================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K/A
(Amendment No. 3)
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- --------------------
Commission file number 0-16560
VANGUARD CELLULAR SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
North Carolina 56-1549590
(STATE OR OTHER JURISDICTION OF INCORPORATION ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.
- ------
2002 Pisgah Church Road, Suite 300,
Greensboro, North Carolina 27455-3314
- ----------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (910) 282-3690
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the registrant's Common Stock held by those
other than executive officers and directors March 17, 1999, based on the NASDAQ
closing sale price for the Registrant's Common Stock as of such date, was
approximately $1,009,579,570
--------------.
The number of shares outstanding of the issuer's common stock as of March
17, 1999 was 40,165,330
------------------.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules.
The financial statements and supplemental schedules listed
in the accompanying Index to Financial Statements and
Schedules are filed as a part of this report.
(a)(3) Exhibits. Exhibits to this report are listed in the
accompanying Index to Exhibits.
(b) Reports on Form 8-K. There were no reports filed on Form
8-K during the fourth quarter of 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
By: /s/ Stephen L. Holcombe
-----------------------------
Stephen L. Holcombe
Executive Vice President and
Chief Financial Officer
Date: March 22, 1999
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
Page
----
Vanguard Cellular Systems, Inc. and Subsidiaries
Consolidated Balance Sheets, December 31, 1997 and 1996 ............. *
Consolidated Statements of Operations for the Years ended December
31, 1997, 1996 and 1995 ......................................... *
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1997, 1996 and 1995 .................... *
Consolidated Statements of Cash Flows for the Years ended December
31, 1997, 1996 and 1995 ......................................... *
Notes to Consolidated Financial Statements .......................... *
Report of Independent Public Accountants ............................ *
Schedule I -- Condensed Financial Information of the Registrant ..... *
Schedule II -- Valuation and Qualifying Accounts .................... *
Financial Statements of Certain 50% or less Owned Persons ............... F-2**
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
- ---------
* Previously filed as Financial Statements and Schedules of Form 10-K.
** The Registrant is filing this amendment to its Form 10-K to update and
replace the financial statements and related independent auditors'
reports for International Wireless Communications Holdings, Inc. and PT
Rajasa Hazanah Perkasa to reflect subsequent events that have occurred
since the filing of the Registrant's Form 10-K/A (Amendment No. 2) on
June 30, 1998. All other Financial Statements of Certain 50% or less
Owned Persons were previously filed as Financial Statements and
Schedules of Form 10-K, Form 10-K/A (Amendment No. 1) and Form 10-K/A
(Amendment No. 2).
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
International Wireless Communications Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
International Wireless Communications Holdings, Inc. and subsidiary ("IWC
Holdings" or the "Company") as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of IWC Holdings'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of PT Rajasa Hazanah Perkasa ("RHP"), an investment which is
reflected in the accompanying consolidated financial statements using the
equity method of accounting as of and for the year ended December 31, 1996
(see Note 5). The Company's investment in RHP as of December 31, 1996 was
$28,030,000 and its equity in losses of RHP was $4,746,000 for the year ended
December 31, 1996. In addition, we did not audit the financial statements of
Star Digitel Limited ("Star Digitel"), an investment which is reflected in
the accompanying consolidated financial statements using the equity method of
accounting as of and for the year ended December 31, 1997 (See Note 5). The
Company's investment in Star Digitel as of December 31, 1997 was $19,122,000
and its equity in losses of Star Digitel was $8,531,000 for the year ended
December 31, 1997. These 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 RHP as of and for the year ended December 31, 1996
and Star Digitel as of and for the year ended December 31, 1997, is based on
the reports of other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, based on our audit and the reports of other
auditors for 1996 and 1997, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of IWC
Holdings as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency
that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG LLP
Mountain View, California
April 10, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the shareholders of Star Digitel Limited
We have audited the consolidated balance sheets of Star Digitel
Limited and subsidiaries as of December 31, 1997, and the related
consolidated profit and loss account and cash flow statement for the year
then ended (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards in Hong Kong, which are substantially similar to generally
accepted auditing standards in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 21(c), the Company's investments in mobile
cellular telecommunications projects in the Peoples Republic of China ("PRC")
are undertaken in the form of cooperative joint ventures or cooperative
agreements. The structure of the Great Wall cooperative joint ventures in which
the Company has invested is a derivative of a structure commonly referred to as
a "Chinese-Chinese-Foreign" ("CCF"). Subsequent to April 1998, it became public
knowledge that the State Planning Commission ("SPC"), the Ministry of Foreign
Trade and Economic Commission ("MOFTEC") and the Ministry of Finance ("MOF") had
requested approval from the State Council for proposed new regulations to govern
the use of the CCF structure in joint ventures involving Unicom, the second
largest telecommunications operator in the PRC. The proposed new regulations
would affect, amongst others, the profit sharing arrangements of the joint
venture partners and the disposition of the fixed assets of the joint venture.
To date, the State Council has not approved the proposed new regulations. A
press conference in December 1998 by the Ministry of Information Industry
("MII") indicated that the MII is currently undertaking a review of Unicom's
joint ventures using the CCF structure. Any new regulations resulting from the
approval from the State Council of the submission from the SPC, MOFTEC and MOF
or the review of the Unicom joint ventures by the MII may trigger a review of
the Company's Great Wall joint ventures and thus, may significantly impact the
operations of the Company.
In addition, as discussed in Note 21(d), (e), (f) and (g), subsequent
to April 1998, the Company received a writ of summons and statutory demands from
certain creditors and banks for repayment of amounts due of approximately
US$52.5 million. The balances represent amounts owed in respect of certain
cellular networks and other related equipment, software and various services for
the construction of the Company's cellular networks in the PRC of approximately
US$15.9 million and loans together with interest and other incidental fees of
approximately US$36.6 million. The Company has filed a writ against one of the
creditors for damages resulting from breach of contract and to rescind contracts
entered by the Company with that creditor. The claim filed by the Company also
requested that the statutory demand filed by that creditor be declared to be of
no effect. The Company has also filed another writ against one of the banks for
damages due to, among others, breach of duty of secrecy owed by that bank to the
Company.
As discussed in Note 21(h), in March 1999, the Company has also
received a request from one of its lenders to apply a deposit of US$1 million
pledged to the lender as security for a loan of approximately the same amount
towards repayment of the loan. The Company had not responded to the request
up to March 22, 1999, the due date of the loan.
As discussed in Note 21(i), on February 12, 1999, the Company
appointed an independent financial advisor to review and give recommendations on
the financial affairs of the Company which includes formulation of proposals for
debt restructuring for submission to creditors of the Company. The Company,
along with the financial advisor, and the creditors, including those mentioned
in the preceding paragraph, are in the process of negotiating a settlement for
the debts owed and the disputes but no agreements have been reached up to March
22, 1999. Further, no formal proposals for debt restructuring have yet
been presented by the financial advisor up to March 22, 1999.
As discussed in Note 21(j), pursuant to written resolutions of the
Board of Directors dated March 11 and 17, 1999, the Company has appointed legal
counsel in the United States to commence legal proceedings against Vanguard
Cellular Systems Inc. ("Vanguard"), one of its shareholders through Vanguard
China Inc., a wholly owned subsidiary of Vanguard, to claim for damages
resulting from Vanguard's breach of a letter agreement dated September 3, 1998
whereby Vanguard agreed to use its best efforts to raise capital to replace the
US$19 million which was originally to be contributed by International Wireless
Communications Inc.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Star Digitel Limited and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles in Hong Kong.
Generally accepted accounting principles in Hong Kong vary in
certain respects with those in the United States of America. A description of
the significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net loss and
shareholders' deficit are set forth in Note 23 to the consolidated financial
statements (not presented separately herein).
Arthur Andersen & Co.
Hong Kong,
April 3, 1998 (except with respect to the matters discussed in Note 21(c),
(d), (e), (f), (g), (h), (i), and (j), as to which the date is March 22, 1999).
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
We have audited the consolidated balance sheets of PT Rajasa
Hazanah Perkasa and Subsidiary as of December 31, 1996 and the related
consolidated statements of income and deficit and cash flows for the year
then ended (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards
established by the Indonesian Institute of Accountants, which are
substantially similar to the generally accepted auditing standards in the
United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PT
Rajasa Hazanah Perkasa and its subsidiary as of December 31, 1996 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles in the Republic of
Indonesia.
Generally accepted accounting principles in Indonesia vary in
certain respects with those in the United States of America. A description of
the significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net loss and
stockholders' equity (capital deficiency) are set forth in Notes 22 and 23 to
the consolidated financial statements (not presented separately herein).
