTS PAYABLE, SHORT-TERM
These balances correspond to invoices payable for services, purchase of
equipment and expenses reimbursement as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
COMPANY RELATIONSHIP 1998 1999
------- ------------ ---- ----
<S> <C> <C> <C>
Entel Chile S.A....... Shareholder/Parent ThCh $20,121,986 ThCh $102,691,256
Entelphone S.A........ Indirect 25,355 --
Satel S.A............. Indirect 10,641 1,276
---------------- -----------------
Total.......................................... ThCh $20,157,982 ThCh $102,692,532
================ =================
</TABLE>
(C) ACCOUNTS PAYABLE
Loans from the ultimate parent company are subject to indexation and
interest based on market conditions, with an annual rate of 8.47%, and mature in
the year 2001.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
COMPANY RELATIONSHIP 1998 1999
------- ------------ ---- ----
<S> <C> <C> <C>
Entel Chile S.A......... Parent company ThCh $41,040,000 ThCh $44,706,781
================ ================
</TABLE>
Current account balances with related companies are subject to indexation
and market interest rates.
F-4-18
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 10-- ACCOUNTS RECEIVABLE FROM AND PAYABLE TO RELATED COMPANIES (CONTINUED)
(D) TRANSACTIONS WITH RELATED COMPANIES
Significant transactions with related companies during 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
COMPANY RELATIONSHIP
------- ------------
<S> <C>
Entel Chile
S.A.............. Parent
Buenaventura
S.A.............. Investee
Entel PCS S.A.... Subsidiary
Entelfonica
S.A.............. Common Parent
Insta Beep
Ltda............. Subsidiary
Entel Movil
S.A.............. Subsidiary
Entelphone S.A... Common Parent
Satel S.A........ Common Parent
Red de
Transacciones
Electronicas
S.A.............. Common Parent
</TABLE>
<TABLE>
<CAPTION>
TRANSACTIONS 1997 1998 1999
------------ ---- ---- ----
<S> <C> <C> <C>
ENTEL CHILE S.A.
Services received(2)..................... ThCh $ 1,576,695 ThCh $ 5,296,344 ThCh $ 14,016,170
Services rendered(1)..................... 123,381 894,609 792,156
Loans received(3)........................ 3,049,460 49,951,505 100,274,677
Expense reimbursement(3)................. 23,113 338,969 1,905,924
Expense recovery(3)...................... -- -- 9,186
Interest on loans received(2)............ 131,387 5,543,662 8,273,252
Interest on loans provided(1)............ 3,658 48,639 5,373
Capital contributions received(4)........ 43,334,504 36,187,373 --
Loans provided(3)........................ -- -- 7,537,500
Payment of loans(3)...................... -- -- 4,723,500
Loan collection(3)....................... -- -- 58,700,901
Transfer of equipment(3)................. -- 25,449,932 52,506,330
Additions to fixed assets(3)............. -- -- 36,487,450
ENTEL PCS S.A.
Capital contribution(4).................. 40,113,037 87,153,908 --
Interest received(1)..................... -- 2,595,797 --
Sale of accessories and equipment(3)..... -- 1,139,529 --
Sale of property, plant and
equipment(3)........................... -- 177,403 --
Expense reimbursement(3)................. -- 38,779 --
ENTELPHONE S.A.
Services rendered(1)..................... -- -- 776.541
Services received(2)..................... -- -- 336,572
SATEL S.A.
Services received(2)..................... -- -- 15,124
RED DE TRANSACCIONES ELECTRONICAS S.A.
Services rendered(1)..................... -- -- 435
</TABLE>
F-4-19
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 10-- ACCOUNTS RECEIVABLE FROM AND PAYABLE TO RELATED COMPANIES (CONTINUED)
<TABLE>
<CAPTION>
TRANSACTIONS 1997 1998 1999
------------ ---- ---- ----
<S> <C> <C> <C>
BUENAVENTURA S.A.
Rental of equipment(2)................... -- 2,290,660 2,043,067
Services received(2)..................... -- -- 1,831,179
Loans granted(3)......................... 1,892,735 -- 1,628,560
ENTELFONICA S.A.
Services received(2)..................... ThCh $ -- ThCh $ 602,512 ThCh $ 498,819
Services rendered(1)..................... 314,720 995,012 4,977,833
Purchase of accessories(3)............... 333,174 -- 440,678
INSTA BEEP LTDA.
Interest paid(2)......................... -- 12,058 --
ENTEL MOVIL S.A.
Interest paid(1)......................... -- 3,338 --
</TABLE>
--------------------------
(1) Affected income of the Company.
(2) Affected expenses of the Company.
(3) No effects on income.
(4) Affected equity of the Company.
NOTE 11--INVENTORIES
Inventories correspond, mainly, to digital and analogical telephones and
accessories. The detail is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
---- ----
<S> <C> <C>
Digital telephones.......................... ThCh $12,553,628 ThCh $ 8,955,758
Analog telephones........................... 906,909 47,404
Accessories................................. 1,402,867 2,016,751
Other....................................... 60,736 84,287
---------------- ----------------
Subtotal.................................... 14,924,140 11,104,200
Obsolescence allowance...................... (311,677) --
---------------- ----------------
Total....................................... 14,612,463 11,104,200
================ ================
</TABLE>
Obsolescence allowance amounts to ThCh$187,571 in 1997.
NOTE 12--RECOVERABLE TAXES
This heading includes the tax credit for value-added tax that arises
basically from equipment purchases for the digital network of the subsidiary
Entel PCS S.A.
F-4-20
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 13--OTHER CURRENT ASSETS
Other current assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1999
---- ----
<S> <C> <C>
Deferred commission expenses............. ThCh $2,311,780 ThCh $ 2,282,658
Subscriber acquisition costs............. -- 16,448,535
--------------- ----------------
Total.................................... 2,311,780 18,731,193
=============== ================
</TABLE>
NOTE 14. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued as described in Note 3i, and the
detail is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1999
---- ----
<S> <C> <C>
Land.................................................. ThCh $ 1,446,374 ThCh $ 1,695,595
----------------- -----------------
Buildings and infrastructure
(including construction in progress)................ 32,567,925 92,311,032
----------------- -----------------
Machinery and equipment:
Telecommunications equipment........................ 81,767,541 77,219,880
Obsolescence allowance (Note 24).................... -- (2,288,061)
----------------- -----------------
Machinery and equipment, net.......................... 81,767,541 74,931,819
----------------- -----------------
Other:
Cellular telephones(1).............................. 18,415,026 36,964,549
Office furniture and equipment...................... 2,599,792 1,938,100
Installations....................................... 1,510,937 1,024,969
Leased buildings.................................... 680,646 680,646
Leased office equipment............................. 532,650 318,584
Leased machinery and equipmnent..................... 5,298,373 5,030,459
Transportation equipment............................ 293,247 240,260
Instruments and tools............................... 15,835 14,627
Other............................................... 4,376,204 4,241,242
----------------- -----------------
33,722,710 50,453,436
Obsolescence allowance (Note 24)...................... -- (420,691)
----------------- -----------------
Other, net............................................ 33,722,710 50,032,745
----------------- -----------------
Subtotal.............................................. 149,504,550 218,971,191
Less: accumulated depreciation........................ (12,370,668) (26,992,513)
----------------- -----------------
Total fixed assets, net............................... ThCh $137,133,882 ThCh $191,978,678
================= =================
</TABLE>
------------------------
(1) The Company has fixed term service contracts with clients who have received
telephone equipment under loan and restitution contracts, that are amortized
as described in Note 3i.
F-4-21
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Depreciation included in Selling and administrative expenses totals
ThCh$734,184 in 1997, ThCh$1,171,806 in 1998 and ThCh$2,087,814 in 1999. In
addition, ThCh$621,820, ThCh$7,811,601 and ThCh$16,278,298 are included in
Operating Costs of each year for depreciation of assets related to cell
infrastructure.
Leased assets are not legally owned by the Company until the purchase option
is exercised, and, as a result, such property cannot be sold.
NOTE 15. INVESTMENTS IN RELATED COMPANIES
Equity investments in companies at December 31 of each year are as follows:
(A) INVESTMENTS
<TABLE>
<CAPTION>
VARIATIONS IN 1999
-----------------------------------------------
1998 EQUITY
-------------- -----------------------------------------------
NET INCREASE IN NET
OWNERSHIP INVESTMENT DECREASE EARNINGS INVESTMENT
--------- ---------- -------- -------- ----------
%
<S> <C> <C> <C> <C> <C>
Entel Movil S.A.(*)........ 99.92% ThCh $ -- ThCh $ -- ThCh $ -- ThCh $ --
Entel PCS S.A.(*).......... 99.90% -- -- -- --
Buenaventura S.A........... 50.00% 862,528 875,290 12,762 --
------------- ------------- ------------ -------------
Total...................... ThCh $862,528 ThCh $875,290 ThCh $12,762 ThCh $ --
============= ============= ============ =============
</TABLE>
------------------------
Equity in earnings of related companies amounts to ThCh$5,079, ThCh$11,068,
and ThCh$12,762 for 1997, 1998 and 1999, respectively.
F-4-22
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 15. INVESTMENTS IN RELATED COMPANIES (CONTINUED)
(B) GOODWILL
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
STARTING YEAR END
BALANCE INCREASE AMORTIZATION BALANCE
------- -------- ------------ -------
<S> <C> <C> <C> <C>
Empresa de
Radiocomunicaciones
Insta Beep Ltda.......................... ThCh $307,737 ThCh $(36,563) ThCh $ 271,174
Entel Movil S.A.(*)...................... -- $ 2,616,353 -- 2,616,353
Entel PCS S.A.(*)........................ -- 11,434 -- 11,434
------------- --------------- ------------- ---------------
Total.................................... ThCh $307,737 ThCh $2,627,787 ThCh $(36,563) ThCh $2,898,961
============= =============== ============= ===============
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------------------------------- --------------------------------
YEAR END YEAR END
AMORTIZATION BALANCE AMORTIZATION BALANCE
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Empresa de
Radiocomunicaciones
Insta Beep Ltda......................... ThCh $ (36,562) ThCh $ 234,612 ThCh $(234,612) ThCh $ --
Entel Movil S.A.(*)..................... (130,818) 2,485,534 (124,797) 2,360,737
Entel PCS S.A.(*)....................... (572) 10,862 (544) 10,318
-------------- --------------- -------------- ---------------
Total................................... ThCh $(167,952) ThCh $2,731,008 ThCh $(359,953) ThCh $2,371,055
============== =============== ============== ===============
</TABLE>
------------------------------
(*) Companies that until February 28, 1998 were in the development stage. Since
1998 they are included in the consolidation.
NOTE 16--CURRENT LIABILITIES AND LONG-TERM LIABILITIES
The detail of creditors, indexation terms and interest on liabilities are
detailed below. Amounts included in the balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1998 1999
----------------------------------- ------------------------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Due to banks and financial
institutions:
Short-term (a)............ ThCh $ 5,539,106 ThCh $ -- ThCh $ 59,289 ThCh $ --
Long-term (b)............. -- 4,415,312 -- 1,325,175
Current portion (b)....... 2,013,952 -- 2,726,847 --
Notes payable and other
liabilities:
Current portion (c)....... 1,326,143 -- 4,009,047 --
Long-term (c)............. -- 5,779,395 -- 3,169,005
Due to related companies--
long-term (c)............. -- 41,040,000 -- 44,706,781
Other short-term liabilities
(d)....................... 43,217,572 -- 130,126,414 --
---------------- ---------------- ----------------- ----------------
Totals...................... ThCh $52,096,773 ThCh $51,234,707 ThCh $136,921,597 ThCh $49,200,961
================ ================ ================= ================
</TABLE>
F-4-23
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 16--CURRENT LIABILITIES AND LONG-TERM LIABILITIES (CONTINUED)
(A) SHORT-TERM LIABILITIES WITH BANKS AND FINANCIAL INSTITUTIONS
<TABLE>
<CAPTION>
TYPE OF CURRENCY
----------------------------------------------------------------------------------------
UNIDADES DE NON-INDEXED
US $ FOMENTO CHILEAN PESOS TOTAL
------------------- -------------------- -------------------- --------------------
BANK 1998 1999 1998 1999 1998 1999 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
THCH $ THCH $ THCH $ THCH $ THCH $ THCH $ THCH $ THCH $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Banco Boston............... -- -- 356,177 -- -- -- 356,177 --
Banco Santander............ -- -- 174,360 -- 144,430 -- 318,790 --
Banco Bice................. -- -- 284,633 -- 91,117 -- 375,750 --
Banco Credito e
Inversiones.............. -- -- 371,201 -- 606,723 51,261 977,924 51,261
Banco Santiago............. -- -- 1,555,930 -- -- 1,555,930 --
Banco del Estado........... -- -- -- -- -- 8,028 -- 8,028
Banco Sud Americano........ -- -- 211,211 -- 1,243,939 -- 1,455,150 --
Rep Nat. Bank N.Y.......... -- -- 499,385 -- -- -- 499,385 --
------ ------ --------- ------- --------- ------ --------- ------
Total...................... -- -- 3,452,897 -- 2,086,209 59,289 5,539,106 59,289
====== ====== ========= ======= ========= ====== ========= ======
Outstanding principal...... -- -- 3,338,517 -- 2,072,277 59,289 5,410,794 59,289
====== ====== ========= ======= ========= ====== ========= ======
* Average annual interest
rate (%)................. 11.68% 1.14%
====== ====== ========= ======= ========= ====== ========= ======
1998 1999
------- ---------
Percentage of liabilities in foreign currency............... 0.00% 0.00%
Percentage of liabilities in local currency................. 100.00% 100.00%
------- ---------
Total....................................................... 100.00% 100.00%
======= =========
</TABLE>
------------------------
* Weighted by balance of principal
F-4-24
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 16--CURRENT LIABILITIES AND LONG-TERM LIABILITIES (CONTINUED)
(B) LONG-TERM LIABILITIES WITH BANKS AND FINANCIAL INSTITUTIONS (INCLUDING
CURRENT INSTALLMENTS):
<TABLE>
<CAPTION>
1998 1999
---------------------- ---------------------------------------------
SHORT- LONG- SHORT- YEARS TO MATURITY
CURRENCY OR TERM TERM TERM ---------------------
BANK INDEXATION PORTION AT PORTION PORTION 1 TO 2 2 TO 3 TOTAL AT
---- ---------- ---------- ------- ------- ------ ------ --------
THCH $ THCH $ THCH $ THCH $ THCH $ THCH $
<S> <C> <C> <C> <C> <C> <C> <C>
Banco Santander.................... US $ 1,262,579 3,663,938 2,726,847 1,325,175 -- 4,052,022
Banco Santiago..................... UF 751,373 751,374 -- -- -- --
--------- --------- --------- --------- --------- ---------
Total.............................. 2,013,952 4,415,312 2,726,847 1,325,175 -- 4,052,022
========= ========= ========= ========= ========= =========
1998 1999
--------- ---------
Percentage of liabilities in foreign currency............................ 76.63% 100.00%
Percentage of liabilities in local currency.............................. 23.37% 0.00%
--------- ---------
100.00% 100.00%
========= =========
<CAPTION>
1999
-----------------------
AVERAGE
ANNUAL
INTEREST OUTSTANDING
BANK RATE PRINCIPAL AT
---- ---- ------------
% THCH $
<S> <C> <C>
Banco Santander.................... 6.70 3,975,525
Banco Santiago..................... --
---------
Total.............................. 3,975,525
=========
Percentage of liabilities in foreig
Percentage of liabilities in local
</TABLE>
(C) NOTES PAYABLE AND OTHER LONG-TERM LIABILITIES (INCLUDING SHORT-TERM
PORTION)
<TABLE>
<CAPTION>
1998 1999
---------------------- ----------------------------------
SHORT- LONG- SHORT- YEARS TO MATURITY
CURRENCY OR TERM TERM TERM ----------------------
ENTITY INDEXATION PORTION PORTION PORTION 1 TO 2 2 TO 3
------ ---------- ------- ------- ------- ------ ------
THCH $ THCH $ THCH $ THCH $ THCH $
<S> <C> <C> <C> <C> <C> <C>
O'Higgins Leasing....................... UF 44,644 -- -- -- --
Euroamerica Leasing..................... UF 27,086 270,040 29,598 32,340 35,337
Security Leasing........................ UF 20,952 134,280 22,709 24,616 26,682
Leasing Andino.......................... UF 102,439 122,510 112,628 9,879 --
Xerox................................... UF 10,923 -- -- -- --
IBM Leasing............................. US$ 1,120,099 3,446,338 1,323,287 1,429,505 1,016,195
Long-term notes payable................. US$ -- -- 2,520,825 359,425 --
Customs duties.......................... US$ -- 1,806,227 -- -- --
Other................................... $ -- -- -- 1,993 --
--------- ---------- --------- ---------- ---------
Sub-total............................... 1,326,143 5,779,395 4,009,047 1,857,758 1,078,214
--------- ---------- --------- ---------- ---------
Accounts payable to related companies... UF -- 41,040,000 -- 44,706,781 --
--------- ---------- --------- ---------- ---------
Total................................... 1,326,143 46,819,395 4,009,047 46,564,539 1,078,214
========= ========== ========= ========== =========
1998 1999
--------- ----------
Percentage of liabilities in foreign currency:................................ 64.27% 12.82%
Percentage of liabilities in local currency:.................................. 35.73% 87.18%
--------- ----------
100.00% 100.00%
========= ==========
<CAPTION>
1999
------------------------------------------------------------
AVERAGE
YEARS TO MATURITY ANNUAL
--------------------- INTEREST OUTSTANDING
ENTITY 3 TO 4 4 TO 5 TOTAL AT RATE PRINCIPAL AT
------ ------ ------ -------- ---- ------------
THCH $ THCH $ THCH $ % THCH $
<S> <C> <C> <C> <C> <C>
O'Higgins Leasing....................... -- -- -- --
Euroamerica Leasing..................... 38,612 134,152 270,039 8.90 270,039
Security Leasing........................ 28,921 31,348 134,276 9.14 134,276
Leasing Andino.......................... -- -- 122,507 9.40 122,507
Xerox................................... -- -- -- -- --
IBM Leasing............................. -- -- 3,768,987 8.15 3,768,987
Long-term notes payable................. -- -- 2,880,250 2,880,250
Customs duties.......................... -- -- -- --
Other................................... -- -- 1,993 1,993
--------- --------- ---------- ----------
Sub-total............................... 67,533 165,500 7,178,052 7,178,052
--------- --------- ---------- ----------
Accounts payable to related companies... -- -- 44,706,781 8.47 41,039,319
--------- --------- ---------- ----------
Total................................... 67,533 165,500 51,884,833 48,217,371
========= ========= ========== ==========
Percentage of liabilities in foreign cur
Percentage of liabilities in local curre
</TABLE>
F-4-25
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 16--CURRENT LIABILITIES AND LONG-TERM LIABILITIES (CONTINUED)
(D) CURRENT LIABILITIES (EXCLUDING LIABILITIES WITH BANKS AND FINANCIAL
INSTITUTIONS)
<TABLE>
<CAPTION>
TYPE OF CURRENCY
---------------------------------------------------------------------------
NON-INDEXED
US $ UNIDADES DE FOMENTO CHILEAN PESOS TOTAL
---------------------- ------------------------ ----------------------- ----------
ITEM 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
THCH $ THCH $ THCH $ THCH $ THCH $ THCH $ THCH $
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term notes and accounts
payable............................ 11,375,845 3,470,711 -- -- -- -- 11,375,845
Accounts payable..................... -- 1,668,509 -- -- 10,799,564 16,550,017 10,799,564
Notes and accounts payable to related
companies.......................... -- -- -- 102,692,532 20,157,982 -- 20,157,982
Accruals............................. -- -- -- -- 548,061 951,979 548,061
Withholdings......................... -- -- -- -- 336,120 383,241 336,120
Other current liabilities............ -- -- -- -- 452,345 --
Income taxes......................... -- -- -- -- -- 3,957,080 --
---------- --------- ---------- ----------- ---------- ---------- ----------
Total................................ 11,375,845 5,139,220 102,692,532 31,841,727 22,294,662 43,217,572
========== ========= ========== =========== ========== ========== ==========
Outstanding principal................ 11,375,845 5,139,220 102,692,532 31,841,727 22,294,662 43,217,572
========== ========= ========== =========== ========== ========== ==========
Average annual interest rate (%)..... 8.15%
========== ========= ========== =========== ========== ========== ==========
1998 1999
----------- ----------
Percentage of liabilities in foreign currency............................. 26.32% 3.90%
Percentage of liabilities in local currency............................... 73.68% 96.10%
----------- ----------
100.00% 100.00%
=========== ==========
<CAPTION>
TOTAL
-----------
ITEM 1999
---- ----
THCH $
<S> <C>
Short-term notes and accounts
payable............................ 3,470,711
Accounts payable..................... 18,218,526
Notes and accounts payable to related
companies.......................... 102,692,532
Accruals............................. 951,979
Withholdings......................... 383,241
Other current liabilities............ 452,345
Income taxes......................... 3,957,080
-----------
Total................................ 130,126,414
===========
Outstanding principal................ 130,126,414
===========
Average annual interest rate (%).....
===========
Percentage of liabilities in foreign
Percentage of liabilities in local cu
</TABLE>
NOTE 17--ACCOUNTS PAYABLE
The detail of accounts payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
---- ----
<S> <C> <C>
Domestic suppliers...................... ThCh $ 8,156,655 ThCh $16,356,625
Foreign suppliers....................... 1,981,133 1,668,509
Other accounts payable.................. 661,776 193,392
---------------- ----------------
Total................................... ThCh $10,799,564 ThCh $18,218,526
================ ================
</TABLE>
F-4-26
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 18--ACCRUED EXPENSES, ALLOWANCES AND WRITE-OFFS
Accrued expenses at each year end are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
Vacations.................................... ThCh $327,981 ThCh $640,428
Contractual obligations with employees....... 220,080 300,610
Others....................................... -- 10,941
------------- -------------
Total accruals............................... ThCh $548,061 ThCh $951,979
============= =============
</TABLE>
There are allowances for uncollectible accounts that have been deducted from
the following accounts:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1999
---- ----
<S> <C> <C>
Trade accounts receivable................. ThCh $2,625,240 ThCh $5,479,709
Notes receivable.......................... 65,166 6,000
--------------- ---------------
Total allowances.......................... ThCh $2,690,406 ThCh $5,485,709
=============== ===============
</TABLE>
During each year, there were write-offs of clients for ThCh$954,044 in 1997,
ThCh$1,568,213 in 1998 and ThCh$1,160,835 in 1999.
F-4-27
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 19. STOCKHOLDERS' EQUITY
During 1997, 1998 and 1999, these accounts show the following movements:
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT IN
ADDITIONAL DEVELOPMENT INCOME (LOSS)
PAID-IN CAPITAL PAID-IN CAPITAL STAGE ACCUMULATED LOSS FOR THE YEAR
--------------- --------------- ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996.... ThCh $ 12,021,497 ThCh $ 5,994 ThCh $(1,134,536) ThCh $ (5,722,939) ThCh $ (2,820,921)
Transfers...................... -- -- -- (2,820,921) 2,820,921
Capital increase............... 48,059,157 923,603 -- -- --
Price-level restatement........ 757,354 378 (71,476) (538,263) --
Deficit of development stage
subsidiaries................. -- -- (98,627) -- --
Loss for the year.............. -- -- -- -- (1,005,887)
----------------- ------------- ---------------- ----------------- -----------------
Balances, December 31, 1997.... ThCh $ 60,838,008 ThCh $929,975 ThCh $(1,304,639) ThCh $ (9,082,123) ThCh $ (1,005,887)
================= ============= ================ ================= =================
Balances, December 31, 1997
price-level restated at
December 31, 1999............ ThCh $ 65,103,847 ThCh $995,183 ThCh $(1,396,117) ThCh $ (9,718,943) ThCh $ (1,076,418)
================= ============= ================ ================= =================
Balances, December 31, 1997.... ThCh $ 60,838,008 ThCh $929,975 ThCh $(1,304,639) ThCh $ (9,082,123) ThCh $ (1,005,887)
Transfers...................... -- -- -- (1,005,887) 1,005,887
Capital increase............... 47,437,438 -- -- -- --
Price-level restatement........ 3,280,159 39,989 (77,591) (433,784) --
Deficit of development stage
subsidiaries................. -- -- (632,073) -- --
Loss for the year.............. -- -- -- -- (17,069,471)
----------------- ------------- ---------------- ----------------- -----------------
Balances, December 31, 1998.... ThCh $111,555,605 ThCh $969,964 ThCh $(2,014,303) ThCh $(10,521,794) ThCh $(17,069,471)
================= ============= ================ ================= =================
Balances, December 31, 1998
price-level restated at
December 31, 1999............ ThCh $114,456,051 ThCh $995,183 ThCh $(2,066,675) ThCh $(10,795,361) ThCh $(17,513,277)
================= ============= ================ ================= =================
Balances, December 31, 1998.... ThCh $111,555,605 ThCh $969,964 ThCh $(2,014,303) ThCh $(10,521,794) ThCh $(17,069,471)
Transfers...................... -- -- -- (17,069,471) 17,069,471
Price-level restatement........ 2,900,446 25,219 (52,372) (717,373) --
Income for the year............ -- -- -- -- 20,627,938
----------------- ------------- ---------------- ----------------- -----------------
Balances, December 31, 1999.... ThCh $114,456,051 ThCh $995,183 ThCh $(2,066,675) ThCh $(28,308,638) ThCh $ 20,627,938
================= ============= ================ ================= =================
<CAPTION>
TOTAL
-----
<S> <C>
Balances, December 31, 1996.... ThCh $ 2,349,095
Transfers...................... --
Capital increase............... 48,982,760
Price-level restatement........ 147,993
Deficit of development stage
subsidiaries................. (98,627)
Loss for the year.............. (1,005,887)
-----------------
Balances, December 31, 1997.... ThCh $ 50,375,334
=================
Balances, December 31, 1997
price-level restated at
December 31, 1999............ ThCh $ 53,907,552
=================
Balances, December 31, 1997.... ThCh $ 50,375,334
Transfers...................... --
Capital increase............... 47,437,438
Price-level restatement........ 2,808,773
Deficit of development stage
subsidiaries................. (632,073)
Loss for the year.............. (17,069,471)
-----------------
Balances, December 31, 1998.... ThCh $ 82,920,001
=================
Balances, December 31, 1998
price-level restated at
December 31, 1999............ ThCh $ 85,075,921
=================
Balances, December 31, 1998.... ThCh $ 82,920,001
Transfers...................... --
Price-level restatement........ 2,155,920
Income for the year............ 20,627,938
-----------------
Balances, December 31, 1999.... ThCh $105,703,859
=================
</TABLE>
In accordance with article 10 of Law No. 18.046, the amount corresponding to
price-level restatement of capital has been included in paid-in capital.
PAID-IN CAPITAL
On August 14, 1996, Motorola Inc. sold 2,420 shares of the Company to Entel
S.A. As a result of this sale, Entel S.A. directly, and through its subsidiary
Entel Inversiones S.A., became the majority shareholder, with 6,987 shares
representing a 51% interest. Motorola reduced its number of shares to 6,714,
with which its interest was reduced to 49%.
On December 19, 1996, at the Special Shareholders' Meeting, the shareholders
agreed to increase the Company's capital by ThCh$4,227,600, with the issuance of
2,740 shares. At the same meeting, Entel Inversiones S.A. and Motorola, Inc.
renounced their preemptive rights, which resulted in Entel S.A., directly and
through its subsidiary Entel Inversiones S.A., controlling 9,727 shares in the
F-4-28
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 19. STOCKHOLDERS' EQUITY (CONTINUED)
Company, representing a 59.16% interest. Motorola, Inc. retained 6,714 shares,
with which its interest was reduced to 40.84%.
At the Special Shareholders' Meeting held on October 14, 1997, the
shareholders agreed to increase the Company's capital by ThCh$48,059,157 with
the issuance of 31,789 shares, of which Entel S.A. subscribed 26,445 and
Motorola the remaining 5,344. This capital increase was used in acquiring a
99.92% interest in Entel Movil S.A. and a 99.90% interest in Entel PCS
Telecomunicaciones S.A.
At the Special Shareholders' Meeting held on September 10, 1998, the
shareholders agreed to increase the Company's capital by ThCh$47,437,438 with
the issuance of 37,041 shares, of which Entel S.A. subscribed 27,781 and
Motorola the remaining 9,260.
The paid-in capital at December 31, 1999 is ThCh$114,456,051 represented by
85,272 no-par value shares
A detail of shareholders at December 31, of each year, is as follows:
<TABLE>
<CAPTION>
OWNERSHIP
AS OF
DECEMBER 31,
------------
1998 1999
SHAREHOLDER % %
----------- - -
<S> <C> <C>
Motorola International Development Co.................... 25.00 25.00
Entel S.A................................................ 69.64 69.64
Entel Inversiones S.A.................................... 5.36 5.36
------ ------
Total.................................................... 100.00 100.00
====== ======
</TABLE>
NOTE 20. INCOME TAX AND DEFERRED TAXES
In 1999, the Company and its subsidiary Entel Telefonia Movil S.A. provided
for first category income tax for ThCh$3,907,276 and ThCh$49,804, respectively,
as follows:
<TABLE>
<CAPTION>
THCH $
------
<S> <C>
First category income tax................................... (5,731,455)
Effect of tax loss carryforward from prior years............ 1,774,375
----------
Income tax payable.......................................... (3,957,080)
==========
</TABLE>
In 1999, the subsidiaries Entel PSC Telecomunicaciones S.A. and Empresa de
Radiocomunicaciones Insta Beep Limitada, did not accrue income tax as they
incurred tax losses.
In 1997 and 1998, the Company and its subsidiaries did not accrue first
category income tax as they incurred tax losses.
F-4-29
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 20. INCOME TAX AND DEFERRED TAXES (CONTINUED)
DEFERRED TAXES AND FUTURE ACCOUNTING CHANGES
Circular No. 1.450 of the Superintendency requires the reporting of deferred
taxes arising from temporary differences, tax losses, and other events that
create differences between the accounting and tax bases of assets and
liabilities as stated in Technical Bulletin No. 60 of the Colegio de Contadores
de Chile A.G., for information purposes only.
The Company should account for deferred taxes according to Technical
Bulletin No. 60 starting January 1, 2000. Such regulations are applicable only
for temporary differences and other events that create differences between the
accounting and tax bases of assets and liabilities that arise after that date.
Accordingly, the current financial statements present the information related to
deferred taxes only in an explanatory note, as if the initial application had
been effective on January 1, 1999.
If this accounting change had been applied from January 1, 1999, the Company
would have recorded deferred taxes as follows:
At December 31, 1999, the detail of accumulated balances for deferred taxes,
excluding accumulated balances at January 1, 1999, would have been as follows:
<TABLE>
<CAPTION>
DEFERRED ASSETS DEFERRED LIABILITIES
--------------------------------- ---------------------------------
SHORT- LONG- SHORT- LONG-
TERM TERM TERM TERM
---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance for uncollectible
accounts....................... ThCh $ 417,544 ThCh $ -- ThCh $ -- ThCh $ --
Leased assets.................... -- 85,211 -- --
Inventory provision.............. -- -- 46,752 --
Capital leases................... -- -- -- 143,829
Allowance for obsolescence of
plant and equipment............ 406,314 -- -- --
Miscellaneous accruals........... 265,000 -- -- --
Capitalized expenses............. -- -- 2,462,792 --
Depreciation of property, plant
and equipment.................. -- -- -- 1,047,424
Accrued vacation................. 49,347 -- -- --
Tax loss carryforward............ -- 2,290,954 -- --
--------------- --------------- --------------- ---------------
Total............................ ThCh $1,138,205 ThCh $2,376,165 ThCh $2,509,544 ThCh $1,191,253
=============== =============== =============== ===============
</TABLE>
F-4-30
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 20. INCOME TAX AND DEFERRED TAXES (CONTINUED)
Accumulated balances at the beginning of the year of asset and liability
accounts for deferred taxes and their respective supplementary accounts and the
amortized amount of the latter, are as follows:
<TABLE>
<CAPTION>
DEFERRED ASSETS DEFERRED LIABILITIES ESTIMATED WEIGHTED
-------------------------------- -------------------------------- REVERSAL AVERAGE
SHORT- LONG- SHORT- LONG- PERIOD IN PERIOD OF
TERM TERM TERM TERM YEARS REVERSAL
---- ---- ---- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Allowance for uncollectible
accounts................... ThCh $379,143 ThCh $ -- ThCh $ -- ThCh $ --
Supplemental liabilities... (379,143) -- -- -- 2 1.41
Capitalized expenses......... -- -- 346,767 --
Supplemental assets........ -- -- (346,767) -- 1 1
Tax loss..................... -- 5,248,956 -- --
Supplemental liabilities... -- (5,248,956) -- -- 10 6.56
Leased assets................ -- -- -- 873,333
Supplemental assets........ -- -- -- (873,333) 92 19.12
Capital leases............... -- 788,200 -- --
Supplemental liabilities... -- (788,200) -- -- 4 6.56
Depreciation of property,
plant and equipment........ -- -- -- 1,134,788
Supplement assets.......... -- -- -- (1,134,788) 20 19.12
Miscellaneous accruals....... 46,752 -- -- --
Supplemental liabilities... (46,752) -- -- -- 1 1.41
Accrued vacations............ 46,717 -- -- --
Supplemental liabilities... (46,717) -- -- -- 1 1.41
------------- --------------- ------------- ---------------
Totals....................... ThCh $ -- ThCh $ -- ThCh $ -- ThCh $ --
============= =============== ============= ===============
</TABLE>
The income tax expense, after recording deferred tax, following Circular
1450, would be as follows:
<TABLE>
<CAPTION>
THCH $
------
<S> <C>
Current tax expense:
Income tax................................................ (3,957,080)
Deferred taxes:
Effect of assets and liabilities arising from the year's
deferred taxes.......................................... (186,428)
Effect of amortization of deferred asset and liability
supplemental accounts................................... 2,001,784
----------
Total net charge to income.................................. (2,141,724)
==========
</TABLE>
F-4-31
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 21--LIABILITIES IN FOREIGN CURRENCY
Liabilities in foreign currency are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1998 1999
---- ----
<S> <C> <C> <C> <C>
Liabilities with banks
and financial
institutions........ ThUS $10,164.21 ThCh $ 4,926,518 ThUS $ 7,644.31 ThCh $ 4,052,022
Accounts and other
payable............. 40,705.48 19,729,642 22,239.44 11,788,457
--------------- ---------------- --------------- ----------------
Total................. ThUS $50,869.69 ThCh $24,656,160 ThUS $29,883.75 ThCh $15,840,479
=============== ================ =============== ================
</TABLE>
At December 31, 1999, the Company has forward exchange hedging contracts for
a total amount of US$25,000,000, which it has committed to purchase for UF
910,181. The comparison of the corresponding current value using the spot rates
for obligations and rights arising from those contracts, results in a negative
balance of ThCh$452,345, which is presented in "Other current liabilities". The
results are included in non-operating income in price-level restatement.
NOTE 22--SHARE TRANSACTIONS
During 1998 and 1999, purchase and sales of shares of the Company by major
stockholders are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------
SALES PURCHASES
------------------- -------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Entel S.A. (majority shareholder)....................... -- -- 27,781 --
Motorola, Inc. (shareholder)............................ -- -- 9,260 --
</TABLE>
NOTE 23--YEAR 2000 ISSUE
Expenses incurred in connection to the year 2000 issue, correspond to
advisory services and others, for ThCh$4,341 in 1998 and ThCh$13,837 in 1999.
There are no contingencies or write-offs that could have resulted from
problems related to the year 2000.
F-4-32
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 24--OTHER NON-OPERATING INCOME
This heading includes an amount of ThCh$34,428,284 in 1999 corresponding to
the sale of licenses explained in Note 2, which has been arrived at after
creating provisions and writing off assets, that the Company estimates will be
obsolete or unusable in future operations. The detail of the proceeds from the
sale, price-level restated, as well as provisions and write-offs are as follows:
<TABLE>
<CAPTION>
THCH $
------
<S> <C>
Sale of licenses............................................ 43,731,914
Less provisions and related expenses:
- Write-off of inventories, property, plant and equipment
and intangibles......................................... (899,190)
- Allowance for uncollectible accounts.................... (830,439)
- Accural for loss of assets in Buenaventura S.A. and
others.................................................. (1,782,568)
- Early termination of contracts with suppliers........... (1,200,687)
- Early termination of contracts with clients and
migration expenses...................................... (1,628,608)
- Allowance for obsolescence of property, plant and
equipment............................................... (2,733,131)
- Others.................................................. (229,007)
----------
Net gain.................................................... 34,428,284
==========
</TABLE>
In addition in 1999, this heading includes other proceeds from sale of a
trunking license for ThCh$365,959 and others for ThCh$1,438,091.
NOTE 25--COMMITMENTS AND CONTINGENCIES
The Company guarantees 50% of loans granted to Buenaventura S.A. for lease
contracts amounting to ThCh$227,761 at December 31, 1999; thus, the Company's
guarantee amounts to ThCh$113,881.
The subsidiary Entel PCS Telecommunicaciones S.A., holds a license to render
mobile digital telephony public services under a temporary authorization under
Resolutions No. 1375 and 95 of October 1, 1999 and January 20, 2000, both of the
Minister of Transport and Telecommunications, which will be final once the
authorities issue the license modification decrees.
The license itself and reception of the installations by the Undersecretary
of Telecommunications do not present risk contingencies on the ownership of, or
the authorization to use, the license. Also, there are no outstanding
performance bonds that could result in contingent payments thereon.
NOTE 26--DIRECTORS' REMUNERATIONS
Directors did not receive remunerations during 1997, 1998 and 1999.
NOTE 27--RESEARCH AND DEVELOPMENT COSTS
In 1997, 1998 and 1999, the Company has not incurred expenses in research
and development.
F-4-33
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 28--SUBSEQUENT EVENTS
In Ordinary File No. 30.469 of January 19, 2000, the Undersecretary of
Telecommunications accused the subsidiary Entel PCS Telecomunicaciones S.A. of
modifying without current authorization, elements of its license to operate
mobile digital telephony. The accusation is not shared by the Company, who will
defend itself within the corresponding administrative procedure. In the event of
an adverse result for the defendant, some sanctions foreseen of article 36 a and
b of the General Law of Telecommunications could be applied, ranging from
admonition to a fine for no more than ThCh$15,067.
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Accounting principles generally accepted in Chile ("Chilean GAAP") vary in
certain important aspects from those generally accepted in the United States
("US GAAP"). Such differences involve certain methods for measuring the amounts
included in the financial statements as well as the required disclosures.
(A) DIFFERENCE IN MEASUREMENT METHODS
The principal methods applied in the preparation of the accompanying
financial statements which have resulted in amounts which differ from those that
would have otherwise been determined under accounting principles generally
accepted in the United States are as follows:
(A.1) INFLATION ACCOUNTING
As disclosed in Note 3d, the cumulative inflation rate in Chile as measured
by the Consumer Price index for the three-year period ended December 31, 1999
was apporximately 13.8%.
Chilean GAAP require that financial statements be restated to reflect the
effects of the changes in the purchasing power of the Chilean peso on the
financial position and results of operations of a company. US GAAP, does not
allow such price-level restatement. Thus, the effects recorded in the financial
statements have been eliminated in the reconciliation. The calculation of the
price-level restatement is shown in Note 5.
(A.2) INCOME TAX
As disclosed under paragraph b.3 below, there are certain differences
between the method used to account for income taxes under Chilean GAAP and that
prescribed by Statement of Financial Accounting Standards No. 109 ("SFAS 109").
The objectives of SFAS 109 are to (1) recognize the amount of income taxes
payable or refundable in the current year and (2) provide for potential future
taxes arising from differences between the amounts shown for assets and
liabilities in the balance sheet and the tax bases of those assets and
liabilities at the balance sheet date. The deferred tax is calculated using
enacted tax rates and regulations and is adjusted if those tax rates and
regulations are changed. In general, the change in the deferred tax asset or
liability from one balance sheet date to the next represents the deferred tax
expense (or benefit) for the year. The method is described as the liability
method. The effect of recording deferred taxes is shown in the reconciliations
below.
F-4-34
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
The Subsidiary Empresa de Radiocomunicaciones Inta Beep Ltda. applied SFAS
109 as from 1997. The cumulative effect of this accounting change at the
beginning of that year totalled ThCh$278,963 and is eliminated in the
reconciliation below.
(A.3) ACCOUNTING FOR INVESTMENTS IN AFFILIATED COMPANIES
Under both Chilean and US GAAP permanent investments are recorded using the
equity method of accounting, when the investor can exercise significant
influence over the investee's operating and financial policies. Under Chilean
GAAP, an investment of 10% or more of the voting stock of the investee leads to
a refutable presumption that the investor has the ability to exercise
significant influence. Under US GAAP, the threshold is 20% or more. During the
three year period ended December 31, 1999, the Company, did not have any
investments in which it owned more than 10% but less than 20%. Accordingly, no
adjustment has been made in the reconciliations below.
(A.4) MANDATORY DIVIDEND
As required by Law No. 18.046 and unless the shareholders unanimously agree
otherwise, the Company must distribute a minimum cash dividend equivalent to 30%
of its income before negative goodwill amortization for each year as determined
in accordance with Chilean GAAP, unless and except to the Company has
accumulated prior year losses. Since the Company has accumulated losses, no
adjustment is required for US GAAP purposes.
(A.5) CAPITALIZATION OF INTEREST COST
For Chilean GAAP, the Company did not capitalize interest on the assets that
are constructed or prepared for its own use. Under US GAAP, such interest would
have been capitalized to the respective assets and amortized over the useful
lives of such assets. The effects on net income of capitalizing interest in
1997, 1998 and 1999 and the resulting depreciation for those assets are shown in
the reconciliation below.
(A.6) MARKETABLE SECURITIES
In accordance with Chilean GAAP, marketable equity securities are stated at
the lower of price-level adjusted cost or market value. For purposes of U.S.
GAAP, the portfolio of marketable equity securities should be recorded at market
value. The difference between the two methods is not significant.
(A.7) BUSINESS COMBINATION
In accordance with Chilean GAAP, the purchase of a subsidiary is accounted
for at the book value of the underlying net assets with the excess of cost over
net book value recorded as goodwill to be amortized to income over a period not
exceeding twenty years.
Under U.S. GAAP, such purchases are recorded at purchase cost with assets
and liabilities acquired stated at their respective fair market values. To the
extent that the purchase price exceeds the fair market value of the net assets
acquired, the remainder is designated as goodwill to be amortized
F-4-35
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
over a period not greater than 40 years, based on the expected period of future
benefit. If an excess of acquired net assets over cost arises the excess should
be allocated to reduce proportionally the values assigned the noncurrent assets
(except long-term investment in marketable securities) in determining their fair
values. If the allocation reduces the noncurrent assets to zero value, the
remainder of the excess over cost (negative goodwill) should be classified as a
deferred credit and amortized systematically to income over the period estimated
to be benefited, but not in excess of 40 years.
In 1997, the Company acquired its two principal subsidiaries, Entel PCS
Telecomunicaciones S.A. and Entel Telefonia Movil S.A., in part from related
companies and in part from third parties. Under Chilean GAAP, the excess of
price over book value of the net assets acquired was allocated to goodwill.
Under US GAAP that difference is allocated to the fair value of the operating
licenses held by the subsidiaries, as the book values of the other assets and
liabilities acquired approximate their fair values. As both goodwill under
Chilean GAAP and licenses under US GAAP are being amortized over 20 years, there
is no significant difference between the two methods that should be included in
the reconciliations below.
(A.8) CLASSIFICATION OF AMORTIZATION OF GOODWILL
Under Chilean GAAP, the amortization of goodwill is classified as
non-operating expense. Under US GAAP, such amortization is classified as
operating expense. The effect of the difference in classification is shown
below.
(A.9) SUBSCRIBER ACQUISITION COST
Under Chilean GAAP, in order to properly correlate revenues and expenses,
separately identifiable costs related to the acquisition of prepaid services
subscribers are deferred and amortized over the minimum contract period of 12
months. If the subscriber leaves the system or is disconnected before that time,
the balance of unamortized deferred costs is written off. Under US GAAP, these
subscriber acquisition costs cannot be deferred because the related future
benefit cannot be quantified based on contract amounts and not on estimates. The
effect on the difference is shown in the reconciliation below.
(A.10) ACCUMULATED DEFICIT IN DEVELOPMENT STAGE
Under Chilean GAAP, the accumulated deficit of development stage
subsidiaries is presented in the consolidated financial statements as a charge
to equity. Under US GAAP, these results should be charged to income. The effect
on net income is shown in the reconciliations below only for 1997 and part of
1998, because the subsidiaries became operative and were consolidated as from
1998, under Chilean GAAP.
(A.11) ACCUMULATED EFFECTS OF ACCOUNTING CHANGE IN JOINT-VENTURE ACCOUNTING
Under Chilean GAAP, the investment in the joint-venture Buenaventura S.A. is
recorded using the equity method of accounting. Under US GAAP this investment is
carried at cost, because it is believed that this more closely reflects the
reality of Buenaventura S.A. as a break-even operation. The
F-4-36
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
cumulative effect of this difference at January 1, 1997 and subsequent effects
are included in the reconciliations below.
(A.12) ACCUMULATED EFFECTS OF CHANGE IN FUNCTIONAL CURRENCY
Under Chilean GAAP, the functional currency is the constant Chilean peso.
Under US GAAP, the Company had used the US dollar as its functional currency
until 1993, changing to the historical Chilean peso thereafter. The change in
functional currency was made in accordance with SFAS 52. The cumulative effect
of this change in prior years is included in the reconciliation below.
(A.13) REVENUE FROM SALE OF PREPAID CALLING CARDS
The Company sells prepaid calling cards which expire after three months.
Under both Chilean and US GAAP revenues are recognized as the service is
provided or when the cards expires, whichever is first. For the Chilean GAAP
financial statements, as a practical matter and given the lack of materiality of
the difference the Company has assumed that all cards are consumed during the
first month. For US GAAP purposes, the Company has recorded the unused amounts
of prepaid cards as a liability. The effect is included in the reconciliation
below.
(A.14) MINORITY INTEREST
An adjustment to record the portion of the foregoing US GAAP adjustments
attributable to minority interest in consolidated subsidiaries has been
recorded.
F-4-37
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
(A.15) EFFECT OF CONFORMING TO US GAAP
The adjustments to reported net equity required to conform to US GAAP are as
follow (all amounts are expressed in thousands of historical Chilean Pesos):
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DECEMBER 31, (NOTE 3T)
REFERENCE ------------------------------------ -----------
RECONCILIATION OF SHAREHOLDERS' EQUITY TO NOTE 29 1998 1999 1999
-------------------------------------- ---------- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
Shareholders' equity under Chilean
GAAP, restated to December 31, 1999
currency............................. ThCh $85,075,921 ThCh $105,703,859 199,463
Reversal of price-level restatements:
Comparative restatement to December
31, 1999 currency.................. (2,155,920) -- --
Assets and liabilities............... a.1 (6,353,969) (10,682,238) (20,157)
Cost of inventories sold............. a.1 143,793 175,510 331
Depreciation, and write-off.......... a.1 522,918 1,325,218 2,501
Amortization of intangibles.......... a.1 22,117 31,318 59
Write-off of intangibles............. a.1 -- 51,067 96
Accumulated effect of change in
functional currency.................. a.12 (598,289) (598,289) (1,129)
Accumulated effect of difference in
accounting for joint venture......... a.11 429,651 429,651 811
Difference in accounting for joint
venture results
and write-off........................ a.11 (33,191) 376,976 711
Deferred taxes......................... a.2 3,029,939 7,763,320 14,649
Capitalization of interest............. a.5 1,008,874 3,141,878 6,929
Depreciation of capitalized interest... a.5 (117,634) (196,490) (371)
Minority interest...................... a.14 (4,894) 7,741 15
Subscriber acquisition cost............ a.9 -- (16,448,535) (31,038)
Revenues from sale of prepaid calling
cards................................ a.13 (54,894) (848,407) (1,601)
Others................................. (70,432) (70,432) (133)
---------------- ----------------- --------
Total shareholders' equity in US
GAAP................................. ThCh $80,843,990 ThCh $ 90,162,147 171,136
================ ================= ========
</TABLE>
F-4-38
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
The adjustments to reported net income required to conform to US GAAP are as
follows (all amounts are expressed in thousands of historical Chilean pesos):
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
YEAR ENDED DECEMBER 31, (NOTE 3T)
REFERENCE ------------------------------------------------------- -----------
RECONCILIATION OF NET INCOME (LOSS) TO NOTE 29 1997 1998 1999 1999
----------------------------------- ---------- ---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C> <C>
Net income (loss) under Chilean
GAAP, restated to December 31,
1999 currency.................. ThCh $(1,076,418) ThCh $(17,513,277) ThCh $20,627,938 $38,925
Reversal of price-level
restatements:
Comparative restatement to
December 31, 1999 currency... 70,531 443,806
Income statement amounts....... a.1 (440,036) (1,550,741) (2,175,351) (4,105)
Cost of inventories sold....... a.1 55,413 39,729 31,717 60
Depreciation of property, plant
and equipment, and write-off.. a.1 22,302 454,117 802,301 1,514
Amortization of intangibles.... a.1 5,560 14,199 9,201 17
Write-off of intangibles....... a.1 -- -- 51,067 96
Difference in accounting for joint
venture results and write-off... a.11 (4,746) (10,788) 413,167 780
Deferred taxes................... a.2 113,661 2,637,315 4,733,382 8,932
Cumulative effect at beginning of
the year of deferred taxes of
subsidiary..................... a.2 278,963 -- -- --
Capitalization of interest....... a.5 233,956 540,846 2,133,004 4,025
Depreciation of capitalized
interest....................... a.5 (33,439) (70,120) (78,856) (149)
Accumulated deficit of subsidiaries
in development stage........... a.10 (98,627) (632,074) -- --
Minority interest................ a.14 (249) (913) 12,635 23
Reversal of subscriber acquisition
cost........................... a.9 -- -- (16,448,535) (31,038)
Revenues from sale of prepaid
calling cards.................. a.13 -- (54,894) (793,513) (1,497)
Others........................... (130,364) -- -- --
---------------- ----------------- ---------------- -------
Net income (loss) under US GAAP.. ThCh$ (1,003,493) ThCh$ (15,702,795) ThCh$ 9,318,157 $17,583
================ ================= ================ =======
</TABLE>
The amortization of intangibles that under US GAAP should be reclassified
from non-operating to operating expense totals ThCh$28,643 in 1997, ThCh$151,423
in 1998 and ThCh$306,571 in 1998.
The total depreciation amount that under Chilean GAAP is classified in
selling and administrative expenses and operating cost totals, in US GAAP, to
ThCh$1,301,512 in 1997, ThCh$8,532,389 in 1998 and ThCh$17,563,930 in 1999.