Arthur Andersen LLP
Greensboro, North Carolina,
March 24, 1997
F-4
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of $1,500 in 1997)................... $ 41,657 4,410
Investments in affiliates held for sale................................................... 2,062 1,873
Other current assets...................................................................... 10,689 10,533
-------------- --------------
Total current assets.................................................................... 54,408 16,816
Property and equipment, net.................................................................. 18,426 22,406
Notes receivable from affiliate.............................................................. -- 4,583
Investments in affiliates.................................................................... 68,394 57,432
Telecommunication licenses and other intangibles, net........................................ 18,484 12,521
Debt issuance costs, net..................................................................... 6,431 7,961
License deposit and other assets ............................................................ 3,215 1,650
-------------- --------------
Total assets.......................................................................... $ 169,358 123,369
-------------- --------------
-------------- --------------
LIABILITIES, MINORITY INTERESTS, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................................................. $ 7,313 11,012
Bank liability.......................................................................... -- 5,000
-------------- --------------
Total current liabilities............................................................ 7,313 16,012
Long-term debt, net...................................................................... 75,466 123,072
-------------- --------------
Total liabilities.................................................................... 82,779 139,084
Commitments and contingencies (Note 13)
Minority interests in consolidated subsidiaries.......................................... 5,685 8,675
Redeemable convertible preferred stock, $.01 par value per share;
21,541,480 and 33,231,480 shares designated in 1996 and 1997,
respectively; 15,973,200 and 15,981,876 shares issued and
outstanding in 1996 and 1997, respectively; net of note receivable from
stockholder of $26 in 1996 and 1997; liquidation and minimum
redemption value of $107,459......................................................... 103,021 105,306
Stockholders' deficit:
Preferred stock, $.01 par value per share;
6,768,520 shares designated; 933,200 shares issued and
outstanding in 1996 and 1997; liquidation value of $793............................ 9 9
Common stock, $.01 par value per share; 26,000,000 and 66,000,000
shares authorized in 1996 and 1997, respectively; 636,720 and 1,310,230
shares issued and outstanding in 1996 and 1997, respectively....................... 6 13
Additional paid-in capital................................................................. 31,060 52,937
Note receivable from stockholder........................................................... (152) (152)
Deferred compensation...................................................................... -- (1,209)
Unrealized gain on investments............................................................. 68 --
Cumulative translation adjustment.......................................................... 271 (1,970)
Accumulated deficit........................................................................ (53,389) (179,324)
-------------- --------------
Total stockholders' deficit.......................................................... (22,127) (129,696)
-------------- --------------
Total liabilities, minority interests, redeemable
convertible preferred stock and stockholders' deficit.............................. $ 169,358 123,369
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Operating revenues......................................................... $ -- 869 3,275
Cost of revenues........................................................... -- 1,948 3,471
------------ ------------ -------------
-- (1,079) (196)
Operating expenses:
Selling, general and administrative expenses............................ 6,365 17,333 31,174
Equity in losses of affiliates.......................................... 3,756 11,258 42,584
Impairment in asset value............................................... -- 525 24,000
Minority interests in losses of consolidated subsidiaries............... -- (275) (1,148)
------------ ------------ -------------
Loss from operations.................................................. (10,121) (29,920) (96,806)
Other income (expense):
Interest income......................................................... 232 1,823 1,599
Interest expense........................................................ (1,354) (6,790) (27,524)
Other................................................................... (28) (1,021) (919)
------------ ------------ -------------
Net loss................................................................... $ (11,271) (35,908) (123,650)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTE RECEIVABLE
--------------------- --------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER
------ ------ ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1994... 1,200,000 $ 12 76,080 $ 1 625 (152)
Issuance of common stock........... -- -- 251,920 2 124 --
Accretion of redeemable
convertible preferred stock...... -- -- -- -- -- --
Foreign currency translation....... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
--------- ------- ----------- ------- ---------- -------------
Balances as of December 31, 1995... 1,200,000 12 328,000 3 749 (152)
Conversion of Series A
preferred stock to common stock.. (266,800) (3) 266,800 3 -- --
Exercise of stock options.......... -- -- 41,920 -- 11 --
Issuance of common stock warrants.. -- -- -- -- 30,300 --
Unrealized gain on investments..... -- -- -- -- -- --
Foreign currency translation....... -- -- -- -- -- --
Accretion of redeemable
convertible preferred stock...... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
--------- ------- ----------- ------- ---------- -------------
Balances as of December 31, 1996... 933,200 9 636,720 6 31,060 (152)
Exercise of stock options.......... -- -- 180,000 2 43 --
Issuance of common stock warrants.. -- -- -- -- 11,701 --
Issuance of common stock........... -- -- 493,510 5 6,154 --
Value assigned to Debt
Conversion Feature of IWCH
Pakistan Facility................ -- -- -- -- 3,979 --
Deferred compensation.............. -- -- -- -- -- --
Amortization of deferred
compensation...................
Net warrant exercises of
redeemable convertible -- -- -- -- -- --
preferred stock................
Accretion of redeemable
convertible preferred stock.... -- -- -- -- -- --
Unrealized loss on investments..... -- -- -- -- -- --
Foreign currency translation....... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
--------- ------- ----------- ------- ---------- -------------
Balances as of December 31, 1997... 933,200 $ 9 1,310,230 $ 13 52,937 (152)
--------- ------- ----------- ------- ---------- -------------
--------- ------- ----------- ------- ---------- -------------
<CAPTION>
UNREALIZED CUMULATIVE TOTAL
DEFERRED GAIN (LOSS) ON TRANSLATION ACCUMULATED STOCKHOLDERS'
COMPENSATION INVESTMENTS ADJUSTMENT DEFICIT DEFICIT
------------- -------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1994... -- -- -- (3,640) (3,154)
Issuance of common stock........... -- -- -- -- 126
Accretion of redeemable
convertible preferred stock...... -- -- -- (459) (459)
Foreign currency translation....... -- -- (1) -- (1)
Net loss........................... -- -- -- (11,271) (11,271)
------------- ------------- ------------- ------------ --------------
Balances as of December 31, 1995... -- -- (1) (15,370) (14,759)
Conversion of Series A
preferred stock to common stock.. -- -- -- -- --
Exercise of stock options.......... -- -- -- -- 11
Issuance of common stock warrants.. -- -- -- -- 30,300
Unrealized gain on investments..... -- 68 -- -- 68
Foreign currency translation....... -- -- 272 -- 272
Accretion of redeemable
convertible preferred stock...... -- -- -- (2,111) (2,111)
Net loss........................... -- -- -- (35,908) (35,908)
------------- ------------- ------------- ------------ --------------
Balances as of December 31, 1996... -- 68 271 (53,389) (22,127)
Exercise of stock options.......... -- -- -- -- 45
Issuance of common stock warrants.. -- -- -- -- 11,701
Issuance of common stock........... -- -- -- -- 6,159
Value assigned to Debt
Conversion Feature of IWCH
Pakistan Facility................ -- -- -- -- 3,979
Deferred compensation.............. (1,453) -- -- -- (1,453)
Amortization of deferred
compensation................... 244 -- -- -- 244
Net warrant exercises of
redeemable convertible -- -- -- (81) (81)
preferred stock................
Accretion of redeemable
convertible preferred stock.... -- -- -- (2,204) (2,204)
Unrealized loss on investments..... -- (68) -- -- (68)
Foreign currency translation....... -- -- (2,241) -- (2,241)
Net loss........................... -- -- -- (123,650) (123,650)
------------- ------------- ------------- ------------ --------------
Balances as of December 31, 1997... (1,209) -- (1,970) (179,324) (129,696)
------------- ------------- ------------- ------------ --------------
------------- ------------- ------------- ------------ --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. $(11,271) (35,908) (123,650)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation..................................................................... 37 732 1,885
Amortization of telecommunication licenses and other intangibles................. 294 1,103 1,249
Amortization of debt issuance costs.............................................. -- 369 9,196
Amortization of long-term debt discount.......................................... -- 5,764 17,319
Amortization of deferred compensation............................................ -- -- 244
Equity in losses of affiliates................................................... 3,756 11,258 42,584
Gain on sale of affiliate........................................................ -- -- (1,156)
Accrual of interest on long-term debt............................................ -- -- 1,287
Minority interests in losses of consolidated subsidiaries........................ -- 275 1,148
Issuance of common stock warrants................................................ -- -- 10,248
Impairment in asset value........................................................ -- 525 24,000
Unrealized gain (loss) on investments............................................ -- 68 (68)
Changes in operating assets and liabilities:
Other current assets........................................................... (350) (2,480) (6,377)
Accounts payable and accrued expenses.......................................... 5,557 1,246 3,699
Net cash used in operating activities........................................ (1,977) (17,048) (18,392)
Cash flows from investing activities:
Issuance of notes receivable from affiliates -- (1,058) (4,873)
Repayment of notes receivable from affiliates......................................... (113) 583 635
Issuance of notes receivable.......................................................... -- (3,231) (563)
Repayment of notes receivable......................................................... -- 1,800 1,496
Advances to affiliate................................................................. (728) (1,921) --
Investments in affiliates held for sale............................................... -- -- (211)
Proceeds from sale of affiliate....................................................... -- -- 3,218
Purchases of property and equipment................................................... (4,218) (8,657) (5,865)
Purchase of subsidiary................................................................ -- (3,198) --
Investments in affiliates............................................................. (19,589) (31,943) (41,411)
Minority interest in consolidated subsidiaries........................................ -- 5,410 1,842
Purchase of telecommunication licenses and other intangibles.......................... (12,153) (5,772) --
License deposits and other assets..................................................... 70 (8,197) 6,820
Net cash used in investing activities........................................ (36,731) (56,184) (38,912)
Cash flows from financing activities:
Proceeds from issuance of notes payable............................................... 28,138 -- --
Repayment of notes payable............................................................ (2,050) (4,000) --
Proceeds from revolving credit facility............................................... -- 7,000 --
Repayment of revolving credit facility................................................ -- (7,000) --
Net proceeds from issuance of stock and warrants...................................... 27,720 30,300 --
Exercise of stock options............................................................. -- 11 45
Debt issuance costs................................................................... -- (6,800) (6,747)
Proceeds from issuance of long-term debt.............................................. -- 69,702 29,000
Net cash provided by financing activities ................................... 53,808 89,213 22,298
Effect of foreign currency exchange rates on cash and cash equivalents................... -- 278 (2,241)
Net increase (decrease) in cash and cash equivalents.................................... 15,100 16,259 (37,247)
Cash and cash equivalents at beginning of year .......................................... 10,298 25,398 41,657
Cash and cash equivalents at end of year ................................................ $ 25,398 41,657 4,410
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information
Cash paid for interest ............................................................. $ 949 662 --
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-8
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<S> <C> <C> <C>
Noncash financing and investing activities:
Conversion of loans to equity................................................... $ 24,307 2,052 --
---------- ---------- ---------
---------- ---------- ---------
Conversion of note receivable to investment in affiliate........................ $ 2,020 -- --
---------- ---------- ---------
---------- ---------- ---------
Net warrant exercises of redeemable convertible preferred stock ................ $ -- -- 81
---------- ---------- ---------
---------- ---------- ---------
Issuance of common stock warrants in connection with Pakistan Bridge Facility,
Mobilink Finder's Fee and Vanguard/Star Digitel Guarantee.......................... $ -- -- 7,967
---------- ---------- ---------
---------- ---------- ---------
Value assigned to Debt Conversion Feature of IWCH Pakistan Facility............. $ -- -- 3,979
---------- ---------- ---------
---------- ---------- ---------
Exchange of redeemable convertible preferred stock for investments in
affiliates and telecommunication licenses and other intangibles................ $ 25,000 -- --
---------- ---------- ---------
---------- ---------- ---------
Exchange of common stock for investment in subsidiary/affiliate................. $ 125 -- 6,159
---------- ---------- ---------
---------- ---------- ---------
Note payable assumed in connection with an affiliate............................ $ 4,000 -- --
---------- ---------- ---------
---------- ---------- ---------
Effect of net assets of subsidiary previously accounted for by the
equity method................................................................... $ -- 4,395 --
---------- ---------- ---------
---------- ---------- ---------
Accretion of redeemable convertible preferred stock............................. $ 459 2,111 2,204
---------- ---------- ---------
---------- ---------- ---------
Vanguard Warrant/Option Exchange................................................ $ -- -- 3,734
---------- ---------- ---------
---------- ---------- ---------
Bank liability assumed in connection with an affiliate.......................... $ -- -- 5,000
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9
<PAGE>
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
International Wireless Communications Holdings, Inc. ("IWC Holdings")
was incorporated in Delaware in July 1996 as a holding company whose primary
assets are all of the issued and outstanding capital stock of International
Wireless Communications, Inc. ("IWC") and notes receivable from IWC (IWC
Holdings and IWC are collectively referred to herein as the "Company"). IWC
was incorporated in Delaware in January 1992 and develops, owns and operates
wireless communications companies in major emerging markets in Asia and Latin
America. The Company, together with its strategic partners, provides cellular
services in China, Pakistan and Indonesia, and is developing a digital
enhanced specialized mobile radio ("ESMR") network in Brazil.