F-4-39
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
The changes in net equity amounts determined under US GAAP are summarized as
follows:
<TABLE>
<CAPTION>
THCH $
------
<S> <C>
Balance at December 31, 1996................................ 1,130,080
Capital paid in............................................. 48,982,760
Net loss for the year....................................... (1,003,493)
-----------
Balance at December 31, 1997................................ 49,109,347
Capital paid in............................................. 47,437,438
Net loss for the year....................................... (15,702,795)
-----------
Balance at December 31, 1998................................ 80,843,990
Net income for the year..................................... 9,318,157
-----------
Balance at December 31, 1999................................ 90,162,147
===========
</TABLE>
(B) ADDITIONAL DISCLOSURE REQUIREMENTS
(B.1) EMPLOYEE BENEFITS
Employee benefits are provided by independent pension funds and
health-insurance companies, which are funded by employees' contributions. The
Company has no responsibility as an employer for payments under these plans,
other than withholding amounts from employees' salaries. Neither does the
Company have obligations for post-employment or post-retirement benefits to its
employees.
(B.2) INCOME TAXES
The provision for income taxes charged to income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Charge for the year under Chilean
GAAP.................................. ThCh $ -- ThCh $ -- ThCh $ 5,731,455
Reversal of valuation allowance......... -- -- (1,845,384)
Deferred tax income net................. (113,661) (2,637,315) (2,887,997)
-------------- ---------------- ----------------
Charge for the year under U.S. GAAP..... ThCh $(113,661) ThCh $(2,637,315) ThCh $ 998,074
============== ================ ================
</TABLE>
F-4-40
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
Deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999
---- ----
<S> <C> <C>
Property, plant and equipment........... ThCh $ (556,782) ThCh $(1,104,650)
Allowance for notes and accounts
receivable............................ 393,334 842,168
Accrued vacations....................... 47,950 96,376
Deferred sale commissions............... (337,979) (342,278)
Other assets............................ 53,801 543,249
Capital leases.......................... (102,165) (102,613)
Tax loss carryforward................... 5,377,164 7,831,068
Valuation allowance..................... (1,845,384) --
---------------- ----------------
Net deferred tax assets................. ThCh $ 3,029,939 ThCh $ 7,763,320
================ ================
</TABLE>
The U.S. GAAP provision for income taxes differs from the amount of income
tax determined by applying the 15% Chilean statutory income tax rate to U.S.
GAAP pretax income as a result of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
At statutory Chilean tax rate........... ThCh $(167,573) ThCh $(2,751,017) ThCh $ 1,281,278
Increase (decrease) in rates resulting
from:
Reversal of valuation allowance....... -- -- (1,845,384)
Tax loss carryforward................. -- -- 1,774,375
Nondeductible items................... 53,912 113,702 (212,195)
-------------- ---------------- ----------------
Effective tax........................... ThCh $(113,661) ThCh $(2,637,315) ThCh $ 998,074
============== ================ ================
</TABLE>
(B.3) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
US GAAP require disclosure of the fair value of financial instruments owned
by the Company, other than investments in related companies that are accounted
for under the equity method of accounting. The estimated fair value of such
financial instruments approximates their carrying amount. The estimated fair
values are based on the following methods and assumptions:
- TIME DEPOSITS
The fair value of time deposits is estimated using interest rates
currently offered for deposits of similar remaining maturities, which
approximate the actual rates obtained by the Company.
F-4-41
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
- MARKETABLE SECURITIES
The fair value of investment in mutual funds is equivalent to carrying
amount, which is based on the net asset value per unit.
- CASH, NOTES AND ACCOUNTS RECEIVABLE AND PAYABLE
The carrying amount of cash, notes and accounts receivable and payable is
equivalent to fair value.
- LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
current interest rates offered to the Company for loans of the same
remaining maturities, which approximate the average rate currently paid
by the Company.
- SHORT-TERM DEBT
Short-term debt has interest rates that vary with market conditions and
accordingly, the carrying amount approximates fair value.
(B.4) LEASE COMMITMENTS
OPERATING LEASES
The Company leases 60 of its branches and headquarter offices under rental
agreements for remaining terms of two to five years, substantially all of which
have options for renewal. Minimum future rentals are as follows:
<TABLE>
<CAPTION>
THCH $
------
<S> <C>
2000........................................................ 1,637,757
2001........................................................ 1,642,670
2002........................................................ 1,647,598
2003........................................................ 1,652,598
2004........................................................ 1,657,499
---------
Total....................................................... 8,238,122
=========
</TABLE>
Rental expense was ThCh$328,000 in 1997, ThCh$968,625 in 1998, and
ThCh$1,632,045 in 1999, respectively.
(B.5) CONCENTRATIONS OF CREDIT RISK
No single customer accounted for more than 5% of the Company's sales of the
years 1997 to 1999.
F-4-42
<PAGE>
ENTEL TELEFONIA PERSONAL S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
CHILEAN PESOS (THCH $) OF DECEMBER 31, 1999)
NOTE 29-- DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
(B.6) IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including goodwill and other intangibles assets, when
events and circumstances warrant such a review. The Company evaluated its
long-lived assets using projected undiscounted future cash flows and determined
that no material impairment of those assets existed as of December 31, 1999,
except for the assets related to the sale of the licenses described in Notes 2
and 24.
(B.7) RECENT ACCOUNTING PRONOUNCEMENTS
In determining US GAAP amounts, the Company has implemented all Statements
of Financial Accounting Standards that have been issued as of December 31, 1999
and are applicable to its operations.
* * * * * *
F-4-43
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-5-1
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-5-3
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-5-4
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1998 and 1999.......................... F-5-6
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1997, 1998 and 1999.............. F-5-7
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1998 and 1999.......................... F-5-8
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheet as of December 31, 1999 and
March 31, 2000 (unaudited)................................ F-5-9
Consolidated Statement of Operations Three Months ended
March 31, 1999 and 2000 (unaudited)....................... F-5-11
Consolidated Statement of Cash Flows Three Months Ended
March 31, 1999 and 2000 (unaudited)....................... F-5-12
Notes to Consolidated Financial Statements (unaudited)...... F-5-13
</TABLE>
F-5-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
TRICOM, S. A.:
We have audited the accompanying consolidated balance sheets of
TRICOM, S. A. and subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three year-period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company'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 the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
TRICOM, S. A. and subsidiaries as of December 31, 1998 and 1999 and the results
of their operations and their cash flows for each of the years in the three
year-period ended December 31, 1999, in conformity with generally accepted
accounting principles in the United States of America.
As explained in note 8 to the consolidated financial statements, effective
January 1, 1999, the Company changed its method of accounting for organization
costs.
KPMG
Member firm of KPMG International
Santo Domingo, Dominican Republic
January 28, 2000
F-5-3
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (notes 4 and 6)................. $ 15,377,410 13,459,566
Accounts receivable (notes 5, 6 and 12):
Customers................................................. 12,367,843 22,821,951
Carriers.................................................. 4,153,003 6,467,016
Related parties........................................... 163,110 40,412
Officers and employees.................................... 275,069 415,702
Current portion of long-term accounts receivable.......... 75,071 66,369
Other..................................................... 2,113,228 624,846
------------ ------------
19,147,324 30,436,296
Allowance for doubtful accounts........................... (740,687) (4,307,563)
------------ ------------
Accounts receivable, net................................ 18,406,637 26,128,733
Current portion of pledged securities (notes 7 and 15)...... 54,470,478 --
Inventories, net:
Equipment and accessories................................. 5,245,262 9,429,905
Other..................................................... 242,991 271,350
------------ ------------
Total inventories....................................... 5,488,253 9,701,255
Prepaid expenses (notes 6 and 17)......................... 3,104,942 6,637,067
Deferred income taxes (note 18)........................... 556,949 949,190
------------ ------------
Total current assets.................................... 97,404,669 56,875,811
------------ ------------
Long-term accounts receivable............................... 91,556 22,619
Investments (notes 7 and 15)................................ 2,164,387 2,710,572
Property and equipment, net (notes 3 and 15)................ 330,456,448 455,045,191
Other assets at cost, net of amortization (notes 8 and
20)....................................................... 14,697,543 16,824,268
------------ ------------
$444,814,603 531,478,461
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5-4
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable (notes 6, 9, 10 and 15):
Borrowed funds--banks................................... $ 21,665,516 63,602,022
Borrowed funds--related parties......................... 25,591,915 17,895,946
Current portion of long-term debt....................... 32,000,000 315,216
------------ ------------
79,257,431 81,813,184
------------ ------------
Current portion of capital leases (notes 6 and 11) -- 14,242,056
Accounts payable (notes 6 and 12):
Carriers................................................ 3,106,898 2,987,379
Related parties......................................... -- 10,035,066
Suppliers............................................... 11,772,957 12,043,787
Other................................................... 1,566,076 329,309
------------ ------------
16,445,931 25,395,541
Other liabilities (notes 13 and 20)....................... 7,413,821 3,789,707
Accrued expenses (note 14)................................ 13,887,974 15,293,910
------------ ------------
Total current liabilities............................. 117,005,157 140,534,398
------------ ------------
Reserve for severance indemnities........................... 42,886 31,414
Deferred income taxes (note 18)............................. 205,258 631,159
Capital leases, excluding current portion (notes 6 and
11)....................................................... -- 11,640,652
Long-term debt, excluding current portion (note 15)......... 200,000,000 228,772,011
------------ ------------
Total liabilities..................................... 317,253,301 381,609,634
------------ ------------
Stockholders' equity (notes 16 and 22):
Class A common stock of RD$10 par value. Authorized
55,000,000 shares; issued 5,700,000 shares.............. 3,750,000 3,750,000
Class B common stock of RD$10 par value. Authorized
25,000,000 shares; issued 19,144,544 shares............. 12,595,095 12,595,095
Additional paid-in capital................................ 94,015,852 94,288,852
Retained earnings......................................... 19,224,112 41,258,637
Equity adjustment from foreign currency translation....... (2,023,757) (2,023,757)
------------ ------------
127,561,302 149,868,827
Commitments and contingencies (notes 3, 15, 17, 18, 19, 20,
21 and 24)................................................
------------ ------------
$444,814,603 531,478,461
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5-5
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Operating revenues (note 6):
Toll revenues............................................. $ 15,510,968 17,644,573 23,118,149
International revenues.................................... 39,432,385 50,332,088 60,592,134
Local service............................................. 6,411,831 12,941,983 33,858,620
Cellular and PCS.......................................... 13,073,309 20,363,647 26,473,985
Paging.................................................... 5,079,103 4,527,579 2,695,531
Sale and lease of equipment............................... 5,502,276 4,114,513 7,689,534
Installations............................................. 5,070,888 12,936,817 15,501,847
Other..................................................... 21,246 2,640,192 889,141
------------ ----------- -----------
Total operating revenues................................ 90,102,006 125,501,392 170,818,941
------------ ----------- -----------
Operating costs:
Satellite connections and carrier (note 20)............... 31,270,652 32,308,880 43,687,794
Network depreciation...................................... 7,432,818 11,382,446 15,982,827
Expense in lieu of income taxes (note 17)................. 6,248,317 9,561,710 12,763,565
General and administrative expenses, including
depreciation charges of $1,956,121, $3,239,714 and
$4,854,653 in 1997, 1998 and 1999, respectively
(notes 6, 19, 20 and 24)................................ 25,631,257 39,379,388 51,501,272
Other..................................................... 3,659,422 3,391,347 5,421,403
------------ ----------- -----------
Total operating costs................................... 74,242,466 96,023,771 129,356,861
------------ ----------- -----------
Operating income........................................ 15,859,540 29,477,621 41,462,080
------------ ----------- -----------
Other income (expenses):
Interest expense (note 6)................................. (16,100,251) (18,006,286) (22,430,031)
Interest income (notes 6 and 7)........................... 4,053,079 5,133,348 2,389,329
Foreign currency exchange gain (loss)..................... (705,983) 104,414 (202,724)
Gain on sale of land (note 6)............................. -- -- 897,833
Other..................................................... (83,097) 844,801 179,409
------------ ----------- -----------
Other expenses, net..................................... (12,836,252) (11,923,723) (19,166,184)
------------ ----------- -----------
Earnings before income taxes, extraordinary item and
cumulative effect of accounting change................ 3,023,288 17,553,898 22,295,896
Income taxes (note 18) -- 351,691 (141,660)
------------ ----------- -----------
Earnings before extraordinary item and cumulative effect
of accounting change.................................. 3,023,288 17,905,589 22,154,236
Extraordinary item--early extinguishment of debt
(note 23)................................................. (5,452,995) -- --
------------ ----------- -----------
Earnings (loss) before cumulative effect of accounting
change................................................ (2,429,707) 17,905,589 22,154,236
Cumulative effect of change in accounting for organization
costs (note 8)............................................ -- -- (119,711)
------------ ----------- -----------
Net earning (loss)...................................... $ (2,429,707) 17,905,589 22,034,525
============ =========== ===========
Earnings (loss) per common share--basic and diluted
Earnings before extraordinary item and cumulative effect
of accounting change.................................... 0.17 0.78 0.89
Extraordinary item........................................ (0.31) -- --
Cumulative effect of accounting change.................... -- -- --
------------ ----------- -----------
Net earnings (loss) per common share--basic and
diluted............................................... $ (0.14) 0.78 0.89
============ =========== ===========
Average number of common shares used in calculation:
Basic..................................................... 17,600,360 22,944,544 24,844,544
============ =========== ===========
Diluted................................................... 17,600,360 22,944,569 24,888,709
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5-6
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1997, 1998 AND 1999
(IN US DOLLARS)
<TABLE>
<CAPTION>
NUMBER OF COMMON
SHARES ISSUED COMMON STOCK ADDITIONAL
----------------------- ------------------------- PAID-IN
CLASS A CLASS B CLASS A CLASS B CAPITAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ -- 10,126,388 $ -- 23,357,343 --
Issuance of common shares........... -- 9,264,141 -- 20,000,000 --
Net loss............................ -- -- -- -- --
--------- ----------- ---------- ------------ ----------
Balance at December 31, 1997........ -- 19,390,529 -- 43,357,343 --
Issuance of common shares, net of
issuance cost $6,337,345
(note 16)......................... 5,700,000 -- 3,750,000 -- 63,812,655
Effect of change from no par value
to RD$10 par value (note 16)...... -- -- -- (30,203,197) 30,203,197
Retirement of treasury stock as a
result of initial public
offering.......................... -- (245,985) -- (559,051) --
Transfer to legal reserve
(note 22)......................... -- -- -- -- --
Net earnings........................ -- -- -- -- --
--------- ----------- ---------- ------------ ----------
Balance at December 31, 1998........ 5,700,000 19,144,544 3,750,000 12,595,095 94,015,852
Stock-based compensation to non-
employees (note 24)............... -- -- -- -- 273,000
Transfer to legal reserve
(note 22)......................... -- -- -- -- --
Net earnings........................ -- -- -- -- --
--------- ----------- ---------- ------------ ----------
Balance at December 31, 1999........ 5,700,000 $19,144,544 $3,750,000 12,595,095 94,288,852
========= =========== ========== ============ ==========
<CAPTION>
ACCUMULATED OTHER
RETAINED EARNINGS COMPREHENSIVE
--------------------------- INCOME--EQUITY
APPROPRIATED ADJUSTMENT FROM
LEGAL UN- FOREIGN CURRENCY TREASURY STOCKHOLDERS'
RESERVE APPROPRIATED TRANSLATION STOCK EQUITY, NET
------- ------------ ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 600,233 3,147,997 (2,023,757) (559,051) 24,522,765
Issuance of common shares........... -- -- -- -- 20,000,000
Net loss............................ -- (2,429,707) -- -- (2,429,707)
--------- ---------- ---------- -------- -----------
Balance at December 31, 1997........ 600,233 718,290 (2,023,757) (559,051) 42,093,058
Issuance of common shares, net of
issuance cost $6,337,345
(note 16)......................... -- -- -- -- 67,562,655
Effect of change from no par value
to RD$10 par value (note 16)...... -- -- -- -- --
Retirement of treasury stock as a
result of initial public
offering.......................... -- -- -- 559,051 --
Transfer to legal reserve
(note 22)......................... 571,955 (571,955) -- -- --
Net earnings........................ -- 17,905,589 -- -- 17,905,589
--------- ---------- ---------- -------- -----------
Balance at December 31, 1998........ 1,172,188 18,051,924 (2,023,757) -- 127,561,302
Stock-based compensation to non-
employees (note 24)............... -- -- -- -- 273,000
Transfer to legal reserve
(note 22)......................... 480,819 (480,819) -- -- --
Net earnings........................ -- 22,034,525 -- -- 22,034,525
--------- ---------- ---------- -------- -----------
Balance at December 31, 1999........ 1,653,007 39,605,630 (2,023,757) -- 149,868,827
========= ========== ========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5-7
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net earnings (loss)....................................... $ (2,429,707) 17,905,589 22,034,525
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation............................................ 9,388,939 14,622,160 20,837,480
Amortization of debt issue cost......................... 484,231 1,381,361 1,499,497
Allowance for doubtful accounts......................... 1,929,167 1,665,349 5,420,717
Amortization of radio frequency right................... -- -- 198,333
Effect of gain (loss) in foreign exchange rate.......... 705,983 31,106 101,835
Expense for severance indemnities....................... 329,153 257,690 328,807
Extraordinary item--early extinguishment of debt........ 5,452,995 -- --
Deferred income tax, net................................ -- (351,691) 33,660
Value of consulting services received in exchange for
stock warrants........................................ -- -- 273,000
Gain on sale of land.................................... -- -- (897,833)
Net changes in assets and liabilities:
Accounts receivable................................... 2,052,023 (3,681,109) (13,407,676)
Inventories........................................... 3,515,558 (3,053,879) (4,213,002)
Prepaid expenses...................................... (33,514) (403,628) (3,532,125)
Long-term accounts receivable......................... 498,121 866,997 68,937
Unearned interest..................................... (355,121) (204,576) --
Other assets.......................................... (10,364,826) (5,542,150) (3,824,555)
Accounts payable...................................... 17,321,727 (4,471,048) 9,005,096
Other liabilities..................................... 1,993,429 4,387,282 (3,624,114)
Accrued expenses...................................... 9,071,492 3,857,953 1,563,855
Reserve for severance indemnities..................... (464,519) (355,445) (340,279)
------------- ------------ ------------
Total adjustments................................... 41,524,838 9,006,372 9,491,633
------------- ------------ ------------
Net cash provided by operating activities................... 39,095,131 26,911,961 31,526,158
------------- ------------ ------------
Cash flows from investing activities:
Acquisition of investments................................ (75,967,805) (367,866) (546,185)
Proceeds from maturity of US Treasury Bonds and
irrevocable restricted funds............................ -- 21,297,912 54,470,478
Proceeds from sale of land................................ -- -- 2,724,458
Acquisition of land....................................... -- -- (1,826,625)
Acquisition of property and equipment..................... (92,667,874) (142,101,012) (119,182,223)
------------- ------------ ------------
Net cash used in investing activities................... (168,635,679) (121,170,966) (64,360,097)
------------- ------------ ------------
Cash flows from financing activities:
Borrowed funds from banks................................. -- 23,234,625 111,580,042
Principal payments to banks............................... (36,410,367) (7,474,114) (69,643,536)
Borrowed funds from related parties....................... 1,393,728 57,019,761 62,233,725
Principal payments to related parties..................... (15,626,945) (36,277,664) (69,929,694)
Short term obligations.................................... (2,235,955) -- --
Capital lease payments.................................... -- -- (361,292)
Cancellation of Carifa bonds.............................. -- -- (32,000,000)
Redemption of short term bonds............................ (7,061,768) -- --
Cancellation of long-term debt............................ (28,000,000) -- --
Proceeds from issuance of long-term debt.................. 200,000,000 -- 29,087,227
Issuance of common stock.................................. 20,000,000 67,562,655 --
------------- ------------ ------------
Net cash provided by financing activities............... 132,058,693 104,065,263 30,966,472
Effect of exchange rate changes on cash..................... (1,077,444) (161,353) (50,377)
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents........ 1,440,701 9,644,905 (1,917,844)
Cash and cash equivalents at beginning of the year.......... 4,291,804 5,732,505 15,377,410
------------- ------------ ------------
Cash and cash equivalents at end of the year................ $ 5,732,505 15,377,410 13,459,566
============= ============ ============
Supplementary information:
Expense in lieu of income tax paid........................ (5,908,420) (9,027,468) (11,180,380)
Interest paid (net of capitalization)..................... (15,367,463) (17,601,409) (23,373,038)
Capital lease obligations incurred........................ -- -- 26,244,000
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5-8
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND MARCH 31, 2000
(IN US DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,459,566 $ 12,781,915
Accounts receivable:
Customers............................................... 22,821,951 21,304,289
Carriers................................................ 6,467,016 6,581,037
Related parties......................................... 40,412 1,769,528
Officers and employees.................................. 415,702 678,383
Current portion of long term accounts receivable........ 66,369 63,172
Other................................................... 624,846 988,653
------------ ------------
30,436,296 31,385,062
Allowance for doubtful accounts......................... (4,307,563) (2,502,686)
------------ ------------
Accounts receivable, net.............................. 26,128,733 28,882,376
Inventories, net............................................ 9,701,255 10,615,612
Prepaid expenses............................................ 6,637,067 5,799,763
Deferred income taxes....................................... 949,190 949,190
------------ ------------
Total current assets.................................. 56,875,811 59,028,856
------------ ------------
Long-term accounts receivable............................... 22,619 --
Other investments........................................... 2,710,572 2,826,967
Property and equipment cost................................. 511,109,186 535,638,219
Accumulated depreciation.................................... (56,063,995) (63,616,729)
------------ ------------
Property and equipment, net................................. 455,045,191 472,021,490
Other assets at cost, net of amortization................... 16,824,268 17,257,852
------------ ------------
TOTAL ASSETS................................................ $531,478,461 $551,135,165
============ ============
</TABLE>
F-5-9
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND MARCH 31, 2000
(IN US DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
(UNAUDITED)
<S> <C> <C>
LIABILITIES & SHAREHOLDERS EQUITY
Current liabilities:
Notes payable:
Borrowed funds-banks.................................... $ 63,602,022 $ 74,144,584
Borrowed funds-related parties.......................... 17,895,946 31,878,523
Current portion of long term debt....................... 315,216 239,050
------------ ------------
81,813,184 106,262,157
------------ ------------
Current portion of capital leases........................... 14,242,056 14,670,406
Accounts payable:
Carriers................................................ 2,987,379 3,701,740
Suppliers............................................... 12,043,787 9,280,933
Related parties......................................... 10,035,066 3,331,810
Other................................................... 329,309 520,137
------------ ------------
25,395,541 16,834,620
Other liabilities........................................... 3,789,707 4,297,453
Accrued expenses............................................ 15,293,910 12,769,142
------------ ------------
Total current liabilities............................. 140,534,398 154,833,778
------------ ------------
Reserve for severance indemnities........................... 31,414 23,767
Deferred income tax......................................... 631,159 631,159
Capital leases, excluding current portion................... 11,640,652 14,191,670
Long-term debt, excluding current portion................... 228,772,011 228,491,126
------------ ------------
Total liabilities..................................... 381,609,634 398,171,500
------------ ------------
Shareholders equity:
Class A Common Stock at par value RD$10: Authorized
55,000,000 shares; 5,700,000 shares issued at
December 31, 1999 and March 31, 2000.................... 3,750,000 3,750,000
Class B Stock at par value RD$10: Authorized
25,000,000 shares at December 31, 1998 and
September 30, 1999; 19,144,544 issued at December 31,
1999 and March 31, 2000................................. 12,595,095 12,595,095
Additional paid-in-capital, excess over par............... 94,288,852 94,015,852
Retained earnings......................................... 41,258,637 44,626,475
Equity adjustment for foreign currency translation........ (2,023,757) (2,023,757)
------------ ------------
Shareholders equity, net.................................... 149,868,827 152,963,665
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS EQUITY..................... $531,478,461 $551,135,165
============ ============
</TABLE>
F-5-10
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(IN US DOLLARS)
<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
MARCH 31,
--------------------------
1999 2000
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING REVENUES:
Toll........................................................ $ 4,705,266 $ 6,551,984
International Settlement.................................... 12,970,980 17,992,204
Local service............................................... 5,840,175 12,194,025
Cellular.................................................... 5,863,334 8,709,247
Paging...................................................... 900,254 475,013
Sale and lease of equipment................................. 966,004 1,119,534
Installations............................................... 3,419,179 3,903,194
Other....................................................... 158,007 36,056
------------ -----------
TOTAL OPERATING REVENUES.................................... 34,823,199 50,981,257
OPERATING COSTS:
Satellite connections and carriers.......................... 8,420,901 14,139,422
Network depreciation........................................ 3,449,453 6,067,401
Expense in lieu of income taxes............................. 2,969,610 2,881,694
General and administrative expenses......................... 9,600,529 13,779,370
Depreciation expense........................................ 1,045,431 1,485,333
Other....................................................... 1,009,404 1,048,650
------------ -----------
TOTAL OPERATING COSTS....................................... 26,495,328 39,401,870
OPERATING INCOME............................................ 8,327,871 11,579,387
OTHER INCOME (EXPENSES):
Interest expense............................................ (4,454,860) (7,979,096)
Interest income............................................. 971,202 203,888
Foreign exchange gain (loss)................................ 165,392 (350,762)
Other....................................................... (427,343) (46,156)
------------ -----------
TOTAL OTHER EXPENSES........................................ (3,745,609) (8,172,126)
------------ -----------
EARNINGS BEFORE INCOME TAX.................................. 4,582,262 3,407,261
INCOME TAX - PROVISION NET OF TAX CREDIT (LOSS)............. 56,203 (39,423)
------------ -----------
NET EARNINGS................................................ $ 4,638,465 $ 3,367,838
============ ===========
EARNINGS PER SHARE:
Basic....................................................... $ 0.19 $ 0.14
============ ===========
Diluted..................................................... $ 0.19 $ 0.13
============ ===========
NUMBER OF SHARES USED IN CALCULATION:
Basic....................................................... 24,844,544 24,844,544
============ ===========
Diluted..................................................... 24,845,093 25,018,868
============ ===========
</TABLE>
F-5-11
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(IN US DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 2000
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................ $ 4,638,465 $ 3,367,838
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................... 4,494,884 7,552,734
Allowance for doubtful accounts............................. 628,689 185,803
Expense for severance indemnities........................... 74,025 48,707
Deferred income tax (benefit) provision..................... (56,203) --
Net changes in assets and liabilities:
Accounts and notes receivable............................... 5,207,154 (2,939,446)
Inventories................................................. (1,978,864) (914,357)
Prepaid expenses............................................ 964,244 837,304
Long-term accounts receivable............................... 3,283 22,619
Other assets................................................ (2,128,962) (433,583)
Accounts payable............................................ 7,164,505 (8,560,921)
Other liabilities........................................... (3,156,710) 234,745
Accrued expenses............................................ (4,288,443) (2,524,768)
Reserve for severance indemnities........................... (89,043) (56,354)
------------ ------------
Total adjustments........................................... 6,838,559 (6,547,517)
------------ ------------
Net cash provided by operating activities................... 11,477,024 (3,179,679)
------------ ------------
Cash flows from investing activities:
Acquisition of investments................................ (30,337) (116,395)
Proceeds from maturity of US Treasury Bonds and
irrevocable restricted funds............................ 10,564,732 --
Acquisition of property and equipment..................... (25,757,966) (20,642,255)
------------ ------------
Net cash used in investing activities................... (15,223,571) (20,758,650)
Cash flows from financing activities:
Borrowed funds from banks................................. 36,741,930 25,333,484
Principal payments to banks............................... (17,410,884) (14,790,922)
Borrowed funds to related parties......................... 15,558,431 15,954,958
Principal payments to related parties..................... (35,136,982) (2,287,597)
Capital lease payments.................................... -- (907,410)
Payment of long-term debt................................. -- (41,835)
------------ ------------
Net cash provided by financing activities............... (247,505) 23,260,678
Net increase in cash and cash equivalents................... (3,994,052) (677,651)
Cash and cash equivalents at beginning of the period........ 15,377,410 13,459,566
------------ ------------
Cash and cash equivalents at end of period.................. $ 11,383,358 $ 12,781,915
============ ============
Supplemental disclosure of cash flow information:
Interest paid, net of capitalization...................... $(11,517,465) $(13,397,972)
Capital lease obligations incurred........................ -- 2,979,096
Expense in lieu of income tax paid........................ 2,969,610 2,881,694
============ ============
</TABLE>
F-5-12
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 1--ORGANIZATION AND NATURE OF BUSINESS
The consolidated financial statements of TRICOM, S. A. include operations of
the following companies in the communications industry, which are identified as
and operate in the Dominican Republic and New York, U.S.A. under the commercial
name TRICOM:
TRICOM, S. A. (Parent Company)
GFN Comunicaciones, S. A.
Bay Tel Communication, S. A.
Call Tel Corporation
TRICOM USA, Inc. and Subsidiaries
TRICOM, S. A. ("TRICOM" or the "Company") is a diversified
telecommunications company which provides international and domestic long
distance, basic local service, mobile, internet and broadband services in the
Dominican Republic and long distance service through subsidiaries in the United
States.
The Company's operations in the Dominican Republic are governed by
Telecommunications Law No. 153-98 and by a Concession Agreement signed with the
Dominican Government and confirmed by the National Congress on April 30, 1990.
This agreement is for a 20-year term through June 30, 2010, subject to renewal
for an additional 20-year term. Law No. 153-98 establishes a basic framework to
regulate the installation, maintenance and operation of telecommunications
networks and the provision of telecommunications services and equipment. The law
adopted the "Universal Services Principle" by guaranteeing access to
telecommunications services at affordable prices in low income rural and urban
areas. The law creates a fund for the development of the telecommunications
sectors that is supported by a 2% tax on industry participants' billings of all
telecommunication services.
The Company was formed by GFN Corporation, Ltd. ("GFN"), one of the
Dominican Republic's largest private holding companies, with equity interests in
insurance, finance and publishing companies. GFN currently holds a 46.2%
interest in the Company, while Motorola, Inc. holds a 30.8% interest. Prior to
the completion of the initial public offering, Motorola, Inc., provided
guarantees for the debt financing used to expand the Company's infrastructure
during the early stages of its development and has assisted in, and continues to
advise on, the development of the Company's network infrastructure.
GFN Comunicaciones S. A. ("Comunicaciones") is currently inactive.
Bay Tel Communication, S. A. ("Bay Tel") is a corporation organized under
the laws of the Republic of Panama and it ceased its operations in 1995 when
substantially all of its net assets and operations were transferred to TRICOM,
S.A. (Parent Company).
Call Tel Corporation ("Call Tel") is a corporation organized under the laws
of the Republic of Panama. It was formed on September 3, 1996 and began its
operations in 1997. Its activities consist of operator-assisted communications
in the Dominican Republic.
TRICOM USA, Inc. ("TRICOM USA") was formed on January 15, 1992 under the
General Corporation Law of Delaware. In September 1995, the United States
Federal Communications Commission ("FCC") authorized TRICOM USA, to operate as a
facilities-based carrier in the United States. Since TRICOM USA received a
license from the FCC, the Company represents an alternative
F-5-13
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 1--ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
means of sending and receiving traffic, potentially reducing the Company's
dependence on other U.S. carriers. TRICOM USA began its operations in 1997.
TRICOM INTERNATIONAL SERVICES, Inc. is a wholly-owned subsidiary of TRICOM
USA. The Company was formed on June 30, 1999 under the General Corporation Law
of Delaware. The Company acts as an agent for the Company, arranging for
telecommunications services in the Dominican Republic paid by Dominicans
resident in New York.
EN EL PUNTO.COM, Inc. is a wholly-owned subsidiary of TRICOM U.S.A. The
Company was formed on June 28, 1999 under the General Corporation Law of
Delaware. The Company is providing internet services.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TRICOM, S. A. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States.
Preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses. Actual results could differ from those estimates and assumptions.
2.2 FOREIGN CURRENCIES
The functional currency of the Company has been the U.S. dollar since
January 1, 1997.
Translation adjustments resulting from the conversion of the consolidated
financial statements to the reporting currency were accumulated and presented in
a separate component of equity in the accompanying consolidated balance sheets
for years prior to January 1, 1997.
Commencing January 1, 1997 the Company has recognized resulting gains and
losses when translating items from currencies other than the US Dollar. As of
December 31, 1998 and 1999, the rates used by the Company to translate Dominican
peso denominated accounts at year-end were RD$15.61 and RD$16.05 per one US
dollar, respectively. Panamanian Balboas (B/.) are at par with the US dollar.
2.3 CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Company considers as
cash equivalents cash time deposits and highly liquid debt instruments with
original maturities of three months or less.
F-5-14
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.4 ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts receivable is established through a
charge to an expense account. The Company reserves 100% of the accounts
receivable balances which are past due over 90 days.
2.5 INVENTORIES
Inventories are valued at the lower of average cost or market.
2.6 INVESTMENT SECURITIES
The Company has classified all of its marketable debt securities as
held-to-maturity and has accounted for these investments at amortized cost. Any
premium or discount is amortized or accreted over the life of the related
security. Accordingly, no adjustment for unrealized holding gains or losses has
been reflected in the Company's consolidated financial statements.
2.7 PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Construction costs and equipment
installations in process are maintained as construction projects until they are
completed and/or equipment is placed in service. Depreciation is calculated and
recorded starting with the first full month that the assets are placed in
service.
2.8 DEPRECIATION
The depreciation method used by the Company is the straight-line method,
that is, the uniform distribution of cost over the estimated useful lives of the
corresponding assets.
The estimated useful lives of assets are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................. 50
Furniture, equipment and transportation equipment........... 5-10
Equipment for lease......................................... 3-4
Operation and communication equipment....................... 15
Cellular phones............................................. 3
Computer equipment.......................................... 6
====
</TABLE>
F-5-15
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.9 OTHER ASSETS
Other assets consist principally of deferred debt issue costs and radio
frequency rights (see note 8). Deferred debt issuance costs are amortized over
the debt service period of the related debt. For the years ended December 31,
1997, 1998 and 1999, amortization expense of deferred debt issue amounted to
$484,231, $1,381,361 and $1,499,497, respectively.
The radio frequency rights are being amortized over a period of 20 years.
For the year ended at December 31, 1999, the amortization expense amounted to
$198,333.
2.10 SEVERANCE INDEMNITIES
According to the Labor Code of the Dominican Republic, employers are
required to pay severance indemnities to those workers whose labor contracts are
terminated without just cause. Just cause is defined in the Labor Code as
including misstatements by an employee in his job application, termination of an
employee within three months of his hire for poor performance, dishonesty,
threats of violence, willful or negligent destruction of property, unexcused
absence or termination of the job for which the employee was hired. The Company
maintains a minimal reserve to cover severance indemnities based on its
experience in this area.
2.11 REVENUE RECOGNITION
TOLL REVENUES
Toll revenues are amounts received by the Company from customers in the
Dominican Republic for international and domestic long distance calls. These
revenues are recognized as the calls are made.
INTERNATIONAL SETTLEMENT REVENUES
International settlement revenues represent amounts recognized by the
Company for termination of traffic based on minutes from foreign
telecommunications carriers into the Dominican network, as per operating
agreements between the Company and each such carrier. These revenues are
recognized as the minutes are provided.
PREPAID CALLING CARD REVENUES
The Company recognizes revenue from prepaid calling cards based on card
usage. The Company accounts for cash received or credit extended from the sale
of the prepaid calling cards as deferred revenues, which are then recognized as
the cards are used. This revenue may be part of the toll or international
revenues depending on the call destination.
LOCAL SERVICE REVENUE
Local service revenue consist of wireline rent, local measured service as
well as charges for "Customer local access signaling services" (CLASS) or
value-added services, which includes call forwarding, three-way calling, call
waiting and voice mail. It also includes collect call revenues and
F-5-16
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenues from other miscellaneous wireline services. These revenues are
recognized as the services are rendered.
CELLULAR AND PCS REVENUES
Represents fees received for mobile cellular and PCS services, including
interconnection charges for incoming calls to the Company's cellular and PCS
subscribers (these revenues do not include international and domestic long
distance calls generated by cellular or PCS units). Cellular and PCS fees
consist of fixed monthly access fees and per-minute usage charges, as well as
additional charges for custom or vertical features, which include call waiting,
call forwarding, three-way calling and voice mail, and for other miscellaneous
cellular and PCS services. These revenues are recognized as the services are
rendered.
PAGING
Paging revenues consist of fixed monthly charges for nationwide service and
the use of paging equipment and activation fees. These revenues are recognized
as these services are rendered.
SALES AND LEASE OF EQUIPMENT
These revenues consist of sales and rental fees charges for customer premise
equipment, including private branch exchanges, key telephone systems,
residential telephones, cellular handsets and paging units. Since late 1996, the
Company has only sold such equipment. These revenues are recognized upon sale to
the customer.
INSTALLATIONS
Installation revenues consist of fees charges by the Company for installing
local access lines, private branch exchanges and key telephone systems, as well
as fees for activating cellular and PCS handsets. These revenues are recognized
as the services are rendered.
OTHER
Other revenues represent all those revenues that are not generated from the
Company's core business activities, including commissions received for providing
handling services for a courier, commissions received for collection services
for utility companies and revenues from miscellaneous product sales. These
revenues are recognized as they are earned.
2.12 CAPITALIZATION OF INTEREST
Interest paid on loans whose proceeds are used in specific projects is
capitalized and included as part of project costs during the period necessary
for installation.
During the years ended December 31, 1997, 1998 and 1999, interest and
commissions capitalized as part of construction projects amounted to
approximately $5,590,000, $10,168,000 and $11,963,000, respectively.
F-5-17
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.13 FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments classified as current
assets or current liabilities approximates their book value due to the relative
short maturities of these financial instruments. See note 15 for the estimated
fair values of the Company's long-term debt.
2.14 EXPENSE IN LIEU OF INCOME TAX
The parent company Tricom, S.A. pays a tax which is based on a percentage of
the Company's domestic gross revenues (less deductions for access to the local
network) plus a percentage of the Company's net international settlement
revenues. An accrual is made for any difference between the date when these
items are reported to the tax authorities and when they are reported in the
accompanying consolidated statements of operations.
2.15 INCOME TAXES
In the case of the subsidiary, TRICOM USA, 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 carry-forwards.
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.
2.16 EARNINGS PER COMMON SHARE
Basic earnings per share has been computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase in
average common shares outstanding that would result from the assumed exercise of
outstanding stock options, calculated using the treasury stock method.
2.17 PENSION PLAN
The Company has a contributory defined benefit pension and retirement plan
that includes all its personnel. The cost of the plan has been determined based
on actuarial studies and includes amortization of past service costs over the
estimated average life of its employees.
2.18 IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of
F-5-18
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
2.19 YEAR 2000
For the years ended December 31, 1998 and 1999, costs incurred for the year
2000 project amounted to approximately $83,000 and $217,000, respectively. Such
costs were funded through operating cash flows and are included in general and
administrative expenses in the accompanying consolidated statements of
operations.
2.20 ADVERTISING COSTS
Advertising costs are expensed as incurred. For the years ended
December 31, 1997, 1998 and 1999, these costs amounted to $1,715,270, $4,461,123
and $5,431,834, respectively, and are included as part of general and
administrative expenses in the accompanying consolidated statements of
operations.
2.21 STOCK OPTION PLAN
The Company applies the instrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
2.22 BASIS OF PRESENTATION--UNAUDITED QUARTERLY FINANCIAL STATEMENTS
The Company considers that all adjustments (all of which are normal
recurring accruals) necessary for a fair statement of financial position and
results of operations for these periods have been made; however, results for
such interim periods are subject to year-end audit adjustments. Results for such
interim periods are not necessarily indicative of results for a full year.
2.23 RECLASSIFICATION
At December 31, 1999, the Company has classified prepaid calling cards held
by distributors as accounts receivable--customers in the accompanying
consolidated balance sheets. The classification was changed as a result of
changes in the billing system in 1999. Previously, these amounts were classified
as inventories and totaled $3,199,103 as of December 31, 1998. Prior years have
been reclassified to conform to the 1999 presentation.
F-5-19
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 3--PROPERTY AND EQUIPMENT
A detail of property and equipment at December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Operations and communications:
Land...................................................... $ 3,454,951 5,288,164
Buildings and improvements................................ 7,933,993 12,730,864
Furniture and equipment................................... 5,061,611 6,868,212
Communications equipment.................................. 46,877,210 94,645,620
Transmission equipment.................................... 95,230,147 170,756,431
Other equipment........................................... 1,253,387 1,668,162
------------ -----------
159,811,299 291,957,453
Less accumulated depreciation............................. 16,506,546 29,196,045
------------ -----------
143,304,753 262,761,408
Communications equipment pending installation............. 28,343,890 31,141,978
In transit (a)............................................ 6,225,237 2,506,092
Construction in process (b)............................... 112,082,008 100,685,397
------------ -----------
Sub-total, operations and communications................ 289,955,888 397,094,875
------------ -----------
Equipment for rental:
Switchboards.............................................. 887,916 1,982,393
Telephone equipment and other............................. 21,137,541 31,145,265
------------ -----------
22,025,457 33,127,658
Less accumulated depreciation............................. 9,611,593 12,578,935
------------ -----------
Sub-total, equipment for rental......................... 12,413,864 20,548,723
------------ -----------
Property and equipment:
Buildings................................................. 6,372,566 6,372,566
Furniture and office equipment............................ 10,087,307 13,965,777
Transportation equipment.................................. 2,807,867 4,435,443
Leasehold improvements.................................... 3,500,603 3,879,221
Data processing equipment................................. 14,426,729 23,037,601
------------ -----------
37,195,072 51,690,608
Less accumulated depreciation............................. 9,108,376 14,289,015
------------ -----------
Sub-total, property and equipment....................... 28,086,696 37,401,593
------------ -----------
Property and equipment, net............................. $330,456,448 455,045,191
============ ===========
</TABLE>
(a) Equipment in transit represents accumulated costs of equipment imported
by TRICOM, for which additional import related costs are still to be
incurred. At December 31, 1999, this amount includes mainly transmission
equipment and accessories, as well as computer materials and parts in
1998.
F-5-20
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 3--PROPERTY AND EQUIPMENT (CONTINUED)
(b) A detail of construction in process at December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Operation and communication:
Buildings................................................. $ 2,255,751 3,816,556
Transmission equipment (i)................................ 99,370,582 87,642,687
Cells..................................................... 9,505,122 8,502,529
Submarine cable........................................... 950,553 723,625
------------ -----------
$112,082,008 100,685,397
============ ===========
</TABLE>
(i) At December 31, 1998 and 1999 construction in process of transmission
equipment includes projects of a wireless local loop (WLL) network which
are in development, as well as cellular and PCS cells, fiber optic and
other network improvements in 1999.
NOTE 4--CASH AND CASH EQUIVALENTS
A detail of this account at December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Checking accounts................................... $ 2,316,963 6,162,442
Cash on hand........................................ 37,810 45,805
Deposits (a)........................................ 13,022,637 7,251,319
----------- ----------
$15,377,410 13,459,566
=========== ==========
</TABLE>
(a) At December 31, 1998 and 1999 represents certificates of deposit due on
demand and with variable dates of maturity.
NOTE 5--ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Allowance at beginning of year........... $ 4,898,199 668,827 740,687
Increase for the year.................... 1,929,167 1,665,349 5,420,717
Write-off during the year................ (6,158,539) (1,593,489) (1,853,841)
----------- ---------- ----------
Allowance at end of year................. $ 668,827 740,687 4,307,563
=========== ========== ==========
</TABLE>
F-5-21
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 5--ACCOUNTS RECEIVABLE (CONTINUED)
A detail of account receivable--others at December 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Interest receivable.................................... $1,662,351 235,016
Other.................................................. 450,877 389,830
---------- -------
$2,113,228 624,846
========== =======
</TABLE>
NOTE 6--TRANSACTIONS WITH RELATED PARTIES
During the years ended December 31, 1997, 1998 and 1999 the Company made
payments to several related parties for leased premises and equipment, internal
audit services, public relations, systems and procedures, legal services and
personnel management.
The majority of these charges are for services received by the Company from
its sister company Grupo Financiero Nacional, S. A., ("Grupo Financiero") a
subsidiary of GFN. Grupo Financiero allocates administrative charges based on
the time invested by its employees providing administrative support services to
each of its subsidiaries.
A detail of balances with related companies at December 31, 1998 and 1999 is
as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Assets:
Cash in banks..................................... $ 1,556,788 4,194,306
Deposits (a)...................................... 13,022,637 7,251,319
Accounts receivable............................... 163,110 40,412
Current portion and long-term accounts
receivable...................................... 88,037 53,820
Prepaid expenses--insurance....................... 2,125,601 3,548,458
Liabilities:
Borrowed funds.................................... 25,591,915 17,895,946
Accounts payable--letters of credit (b)........... 1,089,487 985,187
Accounts payable (c).............................. -- 10,035,066
Capital leases.................................... -- 25,882,708
=========== ==========
</TABLE>
(a) As of December 31, 1998 and 1999, includes $2,185,005 in non-interest
bearing time deposits and certificates of deposit of $10,837,632 and
$7,251,319, respectively which earn annual interest at rates between 9% and
11%.
(b) These letters of credit bear annual interest ranging from 10% to 11.5%
payable at maturity.
(c) Includes $7,775,892 that represents a 7.94% financing facility granted by
Motorola for the acquisition of transmission and communications equipment.
The Company has approved lines of credit with Motorola for an approximate
amount of $13,000,000.
F-5-22
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 6--TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
A detail of transactions with related parties during the years ended
December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest earned........................... $ 140,814 270,352 265,423
Interest incurred on loans................ 3,577,394 880,281 710,537
Bank charges.............................. 6,585 45,916 135,640
Leased premises and equipment............. 64,392 44,610 108,578
Security services......................... 113,778 111,460 77,382
Insurance premiums........................ 1,101,237 1,520,171 2,000,473
Pension plan contributions................ 310,858 433,998 586,921
Communication services revenue............ 1,098,097 828,316 1,970,646
Gain on sale of land (a).................. -- -- 897,833
Equipment purchased (Motorola)............ 8,038,214 2,258,028 23,097,157
Advertising services...................... 97,942 134,830 74,104
Professional services..................... 207,498 494,125 167,470
========== ========= ==========
</TABLE>
(a) During 1999, the Company bought from an unaffiliated third party land which
was later sold to a related party. The sale price was $2,724,458
(RD$44,000,000) and the acquisition cost was $1,826,625 (RD$29,500,000).
This transaction generated a gain on sale of land of $897,833, which is
presented as gain on sale of land in other income (expenses) in the
consolidated statements of operations.
NOTE 7--INVESTMENTS
Investments at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Irrevocable restricted funds to pay indebtedness and
interest (a)...................................... $ 32,772,379 --
U.S. Treasury Bonds at cost (b)..................... 21,698,099 --
------------ ---------
54,470,478
Less current portion of investments............... (54,470,478) --
------------ ---------
-- --
------------ ---------
Mortgage participation contracts, at cost which
approximates market value (c)..................... $ 2,164,387 2,710,572
============ =========
</TABLE>
(a) Represents investment used to fund the payment in full of principal and
interest of CARIFA Bonds, as described in Note 15.
(b) Represents investment securities, obtained to provide funding to pay the
full amount of the 1999 interest on the Senior Notes. (See note 15).
F-5-23
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 7--INVESTMENTS (CONTINUED)
(c) At December 31, 1998 and 1999 represents mortgage participation contracts
which have been purchased from savings and loan associations in the
Dominican Republic. These contracts earn interest at rates between 9% and
12% per annum. These investments are due on demand and are maintained as
compensating balances for mortgage loans made by these savings and loan
associations to several officers of the Company.
NOTE 8--OTHER ASSETS
Other assets at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred debt issue costs, net (a).................. $ 8,296,034 8,864,074
Deposits with international carriers (b)............ 243,652 202,850
Organization expenses, net (c)...................... 119,711 --
Deposits............................................ 361,194 668,432
Radio frequency rights (d).......................... 4,760,000 4,561,667
Other (e)........................................... 916,952 2,527,245
----------- ----------
$14,697,543 16,824,268
=========== ==========
</TABLE>
(a) Represent commissions paid on issuance to brokers and other expenses related
to the issuance of the Senior Notes and bank debt. As of December 31, 1998
and 1999, accumulated amortization amounted to $1,865,592 and $3,365,089,
respectively.
(b) At December 31, 1998 and 1999 deposits with international carriers represent
security deposits made by TRICOM for the installation of international
circuits. These deposits will be recovered at the end of the agreement.
These agreements mature each year and are automatically renewed.
(c) During 1999, the Company changed its method of accounting for organization
expenses in order to comply with Statement of Position No. 98-5 issued by
the American Institute of Certified Public Accountants. The change involved
expensing these costs as incurred, rather than capitalizing and subsequently
amortizing such costs. The change in the accounting principle resulted in
the write-off of the costs capitalized as of January 1, 1999. The cumulative
effect of the write-off, which totals $119,711, has been expensed and
reflected as a separate line in the 1999 consolidated statements of
operations.
(d) Represents payments for user rights for cellular frequencies, in order to
expand the cellular and PCS capacity. These payments are being amortized
over a period of 20 years beginning on March 31, 1999. At December 31, 1999,
accumulated amortization was $198,333.
(e) At December 31, 1999 includes $2,276,012 corresponding to deferred
commissions related to prepaid calling cards.
F-5-24
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 9--BORROWED FUNDS--BANKS
Funds borrowed by the Company are detailed as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Funds denominated in U.S. dollars (a)............... $18,462,441 56,000,776
Funds denominated in R.D. pesos (b)................. 3,203,075 7,601,246
----------- ----------
$21,665,516 63,602,022
=========== ==========
</TABLE>
(a) These borrowings are made with local and international banks and accrue
interest and commissions at rates of 10% to 12.5% per annum at December 31,
1998 and 9.5% to 12% at December 31, 1999.
(b) At December 31, 1998, the loans represent RD$50,000,000 and have maturity
ranging from 90 to 180 days, bearing interest at 26% per annum. At
December 31, 1999 these loans amount to RD$122,000,000 and have maturity
ranging from 60 to 90 days and bear interest of 21% to 30% per annum.
At December 31, 1999 the Company has lines of credit available with local
and international banks for approximately $13,000,000.
NOTE 10--BORROWED FUNDS--RELATED PARTIES
At December 31, 1998 and 1999, borrowed funds from related parties include
financing of letters of credit and open accounts issued for $25,591,915 and
$17,895,946, respectively at an interests rates of 11% and 10% respectively.
At December 31, 1999, the Company has lines of credit available with related
parties for approximately $23,000,000.
NOTE 11--CAPITAL LEASES
During December, 1999 the Company entered into various capital lease
contracts with a related party. Such contracts have various terms of maturity
during the next four years. The gross amount of plant and equipment recorded
under capital leases as of December 31, 1999 were as follows:
<TABLE>
<S> <C>
Communications equipment.................................... $17,248,429
Communications equipment pending installation............... 7,548,214
Transportation.............................................. 1,176,001
Machinery and equipment..................................... 271,356
----------
$26,244,000
==========
</TABLE>
These assets have no accumulated depreciation at December 31, 1999 since, in
accordance with the Company's depreciation policy, depreciation is recorded
commencing with the first full month that the assets are placed in service.