The Company has suffered significant recurring losses from operations
and has a capital deficiency that raise substantial doubt about its ability
to continue as a going concern. To date, the Company has invested principally
in local wireless businesses ("LWBs") that are in their early stages of
development, have a limited number of subscribers and are expected to incur
losses for a substantial period of time. The Company's losses have been
funded from cash previously raised through the sale of debt and equity
securities. The losses of the LWBs in which the Company is a significant
shareholder have been funded principally from equity infusions and advances
from the Company or other shareholders of the LWB. Pursuant to their business
strategies, all of the Company's subsidiaries and affiliates expect to
continue making expenditures to build-out their telecommunications networks
and fund operating losses which will require substantial amounts of cash.
Each of the Company's LWBs intends to raise the required level of cash
through combinations of capital infusions from existing or new shareholders,
equipment financing from equipment vendors or lending banks and/or debt
financing. The Company is committed to participate in such financings, when
necessary, for its core investments in China, Pakistan, Indonesia and Brazil
in order to maintain its current level of ownership, and in certain cases, to
increase its level of ownership. In order to obtain the additional funds it
needs to continue operating at planned levels, the Company will need
substantial funds from additional debt and/or equity financings. The
Company's plans with respect to obtaining additional capital include
additional shareholder investment of which $10,000,000 was obtained in March
1998, (see Note 16) and sale of non-strategic wireless investments. In recent
months, the Company and its LWBs have experienced significant difficulties in
obtaining adequate financing to fund operations. As a result, the majority of
the LWB's business plans have been delayed. Additional delays may negatively
affect the ability of the Company to realize the full value of the Company's
investments. The Company has further retained a financial advisor for the
purpose of evaluating its strategic and financial alternatives. There can be
no assurance that the Company or any of its interests in any of its LWBs can
be sold or that the Company or its LWBs can obtain any additional debt or
equity financing. If the Company cannot obtain additional financing, the
Company will have to significantly curtail its operations including delaying,
scaling back or eliminating one or more of its projects or merging, selling,
liquidating or suffering dilution in one or more of its investments. The
failure of the Company to participate in capital calls for Star Digitel
Limited ("Star Digitel") and International Wireless Communications Pakistan
Limited ("IWCPL") in particular will result in substantial dilution. The
curtailment of operations could result in the loss or revocation of
telecommunication licenses held by the LWBs.
In connection with the Debt Offering (see Note 9), IWC Holdings and IWC
completed a reorganization in which IWC became a wholly owned subsidiary of
IWC Holdings through the conversion of each share of the then-outstanding
capital stock of IWC into 40 shares of the corresponding class and series of
stock of IWC Holdings (the "Stock Conversion"). All data related to shares
and per share amounts for all periods presented have been adjusted to reflect
the effect of the reorganization and the Stock Conversion.
Consistent with industry practice, the Company considers itself to be
operating in one business segment.
F-10
<PAGE>
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of IWC, its wholly owned subsidiary, Servicos de Radio Comunicacoes Ltda.
("SRC"), various offshore holding companies, and a majority owned subsidiary,
PeruTel S.A. ("PeruTel"). The consolidated financial statements for the years
ended December 31, 1996 and 1997 also include the accounts of TeamTalk
Limited ("TeamTalk"), a wholly-owned subsidiary, since April 30, 1996, the
effective date of the acquisition (see Note 5); Wireless Data Services, Ltd.
("WDS") since February 1996 (64% interest as of December 31, 1997); Star
Telecom Overseas (Cayman Islands) Limited ("STOL") since August 1996 (56%
interest as of December 31, 1997) and Uniworld S.A. (formerly Promociones
Telefonicas S.A. ("Protelsa")) ("Uniworld") since December 1996 (66% interest
as of December 31, 1997). All significant intercompany accounts and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operating entities is
the applicable local currency, except for those entities located in highly
inflationary countries. Translation from the applicable foreign currencies to
U.S. dollars is performed for monetary assets and liabilities using current
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period.
The gains or losses, net of applicable deferred income taxes, resulting from
such translation, if material, are included in stockholders' deficit. Gains
or losses resulting from foreign currency transactions are included in other
income. Foreign currency gains or losses associated with transactions of
investments accounted for under the equity method of accounting are reflected
as a component of equity in gains or losses from affiliates. For
non-operating foreign investees and for the Company's investee in Brazil, a
highly inflationary country, the functional currency is the U.S. dollar.
Remeasurement adjustments for foreign entities, where the U.S. dollar is the
functional currency, and exchange gains and losses arising from transactions
denominated in a currency other than the functional currency, are included in
other income and are not material in any of the years presented.
REVENUE RECOGNITION
Revenue includes primarily access and usage charges for subscriber units
under service agreements with the Company's consolidated subsidiaries that
have commenced operations. The terms of these service agreements range from
monthly to 36 month periods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of
90 days or less at the time of acquisition to be cash equivalents.
The Company has classified its investments in certain debt and equity
securities as "available for sale". Such investments are recorded at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' deficit. The cost of securities sold is based upon the specific
identification method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at original cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the respective assets, generally three to five years for
non-telecommunication equipment and ten years for telecommunication equipment.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies consist of interests in entities
that have been awarded telecommunication licenses to provide various wireless
telecommunication services.
The cost method of accounting is used for the Company's investments in
affiliated companies where the Company's voting interest is generally less
than 20% and the Company does not exert significant influence. Under the cost
method, the investment is recorded at cost, and income is recognized only to
the extent distributed by the investee as dividends. No such dividends were
declared or distributed for any of the years presented. Write-downs to the
F-11
<PAGE>
recorded historical cost are recognized when the Company believes that an
other than temporary decline in value of the investment has occurred.
Where the Company's voting interest is 20% to 50% and the Company does
not exercise control, the equity method of accounting is used. Under this
method, the investment, originally recorded at cost, is adjusted to recognize
the Company's share of net earnings or losses of the investee, limited, in
the case of losses, to the extent of the Company's investment therein (except
where the Company has extended guarantees of debt of the affiliate) and the
amortization of telecommunication licenses and other intangibles, if any.
Write-downs from the adjusted historical cost are made when the Company
believes an impairment in value has occurred. The amount of the purchase
price that exceeded the fair value of the Company's percentage ownership of
the equity investee's tangible assets at the date of acquisition reflects the
existence of intangible assets of the equity investee. The primary intangible
asset of each equity investee consists of the equity investee's
telecommunication licenses or rights to participate in such licenses. Amounts
attributable to other intangibles, such as workforce, customer lists, and
agreements with local companies for transmitter and antenna locations, are
not material. Accordingly, the Company has accounted for the excess purchase
price as attributable primarily to telecommunication licenses and
participation rights and amortizes such intangibles generally over a period
of up to 20 years commencing upon the date of completion of the acquisition
or commencement of project operations in the case of Star Digitel. To the
extent that goodwill exists, the Company believes that the difference in
amortization lives between telecommunication licenses and goodwill would not
have a material effect on the accompanying consolidated financial statements.
In some cases, the terms of the licenses held by the equity investees are
less than twenty years. However, the Company believes that it will be able to
renew the licenses indefinitely if it builds out the infrastructure and
establishes commercial service. The costs of license renewal are expected to
be nominal.
The Company consolidates entities it controls, generally through greater
than 50% ownership interest.
TELECOMMUNICATION LICENSES AND OTHER INTANGIBLES
The Company has acquired majority ownership interest in various LWBs.
These acquisitions have been accounted for under the purchase method and are
included in the accompanying consolidated financial statements. The amount of
the purchase price that exceeded the underlying fair value of the Company's
pro rata ownership in the LWB's net tangible assets at the date of
acquisition represents the level of intangible assets of the LWB. The primary
intangible asset of each LWB consists of the LWB's telecommunication licenses
or rights to participate in such licenses. Given the early stage nature of
the acquired entities, amounts attributable to other intangibles, such as
workforce, customer lists, and agreements with local companies for
transmitter and antenna locations, are not material. Accordingly, the Company
has accounted for the excess purchase price as attributable primarily to
telecommunication licenses and participation rights. To the extent that
goodwill exists, the Company believes that the difference in amortization
lives between licenses and goodwill would not have a material effect on the
accompanying consolidated financial statements. Licenses are amortized
generally over a period of 20 years, commencing upon the date of completion
of the acquisition. In some cases, the terms of the licenses held by the
LWB's are less than twenty years. However, the Company believes that it will
be able to renew the licenses indefinitely if it builds out the
infrastructure and establishes commercial service. The costs of license
renewal are expected to be nominal. Amortization expense was approximately
$294,000, $1,103,000, and $1,249,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value-based method of Accounting
Principles Board ("APB") Opinion No. 25 to account for its employee
stock-based compensation plans.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
F-12
<PAGE>
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
reporting period. Actual results could differ from these estimates.
BUSINESS AND CREDIT CONCENTRATIONS AND RISK FACTORS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents. The
Company's cash equivalents are comprised of investment grade short-term debt
instruments. Management believes that the financial risks associated with
such deposits are minimal.
Included in the Company's consolidated balance sheet as of December 31,
1996 and 1997, are long-term investments in various LWBs in such developing
countries as Brazil, China, India, Indonesia, Malaysia, Pakistan, New
Zealand and Peru.
Each IWC subsidiary and affiliate has a unique and distinct market,
operating and regulatory environment, and local economy with different
subscription rates and costs to build and operate the systems. Achieving each
operating plan is dependent upon successfully contending not only with normal
risks associated with constructing and operating wireless properties, but
also risks unique to operating in foreign emerging countries, such as
regulatory compliance, contractual restrictions, labor laws, expropriation,
nationalization, political, economic or social instability, and confiscatory
taxation.
The Company anticipates that it will often have a minority interest in
operating companies, in part because applicable laws often limit foreign
investors to minority equity positions. As such, the Company may be unable to
access the cash flow, if any, of its operating companies. Additionally, the
Company's ability to sell or transfer its ownership interest in its operating
companies is generally subject to limitations based on agreements with its
strategic and financial partners, as well as provisions in local operating
licenses and local government regulations that may prohibit or restrict the
transfer of the Company's ownership interest in such operating companies.
The U.S. dollar-denominated value of the Company's investment in its
operating companies and other wireless projects is partially a function of
the currency exchange rate between the U.S. dollar and the applicable local
currency. In addition, such operating companies and other wireless projects
will report their results of operations in the local currency and,
accordingly, the Company's results of operations may be adversely affected by
changes in currency exchange rate risks. As a result, the Company may
experience economic loss with respect to its investments and fluctuations in
its results of operations solely as a result of currency exchange rate
fluctuations. During the latter half of 1997, the Company experienced
significant equity losses relating to its investments in Asia, particularly
in PT Rajasa Hazanah Perkasa ("RHP"), the Company's cellular affiliate in
Indonesia, due in large part to the significant devaluation of the Indonesian
rupiah and the related remeasurement of its U.S. dollar-denominated credit
facility. The Company expects to experience continued foreign currency
translation losses in Asia, particularly where U.S. dollar-denominated debt
exists. This may also impact the Company's ability to raise debt at the
operating company level in Asia in the foreseeable future. The company does
not carry currency convertibility risk insurance or engage in foreign
currency hedge transactions.
The Company's ability to retain and exploit its existing
telecommunication licenses, and to obtain new licenses in the future, is
essential to the Company's operations. However, these licenses are typically
granted by governmental agencies in developing countries, and there can be no
assurance that these governmental agencies will not seek to unilaterally
limit, revoke, or otherwise adversely modify the terms of these licenses in
the future, any of which could have a material adverse effect on the Company,
and the Company may have limited or no legal recourse if any of these events
were to occur. In addition, licenses typically require renewal from time to
time and there can be no assurance that renewals to these licenses will be
granted.
Most of the LWBs currently operating have incurred operating losses and
negative cash flow from operations since inception, and the Company expects
that most of its operating companies will continue to generate operating
F-13
<PAGE>
losses and negative cash flow from operations for the foreseeable future and
accordingly, the Company expects its losses to increase. Most of these
operating companies have only recently initiated providing commercial
services and have a limited subscriber base. This is not uncommon in the
wireless telecommunications industry, which requires significant capital
investments in the initial years prior to obtaining a sufficient subscriber
revenue base to support operations. Achievement of positive cash flow from
operations will depend on successful execution of management's business
plans. Those plans assume significant additional capital investment, in some
cases, to expand the wireless network. There can be no assurance that such
funding capacity will be available in the future.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment
loss would be recognized when estimated future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount.
The recoverability of property and equipment, investments in equity and
cost investee companies, and the value attributed to telecommunications
licenses, is dependent upon the successful build-out of system
infrastructure, obtaining additional licenses by investee companies, and
successful development of systems in each of the respective markets in which
the Company's investees operate or through the sale of such assets. In 1996,
the Company wrote off its investments in HFCL Mobile Radio, Ltd. ("HFCL") and
PT Binamolti Visvalindo ("PTBV") of $320,000 and $205,000, respectively,
based on management's decision to no longer pursue such projects. In 1997,
the Company wrote off its investments in M/S Mobilcom (Pte) Ltd. ("Mobilcom
Pakistan") and PT Mobilkom Telekomindo ("Mobilkom") of $4,714,000 and
$1,500,000, respectively, and wrote down its investment in Prismanet (M) Sdn.
Bhd. (formerly STW) ("Prismanet") by $11,683,000 ($7,683,000 as an equity
investment and $4,000,000 as a cost investment) and RHP by $1,103,000 based
on management's decision to no longer pursue the Mobilcom Pakistan project
and significant other than temporary impairments in the Company's estimate of
the net realizable value in both Mobilkom, Prismanet and RHP (see Notes 4 and
5). In addition, the Company recorded its pro rata share of reserves
associated with the Prismanet "keep well" of $5,000,000 (see Note 13). All
such impairment write-offs and write-downs are classified as impairment in
asset value on the accompanying consolidated statements of operations for the
years ended December 31, 1996 and 1997.
RECLASSIFICATIONS
Certain amounts in the accompanying 1995 and 1996 consolidated financial
statements have been reclassified to conform with the 1997 consolidated
financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company will adopt SFAS No. 130 in fiscal 1998.
The Financial Accounting Standards Board recently issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
statement establishes standards for the way public business enterprises are
to report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports. The Company will adopt SFAS No. 131 in
fiscal 1998. The Company has determined that it does not have any separately
reportable business segments.
(2) CASH AND CASH EQUIVALENTS
The Company has invested in a variety of short-term, highly liquid
investments all with original maturities of 90 days or less. As of December
31, 1996, the Company had cash of $11,811,000, and cash equivalents
consisting of money market mutual funds and U.S. government and agency
obligations totaling $3,009,000 and
F-14
<PAGE>
$26,837,000, respectively. Unrealized gains on U.S. government and agency
obligations of $68,000 is included as a component of stockholders' deficit on
the accompanying consolidated balance sheet as of December 31, 1996. As of
December 31, 1997, the Company had cash of $669,000 and cash equivalents
consisting of money market mutual funds and seven day fixed term deposits
totaling $2,141,000 and $1,600,000, respectively.
F-15
<PAGE>
(3) BALANCE SHEET COMPONENTS
Balance sheet components as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------------- ---------------
<S> <C> <C>
Other current assets
Employee receivables............................................................... $ 179 272
Taxes receivables.................................................................. 820 805
Accounts receivable................................................................ 348 1,797
Other receivables.................................................................. 1,373 5,487
License deposit.................................................................... 5,255 --
Notes receivable................................................................... 1,431 776
Notes receivable from affiliates................................................... 813 290
Prepaid expenses and other......................................................... 470 1,106
-------------- ---------------
$ 10,689 10,533
-------------- ---------------
-------------- ---------------
Property and equipment
Furniture and fixtures............................................................. $ 320 296
Computer and office equipment...................................................... 935 1,412
Automobiles........................................................................ 197 248
Leasehold improvements............................................................. 276 545
Telecommunication equipment........................................................ 9,930 17,854
Construction in process............................................................ 7,620 4,788
-------------- ---------------
19,278 25,143
Less accumulated depreciation........................................................ 852 2,737
-------------- ---------------
Property and equipment, net..................................................... $ 18,426 22,406
-------------- ---------------
-------------- ---------------
Telecommunication licenses and other intangibles
SRC/Via 1 project.................................................................. $ 6,680 6,680
Mobilcom Pakistan.................................................................. 5,439 725
TeamTalk........................................................................... 1,760 1,760
STOL............................................................................... 3,965 3,965
Protelsa........................................................................... 1,557 1,557
WDS................................................................................ 221 221
Other.............................................................................. 200 200
-------------- ---------------
19,822 15,108
Less accumulated amortization...................................................... 1,338 2,587
-------------- ---------------
Telecommunication licenses and other intangibles, net....................... $ 18,484 12,521
-------------- ---------------
-------------- ---------------
Accounts payable and accrued expenses
Accounts payable.................................................................. $ 5,163 4,187
Professional services............................................................. 718 1,237
Employee compensation and benefits................................................ 619 886
Equipment purchases............................................................... 27 3,393
Interest.......................................................................... -- 525
Other............................................................................. 786 784
-------------- ---------------
$ 7,313 11,012
-------------- ---------------
-------------- ---------------
</TABLE>
F-16
<PAGE>
(4) INVESTMENTS IN AFFILIATES HELD FOR SALE
In June 1997, the Company sold its 1.56% equity interest in Corporation
Mobilcom S.A. de C.V. ("Mobilcom Mexico") for $3,218,000 to a third party
affiliated with an existing shareholder in Mobilcom Mexico. The Company
carried this investment in Mobilcom Mexico at its historical cost basis of
$2,062,000. As a result, the Company reported a gain of $1,156,000 in other
income as of December 31, 1997. In compliance with the Indenture (see Note
9), proceeds from the disposition of the Company's interest in Mobilcom
Mexico were used for Permitted Investments (as defined) within 270 days after
the date of disposition.
In June 1997, the Company initiated the disposition of three additional
enhanced capacity trunked radio ("ECTR") investments as the Company re-aligns
its investment strategy and re-distributes its resources to its larger
cellular and ESMR investments. The investments held for sale include
TeamTalk, the Company's wholly owned New Zealand subsidiary; Universal
Telecommunications Service, Inc. ("UTS") in the Philippines and Mobilkom in
Indonesia. In December 1997, the Company wrote off its investment in Mobilkom
of $1,500,000 (see Note 1) as it does not expect to receive any proceeds from
a sale of this interest as a result of Mobilkom's delay in the execution of
its business plan and the effects of the Asian economic crisis on this
investment. The Company expects that the sale of Team Talk and UTS may occur
in 1998. The Company anticipates that the proceeds from disposition of Team
Talk and UTS will not materially differ from the Company's historical cost
basis.
Investments in affiliates held for sale as of December 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1997
----------------- ------------------
<S> <C> <C>
Mobilcom Mexico..................................... $ 2,062 --
UTS................................................. -- 1,873
----------------- ------------------
$ 2,062 1,873
----------------- ------------------
----------------- ------------------
</TABLE>
In July 1997, the Company changed its method of accounting for its
investment in UTS from the equity method to the cost method since its
ownership interest was reduced from 19.04% to 15.41% as the Company elected
not to participate in a recent capital call. The Company has not changed the
basis of accounting for the remaining investments held for sale. The Company
continues to consolidate TeamTalk and has not reclassified this investment as
an asset held for sale. The Company's investment in, and advances to,
TeamTalk amounted to $17,979,000 as of December 31, 1997. Selected audited
financial information for TeamTalk is as follows as of and for the year ended
December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Current assets.................................................................... $ 803
Noncurrent assets................................................................. 12,913
Current liabilities............................................................... 3,889
Noncurrent liabilities ........................................................... 9,427
Net revenues...................................................................... 1,811
Net loss.......................................................................... (3,235)
</TABLE>
(5) INVESTMENTS IN AFFILIATES
Investments in affiliates represent interests in various LWBs in several
developing countries. These investments are accounted for under the equity or
cost methods of accounting.