F-5-25
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 11--CAPITAL LEASES (CONTINUED)
Future lease payments under capital leases as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $16,807,222
2001........................................................ 4,936,452
2002........................................................ 4,918,489
2003........................................................ 4,941,102
-----------
Total lease payments........................................ 31,603,265
Less related taxes.......................................... 2,087,198
-----------
Minimum lease payments...................................... 29,516,067
Less amount representing interest (12% to 12.875%).......... 3,633,359
-----------
Present value of net minimum capital lease payments......... 25,882,708
Less current maturities of capital lease obligations........ 14,242,056
-----------
Capital lease obligations................................... $11,640,652
===========
</TABLE>
NOTE 12--TRANSACTIONS WITH CARRIERS
Accounts receivable from carriers arise from interconnection services of
inbound calls. Accounts payable result from interconnection services of outbound
calls. These charges are based on minutes billed. Amounts paid to carriers
constitute one of the main operating costs of the Company.
Net amounts receivable and payable for these activities at December 31, 1998
and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------- ----------------------
RECEIVABLE PAYABLE RECEIVABLE PAYABLE
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Inbound........................................ $ 6,933,131 -- 12,406,384 --
Outbound....................................... (2,780,128) 1,549,996 (5,939,368) 1,785,132
Payable accounts interconnection operations--
CODETEL...................................... -- 1,556,902 -- 1,202,247
----------- --------- ---------- ---------
$ 4,153,003 3,106,898 6,467,016 2,987,379
=========== ========= ========== =========
</TABLE>
F-5-26
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 13--OTHER LIABILITIES
Other liabilities at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer advances..................................... $2,131,396 1,203,764
Deferred revenues..................................... 1,480,664 2,130,985
Other (a)............................................. 3,801,761 454,958
---------- ---------
$7,413,821 3,789,707
========== =========
</TABLE>
(a) On September 22, 1998, the Dominican Republic was seriously affected by
hurricane Georges. As a consequence, the transmission and communication
equipment of the Company, as well as other infrastructure suffered certain
damages, for which claims were made to the Company's insurance carrier.
During 1998, the Company received from the insurance company the amounts
claimed, which included $2,505,000 for business interruption that are
included in other operating income for the year ended December 31, 1998. At
December 31, 1998 other liabilities include $3,414,613 corresponding to the
estimated disbursements to be incurred in order to repair the infrastructure
affected by hurricane Georges. The accrued expenses were sufficient to cover
all the payments made during 1999.
NOTE 14--ACCRUED EXPENSES
A summary of accrued expenses at December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Expense in lieu of income tax payable............... $ 1,502,581 3,085,766
Interest payable.................................... 9,726,228 8,783,221
Other............................................... 2,659,165 3,424,923
----------- ----------
$13,887,974 15,293,910
=========== ==========
</TABLE>
F-5-27
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 15--LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Senior notes (a)............................................ $200,000,000 200,000,000
Bank loans:
Four loans with Dominican banks for a total amount of
RD$65,600,000; with interest and commissions ranging from
20% to 24% per annum. These loans are due in monthly
installments of RD$1,399,012 (approximately $87,166)
including principal and interest, starting January, 2000
through December, 2006; two of these loans are secured by
communications equipment in the amount of $3,010,033...... -- 4,087,227
Unsecured line of credit with Citibank, N. A. for the amount
of $10,000,000 renewable every 13 months at 10% interest
per annum. The interest rate can be revised every 60 to
90 days at the request of the parties..................... -- 10,000,000
Loan with Hamilton Bank, N. A. for a 3-year revolving line
of credit of up to $15 million with an interest of
Citibank N. A. prime rate plus 0.05% (9% at December 31,
1999). This line of credit is guaranteed by Tricom, S. A.
and Banco Nacional de Credito, S. A....................... -- 15,000,000
------------ -----------
Total bank loans............................................ -- 29,087,227
------------ -----------
Carifa loan (b)............................................. 32,000,000 --
------------ -----------
Total long-term debt...................................... 232,000,000 229,087,227
Less current portion of long-term debt...................... 32,000,000 315,216
------------ -----------
Long-term debt excluding current portion.................. $200,000,000 228,772,011
============ ===========
</TABLE>
The installment obligations of principal of these long-term loans for the
next years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 315,216
2001........................................................ 378,505
2002........................................................ 25,454,599
2003........................................................ 546,110
2004........................................................ 200,656,185
2005 and thereafter......................................... 1,736,612
============
</TABLE>
F-5-28
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 15--LONG-TERM DEBT (CONTINUED)
(a) SENIOR NOTES
On August 15, 1997, the Company issued $200,000,000 aggregate principal
amount of 11 3/8% Senior Notes due in the year 2004 (the "Senior Notes").
Interest on the Senior Notes is payable in semi-annual installments on
March 1st and September 1st of each year commencing March 1, 1998.
The Senior Notes may be redeemed at any time at the option of the Company,
in whole or in part, after September 1, 2001, at a premium declining to par
after September 1, 2003, plus accrued and unpaid interest, and additional
amounts, if any, through the redemption date. Until September 1, 2000, the
Company, at its option, may redeem from time to time up to 35% of the Senior
Notes originally issued with the net proceeds of the issuance and sale of the
Company's capital stock at a redemption price equivalent to 11.375% of the
principal amount thereof plus accrued interest to the date of redemption
provided that an aggregate principal amount of the Senior Notes of up to
$130.0 million remain outstanding after each redemption and each such redemption
occurs within 180 days after any issuance and sale of stock. The Senior Notes
are senior unsecured obligations of the Company ranking pari passu in right of
payment with all other existing and future senior debt, and will rank senior to
any future subordinated indebtedness.
The indenture for the Senior Notes contains certain covenants that, among
other things, limit the ability of the Company and its Restricted Subsidiaries,
as defined in the indenture, to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company or its Restricted Subsidiaries, engage in
any business other than the telecommunications business, issue or sell equity
interests of the Company's Restricted Subsidiaries or enter into certain mergers
and consolidations.
The fair value of this long term debt at December 31, 1999 is estimated in
the amount of $186,500,000 determined through a combination of management
estimates and information obtained from independent third parties, using market
data available on the last business day of the year.
The Senior Notes are guaranteed fully, unconditionally and jointly and
severally by the Company's subsidiaries, each of which is wholly-owned by the
Company. Separate financial statements of each of the guarantor subsidiaries
have not been presented herein because management has determined that such
separate financial statements would not be material to the holders of the Senior
Notes.
F-5-29
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 15--LONG-TERM DEBT (CONTINUED)
Summarized consolidated financial information of guarantor subsidiaries,
Comunicaciones, Bay Tel, Call Tel and TRICOM USA and Subsidiaries, at
December 31, 1998 and 1999 and for the three years ended December 31, 1999 is as
follows (see note 1):
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 263,168 614,802
Accounts receivable:
Related parties......................................... 4,057,834 12,190,813
Other................................................... 1,697,067 4,860,019
----------- ----------
Accounts receivable, net.............................. 5,754,901 17,050,832
----------- ----------
Other current assets...................................... 843,317 1,154,627
----------- ----------
Total current assets.................................. 6,861,386 18,820,261
Property and equipment, net................................. 6,315,155 8,080,300
Other non-current assets.................................... 933,495 1,243,774
----------- ----------
Total assets.......................................... $14,110,036 28,144,335
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable:
Carriers................................................ 227,195 1,113,416
Related parties......................................... 5,608,247 1,722,915
Other................................................... 978,057 748,970
----------- ----------
6,813,499 3,585,301
Other current liabilities................................. 1,355,246 3,036,241
----------- ----------
Total current liabilities............................. 8,168,745 6,621,542
Other non-current liabilities............................... 192,036 15,685,752
----------- ----------
Total liabilities..................................... 8,360,781 22,307,294
Stockholder's equity........................................ 5,749,255 5,837,041
----------- ----------
Total liabilities and stockholder's equity............ $14,110,036 28,144,335
=========== ==========
</TABLE>
F-5-30
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 15--LONG-TERM DEBT (CONTINUED)
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Operating revenues....................................... 12,805,531 27,919,654 36,179,982
Operating costs.......................................... 12,932,490 28,861,720 36,282,315
---------- ---------- ----------
Operating loss....................................... (126,959) (942,066) (102,333)
Other income (expense)................................... 1,702 21,685 (66,896)
---------- ---------- ----------
Net loss before income tax........................... (125,257) (920,381) (169,229)
Income tax............................................... -- 351,691 (141,660)
---------- ---------- ----------
Net loss............................................. 125,257 568,690 310,889
========== ========== ==========
</TABLE>
CASH FLOW DATA:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net cash (used in) provided by operating activities...... (2,037,871) 83,061 (6,929,619)
Cash flows used in investment activities--acquisition of
property and equipment................................. (3,500,298) (3,241,348) (2,145,814)
Cash flows from financing activities:
Borrowed funds (paid to) received from banks........... (8,305,916) -- 15,000,000
Borrowed funds (paid to) received from related
parties.............................................. 13,652,509 -- (5,608,247)
Short-term obligations................................. (56,629) -- 35,279
Issuance of common shares.............................. 1,100 2,999,000 --
----------- ---------- ----------
Net cash provided by financing activities............ 5,291,064 2,999,000 9,427,032
Effect of exchange rate changes on cash.................. 197,601 88 35
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents........................................ (49,504) (159,199) 351,634
Cash and cash equivalents at beginning of the year....... 471,821 422,317 263,168
----------- ---------- ----------
Cash and cash equivalents at end of the year............. $ 422,317 263,118 614,802
=========== ========== ==========
</TABLE>
(b) CARIFA LOAN
The Company borrowed $32,000,000 in prior years, from the Caribbean Basin
Project Financing Authority (Carifa).
This loan was repaid in 1999 using the irrevocable deposits described in
note 7.
F-5-31
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 16--STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 55,000,000 shares of
Class A common stock and 25,000,000 shares of Class B common stock.
All of the Company's outstanding shares are duly authorized, validly issued
and fully paid. Both classes of capital stock vote together as a single class,
except on any matter that would adversely affect the rights of either class. The
Class A common stock has one vote per share and the Class B has ten votes per
share. The economic rights of each class of capital stock are identical.
In the second quarter of 1998, the Company sold 5,700,000 Class A common
shares in a public offering for US$74.1 million, net of issuance costs of
$6,346,545. The proceeds of this issuance were used to expand the Company's
local service, cellular and PCS networks and its international switching and
circuit capacity. As well as paying short-term debt primarily incurred to fund
equipment purchases.
All share and per share data set forth in the financial statements reflect
the reclassification of the Company's shares of common stock that were
outstanding prior to TRICOM's initial 1998 public offering of American
Depository Shares into shares of Class B stock and give effect to an approximate
3.3132-for-one stock split at that time.
NOTE 17--EXPENSE IN LIEU OF INCOME TAXES
In accordance with the terms of the Concession Agreement signed with the
Dominican Government through, 1995 TRICOM, S.A. had an exemption from income tax
but had to pay instead a single tax of 18% of gross communication revenues
collected from customers nationwide. This tax was based on the amounts collected
monthly by the Company and was payable within the first ten (10) days of the
month following collection.
As result of a settlement between the Company and the Dominican tax
authorities on February 20, 1996, the Concession Agreement with the Dominican
government was modified to establish a fixed tax equal to 10% of gross domestic
revenues, after deducting charges for access to the local network, plus 10% of
net international settlement revenues. This tax will never be less than
RD$18,000,000 ($1,125,000) annually.
In addition, since July 1998, expense in lieu of income taxes also includes
a tax of 2% on international settlement revenues collected. For December 31,
1998 and 1999, the cost of this additional tax was $315,801 and $566,549,
respectively, which is included as part of expense in lieu of income taxes in
the accompanying consolidated statements of operations.
For the year ended at December 31, 1999 the Company paid RD$30,000,000
(equivalent to approximately $1,869,159) as an advance deposit against the fixed
tax of 10%. This is included in prepaid expenses in the accompanying
consolidated balance sheets as of December 31, 1999.
F-5-32
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 18--INCOME TAX
The Company is subject to income taxes in the United States. The components
of income tax (expense) benefit are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current tax provision.............................. $ -- -- (108,000)
Deferred tax....................................... -- 351,691 (33,660)
---- ------- --------
$ -- 351,691 (141,660)
==== ======= ========
</TABLE>
The components of deferred income taxes in the United States are summarized
as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred revenue......................................... $483,011 737,410
Net operating loss carry forward......................... 209,001 45,856
Alternative minimum tax.................................. -- 100,825
Other.................................................... 43,361 65,099
-------- -------
735,373 949,190
Deferred tax liabilities--property and equipment......... 383,682 631,159
-------- -------
Net deferred tax asset................................. $351,691 318,031
======== =======
</TABLE>
The Company has not recorded a valuation allowance for the deferred tax
assets because it believes that sufficient book and taxable income will be
generated to realize the benefit of these tax assets.
In the case of the other subsidiaries, according to the tax legislation of
the Republic of Panama, the Company's is exempt from income taxes as long as it
only operates outside the Republic of Panama.
NOTE 19--PENSION BENEFITS
Substantially all of the employees of the Company are included in a defined
benefit plan that was established by Grupo Financiero. The benefits are based
upon years of service and the employees' compensation during the last years
before retirement, which is administered by the Plan de Pensiones y Jubilaciones
del Grupo Financiero Nacional, S.A.
The Company makes annual contributions to the Plan based on contribution
levels determined by the independent actuaries. The Company's pension expense
was approximately $311,000, $433,000 and $587,000 in the years ended
December 31, 1997, 1998 and 1999, respectively, and is included as part of
general and administrative expenses in the accompanying consolidated statements
of operations.
F-5-33
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 19--PENSION BENEFITS (CONTINUED)
The following summarizes pension obligation information and estimated plan
asset information for the Company individually.
<TABLE>
<CAPTION>
AS OF NOVEMBER 30
----------------------
1998 1999
---- ----
<S> <C> <C>
CHANGES IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............... $1,245,601 2,234,367
Change in exchange rate............................... (100,541) (61,253)
---------- ---------
Benefit obligation at beginning of year, as
adjusted............................................ 1,145,060 2,173,114
Service cost.......................................... 749,263 940,622
Interest cost......................................... 113,659 186,824
Actuarial gain........................................ 103,056 271,744
Benefits paid......................................... (76,378) (88,392)
Adjustments........................................... 199,707 72,260
---------- ---------
Benefit obligation at end of year..................... 2,234,367 3,556,172
---------- ---------
CHANGES IN PLAN ASSETS
Fair value of plan assets at beginning(a)............. 1,550,766 2,513,478
Change in exchange rate............................... (125,174) (68,906)
---------- ---------
Fair value of plan assets at beginning of year,
adjusted............................................ 1,425,592 2,444,572
Actual return in plan assets.......................... 375,674 419,038
Employer contribution................................. 405,871 586,887
Plan participants' contributions...................... 324,697 359,072
Benefits paid......................................... (76,378) (88,392)
Expenses and other adjustments........................ 58,022 (65,001)
---------- ---------
Fair value of plan assets at end of year(a)........... 2,513,478 3,656,176
---------- ---------
Funded status of the plan............................. $ 279,111 100,004
========== =========
RATE ASSUMPTIONS
Discount rates........................................ 6.00% 6.00%
Rates of return on plan assets........................ 11.00% 14.39%
========== =========
</TABLE>
(a) Corresponds to an estimate of the assets allocable to the Company. This
estimate was made by the actuary based on the ratio of total obligations of
TRICOM to the total obligation of Grupo Financiero applied to the total plan
assets. However, there is no formal segregation of assets applicable to the
employees of the Company.
NOTE 20--COMMITMENTS AND CONTINGENCIES
In 1995, TRICOM entered into a lease agreement of premises with a related
company. The total amounts paid for this lease in 1997, 1998 and 1999 were
$68,216, $72,582 and $108,578, respectively. As
F-5-34
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 20--COMMITMENTS AND CONTINGENCIES (CONTINUED)
part of this agreement, the Company paid a deposit of $86,580, which is included
in other assets in the accompanying consolidated balance sheets.
TRICOM maintains contracts with foreign entities for the traffic of overseas
calls. Such contracts require each entity to obtain the necessary facilities to
establish, maintain and operate its respective terminals. The costs involved for
each contract are established through different rates, agreed by the parties,
that are computed based on the amount of traffic each month. For the years ended
December 31, 1997, 1998 and 1999 this cost was $4,642,466, $4,273,617 and
$3,706,683 respectively, and is included in the cost of satellite connections in
the accompanying consolidated statements of operations.
On May 8, 1997, the Federal Communications Commission ("FCC") issued an
order to implement the provisions of the Telecommunications Act of 1996 relating
to the preservation and advancement of universal telephone service (the
"Universal Service Fund"). The Universal Service Order requires all
telecommunications carriers providing interstate telecommunications services to
contribute to universal service by contribution to a fund (the "Universal
Service Fund"). Universal Service Fund contributions were assessed based upon
intrastate, interstate and international end-user gross telecommunications
revenue effective January 1, 1999 through December 31, 1999.
The Company contributed $141,141 to the "Universal Service Fund" on end-user
telecommunications revenue of $4,756,792 for the year ending December 31, 1999.
OTHER LEASE OBLIGATIONS
The Company maintains capital and operating leases for telecommunication
equipment. The operating leases are renewable at the end of the lease period,
which is usually one year. The capital leases are for five-year periods with
purchase options at maturity.
Also, the Company has leased buildings for several of its telecommunication
centers, commercial offices and warehouse. These contracts are mostly short term
and renewable at maturity. Expenses for these contract operations in 1997, 1998
and 1999 were approximately $443,000, $405,000 and $476,000, respectively, and
are included in general and administrative expenses in the consolidated
statements of operations.
LEGAL PROCEEDINGS
In 1998 the Company reported to local police authorities an excessive
irregular traffic of calls from a specific telephone number, detected by
monitoring systems of the Company, which was causing a distortion in the
direction of the traffic, assigned to a person. In 1999 a Dominican Company and
another person, both different from the person who had the mentioned telephone
number assigned, sued the Company for alleged loss and damages of up to
approximately $12,000,000. Management, after consulting with legal counsel,
believes that this matter will not have a material adverse effect on the results
of operations and financial position of the Company.
The Company is involved in various other claims and legal actions arising in
the ordinary course of the business. In the opinion of management, the ultimate
disposition of these matters will not have a
F-5-35
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 20--COMMITMENTS AND CONTINGENCIES (CONTINUED)
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
OTHERS
During 1999, Dominican tax authorities reviewed the statements of tax
withholdings done by the Company corresponding to the year 1998. At
December 31, 1999, the Company has not been informed of the result of this
audit. Management believes that no material adjustments will arise.
SEVERANCE INDEMNITIES
Companies based in the Dominican Republic maintain reserves under the
provisions of U.S. Statement of Financial Accounting Standards "SFAS" 112 to
cover the ultimate payment of the severance indemnities. Severance expense
amounted to $329,153, $257,690 and $328,807 in the years ended December 31,
1997, 1998 and 1999.
NOTE 21--BUSINESS AND CREDIT CONCENTRATION
Most of the company's customers are located in the Dominican Republic and
New York. As of December 31, 1999, no single customer's account receivable
exceeded $50,000.
In the normal course of business, the Company maintains accounts receivable
from carriers. Although the Company's exposure to credit risk associated with
non-payment by these carriers is affected by conditions or occurrences within
the industry, most of these receivables are extended to large, well-established
companies. The Company does not believe that this concentration of credit risk
represents a material risk of loss with respect to its financial position.
NOTE 22--LEGAL RESERVE
Article 58 of the Code of Commerce of the Dominican Republic requires all
companies to segregate at least 5% of net earnings as a legal reserve until such
reserve reaches 10% of paid-in capital. This reserve is not available for
distribution, except in case of dissolution of the corporation.
NOTE 23--EXTRAORDINARY ITEM
During 1997, as a result of the early extinguishment of the Bank Credit
Facility, the Company charged off existing deferred debt issuance costs related
to that debt amounting to $5,452,995. This is included as an extraordinary item
in the accompanying consolidated statement of operations for the year ended
December 31, 1997.
NOTE 24--STOCK OPTION PLAN
At May 4, 1998, the Company initiated a Long Term Incentive Plan, in which
certain employees could be granted options to purchase shares of the Company's
common stock. The Plan is administered by the Board of Directors of the Company
and has the authority to determine which employees will participate in the Plan.
F-5-36
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 24--STOCK OPTION PLAN (CONTINUED)
The Plan authorizes grants of options to purchase up to 750,000 shares of
authorized but unissued common stock. Stock options are granted with an exercise
price equal to the stock's fair market value at the date of grant. All stock
options have ten year terms and vest and become exercisable after three years
from the date of grant.
At December 31, 1999, there were 436,580 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
was $4.62 on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: 1998--expected volatility of 73.22%,
risk-free interest rate of 6.33%, no expected dividends and an expected life of
3.59 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net earnings--as reported.......................... $17,905,589 22,034,525
Net earnings--proforma............................. 17,647,972 21,648,100
=========== ===========
Net earnings per share:
As reported:
Basic.......................................... 0.78 0.89
Diluted........................................ 0.78 0.89
=========== ===========
Pro-forma:
Basic.......................................... 0.77 0.87
Diluted........................................ 0.77 0.87
=========== ===========
</TABLE>
The Company had no outstanding options in 1997.
During 1998, the Company granted options to purchase 313,420 shares of
common stock. No options were granted in 1999.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
NUMBER CONTRACTUAL WEIGHTED AVERAGE NUMBER
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE
-------------- ----------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
$ 8.06(a) 251,420 3.42 8.06(a) --
13.00 58,000 3.42 13.00 --
6.63 4,000 3.92 6.63 --
====== ------- ---- ----- -------
313,420 3.43 8.96 --
======= ==== ===== =======
</TABLE>
F-5-37
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 24--STOCK OPTION PLAN (CONTINUED)
(a) Reflects 1999 reduction in exercise price from $13.00 to $8.06.
No options have been exercised of forfeited during 1998 and 1999.
In addition, on October, 1999 the Company entered into an agreement with a
third party to provide investor relations services for a period of two years.
The Company granted warrants to purchase 300,000 class A common shares of the
Company at an exercise price of $8.875 each share. Warrants for 150,000 shares
vested immediately and warrants for the remaining 150,000 vest through
April 28, 2001.
The Company is recognizing an expense for the fair value of these options
using the Black Scholes option pricing model as follow:
- Warrants for 150,000 shares that are vested--fair value at date of grant
amortized over two-year period of the contract.
- Warrants for 150,000 shares that are not vested at December 31, 1999 fair
value at December 31, 1999. Amortized over two-year period of contract.
For the year ended December 31, 1999 the Company recognized $273,000 as
expense for this contract which is included as part of general and
administrative expense in the accompanying consolidated statement of operations.
NOTE 25--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited consolidated quarterly
financial data for the Company:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Total operating revenues............. 27,015,684 30,696,227 32,635,906 35,153,575
Operating costs, including
depreciation charges of $3,001,163,
$3,554,401 $4,000,965 and
$4,075,631 for each quarter,
respectively....................... 20,874,384 23,157,223 24,954,902 27,037,262
----------- ----------- ----------- -----------
Operating income..................... 6,141,300 7,539,004 7,681,004 8,116,313
Other income (expenses).............. (3,730,608) (3,031,937) (2,436,644) (2,724,534)
----------- ----------- ----------- -----------
Earnings before income taxes......... 2,410,692 4,507,067 5,244,360 5,391,779
Income taxes--benefit................ -- -- -- 351,691
----------- ----------- ----------- -----------
Net earnings......................... 2,410,692 4,507,067 5,244,360 5,743,470
=========== =========== =========== ===========
Earnings per share................... 0.13 0.21 0.22 0.23
=========== =========== =========== ===========
Number of common shares used in
calculation........................ 19,144,544 21,044,544 22,311,211 22,944,544
=========== =========== =========== ===========
</TABLE>
F-5-38
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 25--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Total operating revenues............. 34,823,199 40,901,880 44,968,825 50,125,037
Operating costs, including
depreciation charges of $4,494,884;
$5,141,925; $5,158,482 and
$6,042,189 for each quarter,
respectively....................... 26,495,328 32,149,080 32,719,085 37,993,368
----------- ----------- ----------- -----------
Operating income..................... 8,327,871 8,752,800 12,249,740 12,131,669
Other income (expenses).............. (3,745,609) (3,547,369) (6,534,080) (5,339,126)
----------- ----------- ----------- -----------
Earnings before income taxes and
cumulative effect of accounting
change............................. 4,582,262 5,205,431 5,715,660 6,792,543
Income taxes benefit (expense)....... 56,203 -- -- (197,863)
----------- ----------- ----------- -----------
Earnings before cumulative effect of
accounting change.................. 4,638,465 5,205,431 5,715,660 6,594,680
Cumulative effect of change in
accounting for organization
expenses........................... -- -- -- (119,711)
----------- ----------- ----------- -----------
Net earnings......................... 4,638,465 5,205,431 5,715,660 6,474,969
=========== =========== =========== ===========
Earnings per share................... 0.19 0.21 0.23 0.26
=========== =========== =========== ===========
Number of common shares used in
calculation........................ 24,844,544 24,844,544 24,844,544 24,844,544
=========== =========== =========== ===========
</TABLE>
F-5-39
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 26--SEGMENT INFORMATION
As required by SFAS No. 131 "Disclosures about Segment of an Enterprise and
Related Information" the consolidated financial statements of the Company
includes the following information:
GEOGRAPHIC
<TABLE>
<CAPTION>
1997
------------------------------------------------------
UNITED DOMINICAN
STATES REPUBLIC ELIMINATIONS CONSOLIDATED
------ -------- ------------ ------------
<S> <C> <C> <C> <C>
International settlement revenues........ 12,343,203 35,276,735 (8,187,553) 39,432,385
Other.................................... -- 50,669,621 -- 50,669,621
---------- ----------- ----------- -----------
Total operating revenues............... 12,343,203 85,946,356 (8,187,553) 90,102,006
---------- ----------- ----------- -----------
Operating costs........................ 12,421,915 70,008,104 (8,187,553) 74,242,466
---------- ----------- ----------- -----------
Operating income (loss).................. (78,712) 15,938,252 -- 15,859,540
========== =========== =========== ===========
Identifiable assets...................... 3,827,575 317,636,651 (320,689) 321,143,537
========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------
UNITED DOMINICAN
STATES REPUBLIC ELIMINATIONS CONSOLIDATED
------ -------- ------------ ------------
<S> <C> <C> <C> <C>
International settlement revenues........ 24,208,283 44,812,490 (18,688,685) 50,332,088
Other.................................... 2,857,215 72,312,089 -- 75,169,304
---------- ----------- ----------- -----------
Total operating revenues............... 27,065,498 117,124,579 (18,688,685) 125,501,392
---------- ----------- ----------- -----------
Operating costs........................ 27,818,364 86,894,092 (18,688,685) 96,023,771
---------- ----------- ----------- -----------
Operating income (loss).................. (752,866) 30,230,487 -- 29,477,621
========== =========== =========== ===========
Identifiable assets...................... 8,603,748 436,763,531 (552,676) 444,814,603
========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------
UNITED DOMINICAN
STATES REPUBLIC ELIMINATIONS CONSOLIDATED
------ -------- ------------ ------------
<S> <C> <C> <C> <C>
International settlement revenues........ 35,510,406 46,338,275 (21,256,547) 60,592,134
Other.................................... 490,836 109,735,971 -- 110,226,807
---------- ----------- ----------- -----------
Total operating revenues............... 36,001,242 156,074,246 (21,256,547) 170,818,941
---------- ----------- ----------- -----------
Operating costs........................ 35,007,605 115,605,803 (21,256,547) 129,356,861
---------- ----------- ----------- -----------
Operating income......................... 993,637 40,468,443 -- 41,462,080
========== =========== =========== ===========
Identifiable assets...................... 25,525,617 514,417,693 (8,464,849) 531,478,461
========== =========== =========== ===========
</TABLE>
F-5-40
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 26--SEGMENT INFORMATION (CONTINUED)
PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------------
WIRELINE CELLULAR INTERNATIONAL OTHERS ELIMINATIONS CONSOLIDATED
-------- -------- ------------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............. 35,658,595 26,604,945 69,020,773 12,905,764 (18,688,685) 125,501,392
=========== =========== ========== =========== =========== ===========
Operating income...... 12,594,564 11,697,166 12,790,330 11,084,246 (18,688,685) 29,477,621
=========== =========== ========== =========== =========== ===========
Identifiable assets... 88,372,739 66,747,297 22,510,041 267,737,202 (552,676) 444,814,603
=========== =========== ========== =========== =========== ===========
Depreciation
expense............. 7,924,465 3,222,774 1,509,691 1,965,230 -- 14,622,160
=========== =========== ========== =========== =========== ===========
Capital
expenditures........ 69,663,693 31,777,625 6,980,783 33,678,911 -- 142,101,012
=========== =========== ========== =========== =========== ===========
<CAPTION>
1999
-------------------------------------------------------------------------------------
WIRELINE CELLULAR INTERNATIONAL OTHERS ELIMINATIONS CONSOLIDATED
-------- -------- ------------- ------ ------------ ------------
Revenue. 62,572,264 35,346,554 81,848,681 12,307,989 )(21,256,547 170,818,941
<S> <C> <C> <C> <C> <C> <C>
=========== =========== ========== =========== =========== ===========
Operational income.... 26,958,139 13,167,776 12,781,596 9,811,116 (21,256,547) 41,462,080
=========== =========== ========== =========== =========== ===========
Identifiable assets... 177,806,707 110,876,334 25,590,381 225,669,888 (8,464,849) 531,478,461
=========== =========== ========== =========== =========== ===========
Depreciation
expense............. 11,080,231 5,605,645 2,928,174 1,223,430 -- 20,837,480
=========== =========== ========== =========== =========== ===========
Capital
expenditures........ 79,065,923 42,573,958 7,602,493 16,183,849 -- 145,426,223
=========== =========== ========== =========== =========== ===========
</TABLE>
NOTE 27--SUBSEQUENT EVENTS (UNAUDITED)
At January 19, 2000 the Company obtained an approval of credit guarantees
aggregating US$46.6 million from the Export-Import Bank of the United States.
The credits guaranteed will be disbursed by the International Bank of Miami,
N.A., to fund purchases of communications equipment and materials from Motorola,
Inc. and other U.S. suppliers. The credits will be available for disbursement
during twelve months, will initially bear floating interest rates later to be
converted to fixed interest rates and will feature five-year principal repayment
schedules.
NOTE 28--LIQUIDITY
As of December 31, 1999, the Company's current liabilities exceed its
current assets by $83.7 million. This reflects the Company's short-term
borrowings in the Dominican Republic with related companies and local banks.
Dominican banks lend on a short term term basis, in order to renegotiate
interest rates should market conditions change, without necessarily demanding
the repayment of credit facilities. Additionally, the Company is involved in
negotiations to obtain term financing of up to 5 years for an approximate amount
of $46,600,000. It is the Company's belief that the existence of a negative
working capital does not affect the continuity of its business.
F-5-41
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN US DOLLARS)
NOTE 29--NEW ACCOUNTING STANDARDS
In June, 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). As amended, the statement
becomes effective for fiscal years beginning after June 15, 2000 and will not be
applied retroactively. The statement establishes accounting and reporting
standards for derivative instruments and hedging activity. At December 31, 1999
the Company had no derivatives and, therefore, does not believe that this
Statement will have any effect on its financial position or results of
operations.
F-5-42
<PAGE>
GLOBAL TELECOM S.A.
FINANCIAL STATEMENTS
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-6-1
<PAGE>
GLOBAL TELECOM S.A.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report................................ F-6-3
Balance Sheets.............................................. F-6-4
Statements of Operations.................................... F-6-5
Statements of Changes in Shareholders' Equity and
Comprehensive Income...................................... F-6-6
Statements of Cash Flows.................................... F-6-7
Notes to the Financial Statements........................... F-6-8-17
</TABLE>
F-6-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
</TABLE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and shareholders
Global Telecom S.A.
We have audited the accompanying balance sheets of Global Telecom S.A. (a
development stage corporation until January 1999) as of December 31, 1998 and
1999 and the related statements of operations, changes in shareholders' equity
and comprehensive income and cash flows for the period since inception on
April 8, 1998 to December 31, 1998 and the year ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Global Telecom S.A. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the period since inception on April 8, 1998 to December 31, 1998 and the
year ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
KPMG Auditores Independentes
Curitiba, Brazil
March 14, 2000, except as to the fourth
paragraph of Note 1 which is as of April 7, 2000
F-6-3
<PAGE>
GLOBAL TELECOM S.A.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 13,887 $ 13,176
Trade accounts receivable, net............................ 1,320 10,495
Inventories............................................... 1,626 13,492
Taxes receivable.......................................... 6,336 15,298
Other..................................................... 13 847
-------- ---------
Total current assets.................................... 23,182 53,308
-------- ---------
Property, plant and equipment, less accumulated
depreciation.............................................. 99,767 187,347
License acquisition costs, less accumulated amortization.... 792,532 497,881
Other intangible and other assets, less accumulated
amortization.............................................. 498 2,068
-------- ---------
$915,979 $ 740,604
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments on license obligation................ $162,772 $ 137,862
Trade accounts payable
Related parties......................................... 78,210 70,055
Others.................................................. 10,980 11,703
Accrued expenses.......................................... 7,586 9,451
-------- ---------
Total current liabilities............................... 259,548 229,071
-------- ---------
Long-term debt.............................................. 50,114 271,364
License obligation, less current installments............... 325,544 137,861
-------- ---------
635,206 638,296
-------- ---------
SHAREHOLDERS' EQUITY
Non-cumulative preferred stock, no par value. Authorized,
issued and outstanding 600,000 shares in 1998* and
1,010,420 shares in 1999................................ 214,311 311,777
Common stock, no par value. Authorized, issued and
outstanding 300,000 shares in 1998* and 505,210 shares
in 1999................................................. 107,156 155,889
Accumulated deficit (includes deficit accumulated during
the development stage of $21,835)....................... (21,835) (250,028)
Accumulated other comprehensive income--currency
translation loss........................................ (18,859) (115,330)
-------- ---------
Total shareholders' equity.............................. 280,773 102,308
-------- ---------
Commitments and contingencies (Note 12).....................
-------- ---------
$915,979 $ 740,604
======== =========
</TABLE>
------------------------
* Share information for 1998 has been restated (Note 10).
See the accompanying notes to the financial statements.
F-6-4
<PAGE>
GLOBAL TELECOM S.A.
STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998
AND YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
NET SALES
Mobile telephone services................................. $ 21 $ 25,648
Sale of equipment......................................... 1,150 19,017
-------- ---------
Total net sales......................................... 1,171 44,665
-------- ---------
OPERATING EXPENSES
Mobile telephone service costs............................ 2,281 23,176
Cost of inventory sold.................................... 1,123 52,349
Selling, general and administrative....................... 17,477 44,556
Depreciation and amortization............................. 165 47,482
-------- ---------
Total operating expenses................................ 21,046 167,563
-------- ---------
Operating loss.......................................... (19,875) (122,898)
-------- ---------
OTHER INCOME (EXPENSE)
Interest expense.......................................... (1,722) (78,447)
Interest income........................................... 254 6,294
Foreign currency transaction losses....................... (247) (26,913)
Other expenses............................................ (245) (6,229)
-------- ---------
Other income (expense).................................. (1,960) (105,295)
-------- ---------
LOSS BEFORE INCOME AND SOCIAL CONTRIBUTION TAXES............ (21,835) (228,193)
Income and social contribution taxes...................... -- --
-------- ---------
NET LOSS.................................................... $(21,835) $(228,193)
======== =========
</TABLE>
See the accompanying notes to the financial statements.
F-6-5
<PAGE>
GLOBAL TELECOM S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED
NON-CUMULATIVE OTHER TOTAL
PREFERRED COMMON ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK DEFICIT INCOME EQUITY
----- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Shares issued upon inception on April 8, 1998
(600,000 shares of preferred stock and 300,000
shares of common stock)*........................ $214,311 $107,156 $ -- $ -- $ 321,467
Comprehensive loss:
Net loss...................................... -- -- (21,835) -- (21,835)
Currency translation loss..................... -- -- -- (18,859) (18,859)
---------
Total comprehensive loss...................... (40,694)
-------- -------- --------- --------- ---------
Balances at December 31, 1998*.................... 214,311 107,156 (21,835) (18,859) 280,773
Issuance of shares (515,078 shares of preferred
stock and 100,552 shares of common stock)..... 122,320 23,879 -- -- 146,199
Conversion of 104,658 shares of preferred stock
to 104,658 shares of common stock............. (24,854) 24,854 -- -- --
Comprehensive loss:
Net loss...................................... -- -- (228,193) -- (228,193)
Currency translation loss..................... -- -- -- (96,471) (96,471)
---------
Total comprehensive loss...................... (324,664)
-------- -------- --------- --------- ---------
Balances at December 31, 1999..................... $311,777 $155,889 $(250,028) $(115,330) $ 102,308
======== ======== ========= ========= =========
</TABLE>
------------------------------
* Share information for 1998 has been restated (Note 10).
See the accompanying notes to the financial statements.
F-6-6
<PAGE>
GLOBAL TELECOM S.A.
STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net loss.................................................... $ (21,835) $(228,193)
Adjustments to reconcile net loss to net cash used for
operating activities:
Bad debt expense.......................................... -- 1,510
Depreciation and amortization............................. 165 47,482
Accrued interest included in license obligation........... -- 54,718
Changes in trade accounts receivable...................... (1,323) (10,888)
Changes in inventories.................................... (1,630) (11,714)
Changes in taxes receivable............................... (6,437) (10,602)
Changes in other.......................................... (523) (2,587)
Changes in trade accounts payable......................... 10,573 23,232
Changes in accrued expenses............................... 8,670 3,514
--------- ---------
9,495 94,665
--------- ---------
Net cash used for operating activities...................... (12,340) (133,528)
--------- ---------
Investing activities:
Purchases of property, plant and equipment, net........... (23,969) (138,126)
Acquisition of license and other intangible assets........ (320,316) (265)
--------- ---------
Net cash used in investing activities....................... (344,285) (138,391)
--------- ---------
Financing activities:
Proceeds from issuance of long-term debt.................. 49,979 243,913
Repayments of license obligation.......................... -- (117,422)
Proceeds from issuance of preferred stock................. 214,311 122,320
Proceeds from issuance of common stock.................... 107,156 23,879
--------- ---------
Net cash provided by financing activities................... 371,446 272,690
--------- ---------
Effect of exchange rate changes on cash..................... (934) (1,482)
--------- ---------
Net change in cash and cash equivalents..................... 13,887 (711)
Cash and cash equivalents at beginning of period............ -- 13,887
--------- ---------
Cash and cash equivalents at end of period.................. $ 13,887 $ 13,176
========= =========
</TABLE>
See the accompanying notes to the financial statements.
F-6-7
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
NOTE 1--OPERATIONS AND BACKGROUND
Global Telecom Ltda. was constituted on December 22, 1997. On January 29,
1999, the shareholders converted the Company into a closely held corporation
called Global Telecom S.A. The Company provides mobile telephone services under
a license granted by the National Agency for Telecommunications ("ANATEL") in
accordance with Brazilian laws and sells telecommunication equipment. The
Company started its principal operations in January 1999; prior to this, the
Company was a development stage corporation.
On April 8, 1998, under Act 098 of ANATEL, the Company was granted a license
to operate B Band mobile telephone services for concession area 5, covering two
states of Brazil (Parana and Santa Catarina), for a period of 15 years,
renewable for a further 15 years, subject to review and approval by ANATEL. The
license was granted as part of an ongoing privatization program carried out by
the Brazilian government.
The Company, including the services to be provided and rates to be charged,
is regulated by ANATEL, the regulatory authority for the Brazilian
telecommunications industry pursuant to Law No. 9,472 of July 16, 1997 and the
related regulations, decrees, orders and plans.
LIQUIDITY AND CASH FLOW INFORMATION
Global Telecom is in the early stage of development and will incur losses
for some time. At December 31, 1999, Global Telecom had a total of $547 million
of indebtedness and license fee obligations, and at the same date current
liabilities exceeded current assets. All conditions and payment terms of these
liabilities are disclosed in footnotes 7 and 8 to the financial statements.
In order to fund its future capital needs, Global Telecom expects to access
additional working capital lines, enter into long term debt arrangements with
banks, and/or obtain additional capital contributions from the main
shareholders, which are also the guarantors of the indebtedness.
In connection with this, in April 2000, Global Telecom received a
$120 million equity contribution from its shareholders to fund a portion of the
license installment payment due on April 7, 2000.
NOTE 2--PRESENTATION OF THE FINANCIAL STATEMENTS
The financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. Management of the
Company has made a number of estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
A. BASIS OF TRANSLATION
The functional currency of the Company has been determined to be the
Brazilian real. All foreign currency transaction gains or losses associated with
transactions denominated in a currency other than the Company's functional
currency are recognized currently into income as a foreign currency transaction
gain or loss.
The assets and liabilities of the Company have been translated from its
functional currency into the US dollar in accordance with the provisions of
Statement No. 52 of the Financial Accounting
F-6-8
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Standards Board of the United States of America ("FASB"), using the exchange
rates of R$1.20 per US$1.00 and R$1.79 per US$1.00 as of December 31, 1998 and
1999, respectively. Income and expenses recognized during the period from
inception on April 8, 1998 to December 31, 1998 and in 1999 were converted at
the actual exchange rates, except when not practical, when the monthly average
exchange rates for the period in which income and expenses were recognized was
used. Currency translation gains or losses are reflected in other comprehensive
income.
B. CASH EQUIVALENTS
For purposes of the statements of cash flows, cash equivalents are
considered to be all highly liquid temporary cash investments with original
maturities of three months or less.
C. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are stated at the applicable billing rate on the
date of rendering the service, plus services rendered but not yet billed at the
balance sheet date and are presented net of allowance for doubtful accounts.
Provisions are made for trade accounts receivable for which recoverability is
considered improbable.
D. INVENTORIES
Inventories consist of mobile telephone equipment and accessories and are
stated at the lower of cost, determined using the first in, first out method, or
market.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Construction expenditures
are recorded as assets under construction until the assets are placed in
service, at which time the assets are transferred to the appropriate property,
plant and equipment category. Depreciation, which begins upon operation of the
related assets, is provided using the straight-line method over estimated useful
lives of 25 years for buildings, 5 to 20 years for communication equipment,
computer hardware and software and furniture and fixtures and 5 years for
automobiles. Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the assets, a loss is recognized for the difference between the fair
value and carrying value of the asset.
F. LICENSE ACQUISITION COSTS
License acquisition costs consist of the cost of acquiring the right to
operate B Band mobile telephone services, as reported in Note 1. The costs are
being amortized using the straight-line method over the 15 year period provided
under the license. The Company assesses the recoverability of license
acquisition costs by determining whether the amortization of the asset balance
over its remaining life can be recovered through undiscounted future operating
cash flows. The amount of impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting
F-6-9
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
the Company's average cost of funds. The assessment of the recoverability of
license acquisition costs will be impacted if estimated future operating cash
flows are not achieved.
G. INTEREST CAPITALIZATION
Interest costs are capitalized related to the construction and purchase of
assets, which constitute activities preliminary to the commencement of the
planned principal operation. The interest costs are classified as part of the
cost basis of the related asset and amortized over the life of the respective
asset.
H. DEFERRED DEBT FINANCING COSTS
Deferred debt financing costs, classified as other intangible assets,
represents costs incurred relating to the issuance of debt and are amortized
using the straight-line method over the term of the related debt.
I. INCOME AND SOCIAL CONTRIBUTION TAXES
Income and social contribution 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 tax losses. 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.
J. REVENUE RECOGNITION
The Company earns revenue by providing mobile telephone services to
customers of the Company and of other cellular carriers traveling (roaming) in
the Company's service area and from sales of mobile telephone equipment and
accessories. Service revenue consists of the base monthly service fee and
airtime revenue. Base monthly service fees are billed in arrears and recognized
in the month earned. Airtime revenue is recognized when service is provided.
Roaming revenue consists of the fee charged to other cellular carriers'
customers for roaming in the Company's service area, as well as related airtime
revenue for use of the Company's mobile telephone network. Roaming revenue is
recognized when the service is rendered. The Company recognizes revenue from
sales of mobile telephone equipment and accessories upon shipment to the
customers.
K. RESEARCH AND DEVELOPMENT AND ADVERTISING
Research and development and advertising costs are expensed as incurred.
Research and development costs amounted to $344 in 1999 (none in 1998).
Advertising costs amounted to $4,952 and $16,052 in 1998 and 1999, respectively.
L. PRE-OPERATING EXPENSES
Start-up and organization costs are expensed as incurred.
F-6-10
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
M. COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment
and/or remediation can be reasonably estimated.
N. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
FASB issued Statement 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
in June 1999. Statement 137 amends Statement 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998 and was to be
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Statement 137 defers the effective date of Statement 133 to all fiscal quarters
of fiscal years beginning after June 15, 2000. Earlier application is permitted.
Statement 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. Management of the Company
does not expect the implementation of Statement 133 will have a material effect
on its financial position, results of operations or liquidity.
NOTE 4--TAXES RECEIVABLE
Taxes receivable are principally from ICMS (value added tax) tax credits
earned by the Company totaling $6,336 and $15,108 as of December 31, 1998 and
1999, respectively. These amounts will be recovered as credits against the
Company's future ICMS tax liability resulting from its sales of mobile telephone
services and mobile telephone equipment and accessories.
NOTE 5--TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable consist of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Billed amounts............................................. $ -- $ 4,533
Services rendered but not billed........................... 22 4,328
Sales of mobile telephone equipment and accessories........ 1,298 2,191
Telephone service companies................................ -- 1,029
------ -------
1,320 12,081
Less--allowance for doubtful accounts...................... -- 1,586
------ -------
$1,320 $10,495
====== =======
</TABLE>
F-6-11
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
NOTE 5--TRADE ACCOUNTS RECEIVABLE, NET (CONTINUED)
The activity in the allowance for doubtful accounts for the year ended
December 31, 1999 follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Allowance for doubtful accounts at beginning of year........ $ --
Additions charged to bad debt expense....................... 1,510
Effect of currency translation adjustment................... 76
------
Allowance for doubtful accounts at end of year.............. $1,586
======
</TABLE>
There was no allowance for doubtful accounts established in 1998.
The Company's customers are located in the states of Parana and Santa
Catarina of Brazil. No single customer accounts for more than 10% of trade
accounts receivable.
In the normal course of business, the Company maintains accounts receivable
from carriers. Although the Company's exposure to credit risk associated with
non-payment by these carriers is affected by conditions or occurrences within
the industry, most of these receivables are extended to large, well-established
companies. The Company does not believe that this concentration of credit risk
represents a material risk of loss with respect to its financial position.
NOTE 6--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Buildings................................................ $ 4,707 $ 3,004
Communication equipment.................................. 75,273 125,081
Computer hardware and software........................... 16,433 25,424
Furniture and fixtures................................... 1,641 2,768
Automobiles.............................................. 204 293
Assets under construction................................ 1,673 41,245
------- --------
99,931 197,815
Less--accumulated depreciation........................... 164 10,468
------- --------
$99,767 $187,347
======= ========
</TABLE>
Depreciation expense of $165 and $10,238 was recognized in 1998 and 1999,
respectively.
NOTE 7--LICENSE ACQUISITION COSTS
License acquisition costs consist of the following as of December 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
License costs........................................... $792,532 $535,457
Less--accumulated amortization.......................... -- 37,576
-------- --------
$792,532 $497,881
======== ========
</TABLE>
F-6-12
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM INCEPTION ON APRIL 8, 1998 TO DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF US DOLLARS)
NOTE 7--LICENSE ACQUISITION COSTS (CONTINUED)
License costs consists of the costs of acquiring the right to operate B Band
mobile telephone services in Parana and Santa Catarina and capitalized interest
costs of $46,961. The purchase price of the license was $791,887, with the first
installment of $316,755 paid on April 8, 1998, equivalent to 40% of the total
value. The remaining 60% is due in three equal annual installments as from
April 8, 1999 of $100,922, and bears interest at the IGP-DI (a local inflation
index) from the Fundacao Getulio Vargas, plus 1% per month, as from the date the
authorization documentation and proposals were submitted on April 7, 1997. The
total purchase price of the license has been recorded, with unpaid installment
amounts recognized as current and noncurrent liabilities. Amortization expense
of $37,014 was recognized in 1999 (none in 1998).
F-6-13
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 8--LONG-TERM DEBT
Long-term debt consist of the following as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Bank credit facility..................................... $ -- $ 40,000
Financing agreement with related party................... 50,114 231,364
------- --------
$50,114 $271,364
======= ========
</TABLE>
There were no current installments on long-term debt due as of December 31,
1998 and 1999.
In September 1999, the Company entered into a US dollar denominated credit
facility with the Export-Import Bank of Japan ("EXIMBANK") for up to $220,000 to
finance the establishment and operation of B Band mobile telephone services
under the license granted by ANATEL referred to as "the Project." The Company
receives disbursements under the credit facility for expenditures paid to
suppliers for the Project and if EXIMBANK so agrees, expenditures that are
scheduled to be paid to its suppliers for the Project during a three-month
period after the date of the disbursement request. Borrowings under the credit
facility bear interest at the six-month London Interbank Offering Rate
("LIBOR"), plus 0.125%, to be paid semi-annually. Borrowings under the credit
facility are guaranteed by Motorola Inc. and DDI Corporation Inc., parent
companies of two principal shareholders of the Company. The credit facility will
be repaid in ten equal semi-annual installments beginning August 5, 2002, with
the final installment due February 5, 2007. The credit facility is subject to
various covenants, which the Company is in compliance with as of December 31,
1999.
In May 1999, the Company entered into a US dollar denominated financing
agreement with Motorola Credit Corporation, replacing the pre-existing $50,000
bridge loan, for up to $330,000, excluding capitalized interest (Tranche A for
up to $220,000 and Tranche B for up to $110,000). The proceeds from Tranche A
must be utilized to finance the equipment to be purchased pursuant to an
equipment supply contract entered into with Motorola do Brasil Ltda. The
proceeds from Tranche B will be utilized for general working capital purposes.