EQUITY INVESTMENTS
For investments in companies in LWBs in which the Company's voting
interest is 20% to 50%, or for investments in companies in which the Company
exerts significant influence through board representation and management
authority even if its ownership is less than 20%, the equity method of
accounting is used. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's share of gains or losses of
affiliates, limited to the extent of the Company's investment in and advances
to affiliates, including any debt guarantees or other contractual funding
commitments. All affiliated companies have fiscal years ended December 31.
Investments in affiliated companies are as follows (dollars in thousands):
F-17
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
--------------------------------------------------------------------------
MALAYSIA INDONESIA NEW ZEALAND INDIA INDONESIA
--------- ---------- ---------- ------ ---------
PRISMANET RHP TEAMTALK HFCL PTBV TOTALS
--------- --------- ----------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Percentage of ownership............................... 30%(1) 25% 50% 49% 49%
Investments in affiliated companies as of
December 31, 1994................................. $ 1,400 -- 284 -- -- 1,684
Additional investment................................. 20,770 25,530 2,569 243 206 49,318
Amortization.......................................... (638) (319) (7) (1) (1) (966)
Losses................................................ (1,291) (991) (508) -- -- (2,790)
--------- -------- -------- ------ ----- --------
Equity in losses of affiliates........................ (1,929) (1,310) (515) (1) (1) (3,756)
--------- -------- -------- ------ ----- --------
Investments in affiliated companies as of
December 31, 1995................................. $ 20,241 24,220 2,338 242 205 47,246
--------- -------- -------- ------ ----- --------
--------- -------- -------- ------ ----- --------
Portion of investment exceeding the Company's share
of the underlying historical net assets as of
December 31, 1995................................. $ 16,821 23,361 1,526 242 205 42,155
--------- -------- -------- ------ ----- --------
--------- -------- -------- ------ ----- --------
</TABLE>
(1) The Company, along with the other Prismanet shareholders, agreed to
provide certain support in connection with a Malaysian Ringgit 91,000,000
(approximately $23,400,000 as of December 31, 1997) senior credit facility
obtained by Prismanet with a Malaysian bank syndicate (see Note 13).
F-18
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------------------
MALAYSIA INDONESIA CHINA PHILIPPINES NEW ZEALAND INDIA INDONESIA
--------- ---------- ------------ ----------- ----------- ------ ---------
PRISMANET RHP STAR DIGITEL UTS TEAMTALK HFCL PTBV TOTALS
--------- ---------- ------------ ----------- ----------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of ownership................. 30%(1) 28% 40% 19%(2) 100%(3) 49%(4) 49%(4)
Investments in affiliated companies as
of December 31, 1995.................... $ 20,241 24,220 -- -- 2,338 242 205 47,246
Additional investment (reclassification) 1,201 8,556 20,000 1,906 (1,736) 78 -- 30,005
Impairment in asset value............... -- -- -- -- -- (320) (205) (525)
Amortization............................ (969) (1,278) (347) (51) -- -- -- (2,645)
(Losses) gains.......................... (3,563) (3,468) (1,000) 20 (602) -- -- (8,613)
--------- --------- -------- ------- ------- ------ ------- -------
Equity in losses of affiliates.......... (4,532) (4,746) (1,347) (31) (602) -- -- (11,258)
--------- --------- -------- ------- ------- ------ ------- -------
Investments in affiliated companies as
of December 31, 1996....................$ 16,910 28,030 18,653 1,875 -- -- -- 65,468
Portion of investment exceeding the
Company's share of the underlying
historical net assets as of
December 31, 1996.......................$ 15,852 28,030 10,653 882 -- -- -- 55,417
</TABLE>
(1) The Company, along with the other Prismanet shareholders, agreed to
provide certain support in connection with a Malaysian Ringgit
91,000,000 (approximately $23,400,000 as of December 31, 1997) senior
credit facility obtained by Prismanet with a Malaysian bank syndicate
(see Note 13).
(2) Reflects an additional investment of $532,000, of which $354,000 was
paid in 1996 and the remainder was paid in January 1997, pursuant to an
agreement dated September 25, 1996. This investment was previously
accounted for as a cost investment.
(3) Reflects acquisition of the remaining 50% of TeamTalk, effective April
30, 1996, pursuant to an agreement dated June 24, 1996.
(4) HFCL and PTBV were fully written off during 1996 based on management's
decision to no longer pursue these projects.
F-19
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------------
MALAYSIA INDONESIA CHINA PHILIPPINES PAKISTAN THAILAND
--------- --------- -------- ----------- ----------- -------------
WORLDPAGE
STAR COMPANY LIMITED
PRISMANET RHP DIGITEL UTS IWCPL ("WORLDPAGE") TOTALS
--------- --------- -------- ----------- ----------- --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage of ownership..................... 22.5%(1) 28% 40% 15%(2) 34% 11%
Investments in affiliated companies as of
December 31, 1996...........................$ 16,910 28,030 18,653 1,875 -- -- 65,468
Additional investment (reclassification).... (4,000) -- 9,000 (1,662) 26,127 4,500 33,965
Impairment in asset value................... (7,683) (1,103) -- -- -- -- (8,786)
Amortization................................ (885) (1,676) (731) (23) -- (37) (3,352)
Losses ..................................... (4,342) (25,251) (7,800) (190) (1,518) (131) (39,232)
-------- -------- -------- ------- -------- ------- --------
Equity in losses of affiliates.............. (5,227) (26,927) (8,531) (213) (1,518) (168) (42,584)
-------- -------- -------- ------- -------- ------- --------
Investments in affiliated companies as of
December 31, 1997...........................$ -- -- 19,122 -- 24,609 4,332 48,063
-------- -------- -------- ------- -------- ------- --------
-------- -------- -------- ------- -------- ------- --------
Portion of investment exceeding the
Company's share of the underlying
historical net assets as of
December 31, 1997...........................$ -- -- 18,922 -- -- 2,764 21,197
-------- -------- -------- ------- -------- ------- --------
-------- -------- -------- ------- -------- ------- --------
</TABLE>
(1) The Company, along with the other Prismanet shareholders, agreed to
provide certain support in connection with a Malaysian Ringgit
91,000,000 (approximately $23,400,000 as of December 31, 1997) senior
credit facility obtained by Prismanet with a Malaysian bank syndicate
(see Note 13). The Company's ownership interest in Prismanet was reduced
from 30% to 22.5% during 1997 as the Company elected not to participate in
a recent capital call. Additionally, during 1997 the Company changed its
method of accounting for its investment in Prismanet from the equity
method to the cost method as the company believes it no longer exerts
significant influence.
(2) During 1997, the Company decided to offer UTS for sale and has
reclassified this investment to investments in affiliates held for sale
(see Note 4).
F-20
<PAGE>
In June 1996, the Company entered into an agreement with the other 50%
owner of TeamTalk to acquire their 1,700,000 shares of TeamTalk's common
stock, as well as to assume TeamTalk's indebtedness to the shareholder
totaling $3,022,000, for a total purchase price of approximately $3,198,000.
The transaction was accounted for by the purchase method effective April 30,
1996, with the majority of the purchase price paid in July 1996. As of
December 31, 1996, TeamTalk was consolidated into the financial statements of
the Company as a wholly owned subsidiary. In connection with the incremental
investment, the Company reclassified the associated unamortized portion of
investment exceeding the Company's share of underlying historical net assets
to telecommunication licenses and other intangibles. The fair value of the
assets acquired and the liabilities assumed in connection with the
acquisition were $8,327,000 and $3,584,000, respectively.
In September 1996, IWC entered into a subscription agreement (the "Star
Digitel Subscription Agreement") with Star Telecom Holding Limited ("STHL"),
the Company's partner in STOL, to purchase a 40% equity interest in Star
Digitel for an aggregate purchase price of $20,000,000 and accounted for by
the purchase method. Pursuant to the Subscription Agreement, in September
1996, IWC also entered into an escrow agreement (the "Star Digitel Escrow
Agreement") and deposited, in escrow, $9,000,000 of the $20,000,000 purchase
price. In November 1996, in connection with the closing of the Company's
acquisition of an equity interest in Star Digitel, the $9,000,000 held in
escrow was released to STHL, and the Company funded an additional $11,000,000
to acquire its 40% interest in Star Digitel for an aggregate purchase price
of $20,000,000 and assigned $11,000,000 to participation rights in Star
Digitel's underlying projects, representing the amount of the purchase price
that exceeded the fair value of the Company's percentage ownership of Star
Digitel's tangible net assets.
In October 1996, the Company paid $8,556,000 to increase its interest in
RHP to 29.2% and accounted for this additional acquisition using the purchase
method. The Company assigned the entire amount of the purchase price to the
telecommunication license as the purchase price exceeded the fair value of
the Company's percentage ownership of RHP's tangible net assets in full at
the date of purchase. In December 1996, Nissho Iwai International (Singapore)
Pte. Ltd. purchased 3% of RHP, diluting the Company's ownership interest in
RHP down to 28.3%.
In October 1996, the Company paid $1,000,000 for an option to purchase
50% of Laranda Sdn. Bhd., a 10% shareholder of Prismanet, for an exercise
price of $7,200,000 and certain other contractual rights. The Company, at its
discretion, allowed the option to lapse on November 6, 1996 and subsequently
expensed the entire $1,000,000, which is classified as other expense in the
accompanying consolidated statement of operations.
In June 1997, the Company, including the designated assignee of IWC, IWC
China Limited ("IWC China"), amended the Star Digitel Subscription Agreement.
The Amendment to Subscription Agreement and Waiver ("Amendment and Waiver")
modified certain provisions in the Star Digitel Subscription Agreement,
including waiving the fulfillment of the conditions precedent to its
obligations to enter into and complete a second subscription of Star Digitel
shares for an aggregate subscription price of $19,000,000 and pay and deliver
to STHL the second $9,000,000 premium in June 1997. The Company funded the
$9,000,000 premium in June 1997. The Company assigned the entire amount of
the premium to the participation rights in Star Digitel's underlying projects.