Borrowings under the financing agreement bear interest at the six-month LIBOR,
plus 4.00%, to be accrued and capitalized annually, maturing on February 5, 2007
($114 and $11,670 was capitalized as of December 31, 1998 and 1999,
respectively). Principal payments for both Tranche A and B commence on
February 5, 2002, with six equal annual installments. A commitment fee of 1.25%
on the average unused portion of Tranche B is payable quarterly in arrears. In
connection with the financing agreement, the Company and its shareholders
provided security interests, subject to certain legal limitations and
restrictions and the license in: (a) all licenses held to operate B Band mobile
telephone services, (b) all assets of the Project, and (c) any and all
shareholders' preferred and common stock in the Company. The financing agreement
provides mandatory prepayments if: (a) the Company is able to obtain alternative
financing, (b) upon a change in control or the lead operator DDI
Corporation Inc., and (c) if during the period of five years, commencing from
the effective date of the equipment supply contract with Motorola do
Brasil Ltda., the Company fails to take delivery of a minimum of 80% of the
equipment and services contemplated in the contract or the contract is
terminated. Under the financing agreement, the Company is also required to
maintain certain financial and operating covenants, is restricted in its use of
borrowings, and is limited in its ability to pay dividends and incur additional
indebtedness. The Company was in compliance with all covenants of the financing
agreement as of December 31, 1999, except for the
F-6-13
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 8--LONG-TERM DEBT (CONTINUED)
covenant requiring minimum quarterly levels of net revenue for each of the
quarters in 1999. The Company received waivers of the events of default for each
of these instances of noncompliance.
The aggregate annual principal payments for the next five years and
thereafter under the Company's long-term debt at December 31, 1999 are
summarized as follows:
<TABLE>
<S> <C>
December 31, 2000........................................... $ --
December 31, 2001........................................... --
December 31, 2002........................................... 42,561
December 31, 2003........................................... 46,561
December 31, 2004........................................... 46,561
December 31, 2005 and thereafter............................ 135,681
--------
$271,364
========
</TABLE>
NOTE 9--INCOME AND SOCIAL CONTRIBUTION TAXES
There is no current tax expense or benefit attributable to the period from
inception on April 8, 1998 to December 31, 1998 and for the year ended
December 31, 1999. The following summarizes deferred income and social
contribution taxes from inception on April 8, 1998 to December 31, 1998 and for
the year ended December 31, 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Income taxes............................................. $(5,459) $(57,048)
Social contribution taxes................................ (1,747) (18,255)
------- --------
(7,206) (75,303)
Increase in valuation allowance for deferred tax
assets................................................. 7,206 75,303
------- --------
$ -- $ --
======= ========
</TABLE>
Temporary differences and tax losses that give rise to a significant portion
of the deferred tax assets and related valuation allowance consist of the
following as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Pre-operating costs, not currently deductible.......... $ 7,129 $ 53,974
Currency translation loss.............................. 6,223 38,059
Tax losses............................................. -- 22,026
Accrued expenses not currently deductible.............. -- 3,245
Provision for doubtful accounts........................ -- 525
-------- ---------
Gross deferred tax asset............................... 13,352 117,829
Valuation allowance.................................... (13,352) (117,829)
-------- ---------
Net deferred tax asset................................. $ -- $ --
======== =========
</TABLE>
F-6-14
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 9--INCOME AND SOCIAL CONTRIBUTION TAXES (CONTINUED)
A valuation allowance was established for the entire deferred tax asset
amount as of December 31, 1998 and 1999. In assessing the realizability of
deferred tax assets, the Company considered its early stage of operations and
lack of earnings in determining the deferred tax asset valuation allowance. At
December 31, 1999, the Company had approximately $67,000 of tax losses for
income and social contribution tax purposes, which are not subject to
expiration, however utilization is limited to 30% of taxable income in any
future year.
Income and social contribution taxes differ from the statutory rates (25%
for income taxes and 9% for social contribution taxes) due to the valuation
allowance for deferred tax assets.
NOTE 10--SHAREHOLDERS' EQUITY
On January 29, 1999, the shareholders converted the Company from Global
Telecom Ltda. to a closely held corporation called Global Telecom S.A. The
conversion of outstanding preferred and common quotas was based on 40,608.96
quotas equaling one share of applicable preferred or common stock. At conversion
on January 29, 1999, preferred quotas totaling 24,365,373,885 were converted
into 600,000 shares of preferred stock and common quotas totaling 12,182,686,943
were converted into 300,000 shares of common stock.
Non-cumulative and non-voting preferred stock holders are entitled to
receive a minimum dividend distribution equal to $0.006 per share prior to
common stock holders participating in dividend distributions. If minimum
dividend distributions are not made to preferred stock holders for any three
consecutive year period, the preferred stock holders will receive voting rights.
Preferred stock holders also have priority over common stock holders in the
event of the Company's liquidation. Common stock holders have voting rights.
NOTE 11--RELATED PARTY TRANSACTIONS
The following transactions were undertaken between the Company and related
companies under normal market conditions.
The Company entered into a $220,000 equipment supply contract to purchase
equipment and services from Motorola do Brasil Ltda. In order to finance this
contract and general working capital requirements, the Company entered into a
financing agreement with Motorola Credit Corporation for up to $330,000
(Note 8). Interest expense recognized under the financing agreement amounted to
$114 and $12,924 in 1998 and 1999, respectively.
The credit facility entered into with EXIMBANK is guaranteed by
Motorola Inc. and DDI Corporation Inc., the parent companies of two principal
shareholders of the Company (Note 8).
The Company has outstanding trade accounts payable with Motorola do
Brasil Ltda. and Motorola Industrial Ltda., of $24,828 and $53,382 at
December 31, 1998, respectively, and $27,122 and $42,933 at December 31, 1999,
respectively. In addition, the Company has outstanding advances for supply of
property, plant and equipment of $2,372 at December 31, 1999 with Motorola do
Brasil Ltda. classified as property, plant and equipment in the balance sheet.
F-6-15
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 12--COMMITMENTS AND CONTINGENCIES
A. CAPITAL EXPENDITURE COMMITMENTS
At December 31, 1999, the Company was committed to purchase approximately
$29,000 in communication equipment and computer hardware and software,
principally from Motorola do Brasil Ltda. (Note 11).
B. OPERATING LEASE COMMITMENTS
The Company leases land, buildings and equipment under non-cancelable
operating leases. Future minimum payments under these leases as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000........................................................ $3,516
2001........................................................ 2,181
2002........................................................ 1,842
2003........................................................ 1,316
2004........................................................ 570
2005 and thereafter......................................... 59
------
$9,484
======
</TABLE>
Rental expense for operating leases was approximately $656 and $3,237 in
1998 and 1999, respectively.
C. LEGAL CONTINGENCIES
The Company is involved in various legal matters and claims which are being
defended and handled in the ordinary course of business. In the opinion of
management, none of these matters is expected to have a material adverse effect
on the financial condition, results of operations or liquidity of the Company.
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments for which it is practicable to estimate that value,
whether or not recognized in the balance sheet. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. SFAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts do not represent the underlying value of the
Company.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying values of the Company's financial instruments at December 31, 1998
and 1999, such as cash and cash equivalents, trade accounts receivable, taxes
receivable, other receivables, trade accounts payable, and accrued expenses
F-6-16
<PAGE>
GLOBAL TELECOM S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US DOLLARS)
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
approximates fair value because of the short maturity of these instruments. The
carrying values of long-term debt and license obligation approximates fair value
due to their variable rate nature.
NOTE 14--SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," in 1998.
The Company provides mobile telephone services in Parana and Santa Catarina,
under a license granted by ANATEL. The Company's financial statements include
only one business segment--mobile telephone services. The Company's two
principal sources of revenue include sales of mobile telephone equipment and
accessories and mobile telephone services generated from usage of mobile
telephone equipment sold totaling $25,648 and $19,017, respectively, in 1999.
The Company was considered a development stage corporation in 1998.
NOTE 15--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid by the Company amounted to $2,125 and $2,023 in 1998 and 1999,
respectively. No income and social contribution taxes were paid in 1998 and
1999. The license obligation of $480,474 represents a non-cash financing
activity that occurred in 1998 in connection with the acquisition of the license
for the rights to operate B Band mobile telephone services.
F-6-17
<PAGE>
ABIATAR S.A.
FINANCIAL STATEMENTS
December 31, 1998 and 1999
(With Report of Independent Accountants Thereon)
F-7-1
<PAGE>
ABIATAR S.A.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-7-3
Balance Sheets at December 31, 1998 and 1999................ F-7-4
Statements of Income for the years ended December 31, 1997,
1998 and 1999............................................. F-7-6
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999.................... F-7-7
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-7-8
Notes to the Financial Statements........................... F-7-9
</TABLE>
F-7-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Abiatar S.A.
We have audited the accompanying balance sheets of Abiatar S.A. as of
December 31, 1998 and 1999, and the related statements of income, of cash flows
and of changes in stockholders' equity for each of the three years in the period
ended December 31, 1999, all expressed in United States dollars. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the financial statements audited by us present fairly, in all
material respects, the financial position of Abiatar S.A. at December 31, 1998
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
PRICEWATERHOUSECOOPERS
Montevideo, Uruguay
February 29, 2000
F-7-3
<PAGE>
ABIATAR S.A.
BALANCE SHEETS
AT DECEMBER 31, 1998 AND 1999
(IN US DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
US $ US $
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Notes 2.d and 3)................. $10,388,752 $ 2,208,785
Accounts receivable (Notes 2.e, 2.f and 4).................. 11,133,815 12,291,443
Prepaid expenses (Note 5)................................... 227,175 1,091,704
Other accounts receivable (Note 6).......................... 717,984 1,052,320
Inventories (Notes 2.g and 7)............................... 2,587,418 2,660,036
----------- -----------
TOTAL CURRENT ASSETS........................................ 25,055,144 19,304,288
----------- -----------
NON CURRENT ASSETS
Inventories (Notes 2.g and 7)............................... 62,923 226,612
Property, plant and equipment (Notes 2.h and 8)............. 37,991,640 51,056,185
Intangibles (Note 2.j)...................................... 0 35,849
----------- -----------
TOTAL NON CURRENT ASSETS.................................... 38,054,563 51,318,646
----------- -----------
TOTAL ASSETS................................................ $63,109,707 $70,622,934
=========== ===========
</TABLE>
The accompanying notes are integral part of the financial statements.
F-7-4
<PAGE>
ABIATAR S.A.
BALANCE SHEETS
AT DECEMBER 31, 1998 AND 1999
(IN US DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
US$ US$
--- ---
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Accounts payable--trade (Note 9)............................ $ 8,843,654 $ 9,123,491
Current financial liabilities (Note 10)..................... 2,520,119 155,705
Other liabilities (Note 11)................................. 4,400,839 3,609,366
----------- -----------
TOTAL CURRENT LIABILITIES................................... 15,764,612 12,888,562
----------- -----------
NON CURRENT LIABILITIES
Customer guaranty deposits.................................. 860,367 735,392
Non current financial liabilities (Note 10)................. 0 10,000,000
----------- -----------
TOTAL NON CURRENT LIABILITIES............................... 860,367 10,735,392
----------- -----------
TOTAL LIABILITIES........................................... 16,624,979 23,623,954
=========== ===========
Commitments and Contingencies (Notes 19 and 20)
STOCKHOLDERS' EQUITY (NOTE 14)
Common Stock (200,000,000 shares authorized; 120,000,000
shares issued at a stated value of Uruguayan pesos 1
each)..................................................... 6,697,361 13,546,090
Retained earnings
Appropriated to restricted reserves......................... 10,773,588 7,225,746
Unnapropriated.............................................. 29,013,779 26,227,144
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. $46,484,728 $46,998,980
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $63,109,707 $70,622,934
=========== ===========
</TABLE>
The accompanying notes are integral part of the financial statements.
F-7-5
<PAGE>
ABIATAR S.A.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1998 1999
US $ US $ US $
---- ---- ----
<S> <C> <C> <C>
Services and Equipment--Net Revenues (Note 15).............. $ 44,998,326 $ 59,106,955 $ 86,364,593
Cost of Services and Equipment
Cost of services provided............................... (11,894,759) (17,377,954) (31,319,411)
Cost of equipment sold.................................. (3,596,600) (4,405,308) (5,443,492)
------------ ------------ ------------
GROSS MARGIN.............................................. 29,506,967 37,323,693 49,601,690
OPERATING EXPENSES
Sales and Marketing expenses (Note 16)...................... (5,131,647) (6,827,329) (11,124,339)
General and Administrative Expenses (Note 17)............... (7,933,692) (9,348,297) (10,661,701)
------------ ------------ ------------
Total Operating Expenses.................................... (13,065,339) (16,175,626) (21,786,040)
------------ ------------ ------------
OPERATING INCOME............................................ 16,441,628 21,148,067 27,815,650
Other income and expenses, net (Note 18).................... (839,509) 57,190 (641,387)
------------ ------------ ------------
INCOME BEFORE INCOME TAX.................................... 15,602,119 21,205,257 27,174,263
Provision for income taxes (Notes 2.k and 12)............... (4,628,774) (6,044,846) (6,660,011)
------------ ------------ ------------
NET INCOME.................................................. $ 10,973,345 $ 15,160,411 $ 20,514,252
============ ============ ============
</TABLE>
The accompanying notes are integral part of the financial statements.
F-7-6
<PAGE>
ABIATAR S.A.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN US DOLLARS EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
RETAINED EARNINGS
NUMBER OF COMMON LEGAL SPECIAL PURPOSE
SHARES STOCK RESERVE TAX RESERVE UNAPPROPRIATED TOTAL
------ ----- ------- ----------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996....... 40,000,000 $ 6,697,361 $390,279 $ 2,571,098 $ 10,692,234 $ 20,350,972
Appropriations of retained earnings
approved by the shareholders on
May 23, 1997:
--To legal reserve.................. 403,208 (403,208) 0
--To special purpose tax reserve.... 4,482,896 (4,482,896) 0
Net income.......................... 10,973,345 10,973,345
------------ ----------- -------- ----------- ------------ ------------
Balances at December 31, 1997....... 40,000,000 6,697,361 793,487 7,053,994 16,779,475 31,324,317
Appropriations of retained earnings
approved by the shareholders on
July 3, 1998:
--To legal reserve.................. 176,191 (176,191) 0
--To special purpose tax reserve.... 2,749,916 (2,749,916) 0
Net income.......................... 15,160,411 15,160,411
------------ ----------- -------- ----------- ------------ ------------
Balances at December 31, 1998....... 40,000,000 6,697,361 969,678 9,803,910 29,013,779 46,484,728
Shares issued....................... 80,000,000 6,848,729 (6,848,729) 0
Appropriations of retained earnings
approved by the shareholders on
July 1, 1999:
--To special purpose tax reserve.... 3,300,887 (3,300,887) 0
Dividends declared (US$0.167 per
share)............................ (20,000,000) (20,000,000)
Net income.......................... 20,514,252 20,514,252
------------ ----------- -------- ----------- ------------ ------------
Balances at December 31, 1999....... 120,000,000 $13,546,090 $969,678 $ 6,256,068 $ 26,227,144 $ 46,998,980
============ =========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7-7
<PAGE>
ABIATAR S.A.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 10,973,345 $ 15,160,411 $ 20,514,252
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................... 5,047,979 6,009,860 7,637,870
Allowance for bad debts......................... 1,631,928 1,894,466 1,584,418
Gain on sale of property........................ (12,613) 0 0
Deferred income tax............................. 705,626 (393,517) (309,238)
Changes in operating assets and liabilities
Increase in accounts receivable............... (988,037) (3,870,314) (5,277,102)
(Increase)/Decrease in other accounts
receivable.................................. (1,096,571) (658,428) 1,645,429
Increase in inventories....................... (69,874) (878,787) (236,307)
Increase in accounts payable.................. 1,982,073 2,234,860 279,837
Increase/(Decrease) in other liabilities...... 50,920 (16,973) (791,473)
Increase/(Decrease) in customer guaranty
deposits.................................... 0 3,627 (124,975)
Increase/(Decrease) in financial
liabilities................................. (960,950) (25,182) 135,586
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 17,263,826 19,460,023 25,058,297
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment............... (10,498,631) (12,261,387) (20,738,264)
Proceeds from sale of property.................... 79,905 0 0
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES............. (10,418,726) (12,261,387) (20,738,264)
CASH FLOWS USED IN FINANCIAL ACTIVITIES
Repayment of short-term notes..................... (2,500,000) (2,500,000) (2,500,000)
Proceeds from issuance of long-term notes......... 0 0 10,000,000
Dividends paid.................................... 0 0 (20,000,000)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES............. (2,500,000) (2,500,000) (12,500,000)
NET INCREASE/(DECREASE) OF CASH AND CASH
EQUIVALENTS....................................... 4,345,100 4,698,636 (8,179,967)
------------ ------------ ------------
CASH AND CASH EQUIVALENT AT BEGINNING OF YEAR....... 1,345,016 5,690,116 10,388,752
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR.... $ 5,690,116 $ 10,388,752 $ 2,208,785
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest.......................................... 666,726 405,375 186,295
Income taxes...................................... 2,180,976 4,327,177 5,809,923
NON CASH TRANSACTIONS
Purchase of Inventories and Property, plant and
equipment through an increase in accounts
payable......................................... 1,066,445 1,568,101 981,671
Increase of current financial liabilities through
a decrease in non-current financial
liabilities..................................... 2,888,749 2,704,376 --
</TABLE>
The accompanying notes are integral part of the financial statements.
F-7-8
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 1--THE COMPANY AND ITS OPERATIONS
Abiatar S.A. (the Company) is a company incorporated in Uruguay as a public
company under Uruguayan legislation. The Company was awarded a contract to lease
a mobile cellular land telephone system by International Public Tender number
719 called for by the National Administration of Telecommunications (ANTEL), the
government owned telecommunications utility, on March 17, 1989. This
adjudication was formalized in a signed contract on December 12, 1990.
ANTEL commissioned the Company for the construction, maintenance and
commercial operation of the system of cellular mobile telephony in the south
zone of the country.
Originally, the term of the contract was 10 years, starting August 12, 1991
and expiring on August 12, 2001, allowing for two extensions of 5 years each at
the sole discretion of Antel. Through an amendment of the contract, signed on
April 4, 1995, Antel exercised its right to extend the term for the first
additional period of 5 years, moving the expiry date to August 12, 2006 and
agreed not to deny the second 5 years extension, unless Abiatar incurs in
serious default of its contractual obligations.
The system came into service in November 1991. Presently, the service is
provided covering all the authorized area.
Competition in the mobile cellular market started in September 1994 and the
competitor, Ancel (the cellular branch of ANTEL), is providing service in all
the areas of the country including the authorized area covered by the Company.
During 1995, an amendment to the contract with Antel changed the billing
system from mobile party pays to calling party pays. Under this agreement, Antel
assumes responsibility for the collection and bad debt losses of all incoming
calls from land line network to Abiatar cellular network and Abiatar assumes
responsibility for the collection and bad debt losses of all Antel charges to
its customers.
During 1996, the Company signed a national roaming agreement with Antel.
Through this agreement Abiatar customers can use Antel's facilities in the areas
where Abiatar is not providing service.
In November 1998, an amendment to the contract with Antel was made in
connection with the introduction of prepaid cellular services.
In September 1999, the Company started to operate as an ISP (Internet
Service Provider ).
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which differ in
certain respects from the accounting principles applied by the Company in its
financial statements prepared in local currency and in accordance with Uruguayan
corporate law and for other statutory purposes in Uruguay. The U.S. dollar has
been used as the reporting currency.
F-7-9
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
The books and accounts of the Company are maintained in Uruguayan pesos. The
financial statements for Uruguayan corporate law and other statutory purposes
are prepared in local currency. Future dividends will be declared in local
currency in accordance with Uruguayan corporate law.
The U.S. dollar has been used as the reporting currency as it is the
reporting currency of the financial statements of several of its shareholders.
The financial statements have been translated into United States dollars in
accordance with Statement of Financial Accounting Standards No 52, "Foreign
Currency Translations" (SFAS No 52).
Up to December 31, 1998, the Company operated in a highly inflationary
economy and, as prescribed by SFAS No. 52, the United States dollar (reporting
currency) was used as the functional currency. Under such method non monetary
assets and liabilities and related expenses are translated into U.S. dollars at
historical exchange rates. All other income statement amounts are translated
using average exchange rates for the period. Monetary assets and liabilities are
translated at end-of-period exchange rates, and the resulting losses are
reported in income as "Translation loss" under "Other income and expenses, net".
Common stock, reserves and retained earnings are translated using historical
exchange rates.
As from January 1, 1999, management considers that Uruguay's economy is no
longer considered hyperinflationary under SFAS No. 52. However, managements
assessment is that the Company continued to comply with certain conditions
indicating that the United States dollar is the Company's functional currency.
Therefore, the accompanying financial statements were translated following the
method described above.
C. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Estimates are used when
accounting for the allowance for bad debts, allowance for lower of cost or
market, depreciation and amortization, evaluation of the carrying value of
long-lived assets, income taxes and contingencies. Actual results could differ
from those estimates.
D. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates markets value. Interest
income on cash equivalents was US$ 612,390 in 1998 and US$ 203,689 in 1999.
E. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR BAD DEBTS
Accounts receivable correspond to customer trade accounts in the normal
course of business.
F-7-10
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for bad debts is recorded against trade accounts receivable
based on the risk of uncollectibility as a reduction of the related receivable
balance. The allowance for such uncollectible accounts was US$ 2,614,402 at
December 31, 1998 and US$ 3,338,561 at December 31, 1999.
F. OTHER CREDITS
Other credits include credits billed to customers for Antel charges.
G. INVENTORIES
Inventories are stated at the lower of its acquisition cost or market value.
Cost is determined on the basis of weighted average method.
H. PROPERTY, PLANT AND EQUIPMENT
These assets are stated at historical acquisition cost. Depreciation is
computed using the straight-line method starting in the month following purchase
or when the asset is put into service using the following annual rates:
<TABLE>
<S> <C>
Buildings................................................... 2.00%
Improvements to leasehold property--office.................. 20.00%
Improvements to leasehold property--cell sites.............. 10.00%
Cell Site equipment......................................... 14.28%
Tools and test equipment.................................... 20.00%
Telephones.................................................. 33.33%
Furniture and fixtures...................................... 10.00%
Data processing and office equipment........................ 20.00%
Vehicles.................................................... 20.00%
</TABLE>
I. VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. For
assets that the Company intends to hold for use, if the total expected future
cash flow is less than the carrying amount of the assets, an impairment loss is
recognized for the difference between the fair value and carrying value of the
asset. For assets the Company intends to dispose of, a loss is recognized to
reduce the carrying value to the amount of its estimated fair value less selling
costs. As of December 31, 1998 and 1999, no impairment losses have been
recognized on long-lived assets.
J. INTERNAL USE SOFTWARE
Effective January 1, 1999, the Company adopted SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". This
standard requires the capitalization of costs of internal-use software which has
a useful life in excess of one year. Subsequent additions, modifications or
upgrades to internal use software are capitalized only to the extent that they
allow the software to
F-7-11
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
perform a task it previously did not perform and if are specified. Unspecified
upgrades and enhancements and costs under agreements that combine maintenance
and unspecified upgrades and enhancements are expensed over the estimated useful
life of the software on a straight-line basis. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over a
period of 3 years.
K. INCOME TAX
Income tax is recorded following SFAS No 109, "Accounting for Income Taxes",
which applies a balance sheet approach to income tax accounting. In accordance
with the standard, the balance sheet reflects the anticipated tax impact of
future taxable income or deductions implicit in the balance sheet in the form of
temporary differences. These temporary differences reflect the difference
between the basis in assets and liabilities as measured in the financial
statements and as measured by tax law using enacted tax rates.
L. REVENUE RECOGNITION
Revenues are recognized when services are rendered or as products are
delivered to clients. Revenues derived from cellular airtime usage are
recognized monthly as services are provided. Revenue associated with the sale of
pre-paid calling cards is deferred and recognized as the airtime is utilized.
M. MAINTENANCE AND REPAIRS
The cost of maintenance and repairs of plant, including the cost of
replacing minor items not resulting in substantial betterments, is charged to
operating expense.
N. ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
costs incurred are shown in note 16.
O. PENSION INFORMATION
The Company does not maintain any pension plans. Uruguayan laws provide for
pension benefits to be paid to retired employees from government pension plans
and/or privately managed funds plans to which employees may elect to contribute.
Employer contributions to such plans are expensed as incurred.
The Company does not sponsor any employee stock ownership plans, or any
other kind of stock option plan.
F-7-12
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
P. CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
The Company's business activity is basically with customers located in
Uruguay, and as such the Company is subject to the risk of the Uruguayan
economy. The industry can be affected by changes in the operation and
competition.
Financial Instruments which potentially subject the Company to concentration
of credit risk, consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and cash equivalents with high credit
quality financial institutions located in Uruguay. Accounts receivable consist
of amounts receivable form a significant variety of customers acting in
different industries within Uruguay. The only customer that represents more than
10% of the balance at any given year-end is Antel. Consequently, the Company has
a significant geographic concentration of credit risk in Uruguay.
Q. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet are reasonable
approximations of their fair values.
R. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a company during
a period from transactions and other events and circumstances excluding
transactions resulting from investment by owners and distribution to owners. For
each of the three years ended December 31, 1999 the Company's comprehensive
income represented the Company's net income for the year and the Company had no
other elements of comprehensive income.
S. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" as
amended is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS 133 requires all derivative instruments to be recognized in
the financial statements as either assets or liabilities at their fair values.
Changes in fair value of derivative instruments are either recognized in income
or outside income as a component of other comprehensive income depending on
their designation and effectiveness as fair value hedges, cash flow hedges or
foreign currency hedges.
We estimate no significant impact as the result of implementing SFAS No. 133
considering that up to December 31, 1999 the Company did not enter into any
derivative contract or hedging activity as defined by SFAS No. 133.
F-7-13
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 3--CASH AND CASH EQUIVALENTS
Composition:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---- ----
<S> <C> <C>
Cash................................................ $ 89,526 $ 126,126
Bank accounts....................................... 1,058,571 832,659
Time deposits at banks.............................. 9,240,655 1,250,000
----------- ----------
$10,388,752 $2,208,785
=========== ==========
</TABLE>
NOTE 4--ACCOUNTS RECEIVABLE
Composition:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Accounts receivable trade.......................... $10,643,566 $14,772,135
Less: Allowance for bad debts...................... (2,614,402) (3,338,561)
Other credits...................................... 3,142,020 765,173
Other credits--collections......................... 422,643 264,434
Less: Allowance for bad debts...................... (460,012) (171,738)
----------- -----------
$11,133,815 $12,291,443
=========== ===========
</TABLE>
NOTE 5--PREPAID EXPENSES
Composition:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---- ----
<S> <C> <C>
Prepaid expenses...................................... $227,775 $1,009,945
Prepaid insurance premiums............................ 0 81,759
-------- ----------
$227,175 $1,091,704
======== ==========
</TABLE>
F-7-14
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 6--OTHER ACCOUNTS RECEIVABLE
Composition:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---- ----
<S> <C> <C>
Advances to suppliers................................. $129,593 $ 155,691
Affiliates............................................ 9,500 8,500
Deferred tax assets................................... 578,891 888,129
-------- ----------
$717,984 $1,052,320
======== ==========
</TABLE>
NOTE 7--INVENTORIES
Composition:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
CURRENT
Imports in transit................................... $ 299,706 $ 13,887
Telephones........................................... 1,547,258 1,875,081
Accessories.......................................... 624,101 568,460
Spare parts.......................................... 109,479 142,310
Prepaid cards........................................ 6,874 60,298
---------- ----------
$2,587,418 $2,660,036
========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
---- ----
<S> <C> <C>
NON-CURRENT
Telephones and accessories............................... $62,923 $226,612
------- --------
$62,923 $226,612
======= ========
</TABLE>
F-7-15
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 8--PROPERTY, PLANT AND EQUIPMENT
Composition:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
GROSS DEPRECIATION NET
----- ------------ ---
<S> <C> <C> <C>
Land and buildings.................................... $ 1,055,721 $ (41,877) $ 1,013,844
Improvements to leasehold property--office............ 649,606 (227,872) 421,734
Improvements to leasehold property--
cell sites.......................................... 2,570,615 (490,006) 2,080,609
Cell Site equipment................................... 40,060,980 (14,130,359) 25,930,621
Tools and test equipment.............................. 699,126 (340,712) 358,414
Telephones............................................ 458,824 (320,046) 138,778
Furniture and fixtures................................ 878,209 (224,532) 653,677
Data processing and office equipment.................. 1,762,361 (764,794) 997,567
Vehicles.............................................. 193,024 (65,135) 127,889
Construction in progress.............................. 6,268,507 6,268,507
----------- ------------ -----------
Total $54,596,973 $(16,605,333) $37,991,640
=========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------
GROSS DEPRECIATION NET
----- ------------ ---
<S> <C> <C> <C>
Land and Buildings................... $ 1,575,128 $ (56,897) $ 1,518,231
Improvements to leasehold property--
office............................. 894,992 (347,442) 547,550
Improvements to leasehold
property--cell sites............... 3,441,723 (786,737) 2,654,986
Cell Site equipment.................. 62,431,700 (20,548,326) 41,883,374
Tools and test equipment............. 1,046,298 (490,123) 556,175
Telephones........................... 637,100 (426,074) 211,026
Furniture and fixtures............... 1,100,878 (321,449) 779,429
Data processing and office
equipment.......................... 2,915,663 (1,160,016) 1,755,647
Vehicles............................. 212,130 (103,714) 108,416
Construction in progress............. 1,041,351 1,041,351
----------- ------------ -----------
$75,296,963 $(24,240,778) $51,056,185
=========== ============ ===========
</TABLE>
F-7-16
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 9--ACCOUNTS PAYABLE--TRADE
Composition:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
To suppliers......................................... $3,590,016 $3,629,418
To ANTEL............................................. 3,442,404 3,227,162
Provision for expenses............................... 1,811,234 2,266,911
---------- ----------
$8,843,654 $9,123,491
========== ==========
</TABLE>
NOTE 10--FINANCIAL LIABILITIES
In November 1996 Abiatar issued debentures for US$7,500,000. The term of the
issuance is 3 years with equal annual repayments. The interest rate is Libor
plus 2.30%. During 1997, 1998 and 1999 there were payments of US$2,500,000,
canceling the balance of this debt.
In October 1999 Abiatar issued further debentures for US$10,000,000. The
term of the issuance is 5 years with repayments of 30% at the end of the 3rd
year, 30% at the end of the 4th year, and 40% at the end of the 5th year. The
interest rate is Libor plus 2.50%.
As of December 31, 1998 and 1999 the breakdown of this caption was as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
CURRENT
Current portion of long term debt--Notes payable--
Debentures........................................ $2,500,000 $ 0
Interest payable on Debentures...................... 20,119 155,705
---------- -----------
$2,520,119 $ 155,705
========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
NON CURRENT
Long-term debt--Notes payable--Debentures........... $ 0 $10,000,000
========== ===========
$ 0 $10,000,000
========== ===========
</TABLE>
F-7-17
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 11--OTHER LIABILITIES
Composition:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Salaries and wages................................... $ 898,645 $1,044,954
Affiliates (Note 13)................................. 1,782,659 1,718,783
Taxes payable........................................ 1,504,192 605,850
Social security taxes................................ 177,006 230,985
Other................................................ 38,337 8,794
---------- ----------
$4,400,839 $3,609,366
========== ==========
</TABLE>
NOTE 12--TAXES
12.A. SIGNIFICANT COMPONENTS OF THE DEFERRED TAX ASSETS (LIABILITIES) ARE SHOWN
IN THE FOLLOWING TABLE:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Allowance for bad debts............................ $ 1,621,897 $ 2,049,858
Provision for expenses............................. 647,164 668,979
Deferred charges................................... 40,939 22,972
Fixed assets (difference in useful lives).......... 365,165 772,305
Expenses recorded as assets for tax purposes....... (350,518) (412,432)
Difference in revenue recognition criteria......... (1,745,756) (2,213,553)
----------- -----------
Total.............................................. $ 578,891 $ 888,129
=========== ===========
</TABLE>
Management believes it is more likely than not that deferred income tax
assets will be realized based on current income tax laws and expectations of
future taxable income stemming from the reversal of existing deferred tax
liabilities or ordinary operations. Accordingly, no valuation allowance has been
established. Uncertainties surrounding income tax law changes and future
operation income levels may, however, affect the ultimate realization of all or
some of such deferred income tax assets.
F-7-18
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 12--TAXES (CONTINUED)
12.B. ANALYSIS OF INCOME TAX EXPENSE
The components of income tax expense from continuing operations are
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current.................................. $3,923,148 $6,438,363 $6,969,249
Deferred (gain)/loss..................... 705,626 (393,517) (309,238)
---------- ---------- ----------
Total income tax expense................. $4,628,774 $6,044,846 $6,660,011
========== ========== ==========
</TABLE>
At December 31, 1997 current income tax include a one-time gain of
US$513,507 resulting from a tax credit recognized after a specific authorization
received from the tax authority to modify the criteria for determination of
income tax payable.
12.C. THE FOLLOWING TABLE SHOWS THE MAIN REASONS FOR THE DIFFERENCE BETWEEN THE
EFFECTIVE INCOME TAX RATE AND THE STATUTORY INCOME TAX RATE:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income Tax at statutory rate (30.0%).... $4,680,636 $ 6,361,577 $ 8,152,279
Deductions for financial reporting not
allowed for tax purposes.............. 163,589 275,813 308,000
Fiscal exemptions....................... (892,674) (1,355,323) (1,934,451)
Differences in tax estimates............ (3,873) 612,076 291,016
Effect of change in fiscal ruling of
Abiatar S.A........................... 926,616 0 0
Other................................... (245,520) 150,703 (156,833)
---------- ----------- -----------
Income Tax at effective rate............ $4,628,774 $ 6,044,846 $ 6,660,011
========== =========== ===========
</TABLE>
NOTE 13--RELATED PARTY TRANSACTIONS
The Company's shareholders include through direct or indirect ownership
Motorola Inc. and Bell South Inc. companies engaged in the telecommunications
business, and also two local shareholder groups. The Company has transactions in
the normal course of business with Motorola Inc. and Bell South Inc. and its
respective subsidiaries and affiliated companies.
Such transactions include inter-affiliates roaming services and the
acquisition of telephone and cellular equipment from Motorola Inc.
F-7-19
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 13--RELATED PARTY TRANSACTIONS (CONTINUED)
Intercompany Balances as of December 31, are as follows:
<TABLE>
<CAPTION>
RELATION 1998 1999
-------- ---- ----
<S> <C> <C> <C>
ASSETS
ACCOUNTS RECEIVABLE
ROAMING DEBTORS
Compania de Radiocomunicaciones Moviles S.A.... Common Shareholder $ 804,164 $ 632,915
Bellsouth Chile................................ Common Shareholder 81,281 20,217
---------- ----------
885,445 653,132
OTHER ACCOUNTS RECEIVABLE
AFFILIATES
Bellsouth Inc.................................. Shareholder 1,000 0
Compania de Radiocomunicaciones Moviles S.A.... Common Shareholder 8,500 8,500
---------- ----------
9,500 8,500
LIABILITIES
ACCOUNTS PAYABLE
ROAMING
Compania de Radiocomunicaciones Moviles S.A.... Common Shareholder 87,337 85,000
Bellsouth Chile................................ Common Shareholder 5,385 24,201
---------- ----------
92,722 109,201
SERVICES
Compania de Radiocomunicaciones Moviles S.A.... Common Shareholder 52,474 68,796
OTHER LIABILITIES
AFFILIATES
Bellsouth Mobility............................. Shareholder 32,259 0
Bellsouth International........................ Shareholder 30,000 100,658
Motorola, Inc.................................. Shareholder 1,720,400 1,618,125
---------- ----------
$1,782,659 $1,718,783
========== ==========
</TABLE>
F-7-20
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 13--RELATED PARTY TRANSACTIONS (CONTINUED)
The following is a summary of the related party transactions ocurred during
each of the three years ended December 31, 1999:
<TABLE>
<CAPTION>
RELATION 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C> <C>
SERVICES AND EQUIPMENT NET REVENUES
ROAMING
Compania de Radiocomunicaciones
Moviles S.A............................ Common Shareholder $2,042,791 $2,366,902 $2,473,290
Bellsouth Chile.......................... Common Shareholder 11,866 24,316 27,352
COST OF SERVICES:
ROAMING
BellSouth Mobility....................... Shareholder 47,845 84,219 69,775
Compania de Radiocomunicaciones
Moviles S.A............................ Common Shareholder 672,656 925,611 795,681
Bellsouth Chile.......................... Common Shareholder 5,385 0 71,019
SERVICES:
BellSouth International.................. Shareholder 0 0 137,370
Compania de Radiocomunicaciones
Moviles S.A............................ Common Shareholder 109,500 758,172 599,432
IMPORTS:
Motorola, Inc............................ Shareholder
Cellular Equipment..................... 4,174,465 3,611,008 8,123,013
Telephones and Accessories............. $2,092,337 $2,326,357 $3,201,862
</TABLE>
NOTE 14--RESTRICTIONS ON DIVIDEND DISTRIBUTION
A. LEGAL RESERVE
Under Uruguayan law, 5% of the annual profits reported in statutory
financial statements must be allocated to the legal reserve until this equals
20% of the issued capital. The reserve is not available for distribution.
At December 31, 1999 the legal reserve in the statutory financial statements
prepared in local currency amounts to Uruguayan pesos 8,000,000 (1998: Uruguayan
pesos 8,000,000) and capital issued amounts to Uruguayan pesos 120,000,000
(1998: Uruguayan pesos 40,000,000).
B. SPECIAL PURPOSE TAX RESERVE
This reserve was created in accordance with Law No 15,903 Article 447 to
secure an income tax benefit related to investment in data processing and
communication equipment. The reserve is not available for distribution.
F-7-21
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 14--RESTRICTIONS ON DIVIDEND DISTRIBUTION (CONTINUED)
At December 31, 1999 the special purpose tax reserve in the statutory
financial statements prepared in local currency amounts to Uruguayan pesos
45,716,268 (Uruguayan pesos 88,181,890 in 1998).
The company computed an amount of Uruguayan pesos 180,979,276 of investments
made during the year 1999 (Uruguayan pesos 93,835,946 during 1998) in data
processing and communication equipment that qualifies for the benefit of
reducing income tax payable. Shareholders, when considering the statutory
financial statements in local currency as of and for the year ended
December 31, 1999 should transfer retained earnings for approximately Uruguayan
pesos 72,391,710 (Uruguayan pesos 37,534,378 for 1998) in order to use
the benefit.
C. DIVIDEND PAYMENTS
Law No 16,060 stipulates that dividend payments are limited to the profits
reported in the statutory financial statements expressed in Uruguayan pesos. As
of December 31, 1999, the retained earnings available for dividend distribution
were Uruguayan pesos 255,277,616.
NOTE 15--SERVICES AND EQUIPMENT NET REVENUES
Composition:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cellular phones services.............. $39,037,008 $50,011,379 $75,904,810
Roaming services revenue.............. 3,478,684 4,543,883 4,737,174
Sales of equipment.................... 2,482,634 4,551,693 5,633,617
Internet access services.............. 0 0 88,992
----------- ----------- -----------
$44,998,326 $59,106,955 $86,364,593
=========== =========== ===========
</TABLE>
NOTE 16--SALES AND MARKETING EXPENSES
Composition:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Salaries and wages.................... $ (727,974) $ (801,199) $ (851,604)
Commission expenses................... (2,072,066) (3,543,331) (7,465,749)
Advertising and promotion............. (2,331,607) (2,482,799) (2,806,986)
----------- ----------- ------------
$(5,131,647) $(6,827,329) $(11,124,339)
=========== =========== ============
</TABLE>
F-7-22
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 17--GENERAL AND ADMINISTRATIVE EXPENSES
Composition:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Salaries and wages.................... $(1,374,590) $(1,733,897) $ (2,349,272)
Performance bond...................... (11,308) (11,308) (11,308)
Professional services................. (151,680) (215,116) (238,237)
Building and office expenses.......... (315,825) (561,456) (896,377)
Other general and administrative...... (2,849,294) (3,621,350) (3,634,517)
Billing and collection................ (2,638,543) (2,891,414) (2,794,746)
Depreciation.......................... (592,452) (313,756) (737,244)
----------- ----------- ------------
$(7,933,692) $(9,348,297) $(10,661,701)
=========== =========== ============
</TABLE>
NOTE 18--OTHER INCOME AND EXPENSES, NET
Composition:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest expense............................ $(659,344) $(382,521) $(532,020)
Interest income............................. 223,661 612,390 203,689
Translation loss............................ (570,966) (419,175) (490,196)
Other income................................ 173,816 248,084 178,092
Other expenses.............................. (6,676) (1,588) (952)
--------- --------- ---------
$(839,509) $ 57,190 $(641,387)
========= ========= =========
</TABLE>
NOTE 19--COMMITMENTS AND CONTINGENCIES
A. LEASES
The Company has entered into operating leases as a lessor of facilities used
in operations including office space and cell site space. The following table
summarizes the approximate future minimum rentals under non-cancelable operating
leases in effect at December 31, 1999:
<TABLE>
<CAPTION>
YEAR US $
---- ----
<S> <C>
2000........................................................ 651,449
2001........................................................ 500,260
2002........................................................ 369,930
2003........................................................ 246,380
2004........................................................ 181,780
Thereafter.................................................. 390,180
---------
Total minimum leases payments............................... 2,339,979
=========
</TABLE>
F-7-23
<PAGE>
ABIATAR S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
(IN US DOLLARS)
NOTE 19--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease expense amounted to US$1,107,062 for the year ended December 31, 1999
(US$736,119 for 1998).
B. CONSTRUCTION AND PURCHASE COMMITMENTS
There are no construction or purchase commitments as of December 31, 1998.
During 1999, the Company signed a contract with Motorola Inc. for the purchase
of digital network equipment for a net amount of US$12,444,740.
C. LEGAL ACTIONS
The Company is subject to legal proceedings arising in the ordinary course
of business. Although the final outcome of these actions cannot be predicted, no
provision has been recognized in the financial statements as the company
believes that any financial impact would not be material.
NOTE 20--GUARANTEES
In order to guarantee the agreement with ANTEL, the Company is obliged to
provide a performance bond in favor of ANTEL for an amount of US$1,750,000.
The Company contracted with the NationsBank N.A. South a Letter of Credit in
favor of ANTEL for that amount.
NOTE 21--SEGMENT INFORMATION
The Company provides different type of services: cellular and Internet
services that may be grouped in two operating segments. However, cellular is the
only reportable segment exceeding the quantitative reporting thresholds
established by SFAS No. 131 ("Disclosures about segments of an entreprise and
related information"). Accordingly no segment information is provided in these
financial statements. The Company started providing Internet access services by
the end of 1999.
F-7-24
<PAGE>
PELEPHONE
COMMUNICATIONS LTD.
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-8-1
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
FINANCIAL STATEMENTS AS AT DECEMBER 31, 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-8-3
Balance Sheets of the Company............................... F-8-4
Statements of Income--Consolidated and of the Company....... F-8-6
Statement of Shareholders' Equity........................... F-8-7
Statements of Cash Flows--Consolidated and of the Company... F-8-8
Notes to the Financial Statements........................... F-8-11
</TABLE>
F-8-2
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF PELEPHONE COMMUNICATIONS LTD.
We have audited the accompanying balance sheets of Pelephone
Communications Ltd. (the Company) as at December 31, 1998 and 1999, and the
related statements of income, shareholders' equity, and cash flows of the
Company, for each of the three years, the last of which ended December 31, 1999
as well as the consolidated statements of income, shareholders' equity and cash
flows for each of the two years, the last of which ended December 31, 1998.
These financial statements are the responsibility of the Company's Board of
Directors and of its 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, including standards prescribed by the Auditors Regulations (Manner of
Auditor's Performance) 1973. Such auditing standards are substantially identical
to generally accepted auditing standards in the United States. These standards
require that we plan and perform the audit to obtain reasonable assurance that
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 the Board of Directors and 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, based on our audits the financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as at December 31, 1998 and 1999 and the results of operations, the
changes in the shareholders' equity and the cash flows of the Company for each
of the three years, the last of which ended December 31, 1999, as well as the
consolidated results of operations, changes in shareholders' equity and cash
flows for each of the two years, the last of which ended December 31, 1998, in
conformity with generally accepted accounting principles in Israel
(Israeli GAAP). As applied to these financial statements, Israeli GAAP are
identical with US GAAP in all material respects except as otherwise described in
Note 26 to the financial statements.
As explained in Note 2D, the above mentioned financial statements are stated
in values adjusted for the changes in the general purchasing power of the
Israeli currency, in accordance with opinions of the Institute of Certified
Public Accountants in Israel.
Somekh Chaikin
Certified Public Accountants (Isr.)
(A member firm of KPMG International)
Tel-Aviv, Israel
March 14, 2000 except as to
Note 23 which is as of
May 17, 2000
F-8-3
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
BALANCE SHEETS AS AT DECEMBER 31
(IN TERMS OF NIS OF DECEMBER 1999)
<TABLE>
<CAPTION>
COMPANY
-----------------------------------
CONVENIENCE
TRANSLATION
(NOTE 2F)
-----------
NOTE 1998 1999 1999
---- ---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C> <C>
ASSETS 24
Current assets
Cash and cash equivalents................................... 3 40,202 4,832 1,163
Trade receivables, net...................................... 2H,4 398,902 471,360 113,499
Interested party............................................ 22 100,292 95,305 22,948
Other receivables........................................... 5 60,025 153,173 36,883
Inventory................................................... 2I 97,558 206,079 49,623
--------- --------- -------
TOTAL CURRENT ASSETS........................................ 696,979 930,749 224,116
--------- --------- -------
LONG-TERM TRADE RECEIVABLES, NET............................ 6 18,015 11,352 2,733
--------- --------- -------
SEVERANCE PAY FUNDINGS, NET................................. 14 -- 3,482 838
--------- --------- -------
PROPERTY AND EQUIPMENT, NET................................. 2J,7 2,355,686 2,512,688 605,029
--------- --------- -------
OTHER ASSETS, NET........................................... 2K,8 -- 459,494 110,641
--------- --------- -------
TOTAL ASSETS................................................ 3,070,680 3,917,765 943,357
========= ========= =======
</TABLE>
F-8-4
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
BALANCE SHEETS AS AT DECEMBER 31
(IN TERMS OF NIS OF DECEMBER 1999)
<TABLE>
<CAPTION>
COMPANY
-----------------------------------
CONVENIENCE
TRANSLATION
(NOTE 2F)
-----------
NOTE 1998 1999 1999
---- ---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY 24
CURRENT LIABILITIES
Short-term bank credit................................... 9 94,834 678,077 163,274
Trade payables........................................... 10 50,912 144,667 34,834
Taxes and other statutory payments....................... 16A(1) 109,137 102,043 24,571
Liabilities to interested and related parties............ 11, 22 199,456 142,696 34,360
Other payables........................................... 12 133,162 118,730 28,589
--------- --------- -------
587,501 1,186,213 285,628
--------- --------- -------
PROVISION FOR LOSSES OF AN INVESTEE COMPANY.............. 2L -- 3,978 958
--------- --------- -------
LONG-TERM LIABILITIES
Long-term bank credit.................................... 13 564,401 735,390 177,074
Liability in respect of employee severance benefits,
net.................................................... 14 607 -- --
Deferred taxes........................................... 2M; 15B 4,188 38,726 9,325
--------- --------- -------
569,196 774,116 186,399
--------- --------- -------
CONTINGENT LIABILITIES, COMMITMENTS AND LIENS............ 16
TOTAL LIABILITIES........................................ 1,156,697 1,964,307 472,985
--------- --------- -------
SHAREHOLDERS' EQUITY..................................... 1,913,983 1,953,458 470,372
--------- --------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... 3,070,680 3,917,765 943,357
========= ========= =======
</TABLE>
The notes are an integral part of the financial statements.
F-8-5
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
(IN TERMS OF NIS OF DECEMBER 1999)
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
TRANSLATION
*CONSOLIDATED COMPANY (NOTE 2F)
--------------------- --------------------------------- -----------
NOTE 1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C> <C>
Income from cellular phone services, sales
and other services......................... 2N 2,637,089 3,011,278 2,637,089 3,011,278 2,975,126 716,380
Cost of cellular phone services, sales and
other services............................. 17 1,882,373 2,176,838 1,882,373 2,176,838 2,367,043 569,960
--------- --------- --------- --------- --------- -------
Gross profit................................. 754,716 834,440 754,716 834,440 608,083 146,420
--------- --------- --------- --------- --------- -------
Selling and marketing expenses............... 18 198,379 230,465 198,249 229,918 280,398 67,517
General and administrative expenses.......... 19 138,929 161,577 138,454 160,951 183,677 44,228
--------- --------- --------- --------- --------- -------
337,308 392,042 336,703 390,869 464,075 111,745
OPERATING PROFIT............................. 417,408 442,398 418,013 443,571 144,008 34,675
Financing expenses, net...................... 20 35,168 29,541 35,171 29,586 65,745 15,830
Other expenses (income)...................... 593 5,156 593 5,156 (521) (125)
--------- --------- --------- --------- --------- -------
PROFIT BEFORE INCOME TAX..................... 381,647 407,701 382,249 408,829 78,784 18,970
Income tax................................... 15 142,863 157,816 142,863 157,816 35,331 8,507
--------- --------- --------- --------- --------- -------
PROFIT BEFORE COMPANY'S EQUITY IN LOSSES OF
INVESTEE COMPANIES......................... 238,784 249,885 239,386 251,013 43,453 10,463
Company's equity in losses of investee
companies.................................. -- -- 602 1,128 3,978 958
--------- --------- --------- --------- --------- -------
NET EARNINGS................................. 238,784 249,885 238,784 249,885 39,475 9,505
========= ========= ========= ========= ========= =======
NIS NIS NIS NIS NIS NIS
--------- --------- --------- --------- --------- -------
BASIC AND DILUTED EARNINGS PER NIS 1 PAR
VALUE OF SHARE CAPITAL (302,460,000
ORDINARY SHARES)........................... 2O;21 0.789 0.826 0.789 0.826 0.131 0.031
========= ========= ========= ========= ========= =======
</TABLE>
------------------------------
* See Note 1B.
The notes are an integral part of the financial statements.
F-8-6
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
STATEMENT OF SHAREHOLDERS' EQUITY
(IN TERMS OF NIS OF DECEMBER 1999)
<TABLE>
<CAPTION>
SHARE SHARE RETAINED
CAPITAL PREMIUM EARNINGS TOTAL
------- ------- -------- -----
NIS NIS NIS NIS
(000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997.................................. 484,130 129,544 808,848 1,422,522
Changes during 1997:
Net earnings................................................ 238,784 238,784
Inflationary erosion of dividend declared in prior year..... 2,792 2,792
------- ------- --------- ---------
BALANCE AT DECEMBER 31, 1997................................ 484,130 129,544 1,050,424 1,664,098
Changes during 1998:
Net earnings................................................ 249,885 249,885
------- ------- --------- ---------
BALANCE AT DECEMBER 31, 1998................................ 484,130 129,544 1,300,309 1,913,983
Changes during 1999:
Net earnings................................................ 39,475 39,475
------- ------- --------- ---------
Balance at December 31, 1999................................ 484,130 129,544 1,339,784 1,953,458
======= ======= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CONVENIENCE TRANSLATION (NOTE 2F)
-----------------------------------------------------
SHARE SHARE RETAINED
CAPITAL PREMIUM EARNINGS TOTAL
------- ------- -------- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
US $ US $ US $ US $
(000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999....................... 116,574 31,193 313,100 460,867
Changes during 1999:
Net earnings..................................... 9,505 9,505
------- ------ ------- -------
BALANCE AT DECEMBER 31, 1999..................... 116,574 31,193 322,605 470,372
======= ====== ======= =======
</TABLE>
The notes are an integral part of the financial statements.
F-8-7
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
(IN TERMS OF NIS OF DECEMBER 1999)
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
TRANSLATION
*CONSOLIDATED COMPANY (NOTE 2F)
----------------------- ---------------------------------- -----------
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net earnings......................................... 238,784 249,885 238,784 249,885 39,475 9,505
Adjustments to reconcile net income to net cash flows
generated by operating activities (A).............. 427,725 648,812 427,863 649,936 568,178 136,811
---------- ---------- -------- ---------- ---------- --------
Net cash inflow generated by operating activities.... 666,509 898,697 666,647 899,821 607,653 146,316
---------- ---------- -------- ---------- ---------- --------
CASH FLOWS GENERATED BY INVESTING ACTIVITIES:
Purchase of property and equipment................... (687,774) (1,059,166) (687,034) (1,058,869) (844,403) (203,323)
Proceeds from sale of property and equipment......... 5,507 1,931 5,507 1,931 5,006 1,205
Purchase of a jointly controlled company............. -- -- (81) -- -- --
Loan to a jointly controlled company................. -- (1,314) (1,875) (3,979) -- --
Sale of investment in a jointly controlled
company(C)......................................... -- (122) -- 80 -- --
Capitalized software development costs............... (723) (1,397) -- -- -- --
Investment in other assets........................... -- -- -- -- (560,331) (134,922)
---------- ---------- -------- ---------- ---------- --------
Net cash outflow used for investing activities....... (682,990) (1,060,068) (683,483) (1,060,837) (1,399,728) (337,040)
---------- ---------- -------- ---------- ---------- --------
CASH FLOWS GENERATED BY FINANCING ACTIVITIES:
Dividend paid........................................ (91,740) -- (91,740) -- -- --
Receipt of long-term loans and other liabilities..... 255,250 229,096 255,250 229,096 316,257 76,151
Repayment of long-term loans and other liabilities... (74,526) (141,551) (74,526) (141,551) (101,564) (24,456)
Short-term bank credit, net.......................... -- -- -- -- 542,012 130,512
---------- ---------- -------- ---------- ---------- --------
Net cash inflow generated by financing activities.... 88,984 87,545 88,984 87,545 756,705 182,207
---------- ---------- -------- ---------- ---------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 72,503 (73,826) 72,148 (73,471) (35,370) (8,517)
Cash and cash equivalents at beginning of year....... 41,525 114,028 41,525 113,673 40,202 9,680
---------- ---------- -------- ---------- ---------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............. 114,028 40,202 113,673 40,202 4,832 1,163
========== ========== ======== ========== ========== ========
</TABLE>
------------------------------
* See Note 1B.
The notes are an integral part of the financial statements.
F-8-8
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
TRANSLATION
*CONSOLIDATED COMPANY (NOTE 2F)
----------------------- ---------------------------------- -----------
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
A. ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FLOWS GENERATED BY OPERATING ACTIVITIES
Income and expenses not involving cash flows:
Depreciation and amortization........................ 619,478 694,618 619,465 694,581 854,723 205,809
Deferred taxes, net.................................. (27,670) (20,192) (27,670) (20,192) 25,820 6,217
(Decrease) increase in excess of liability for
severance benefits over related fundings........... 670 (806) 670 (806) (4,089) (985)
Capital losses....................................... 593 706 593 706 304 73
Erosion of long-term loans........................... 6,999 22,685 6,999 22,685 (2,473) (595)
Company's equity in losses of investee companies..... -- -- 602 1,128 3,978 958
Inflationary erosion of loan to a jointly controlled
company............................................ -- (312) (13) (312) -- --
Gain on sale of investment in a jointly controlled
company............................................ -- (1,731) -- (1,731) -- --
Allowance for a capital loss in respect of a loan
write-off.......................................... -- 6,181 -- 6,181 -- --
---------- ---------- -------- ---------- ---------- --------
600,070 701,149 600,646 702,240 878,263 211,477
---------- ---------- -------- ---------- ---------- --------
Changes in assets and liability items:
Increase in trade receivables........................ (82,249) (71,515) (82,249) (71,515) (65,795) (15,843)
Decrease (increase) in other receivables including
interested party................................... (21,925) 11,284 (22,027) 11,620 (79,443) (19,129)
Decrease (increase) in inventory..................... 10,677 (121,340) 10,677 (121,340) (166,055) (39,984)
Increase (decrease) in trade payables including
interested and related parties..................... (99,825) 84,533 (99,943) 84,359 22,734 5,473
Increase (decrease) in other payables................ 20,977 44,701 20,759 44,572 (21,526) (5,183)
---------- ---------- -------- ---------- ---------- --------
(172,345) (52,337) (172,783) (52,304) (310,085) (74,666)
---------- ---------- -------- ---------- ---------- --------
427,725 648,812 427,863 649,936 568,178 136,811
========== ========== ======== ========== ========== ========
</TABLE>
------------------------------
* See Note 1B.
The notes are an integral part of the financial statements.
F-8-9
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
TRANSLATION
*CONSOLIDATED COMPANY (NOTE 2F)
----------------------- ---------------------------------- -----------
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
B. NON-CASH TRANSACTIONS
Purchase of property and equipment on suppliers
credit............................................. 116,095 100,807 116,095 100,807 115,068 27,707
========== ========== ======== ========== ========== ========
C. WITHDRAWAL FROM CONSOLIDATION--PROCEEDS FROM SALE
OF INVESTMENT IN A PROPORTIONATELY CONSOLIDATED
COMPANY
Working capital (excluding cash)..................... (411)
Property and equipment............................... 873
Capitalized software development costs............... 2,233
Short-term loan to company that withdrew from the
consolidation...................................... (4,548)
Capital gain from sale of the investment............. 1,731
----------
(122)
==========
</TABLE>
------------------------------
* See Note 1B.
The notes are an integral part of the financial statements.
F-8-10
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 1--GENERAL
A. Pelephone Communications Ltd. (hereinafter--"the Company") is owned by
Motorola Israel Ltd. (hereinafter--"Motorola") and Bezeq--The Israel
Telecommunication Corp. Ltd. (hereinafter--"Bezeq"), each having a 50% interest
in the Company.
The Company operates mobile cellular telephone services, markets cellular
telephone equipment, and installs, operates and maintains equipment and systems
in the cellular communications field.
The Company operates under an operating license for mobile radio--telephone
services (hereinafter--"the MRTS license"). The license in its updated form was
received on February 7, 1996 and is valid for 10 years commencing January 1,
1994, with an option for extension for an additional period of 6 years ("the
additional period") and for renewal of the license for one or more additional
periods of 6 years each, over and above the period of the license or the
additional period.
B. In 1997, the Company invested in T.C.S.--Telcom Solutions Ltd.
(hereinafter "T.C.S"), a jointly controlled company. The Company held 50% of the
equity and control therein. T.C.S. engages in the development, marketing and
selling of management computer program systems. The Company sold its investment
in T.C.S. during 1998.
C. In the current year the Company entered into an agreement providing for
the establishment of a company called Safe Com--Car Communication Ltd.
(hereinafter--"Safe Car"). Safe Car purchased assets and rights from a court
appointed trustee under a rehabilitation program of Mobitel Ltd., at a price of
NIS 8.5 million.
Safe Car's main activity is the tracing and locating of missing vehicles.
The Company holds 51% of the shares of Safe Car. The financial statements of
Safe Car were not consolidated since the Company has neither control nor joint
control thereof. According to the agreement for the establishment of Safe Car,
important decisions have to be approved by a 75% majority. The Company treated
this investment in its financial statements according to the equity method (see
Note 2 L).
NOTE 2--REPORTING PRINCIPLES AND ACCOUNTING POLICIES
A. DEFINITIONS
1. PROPORTIONALLY CONSOLIDATED COMPANIES--companies whose financial statements
are directly consolidated with those of the Company by the proportionate
consolidation method.
2. AFFILIATED COMPANIES--investees, other than proportionately consolidated
companies, the investment in which is included directly in the Company's
financial statement by the equity method.
3. INVESTEE COMPANIES--Proportionately consolidated companies and
affiliated companies.
4. INTERESTED PARTIES--as defined in Paragraph (1) of the definition of an
interested party in a company in Section 1 of the Securities Law.
5. RELATED PARTIES--as defined in Opinion No. 29 of the Institute of Certified
Public Accountants in Israel (hereinafter--"ICPAI").
F-8-11
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 2--REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONTINUED)
As applicable to the Company, related parties and interested parties, as
described above, would also be considered related parties under United States
generally accepted accounting principles ("U.S. GAAP").
6. CPI--the Consumer Price Index as published by the Central Bureau of
Statistics in Israel.
7. DOLLAR--the U.S. dollar
8. NIS--New Israeli Shekel
B. ISRAELI GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements presented herein have been prepared in conformity
with Israeli GAAP which, as applied to the Company, are substantially identical
in all material respects to U.S. GAAP, except as described in Note 26.
C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
D. FINANCIAL STATEMENTS IN INFLATION ADJUSTED VALUES
1. Since 1994, the Company prepares its financial statements on the basis of
historical cost adjusted for changes in the general purchasing power of the
NIS. The financial statements in nominal historical values were adjusted to
NIS of a constant purchasing power in accordance with Opinions 36 and 50 of
the ICPAI. Financial statement data of the Company in nominal historical
values is presented in Note 25.
2. The principal financial statements of the Company for all years through 1993
were prepared in dollars, since during those years the Company was a
wholly-owned subsidiary of Motorola Israel Ltd., a company wholly-owned by
foreign investors, and its operations were mainly in dollars, because of the
financing it received was denominated in dollars and because most of its
operations were either denominated in dollars or linked thereto.
The financial statements as at December 31, 1993 were translated into NIS of
December 1993 in accordance with Paragraph 29 of Opinion 36 of the ICPAI, at
the representative exchange rate of the dollar as at December 31, 1993
($1=NIS 2.986). Since such date, they have been adjusted as described in
2D(1) above.
3. The adjusted values of non-monetary items do not necessarily represent their
market value or their value to the Company, but rather their adjusted cost,
computed as stated in Paragraphs (1) and (2) above.
4. In the inflation-adjusted financial statements the term "cost" means
"adjusted cost."
F-8-12
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 2--REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONTINUED)
5. All comparative figures for previous years (including monetary items) have
also been adjusted and are stated in terms of NIS of the end of the current
reporting period.
E. PRINCIPLES OF ADJUSTMENT
1. Balance sheet
Since 1994, non-monetary items (mainly property and equipment and inventory)
have been adjusted based on the changes in the CPI from the index published
in respect of the month of the transaction until the index published in
respect of the month of balance sheet date (regarding the period up to
December 31, 1993--see D(2) above). Monetary items are stated in the
adjusted balance sheet at the same value by which they are stated in the
nominal historical balance sheet.
The net asset value of the investments in investee companies is determined
on the basis of the inflation adjusted financial statements of
such investees.
2. Statement of income
Statement of income items have been adjusted in respect of the changes in
the CPI as follows:
a) Income and expenses arising from non-monetary items (e.g., depreciation
and amortization, changes in inventory, prepaid expenses and deferred
income etc.) or from provisions included in the balance sheet (such as
provisions for vacation pay and employee vacation expense allowance,
etc.) have been adjusted on the basis of specific indices, parallel with
the adjustment of the related balance sheet item.
b) Other statement of income items (such as sales, purchases, etc.), except
for financing income and expense, have been adjusted on the basis of
changes in the CPI from the date of the transaction until balance
sheet date.
c) Transactions involving credit in unlinked Israeli currency which does
not bear interest at going market rates, have been adjusted on the basis
of indices relating to the cash flow related thereto, if the rate of
inflation in the credit period of the transaction exceeds 8%.
d) The Company's equity in the operating results of the investee companies,
is determined on the basis of the inflation adjusted audited financial
statements of such investees.
e) The financing item reflects financing income and expenses in real values
(net of inflation), inflationary erosion, over the year, of monetary
items and gains and losses from sale and valuation of marketable
securities as well as from derivative financial instruments.
f) Income taxes:
Current income taxes include payments on account during the year plus
amounts payable (or less amounts refundable) at year end. The payments on
account have been adjusted based on the change in the CPI since the date
of each payment, while the year-end balance payable or refundable is
stated without adjustment. Therefore, current tax expense also includes
the
F-8-13
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 2--REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONTINUED)
erosion of the value of the advance tax payments from the date of payment
until balance sheet date.
Regarding deferred taxes--See Note 2M.
3. Statement of shareholders' equity
A dividend that was declared and paid during the year is adjusted on the
basis of the index of the date of payment.
The erosion in the amount of dividend declared in one accounting period
but paid in a subsequent period, is set-off against the amount of
dividend declared in such subsequent period.
4. Statement of cash flows
The financial statements include a statement of cash flows. This
statement provides information on cash receipts and payments, during the
year, relating to operating, investing, and financing activities, and is
stated in terms of NIS of the end of the current period.
F. PRESENTATION IN DOLLARS FOR THE CONVENIENCE OF THE READER
For the convenience of the reader (not for US GAAP purposes), the adjusted
NIS figures of the Company's statements as at December 31, 1999 and for the year
then ended have been presented in U.S. dollars, using the representative
exchange rate of December 31, 1999 (U.S.$ 1 = NIS 4-153). The dollar amounts
presented in the financial statements should not be construed as representing
amounts receivable, payable or convertible into dollars, unless otherwise
indicated.
G. PRINCIPLES OF CONSOLIDATION
1. A jointly controlled company is consolidated in the financial statements by
the proportionate consolidation method (see Note 1B).
2. The consolidated financial statements include the proportionate part of the
items of expenses and income of the proportionately consolidated companies
based on the percentage of holding therein.
H. ALLOWANCE FOR DOUBTFUL DEBTS
The financial statements include specific allowances for doubtful debts that
reflect adequately, in Management's opinion, the loss that may result from trade
receivables the collection of which is in doubt. In determining the adequacy of
the allowances, Management based its judgment, inter alia, on its assessment of
risks, based on information available pertaining to the financial position of
the debtors, the volume of activity with them, an assessment of the value of
collateral received from them and legal counsels' estimates. Doubtful debts
which, in the opinion of Management and the Company's legal counsel, are no
longer collectible, are written off on the basis of a Management resolution.
F-8-14
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 2--REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONTINUED)
I. INVENTORY
Inventory of subscriber equipment is stated at the lower of cost or value to
the business. Cost is determined by the "first-in, first-out" method.
Part of the Company's current operations is to upgrade its customers'
cellular telephone equipment and as a result inventory also includes cellular
telephone equipment that was returned by customers.
The inventory of the Company includes spare parts it uses to repair cellular
telephone equipment of customers, in the framework of the insurance the Company
provides its customers.
J. PROPERTY AND EQUIPMENT
1. Property and equipment are stated at cost less accumulated depreciation.
2. Improvements and enhancements are added to the cost of related assets,
whereas maintenance and repairs are charged to expense as incurred.
3. Depreciation is computed on cost using the straight-line method, over the
useful lives of the assets as estimated by the Company.
Annual depreciation rates are as follows:
<TABLE>
<CAPTION>
%
--------
<S> <C>
Infrastructure equipment at sites........................... 10-20
Subscriber equipment........................................ 33-66
Motor vehicles.............................................. 15
Electronic equipment, computers and communication systems... 14-33
Office furniture and equipment.............................. 14
</TABLE>
Leasehold improvements are amortized over the term of the lease.
K. OTHER ASSETS
Beginning in 1999, the Company capitalized its net direct costs, which it
paid to a third party (subscriber acquisition costs) in respect of sales to
subscribers, who undertook to continue being customers of the Company. Any
breach of the undertaking, subjects the subscriber to the payment of a penalty
and also the capitalized asset is immediately written off to expense. These
costs are amortized over the period of the undertaking of up to 36 months.
L. PROVISION FOR LOSSES OF AN INVESTEE COMPANY
The financial statements include a provision in respect of the Company's
equity in the losses accumulated by Safe Car as reflected by the financial
statements of Safe Car, according to the equity method (see Note 1C).
F-8-15
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 2--REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONTINUED)
M. DEFERRED TAXES
Deferred taxes are created in respect of timing differences between amounts
included in the adjusted financial statements and amounts taken into
consideration for tax purposes. The major items for which deferred taxes have
been created are as follows:
- Differences between the balance of depreciable assets, as stated in the
adjusted financial statements (excluding private cars), and amounts
deductible in the future for tax purposes in respect of such assets.
- Temporary differences relating to the recognition of expenses and income
(mainly provisions for employee benefits and doubtful debts) for financial
reporting and tax purposes;
- Differences in the carrying value of assets for financial reporting and
tax purposes (mainly inventory).
The amount deferred annually is computed based on the liability method, at
tax rates which will be in effect when the deferred taxes are utilized, or the
tax benefit realized, as such are known proximate to the date the financial
statements are approved by the Company's Board of Directors.
Accounting for deferred taxes under Israeli GAAP is similar to that required
under U.S. GAAP based on the provisions of Statement No. 109 of the Financial
Accounting Standards Board ("FASB")--"Accounting for Income Taxes."
N. INCOME RECOGNITION
1. Income from mobile radio-telephone services is recognized proportionately
over the period of contract or of the rendering of the service.
2. Income arising from sales of subscriber equipment is recognized upon
delivery to the customer.
3. The income from the installment sale of subscriber equipment, is recognized,
upon delivery to the subscriber, on the basis of the present value of the
payments receivable. The financing income is recognized according to the
payment period.
O. EARNINGS PER SHARE
Earnings per share are computed in accordance with Opinion No. 55 of
the ICPAI.
P. RATES OF EXCHANGE AND LINKAGE
Assets and liabilities in, or linked to, foreign currency are stated on the
basis of the representative exchange rate as at balance sheet date as published
by Bank of Israel.
Balances linked to the CPI are stated per the contractual linkage terms of
each item.
F-8-16
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 2--REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONTINUED)
Details of the CPI and the representative exchange rate are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
DURING THE YEAR
DECEMBER 31 ENDED DECEMBER 31
------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
% % %
<S> <C> <C> <C> <C> <C> <C>
CPI (1998 average basis) in respect of December--
in points........................................ 153.1 166.3 168.5 6.99 8.62 1.34
Exchange rate of the U.S. dollar (NIS)............. 3.536 4.16 4.153 8.77 17.65 (0.17)
</TABLE>
Q. DERIVATIVE FINANCIAL INSTRUMENTS
1. The gains and losses on derivative financial instruments held as hedging
instruments for existing assets and liabilities are recognized concurrently
with the gains and losses on the hedged assets and liabilities.
2. The gains and losses on derivative financial instruments held as hedging
instruments for firm commitments are deferred, and are recognized in the
same period in which the gains and losses from the hedged transactions
are recognized.
NOTE 3--CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Cash at banks...................................... 7,049 4,832 1,163
NIS deposits (CPI-linked)*......................... 8,006 -- --
NIS deposits (U.S. dollar-linked).................. 25,147 -- --
------ ----- -----
40,202 4,832 1,163
====== ===== =====
</TABLE>
------------------------
* Linked to the CPI or bearing interest at a rate approximating the increase
in the CPI.
Deposits with banks, with an original maturity not exceeding three months
are considered to be cash equivalents.
F-8-17
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 4--TRADE RECEIVABLES, NET
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
On open accounts................................... 432,075 496,123 119,461
Post-dated checks, notes receivables and credit
cards*........................................... 6,775 10,932 2,632
------- ------- -------
438,850 507,055 122,093
Less--
Deferred interest income**......................... -- 167 40
Allowance for doubtful debts***.................... 60,588 84,107 20,251
------- ------- -------
378,262 422,781 101,802
Current maturities of long-term trade
receivables...................................... 20,640 48,579 11,697
------- ------- -------
398,902 471,360 113,499
======= ======= =======
------------------------
* Including balances of related parties in the
amount of:..................................... 1,617 1,563 376
======= ======= =======
</TABLE>
** Deferred interest income is the difference between the original amount
receivable and its present value on the date the income is recognized. The
present value is calculated on the basis of an effective interest rate of
12% p.a.
*** See Note 2 H.
NOTE 5--OTHER RECEIVABLES
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Government agencies re tax refunds................. 4,776 72,772 17,523
Deferred tax asset, net............................ 27,453 36,171 8,710
Prepaid expenses................................... 27,144 26,459 6,371
Communications suppliers and sundry................ 652 17,771 4,279
------ ------- ------
60,025 153,173 36,883
====== ======= ======
</TABLE>
F-8-18
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 6--LONG-TERM TRADE RECEIVABLES, NET
A. COMPOSITION:
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Long-term trade receivables........................ 43,578 70,089 16,877
Less deferred interest income*..................... 4,595 8,202 1,975
------ ------ ------
38,983 61,887 14,902
Allowance for doubtful accounts.................... 328 1,956 472
------ ------ ------
38,655 59,931 14,430
Less current maturities............................ 20,640 48,579 11,697
------ ------ ------
18,015 11,352 2,733
====== ====== ======
</TABLE>
------------------------
* Deferred interest income is the difference between the original amount
receivable and its present value on the date the income is recognized. The
present value is calculated on the basis of an effective interest rate of
12% p.a.
B. REPAYMENT SCHEDULE
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31
1999 1999
---- ----
NIS (UNAUDITED)
(000S) US $
(000S)
<S> <C> <C>
2001............................................ 9,943 2,394
2002............................................ 1,409 339
------ -----
11,352 2,733
====== =====
</TABLE>
F-8-19
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 7--PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------------------
FURNITURE
AND
EQUIPMENT INFRASTRUCTURE
INCLUDING (A) (B) AND
LEASEHOLD COMPUTER SUBSCRIBER
IMPROVEMENTS EQUIPMENT MOTOR VEHICLES EQUIPMENT TOTAL
------------ --------- -------------- --------- -----
NIS NIS NIS NIS NIS
(000S) (000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C> <C>
COST
Balance at beginning of year........................ 55,171 221,694 33,515 4,045,802 4,356,182
Additions........................................... 21,667 105,172 8,525 847,890 983,254
Disposals........................................... (52) (1,764) (2,373) (99,356) (103,545)
------ ------- ------ --------- ---------
Balance at end of year.............................. 76,786 325,102 39,667 4,794,336 5,235,891
------ ------- ------ --------- ---------
ACCUMULATED DEPRECIATION
Balance at beginning of year........................ 20,208 88,482 10,208 1,881,598 2,000,496
Depreciation for the year........................... 6,341 54,413 5,567 687,565 753,886
Accumulated depreciation in respect of disposals.... (36) (1,647) (1,231) (28,265) (31,179)
------ ------- ------ --------- ---------
Balance at end of year.............................. 26,513 141,248 14,544 2,540,898 2,723,203
------ ------- ------ --------- ---------
NET BOOK VALUE AS AT DECEMBER 31, 1999.............. 50,273 183,854 25,123 2,253,438 2,512,688
====== ======= ====== ========= =========
NET BOOK VALUE AS AT DECEMBER 31, 1998.............. 34,963 133,212 23,307 2,164,204 2,355,686
====== ======= ====== ========= =========
</TABLE>
------------------------------
(a) See Note 16D regarding liens on assets.
(b) The CDMA equipment was put into partial operation at the beginning of
December 1998. Until full operation of the system beginning in August 1999
the equipment was depreciated at half of the regular rate of depreciation.
F-8-20
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 7--PROPERTY AND EQUIPMENT, NET (CONTINUED)
CONVENIENCE TRANSLATION
<TABLE>
<CAPTION>
COMPANY
---------------------------------------------------------------------------
FURNITURE
AND
EQUIPMENT INFRASTRUCTURE
INCLUDING (A) (B) AND
LEASEHOLD COMPUTER SUBSCRIBER
IMPROVEMENTS EQUIPMENT MOTOR VEHICLES EQUIPMENT TOTAL
------------ --------- -------------- --------- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
US $ US $ US $ US $ US $
(000S) (000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C> <C>
COST
Balance at beginning of year.................... 13,284 53,382 8,070 974,188 1,048,924
Additions....................................... 5,217 25,324 2,053 204,163 236,757
Disposals....................................... (13) (425) (571) (23,924) (24,933)
------ ------ ----- --------- ---------
Balance at end of year.......................... 18,488 78,281 9,552 1,154,427 1,260,748
------ ------ ----- --------- ---------
ACCUMULATED DEPRECIATION
Balance at beginning of year.................... 4,866 21,306 2,458 453,069 481,699
Depreciation for the year....................... 1,527 13,102 1,340 165,559 181,528
Accumulated depreciation in respect of
disposals..................................... (9) (397) (296) (6,806) (7,508)
------ ------ ----- --------- ---------
Balance at end of year.......................... 6,384 34,011 3,502 611,822 655,719
------ ------ ----- --------- ---------
NET BOOK VALUE AS AT DECEMBER 31 1999........... 12,104 44,270 6,050 542,605 605,029
====== ====== ===== ========= =========
</TABLE>
------------------------------
(a) See Note 16D regarding liens on assets.
(b) The CDMA equipment was put into partial operation at the beginning of
December 1998. Until full operation of the system beginning in August 1999
the equipment was depreciated at half of the regular rate of depreciation.
NOTE 8--OTHER ASSETS, NET
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Capitalized costs.................................. -- 560,331 134,922
Amortization....................................... -- (100,837) (24,281)
-------- -------- -------
Balance at end of year............................. -- 459,494 110,641
======== ======== =======
</TABLE>
F-8-21
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 9--SHORT-TERM BANK CREDIT
<TABLE>
<CAPTION>
COMPANY
-----------------------------------------------------------------
CONVENIENCE
TRANSLATION
------------
LINKAGE RATE OF DECEMBER 31 DECEMBER 31 DECEMBER 31
BASIS INTEREST 1998 1999 1999
----- -------- ---- ---- ----
% NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C>
Short-term loans............... Unlinked 10.95 -- 542,012 130,511
Current maturities of long-term
bank loans................... 94,834 136,065 32,763
------ ------- -------
94,834 678,077 163,274
====== ======= =======
</TABLE>
NOTE 10--TRADE PAYABLES
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
On open account (unlinked)......................... 14,212 73,970 17,811
On open account (linked to the dollar)............. 602 56,915 13,704
Notes and post-dated checks payable................ 36,098 13,782 3,319
------- ------- ------
50,912 144,667 34,834
======= ======= ======
</TABLE>
F-8-22
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 11--LIABILITIES TO INTERESTED AND RELATED PARTIES
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Trade payables (unlinked).......................... 22,902 6,838 1,647
Trade payables (dollar-linked)*.................... 172,187 135,808 32,701
Notes and post-dated checks payable and other
liabilities...................................... 4,367 50 12
------- ------- -------
199,456 142,696 34,360
======= ======= =======
</TABLE>
------------------------
* See Note 24 regarding linkage bases.
NOTE 12--OTHER PAYABLES
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Deferred income and obligations to customers....... 16,251 32,582 7,846
Salaries........................................... 41,330 25,173 6,061
Payroll taxes and withholdings remittable.......... 9,598 8,198 1,974
Distributors and advertising....................... 22,933 16,479 3,968
Maintenance, rent and insurance payable............ 11,056 9,460 2,278
Accrued interest................................... 8,061 5,821 1,402
Other credit balances.............................. 23,933 21,017 5,060
------- ------- -------
133,162 118,730 28,589
======= ======= =======
</TABLE>
F-8-23
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 13--LONG-TERM BANK CREDIT
A. COMPOSITION
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------------------------------------------
CONVENIENCE
COMPANY TRANSLATION
--------------------------- ------------
LINKAGE RATE OF DECEMBER 31 DECEMBER 31 DECEMBER 31
BASIS INTEREST 1998 1999 1999
----- -------- ---- ---- ----
% NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C>
Bank loans--................. CPI 3.6--5.75 385,202 663,804 159,837
US$ Libor + 0.25--0.5 274,033 207,651 50,000
------- ------- -------
659,235 871,455 209,837
Less--current maturities..... 94,834 136,065 32,763
------- ------- -------
564,401 735,390 177,074
======= ======= =======
</TABLE>
See Note 16D regarding liens.
B. REPAYMENT SCHEDULE
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31
1999 1999
---- ----
NIS (UNAUDITED)
(000S) US $
(000S)
<S> <C> <C>
2001............................................ 197,770 47,621
2002............................................ 143,597 34,577
2003............................................ 113,961 27,440
2004............................................ 73,123 17,607
2005 and thereafter............................. 206,939 49,829
------- -------
735,390 177,074
======= =======
</TABLE>
NOTE 14-- SEVERANCE PAY FUNDINGS, NET (LIABILITY IN RESPECT OF EMPLOYEE
SEVERANCE BENEFITS, NET)
The liability of the Company to pay pensions, retirement grants and
severance pay to its employees, is covered mainly by regular deposits (in the
name of each employee) in recognized pension and severance pay funds, and/or by
payments of premiums to insurance companies. Such fundings have not been
included in the balance sheet since they are not under the Company's control or
management.
The liability for employee severance benefits included in the balance sheet
represents the outstanding liability not covered by deposits and/or the value of
insurance policies as stated above. In
F-8-24
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 14-- SEVERANCE PAY FUNDINGS, NET (LIABILITY IN RESPECT OF EMPLOYEE
SEVERANCE BENEFITS, NET) (CONTINUED)
respect of this outstanding liability, the Company deposits funds under its own
name with a recognized severance pay fund.
The outstanding liability and amounts funded as at balance sheet date are as
follows:
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Amounts funded..................................... 18,241 19,548 4,707
Less--liability for employee severance benefits.... 18,848 16,066 3,869
------ ------ -----
(607) 3,482 838
====== ====== =====
</TABLE>
NOTE 15--INCOME TAX
A. TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments) 1985, in effect since the 1985
tax year, provides for the measurement of business results for tax purposes on
an inflation adjusted basis. The various adjustments required by the said law
are intended to bring about taxation of earnings on a real (non-inflationary)
basis. Nevertheless, adjustments for inflation as prescribed by the tax laws are
not always identical to the adjustments as calculated for accounting reporting
purposes in accordance with the opinions issued by the ICPAI. As a result, there
are differences between earnings adjusted for financial reporting purposes and
those adjusted for tax purposes.
For information relating to deferred taxes in respect of such
differences--see Notes 15B and 15C below.
F-8-25
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 15--INCOME TAX (CONTINUED)
B. DEFERRED TAXES
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
IN RESPECT OF CURRENT BALANCE SHEET ITEMS: *
Inventory of subscriber equipment........................... (536) (257) (62)
Timing differences relating to recognition of expenses
(mainly provisions for vacation pay and doubtful debts)... 27,989 36,428 8,772
------- ------- ------
Deferred tax asset.......................................... 27,453 36,171 8,710
======= ======= ======
IN RESPECT OF NON-CURRENT BALANCE SHEET ITEMS:
Property and equipment...................................... (4,876) (36,090) (8,690)
Other assets................................................ -- (1,383) (333)
Timing differences in recognition of expenses (mainly from
other assets and liability for employee severance
benefits)................................................. 688 (1,253) (302)
------- ------- ------
Deferred tax liability...................................... (4,188) (38,726) (9,325)
======= ======= ======
</TABLE>
C. INCOME TAX EXPENSE INCLUDED IN STATEMENT OF INCOME
<TABLE>
<CAPTION>
COMPANY
------------
CONVENIENCE
CONSOLIDATED COMPANY TRANSLATION
--------------------------- ------------------------------------------ ------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S)
US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
Current taxes......................... 171,466 178,008 171,466 178,008 9,488 2,285
Deferred taxes, net................... (27,670) (20,192) (27,670) (20,192) 25,820 6,217
Taxes in respect of prior years,
net................................. (933) -- (933) -- 23 5
------- ------- ------- ------- ------ -----
142,863 157,816 142,863 157,816 35,331 8,507
======= ======= ======= ======= ====== =====
</TABLE>
F-8-26
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 15--INCOME TAX (CONTINUED)
D. RECONCILIATION OF THEORETICAL TAX ON ADJUSTED PRE-TAX INCOME TO TAX EXPENSE
INCLUDED IN THE STATEMENT OF INCOME:
<TABLE>
<CAPTION>
COMPANY
------------
CONVENIENCE
CONSOLIDATED COMPANY TRANSLATION
--------------------------- ------------------------------------------ ------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
Pre-tax earnings for the year per the
statement of income................... 381,647 407,701 382,249 408,829 78,784 18,970
======= ======= ======= ======= ====== ======
Income tax based on statutory tax rate
(36%)................................. 137,393 146,772 137,610 147,178 28,362 6,829
Increase (decrease) in tax liability
resulting from:
Non-deductible expenses................. 2,891 881 2,849 881 2,650 638
Exempt income........................... (823) (894) (823) (894) (438) (105)
Differences in depreciation and
amortization.......................... 191 1,625 190 1,622 3,056 736
Erosion of advance tax payments......... 3,708 7,495 3,709 7,498 865 208
Differences between the inflationary
deduction for tax purposes and for
financial reporting................... 261 1,531 261 1,531 813 196
Loss of a proportionately consolidated
company for which no deferred taxes
were created.......................... 175 406 -- -- -- --
Taxes in respect of prior years,
net................................... (933) -- (933) -- 23 5
------- ------- ------- ------- ------ ------
Income tax per the statement of
income................................ 142,863 157,816 142,863 157,816 35,331 8,507
======= ======= ======= ======= ====== ======
</TABLE>
E. TAX ASSESSMENTS
The Company has received final tax assessments for all years through the
year ended December 31, 1993.
In addition, the Company received an assessment for the year ended
December 31, 1994, demanding additional taxes of NIS 23 million (including
interest and linkage increments) in excess of the amount provided on its books
for such year.
The Company, in reliance on the opinion of its legal advisors, is contesting
the demand of the Tax Authorities.
The Company has not made a provision on its books in connection with the
additional amount of taxes demanded by the aforesaid assessment.
F-8-27
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 16--CONTINGENT LIABILITIES, COMMITMENTS AND LIENS
A. ROYALTIES
1. The State of Israel
The MRTS License (see Note 1A above) provides for the payment by the
Company of royalties to the State of Israel at the rate of 8% on income
subject to royalties on a cumulative basis.
The Company has received a notice from the State demanding the payment of
royalties also in respect of the period prior to the granting of the
license. Management, based on the advice of its external legal counsel,
is of the opinion that the Company is not liable to pay the full amount
of such royalties. Nevertheless, the Company has made a prudential
provision in respect of such royalties. The amount is included under
liabilities in the item "Taxes and other statutory payments".
In 1999 this provision was decreased by NIS 22 million in light of a
reevaluation of the management of the Company, based on an updated
opinion of the Company's external legal counsel.
2. Bezeq
Section 22 of the agreement between Bezeq and Motorola dated October 10,
1994, provides for the payment by the Company of royalties to Bezeq at
the rate of 3% of revenues from cellular telephone services, without VAT.
Royalties are payable during a period of twelve years beginning
January 1, 1994, excluding the years 1995 and 1996.
On September 4, 1997 the Company's Board of Directors decided that
royalties in an aggregate amount of $19 million will be paid to Bezeq in
respect of 1995 and 1996. The royalty expenses have been paid and
included in the financial statements for 1997.
F-8-28
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 16--CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (CONTINUED)
B. COMMITMENTS TO PURCHASE PROPERTY AND EQUIPMENT, INVENTORY AND SERVICES*
As part of the Company's current operations it submits orders for the
purchase of assets and services from the indicated sources:
<TABLE>
<CAPTION>
COMPANY
------------------------------------------
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT**
Related party...................................... 55,133 41,108 9,898
Others............................................. 52,793 107,285 25,833
------- ------- ------
107,926 148,393 35,731
======= ======= ======
INVENTORY OF SUBSCRIBER EQUIPMENT
Related party...................................... 81,872 173,326 41,735
Others............................................. 89,886 211,894 51,022
------- ------- ------
171,758 385,220 92,757
======= ======= ======
SERVICES
Interested parties................................. 834 -- --
Others............................................. 8,643 25,562 6,155
------- ------- ------
9,477 25,562 6,155
======= ======= ======
</TABLE>
------------------------
* See Note 24 regarding linkage bases.
** Except for that stated in Notes 16G and 16H.
C. COMMITMENTS RELATING TO RENTAL AGREEMENTS
The Company has commitments to rent space for various periods until 2009,
(including optional extension periods). These leases ensure the long-term usage
by the Company of the buildings and infrastructure sites it occupies.
The rental fees are for the most part linked to the dollar.
F-8-29
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 16--CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (CONTINUED)
Estimated future rental payments (computed at rental rates in effect at
December 31, 1999) are as follows:
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
-----------
NIS (UNAUDITED)
(000S) US $
(000S)
<S> <C> <C>
2000.................................................. 54,992 13,242
2001.................................................. 72,756 17,519
2002.................................................. 70,133 16,887
2003.................................................. 66,755 16,074
2004 and thereafter................................... 247,986 59,712
------- -------
512,622 123,434
======= =======
</TABLE>
D. LIENS
1. Bank loans are guaranteed by an irrevocable commitment to the banks, by
which the Company has created a negative pledge in favor of the banks.
This commitment includes, inter alia, an undertaking by the Company not to
pledge, in any manner, by either a floating or fixed lien, of any type or
degree, its assets (as existing from time to time), in whole or in part, in
favor of any third party, without prior written consent of the banks. In
addition, the commitment includes an undertaking that the liabilities of the
Company will not exceed a sum equal to 1.5 times the shareholders' equity of
the Company.
At the date of the financial statements, the Company is in compliance with
the terms of its commitment to the banks.
2. Under the MRTS license, the Company may not sell, lease or mortgage any
asset used for mobile radio-telephone services without the consent of the
Minister of Communications, other than:
a) Mortgaging any of the licensed assets in favor of a recognized banking
institution operating in Israel, for the purpose of receiving bank
credit, providing that it informs the Ministry of Communications with
regard to the lien it intends to create and that a provision included in
the mortgage agreement guarantees that under no circumstances will the
foreclosure of the lien by the banking institution impair services
provided under the license.
b) Selling equipment in the framework of an equipment upgrade, including
the trade-in of equipment.
F-8-30
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 16--CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (CONTINUED)
E. GUARANTEES
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1999 1999
---- ---- ----
NIS NIS (UNAUDITED)
(000S) (000S) US $
(000S)
<S> <C> <C> <C>
Guarantee securing liabilities of an investee
company to banks................................. -- 7,186 1,730
Guarantees in respect of a joint venture*.......... 6,498 3,726 897
Guarantees to others............................... 592 656 158
----- ------ -----
7,090 11,568 2,785
===== ====== =====
</TABLE>
------------------------
* In December 1998 a joint venture was agreed upon with a communications
company for the renting out of cellular telephones and related equipment to
customers while they are abroad. For the purpose of carrying out the
transaction guarantees were given to communication suppliers abroad to
secure the payments of the company with which the agreement was signed.
F. LAWSUITS
1. A class action was filed in the District Court (civil Claim 2738/99, Shaabi
Shimon and others vs. Pelephone) under the Consumer's Protection Law--1981
and the Restrictive Trade Practices Law--1988. The basis of the action is an
allegation of the misuse of the Company's status as a monopoly and its
misleading of the consumers and its taking advantage of their vulnerability.
If the suit is certified as a class action the amount of the claim is
estimated to be NIS 16 billion.
The Company petitioned the Court to summarily dismiss the suit, maintaining
that it is devoid of any basis. In the opinion of the management of the
Company, based on the opinion of its legal counsel and on an outside
opinion, the prospect of the suit succeeding are poor. Therefore, no
provision in respect thereto was included in the financial statements.
2. A class action was filed with the District Court (3352/87 Noam Kedem vs.
Bezeq, Cellcom and Pelephone). If the suit is certified as a class action,
the amount of the claim is estimated at NIS 2 billion. The basis of the
action is a claim that the Company received payments for air-time for
services that do not require use of the wireless system.
In the opinion of the management of the Company, based on the opinion of its
legal counsel and on an outside opinion, the chances are good that the
request to certify the class action will be dismissed. Therefore, no
provision in respect thereto was included in the financial statements.
3. There are a number of additional claims regarding which the prospects of
success are low or the amounts involved are insignificant and, therefore, no
provision in respect thereto has been included in the financial statements.
F-8-31
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 16--CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (CONTINUED)
G. AGREEMENT FOR THE PURCHASE OF CDMA EQUIPMENT
In December 1999, the Company signed a letter of intent for the purchase of
additional CDMA infrastructure equipment from Motorola, the parent company, at a
price of $122 million.
H. THE BORROWING OF INFRASTRUCTURE EQUIPMENT FROM MOTOROLA ISRAEL
In accordance with an agreement with Motorola, the parent company, Motorola
lent the Company CDMA digital infrastructure equipment. The agreement provides
that at the end of the loan period, the degree to which the system and the
equipment which was borrowed, met a number of tests will be evaluated, as a
precondition to the purchase of the equipment. Subsequent to balance sheet date,
the Company notified Motorola that the equipment had successfully met the
criteria which had been set, and that therefore the Company intends to purchase
such equipment. The price of the anticipated purchase is about $19 million.
Since the equipment was owned by Motorola during the current year and not by
the Company, the Company did not record it as an asset on its books, nor did it
recognize any depreciation expense in respect thereto.
I. GENERAL LICENSE TO PROVIDE CELLULAR RADIO TELEPHONE SERVICES (MRTS)
The Ministry of Communications is considering the revision of the general
license for providing MRTS services which it had granted to the Company. The
proposed revision includes a change in the manner of calculating the tariffs for
incoming calls. If such change is implemented, it may have a significant effect
on the Company's future operating results.
The Company's Management opposes the proposed change and is holding
discussions, on this matter, with the Ministry of Communications.
J. ARRANGEMENTS FOR CHARGING AND COLLECTION BY BEZEQ
A. During the current year, the Company was approached by Bezeq in regard to a
change, which it proposes, in the arrangement under which Bezeq collects
certain charges from customers, on behalf of the Company. According to the
proposed revision in the existing arrangement, Bezeq will transfer to the
Company, only those amounts which it actually collects, less a collection
commission of 2% of every amount which it charges. This may have a
significant effect on the Company's future operating results.
The Company's Management opposes the proposed change and is holding
discussions, on this matter, with Bezeq.
B. During the current year, the Company was contacted by Bezeq, which requested
an increase in the rent charges for sites used by Pelephone and its
switching equipment which are located in facilities which it owns. The
Company has rejected the request and has suggested to Bezeq that the matter
be negotiated in order that an agreement be reached regarding future
rent charges.
F-8-32
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 17--COST OF CELLULAR PHONE SERVICES, SALES AND SERVICES
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
CONSOLIDATED COMPANY TRANSLATION
--------------------- --------------------------------- -----------
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
Usage charges and royalties............................ 518,619 604,245 518,619 604,245 645,909 155,528
Royalties in respect of prior years.................... 74,114 -- 74,114 -- -- --
Depreciation........................................... 590,880 661,897 590,880 661,897 716,325 172,483
Amortization of subscriber acquisition costs........... -- -- -- -- 94,715 22,807
Purchase of subscriber equipment, net.................. 323,381 397,680 323,381 397,680 287,606 69,253
Rent and maintenance................................... 90,812 117,649 90,812 117,649 137,394 33,083
Service and insurance.................................. 92,784 134,550 92,784 134,550 169,292 40,764
Salaries and related benefits.......................... 123,825 164,027 123,825 164,027 193,744 46,652
Sundry................................................. 67,958 96,790 67,958 96,790 122,058 29,390
--------- --------- --------- --------- --------- -------
1,882,373 2,176,838 1,882,373 2,176,838 2,367,043 569,960
========= ========= ========= ========= ========= =======
</TABLE>
NOTE 18--SELLING AND MARKETING EXPENSES
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
CONSOLIDATED COMPANY TRANSLATION
--------------------- --------------------------------- -----------
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
Salaries and related benefits.......................... 45,939 47,841 45,865 47,294 87,608 21,095
Doubtful and bad debts................................. 26,142 18,118 26,142 18,118 27,134 6,534
Advertising and marketing.............................. 52,886 64,424 52,838 64,424 91,856 22,118
Marketing commission................................... 50,743 63,858 50,743 63,858 32,510 7,828
Depreciation........................................... 1,847 1,631 1,844 1,631 1,955 471
Legal expenses and fees................................ 8,836 8,410 8,836 8,410 7,577 1,824
Sundry................................................. 11,986 26,183 11,981 26,183 31,758 7,647
--------- --------- --------- --------- --------- -------
198,379 230,465 198,249 229,918 280,398 67,517
========= ========= ========= ========= ========= =======
</TABLE>
F-8-33
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 19--GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
CONSOLIDATED COMPANY TRANSLATION
------------------- ------------------------------ -----------
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
Salaries and related benefits............................... 33,639 37,512 33,451 36,915 48,246 11,617
Rent, office equipment supplies and maintenance............. 41,600 49,512 41,476 49,512 55,436 13,349
Depreciation................................................ 26,751 31,053 26,738 31,053 35,606 8,574
Consultancy services........................................ 4,861 7,358 4,861 7,358 9,682 2,331
Insurance................................................... 6,315 5,767 6,315 5,767 4,129 994
Training and recruitment of employees....................... 6,942 8,539 6,942 8,539 8,171 1,968
Sundry...................................................... 18,821 21,836 18,671 21,807 22,407 5,395
------- ------- ------- ------- ------- ------
138,929 161,577 138,454 160,951 183,677 44,228
======= ======= ======= ======= ======= ======
</TABLE>
NOTE 20--FINANCING EXPENSES, NET
<TABLE>
<CAPTION>
COMPANY
-----------
CONVENIENCE
CONSOLIDATED COMPANY TRANSLATION
------------------- ------------------------------ -----------
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1997 1998 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
NIS NIS NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C> <C> <C>
Interest on long-term bank loans............................ 34,563 49,639 34,563 49,639 37,827 9,108
Interest on short-term bank credit.......................... -- -- -- -- 29,944 7,210
Other financing items (including erosion of monetary
items).................................................... 605 (20,098) 608 (20,053) (2,026) (488)
------ ------- ------ ------- ------ ------
35,168 29,541 35,171 29,586 65,745 15,830
====== ======= ====== ======= ====== ======
</TABLE>
F-8-34
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 21--PER SHARE EARNINGS
EARNINGS AND NUMBER OF SHARES USED IN COMPUTING THE PER SHARE EARNINGS
A. IN NIS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------------------- -------------------- --------------------
BASIC NUMBER BASIC NUMBER BASIC NUMBER
EARNINGS OF SHARES EARNINGS OF SHARES EARNINGS OF SHARES
-------- --------- -------- --------- -------- ---------
NIS (000S) NIS (000S) NIS (000S)
(000S) (000S) (000S)
<S> <C> <C> <C> <C> <C>
238,784 302,460 249,885 302,460 39,475 302,460
======= ======= ======= ======= ======= =======
</TABLE>
B. CONVENIENCE TRANSLATION
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------
BASIC NUMBER
EARNINGS OF SHARES
-------- ---------
(UNAUDITED) (UNAUDITED)
US $ (000S)
(000S)
<S> <C> <C> <C> <C> <C>
9,505 302,460
======= =======
</TABLE>
NOTE 22-- TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES
A. SIGNIFICANT AMOUNTS OF INCOME AND EXPENSES IN RESPECT OF INTERESTED AND
RELATED PARTIES
The Company conducts transactions with interested and related parties. In
Management's opinion, the terms of such transactions are identical with the
terms available from unrelated third parties.
F-8-35
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 22-- TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES
(CONTINUED)
Such transactions include, inter-alia, cellular phone services including
incoming telephone calls, purchase of transmission services, acquisition and
maintenance of infrastructure and subscriber equipment and other general and
administrative services.
<TABLE>
<CAPTION>
COMPANY
-----------
FOR THE YEAR ENDED CONVENIENCE
DECEMBER 31 TRANSLATION
------------------------------ -----------
1997 1998 1999 1999
---- ---- ---- ----
NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C>
Income from cellular telephone services, sales and other
services............................................... 770,378 910,181 782,138 188,331
Expenses:
Purchase of telecommunication services (including
royalties)............................................. 423,350 405,130 343,860 82,798
Maintaining and servicing the mobile radio telephone
system and subscriber equipment........................ 108,710 105,402 81,106 19,529
Selling and marketing.................................... 3,380 2,870 4,958 1,194
Expense refund (mainly advertising expenses)............. (5,561) (9,786) (13,549) (3,262)
Directors fees........................................... 415 133 126 30
General and administrative............................... 12,418 9,921 10,855 2,614
Financing income......................................... -- (9,045) -- --
</TABLE>
B. MATERIAL BALANCES AND TRANSACTIONS WITH INTERESTED AND RELATED PARTIES
1. Balances of related parties are presented in detail in the financial
statements and accompanying notes.
2. Material transactions with interested and related parties:
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------
CONVENIENCE
TRANSLATION
-----------
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1998 1999 1999
---- ---- ---- ----
NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C>
Purchase of subscriber equipment............ 309,992 511,884 481,391 115,914
Purchase of infrastructure equipment........ 441,828 779,833 537,956 129,534
</TABLE>
3. The highest balance of current debts of an interested party during 1999
amounted to NIS 250,502 thousand ($ 60,318 thousand) (1998--NIS
120,851 thousand).
F-8-36
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 22-- TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES
(CONTINUED)
4. A related party's balance, included in current assets, represents a current
account of one of the shareholders of the Company. The balance relates to
income from incoming telephone calls less the cost of the acquisition of
transmission services, royalties, access fees and other expenses.
See Note 16B, 16G and 16H for details of commitments.
NOTE 23--SUBSEQUENT EVENTS
1. On March 16, 2000, an agreement was signed between the Company and
Sunycom Ltd. for the set up of a company named Gonext Ltd.
(hereinafter--"Gonext") which will be engaged, mainly, in the establishment
of a portal with a connection for a cellular interface. Pelephone is to hold
51% of the shares of Gonext.
2. On March 22, 2000 a class action lawsuit has been filed with the District
Court of Tel-Aviv (T.A. 1502/00 Goldshlagger et.al. v. Cellcom, Partner and
Pelephone) in connection with VAT charges in the Free Trade Zone in Eilat.
Should the suit be recognized as a class action, the amount claimed is
estimated at approximately NIS 34 million. At this stage, the Company and
its legal advisors are unable to express an opinion regarding the claim as
they are still studying the matter. Therefore, no provision in respect
thereto has been included in the financial statements.