In August 1997, the Company through its wholly owned subsidiary,
Pakistan Wireless Holdings Limited ("PWH"), acquired a 43.48% indirect equity
interest in IWCPL for an aggregate purchase price of $22,000,000 (see note
9), of which $15,841,000 was paid in cash and $6,159,000 of which was paid
with 493,510 shares of IWCH's common stock. IWCPL used these funds and the
proceeds from the sale of the remaining equity of IWCPL to an unrelated party
and to Vanguard Pakistan, Inc., a wholly owned indirect subsidiary of
Vanguard Cellular Systems, Inc., a significant stockholder of the Company
("Vanguard"), to acquire a 46% equity interest in Pakistan Mobile
Communications (Pvt) Limited ("Mobilink"), a cellular telephone service
provider in Pakistan, for an aggregate purchase price of $50,600,000. In
September 1997, IWCPL consummated the sale of newly issued shares in IWCPL to
an unrelated third party for $13,959,000 and used the proceeds to purchase an
additional 12.69% equity interest in Mobilink, thereby increasing its equity
interest in Mobilink to 58.69%. The Company's indirect equity interest in
Mobilink and IWCPL was 20% and 34.08%, respectively, after the consummation
of the foregoing transactions. During 1997, the Company also funded an
aggregate of $4,127,000 to IWCPL, which amount represents the Company's pro
rata share of various capital calls declared by IWCPL. This additional
funding brought the Company's investment in IWCPL to $26,127,000, as of
December 31, 1997. The Company accounted for its investment in IWCPL using
the purchase method of accounting and subsequently has reported this
investment under the equity method of accounting.
F-21
<PAGE>
In September 1997, the Company paid its pro rata share of a finder's fee
to an unrelated third party in connection with its indirect investment in
Mobilink primarily through the issuance of a warrant to purchase 81,982
shares of the Company's common stock at an exercise price of $0.01 per share
(the "Mobilink Finder's Fee"). The Company recognized a total fee of
$1,022,000 million related to the Mobilink Finder's Fee which is included as
a component of the cost basis of IWCPL's investment in Mobilink.
In September 1997, STOL, a company that holds interests in various
paging projects in Asia and in which the Company holds a 56% indirect equity
interest, invested $4,500,000 for a 20% equity interest in WorldPage, a Thai
paging operator. The Company's corresponding indirect equity interest in
WorldPage is 11.2%. STOL recorded its investment in WorldPage using the
purchase method of accounting and assigned $2,801,000 of its investment to
telecommunication licenses and other intangibles, representing the amount of
the purchase price that exceeded the fair value of STOL's percentage
ownership of WorldPage's tangible net assets.
In September 1997, the Company recorded a write-down of $7,683,000 in
the Company's equity investment in Prismanet based on the Company's estimate
of the net realizable value of this investment using a discounted cash flow
analysis of Prismanet's revised business plan. The Company believes that a
significant other than temporary impairment in the value had occurred due to
then recently diminished prospects for the allocation of additional spectrum
at a different frequency band to Prismanet by the government of Malaysia in
the then foreseeable future. This allocation of additional spectrum is
believed by the Company to be critical to support the value of Prismanet's
business as proposed to be conducted. In December 1997, the Company changed
its method of accounting for its investment in Prismanet from the equity
method to the cost method since its ownership interest was reduced from 30%
to 24% as the Company elected not to participate in a recent capital call and
the Company is no longer able to exercise significant influence over this
investment. In December 1997, the Company further wrote down the investment
by $4,000,000 and recorded a $5,000,000 reserve associated with the Prismanet
"keep well" (see Note13). The remaining investment in Prismanet is zero as of
December 31, 1997.
In December 1997, the Company wrote off its remaining investment in RHP
of $1,103,000. As a result of the economic crisis in Asia, the inability of
PT Mobile Selular Indonesia ("Mobisel") (the operating company and subsidiary
of RHP) to extend bank financing with Nissho Iwai International (Singapore)
Pte. Ltd. ("Nissho Iwai"), the negative net equity of RHP and the
postponement in the execution of Mobisels' business plan, the Company
believes the impairment in the RHP investment is other than temporary. As a
result the Company wrote off the remaining equity investment balance. The
Company has no further obligations with respect to guarantees or commitments
pertaining to RHP or Mobisel.
Condensed financial statement data, presented in accordance with U.S.
generally accepted accounting principles and stated in U.S. dollars for
significant affiliated companies accounted for by the equity method follows
(in thousands):
F-22
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
------------------------------------------------------
PRISMANET RHP (A) TEAM TALK
-------------- -------------- -------------------
<S> <C> <C> <C>
Current assets............................................ $ 2,611 5,316 213
Noncurrent assets......................................... 33,299 21,336 6,307
Current liabilities....................................... 2,988 17,496 3,933
Noncurrent liabilities.................................... 21,925 6,257 1,492
Net revenues.............................................. 749 5,463 348
Net loss.................................................. (5,898) (3,186) (1,490)
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996 (B)
------------------------------------------------------
PRISMANET RHP STAR DIGITEL
-------------- -------------- -------------------
<S> <C> <C> <C>
Current assets............................................ $ 820 13,354 11,215
Noncurrent assets......................................... 41,686 64,556 55,617
Current liabilities....................................... 6,909 23,341 12,460
Noncurrent liabilities.................................... 33,526 63,834 47,817
Net revenues.............................................. 1,858 10,268 436
Net loss.................................................. (11,873) (12,072) (2,618)
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997
----------------------------------------------------------------------------------------
RHP STAR DIGITEL IWCPL (C) WORLDPAGE (D)
----------------- --------------------- --------------------- --------------------
(unaudited)
<S> <C> <C> <C> <C>
Current assets......... $ 5,176 12,543 15,710 1,865
Noncurrent assets...... 56,105 114,748 118,071 7,651
Current liabilities.... 118,475 77,520 45,794 3,324
Noncurrent liabilities. 1,126 49,727 17,981 298
Net revenues........... 8,300 5,372 8,580 1,016
Net loss............... (89,151) (17,149) (4,453) (504)
</TABLE>
- ------------
(A) For the period March 28, 1995 through December 31, 1995. Net revenues
and net loss for the period from January 1, 1995 through March 27,
1995 were $1,821,000 and $387,000, respectively.
(B) Effective April 30, 1996, TeamTalk became a wholly owned subsidiary
of the Company. Net revenues and net loss for the period from January
1, 1996 through April 30, 1996 were $282,000 and $645,000, respectively.
(C) Net revenues and net loss are from August 18, 1997, the date of the
acquisition. IWCPL had no revenues and net loss prior to this date.
(D) Net revenues and net loss are from September 25, 1997, the date of
acquisition. WorldPage had net revenues and net loss (unaudited) of
$3,263,000 and $3,383,000 respectively, for the year ended December 31,
1997.
F-23
<PAGE>
COST INVESTMENTS
The Company uses the cost method of accounting for four other long-term
investments as of December 31, 1997. These are Prismanet, RPG Paging Services
Limited ("RPSL"), First International Telecommunication Company, Limited
("FIT") and Telecomunicaciones Globales, S.A. de C.V. ("Global Telecom"). In
December 1997, the Company began to account for its investment in Prismanet
as a cost investment (see above). As of December 31, 1997, the Company's
equity interest in Prismanet was 22.5% and the Company's investment in
Prismanet has been reduced to zero. The Company holds its interest in RPSL
and FIT indirectly through STOL. In January 1997, STOL purchased an
additional 9% of RSPL for $2,100,000, thereby increasing its equity interest
in RPSL from 10% to 19%, and correspondingly increasing the Company's
indirect interest in RPSL to 10.64% as of December 31, 1997. In September
1997, STOL invested $5,781,000 for a 12% equity interest in FIT, a Taiwanese
paging operator, which corresponds to a 6.72% indirect equity interest in FIT
held by the Company as of December 31, 1997. In January 1997, the Company
acquired a 1.56% equity interest in Global Telecom, a Mexican long distance
company, for $62,000.
The Company's carrying value of these investments as of December 31 are
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
----------------- ---------------
<S> <C> <C>
Mobilkom........................................ $ 1,500 --
RPSL............................................ 1,426 3,526
FIT............................................. -- 5,781
Global Telecom.................................. -- 62
----------------- ---------------
$ 2,926 9,369
----------------- ---------------
----------------- ---------------
</TABLE>
During 1997, the Company reclassified Mobilkom to investments in
affiliates held for sale (see Note 4). The investment was subsequently
written off.
PRO FORMA SUMMARY
The following unaudited pro forma summary combines the consolidated
results of operations of the Company as if (i) TeamTalk had been a wholly
owned consolidated subsidiary as of January 1, 1996, (ii) ownership in RHP
had been 28.3% as of January 1, 1996 and (iii) the acquisitions of STOL, Star
Digitel, Uniworld and IWCPL had occurred as of January 1, 1996.
This pro forma summary does not necessarily reflect the results of
operations as they would have been if the Company had acquired the entities
as of January 1, 1996.
Unaudited pro forma consolidated results of operations for the various
acquisitions and mergers as described above are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997
---------------- --------------
<S> <C> <C>
Revenues......................................................................... $ 1,161 3,275
Net loss......................................................................... (46,408) (127,063)
</TABLE>
F-24
<PAGE>
(6) RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM AFFILIATES
Notes receivable from affiliates as of December 31, 1996, consisted
primarily of the note due from Mobilcom Mexico for $158,000, plus cumulative
accrued interest of $20,000; and a series of interest-free promissory notes
loaned to Mobisel, an entity which the Company indirectly owns 19.8% through
its investment in RHP, totaling $635,000. In April 1997, the Company
collected the $635,000 note receivable from Mobisel. Concurrent with the sale
of Mobilcom Mexico in June 1997, the Company reclassified the Mobilcom Mexico
note from notes receivable from affiliates to notes receivable (see Note 7).
In March 1997, the Company loaned $3,500,000 to Star Digitel. This loan,
which is evidenced by a promissory note, accrues interest at 9% per annum and
is due upon written demand by the Company. In September 1997, the Company,
through its wholly owned subsidiary, IWC China, loaned $800,000 to Star
Digitel. This loan accrues interest at 9% per annum and is due upon written
demand by the Company. These loans have been classified as non-current as
repayment is not expected within the next 12 months.
VANGUARD MERGER
On December 18, 1995, the Company merged with Vanguard International
Telecommunications, Inc. ("VIT") (See Note 11), a wholly owned subsidiary of
Vanguard. Prior to this merger, Vanguard owned 10.46% of the Company and
provided a variety of services relating to the formation, development and
operation of the Company's wireless communication businesses. In exchange for
3,972,240 shares of Series E Redeemable Convertible Preferred Stock with a
liquidation preference of $6.29 per share, the Company acquired VIT's
interests in TeamTalk and VIT's rights to acquire an interest in various
international LWBs. The liquidation value was equal to the fair market value
of the Series E preferred stock on the date of the merger. The resulting
total value of $25,000,000, was allocated to the various LWBs based on their
respective stage of development and an independent valuation study of the
LWBs. As a result of this merger, Vanguard increased its ownership position
to approximately 36% and continues to provide the services described above.