F-8-37
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 24--ASSETS AND LIABILITIES CLASSIFIED BY LINKAGE BASIS
A. COMPANY--DECEMBER 31, 1999
<TABLE>
<CAPTION>
IN ISRAELI CURRENCY IN FOREIGN
--------------------- CURRENCY NON-MONETARY
UNLINKED *OTHERS (US $) ITEMS TOTAL
-------- ------- ------ ----- -----
NIS NIS NIS NIS NIS
(000S) (000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................................... 3,069 -- 1,763 -- 4,832
Trade receivables........................................... 471,360 -- -- -- 471,360
Interested party............................................ 95,305 -- -- -- 95,305
Other receivables........................................... 17,563 72,772 208 62,630 153,173
Inventory................................................... -- -- -- 206,079 206,079
Long-term trade receivables, net............................ 11,352 -- -- -- 11,352
Severance pay fundings net of liability, for severance
benefits.................................................. -- 3,482 -- -- 3,482
Property and equipment, net................................. -- -- -- 2,512,688 2,512,688
Other assets, net........................................... -- -- -- 459,494 459,494
------- ---------- ---------- --------- ---------
Total assets................................................ 598,649 76,254 1,971 3,240,891 3,917,765
------- ---------- ---------- --------- ---------
Short-term bank credit...................................... -- 642,777 35,300 -- 678,077
Trade payables.............................................. 87,752 -- 56,915 -- 144,667
Taxes and other statutory payments.......................... 11,735 90,308 -- -- 102,043
Liabilities to interested and related parties............... 6,888 -- ** 135,808 -- 142,696
Other payables.............................................. 80,327 3,727 2,094 32,582 118,730
Provision for losses of an investee company................. -- -- -- 3,978 3,978
Long-term bank credit....................................... -- 563,039 172,351 -- 735,390
Deferred taxes.............................................. -- -- -- 38,726 38,726
------- ---------- ---------- --------- ---------
Total liabilities........................................... 186,702 1,299,851 402,468 75,286 1,964,307
------- ---------- ---------- --------- ---------
Difference.................................................. 411,947 (1,223,597) (400,497) 3,165,605 1,953,458
======= ========== ========== ========= =========
Commitments to purchase property, inventory, subscriber
equipment and services.................................... 130,576 266,072 1,181,815 -- 1,578,463
======= ========== ========== ========= =========
</TABLE>
------------------------------
* Linked to the CPI or bearing interest at a rate proximate to the rate of
increase in the CPI.
** Including a balance in the amount of NIS 34 million which is linked to the
dollar when the change in the dollar exchange rate from the date of the
invoice until the date of payment is higher than 2.5%.
A. As at December 31, 1999 the Company had an excess of non-monetary assets over
shareholders' equity of NIS 1,212 million, as against an excess of
CPI-linked liabilities or liabilities bearing interest at a rate close to
the rate of the increase in the CPI of NIS 1,224 million.
B. As at December 31, 1999 the Company had an excess of dollar liabilities of
NIS 400 million. These liabilities include amounts due to interested parties
of NIS 92 million, in respect of property and equipment purchases.
F-8-38
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 24--ASSETS AND LIABILITIES CLASSIFIED BY LINKAGE BASIS (CONTINUED)
B. CONVENIENCE TRANSLATION INTO DOLLARS
<TABLE>
<CAPTION>
IN ISRAELI CURRENCY IN FOREIGN
------------------------- CURRENCY NON-MONETARY
UNLINKED OTHER* (US$) ITEMS TOTAL
-------- ------ ----- ----- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
US $ US $ US $ US $ US $
(000S) (000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.............................. 739 -- 424 -- 1,163
Trade receivables...................................... 113,499 -- -- -- 113,499
Interested party....................................... 22,948 -- -- -- 22,948
Other receivables...................................... 4,229 17,523 50 15,081 36,883
Inventory.............................................. -- -- -- 49,623 49,623
Long-term trade receivables, net....................... 2,733 -- -- -- 2,733
Severance pay fundings net of liability for severance
benefits............................................. -- 838 -- -- 838
Property and equipment, net............................ -- -- -- 605,029 605,029
Other assets, net...................................... -- -- -- 110,641 110,641
------- -------- --------- ------- -------
Total assets........................................... 144,148 18,361 474 780,374 943,357
------- -------- --------- ------- -------
Short-term bank credit................................. -- 154,774 8,500 -- 163,274
Trade payables......................................... 21,129 -- 13,705 -- 34,834
Taxes and other statutory payments..................... 2,825 21,746 -- -- 24,571
Liabilities to interested and related parties.......... 1,659 -- ** 32,701 -- 34,360
Other payables......................................... 19,342 897 504 7,846 28,589
Provision for losses of an investee company............ -- -- -- 958 958
Long-term bank credit.................................. -- 135,574 41,500 -- 177,074
Deferred taxes......................................... -- -- -- 9,325 9,325
------- -------- --------- ------- -------
Total liabilities...................................... 44,955 312,991 96,910 18,129 472,985
------- -------- --------- ------- -------
Difference............................................. 99,193 (294,630) (96,436) 762,245 470,372
======= ======== ========= ======= =======
Commitments to purchase property, inventory subscriber
equipment and services............................... 31,441 64,067 284,569 -- 380,077
======= ======== ========= ======= =======
</TABLE>
------------------------------
* Linked to the CPI or bearing interest at a rate proximate to the rate of
increase in the CPI.
** Including a balance in the amount of U.S.$ 8 million which is linked to the
dollar when the change in the dollar exchange rate from the date of the
invoice until the date of payment is higher than 2.5%
A. As at December 31, 1999 the Company had an excess of non-monetary assets over
shareholders' equity of U.S. $ 292 million, as against an excess of
CPI-linked liabilities or liabilities bearing interest at a rate close to
the rate of the increase in the CPI of U.S. $ 295 million.
F-8-39
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 24--ASSETS AND LIABILITIES CLASSIFIED BY LINKAGE BASIS (CONTINUED)
B. As at December 31, 1999 the Company had an excess of dollar liabilities of
U.S. $96 million. These liabilities include amounts due to interested
parties of U.S. $22 million, in respect of property and equipment purchases.
C. COMPANY--DECEMBER 31, 1998
<TABLE>
<CAPTION>
IN ISRAELI
CURRENCY IN FOREIGN
------------------- CURRENCY NON-MONETARY
UNLINKED OTHER* (US$) ITEMS TOTAL
-------- ------ ----- ----- -----
NIS NIS NIS NIS NIS
(000S) (000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................................... 7,044 8,006 25,152 -- 40,202
Trade receivables........................................... 398,902 -- -- -- 398,902
Interested party............................................ 100,292 -- -- -- 100,292
Other receivables........................................... 153 4,776 500 54,596 60,025
Inventory................................................... -- -- -- 97,558 97,558
Long-term trade receivables, net............................ 18,015 -- -- -- 18,015
Property and equipment, net................................. -- -- -- 2,355,686 2,355,686
------- -------- -------- --------- ---------
Total assets................................................ 524,406 12,782 25,652 2,507,840 3,070,680
------- -------- -------- --------- ---------
Current maturities of long-term liabilities................. -- 31,596 63,238 -- 94,834
Trade payables.............................................. 50,310 -- 602 -- 50,912
Taxes and other statutory payments.......................... 4,401 104,736 -- -- 109,137
Liabilities to interested and related parties............... 27,270 -- 172,186 -- 199,456
Other payables.............................................. 106,978 1,933 8,000 16,251 133,162
Long-term bank credit....................................... -- 353,606 210,795 -- 564,401
Liability in respect of employee severance benefits, net.... 607 -- -- -- 607
Deferred taxes.............................................. -- -- -- 4,188 4,188
------- -------- -------- --------- ---------
Total liabilities........................................... 189,566 491,871 454,821 20,439 1,156,697
------- -------- -------- --------- ---------
Difference.................................................. 334,840 (479,089) (429,169) 2,487,401 1,913,983
======= ======== ======== ========= =========
Commitments to purchase property,inventory, subscriber
equipment and services.................................... 113,317 206,349 403,565 -- 723,231
======= ======== ======== ========= =========
</TABLE>
------------------------------
* Linked to the CPI or bearing interest at a rate proximate to the rate of the
increase in the CPI.
** Including a balance in the amount of NIS 77 million which is linked to the
dollar when the change in the dollar exchange rate from the date of the
invoice until the date of payment, is higher than 2.5%
A. As at December 31, 1998 the Company had an excess of non-monetary assets over
shareholders' equity of NIS 573 million, as against an excess of CPI-linked
liabilities or liabilities bearing interest at a rate close to the rate of
the increase in the CPI of NIS 479 million.
B. As at December 31, 1998 the Company had an excess of dollar liabilities of
NIS 429 million. These liabilities include amounts due to interested parties
of NIS 94 million, in respect of property and equipment purchases.
F-8-40
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 25--DATA OF THE COMPANY IN NOMINAL HISTORICAL VALUES
A. BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1999
---- ----
NIS NIS
(000S) (000S)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... 39,669 4,832
Trade receivables, net...................................... 393,612 471,360
Interested party............................................ 98,962 95,305
Other receivables........................................... 58,568 153,225
Inventory................................................... 94,794 205,365
--------- ---------
TOTAL CURRENT ASSETS........................................ 685,605 930,087
--------- ---------
LONG-TERM TRADE RECEIVABLES, NET............................ 17,776 11,352
--------- ---------
SEVERANCE PAY FUNDINGS, NET................................. -- 3,482
--------- ---------
PROPERTY AND EQUIPMENT, NET................................. 2,060,684 2,321,656
--------- ---------
OTHER ASSETS, NET........................................... -- 455,653
--------- ---------
2,764,065 3,722,230
========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1999
---- ----
NIS NIS
(000S) (000S)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank credit...................................... 93,577 678,077
Trade payables.............................................. 50,237 144,667
Taxes and other statutory payments.......................... 107,689 102,043
Liabilities to interested and related parties............... 196,812 142,696
Other payables.............................................. 131,396 118,730
--------- ---------
579,711 1,186,213
--------- ---------
PROVISIONS FOR LOSSES OF AN INVESTEE COMPANY................ -- 3,978
--------- ---------
LONG-TERM LIABILITIES
Long-term bank credit....................................... 556,917 735,390
Liability in respect of employee severance benefits, net.... 599 --
Deferred taxes.............................................. 5,832 37,594
--------- ---------
563,348 772,984
--------- ---------
TOTAL LIABILITIES........................................... 1,143,059 1,963,175
--------- ---------
SHAREHOLDERS' EQUITY........................................ 1,621,006 1,759,055
--------- ---------
2,764,065 3,722,230
========= =========
</TABLE>
F-8-41
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 25--DATA OF THE COMPANY IN NOMINAL HISTORICAL VALUES (CONTINUED)
B. STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1998 1999
---- ---- ----
NIS NIS NIS
(000S) (000S) (000S)
<S> <C> <C> <C>
Income from cellular phone services, sales
and other services......................... 2,348,831 2,826,026 2,937,049
Cost of cellular phone services, sales and
other services............................. 1,582,292 1,928,532 2,230,695
--------- --------- ---------
GROSS PROFIT................................. 766,539 897,494 706,354
Selling and marketing expenses............... 178,504 218,892 277,779
General and administrative expenses.......... 119,558 146,431 176,375
--------- --------- ---------
OPERATING INCOME............................. 468,477 532,171 252,200
Financing expenses, net...................... 54,175 58,732 80,227
Other expenses (income)...................... (170) 4,587 (1,166)
--------- --------- ---------
PROFIT BEFORE INCOME TAX..................... 414,472 468,852 173,139
Income tax................................... 129,127 147,657 31,112
--------- --------- ---------
Profit before Company's equity in losses of
investees companies........................ 285,345 321,195 142,027
Company's equity in losses of investee
companies.................................. 546 1,027 3,978
--------- --------- ---------
NET EARNINGS................................. 284,799 320,168 138,049
========= ========= =========
</TABLE>
F-8-42
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 25--DATA OF THE COMPANY IN NOMINAL HISTORICAL VALUES (CONTINUED)
C. STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARE SHARE RETAINED
CAPITAL PREMIUM EARNINGS TOTAL
------- ------- -------- -----
NIS NIS NIS NIS
(000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C>
BALANCE AS AT JANUARY 1, 1997... 302,460 80,530 633,049 1,016,039
Changes during 1997:
Net earnings.................... -- -- 284,799 284,799
------- ------ --------- ---------
BALANCE AS AT DECEMBER 31,
1998.......................... 302,460 80,530 917,848 1,300,838
Changes during 1998:
Net earnings.................... -- -- 320,168 320,168
------- ------ --------- ---------
BALANCE AS AT DECEMBER 31,
1998.......................... 302,460 80,530 1,238,016 1,621,006
Changes during 1999:
Net loss........................ -- -- 138,049 138,049
------- ------ --------- ---------
BALANCE AS AT DECEMBER 31,
1999.......................... 302,460 80,530 1,376,065 1,759,055
======= ====== ========= =========
</TABLE>
D. SHARE CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31,
1998 AND 1999
-------------------
AUTHORIZED,
ISSUED AND FULLY
PAID
----
NUMBER OF SHARES
----------------
<S> <C>
Ordinary shares of a par value of NIS 1 each........... 302,460,000
===========
</TABLE>
NOTE 26--DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
A. THE FINANCIAL STATEMENTS OF THE COMPANY CONFORM WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN ISRAEL WHICH DIFFER IN CERTAIN RESPECTS FROM THOSE
FOLLOWED IN THE UNITED STATES, AS DESCRIBED BELOW:
1. Effect of inflation
In accordance with Israeli GAAP, the Company comprehensively includes the
effect of price level changes in the accompanying financial statements, as
described in Note 2D. Such Israeli accounting principle measures the effects
of price level changes in the inflationary Israeli economy. US GAAP does not
provide for recognition of the effects of such price level changes. The
reconciliation of the effect of the differences between Israeli GAAP and
U.S. GAAP in B below does not relate to such differences.
2. Proportionate consolidation
F-8-43
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 26--DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONTINUED)
In accordance with Israeli GAAP, based on Opinion No. 57 of ICPAI, the
financial statements of a jointly owned company were consolidated by the
proportionate consolidation method.
In accordance with US GAAP the investment in a jointly equal owned company
is to be stated on the equity basis. Nevertheless the SEC permits the use of
the proportionate consolidation method by a foreign issuer.
The practical difference between the two methods is in number of items in
the balance sheet and statement of income in which the investment is
reflected. There is no effect on the Company's net earnings figure or on the
shareholders' equity. Since the only investee included in the consolidation
is the said jointly owned company (see Note 1B), the difference between the
two approaches is the difference between the Company's financial statements
and the consolidated financial statements.
3. Recognizing losses from the loaning of equipment
According to Israeli GAAP, based on International Accounting Standard
No. 17, the loaning of instruments is recognized as an operating lease, and
therefore the Company records such equipment as assets which are amortized
over a three year period.
According to industry practice in the US the cellular telephone companies do
not defer the "loss" from the loaning of equipment, but write off the cost
of the equipment on a current basis.
4. According to para. 9f of FAS No. 109, deferred taxes are not created in
respect of differences arising as a result of the difference between the
rate of change in the Consumer Price Index (which is the basis for measuring
results for tax purposes) and the rate of change in the exchange rate of the
dollar versus the shekel. According to Israeli GAAP deferred taxes are
created in respect of this difference. These financial statements are
prepared under Israeli GAAP with the effect of inflation as described in
para. 1 above, and the above requirement of FAS 109 has no effect to this
note since the translation to the dollar is made by way of convenience only.
5. Earnings per share
Earnings per share were computed based on the number of shares outstanding
during the period, in accordance with Opinion no. 55 of the ICPAI. There is
no material difference between the computation described above and the
computation prescribed by guidelines issued by the Financial Accounting
Standard Board in the United States (FAS No. 128).
6. Other assets
In accordance with accounting rules in Israel, correlation is made between
direct costs in respect of sales to subscribers who signed a long-term
liability (as mentioned in Note 2K) and the liability period.
According to Industry practice in the US in cellular communication
companies, the loss from the sale to customers which signed a liability is
currently recorded and is not deferred over the period of the asset.
7. In June 1997 FAS 131 was published regarding the reporting on segments and
related information. As virtually all the Company's operations are in one
segment, the implementation of FAS 131 has no effect on the Company's
financial statements.
F-8-44
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 26--DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONTINUED)
8. The Company adopted SFAS 130 "Reporting Comprehensive Income" with effect
from January 1, 1998. It required that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statements that is displayed in the same
prominence as other financial statements. It requires that an enterprise
(a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid
in capital in the equity section of the statement of financial position.
Comprehensive income is the same as net income for all years presented.
9. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
will require that all derivative financial instruments be recognized as
either assets or liabilities on the balance sheet. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133, which deferred
the implementation of SFAS No. 133. SFAS No. 133 will be effective for the
Company's first quarter of fiscal 2001. The Company is evaluating the
effects of the new statement and how to implement the new requirements.
THE EFFECT OF THE DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP OF THE
ABOVEMENTIONED ITEMS AND ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED
FOR US GAAP ON THESE FINANCIAL STATEMENTS IS AS FOLLOWS:
1. On statements of income:
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
COMPANY -----------
---------------------------------------------------------
1997 1998 1999 1999
---- ---- ---- ----
NIS NIS NIS (UNAUDITED)
(000S) (000S) (000S) US $
(000S)
<S> <C> <C> <C> <C>
Net earnings on the basis of Israeli
GAAP............................... 238,784 249,885 39,475 9,505
Provision for losses in respect of
loaning of instruments............. (3,377) (24,461) (19,811) (4,771)
Provision for losses from subscribers
acquisition costs.................. -- -- (294,076) (70,810)
-------- -------- -------- -------
Net earnings (loss) on the basis of
US GAAP............................ 235,407 225,424 (274,412) (66,076)
======== ======== ======== =======
Earnings (losses) per share NIS 1 par
value of share capital (NIS):
Israeli GAAP......................... 0.789 0.826 0.131 0.031
======== ======== ======== =======
US GAAP.............................. 0.778 0.745 (0.907) (0.218)
======== ======== ======== =======
</TABLE>
F-8-45
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 26--DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONTINUED)
2. On balance sheets items:
<TABLE>
<CAPTION>
COMPANY
-----------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------- -------------------------
ISRAELI GAAP U.S. GAAP ISRAELI GAAP U.S. GAAP
------------ --------- ------------ ---------
NIS NIS NIS NIS
(000S) (000S) (000S) (000S)
<S> <C> <C> <C> <C>
Fixed assets(1)......................... 2,355,686 2,317,465 2,512,688 2,443,513
Other assets(2)......................... -- -- 459,494 --
Long-term deferred taxes(1),(2)......... 4,188 (9,572) (38,726) 151,595
Shareholders' equity(1),(2)............. 1,913,983 1,660,716 1,953,458 1,615,110
</TABLE>
<TABLE>
<CAPTION>
CONVENIENCE TRANSLATION
-------------------------------
COMPANY
-------------------------------
DECEMBER 31, 1999
-------------------------------
ISRAELI GAAP U.S. GAAP
------------ ---------
(UNAUDITED) (UNAUDITED)
US $ US $
(000S) (000S)
<S> <C> <C>
Fixed assets(1)............................................. 605,029 588,373
Other assets(2)............................................. 110,641 --
Deferred taxes(1), (2)...................................... (9,325) 36,502
Shareholders' equity(1), (2)................................ 470,372 388,902
</TABLE>
------------------------
(1) Losses from the loaning of equipment.
(2) Losses from subscribers acquisition costs.
3. Statement of cash flows:
(1) Cash received from interest during the years ended December 31, 1997,
1998 and 1999 were NIS 13,423 thousand, NIS 19,617 thousand, and NIS
1,207 thousand, respectively.
(2) Cash paid for interest during the years ended December 31, 1997, 1998
and 1999 were NIS 33,836 thousand, NIS 52,746 thousand and NIS
89,654 thousand, respectively.
(3) Cash paid for income tax during the years ended December 31, 1997, 1998
and 1999 were NIS 218,052 thousand, NIS 202,728 thousand and NIS
75,686 thousand, respectively.
4. Fair value of financial instruments:
There is not a major difference between the fair value and the carrying
amount of the liabilities to banking institutions for December 31, 1997,
1998 and 1999.
Cash, trading account assets, other accounts receivable, debt trade
payables, other payables, The carrying amounts approximate fair value.
F-8-46
<PAGE>
PELEPHONE COMMUNICATIONS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(IN TERMS OF NIS OF DECEMBER 1999)
NOTE 26--DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONTINUED)
Considerable judgment is required to develop the estimates of fair value,
thus, the estimates provided herein are not necessarily indicative of
amounts that could be realized in a current market exchange.
C. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
The following disclosures are made with regard to the Company's financial
instruments, including derivatives.
(1) Credit risk of financial instruments, including derivatives:
The face value (nominal) amounts of derivatives do not represent amounts
exchanged by the parties and, accordingly, are not a measure of the exposure
of the Company.
In Management's estimate, due to the fact that the Company enters into such
transactions solely with recognized financial institution counterparts, it
is not expected that such counterparts will fail to meet their obligations
toward the Company.
(2) Long-term debt--
The fair value of the Company's long-term debt to banking institutions is
estimated based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the same
remaining maturities.
At the date of signing on the financial statements repayment dates have not
been fixed.
(3) Concentration of credit risk:
The Company markets its services and products via exclusive dealers. Most of
the distribution agreements are similar. The Company secures the major part
of these receivables by obtaining credit insurance and guarantees.
In Management's estimate, the allowance for doubtful debts adequately covers
all anticipated losses in respect of the dealers' debts.
F-8-47
<PAGE>
MOBINIL FOR TELECOMMUNICATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(IN EGYPTIAN POUNDS)
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-9-1
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(S.A.E.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-9-3
Consolidated Balance Sheets................................. F-9-4
Consolidated Statements of Income........................... F-9-5
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-9-6
Consolidated Statements of Cash Flows....................... F-9-7
Notes to the Consolidated Financial Statements.............. F-9-8
</TABLE>
F-9-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Mobinil For Telecommunication
We have audited the accompanying consolidated balance sheets of Mobinil For
Telecommunication and Subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the period May 5 to December 31, 1998 and the year ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company'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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mobinil For
Telecommunication and Subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for the period May 5 to
December 31, 1998 and the year ended December 31, 1999 in conformity with
International Accounting Standards.
KPMG Hazem Hassan
Cairo, Egypt
April 1, 2000
F-9-3
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(S.A.E.)
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
AS OF DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF EGYPTIAN POUNDS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 2M)
1998 1999 -----------
NOTE NO. L.E. L.E. 1999
-------- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
LONG-TERM ASSETS
Fixed assets (net).......................................... (2d/3) 465,032 881,683 257,802
Assets under construction................................... 177,229 384,191 112,337
Pre-operating expenses (net)................................ (4) 22,513 17,485 5,113
Deferred expenses (net)..................................... (5) 1,710,646 1,615,032 472,232
Goodwill (net).............................................. (2k/6) 5,637 4,049 1,184
Rent deposits............................................... -- 3,611 1,056
--------- --------- ---------
TOTAL LONG-TERM ASSETS...................................... 2,381,056 2,906,051 849,724
--------- --------- ---------
CURRENT ASSETS
Inventory................................................... (2i) 3,396 20,689 6,049
Accounts receivable (net)................................... (7) 99,978 135,579 39,643
Other current assets........................................ (8) 39,981 136,599 39,941
Prepaid expenses............................................ 10,930 27,483 8,036
Cash........................................................ (9) 438,586 480,452 140,483
--------- --------- ---------
TOTAL CURRENT ASSETS........................................ 592,871 800,802 234,152
--------- --------- ---------
TOTAL ASSETS.............................................. 2,973,927 3,706,853 1,083,876
========= ========= =========
CURRENT LIABILITIES
Bank overdraft.............................................. 115,936 68,960 20,164
Accounts payable............................................ 151,901 157,379 46,017
Due to affiliated companies................................. (10) 70,780 158,194 46,256
Other current liabilities................................... 38,891 203,975 59,642
Accrued expenses............................................ 96,437 69,679 20,374
--------- --------- ---------
TOTAL CURRENT LIABILITIES................................... 473,945 658,187 192,453
--------- --------- ---------
LONG-TERM LIABILITIES
Long-term loans............................................. (11) 1,659,374 1,740,840 509,018
Shareholders' loans......................................... (12) 513,691 513,691 150,202
Bonds....................................................... (13) -- 340,000 99,415
--------- --------- ---------
TOTAL LONG-TERM LIABILITIES................................. 2,173,065 2,594,531 758,635
--------- --------- ---------
MINORITY INTEREST........................................... 410,005 471,937 137,993
SHAREHOLDERS' EQUITY (DEFICIT)
Share capital............................................... (14) 250 250 73
Retained deficit............................................ (83,338) (18,052) (5,278)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........................ (83,088) (17,802) (5,205)
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........ 2,973,927 3,706,853 1,083,876
========= ========= =========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
and are to be read therewith.
F-9-4
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(S.A.E.)
CONSOLIDATED STATEMENTS OF INCOME
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998 AND THE
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
1998 (NOTE 2M)
(NOTE 2A) 1999 ---------
NOTE NO. L.E. L.E. 1999
-------- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
Revenues..................................... (2e) 417,531 1,500,557 438,763
OPERATING COSTS
Cost of services............................. (83,445) (338,354) (98,935)
Other operating costs........................ (306,429) (624,260) (182,534)
Depreciation and amortization................ (120,225) (249,787) (73,038)
-------- ---------- ----------
TOTAL OPERATING COSTS........................ (510,099) (1,212,401) (354,507)
-------- ---------- ----------
NET OPERATING PROFIT (LOSS).................. (92,568) 288,156 84,256
OTHER INCOME (EXPENSE)
Interest income.............................. 6,893 14,767 4,318
Interest expense............................. (80,691) (156,236) (45,682)
Other expense................................ -- (92) (27)
Foreign currency gain (loss)................. (2c) 3,196 (18,203) (5,323)
-------- ---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST.......................... (163,170) 128,392 37,542
Income taxes................................. (15) -- -- --
Minority interest............................ 79,832 (63,106) (18,452)
-------- ---------- ----------
NET INCOME (LOSS)............................ (83,338) 65,286 19,090
======== ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
and are to be read therewith.
F-9-5
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(S.A.E.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
RETAINED SHAREHOLDERS' (NOTE 2M)
CAPITAL DEFICIT EQUITY -----------
L.E. L.E. L.E. 1999
---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
Shares issued on formation................... 25 25
Subsequent share issuance in 1998............ 225 225
Net loss for the period May 5 to
December 31, 1998.......................... (83,338) (83,338)
--- ------- -------
Balances at December 31, 1998................ 250 (83,338) (83,088) (24,295)
Net income for 1999.......................... 65,286 65,286 19,090
--- ------- ------- -------
Balances at December 31, 1999................ 250 (18,052) (17,802) (5,205)
=== ======= ======= =======
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
and are to be read therewith.
F-9-6
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(S.A.E.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS)
<TABLE>
<CAPTION>
CONVENIENCE
1998 TRANSLATION
(NOTE 2A) 1999 (NOTE 2M)
L.E. L.E. 1999
---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... (83,338) 65,286 19,089
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization.......................... 120,225 249,787 73,038
Provision for doubtful debts........................... 28,337 43,881 12,830
Loss from disposals of fixed assets.................... -- 775 228
CHANGES IN WORKING CAPITAL
Changes in current assets and rent deposits............ (182,622) (213,556) (62,443)
Changes in current liabilities other than
bank overdraft....................................... 358,009 231,218 67,607
---------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 240,611 377,391 110,348
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for fixed asset purchases..................... (338,974) (535,745) (156,650)
Payments for assets under construction................. (177,229) (206,962) (60,515)
Payments for deferred expenses......................... (1,811,441) (29,240) (8,550)
Payments for goodwill.................................. (5,637) -- --
---------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.................. (2,333,281) (771,947) (225,715)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft.................. 115,936 (46,976) (13,736)
Proceeds from issuance of capital...................... 250 -- --
Minority interest...................................... 242,005 61,932 18,109
Proceeds from long-term loans.......................... 1,659,374 81,466 23,820
Proceeds from shareholders' loans...................... 513,691 -- --
Proceeds from issuance of bonds........................ -- 340,000 99,415
---------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 2,531,256 436,422 127,608
---------- -------- --------
Increase in cash and cash equivalents.................. 438,586 41,866 12,241
Cash and cash equivalents at beginning of the period... -- 438,586 128,242
---------- -------- --------
Cash and cash equivalents at end of the period......... 438,586 480,452 140,483
========== ======== ========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
and are to be read therewith.
F-9-7
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 1--DESCRIPTION OF BUSINESS
Mobinil For Telecommunication S.A.E. ("Mobinil") was formed by a consortium
of shareholders on May 5, 1998 as an Egyptian Stock Company under law no. 159 of
1981, to act as a holding company for its agreed acquisition of a 51%
controlling interest in the government owned Egyptian Company for Mobile
Services ("ECMS"), which was privatized on May 21, 1998.
As a holding company, Mobinil has no activity other than to control and
manage its interest in ECMS, which operates a GSM digital cellular mobile
telecommunication system to provide services to both postpaid and prepaid
customer subscribers in the Arab Republic of Egypt.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The consolidated financial statements are presented in accordance with
Egyptian Accounting Standards which are in conformity with International
Accounting Standards.
Adjustments to be in conformity with US GAAP appear under Note 18.
Amounts presented for 1998 are for the period May 5 to December 31, 1998.
B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the assets, liabilities and
results of operations of Mobinil as the parent company and its subsidiary, ECMS,
which in turn consolidates its wholly owned interest in a small company formed
late in 1999. All significant balances and transactions have been eliminated in
consolidation.
C) FOREIGN CURRENCY TRANSLATION
The company maintains its books of accounts in Egyptian Pounds. Transactions
denominated in foreign currencies are recorded at the prevailing exchange rate
at the date of transactions.
Monetary assets and liabilities denominated in foreign currency at year end
are translated at the prevailing exchange rates at that date. The exchange
differences are recorded in the income statement.
F-9-8
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D) FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at historical cost. The assets are depreciated by
the straight line method over the estimated useful lives of each type of asset
at annual percentage rates as follows:
<TABLE>
<S> <C>
Building.................................................... 5%
Cell sites.................................................. 12.5%
Computers................................................... 20%
Office equipment............................................ 20%
Vehicles.................................................... 20%
Furniture................................................... 10%
Leasehold improvements...................................... 20%
</TABLE>
E) REVENUE RECOGNITION
Airtime revenue is recognized on the basis of actual and accrued billings
for usage by postpaid subscribers, and deferred and amortized to income based on
usage by prepaid subscribers. Connection fees are recognized directly in income.
Sales of mobile phones and other accessories are recognized in income at the
time of delivery.
F) AMORTIZATION OF DEFERRED EXPENSES
Deferred expenses include the license fee and compensation for car phones
paid to the Egyptian Company for Telecommunication ("ECT"). The license is
amortized over its fifteen year concession period commencing May 21, 1998.
Compensation for car phones is amortized over five years as it is estimated that
this period reflects the related benefit.
G) PRE-OPERATING EXPENSES
Pre-operating expenses are amortized over a period of five years commencing
May 21, 1998.
H) INVESTMENTS
Investments are recorded at their cost of acquisition, and only at an
impairment value to reflect any decline in value below cost deemed to be other
than temporary.
I) INVENTORY
Inventory is valued at the lower of cost or fair market value. Cost is
determined using the weighted average method.
J) 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
F-9-9
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry-forwards.
Income taxes are recognized as and when taxable income arises on an accrual
basis. No taxable income arises during a tax holiday, as currently applicable to
the Company's subsidiary ECMS.
K) GOODWILL
Goodwill arising from consolidation is amortized over a period of fifteen
years starting from May 21, 1998 in line with that for the license concession
period.
L) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
M) PRESENTATION IN DOLLARS
For convenience, the financial statements in Egyptian Pounds as at
December 31, 1999 and for the year then ended have been translated to U.S.
dollars using the applicable exchange rate at December 31, 1999 (U.S.$1=3.42
Egyptian Pounds). The dollar amounts presented in the financial statements
should not be construed as representing amounts receivable, payable or
convertible into dollars, unless indicated elsewhere in the notes to the
consolidated financial statements.
NOTE 3--FIXED ASSETS
<TABLE>
<CAPTION>
OFFICE FURNITURE &
LAND BUILDING CELL SITES COMPUTERS EQUIPMENTS FIXTURES VEHICLES
---- -------- ---------- --------- ---------- -------- --------
L.E. L.E. L.E. L.E. L.E. L.E. L.E.
<S> <C> <C> <C> <C> <C> <C> <C>
COST
Balance as of January 1, 1999............. 245 -- 455,161 30,611 7,527 2,341 3,196
Additions................................. 461 300 425,296 63,026 6,240 13,339 7,315
Disposals................................. -- -- -- (83) (154) (895) --
--- --- ------- ------ ------ ------ ------
Balance as of
December 31, 1999....................... 706 300 880,457 93,554 13,613 14,785 10,511
=== === ======= ====== ====== ====== ======
ACCUMULATED DEPRECIATION
Balance as of January 1, 1999............. -- -- 40,446 849 260 77 105
Depreciation.............................. -- 2 96,676 12,720 2,341 1,255 1,629
Accumulated depreciation on disposals..... -- -- -- (25) (44) (288) --
--- --- ------- ------ ------ ------ ------
Balance as of December 31, 1999........... -- 2 137,122 13,544 2,557 1,044 1,734
--- --- ------- ------ ------ ------ ------
Net book value as of December 31,
1999.................................... 706 298 743,335 80,010 11,056 13,741 8,777
=== === ======= ====== ====== ====== ======
Net book value as of December 31,
1998.................................... 245 -- 414,715 29,762 7,267 2,264 3,091
=== === ======= ====== ====== ====== ======
<CAPTION>
LEASEHOLD
IMPROVEMENTS TOTAL
------------ -----
L.E. L.E.
<S> <C> <C>
COST
Balance as of January 1, 1999............. 7,893 506,974
Additions................................. 19,768 535,745
Disposals................................. -- (1,132)
------ ---------
Balance as of
December 31, 1999....................... 27,661 1,041,587
====== =========
ACCUMULATED DEPRECIATION
Balance as of January 1, 1999............. 205 41,942
Depreciation.............................. 3,696 118,319
Accumulated depreciation on disposals..... -- (357)
------ ---------
Balance as of December 31, 1999........... 3,901 159,904
------ ---------
Net book value as of December 31,
1999.................................... 23,760 881,683
====== =========
Net book value as of December 31,
1998.................................... 7,688 465,032
====== =========
</TABLE>
F-9-10
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 4--PRE-OPERATING EXPENSES
Changes in pre-operating expenses are as follows:
<TABLE>
<CAPTION>
1998
(NOTE 2A) 1999
---------- --------
L.E. L.E.
---- ----
<S> <C> <C>
Pre-operating expenses................................. 25,413 22,513
Reclassification transfer from deferred expenses....... 147
Amortization of pre-operating expenses................. (2,900) (5,175)
------ ------
Pre-operating expenses (net)........................... 22,513 17,485
====== ======
</TABLE>
NOTE 5--DEFERRED EXPENSES
Deferred expenses as of December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
L.E. L.E.
---- ----
<S> <C> <C>
Car phones............................................. 30,000 30,000
Capital increase....................................... 800 1,193
GSM license............................................ 1,755,000 1,755,000
Costs related to loan agreement........................ -- 24,075
Bonds underwriters' costs.............................. -- 4,624
--------- ---------
1,785,800 1,814,892
Less accumulated amortization.......................... (75,154) (199,860)
--------- ---------
1,710,646 1,615,032
========= =========
</TABLE>
The GSM license agreement was signed between ECMS and ECT. This agreement
gives ECMS the right to establish and operate a digital cellular mobile
telephone network within Egypt. It is of fifteen years duration starting from
May 21, 1998 and subject to renewal upon expiration. ECMS paid
L.E. 1,755 million as a fee for this agreement.
In addition, ECMS is liable to pay annual fees to ECT based on fixed and
variable amounts linked to the expansion of the network and its subscriber base,
as well as related usage. The amounts paid for such incremental license fees in
1998 and 1999 were L.E. 102,212 and L.E. 119,102, respectively.
NOTE 6--GOODWILL
Goodwill arises from the excess of Mobinil's purchase price of L.E. 515,865
for its 51% investment in ECMS with a related fair value of L.E. 510,000 at the
time of its privatization on May 21, 1998.
F-9-11
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 6--GOODWILL (CONTINUED)
ECMS was privatized with a fair value of L.E. 1 billion attributed by the
government for this purpose and recorded in its opening balance sheet as
summarized below:
<TABLE>
<S> <C>
Long-term Assets
Fixed assets................................................ 242,705
GSM license................................................. 1,755,000
Deferred charges............................................ 5,494
---------
Total long-term assets...................................... 2,003,199
---------
Current Assets
Cash at banks............................................... 833,200
Inventory--SIM cards........................................ 2,958
---------
Total current assets........................................ 836,158
---------
Total Assets................................................ 2,839,357
=========
Current Liabilities
Amount due to National Bank of Egypt........................ 2,000
Amount payable to ECT for GSM license....................... 1,755,000
Other amount payable to ECT................................. 81,157
Accrued share issuance costs................................ 1,200
---------
Total current liabilities................................... 1,839,357
Shareholders' Equity........................................
Share capital............................................... 1,000,000
---------
Total Liabilities and Shareholders' Equity.................. 2,839,357
=========
</TABLE>
Changes in goodwill are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
L.E. L.E.
---- ----
<S> <C> <C>
Opening balance............................................. 5,865 5,637
Amortization for 1998 and 1999.............................. (228) (1,588)
----- ------
Closing balance............................................. 5,637 4,049
===== ======
</TABLE>
F-9-12
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 7--ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
L.E. L.E.
---- ----
<S> <C> <C>
Service receivable........................................ 116,746 135,544
Distributor receivable.................................... -- 6,264
Roaming receivables....................................... 11,569 21,267
Allowance for doubtful debts.............................. (28,337) (27,496)
------- -------
Accounts receivable (net)................................. 99,978 135,579
======= =======
</TABLE>
NOTE 8--OTHER CURRENT ASSETS
Other current assets as of December 31, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
L.E. L.E.
---- ----
<S> <C> <C>
Advance payment to suppliers............................... 31,352 108,382
Accrued interest........................................... 3,874 25,755
Others..................................................... 4,755 2,462
------ -------
Total...................................................... 39,981 136,599
====== =======
</TABLE>
NOTE 9--CASH
Cash as of December 31, 1998 and 1999 consists of the following:
A). CASH ON HAND:
<TABLE>
<CAPTION>
1998 1999
L.E. L.E.
---- ----
<S> <C> <C>
Cash on hand............................................... 24 1,969
</TABLE>
B) CASH AT BANKS:
<TABLE>
<S> <C> <C>
*Current accounts........................................ 17,038 100,196
Checks under collection................................. -- 6,293
**Current account for capital increase.................... 400,800 --
Time deposits........................................... 20,388 371,732
Letters of guarantee-margin amount...................... 336 262
------- -------
438,586 480,452
======= =======
</TABLE>
* The 1999 balance includes an amount of L.E. 23,000 which was transferred
from the Commercial International Bank to the American Express Bank in order
to subscribe in the American Express
F-9-13
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 9--CASH (CONTINUED)
Bank Investment Fund, which was transacted on January 2, 2000 for
21,720 securities in a mutual fund at a cost of L.E. 1,058.91 for each
security.
** This account represents part of the capital increase which was released and
made available at the beginning of January 1999.
NOTE 10--DUE TO AFFILIATED COMPANIES
Amounts due to affiliated shareholder companies as of December 31, 1998 and
1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
L.E. L.E.
---- ----
<S> <C> <C>
France Telecom............................................. 347 45,864
Orascom Telecom............................................ 5,899 7,507
Motorola................................................... 63,001 102,841
Al Ahram Company........................................... 1,533 1,982
------ -------
70,780 158,194
====== =======
</TABLE>
NOTE 11--LONG-TERM LOANS
Long-term loans at December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Bridging loans:
Repayable in Egyptian Pounds......................... 340,000
Repayable in U.S. dollars--390,000................... 1,319,374
Senior secured long-term credit facility:
Repayable in Egyptian Pounds......................... 988,000
Repayable in U.S. dollars--$220,000.................. 752,840
--------- ---------
1,659,374 1,740,840
========= =========
</TABLE>
The bridging loans facility signed on May 9, 1998 for an equivalent
$490,000, of which $100,000 was repayable in Egyptian Pounds, was refinanced by
a new facility provided by a group of banks for an equivalent $570,000, of which
$350,000 is repayable in Egyptian Pounds.
The new facility consists of the following elements:
-- An International Tranche available in US dollars amounting to $220,000
for a period of six and a half years.
F-9-14
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 11--LONG-TERM LOANS (CONTINUED)
-- A Domestic Tranche available in Egyptian Pounds amounting to L.E.
1,190,000 for a period of seven and a half years, equivalent to $350,000
of which $30,000 is a revolving facility. At December 31, 1999, L.E.
202,000 had not been drawn down.
Both the International and the Domestic Tranches have been fully
underwritten by the International Arrangers and the Domestic Arrangers
respectively.
The interest rate for the International Tranche is to be calculated on an
actual 360 days basis as the sum of:
(i) The London Inter Bank Offered Rate ("Libor") two Business Days prior to the
commencement of each interest period; and
(ii) The Applicable Margin of 1.6% which can be decreased gradually to be 0.9%
according to the growth in the Company's performance ratios.
The interest rate for the Domestic Tranche is to be calculated on an actual
360 days basis and is fixed at 11.25% per annum.
The facility is secured by a pledge of the Company's 51% share ownership of
ECMS, a pledge of ECMS bank accounts used for revenue collection, a first
priority commercial lien on present and future assets of ECMS, an assignment of
insurance contracts, and an assignment of shareholders' subordinated loans.
The maturities of the above refinanced secured long-term credit facility for
each of the five years subsequent to December 31, 1999 and thereafter are as
follows:
<TABLE>
<CAPTION>
YEAR CURRENCY L.E. AMOUNT
---- -------- -----------
<S> <C> <C>
2000.................................... -- --
2001.................................... -- --
2002.................................... Egyptian Pounds 98,800
$48,889 167,298
2003.................................... Egyptian Pounds 197,600
$48,889 167,298
2004.................................... Egyptian Pounds 197,600
$48,889 167,298
Thereafter.............................. Egyptian Pounds 494,000
$73,333 250,946
---------
1,740,840
=========
</TABLE>
F-9-15
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 12--SHAREHOLDERS' LOANS
The Company received the following interest free loans from its shareholders
during 1998 which remained outstanding at the end of 1998 and 1999:
<TABLE>
<CAPTION>
L.E.
----
<S> <C>
France Telecom.............................................. 236,682
Orascom Telecom............................................. 95,704
Motorola.................................................... 181,305
-------
513,691
=======
</TABLE>
NOTE 13--BONDS
At an extraordinary general assembly meeting held on February 21, 1999, the
shareholders approved the issuance of bonds for an amount of L.E. 340 million.
On August 22, 1999 these bonds were privately placed to the extent of 70% and
publicly subscribed to the extent of 30%. The provisions of the bonds include
the following:
<TABLE>
<S> <C>
TYPE OF ISSUANCE: L.E. par value with fixed interest rate, marketable but
non-convertible into shares and rank second after
repayment of long-term loans.
INTEREST RATE: Fixed interest rate of 12.25% per annum due every six
months.
ISSUE PRICE: At face value of L.E. 100 for each bond.
TERM: Eight years from issuance on August 22, 1999.
PAYMENT: The bonds will be paid in one installment at the end of
the term. The Company has the right to repay the bonds
before maturity.
</TABLE>
F-9-16
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 14--CAPITAL
The Company's authorized capital amounts to L.E. 2,500,000 divided into
250,000 shares of nominal value L.E. 10 each. The Company's issued and paid
capital amounts to L.E. 250,000 divided into 25,000 shares held in percentage
terms as follows:
<TABLE>
<S> <C>
France Telecom.............................................. 46.1%
Orascom Telecom............................................. 18.6%
Motorola.................................................... 35.3%
-----
100.0%
=====
</TABLE>
The Company is in the process of increasing its share capital to
L.E. 510,000,000 through the conversion of its shareholders' loans.
NOTE 15--INCOME TAXES
Mobinil and its subsidiaries are taxed separately without any group relief
under Egyptian tax rules.
Mobinil, as a holding company, with no operations, has, as yet, no revenues
in the form of dividends and only minimal expenses, and, accordingly, has no
taxable income.
ECMS benefits from a five year tax holiday until December 31, 2003.
Upon becoming taxable, the financial statement carrying values of all assets
and liabilities of ECMS will be deemed to be the same for tax purposes, so no
temporary differences will need to be recognized for deferred tax purposes.
NOTE 16--RELATED PARTY TRANSACTIONS
During the period May 5, 1998 to December 31, 1998 and for the year ended
December 31, 1999, the Company purchased cell site equipment, civil works,
technical assistance, computer equipment and advertising from related party
shareholders on an arms length basis as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
L.E. L.E.
---- ----
<S> <C> <C>
France Telecom--technical assistance...................... 14,017 31,355
Orascom Telecom--computer equipment....................... 29,838 27,960
Motorola--cell site equipment............................. 132,374 203,879
El Ahram Company--advertising............................. 7,406 7,692
</TABLE>
F-9-17
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 17--FINANCIAL INSTRUMENTS AND DERIVATIVES
The fair values of the Company's monetary assets and liabilities at
December 31, 1998 and 1999 are deemed to approximate their carrying values, as
market conditions in terms of interest rate and risk have been relatively stable
for the periods from their initial recognition until year end.
In connection with the refinancing of the bridging loans facility by a new
secured long-term credit facility as described under note 11, a tranche of
$170 million repayable in U.S. dollars was replaced by a tranche repayable in
Egyptian Pounds. To fund this U.S. dollar repayment, $68 million was financed
internally and $102 million was financed externally through five swap contracts
with three banks for periods between six and twelve months as detailed below
with related fair values at December 31, 1999:
<TABLE>
<CAPTION>
SWAP US$ SWAP SWAP FAIR
DATE PERIOD AMOUNT RATE VALUE VALUE
---- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
September 21, 1999............. 12 months 20,000 3.4998 69,996 68,400
November 30, 1999.............. 6 months 10,000 3.4730 34,730 34,200
November 30, 1999.............. 9 months 10,000 3.5010 35,010 34,200
November 30, 1999.............. 12 months 21,000 3.6691 77,051 71,820
November 30, 1999.............. 12 months 41,000 3.4921 143,136 140,220
</TABLE>
NOTE 18--RECONCILIATION BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES
There are two main areas of difference between the reporting of the
Company's transactions in accordance with international accounting standards and
accounting principles generally accepted in the United States.
The Company defers and amortizes its pre-operating costs and capital
increase expenses over five years as opposed to charging them directly to income
as they arise. In addition, the Company directly recognizes in income connection
fees paid upfront by new subscribers as opposed to deferring them as income to
be amortized over four years, the estimated average customer retention period.
F-9-18
<PAGE>
MOBINIL FOR TELECOMMUNICATION
(EGYPTIAN JOINT STOCK COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH INTERNATIONAL ACCOUNTING STANDARDS
FOR THE PERIOD MAY 5 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS OF EGYPTIAN POUNDS EXCEPT SHARE DATA)
NOTE 18--RECONCILIATION BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED)
The effects of these differences on net income for the period May 5 to
December 31, 1998 and the year ended December 31, 1999, and on stockholders'
equity (deficit) at December 31, 1998 and 1999, as shown in the consolidated
financial statements are as follows:
<TABLE>
<CAPTION>
1998 1999
L.E. L.E.
-------- --------
<S> <C> <C>
Net income (loss) as shown in the consolidated financial
statements................................................ (83,338) 65,286
Description of items having the effect of increasing
reporting income:
Amortization of pre-operating costs and capital increase
expenses................................................ 2,781
Description of items having the effect of decreasing
reporting income:
Write off of deferred balances of pre-operating costs and
capital increase expenses............................... (11,836) (280)
Deferral of connection fee revenue.......................... (41,627) (136,915)
-------- --------
Net loss in accordance with accounting principles generally
accepted in the United States............................. (136,801) (69,128)
======== ========
Shareholders' equity (deficit) as shown in the consolidated
financial statements...................................... (83,088) (17,802)
Description of items having the effect of decreasing equity:
Write-off of deferred balance of pre-operating costs and
capital increase expenses............................... (11,836) (9,335)
Deferral of connection fee revenue........................ (41,627) (178,542)
-------- --------
Shareholders' equity (deficit) according to generally
accepted accounting principles in the United States....... (136,551) (205,679)
======== ========
</TABLE>
F-9-19
<PAGE>
UAB OMNITEL
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-10-1
<PAGE>
UAB OMNITEL
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-10-3
Balance Sheets.............................................. F-10-4
Statements of Income........................................ F-10-5
Statements of Changes in Stockholders' Equity and
Comprehensive Income...................................... F-10-6
Statements of Cash Flows.................................... F-10-7
Notes to the Financial Statements........................... F-10-8
</TABLE>
F-10-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of UAB Omnitel
We have audited the accompanying balance sheets of UAB Omnitel as of
December 31, 1998 and 1999, and the related statements of income, stockholders'
equity and comprehensive income and cash flows for the years ended December 31,
1997, 1998 and 1999. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UAB Omnitel as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1998 and 1999 in conformity with
accounting principles generally accepted in the United States of America.
Vilnius Lithuania,
April 9, 2000
KPMG Lietuva
<TABLE>
<S> <C>
Leif Rene Hansen
Danish State Authorised
Public Accountant
</TABLE>
F-10-3
<PAGE>
UAB OMNITEL
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 1J)
-------------
NOTE 1998 1999 1999
---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<C> <S> <C> <C> <C>
ASSETS
Current assets
2 Cash at bank and in hand....................... 19,905 75,750 $ 18,938
3 Accounts receivable, net....................... 31,258 24,178 6,044
4 Inventory, net................................. 15,235 5,328 1,332
5 Other current assets........................... 6,836 3,395 849
------- ------- --------
Total current assets........................... 73,234 108,651 27,163
------- ------- --------
6 Property, plant and equipment, net............. 317,578 318,894 79,724
Other long-term assets......................... -- 207 51
------- ------- --------
390,812 427,752 $106,938
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
7 Current installments of long-term debt......... 99,376 30,555 $ 7,638
Interest payable............................... 4,575 1,198 300
Accounts payable............................... 24,534 20,529 5,132
Taxes and duties payable....................... 2,199 10,545 2,636
8 Other current liabilities...................... 4,365 8,298 2,075
------- ------- --------
Total current liabilities...................... 135,049 71,125 17,781
7 Long-term debt, excluding current
installments................................. 116,534 86,176 21,544
9 Other liabilities.............................. -- 1,085 271
------- ------- --------
Total liabilities.............................. 251,583 158,386 39,596
------- ------- --------
STOCKHOLDERS' EQUITY
10 Common stock................................... 39,689 39,689 9,922
Additional capital............................. 16,031 16,031 4,008
10 Retained earnings.............................. 83,509 213,646 53,412
------- ------- --------
Total stockholders' equity..................... 139,229 269,366 67,342
------- ------- --------
11 Commitments and contingencies.................. -- -- --
------- ------- --------
390,812 427,752 $106,938
======= ======= ========
</TABLE>
See accompanying notes to the financial statements.
F-10-4
<PAGE>
UAB OMNITEL
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 1J)
-----------
NOTE 1997 1998 1999 1999
---- ---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<C> <S> <C> <C> <C> <C>
12 Net sales.................................... 201,510 366,631 354,513 $ 88,628
13 Cost of sales, products and equipment........ (95,486) (149,839) (89,531) (22,382)
------- -------- ------- --------
Gross profit................................. 106,024 216,792 264,982 66,246
14 Selling, general and administrative
expenses................................... (64,908) (98,119) (75,043) (18,761)
Depreciation................................. (19,030) (29,846) (39,626) (9,907)
------- -------- ------- --------
Operating income............................. 22,086 88,827 150,313 37,578
15 Interest expense, net........................ (7,875) (14,635) (11,064) (2,766)
16 Other income (expense), net.................. 1,312 (667) 164 41
------- -------- ------- --------
Income before income taxes................... 15,523 73,525 139,413 34,853
17 Income taxes................................. 0 0 (9,276) (2,319)
------- -------- ------- --------
Net income................................... 15,523 73,525 130,137 $ 32,534
======= ======== ======= ========
18 Basic earnings per share..................... 0.39 1.85 3.28 $ 0.82
======= ======== ======= ========
</TABLE>
See accompanying notes to the financial statements.
F-10-5
<PAGE>
UAB OMNITEL
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS)
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----- ------- -------- ------
<S> <C> <C> <C> <C>
Balances at December 31, 1996..................... 35,720 -- (5,539) 30,181
-------
Net income...................................... 15,523 15,523
-------
Comprehensive income.............................. 15,523
-------
Issuance of stock............................... 3,969 16,031 20,000
------ ------ -------- -------
Balances at December 31, 1997..................... 39,689 16,031 9,984 65,704
-------
Net income...................................... 73,525 73,525
-------
Comprehensive income.............................. 73,525
------ ------ -------- -------
Balances at December 31, 1998..................... 39,689 16,031 83,509 139,229
-------
Net income...................................... 130,137 130,137
-------
Comprehensive income.............................. 130,137
------ ------ -------- -------
Balances at December 31, 1999..................... 39,689 16,031 213,646 269,366
====== ====== ======== =======
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED)
US $
(000'S)
CONVENIENCE TRANSLATION (NOTE 1J) -------
<S> <C>
Balances at December 31, 1998............................... $34,807
Net income.................................................. 32,534
Comprehensive income........................................ 32,534
-------
Balances at December 31, 1999............................... $67,341
=======
</TABLE>
F-10-6
<PAGE>
UAB OMNITEL
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 1J)
-----------
1997 1998 1999 1999
---- ---- ---- ----
(UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME.............................................. 15,523 73,525 130,137 32,534
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation............................................ 19,030 29,846 39,626 9,906
Provision for bad and doubtful accounts receivable...... 2,911 4,547 (4,997) (1,249)
Provision for slow moving and obsolete items on stock... 230 778 (660) (165)
Provision for warranties................................ -- -- 171 43
Deferred income tax provision........................... -- -- 914 229
Decrease (increase) in accounts receivable.............. (26,725) (242) 12,077 3,019
Decrease (increase) in inventory........................ (3,377) (8,097) 10,567 2,642
Decrease (increase) in other current assets............. (5,401) 1,559 3,441 860
Increase in other long-term assets...................... -- -- (207) (52)
Increase (decrease) in interest payable................. 269 2,904 (3,377) (844)
Increase (decrease) in accounts payable................. 2,533 (22,873) (4,005) (1001)
Increase in taxes and duties payable.................... 678 788 8,346 2,087
Increase in other liabilities........................... 716 1,352 3,933 983
-------- -------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 6,387 84,087 195,966 48,992
-------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of long term assets......................... (97,457) (133,761) (41,082) (10,271)
Proceeds from disposals of fixed assets................. 180 2,269 140 35
-------- -------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES................... (97,277) (131,492) (40,942) (10,236)
-------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................. 20,000 -- -- --
Proceeds from issuance of long-term debt................ 135,457 111,241 6,277 1,569
Principal payments on long-term debt.................... (57,200) (60,345) (104,934) (26,233)
Net changes in leasing obligations...................... 464 629 (522) (131)
-------- -------- -------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 98,721 51,525 (99,179) (24,795)
-------- -------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 7,831 4,120 55,845 13,961
Cash and cash equivalents at the beginning of the
year.................................................. 7,954 15,785 19,905 4,977
-------- -------- -------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR........ 15,785 19,905 75,750 18,938
======== ======== ======== =======
</TABLE>
The Company paid tLitas 7,880, 11,973 and 16,011 for interest and no income
taxes in 1997, 1998 and 1999 respectively.
See accompanying notes to the financial statements.
F-10-7
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
The Company was formed on March 16, 1995 and operates its own cellular
telecommunications network in Lithuania under 10 year licenses subsequently
granted in 1997 and 1998. It sells airtime, both on a postpaid and prepaid
basis, and telephone handsets to subscriber customers, mainly for mobile and
internet usage.
(B) ACCOUNTS RECEIVABLE
Accounts receivable are carried at cost less an allowance for doubtful
accounts based on specific balances and general experience.
(C) INVENTORIES
Inventories are stated at the lower cost or market price using the
first-in, first-out method, less an allowance for slow moving items.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation or at an impairment value, where lower for reasons not
considered temporary. Depreciation is provided on a straight-line basis over
the expected useful lives of the assets.
The expected useful lives are as follows:
<TABLE>
<S> <C>
Buildings................................................... 40 years
Telecommunication and other equipment....................... 7 years
Satellite station, GSM...................................... 10 years
Office equipment and cars................................... 5 years
License..................................................... 10 years
Software.................................................... 1-5 years
</TABLE>
Tangible fixed assets with a cost of less than tLitas 3 and with a
useful life shorter than one year are charged to income in the year of
acquisition.
(E) WARRANTY PROVISION
The Company provides customers with a one year warranty period under
which it undertakes to replace or repair defective telephones.
A warranty provision is calculated based on the ratio of estimated
repair costs in relation to the current sales volume.
F-10-8
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(F) REVENUE RECOGNITION
Revenue from airtime is recognized based on actual and accrued billings
for usage by post-paid subscribers, and deferred and recognized based on
usage by pre-paid customers. There are no connection fees. Equipment sales
are recorded at the time of delivery of the mobile telephones.
(G) 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 carry-forwards. Deferred tax assets
and liabilities are measured using 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.
(H) FOREIGN CURRENCY TRANSLATION
Transactions denominated in foreign currencies are translated into Litas
at the exchange rates ruling at the transaction date.
Balances denominated in foreign currencies are translated into Litas at
the exchange rates ruling at year end. Realised and unrealised foreign
currency exchange gains and losses are recognised in income.
(I) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United
States. Actual results could differ from these estimates.
(J) CONVENIENCE TRANSLATION
For convenience, the Lithuanian Litas amounts presented in the Company's
financial statements at December 31, 1999 and for the year then ended have
also been presented in U.S. dollars using the applicable exchange rate at
December 31, 1999 [U.S. $1=4 Lithuanian Litas]. The dollar amounts in the
financial statements should not be construed as representing amounts
convertible into dollars, unless otherwise indicated in the notes to the
financial statements.
NOTE 2--CASH AT BANK AND IN HAND
The use of cash accounts to the extent of tLitas 5,103 with Citibank is
restricted to the repayment of the loan from the Overseas Private Investment
Corporation of tLitas 80,160. The Debt Service Escrow Account (special account
with Citibank) is fully funded in accordance with the requirements of the Second
Restated and Amended Loan Agreement.
F-10-9
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 3--ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1999
---- ----
<C> <S> <C> <C>
Customer receivables........................................ 38,986 26,909
Allowance for bad and doubtful receivables.................. (7,728) (2,731)
-------- --------
Accounts receivable, net.................................... 31,258 24,178
======== ========
</TABLE>
The activity in the allowance for bad and doubtful receivables for the years
ended December 31, 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<C> <S> <C> <C> <C>
Allowance for bad and doubtful receivables at beginning of
the year.................................................... 270 3,181 7,728
Additions charged to bad debt expense....................... 7,132 17,418 7,342
Write-downs charged against the allowance................... (4,221) (12,871) (12,339)
-------- -------- --------
Allowance for bad and doubtful receivables at end of
the year.................................................... 3,181 7,728 2,731
======== ======== ========
</TABLE>
NOTE 4--INVENTORY
<TABLE>
<CAPTION>
1998 1999
---- ----
<C> <S> <C> <C>
Goods for resale............................................ 16,688 5,465
Materials and spare parts................................... 10 581
Other....................................................... 137 222
-------- --------
16,835 6,268
Less allowance for slow moving and obsolete items........... (1,600) (940)
-------- --------
Inventory, net.............................................. 15,235 5,328
======== ========
</TABLE>
NOTE 5--OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
1998 1999
---- ----
<C> <S> <C> <C>
Other receivables........................................... 1,344 522
Advances to suppliers....................................... 2,038 1,319
Prepaid expenses............................................ 3,454 1,554
-------- --------
6,836 3,395
======== ========
</TABLE>
F-10-10
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 6--PROPERTY PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
LICENSE
LAND AND GSM OTHER CONSTRUCTION AND
BUILDINGS EQUIPMENT VEHICLES EQUIPMENT IN PROGRESS SOFTWARE TOTAL
--------- --------- -------- --------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
12,320 282,179 2,509 39,245 42,660 3,084 381,997
Cost at January 1, 1999....................
12 788 5,402 34,103 777 41,082
Additions during the year..................
95 59,230 (59,325) --
Transfers in (out).........................
(90) (38) (53) (181)
Disposals..................................
------ ------- ------ ------- ------- ------ --------
12,427 341,319 3,297 44,609 17,438 3,808 422,898
Cost at December 31, 1999..................
------ ------- ------ ------- ------- ------ --------
(570) (49,088) (634) (13,433) -- (694) (64,419)
Accumulated depreciation at January 1,
1999.......................................
(429) (30,941) (437) (6,957) -- (862) (39,626)
Depreciation during the year...............
22 4 -- 15 41
Depreciation on disposals..................
------ ------- ------ ------- ------- ------ --------
(999) (80,007) (1,071) (20,386) -- (1,541) (104,004)
Accumulated depreciation at December 31,
1999.......................................
------ ------- ------ ------- ------- ------ --------
11,428 261,312 2,226 24,223 17,438 2,267 318,894
Net book value at December 31, 1999........
====== ======= ====== ======= ======= ====== ========
11,749 233,091 1,876 25,812 42,660 2,390 317,578
Net book value at December 31, 1998........
====== ======= ====== ======= ======= ====== ========
</TABLE>
NOTE 7--LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C> <C>
Interest bearing loans...................................... 147,757 116,160
Bills of exchange........................................... 67,060 --
Leasing obligations......................................... 1,093 571
------- -------
215,910 116,731
Less--current installments.................................. (99,376) (30,555)
------- -------
116,534 86,176
======= =======
</TABLE>
F-10-11
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 7--LONG-TERM DEBT (CONTINUED)
Interest bearing loans consist of the following:
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
INTEREST DECEMBER 31, DECEMBER 31,
CURRENCY RATE 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Overseas Private
Investment Corporation
(OPIC) (secured loan).................... USD 7.63% 12,000 12,000
Overseas Private USD 8.30% 85,200 68,160
Investment Corporation
(OPIC) (secured loan)....................
Merita Bank (secured loan)............... USD 6 months 36,000 36,000
LIBOR plus
variable
margin
Merita Bank (secured loan)............... USD 7.53% 11,520 --
Siemens.................................. DEM 6.50% 3,037 --
------- -------
Total interest bearing loans............. 147,757 116,160
======= =======
</TABLE>
Terms of repayment of loans to Overseas Private Investment Corporation and
Merita Bank to be paid back in USD:
<TABLE>
<CAPTION>
2000 2001 2002 2003 TOTAL
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
OPIC....................................... 17,040 17,040 17,040 17,040 68,160
OPIC....................................... 4,000 4,000 4,000 12,000
Merita Bank................................ 9,000 9,000 18,000 36,000
------- ------- ------- ------- -------
30,040 30,040 39,040 17,040 116,160
======= ======= ======= ======= =======
</TABLE>
Under the loan agreement with the Overseas Private Investment Corporation
amounting to tLitas 80,160, the Company pledges all its assets with the book
value of tLitas 427,752 as at December 31, 1999, including any related insurance
payments, but excluding a GSM station carried at tLitas 1,301 pledged to a bank
for a customs guarantee.
NOTE 8--OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C> <C>
Advances received........................................... 3,147 1,808
Other payables.............................................. 1,218 6,490
------- -------
4,365 8,298
======= =======
</TABLE>
F-10-12
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 9--OTHER LIABILITIES
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C> <C>
Warranty provision.......................................... -- 171
Deferred taxes.............................................. -- 914
------- -------
-- 1,085
======= =======
</TABLE>
NOTE 10--COMMON STOCK AND RETAINED EARNINGS
At December 31, 1996 common stock comprises 35,720,000 shares of Litas 1
(one). 3,968,889 additional shares were issued during 1997, so that 39,688,889
shares are issued and outstanding at December 31, 1999. No shares have special
rights.
The members of the Board have the following nominal shareholdings in the
Company, based on the common stock of tLitas 39,689:
<TABLE>
<CAPTION>
PER CENT OF
THE
SHARE
SHARES CAPITAL
------ -------
<S> <C> <C>
Viktoras Gediminas Gruodis.................................. 1,230,094 3.1%
Amber Mobile Teleholding AB represented by:
Aimo Olkkonen............................................... 21,828,889 55.0%
Motorola Lithuania Telecom, Inc. represented by:
Kyle Spainhour.............................................. 13,891,111 35.0%
</TABLE>
Included in retained earnings is an amount of tLitas 167 not available for
distribution as required under Lithuanian Company Law.
NOTE 11--COMMITMENTS AND CONTINGENCIES
According to the purchase orders made in 1999, the Company has an obligation
of tLitas 8,514 to acquire equipment and telephones. The value of the obligation
is based on the exchange rate at December 31, 1999.
Vilniaus Bankas has issued a guarantee of tLitas 1,500 in favour of Omnitel
for the customs clearance procedures. The collateral for the guarantee is a
pledge of a GSM station with a book value of tLitas 1,301.
F-10-13
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Omnitel signed rent agreements for land and buildings with a maturity
varying from one to ten years, under non-cancelable operating leases, for which
the future minimum lease payments as of December 31, 1999 are as follows (in
tLitas):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000........................................................ 2,432
2001........................................................ 1,708
2002........................................................ 1,573
2003........................................................ 1,353
2004........................................................ 1,213
Due after 5 years........................................... 3,553
------
11,832
======
</TABLE>
Total rent expenses associated with the above leases for the years ended
December 31, 1997, 1998 and 1999 was tLitas 1,066, tLitas 2,337 and tLitas 2,851
respectively.
NOTE 12--SALES AND SERVICE REVENUES
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
GSM and other unit sales.................................... 37,187 40,270 21,912
GSM service revenue......................................... 153,513 312,460 320,817
Data service revenue........................................ 5,615 8,233 10,061
Other service revenue*...................................... 5,195 5,668 1,723
------- ------- -------
201,510 366,631 354,513
======= ======= =======
</TABLE>
* In 1999 the Company ceased its operations related to segment
administration and sold the business to France Telecom.
NOTE 13--COST OF SALES, PRODUCTS AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
GSM unit costs and price protection......................... 68,352 94,618 30,375
Interconnect and roaming expenses........................... 21,908 40,320 41,251
Internet and data network expenses.......................... 2,037 3,909 4,649
Intelsat expenses........................................... 1,217 1,951 2,453
Frequency channels expenses................................. 1,972 4,222 4,544
Software maintenance expenses............................... -- 4,819 6,259
------- ------- -------
95,486 149,839 89,531
======= ======= =======
</TABLE>
F-10-14
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 14--SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
Sales commissions.......................................... 27,026 27,894 6,955
Airtime commissions........................................ 2,186 5,337 5,382
Advertising expenses....................................... 6,612 8,302 7,630
Salaries, social security costs and bonuses................ 10,676 19,615 24,064
Office expenses............................................ 2,599 3,776 4,579
Billing expenses........................................... 1,083 2,111 2,608
Bank charges and insurance................................. 1,382 2,243 2,383
Operating taxes and charges................................ 1,319 2,811 6,419
Travelling and training expenses........................... 937 1,411 1,311
Bad debt costs............................................. 7,132 17,418 7,342
Other expenses............................................. 3,956 7,201 6,370
------ ------ ------
64,908 98,119 75,043
====== ====== ======
</TABLE>
NOTE 15--INTEREST EXPENSE, NET
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
Interest expense for long-term debt........................ 795 7,854 7,739
Interest expense for short-term financing.................. 7,354 7,023 4,895
Interest income............................................ (274) (242) (1,570)
------ ------ ------
7,875 14,635 11,064
====== ====== ======
</TABLE>
NOTE 16--OTHER INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
Currency exchange gain (loss), net......................... 305 (624) 405
Other income (expense), net................................ 1,007 (43) (241)
------ ------ ------
1,312 (667) 164
====== ====== ======
</TABLE>
NOTE 17--INCOME TAXES
The Company benefits from tax holidays under Article 8 of the Law on Profit
Tax.
Under this law, the Company was totally exempt for five years from
Lithuanian income taxes until June 30, 1999, and after this date is only subject
to income taxes at half the regular rate of tax for three years until June 30,
2002. Thereafter, it is subject to the full regular rate.
Actual and deferred taxes have been provided as from July 1, 1999. At that
date, the financial statement carrying amounts of assets and liabilities are
deemed by the fiscal authorities to be the same as their tax bases. In
particular the written down values of property, plant and equipment have been
F-10-15
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 17--INCOME TAXES (CONTINUED)
historically depreciated at rates allowed for tax purposes, and, accordingly,
there are no temporary differences for tax deferral recognition prior to
July 1, 1999.
Income taxes charged for 1999, but only based on the results of the period
from July 1 to December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Income tax.................................................. 8,362
Deferred tax................................................ 914
-----
9,276
=====
</TABLE>
Income tax is based on income before income taxes of tLitas 66,406, adjusted
for permanent differences and special allowances to produce a taxable income of
tLitas 57,672 to which a rate of 14.5% is applied, being half the regular rate
of 29% applicable to 1999.
Temporary differences arise on certain current assets and liabilities, which
are recovered or settled within short periods of one to six months. With the
introduction of 100% first year depreciation for tax purposes in 1999,
significant temporary differences arise on property, plant and equipment, which
for financial statement purposes continue to be depreciated over their
respective useful lives, in some cases extending to 2006.
Due to a new regular rate of tax of 24% being enacted for 2000 and beyond,
until further notice, half of this rate has been applied to temporary
differences expected to be eliminated up to June 30, 2002 and the full rate
thereafter.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are presented below:
<TABLE>
<S> <C>
Deferred tax asset:
Accrued products and services............................... 112
Accrued holiday reserve..................................... 214
Accrued bonuses and related social security taxes........... 144
Accrued income for prepaid services......................... 366
Allowance for inventory items............................... 133
-----
Total gross deferred tax assets............................. 969
-----
Deferred tax liability:
Accrued receivable.......................................... 21
Depreciation................................................ 1,862
-----
Total gross deferred tax liabilities........................ 1,883
-----
Net deferred tax liability.................................. 914
=====
</TABLE>
F-10-16
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 18--EARNINGS PER SHARE
The calculation of earnings per share is based on:
- net income for the year attributable to ordinary shareholders of tLitas
130,137 (1998: tLitas 73,525, 1997: tLitas 15,523); and
- weighted average number of ordinary shares outstanding during the year of
39,688,889 shares (1998 and 1997: 39,688,889 shares).
The Company has no dilutive potential ordinary shares and therefore the
diluted earnings per share are the same as basic earnings per share.
NOTE 19--RELATED PARTY TRANSACTIONS
UAB Omnitel has a related party relationship with Amber Mobile Teleholding
AB, owned by Sonera and Telia and other shareholders.
UAB Omnitel has purchased and sold goods and services from the following
related parties:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
PURCHASES SALES PURCHASES SALES PURCHASES SALES
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Telia AB and its subsidiaries and associates....... 84 575 113 1,218 2,786 1,384
Sonera Corporation and its subsidiaries and
associates........................................ 53 808 85 1,755 224 2,013
Motorola Inc., subsidiaries and associates......... 6,961 44 57,894 3,060 21,297 1
</TABLE>
UAB Omnitel has the following balances due from/to related parties:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
RECEIVABLE PAYABLE RECEIVABLE PAYABLE RECEIVABLE PAYABLE
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Telia AB and its subsidiaries and associates...... -- -- -- -- 56 222
Sonera Corporation and its subsidiaries and
associates....................................... -- -- -- -- 147 73
Motorola Inc., subsidiaries and associates........ 47,612 47,403 -- 2,567
</TABLE>
All transactions with related companies are based on arm-length principles.
During 1999 Directors of the Company received remuneration in the form of
salaries and bonuses amounting to tLitas 4,792.
F-10-17
<PAGE>
UAB OMNITEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF LITHUANIAN LITAS EXCEPT SHARE DATA)
NOTE 20-- FOREIGN CURRENCY, FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES
At December 31, 1999, the Company held the following positions in foreign
currencies, translated at the exchange rates ruling at the balance sheet date:
<TABLE>
<CAPTION>
OTHER
USD DEM EUR SDR GBP CURRENCY
--- --- --- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
Prepayments................................................. 50 71 13 14
Accounts receivable......................................... 519 3,556 -- --
Cash at bank and in hand.................................... 72,783 6 35 -- -- 7
Deferred expenses........................................... 32
Long-term debt.............................................. (86,120) -- (33) -- -- --
Short-term debt............................................. (30,040) -- (164) -- -- --
Interest payable............................................ (1,198)
Accounts payable............................................ (6,498) (485) (197) (2,470) (229) (475)
-------- ------ ---- ------ ---- ----
December 31, 1999........................................... (50,472) (408) (359) 1,086 (216) (475)
======== ====== ==== ====== ==== ====
December 31, 1998........................................... (208,469) (8,588) (646) 294 175 (121)
======== ====== ==== ====== ==== ====
December 31, 1997........................................... (167,228) (5,221) 35 (1,048) (662) (72)
======== ====== ==== ====== ==== ====
</TABLE>
The fair values of the Company's financial instruments, particularly the
long-term debt, are considered to approximate the carrying values at the
respective balance sheet dates.
The Company had no involvement in derivative financial instruments.
F-10-18
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
CONSOLIDATED FINANCIAL STATEMENTS
(IN JORDANIAN DINAR)
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
F-11-1
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
DECEMBER 31, 1998 AND 1999
(IN JORDANIAN DINAR)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-11-3
Consolidated Balance Sheet.................................. F-11-4
Consolidated Statement of Income............................ F-11-6
Consolidated Statement of Changes in Shareholders' Equity... F-11-7
Consolidated Statement of Cash Flows........................ F-11-8
Notes to Consolidated Financial Statements.................. F-11-9
</TABLE>
F-11-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
AM/ 9149
To the Shareholders of
Pella Investment Company
Amman-Jordan
We have audited the accompanying consolidated balance sheet of Pella
Investment Company (a limited liability company) as of December 31, 1998 and
1999, and the related consolidated statement of income, changes in shareholders'
equity and cash flows for the years ended December 31, 1997, 1998 and 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with International Standards on
Auditing, which are substantially similar to auditing standards generally
accepted in the United States of America. Those Standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Pella Investment
Company as of December 31, 1998 and 1999 and the results of its operations, and
its cash flows for the years ended December 31, 1997, 1998 and 1999 in
conformity with International Accounting Standards.
International Accounting Standards vary in certain respects from accounting
principles generally accepted in the United States of America. In our opinion,
based on our audits, application of accounting principles generally accepted in
the United States would have affected the determination of the amount shown as
net profit for the years ended December 31, 1998 and 1999 and the total amount
of shareholders' equity as of December 31, 1998 and 1999 to the extent
summarized in Note 31 to the consolidated financial statements.
Saba & Co.
Member Firm of Deloitte Touche
Tohmatsu
Amman-Jordan
May 11, 2000
F-11-3
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
CONSOLIDATED BALANCE SHEET
(IN JORDANIAN DINAR)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DECEMBER 31, NOTE (3L)
------------------------- -----------
1998 1999 1999
---- ---- ----
JD JD (UNAUDITED)
US $
(000S)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash on hand and at banks (Note 4).................. 17,353,673 3,367,674 4,743
Short-term investments (Note 5)..................... 250,000 -- --
Accounts receivable--net (Note 6)................... 12,473,832 16,034,985 22,585
Inventories (Note 7)................................ 1,328,453 1,240,266 1,747
Prepaid expenses, refundable deposits and accrued
revenue (Note 8).................................. 795,728 1,318,568 1,857
----------- ----------- -----------
Total Current Assets.............................. 32,201,686 21,961,493 30,932
----------- ----------- -----------
INTANGIBLE ASSETS:
License fees--net (Note 9).......................... 5,090,948 4,621,015 6,508
MTS compensation--net (Note 10)..................... 5,163,956 2,175,181 3,064
Spectrum clearance compensation--net (Note 11)...... 131,297 55,097 78
Other intangible assets--net (Note 12).............. 483,944 701,436 987
Pre-operating expenses--net (Note 13)............... 635,049 267,469 377
----------- ----------- -----------
Total Intangible Assets........................... 11,505,194 7,820,198 11,014
----------- ----------- -----------
FIXED ASSETS (NOTE 14)
Fixed assets--at cost............................... 57,403,795 79,837,015 112,446
LESS: Accumulated depreciation...................... (13,657,011) (20,861,949) (29,383)
----------- ----------- -----------
Net Book Value of Fixed Assets.................... 43,746,784 58,975,066 83,063
----------- ----------- -----------
Fixed Assets to be Deployed......................... 13,212,910 11,665,946 16,431
----------- ----------- -----------
TOTAL ASSETS...................................... 100,666,574 100,422,703 141,440
=========== =========== ===========
</TABLE>
The accompanying notes constitute an integral part of these consolidated
financial statements.
F-11-4
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
CONSOLIDATED BALANCE SHEET
(IN JORDANIAN DINAR)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DECEMBER 31, NOTE (31)
------------------------- -----------
1998 1999 1999
---- ---- ----
JD JD (UNAUDITED)
US $
(000S)
<S> <C> <C> <C>
LIABILITIES
CURRENT LIABILITIES:
Accounts payable (Note 15).......................... 37,585,132 27,707,361 39,024
Accrued expenses (Note 16).......................... 2,778,011 643,166 906
Deferred revenue (Note 17).......................... 997,778 1,025,944 1,445
Current portion of long-term loans (Note 20)........ 4,318,313 3,564,000 5,020
----------- ----------- -----------
Total Current Liabilities......................... 45,679,234 32,940,471 46,395
----------- ----------- -----------
Customers' Deposits (Note 18)....................... 6,959,739 6,725,869 9,473
----------- ----------- -----------
Shareholders' Loans (Note 19)....................... 1,957,035 1,957,035 2,756
----------- ----------- -----------
Long-term Loans (Note 20)........................... 16,075,563 14,339,000 20,196
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Paid-up capital..................................... 21,240,000 21,240,000 29,915
Statutory reserve................................... 1,505,291 3,419,486 4,816
Accumulated profit.................................. 7,249,712 19,800,842 27,889
----------- ----------- -----------
Total Shareholders' Equity........................ 29,995,003 44,460,328 62,620
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ 100,666,574 100,422,703 141,440
=========== =========== ===========
</TABLE>
The accompanying notes constitute an integral part of these consolidated
financial statements.
F-11-5
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
CONSOLIDATED STATEMENT OF INCOME
(IN JORDANIAN DINAR)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
FOR THE YEAR ENDED DECEMBER 31, NOTE (3L)
--------------------------------------- -----------
1997 1998 1999 1999
---- ---- ---- ----
JD JD JD (UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
Service:
Service revenue................................. 32,940,543 57,726,789 68,684,813 96,740
LESS: Interconnection charges (Note 21)......... (4,721,143) (7,254,161) (8,883,661) (12,512)
Other direct costs (Note 22).............. (9,103,025) (15,259,836) (12,860,141) (18,113)
----------- ----------- ----------- -----------
Net Income from Service................... 19,116,375 35,212,792 46,941,011 66,115
----------- ----------- ----------- -----------
Equipment:
Equipment sales................................. 935,956 1,590,889 1,800,688 2,536
LESS: Cost of equipment sold.................... (1,500,572) (3,268,217) (3,576,545) (5,037)
----------- ----------- ----------- -----------
Net (Loss) from Sale of Equipment......... (564,616) (1,677,328) (1,775,857) (2,501)
----------- ----------- ----------- -----------
Gross profit.................................. 18,551,759 33,535,464 45,165,154 63,614
----------- ----------- ----------- -----------
LESS: Revenue sharing (Note 23)................. (5,656,905) (9,412,545) (11,959,499) (16,844)
General and administrative
expenses (Note 24)...................... (8,206,930) (10,221,735) (12,370,773) (17,424)
Net Operating Profit.......................... 4,687,924 13,901,184 20,834,882 29,346
----------- ----------- ----------- -----------
LESS: Interest on bank loans.................... (2,545,544) (2,404,769) (2,133,647) (3,005)
ADD: Other income (Note 25)..................... 596,413 817,693 589,824 831
----------- ----------- ----------- -----------
Net Profit for the Year before Income Tax..... 2,738,793 12,314,108 19,291,059 27,172
LESS: Income Tax................................ -- (3,100,091) (4,825,734) (6,797)
----------- ----------- ----------- -----------
Net Profit for the Year....................... 2,738,793 9,214,017 14,465,325 20,375
Accumulated profit (loss)--beginning
of the year................................... (3,197,807) (732,894) 7,264,627 10,232
----------- ----------- ----------- -----------
(459,014) 8,481,123 21,729,952 30,607
=========== =========== =========== ===========
APPROPRIATION:
Statutory reserve............................... 273,880 1,231,411 1,929,110 2,717
Accumulated Profit--End of the Year............. (732,894) 7,249,712 19,800,842 27,889
----------- ----------- ----------- -----------
(459,014) 8,481,123 21,729,952 30,606
=========== =========== =========== ===========
</TABLE>
The accompanying notes constitute an integral part of these consolidated
financial statements.
F-11-6
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN JORDANIAN DINAR)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
FOR THE YEAR ENDED DECEMBER 31, NOTE (31)
------------------------------------ ------------
1997 1998 1999 1999
---- ---- ---- ----
JD JD JD (UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
PAID-UP CAPITAL:
Beginning Balance............................. 21,240,000 21,240,000 21,240,000 29,915
Increase during the year...................... -- -- -- --
---------- ---------- ---------- ----------
Ending Balance.............................. 21,240,000 21,240,000 21,240,000 29,915
========== ========== ========== ==========
STATUTORY RESERVE:
Beginning Balance............................. -- 273,880 1,490,376 2,099
Increase during the year...................... 273,880 1,231,411 1,929,110 2,717
---------- ---------- ---------- ----------
Ending Balance.............................. 273,880 1,505,291 3,419,486 4,816
========== ========== ========== ==========
ACCUMULATED PROFIT (LOSS):
Beginning balance............................. (3,197,807) (732,894) 7,264,627 10,232
Net profit for the year....................... 2,738,793 9,214,017 14,465,325 20,374
Transfer to statutory reserve................. (273,880) (1,231,411) (1,929,110) (2,717)
---------- ---------- ---------- ----------
Ending Balance.............................. (732,894) 7,249,712 19,800,842 27,889
========== ========== ========== ==========
</TABLE>
The accompanying notes constitute an integral part of these consolidated
financial statements.
F-11-7
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN JORDANIAN DINAR)
<TABLE>
<CAPTION>
CONVENIENCE
FOR THE YEAR ENDED TRANSLATION
DECEMBER 31, NOTE (3L)
--------------------------------------- -----------
1997 1998 1999 1999
---- ---- ---- ----
JD JD JD (UNAUDITED)
US $
(000S)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit for the year................................... 2,738,793 9,214,017 14,465,325 20,375
Adjustments for:
MTS compensation amortization............................. 2,988,768 2,995,118 2,988,775 4,209
Spectrum clearance compensation amortization.............. 76,199 69,850 76,200 107
License fees amortization................................. 469,932 469,932 469,933 662
Other intangible assets amortization...................... 22,466 44,023 145,298 205
Fixed assets depreciation................................. 4,288,975 6,525,203 7,394,512 10,415
Amortization of pre-operating expenses.................... 367,500 367,500 367,580 518
Provision for doubtful debts and bad debts written-off.... 1,016,209 1,375,230 2,506,506 3,530
Provision for inventory write-down........................ 305,277 -- -- --
Stock write-down.......................................... 677,926 61,496 259,642 366
Loss on disposal of fixed assets.......................... 224,058 10,063 18,309 26
Prior year adjustments.................................... (14,692) -- -- --
Interest expense.......................................... 2,545,544 2,404,769 2,133,647 3,005
----------- ----------- ----------- -----------
Net Cash Flows from Operating Activities before Changes
in Working Capital.................................... 15,706,955 23,537,201 30,825,727 43,418
(Increase) in accounts receivable......................... (3,244,720) (7,797,900) (6,067,659) (8,546)
(Increase) decrease in inventory.......................... 7,461 (370,480) (171,455) (241)
(Increase) in prepaid expenses and refundable deposits.... (121,801) (111,982) (522,840) (736)
(Decrease) increase in accounts payable................... 8,101,299 4,114,199 (2,572,305) (3,623)
(Decrease) increase in accrued expenses................... 843,409 1,049,763 (1,706,886) (2,404)
Increase in deferred revenue.............................. 246,198 174,070 28,166 40
Customer deposits......................................... 1,859,074 2,038,224 (233,870) (329)
----------- ----------- ----------- -----------
Cash from Operations.................................... 23,397,875 22,633,095 19,578,878 27,579
Interest paid............................................. (2,329,023) (2,450,643) (2,561,606) (3,608)
----------- ----------- ----------- -----------
Net Cash from Operating Activities...................... 21,068,852 20,182,452 17,017,272 23,971
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other intangible assets paid.............................. (164,000) (331,500) (362,790) (511)
Acquisition of fixed assets............................... (11,206,526) (7,962,276) (3,273,306) (4,610)
Purchase of investments................................... -- (250,000) (250,000) (352)
Proceed from sale of investments.......................... -- -- 500,000 704
Additions on fixed assets to be deployed.................. (2,427,591) (1,094,019) (4,201,328) (5,917)
Proceeds from sale of fixed assets........................ 75,680 19,205 100 --
----------- ----------- ----------- -----------
Net Cash (used in) Investing Activities................. (13,722,437) (9,618,590) (7,587,324) (10,686)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable................................ -- -- (20,925,071) (29,472)
Payment of loans -- (3,254,374) (2,490,876) (3,508)
----------- ----------- ----------- -----------
Net Cash (used in) from Financing Activities............ -- (3,254,374) (23,415,947) (32,980)
----------- ----------- ----------- -----------
(Decrease) Increase in Cash and Cash Equivalents.......... 7,346,415 7,309,488 (13,985,999) (19,695)
Cash and Cash Equivalents--beginning of the year.......... 2,697,770 10,044,185 17,353,673 24,442
----------- ----------- ----------- -----------
Cash and Cash Equivalents--End of the Year 10,044,185 17,353,673 3,367,674 4,747
=========== =========== =========== ===========
</TABLE>
The accompanying notes constitute an integral part of these consolidated
financial statements.
F-11-8
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN JORDANIAN DINAR)
NOTE 1--GENERAL
Pella Investment Company was registered in Jordan on March 19, 1994 as a
limited liability Company in accordance with the Companies Law No. 1 of 1989,
under registration No. 3497 with initial capital of JD 100,000. During 1996, the
Company increased its paid-up capital to JD 21,240,000. The Company had an
exclusivity agreement through its subsidiary (Jordan Mobile Telephone Services
Company) with the Telecommunication Regulatory Commission which ended on
November 1, 1998. As of November 1st, 1998, other companies are permitted to
enter into the same business. Consequently, another company (MobileCom) was
recently granted a license to operate a GSM cellular telephone network in
Jordan. They are still in the setup stage and will start operations later during
the year 2000.
NOTE 2--BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of Jordan Mobile Telephone Services Company "JMTS" (a wholly owned
subsidiary), registered in Jordan on November 13, 1993 as a limited liability
company in accordance with the companies law No. 1 of 1989 under registration
No. 3364.
Inter-Company transactions and balances are eliminated from the consolidated
financial statements.
NOTE 3--SIGNIFICANT ACCOUNTING POLICIES
a. Revenue is measured at the fair value of the consideration received or
receivable and recognized when services are rendered and when equipment is
sold.
b. Cash and cash equivalents consist of cash on hand and at banks.
c. Accounts receivable are stated at net realizable value. Doubtful debts are
provided for at a rate ranging from 3.5% to 7% of service revenue less
roaming and Jordan Telecommunication Company "JTC" service revenue, adjusted
for individual account balances at year-end.
d. Inventories are stated at the lower of cost, following the first-in
first-out method, or net realizable value.
e. License fees are amortized over the life of the license of 15 years,
starting from the date of signing the license agreement. MTS compensation
and spectrum clearance compensation are amortized over 5 years, from the
date of commencement of operations. Other intangible assets, which include
key money, and license fees paid to Royal Air Force, are amortized over
5 years (starting from the date of signing the agreement with Royal Air
Force for the license fees).
f. Expenses and key money incurred in the pre-operating stage were deferred
until the commencement of operations on September 23, 1995, as of which date
they have been amortized over 5 years.
g. Key money arising from newly rented centers and shops is amortized over
5 years from the date of acquisition. The term "Key money" refers to the
one-time payment by the tenant to the landlord when renting a store or an
office.
h. Fixed assets are stated at cost, and depreciated using the straight line
method at annual rates ranging from 2% to 25%.
F-11-9
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 3--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
i. Short-term investments are stated at the lower of cost or market value at
year end.
j. The Company provides for income tax in accordance with IAS 12. Deferred
taxation is accounted for under the liability method in accordance with IAS
12, for the difference between the book and the tax basis for assets and
liabilities. Under IAS 12, timing differences give rise to a deferred tax
asset or liability, which due to its uncertainty and immateriality, has not
been recognized in the financial statements.
k. Financial instruments include on-balance sheet items. On-balance sheet
instruments include investments, receivables, cash, payables and certain
other assets and liabilities.
The financial instruments' book values approximate their market value.
l. Solely for the convenience of the reader, the amounts pretaining to the
latest fiscal year are translated from the Jordanian Dinar to the United
States Dollar at the rate on December 31, 1999 of 0.71 Jordanian Dinar per
United States Dollar.
NOTE 4--CASH ON HAND AND AT BANKS
This item includes an amount of JD 375,325 representing cash blocked to pay
back a portion of notes payable in the total amount of JD 12,878,737 used to
finance the acquisition of cellular equipment.
NOTE 5--SHORT-TERM INVESTMENTS
This item consists of Certificates of Deposit at the Export and Finance Bank
which matured on September 3, 1999.
NOTE 6--ACCOUNTS RECEIVABLE--NET
This item consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Trade receivables.................................... 9,892,378 14,405,376
LESS: Provision for doubtful debts................... (543,685) (544,009)
---------- ----------
Net Trade Receivables................................ 9,348,693 13,861,367
Due from related parties (Note 27)................... 214,626 225,653
GSM Facilities Ltd................................... 52,190 37,020
Employees advances................................... 1,556 70,038
Business advances.................................... 64,595 --
Advance payments to suppliers........................ 86,616 --
Roaming partners..................................... 833,000 933,186
Jordan Telecommunication Company..................... 1,753,188 885,613
Other................................................ 119,368 22,108
---------- ----------
12,473,832 16,034,985
========== ==========
</TABLE>
F-11-10
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 7--INVENTORIES
This item consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---- ----
<S> <C> <C>
Cellular phones........................................ 659,081 851,611
SIM (subscriber identity module) cards................. 89,486 99,585
SIM cards-ezlink....................................... -- 59,073
Accessories............................................ 311,352 106,858
Spare parts............................................ 101,623 123,139
Telular units and parts................................ 141,082 --
Antennas............................................... 247 --
Inventory in transit................................... 330,859 --
--------- ---------
1,633,730 1,240,266
LESS: Provision for permanent diminution in value...... (305,277) --
--------- ---------
1,328,453 1,240,266
========= =========
</TABLE>
------------------------
* The Company disposed of obsolete stock in the amount of JD 391,976 during
the year 1999, of which an amount of JD 259,642 was charged to 1999 income
statement (see note 24), while the remainder was charged to the provision
for permanent diminution in value. The disposal of obsolete stock was
carried out in the presence of an income tax officer.
The movement on the provision of permanent diminution in value during the
year was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Balance--beginning of the year................... -- 305,277 305,277
ADD:
Provision for the year......................... 305,277 61,496 259,642
DEDUCT:
Stock write-down............................... -- 61,496 564,919
------- ------- -------
Balance--End of the Year..................... 305,277 305,277 --
======= ======= =======
</TABLE>
F-11-11
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 8--PREPAID EXPENSES, REFUNDABLE DEPOSITS AND ACCRUED REVENUE
This item consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
---- ----
<S> <C> <C>
Prepaid rent............................................ 451,562 387,061
Prepaid insurance....................................... 84,302 109,318
Prepaid maintenance..................................... 102,985 140,826
Prepaid subscriptions................................... 8,981 9,993
Prepaid security........................................ 1,500 1,080
Prepaid mortgage release expenses....................... -- 82,449
Prepaid loan fees....................................... 35,480 169,231
Prepaid leased line fees................................ 26,267 15,307
Refundable deposits..................................... 75,741 264,552
Accrued revenue......................................... 2,728 117,000
Other................................................... 6,182 21,751
------- ---------
795,728 1,318,568
======= =========
</TABLE>
NOTE 9--LICENSE FEES--NET
This item consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
License fees......................................... 7,049,000 7,049,000
LESS: Accumulated amortization....................... (1,958,052) (2,427,985)
---------- ----------
5,090,948 4,621,015
========== ==========
</TABLE>
F-11-12
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 10--MTS COMPENSATION--NET
This item represents the compensation paid to the Telecommunication
Corporation (TCC), currently Jordan Telecom, for the right to switch-off the
motor car Mobile Telephone System (MTS) and the related university fees and
revenue stamps as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---- ----
<S> <C> <C>
MTS compensation.................................... 14,840,000 14,840,000
University fees and revenue stamps.................. 103,880 103,880
---------- -----------
14,943,880 14,943,880
LESS: Accumulated amortization...................... (9,779,924) (12,768,699)
---------- -----------
5,163,956 2,175,181
========== ===========
</TABLE>
NOTE 11--SPECTRUM CLEARANCE COMPENSATION--NET
This item represents amounts paid to various parties to vacate a range of
frequencies, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
---- ----
<S> <C> <C>
Spectrum clearance compensation......................... 381,000 381,000
LESS: Accumulated amortization.......................... (249,703) (325,903)
-------- --------
131,297 55,097
======== ========
</TABLE>
NOTE 12--OTHER INTANGIBLE ASSETS--NET
This item represents amounts paid to the Royal Air Force for establishing a
fiber optic link between 3 sites with JMTS network. It also includes key money
for renting a center in Shmeisani and 6 shops as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
---- ----
<S> <C> <C>
Royal Air Force license fees............................. 228,000 228,000
Key money................................................ 331,500 694,290
LESS: Accumulated amortization........................... (75,556) (220,854)
------- --------
483,944 701,436
======= ========
</TABLE>
F-11-13
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 13--PRE-OPERATING EXPENSES--NET
The details of this item are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Salaries and wages........................................ 216,077 216,077
Amortization and depreciation............................. 441,112 441,112
Professional fees......................................... 375,154 375,154
Rent and key money........................................ 184,031 184,031
Advertising............................................... 91,115 91,115
Stationery and printing................................... 83,910 83,910
Social security and health insurance...................... 17,908 17,908
Interest on credit facilities *........................... 74,451 74,451
Bank charges.............................................. 54,945 54,945
Insurance................................................. 16,076 16,076
Travel and accommodation.................................. 54,580 54,580
Transportation............................................ 28,467 28,467
Communication and postage................................. 29,772 29,772
Entertainment............................................. 11,642 11,642
Government fees........................................... 23,684 23,684
Market research........................................... 9,750 9,750
Training.................................................. 74,097 74,097
Utilities................................................. 12,207 12,207
Miscellaneous............................................. 38,666 38,666
---------- ----------
Total Pre-Operating Expenses............................ 1,837,644 1,837,644
LESS: Accumulated amortization............................ (1,202,595) (1,570,175)
---------- ----------
Net Pre-Operating Expenses.............................. 635,049 267,469
========== ==========
</TABLE>
--------------------------
* This item represents interest on credit facilities extended by
Motorola, Inc. for the purchase of cellular equipment.
F-11-14
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 14--FIXED ASSETS
The details of this item are as follows:
<TABLE>
<CAPTION>
BUILDING
COMPUTER RENOVATION FURNITURE
CELLULAR AND OFFICE AND CELL SITES AND
EQUIPMENT EQUIPMENT CONSTRUCTION CONSTRUCTION VEHICLES FIXTURES LAND TOTAL
--------- --------- ------------ ------------ -------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost:
Beginning balance........ 43,058,079 3,372,604 1,579,561 8,540,917 606,360 246,274 -- 57,403,795
Additions.................. 17,670,243 1,755,609 357,603 2,402,006 151,694 64,298 239,750 22,641,203
Disposals.................. -- 207,811 -- -- -- 172 -- 207,983
---------- --------- --------- ---------- ------- ------- ------- ----------
Ending Balance......... 60,728,322 4,920,402 1,937,164 10,942,923 758,054 310,400 239,750 79,837,015
---------- --------- --------- ---------- ------- ------- ------- ----------
Accumulated Depreciation:
Beginning balance........ 8,818,232 1,392,035 815,767 2,385,026 193,134 52,817 -- 13,657,011
Additions................ 5,491,646 1,012,955 91,263 680,320 94,056 24,272 -- 7,394,512
Disposals................ -- 189,420 -- -- -- 154 -- 189,574
---------- --------- --------- ---------- ------- ------- ------- ----------
Ending Balance......... 14,309,878 2,215,570 907,030 3,065,346 287,190 76,935 -- 20,861,949
---------- --------- --------- ---------- ------- ------- ------- ----------
Net Book Value--
December 31, 1999.... 46,418,444 2,704,832 1,030,134 7,877,577 470,864 233,465 239,750 58,975,066
========== ========= ========= ========== ======= ======= ======= ==========
Net Book Value--
December 31, 1998.... 34,239,847 1,980,569 763,794 6,155,891 413,226 193,457 -- 43,746,784
========== ========= ========= ========== ======= ======= ======= ==========
Depreciation rate %........ 12 25 2 - 12 10 15 9
</TABLE>
The Company's cellular equipment, cell sites constructions, computer and
office equipment, vehicles, and furniture and fixtures are pledged as collateral
against the JMTS long-term loans.
Effective January 1, 1999, the subsidiary company, JMTS, revised its
estimate of the depreciation rate of the cell sites constructions. Previously,
cell sites constructions were depreciated at 20%. The depreciation rate was
changed to 10% and so the useful life was extended. The change was made to
better reflect the estimated periods during which cell sites constructions will
remain in service. The change had the effect of reducing depreciation expense by
approximately JD 1,147,993 for the year ended December 31, 1999 and accordingly
increasing net profit before tax by approximately JD 1,147,993 for the year
then ended.
F-11-15
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 15--ACCOUNTS PAYABLE
This item consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Accounts and notes payables trade *.................. 21,480,733 14,069,166
Revenue sharing due to the Ministry of Finance....... 10,805,234 6,194,991
Roaming interconnect--Tap in......................... 95,000 472,183
Employees income tax and social security withheld.... 59,164 22,704
Provision for income tax............................. 3,851,404 4,814,465
Calls and features tax............................... 761,422 1,168,212
Provision for legal fees............................. 100,000 --
Other................................................ 432,175 965,640
---------- ----------
37,585,132 27,707,361
========== ==========
</TABLE>
* This item includes an amount of JD 12,878,737 as of December 31, 1999
(JD 20,184,203 as of December 31, 1998), representing notes payable used to
finance the purchase of cellular equipment. These notes are of a short-term
nature (1 year from issuance). The notes, which were issued during 1998 do
not carry any interest (implicitly or explicitly), while the notes issued
during 1999 are of two kinds, the first of which is interest bearing (LIBOR
plus 2%), while the second type is non-interest bearing.
F-11-16
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 16--ACCRUED EXPENSES
The details of this item are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
---- ----
<S> <C> <C>
Interest on bank loans...................................... 471,673 43,714
Frequency fees.............................................. 210,142 --
Professional fees........................................... 9,000 26,060
Utilities................................................... 63,826 37,364
Leased line accrued fees.................................... 347,935 --
Management fees............................................. 27,420 350
Overtime & bonus............................................ 438,000 212,000
Withholding tax (10%)....................................... 208,737 --
Sales commission............................................ 144,873 13,175
Government fees............................................. 200,000 --
Roaming fees................................................ 215,910 29,000
Advertising................................................. 14,236 115,457
Maintenance................................................. 7,313 36,025
Collection commission....................................... 10,000 5,000
Billing expense............................................. 12,100 71,364
Communications.............................................. 8,422 10,161
Insurance................................................... 30,206 --
Training.................................................... 50,000 18,683
Other....................................................... 308,218 24,813
--------- -------
2,778,011 643,166
========= =======
</TABLE>
NOTE 17--DEFERRED REVENUE
This item consists of unearned monthly subscriptions fees paid in advance by
the subscribers.
NOTE 18--CUSTOMERS' DEPOSITS
This item represents the deposits paid by customers upon initial
subscription and refundable upon cancellation of subscription after settlement
of all outstanding invoices.
NOTE 19--SHAREHOLDERS' LOANS
This item consists of interest free loans extended by the shareholders. The
loans are subordinated against all debts of the Company and, accordingly,
considered as long-term debts. The loan has no maturity date.
F-11-17
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 20--LONG-TERM LOANS
This item consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Syndicated loans managed by Arab Bank................ 9,762,063 15,640,000
Arab Bank loan....................................... -- 2,263,000
International Finance Corporation loan............... 10,631,813 --
---------- ----------
20,393,876 17,903,000
LESS: Current portion................................ 4,318,313 3,564,000
---------- ----------
Long-Term Portion.................................. 16,075,563 14,339,000
========== ==========
</TABLE>
- On June 21, 1999, JMTS signed a syndicated loan agreement managed by Arab
Bank Ltd. in the amount of JD 10,640,000 at an annual interest rate of
12%, subject to amendment at the end of each period. The loan agreement
stipulates that a late payment fee of 1% is to be charged on any delay in
the payment of any installment.
- The principal amount and accrued interest of the loan will be settled in
ten equal semi-annual installments, the first to be paid after 18 months
from signing the loan agreement and the last to be paid after six years
from the date of signing the loan agreement. The loan agreement further
stipulates that a commission of 0.25% of total facilities is to be paid to
the agent upon signing the loan agreement. The purpose of the loan is the
settlement of the International Finance Corporation loan previously
granted to JMTS in the amount of USD 15 million.