The original cost to Vanguard of the net assets acquired by IWC in the merger
was approximately $550,000. The value of these assets, however, appreciated
significantly over time as licenses were subsequently granted, joint ventures
and other strategic alliances formed and business plans developed.
The excess of the allocated portion of the merger value to TeamTalk over
the net book value of TeamTalk was attributed to telecommunication licenses
and other intangibles. This excess amounted to $1,712,000 and is amortized on
a straight-line basis over 20 years.
The Company also acquired VIT's rights to participate in RHP, SRC,
Mobilcom Pakistan, HFCL and PTBV and other yet to be developed projects.
Approximately $23,288,000 was allocated to telecommunication licenses and
other intangibles in the LWBs based on their relative stage of development.
These amounts are amortized on a straight-line basis over 20 years.
Subsequently, Mobilcom Pakistan, HFCL and PTBV have been written off.
VANGUARD WARRANT/OPTION EXCHANGE
On May 5, 1997, the Company entered into an agreement with Vanguard,
pursuant to which Vanguard surrendered then-outstanding warrants to purchase
323,880 shares of Series C preferred stock, 416,720 shares of Series D
preferred stock and 64,120 shares of Series F preferred stock in exchange for
the issuance by the Company of a warrant to acquire 249,970 shares of common
stock at a purchase price of $0.25 per share and a second warrant to purchase
554,750 shares of common stock at an exercise price of $9.375 per share. This
second warrant was subsequently surrendered by Vanguard in exchange for the
issuance to certain officers and employees of Vanguard of an option to
purchase 53,330 shares of common stock at an exercise price of $9.375 per
share under International Wireless Communications Holdings, Inc.'s 1996 Stock
Option/Stock Issuance Plan (the "1996 SO/SIP") and options to purchase an
aggregate of 501,420 shares of common stock at a purchase price of $9.375 per
share outside the
F-25
<PAGE>
1996 SO/SIP (see Note 11) (The foregoing transaction is hereinafter referred
to as the "Vanguard Warrant/Option Exchange"). Vanguard agreed to guarantee
from time to time, as part of the management advisory services in connection
with the Vanguard Warrant/Option Exchange, up to an aggregate of $3.2 million
of indebtedness incurred by the Company or its wholly owned subsidiaries
until the Company receives at least $3.2 million in alternative debt
financing or consummates an initial public offering ("IPO") of its common
stock, but in no event later than February 3, 1999. In addition, certain
Vanguard employees agreed to perform management advisory services over a four
year period. The Company recognized management advisory service expense of
$2.3 million related to the Vanguard Warrant/Option Exchange, which is
classified in selling, general and administrative expenses in the
accompanying consolidated statement of operations, and deferred compensation
of $1.5 million, which is presented net of amortization of $244,000, on the
accompanying balance sheet as of December 31, 1997. Pursuant to an $8 million
bridge loan agreement dated May 19, 1997 between Star Digitel and The
Toronto-Dominion Bank, each shareholder of Star Digitel agreed to guarantee
its pro rata share of the bridge loan. Pursuant to the guarantee facility
provided by it in connection with the Vanguard Warrant/Option Exchange,
Vanguard guaranteed the Company's $3.2 million pro rata share of the
guarantee.
VANGUARD STAR DIGITEL GUARANTEE
In September 1997, at the request of IWC China, Vanguard guaranteed
$8,000,000 of indebtedness to be incurred by Star Digitel (the "Vanguard Star
Digitel Guarantee"). Pursuant to a reimbursement agreement (the
"Reimbursement Agreement"), IWC China agreed to pay Vanguard (i) an up-front
guarantee fee of $240,000 in cash, (ii) a quarterly in-kind guarantee fee at
an initial rate of 6.75% that increases over time to 17.75% and (iii) an
additional guarantee fee payable in shares of Star Digitel owned by IWC China
if Vanguard is required to make any payments under the guarantee. In
addition, the Company granted Vanguard a ten-year warrant to purchase shares
of its common stock at an exercise price of $0.01 per share. The number of
shares issuable upon exercise of the warrant is initially set at 68,819 and
increases in quarterly increments thereafter until Vanguard's obligations
under the guarantee have been permanently released and discharged. In
December 1997, under this arrangement, the number of additional shares of the
Company's common stock issuable upon exercise of this warrant increased by
51,864 to an aggregate of 120,683 shares as of December 31, 1997 (see Note
11). The Company recognized an expense of $1,755,000 related to the Vanguard
Star Digitel Guarantee through December 31, 1997. The Company has recorded
this expense in other expense in the accompanying consolidated statement of
operations. The Company recognized additional expense related to incremental
quarterly warrant grants associated with this Vanguard Star Digitel Guarantee
in 1998 (see Note 16). Pursuant to a Pledge Agreement dated September 18,
1997, IWC China pledged all of its Star Digitel Shares to secure performance
of its obligations under the Reimbursement Agreement (and certain related
agreements).
(7) NOTE RECEIVABLE
On June 6, 1996, the Company loaned $3,080,000 to a co-shareholder of
Mobilcom Mexico, a trunked radio services operator in Mexico. The loan, in
the form of a promissory note, accrues interest at 13% per annum and was due
upon written demand by the Company. The Company's belief was that this loan
may facilitate future strategic investments in projects in which this
co-shareholder is involved. As of December 31, 1996, the co-shareholder had
repaid $1,800,000 of the total amount loaned, bringing the remaining
principal plus interest owed to $1,431,000. During 1997, this note, including
accrued interest, totaling $1,496,000 was repaid in full.
In March 1997, the Company loaned $500,000 to an unrelated third party.
This loan, which has a one year term, accrues interest at the rate of 15% per
annum and is guaranteed by another unrelated third party. In March 1998, the
Company agreed on a repayment plan with such party (see Note 16). Concurrent
with the sale of Mobilcom Mexico, the Company reclassified its note
receivable with Mobilcom Mexico from notes receivable with
F-26
<PAGE>
affiliates to notes receivable (see Note 6). Consequently, as of December 31,
1997, principal plus interest on this note of $213,000 in the aggregate, is
included in notes receivable on the accompanying consolidated balance sheet.
(8) LICENSE DEPOSITS
In June 1996, the Company deposited $3,042,000 for a 20% interest in a
consortium pursuing ECTR licenses in Taiwan, which the Company classified as
license deposit and other assets in the accompanying consolidated balance
sheet as of December 31, 1996. The consortium was successful in winning four
of twelve license applications. In August 1997, the Company received a refund
of $1,933,000, which represents its pro rata portion of the deposit applied
to the unsuccessful applications, net of the Company's pro rata share of
application expenses and foreign currency loss of $105,000. The remaining
deposit of $1,004,000 was to represent the Company's initial capital
contribution to the ECTR venture to be formed; however, in September 1997,
the Company sold this interest to a third party for $1,153,000.
In August 1996, STOL and the Company deposited $3,005,000 and
$2,250,000, respectively, representing a combined 30% equity interest in a
proposed Taiwan paging project. In early February 1997, it was announced that
the respective bid applications were unsuccessful and the Company
reclassified the deposits to other current assets in the accompanying
consolidated balance sheet as of December 31, 1996. In 1997, STOL received a
refund of $1,881,000 of its deposit, net of its pro rata share of application
expenses of $347,000. In order to mitigate its transactional foreign currency
exposure, the remaining balance of $777,000, which was denominated in New
Taiwanese dollars, was used to pay fees associated with STOL's investment in
FIT. In 1997, the Company received a refund of $2,030,000, net of its pro
rata share of application expenses of $230,000.
(9) LONG-TERM DEBT AND DEBT ISSUANCE COSTS
DEBT OFFERING
In August 1996, the Company issued 196,720 units, each consisting of a
$1,000 principal amount 14% Senior Secured Discount Note due 2001 (a "Note"
and, collectively, the "Notes") and one warrant to purchase 11.638 shares
(for an aggregate of 2,289,421 shares) of common stock (the "Unit Warrants"),
$0.01 par value, for total gross proceeds of $100.0 million (the "Debt
Offering") (see note 11). Net proceeds, after repayment of $7.4 million,
including interest and fees, borrowed under a 1996 revolving credit agreement
with Toronto Dominion Capital (U.S.A.), Inc., an affiliate of Toronto
Dominion Bank, a stockholder of the Company, and other offering expenses,
totaled $86,602,000. Of the $100.0 million gross proceeds, $30.3 million was
allocated to additional paid-in capital related to the fair value of the
warrants issued in the Debt Offering. The Debt Offering is governed by the
Indenture dated as of August 15, 1996 between the Company, as issuer, and
Marine Midland Bank, as trustee (the "Indenture"). In November 1996, the
Company exchanged new 14% Senior Secured Discount Notes due 2001 (the
"Exchange Notes") which were registered under the Securities Act of 1933, as
amended (the "1933 Act"), for its outstanding Notes that were issued and sold
in a transaction exempt from registration under the 1933 Act. The terms of
the Exchange Notes are substantially identical (including principal amount,
interest rate, maturity, security and ranking) to the terms of the Notes.
Long-term debt associated with the Notes, net of unamortized discount, is
$92,785,000 on the accompanying consolidated balance sheet as of December 31,
1997.
The aggregate principal amount of the Notes is $196,720,000. The Notes
are due on August 15, 2001 and bear interest at an effective interest rate of
23.06%, compounded semi-annually. There are no scheduled cash interest
payments on the Notes. The Notes are senior secured obligations of the
Company and will rank pari passu in right of payment with all existing and
future senior indebtedness of the Company and senior to all subordinated
indebtedness of the Company. The Notes are effectively subordinated to all
indebtedness and other liabilities (including trade payables) of the
Company's subsidiaries and affiliated companies. The collateral securing the
Notes consists of a pledge of all of the capital stock of the Company.
There are no sinking fund requirements with respect to the principal of,
or the interest on, the Notes. Upon the occurrence of a change of control (as
defined in the indenture governing the Notes), each holder of the Notes will
have the option to require the Company to repurchase all or a portion of such
holder's Notes at 101% of the accreted value thereof to the date of
repurchase.
F-27
<PAGE>
In connection with the Debt Offering, the Company entered into the
Indenture, which contains certain covenants that, among other things, limits
the ability of the Company and its subsidiaries and affiliates to incur
additional indebtedness, limits the ability of the Company to merge,
consolidate or sell substantially all of its assets; and limits the ability
to make investments. In addition, the Indenture prohibits making restricted
payments (as defined) and creating certain liens (as defined).