- In addition to the above mentioned syndicated loan, JMTS still has to
settle the remaining balance of the old two-tranche syndicated loan
managed by Arab Bank in the amounts of JD 10 million and
USD 4.25 million. The outstanding balance to be settled by JMTS was
JD 5 million as of December 31, 1999, at an annual interest rate of 12.5%
p.a., subject to amendment at the end of each interest period.
On June 21, 1999, JMTS signed a loan agreement with Arab Bank Ltd. in the
amount of JD 2,263,000 at an annual interest rate of 10.5%, such interest
to be paid semi annually. The loan agreement stipulates that a late
payment fee of 1% is to be charged on any delay in the settlement of any
installment.
The principal amount of the loan will be settled in one payment falling
due on June 30, 2004. The purpose of the loan is the settlement of the
remaining balance of the USD tranche of the syndicated loan, in the amount
of USD 4,250,000, managed by Arab Bank.
NOTE 21--INTERCONNECTION CHARGES
This item consists of charges paid to Jordan Telecom for connecting the
mobile system to the public service telephone network (PSTN).
F-11-18
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 22--OTHER DIRECT COSTS
The details of this item are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
MTS compensation amortization............................. 2,988,768 2,995,118 2,988,775
Spectrum compensation amortization........................ 76,199 69,850 76,200
License fees amortization................................. 469,932 469,932 469,933
Other intangible assets amortization...................... 22,466 44,023 145,298
Cellular equipment, cell sites and rental phones
depreciation............................................ 3,460,974 5,393,682 6,171,966
Frequency fees............................................ 206,150 307,420 173,928
Leased lines.............................................. 36,368 358,827 28,707
Billing expenses.......................................... 223,486 274,597 466,740
Sales commissions......................................... 565,395 1,514,231 1,860,047
Promotional expenses...................................... 960,971 3,224,400 80,165
Roaming port.............................................. 92,316 607,756 226,665
Collection commission..................................... -- -- 171,717
--------- ---------- ----------
9,103,025 15,259,836 12,860,141
========= ========== ==========
</TABLE>
NOTE 23--REVENUE SHARING
In accordance with the license agreement, a minimum of JD 8,449,832 or 20%
of the annual service revenue less interconnection charges and promotional
expenses, whichever is greater, is payable to the Ministry of Finance in the
fifth year of the commencement of the license. The fifth year of the agreement
covers the period from November 1, 1998 to October 31, 1999. However, the above
mentioned percentage was reduced to 10% under a revised agreement, starting from
January 1, 2000 (see Note 29).
F-11-19
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 24--GENERAL AND ADMINISTRATIVE EXPENSES
The details of this item are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Salaries and other employee benefits..... 1,300,611 1,921,911 2,266,401
Social security contribution............. 88,648 124,988 144,803
Provident fund........................... -- -- 51,290
Professional fees........................ 457,504 458,126 597,615
Advertising.............................. 242,959 525,428 1,031,822
Pre-operating expenses amortization...... 367,500 367,500 367,503
Rent..................................... 584,769 843,121 988,474
Training and seminars.................... 121,852 168,571 271,427
Utilities................................ 175,537 246,981 382,827
Transportation........................... 49,931 88,049 97,398
Insurance................................ 180,000 275,878 188,720
Fixed assets depreciation................ 828,001 1,131,523 1,222,546
Communication and postage................ 193,446 254,639 163,745
Government fees.......................... 53,022 352,537 77,765
Travel and hotel accommodation........... 189,168 365,059 371,672
Printing and stationery.................. 99,583 93,612 116,849
Provision for doubtful debts............. 196,035 257,650 324
Debts written--off....................... 820,174 1,117,580 2,506,182
Bank charges............................. 100,258 234,194 129,438
Loss on disposal of assets............... 224,058 10,063 18,309
Maintenance.............................. 268,241 386,526 699,551
Withholding tax.......................... 302,980 40,543 24,929
Loan fees................................ 110,932 102,074 104,834
Entertainment............................ 13,321 27,967 32,779
Stock write-down......................... 983,203 61,496 259,642
Other.................................... 255,197 765,719 253,928
---------- ---------- ----------
8,206,930 10,221,735 12,370,773
========== ========== ==========
</TABLE>
F-11-20
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 25--OTHER INCOME (EXPENSE)
The details of this item are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest revenue................................. 580,770 786,842 633,102
Difference on exchange........................... (5,907) (23,749) (50,311)
Other income..................................... 21,550 54,600 7,033
------- ------- -------
596,413 817,693 589,824
======= ======= =======
</TABLE>
NOTE 26--TRANSACTIONS WITH RELATED PARTIES
Transactions with related parties and relationships during the year 1999
were as follows:
<TABLE>
<CAPTION>
DUE FROM RELATED
PARTIES AS OF
RELATED PARTY DECEMBER 31, 1999
------------- -----------------
<S> <C>
Pioneer (Shareholders)................................... 160,918
Motorola Inc. (Shareholders)............................. 61,831
Habib Ghawi (Shareholders)............................... 2,904
-------
225,653
=======
</TABLE>
Related parties transactions and relationships during the year 1998 were as
follows:
<TABLE>
<CAPTION>
DURING THE
YEAR 1998
DUE FROM (TO) ---------------
RELATED PARTIES EXPENSES
AS OF PAID TO
RELATED PARTY DECEMBER 31, 1998 RELATED PARTIES
------------- ----------------- ---------------
<S> <C> <C>
Shareholders of Pella Investment Co...................... 195,800 --
United Insurance......................................... (15,535) 257,672
Habib Ghawi.............................................. 1,043 --
Ziad Abu Jaber........................................... 17,783 --
</TABLE>
Transactions with related parties represent expenses paid by Pella
Investment Company, prior to 1999, on behalf of its shareholders. Such expenses
include legal fees, telephone bills and other expenses.
F-11-21
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 27--CONTINGENT LIABILITIES
As of December 31, 1999 the Company was contingently liable for the
following:
<TABLE>
<CAPTION>
JD
--
<S> <C>
Letters of credit........................................... 1,602,664
Letters of guarantee........................................ 3,006,377
---------
4,609,041
=========
</TABLE>
NOTE 28--AMENDMENT TO THE LICENSE AGREEMENT
On December 21, 1999, JMTS. signed an amendment to the existing agreement
with Telecommunications Regulatory Commission, the main features of which are:
- The Company is exempt from custom duties and related taxes on new
expenditures on cellular infrastructure for a period of 4 years beginning
January 1, 2000.
- The revenue sharing percentage due to Government is reduced from 20% to
10%.
- Customer rates and charges are reduced.
- The Company is given a discount on international charges for use of the
Jordaninan telecommunication network.
NOTE 29--NON CASH FINANCING AND INVESTING ACTIVITIES
The Subsidiary Company (JMTS) has issued notes payable amounting to
JD 20,184,203 and JD 13,619,605 during 1998 and 1999, respectively to finance
the acquisition of fixed assets and fixed assets to be deployed as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
JD JD
<S> <C> <C>
Fixed assets to be deployed.......................... 8,915,382 8,801,386
Cellular equipment................................... 11,268,821 4,818,219
---------- ----------
20,184,203 13,619,605
========== ==========
</TABLE>
NOTE 30--COMPARATIVE FIGURES
Some of the comparative figures for the year ended December 31, 1998 have
been reclassified to correspond with the current year presentation.
F-11-22
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 31--RECONCILIATION TO U.S. GAAP
RECONCILIATION OF NET INCOME TO U.S. GAAP:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
NOTE 1998 1999
-------- --------- ----------
JD JD
<S> <C> <C> <C>
Net Profit under International Accounting Standards (IAS)... 9,214,017 14,465,325
U.S. GAAP adjustments:
Amortization of pre-opening expenses...................... (a) 367,500 367,500
Capitalization of interest................................ (b) 26,346 207,986
Tax effect of U.S. GAAP adjustments....................... (c) (98,462) (143,872)
--------- ----------
Net profit under U.S. GAAP................................ 9,509,401 14,896,939
========= ==========
</TABLE>
RECONCILIATION OF SHAREHOLDERS' EQUITY TO U.S. GAAP:
<TABLE>
<CAPTION>
BALANCE AS OF
DECEMBER 31,
-----------------------
NOTE 1998 1999
-------- ---------- ----------
JD JD
<S> <C> <C> <C>
Stockholders' equity as reported in the consolidated Balance
Sheet under IAS........................................... 29,995,003 44,460,328
U.S. GAAP adjustments:
Pre-operating expenses--net............................... (a) (635,049) (267,469)
Capitalization of interest................................ (b) 26,346 234,332
Tax effect of U.S. GAAP adjustments....................... (c) 152,176 8,284
---------- ----------
Stockholders equity under U.S. GAAP....................... 29,538,476 44,435,475
========== ==========
</TABLE>
a) Pre-operating expenses
The IAS was silent with respect to pre-operating expenses, in particular, as
it was not mentioned whether those are to be expensed when incurred or
deferred and amortized over a certain period of time. However, the practice
adopted was to defer those expenses when incurred and to amortize them over
a period of 5 years due to the fact that the benefits are extended for more
than one year. Furthermore, IAS 38, which addressed directly pre-operating
expenses is effective for the financial statements beginning on or after
July 1, 1999. According to U.S. GAAP, pre-operating expenses are to be
expensed when incurred.
b) Capitalization of interest
The Company did not capitalize interest on the construction of its new
building, as it is optional under IAS. In accordance with U.S. GAAP,
interest costs incurred during the construction period (i.e., the period of
time necessary to bring a constructed fixed asset to the condition and
location necessary for its intended use) must be capitalized and amortized.
The Company did not capitalize
F-11-23
<PAGE>
PELLA INVESTMENT COMPANY
(A LIMITED LIABILITY COMPANY)
AMMAN-JORDAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN JORDANIAN DINAR)
NOTE 31--RECONCILIATION TO U.S. GAAP (CONTINUED)
any interest on the construction of its new building. The interest that
should have been capitalized according to U.S. GAAP was JD 26,346 and JD
207,986 for the years 1998 and 1999 respectively.
Furthermore, the building was still under construction as of December 31,
1999, and accordingly, there is no depreciation that will result from the
capitalization of interest made to reconcile with U.S. GAAP.
c) Tax effect of U.S. GAAP adjustments
This reconciliation item includes all tax effects due to the aforementioned
reconciling items.
F-11-24
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
(With Report of Independent Auditors)
F-12-1
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-12-3
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-12-4
Consolidated Statements of Operations for the three years
ended December 31, 1997, 1998 and 1999.................... F-12-5
Consolidated Statements of Changes in Shareholders'
Equity/(Deficit) for the three years ended December 31,
1997, 1998 and 1999....................................... F-12-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997, 1998 and 1999.................... F-12-7 and 8
Notes to Consolidated Financial Statements.................. F-12-9 to 23
</TABLE>
F-12-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of Hutchison Telephone Company Limited
We have audited the accompanying consolidated balance sheets of Hutchison
Telephone Company Limited and its subsidiary as of December 31, 1998 and 1999,
and the related consolidated statements of operations, of cash flows and of
changes in shareholders' equity/(deficit) for each of the three years in the
period ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Hutchison Telephone
Company Limited and its subsidiary at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 1998, and 1999 in conformity with accounting
principles generally accepted in the United States of America.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, May 4, 2000
F-12-3
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 2(V))
-----------
(UNAUDITED)
DECEMBER 31, US $
------------------------- (000S)
NOTE 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................. $ 819 $ 13,411 $ 1,726
Accounts receivable, net................... 3 51,587 117,746 15,154
Other receivables, deposits and
prepayments.............................. 4 220,595 254,503 32,755
Inventories................................ 5 142,950 168,971 21,746
Amounts due from affiliates................ 9 186,153 385,813 49,654
----------- ----------- ---------
TOTAL CURRENT ASSETS......................... 602,104 940,444 121,035
Property, plant and equipment................ 6 3,086,108 3,267,519 420,530
Restricted investments and other asset....... 7 2,955,011 2,920,560 375,876
----------- ----------- ---------
TOTAL ASSETS................................. $ 6,643,223 $ 7,128,523 $ 917,441
=========== =========== =========
LIABILITIES
CURRENT LIABILITIES..........................
Trade accounts payable..................... $ 166,235 $ 267,990 $ 34,490
Other payables and accrued liabilities..... 8 352,404 481,131 61,922
Service subscription fees received in
advance.................................. 117,155 620,577 79,868
Amounts due to affiliates.................. 9 48,556 95,602 12,304
Current portion of capital lease
obligations.............................. 11 57,109 114,984 14,798
----------- ----------- ---------
TOTAL CURRENT LIABILITIES.................... 741,459 1,580,284 203,382
Long term loans from affiliates.............. 10 4,199,025 3,211,698 413,346
Obligations under capital lease, less current
portion.................................... 11 2,781,636 2,689,026 346,078
Deferred gain on defeasance of capital
lease...................................... 115,664 101,175 13,021
----------- ----------- ---------
TOTAL LIABILITIES............................ 7,837,784 7,582,183 975,827
----------- ----------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES....... 17 & 18
SHAREHOLDERS' DEFICIT
Share capital.............................. 12 1,000 1,195 154
Additional paid-in capital................. -- 2,729,426 351,277
Accumulated losses......................... (1,195,561) (3,184,281) (409,817)
----------- ----------- ---------
TOTAL SHAREHOLDERS' DEFICIT.................. (1,194,561) (453,660) (58,386)
----------- ----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIT.................................... $ 6,643,223 $ 7,128,523 $ 917,441
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12-4
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 2(V))
-----------
(UNAUDITED)
YEAR ENDED DECEMBER 31, US $
------------------------------------- (000S)
1997 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................... $4,186,025 $4,051,165 $ 4,070,071 $ 523,818
---------- ---------- ----------- ---------
Operating expenses
Cost of revenues........................... 3,607,894 3,486,728 4,471,011 575,419
Selling and marketing expenses............. 477,737 649,421 880,451 113,314
General and administrative expenses........ 301,186 297,004 311,128 40,042
---------- ---------- ----------- ---------
Total operating expenses................... 4,386,817 4,433,153 5,662,590 728,775
---------- ---------- ----------- ---------
Loss from operations....................... (200,792) (381,988) (1,592,519) (204,957)
Interest income............................ 98,957 245,077 87,086 11,208
Interest expense (note 13)................. (389,751) (700,346) (497,776) (64,064)
Other income............................... -- 7,088 14,489 1,865
---------- ---------- ----------- ---------
Loss before provision for income tax....... (491,586) (830,169) (1,988,720) (255,948)
Income tax credit (note 14)................ (46,315) -- -- --
---------- ---------- ----------- ---------
Net loss for the year...................... $ (445,271) $ (830,169) $(1,988,720) $(255,948)
========== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12-5
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY/(DEFICIT)
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED TOTAL
AUTHORIZED ADDITIONAL EARNINGS/ SHAREHOLDERS'
AND ISSUED PAID-IN (ACCUMULATED EQUITY/
SHARES AMOUNT CAPITAL LOSSES) (DEFICIT)
------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997................... 100,000 $1,000 $ -- $ 79,879 $ 80,879
Net loss for the year........................ -- -- -- (445,271) (445,271)
------- ------ ---------- ----------- -----------
Balance at December 31, 1997................. 100,000 1,000 -- (365,392) (364,392)
Net loss for the year........................ -- -- -- (830,169) (830,169)
------- ------ ---------- ----------- -----------
Balance at December 31, 1998................. 100,000 1,000 -- (1,195,561) (1,194,561)
Issue of 'A' common shares of HK$10 par
value...................................... 15,812 158 2,210,834 -- 2,210,992
Issue of 'C' common shares of HK$10 par
value...................................... 3,709 37 518,592 -- 518,629
Net loss for the year........................ -- -- -- (1,988,720) (1,988,720)
------- ------ ---------- ----------- -----------
Balance at December 31, 1999................. 119,521 $1,195 $2,729,426 $(3,184,281) $ (453,660)
======= ====== ========== =========== ===========
</TABLE>
CONVENIENCE TRANSLATION (NOTE 2(V))
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY/
(DEFICIT)
-------------
(UNAUDITED)
US $
(000S)
------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998.................................................................... $(153,748)
Issue of 'A' common shares of HK$10 par value................................................... 284,555
Issue of 'C' common shares of HK$10 par value................................................... 66,747
Net loss for the year........................................................................... (255,948)
---------
Balance at December 31, 1999.................................................................... $ (58,386)
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12-6
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 2(V))
-----------
(UNAUDITED)
YEAR ENDED DECEMBER 31, US $
----------------------------------- (000S)
1997 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss for the year........................ $(445,271) $(830,169) $(1,988,720) $(255,948)
Adjustments to reconcile net loss for the
year to net cash provided by/(used in)
operations:
Depreciation and amortization.............. 447,508 563,453 549,134 70,674
Loss/(gain) on disposal of property, plant
and equipment............................ 4,943 9,863 (187) (24)
Changes in assets and liabilities:
(Increase)/decrease in accounts
receivable............................... (47,116) 37,974 (66,159) (8,515)
Increase in other receivables, deposits and
prepayments.............................. (40,230) (120,841) (33,908) (4,364)
Decrease/(increase) in inventories......... 8,077 10,102 (26,021) (3,349)
Transfer from property, plant and equipment
to current assets........................ -- 6,874 -- --
(Decrease)/increase in trade accounts
payable.................................. (102,147) (93,700) 101,755 13,096
Increase in other payables and accrued
liabilities.............................. 123,074 22,582 128,727 16,567
Increase/(decrease) in service subscription
fees received in advance................. 155,632 (38,477) 503,422 64,790
Decrease in income tax payable............. (18,582) -- -- --
Decrease in deferred tax liabilities....... (27,733) -- -- --
Increase/(decrease) in deferred gain on
defeasance of capital lease.............. -- 115,664 (14,489) (1,865)
--------- --------- ----------- ---------
Net cash provided by/(used in)
operations............................... 58,155 (316,675) (846,446) (108,938)
--------- --------- ----------- ---------
</TABLE>
F-12-7
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
(NOTE 2(V))
-----------
(UNAUDITED)
YEAR ENDED DECEMBER 31, US $
-------------------------------------- (000S)
1997 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from investing activities:
(Purchase)/disposal of restricted
investments and other asset............ $ -- $(2,955,011) $ 34,451 $ 4,434
Purchase of property, plant and
equipment.............................. (1,537,868) (522,313) (780,024) (100,389)
Proceeds on disposal of property, plant
and equipment.......................... 33,270 39,266 49,666 6,392
----------- ----------- ---------- ---------
Net cash used in investing activities.... (1,504,598) (3,438,058) (695,907) (89,563)
----------- ----------- ---------- ---------
Cash flows from financing activities:
(Increase)/decrease in amounts due from
affiliates............................. (120,842) 526,702 (199,660) (25,696)
(Decrease)/increase in amounts due to
affiliates............................. (293) 48,556 47,046 6,055
Loans from/(repayment to) affiliates..... 1,567,324 341,203 (987,327) (127,069)
Increase in/(repayment of) capital lease
liabilities............................ -- 2,838,745 (34,735) (4,470)
Proceeds from issue of common
stock.................................. -- -- 2,729,621 351,302
----------- ----------- ---------- ---------
Net cash provided by financing
activities............................. 1,446,189 3,755,206 1,554,945 200,122
----------- ----------- ---------- ---------
Net (decrease)/increase in cash and cash
equivalents.............................. (254) 473 12,592 1,621
Cash and cash equivalents at beginning of
year..................................... 600 346 819 105
----------- ----------- ---------- ---------
Cash and cash equivalents at end of
year..................................... $ 346 $ 819 $ 13,411 $ 1,726
=========== =========== ========== =========
Supplemental disclosures:
Interest paid............................ $ 418,836 $ 705,802 $ 574,255 $ 73,907
=========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12-8
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND BASIS OF PRESENTATION
THE COMPANY
Hutchison Telephone Company Limited (the "Company") was incorporated in Hong
Kong in September 1983 under the name Selby Company Limited. In October 1983,
the Company changed its name to Hutchison Radio Telephone Limited; which was
further changed to Hutchison Telephone Company Limited in October 1984. The
Company is engaged in the provision of mobile telephone and radio transmission
services in Hong Kong and sales of mobile phones and accessories. The Company
has a wholly owned subsidiary, Citicomm Limited, a company incorporated in Hong
Kong. The subsidiary was dormant during the year ended December 31, 1999 and is
in the process of voluntary winding up.
As of December 31, 1999, the Company was 55.9% owned by Whampoa Holdings
Limited, a company incorporated in Jersey, 25.1% owned by Motorola Asia Limited,
a company incorporated in Hong Kong and 19.0% owned by HTCL Holdings Limited, a
company incorporated in Hong Kong. Whampoa Holdings Limited is wholly owned by
Hutchison Whampoa Limited, a company incorporated and listed in Hong Kong.
Motorola Asia Limited is wholly owned by Motorola Inc., a company incorporated
in the United States of America and listed in the New York Stock Exchange. HTCL
Holdings Limited is wholly owned by NTT DoCoMo, Inc., a company incorporated in
Japan and listed in the Nikkei Stock Exchange.
BASIS OF PRESENTATION
The Company has been incurring a net loss in each of the three years in the
period ended December 31, 1999; and as of December 31, 1999, the Company had an
accumulated loss of HK$3,184,281,000 and a shareholders' deficit of
HK$453,660,000 and the Company's current liabilities exceeded its current assets
by HK$639,840,000. The Company's operation is being financed principally by
funding provided by shareholders. On March 31, 2000, the Company completed an
agreement with a syndicate of financial institutions for a credit facility of
HK$4,000 million. This credit facility bears interest at Hong Kong Interbank
Offer Rate plus 1.1% to 1.3%, expires on various dates from March 2005 to March
2007 and is secured, inter alia, by a fixed and floating charge over the assets
of the Company and a fixed charge over the telecommunication licences.
Management believes that the funding from the shareholders together with the
available credit facility should be sufficient to enable the Company to carry on
its operations as a going concern for a period of at least one year from
December 31, 1999.
NOTE 2--PRINCIPAL ACCOUNTING POLICIES
(A) ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from these estimates.
F-12-9
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All material intercompany accounts and
transactions have been eliminated.
(D) REVENUE RECOGNITION
The Company recognizes income on the following bases:
(i) Revenue from sales of mobile phones and accessories
Revenue from sales of mobile phones and accessories is recognized when
the mobile phones and accessories are delivered to customers and
collectibility can be reasonably assured.
(ii) Revenue from network service fees and airtime charges
Revenue from network service fees and airtime charges is recognized when
the services are rendered.
(iii) Interest income
Interest income is recognized on a time proportion basis, taking into
account the principal amounts outstanding and the interest rates
applicable.
(E) SUBSCRIBER ACQUISITION COSTS
The direct costs of acquisition of subscribers, which comprise the loss on
the sale of mobile phones and accessories to the Company and commission
expenses, are expensed as incurred. Revenue and cost of revenues in respect of
sales of mobile phones and accessories are included in revenues and cost of
revenues, respectively and commission expenses are included in sales and
marketing expenses.
(F) PRE-LAUNCH COSTS
Operating and overhead costs incurred during the development of cellular
networks prior to the launch date are expensed as incurred.
(G) ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are charged to the statement of operations
as incurred.
(H) WARRANTY COSTS
The Company provides certain warranty to customers on mobile phones and
accessories sold for a period ranging from one to three years. Costs incurred
for the provision of warranty service mainly include labour and spare parts.
Labour cost is expensed as incurred and spare parts are amortized on a straight
line basis over one year. Balance of unamortized cost of spare parts is included
in inventories. The warranty costs incurred by the Company in each of the three
years ended December 31, 1997, 1998 and 1999 were not material.
(I) BORROWING COSTS
Interest expenses during the construction or production of property, plant
and equipment are capitalized as cost of the related property, plant and
equipment up to the date of completion of construction or production.
Other borrowing costs are charged to the statement of operations in the
period in which they are incurred, or deferred and amortized on a straight line
basis over the term of the related credit facilities. Balances of unamortized
borrowing costs are included in other receivables, deposits and prepayments in
the balance sheet.
F-12-10
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(J) OPERATING LEASES
Leases where substantially all of the rewards and risks of ownership of
assets remain with the leasing company are accounted for as operating leases.
Rentals incurred are charged to the statement of operations on a straight line
basis over the lease term.
(K) CAPITAL LEASE UNDER SALES AND LEASEBACK
In 1998, certain telecommunications equipment was sold and leased back for a
lease term equal to seventy-five percent or more of the estimated economic life
of the equipment. Such lease is accounted for as a capital lease. The gross
amount of the telecommunications equipment under capital lease is recorded under
site plant and network equipment in the Company's property, plant and equipment.
Depreciation of the leased telecommunications equipment is provided on the same
basis as the Company's site plant and network equipment (see note 2(m)). The
Company recorded a net profit of HK$122,752,000 on the transaction, which is
deferred and amortized in proportion to the amortization of the equipment sold
in accordance with the requirements of Statement of Financial Accounting
Standards No. 28.
(L) DEFERRED TAXATION
Deferred income taxes are accounted for using the liability method, under
which the expected future tax consequences of timing differences between the
book and tax basis of assets and liabilities, and the benefit of tax losses
available for carry forward to future years are recognized as deferred tax
assets and liabilities. Valuation allowance is provided on deferred tax assets
to the extent that the ultimate realization of the assets is considered less
likely than not.
(M) PROPERTY, PLANT AND EQUIPMENT
(i) Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is provided
using the straight-line method over the estimated useful lives of the
assets. Estimated useful lives are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings............................ Shorter of 50 years or lease period
Leasehold improvements............... Shorter of 7 years or lease period
Site plant and network equipment..... 10 years
Computer equipment................... 5 years
Office furniture and equipment....... 7 years
Motor vehicles....................... 4 years
Other assets......................... 5 years
</TABLE>
Leasehold land is amortized over the remaining period of the lease.
The cost of network equipment comprises the purchase cost of network
assets and equipment and direct expenses in respect of the development of
the network.
(ii) The carrying amounts of property, plant and equipment are reviewed
regularly on a gross cash flow basis to assess whether their recoverable
amounts have declined below their carrying amounts and a provision made
for any shortfall identified. Based on its most recent analysis, the
Company believes that there was no material impairment of its property,
plant and equipment as of December 31, 1999.
F-12-11
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(iii) The gain or loss on disposal of property, plant and equipment is the
difference between the net sales proceeds and the carrying amount of the
relevant asset, and is included in the statement of operations.
(N) ACCOUNTS RECEIVABLE
Provision is made against accounts receivable to the extent that they are
considered to be doubtful. Accounts receivable in the balance sheet are stated
net of such provision.
(O) INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is
calculated on the first in first out basis. Net realizable value is determined
on the basis of anticipated sales proceeds after the provision for inventory
obsolescence, less estimated selling expenses.
(P) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term highly liquid investments, which
are readily convertible into cash and have original maturities of three months
or less at the date of acquisition.
(Q) INVESTMENTS
The Company's investments in money market accounts with a bank and corporate
and other bonds have an original contractual maturity of greater than ninety
days at the time of purchase. The investments are held to maturity and are
stated at cost. Interest income on money market accounts is accrued as earned.
(R) REFUNDABLE DEPOSITS
Refundable deposits are received from customers who loan handsets from the
Company or require mobile international calls and roaming services. The
refundable deposits are retained by the Company and are included in other
payables and accrued liabilities for as long as the customers require these
services.
(S) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. The carrying amount of the Company's
financial instruments, including cash equivalents, investments in money market
accounts, accounts receivable, accounts payable and accrued expenses,
approximate fair value due to their short maturity.
(T) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the operations of the Company and its subsidiary
is the Hong Kong dollar.
Transactions in foreign currencies are translated at exchange rates ruling
at the transaction dates. Monetary assets and liabilities expressed in foreign
currencies at the balance sheet date are translated at rates of exchange ruling
at the balance sheet date. Exchange differences arising are included in the
statement of operations.
(U) COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a company during
a period from transactions and other events and circumstances excluding
transactions resulting from investment by owners and distribution to owners. For
each of the three years ended December 31, 1997, 1998 and
F-12-12
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
1999, the Company's comprehensive loss represented the Company's net loss for
the year and the Company had no other elements of comprehensive income.
(V) CONVENIENCE TRANSLATIONS
The consolidated balance sheet as of December 31, 1999 and consolidated
statements of operations, of cash flows and of changes in shareholders'
equity/(deficit) for the year ended December 31, 1999 contain translations of
Hong Kong dollars to US dollars at the rate of HK$7.77 to US dollar. Such
translations should not be construed as representations that the Hong Kong
dollar amounts represent or have been or could be converted into US dollars at
that or any other rate.
NOTE 3--ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C>
Trade accounts receivable............................. $ 242,198 $ 294,084
Less: Allowance for doubtful accounts................. (190,611) (176,338)
--------- ---------
$ 51,587 $ 117,746
========= =========
</TABLE>
NOTE 4--OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG
DOLLARS)
<S> <C> <C>
Rental and utility deposits............................. $ 67,451 $ 66,896
Roaming charges prepaid................................. 7,457 10,524
Network licence fee prepaid............................. 57,982 60,919
Prepaid distributed communication system access fees.... 61,965 76,357
Prepaid integrated radio system project access fee...... 14,510 24,936
Prepaid expenses........................................ 3,070 4,466
Other receivables....................................... 8,160 10,405
-------- --------
$220,595 $254,503
======== ========
</TABLE>
F-12-13
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C>
Mobile phones and accessories:
Gross inventory amount............................... $168,945 $241,574
Less: Provisions..................................... (25,995) (72,603)
-------- --------
$142,950 $168,971
======== ========
</TABLE>
NOTE 6--PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C>
Leasehold land and buildings in Hong Kong............ $ 2,118 $ 2,118
Leasehold improvements............................... 510,122 580,248
Office furniture and equipment....................... 31,372 29,976
Site plant and network equipment..................... 3,892,242 4,504,928
Computer equipment................................... 204,606 149,151
Motor vehicles and other assets...................... 3,961 3,653
Construction in progress............................. 29,710 38,158
---------- ----------
4,674,131 5,308,232
Less: Accumulated depreciation and amortization...... 1,588,023 2,040,713
---------- ----------
$3,086,108 $3,267,519
========== ==========
</TABLE>
Included in site plant and equipment are telecommunications equipment under
capital leases at an aggregated cost of HK$3,220,949,000 and HK$3,222,480,000
with related accumulated depreciation of HK$686,946,000 and HK$995,556,000 at
December 31, 1998 and 1999, respectively. Depreciation of the telecommunications
equipment under capital leases, amounting to HK$158,208,000 and HK$318,914,000
for the years ended December 31, 1998 and 1999, respectively, has been included
in the depreciation expense of the respective years. The Company did not have
property, plant and equipment under capital lease as of and during the year
ended December 31, 1997.
F-12-14
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--RESTRICTED INVESTMENTS AND OTHER ASSET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C>
Corporate and other bonds............................ $ 547,925 $ 549,339
Defeased other asset................................. 2,290,820 2,254,671
Money market accounts................................ 116,266 116,550
---------- ----------
$2,955,011 $2,920,560
========== ==========
</TABLE>
In 1998, the Company sold certain telecommunications equipment indirectly
for a consideration of HK$2,945,992,000 and such equipment was leased back under
a capital lease. A portion of the sales proceeds, amounting to HK$547,925,000,
was invested in corporate and other bonds, a portion amounting to
HK$2,290,820,000 was deposited with a financial institution and the remainder
was deposited in money market accounts. The corporate and other bonds and the
deposit with the financial institution, and interest thereon, are restricted to
be used for repayment of amounts due under the capital lease agreement.
The Company's investment in money market accounts with a bank has a maturity
of greater than ninety days and is pledged to the bank as a collateral to secure
the Company's obligations under the capital lease.
The investments in money market accounts and corporate and other bonds are
classified as "held to maturity" debt securities and are stated at cost.
NOTE 8--OTHER PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C>
Accrual for sales commission......................... $ 74,702 $119,827
Accrual for marketing and promotion.................. 14,979 44,147
Accrual for leased lines............................. 18,340 2,390
Accrual for connection fees.......................... 45,888 54,605
Accrual for other network operating expenses......... 61,189 87,829
Other expenses accrued............................... 9,775 16,006
Refundable deposits received......................... 127,531 156,327
-------- --------
$352,404 $481,131
======== ========
</TABLE>
F-12-15
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--AMOUNTS DUE FROM/TO AFFILIATES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C>
Due from affiliates:
Interest bearing................................... $185,460 $385,461
Non-interest bearing............................... 693 352
-------- --------
$186,153 $385,813
======== ========
Due to affiliates:
Interest bearing................................... $ 48,555 $ 95,572
Non-interest bearing............................... 1 30
-------- --------
$ 48,556 $ 95,602
======== ========
</TABLE>
Amounts due from/to affiliates, companies controlled by the Company's
controlling shareholder, Hutchison Whampoa Limited, are unsecured and have no
fixed repayment terms. The interest bearing amounts due from/to affiliates bear
interest at prevailing market rate (as at December 31, 1999: one month Hong Kong
Interbank Offer Rate less 0.25% which was 6.34%). The average balance of non-
interest bearing amounts due to affiliates during the years ended December 31,
1998 and 1999 were HK$1,000 and HK$16,000, respectively. These amounts were
provided by the affiliates as part of the Company's working capital.
NOTE 10--LONG TERM LOANS FROM AFFILIATES
Long term loans from affiliates, companies controlled by the Company's
controlling shareholder, Hutchison Whampoa Limited, are unsecured, bear interest
at prevailing market rate (as at December 31, 1999: three months' Hong Kong
Interbank Offer Rate plus 1.3% which was 7.05%) and have no fixed repayment
term. The loans from the affiliates are borrowed to finance the capital
expenditure and working capital of the Company.
F-12-16
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--OBLIGATIONS UNDER CAPITAL LEASE
As of December 31, 1999, future minimum lease payments under capital lease
of telecommunications equipment are as follows (in thousands of Hong Kong
dollars):
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
2000........................................................ $ 246,757
2001........................................................ 246,757
2002........................................................ 246,757
2003........................................................ 246,757
2004........................................................ 246,757
2005 and beyond............................................. 2,720,050
----------
Total minimum lease payments................................ 3,953,835
Less: Amount representing interest.......................... 1,149,825
----------
Present value of capital lease obligations.................. 2,804,010
Less: Current portion....................................... 114,984
----------
Noncurrent portion of capital lease obligations............. $2,689,026
==========
</TABLE>
NOTE 12--SHARE CAPITAL
The Company was incorporated with an authorized share capital of HK$10,000,
divided into 1,000 shares of Common Stock with par value of HK$10 per share.
Pursuant to a special resolution on August 2, 1984, the 1,000 authorized Common
shares were designated as 510 'A' Shares, 300 'B' Shares and 190 'C' Shares.
Pursuant to an ordinary resolution on September 27, 1984, the Company's
authorized share capital was increased to HK$1,000,000, divided into 100,000
shares of Common Stock with a par value of HK$10 per share, of which 51,000
shares were designated as 'A' Shares, 30,000 shares were designated as 'B'
Shares and 19,000 shares were designated as 'C' Shares.
As of December 31, 1997 and 1998, 51,000 'A' Shares, 30,000 'B' shares and
19,000 'C' shares were issued at par value.
Pursuant to a special resolution on December 8, 1999, the Company was
authorized to increase its Common Stock to 119,521 shares with a par value of
HK$10 per share, of which 66,812 shares were designated as 'A' Shares, 30,000
shares were designated as 'B' shares and 22,709 shares were designated as 'C'
Shares.
On December 8, 1999, 15,812 'A' shares and 3,709 'C' shares were issued for
cash at a price of HK$139,830 per share.
Except as further described below, the A Shares, the B Shares and the C
Shares of the Company rank pari passu in voting and dividend rights and assets
distribution at liquidation of the Company.
Each share entitles the holder to one vote. Holders of the A Shares are
entitled to appoint three directors to the Board and to nominate the chairman of
the directors. Holders of the B Shares are entitled to appoint two directors
while holders of the C Shares are entitled to appoint one director to the Board.
In addition, the board of directors is entitled to appoint a director, so that
the total number of directors shall not at any time exceed the maximum number of
seven.
F-12-17
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SHARE CAPITAL (CONTINUED)
Upon liquidation of the Company, the net assets of the Company available for
distribution to the shareholders after the payments of all debts and other
liabilities of the Company will be distributed among the holders of A Shares, B
Shares and C Shares in proportion to their respective percentage of equity
holding in the Company.
A holder of any class of shares proposing to transfer shares in the Company
shall not transfer part only of his shares and shall not transfer the shares
without the consent of all the other shareholders of the Company. A shareholder
proposing to transfer his shares in the Company has to offer the shares to the
existing shareholders of the Company; and to the extent that his shares are not
taken up by the existing shareholders may be able to offer them to other third
parties.
NOTE 13--INTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C> <C>
Interest expense incurred................................... $397,195 $705,802 $500,319
Less: Amount capitalized into property, plant and
equipment................................................. 7,444 5,456 2,543
-------- -------- --------
$389,751 $700,346 $497,776
======== ======== ========
</TABLE>
NOTE 14--INCOME TAX
The components of the income tax credit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C> <C>
Current
Write back of overprovision for income tax................ $(18,582) $ -- $ --
Deferred.................................................... (27,733) -- --
-------- -------- --------
$(46,315) $ -- $ --
======== ======== ========
</TABLE>
F-12-18
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--INCOME TAX (CONTINUED)
Deferred tax assets/(liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Depreciation.............................................. $(284,586) $(315,504)
Accrued expenses.......................................... (4,308) (1,397)
Deferred expenditure...................................... -- (249)
--------- ---------
(288,894) (317,150)
DEFERRED TAX ASSETS:
Net operating loss........................................ 430,120 762,984
--------- ---------
141,226 445,834
Valuation allowance......................................... (141,226) (445,834)
--------- ---------
$ -- $ --
========= =========
</TABLE>
F-12-19
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS AND BALANCES
The Company had the following transactions with related parties:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
NOTE 1997 1998 1999
---- ---- ---- ----
(IN THOUSANDS OF
HONG KONG DOLLARS)
<S> <C> <C> <C> <C>
HUTCHISON TELECOMMUNICATIONS LIMITED I
Fees paid to the above for management consultancy
services............................................ 2(i) $ 31,000 $ 34,000 $ 32,774
Disposal of TACS Equipment to above................... 33,283 -- --
HUTCHISON GLOBAL CROSSING LIMITED (FORMERLY KNOWN AS
"HUTCHISON COMMUNICATIONS LIMITED") I
Dealer commission paid to above company............... 2(ii) 208,219 222,979 220,302
Collection fee paid to above company.................. 2(iii) -- 35,118 28,855
Service fee paid to above company..................... 2(iv) 16,322 -- --
Dealer commission received from above company......... 2(v) 969 332 12
Properties and other assets sold to above company..... -- -- 1,936
Interconnection charges paid to above company......... -- 151 5,511
IDD charges paid to the above company................. 416 105,884 214,094
Leased lines rental paid to the above company......... -- 22,237 110,612
MNP porting and dipping paid to above company......... -- -- 14,208
HUTCHISON PAGING SERVICES LIMITED I
Dealer commission paid to above company............... 2(ii) -- -- 59,810
Collection fee paid to above company.................. 2(iii) -- -- 6,678
FORTRESS LIMITED I
Dealer commission paid to above company............... 2(ii) 6,661 26,103 29,071
WATSON'S THE CHEMIST I
Dealer commission paid to above company............... 2(ii) -- -- 9,113
HUTCHISON TELECOMMUNICATIONS (HONG KONG) LIMITED I
Fees paid to the above company for the provision of
management and treasury services.................... 2(vi) 28,990 47,110 54,068
MOTOROLA ASIA PACIFIC LIMITED & MOTOROLA INC. I
Payments made to the above companies in return for
maintenance services................................ 110,021 78,055 77,502
Purchase of site equipment from above companies....... 1,202,650 245,833 540,328
Purchase of inventories from the above companies...... 321,847 150,227 505,760
</TABLE>
F-12-20
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
NOTES
1. The relationships between Hutchison Telephone Company Limited and the above
companies are as follows:
<TABLE>
<CAPTION>
RELATIONSHIP COMPANY
------------ -------
<S> <C>
Companies controlled by the Company's Hutchison Telecommunications Limited
controlling shareholder, Hutchison Hutchison Global Crossing Limited
Whampoa Limited Hutchison Paging Services Limited
Fortress Limited
Watson's The Chemist
Hutchison Telecommunications
(Hong Kong) Limited
Company wholly owned by Motorola Motorola Asia Pacific Limited
Inc., parent of a shareholder of the
Company
</TABLE>
Since January 12, 2000, Hutchison Global Crossing Limited is 50% owned by
Hutchison Whampoa Limited.
2. (i) The Company paid fees to Hutchison Telecommunications Limited for the
provision of management consultancy services which were priced based on
the projected time consumption of services and facilities used by the
Company's business operations.
(ii) Dealer commission was paid to Hutchison Global Crossing Limited,
Hutchison Paging Services Limited, Fortress Limited and Watson's The
Chemist in respect of the sale of mobile phones and connections to the
Company's cellular network through retail stores.
(iii) Amounts represented payments for the services rendered by Hutchison
Global Crossing Limited and Hutchison Paging Services Limited in the
collection of mobile service fees through the retail stores of these two
companies.
(iv) Amounts were paid for the provision of paging services to telephone
subscribers using bundled service.
(v) Commission was received for the sale of pagers and connection to
Hutchison Global Crossing Limited's paging networks through telephone
retail stores.
(vi) Certain operating expenses of the Company, along with certain other
affiliates under the control of Hutchison Whampoa Limited, are incurred
by Hutchison Telecommunications (Hong Kong) Limited which provides
services and facilities to the Company and the said other affiliates.
These expenses relate to a number of different cost centers. The Company
is charged a share of these common costs based on the allocation, by
reference to the respective allocation percentages fixed in respect of
each cost center, on the basis of projected time consumption of services
and facilities used by the business operations sharing the relevant
services and facilities.
F-12-21
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
In addition to the related party transactions disclosed above, the Company
had the following trademark licenses and related agreements with related
parties:
1. The Company entered into a license agreement with Hutchison Whampoa
Enterprises Limited, a company controlled by the Company's controlling
shareholder, Hutchison Whampoa Limited, on June 23, 1998 for the rights to
use the "Hutchison Telecom" logo and the "CDMA Four Square Device" mark for
an indefinite period at no cost to the Company unless terminated in
accordance with the terms of the agreement.
2. The Company entered into a trade mark sub-license agreement with Hutchison
Whampoa Enterprises Limited and a user agreement with Orange Personal
Communications Services Limited, an investee company of the Company's
controlling shareholder, Hutchison Whampoa Limited, on May 26, 1999 for the
rights to use certain "Orange" trademarks for an indefinite period at no
cost to the Company unless terminated in accordance with the terms of
the agreement.
3. The Company entered into a brand support agreement with Orange Personal
Communications Services Limited on May 26, 1999 under which Orange Personal
Communications Services Limited will provide information and expertise to
support in Hong Kong the "Orange" brand as long as the Company uses the
"Orange" brand or at a minimum a period of five years at a price of L150,000
per annum, approximating HK$1,887,000 at the December 31, 1999 exchange
rate.
Included in trade accounts payable were trade payables to Motorola Asia
Pacific Limited and Motorola Inc., amounting to HK$61,510,000 and HK$7,916,000
as of December 31, 1998 and 1999, respectively.
NOTE 16--CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of investments in checking and money market
accounts and accounts receivable. The Company maintains checking and money
market accounts with highly rated financial institutions and their composition
and maturity are regularly monitored by management.
The Company performs ongoing credit evaluation of its customers and
maintains reserves for credit losses where necessary. No individual customer
accounted for 10% or more of the Company's revenues from sales of mobile phones
and accessories or sales of network service for each of the year in the three
years ended December 31, 1999. No individual customer represented 10% or more of
the trade accounts receivable balance as of December 31, 1998 and 1999.
NOTE 17--COMMITMENTS
The Company leases its shops, network cell sites and telephone lines under
noncancelable operating leases. Lease rental for shops and network cell sites
were HK$230,856,000, HK$267,506,000 and HK$352,867,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. Rental expense for leased
telephone lines were HK$231,149,000, HK$228,327,000 and HK$279,027,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
F-12-22
<PAGE>
HUTCHISON TELEPHONE COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--COMMITMENTS (CONTINUED)
As of December 31, 1999, future minimum lease payments under operating
leases are as follows:
<TABLE>
<CAPTION>
LEASED
SHOPS AND TELEPHONE
NETWORK CELL SITES LINES TOTAL
------------------ ----- -----
(IN THOUSANDS OF HONG KONG DOLLARS)
<S> <C> <C> <C>
Year ending December 31,
2000................................................ $163,484 $56,187 $219,671
2001................................................ 54,258 6,662 60,920
2002................................................ 18,188 37 18,225
2003................................................ 12,750 -- 12,750
2004................................................ 9,877 -- 9,877
2005 and beyond..................................... 6,496 -- 6,496
-------- ------- --------
$265,053 $62,886 $327,939
======== ======= ========
</TABLE>
As of December 31, 1999, the Company has approved commitments for capital
expenditures on property, plant and equipment of HK$1,291,852,000 in total, of
which an amount of HK$283,567,000 has been contracted with vendors.
NOTE 18--CONTINGENT LIABILITIES
As of December 31, 1999, the Company had the following contingent
liabilities:
(i) Performance guarantees in the amount of HK$80,000,000 in respect of
installation of PCS network which was subsequently cleared after the year
end date,
(ii) Guarantees in the amount of HK$10,617,000 for the use of antenna in
Hong Kong International Airport.
NOTE 19--SEGMENT INFORMATION
Pursuant to paragraph 9 of Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
segment information of the Company is not presented as the Company is not a
listed company.
F-12-23
<PAGE>
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SHARES
[LOGO]
COMMON STOCK
JOINT BOOKRUNNING MANAGERS
GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ------
<S> <C>
Securities and Exchange Commission registration fee......... $132,000
NASD registration fee....................................... 30,500
Nasdaq listing fee.......................................... *
Blue Sky qualification fees and expenses.................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Directors and officers insurance............................ *
Printing and engraving expenses............................. *
Miscellaneous expenses...................................... *
--------
Total................................................... $ *
========
</TABLE>
------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
GENERAL CORPORATION LAW
Propel is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reasons of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses that such officer or
director has actually and reasonably incurred.
II-1
<PAGE>
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
CERTIFICATE OF INCORPORATION
Propel's Certificate of Incorporation and Bylaws provide for the
indemnification of officers and directors to the fullest extent permitted by the
General Corporation Law.
All of Propel's directors and officers are covered by insurance policies
maintained by it against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933, as
amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization on February 24, 1999,
Propel issued shares of common stock to Motorola, Inc. Propel believes
that this issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not involving any public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
Reference is made to the attached "Exhibit Index."
(B) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide 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.
Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted as to directors, officers
and controlling persons of the registrant under the provisions described in Item
14, or otherwise, the registrant has been advised that in the opinion of the
SEC, 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 payments 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 it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) 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)
II-2
<PAGE>
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Propel, Inc. has
duly caused this Registration Statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Schaumburg, State
of Illinois, on June 27, 2000.
<TABLE>
<S> <C> <C>
PROPEL, INC.
By: /s/ J. MICHAEL NORRIS
-----------------------------------------
J. Michael Norris
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Michael Norris, Richard D. Haning and Thomas
P. Holden, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this registration statement (and any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, for the offering which this Registration Statement relates),
and to file the same, with all exhibits thereto, and other 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 said
attorneys-in-fact and agents or any of them, or their or his 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 on Form S-1 and Power of Attorney have been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES CAPACITY DATES
---------- -------- -----
<S> <C> <C>
/s/ J. MICHAEL NORRIS
--------------------------------- Principal Executive Officer and June 27, 2000
J. Michael Norris Director
/s/ RICHARD D. HANING
--------------------------------- Principal Financial and Accounting June 27, 2000
Richard D. Haning Officer and Director
/s/ THEODORE W. SCHAFFNER
--------------------------------- Director June 27, 2000
Theodore W. Schaffner
/s/ RICHARD D. SEVERNS
--------------------------------- Director June 27, 2000
Richard D. Severns
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Form of Restated Certificate of Incorporation of Propel,
Inc.
*3.2 Form of Amended and Restated Bylaws of Propel, Inc.
*4.1 Form of certificate representing shares of common stock of
Propel. Inc.
*5.1 Opinion of Kirkland & Ellis.
*10.1 Form of Master Separation Agreement by and between
Propel, Inc. and Motorola, Inc.
*10.2 Form of Transitional Services Agreement by and between
Propel, Inc. and Motorola, Inc.
*10.3 Form of Israel Transitional Services Agreement by and
between Propel, Inc. and Motorola, Inc.
*10.4 Form of Israeli Separation, IPO and Distribution Agreement
by and between Propel, Inc. and Motorola, Inc.
*10.5 Form of Tax Sharing Agreement by and between Propel, Inc.
and Motorola, Inc..
*10.6 Form of Registration Rights Agreement by and between
Propel, Inc. and Motorola, Inc.
*10.7 Form of Employee Matters Agreement by and between
Propel, Inc. and Motorola, Inc.
*10.8 Form of Wireless Products Distribution Agreement among
Propel, Inc., Motorola, Inc. and Motorola Israel, Ltd.
*10.9 Propel, Inc. Incentive Compensation Plan
*10.10 Form of Change in Control Agreement
*21.1 Subsidiaries of Propel, Inc.
*23.1 Consent of Kirkland & Ellis (included in Exhibit 5.1).
23.2 Consent of KPMG LLP relating to the consolidated financial
statements of Propel, Inc.
23.3 Consent of PricewaterhouseCoopers relating to the
consolidated financial statements of Compania de
Radiocomunicaciones Moviles S.A.
23.4 Consent of Mancera-Ernst & Young International relating to
the consolidated financial statements of Baja Celular
Mexicana, S.A. de C.V.
23.5 Consent of Deloitte & Touche relating to the consolidated
financial statements of Entel Telefonia Personal S.A.
23.6 Consent of KPMG relating to the consolidated financial
statements of Tricom, S.A.
23.7 Consent of KPMG Auditores Independentes relating to the
financial statements of Global Telecom S.A.
23.8 Consent of PricewaterhouseCoopers relating to the financial
statements of Abiatar S.A.
23.9 Consent of Somekh Chaikan (a member firm of KPMG
International) relating to the consolidated financial
statements of Pelephone Communications Ltd.
23.10 Consent of KPMG Hazem Hassan relating to the consolidated
financial statements of MobiNil for Telecommunications.
23.11 Consent of KPMG Lietuva relating to the financial statements
of UAB Omnitel.
23.12 Consent of Saba & Co. relating to the consolidated financial
statements of Pella Investment Company.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
23.13 Consent of PricewaterhouseCoopers relating to the
consolidated financial statements of Hutchison Telephone
Company Limited.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedules.
</TABLE>
------------------------
* To be filed by amendment.
II-6