The Indenture also contained a provision that in the event the Company
did not complete an IPO of common stock on or prior to May 15, 1997, each
unexercised Unit Warrant issued in connection with the Debt Offering, would
entitle the holder thereof to purchase an additional 2.645 shares (for an
aggregate of 520,324 shares) of common stock. The Company issued such
additional warrants on May 15, 1997 (see Note 11).
The warrants are supported by a warrant agreement (the "Warrant
Agreement"). The Warrant Agreement includes a provision that if the Company
issues any options, warrants, or other securities convertible into or
exchangeable or exercisable for common stock, for a consideration per share
of common stock less than the current market value per share on the date of
issuance of such securities, the warrant number for each Note holder shall be
adjusted in accordance with the formula provided in the Warrant Agreement.
Such additional Unit Warrants have been issued (see Notes 11 and 16).
The costs related to the issuance of the Notes were capitalized and are
being amortized to interest expense using the effective interest method over
the life of the debt. Debt issuance costs are presented, net of amortization,
as $5,369,000 on the accompanying consolidated balance sheet as of December
31, 1997.
PAKISTAN BRIDGE FACILITY
In August 1997, the Company closed a bridge financing facility (the
"Pakistan Bridge Facility"), with Toronto Dominion Investments, Inc. ("TDI"),
Vanguard and other stockholders, whereby the Company received written
commitments for an aggregate amount of $29,000,000 in exchangeable bridge
loans. The Pakistan Bridge Facility is structured as a two-tier facility,
with $7,000,000 available to IWCH for general corporate and other purposes
(the "IWCH Pakistan Facility") and $22,000,000 loaned to PWH for the specific
purpose of financing the cash portion of the purchase price of the Company's
indirect investment in Mobilink and the Company's pro rata share of the
shareholder capital calls and shareholder loans required to finance the
operations of Mobilink (the "PWH Pakistan Facility"). The Pakistan Bridge
Facility contains significant restrictions on the Company's ability to raise
additional debt or equity financing until all amounts outstanding under the
Pakistan Bridge Facility are repaid in full. The Pakistan Bridge Facility
bears interest payable in-kind on a quarterly basis beginning at 14% and
increases over time to 25% (14% as of December 31, 1997). There are no
scheduled cash interest payments on the Pakistan Bridge Facility. Principal
plus accrued but unpaid interest on the Pakistan Bridge Facility matures in
August 2002. Principal plus accrued but unpaid interest on the Pakistan
Bridge Facility may be exchanged for the Company's Series G and H redeemable
convertible preferred stock upon certain occasions (as defined). As of
December 31, 1997, the $7,000,000 IWCH Pakistan Facility had been fully drawn
down. Accrued but unpaid interest on the Pakistan Bridge Facility as of
December 31, 1997 totaled $1,287,000.
Warrants to purchase shares of the Company's common stock at an exercise
price of $0.01 per share were also issued in connection with the IWCH
Pakistan Facility (the "Initial Pakistan Warrants"). The number of shares
issuable of the Company's common stock at the closing of the Pakistan Bridge
Facility upon exercise of the Initial Pakistan Warrants was initially set at
247,737 and increases upon the occurrence of certain events. During 1997, the
number of shares of the Company's common stock issuable upon exercise of the
Initial Pakistan Warrants increased by 445,839 to an aggregate of
693,576. The number of shares of the Company's common stock issuable upon
exercise of the Initial Pakistan Warrants subsequently increased (see Note
16). The Company also agreed to grant to the lenders under the Pakistan
Bridge Facility, upon the occurrence of a specified liquidity event (as
defined), additional warrants (the "Pakistan Liquidity Warrants"; together
with the Initial Pakistan Warrants, including its subsequent increases, the
"Pakistan Warrants") to purchase a number of shares of the Company's common
stock equal to the quotient of (i) 35% of the greater of (A) $2.0 million and
(B) the unpaid principal amount of and unpaid accrued interest in the IWCH
Pakistan Facility and (ii) the value of the Company's common stock with
respect to such liquidity event. As of December 31, 1997, no Pakistan
Liquidity warrants have been issued.
The costs related to the issuance of the Notes, which include all
warrants expected to be earned through December 1997 in accordance with the
terms of the IWCH Pakistan Facility and certain fees paid to TDI, were
F-28
<PAGE>
capitalized and are being amortized to interest expense using the effective
interest method over the estimated term of the debt. In addition, the IWCH
Pakistan Facility contains a conversion feature whereby debt can be converted
to Series G redeemable convertible preferred stock at a price less than fair
value (the "Debt Conversion Feature"). The difference between fair value and
the conversion price (as defined) at the date of drawdown of the IWCH
Pakistan Facility, amounting to $3,979,000, was also capitalized and is being
amortized to interest expense using the effective interest method over the
estimated term of the debt. Debt issuance costs related to the Pakistan
Bridge Facility are presented, net of amortization, as $2,592,000 on the
accompanying consolidated balance sheet as of December 31, 1997.
(10) MINORITY INTEREST
In February 1996, the Company formed WDS, a joint venture, to develop,
install and support mobile data systems throughout the Pacific Rim. The
Company initially had a 50% equity interest in WDS, and funded its operations
on a pro rata basis for total funding during 1996 of $433,000. The Company
increased its equity interest in WDS to 64% during 1997 through the
conversion of shareholder advances into equity.
In August 1996, the Company acquired a 70% equity interest in STOL for
an aggregate purchase price of $13,500,000 which has been accounted for using
the purchase method. STOL holds a minority interest in RPSL, FIT and World
Page and is currently pursuing additional paging opportunities in Asia. The
Company's partner in STOL is STHL, the Company's partner in Star Digitel. The
Company allocated $3,965,000 of the purchase price to participation rights.
In July 1997, the Company, STOL and STHL entered into an agreement with a
third party providing for the issuance and sale to such third party of new
shares equivalent to up to a 20% interest in STOL, subject to STOL entering
into valid and binding agreements to invest in certain specified paging
companies. In September 30, 1997, STOL entered into such agreements with
these specified paging companies and, as a result, the third party paid STOL
$4,160,000 for a 20% interest in STOL, thereby diluting the Company's
interest in STOL to 56%.
In December 1996, the Company paid $1,600,000 to acquire a 66% equity
interest in Uniworld, which has been awarded a national license to provide
paging services in Peru and accounted for the acquisition using the purchase
method. The Company allocated $1,557,000 of the purchase price to the
telecommunication license.
Minority shareholders' interests is principally related to STOL and was
$5,315,000 and $8,675,000 as of December 31, 1996 and 1997, respectively.
(11) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
The Company is authorized to issue 40,000,000 shares of preferred stock,
of which 33,231,480 are designated redeemable convertible preferred stock,
1,200,000 are designated nonredeemable convertible preferred stock, 5,568,520
are undesignated, and 66,000,000 shares of common stock, of which 60,000,000
are designated class 1 and 6,000,000 are designated class 2. All shares have
a par value of $0.01 per share.
Nonredeemable convertible preferred stock as of December 31, 1996 and
1997, was comprised of 933,200 issued and outstanding shares of Series A
preferred stock. In August 1996, a stockholder of the Company converted
266,800 shares of Series A preferred stock into 266,800 shares of common
stock. Series A preferred stock has a liquidation value per share of $.85 and
an aggregate liquidation value of $793,000.
F-29
<PAGE>
Redeemable convertible preferred stock as of December 31, 1997, was
comprised of the following (in thousands except share and per share amounts):
<TABLE>
<CAPTION>
LIQUIDATION AGGREGATE
REDEEMABLE CONVERTIBLE PREFERRED STOCK: SHARES SHARES ISSUED AND VALUE PER LIQUIDATION
DESIGNATED OUTSTANDING SHARE VALUE
- ---------------------------------------- --------------- --------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Series B.............................. 1,229,240 1,229,240 .9652 $ 1,186
Series C.............................. 2,460,000 1,762,280 2.3343 4,114
Series D.............................. 5,800,000 3,652,960 6.8775 25,183
Series E.............................. 3,972,240 3,972,240 6.7365 26,759
Series F-1............................ 7,000,000 7,000,000 9.3750 43,505
Series F-2............................ 1,080,000 1,080,000 9.3750 6,712
Series G-1............................ 1,928,000 -- see below --
Series G-2............................ 1,292,000 -- see below --
Series H-1............................ 5,072,000 -- see below --
Series H-2............................ 3,398,000 -- see below --
--------------- --------------------- ----------------
33,231,480 15,981,876 $ 107,459
--------------- --------------------- ----------------
--------------- --------------------- ----------------
</TABLE>
Each series of redeemable preferred stock is being accreted to its
respective minimum redemption amount, which is equal to the liquidation value.
The rights, preferences, and privileges of the holders of preferred
stock are as follows:
- LIQUIDATION
In the event of Company liquidation, the holders of Series G
preferred stock shall be entitled to receive, prior and in preference
to the holders of Series A, B, C, D, E, F and H preferred stock and
common stock an amount equal to the sum of (i) the IWCH Note Exchange
Price (as defined in the Company's Form 8-K as filed with the
Securities and Exchange Commission on September 12, 1997) and (ii) an
amount equal to declared but unpaid dividends on such share. The IWCH
Note Exchange Price is the lesser of (A) the conversion price
applicable to Series F preferred stock as of the date of the exchange
and (B) 65% of the share value applicable to the liquidity event (as
defined) or 65% of the appraised value if no liquidity event (as
defined) has occurred.
Then, the holders of Series H preferred stock shall be entitled to
receive an amount per share equal to the sum of (i) the PWH Note
Exchange Price (as defined in the Company's Form 8-K as filed with
the Securities and Exchange Commission on September 12, 1997) and
(ii) an amount equal to declared but unpaid dividends on such share.
The PWH Note Exchange Price is the net cash price per share used when
determining the number of shares of Series H preferred stock to issue
in order to equal the aggregate amount of the unpaid principal and
accrued interest on the PWH Pakistan Facility at the date of the
exchange.
Then, the holders of Series F preferred stock shall be entitled to
receive an amount per share equal to the sum of (i) the product of
(A) .50 multiplied by (B) the liquidation value per share specified
above, as adjusted, and (ii) any declared but unpaid dividends
thereon. Holders of Series B, C, D and E preferred stock ("Junior
preferred stock") shall next be entitled to receive an amount per
share equal to the sum of (i) the product of (A) .55 multiplied by
(B) an amount per share of .9193, 2.223, 6.55 and 6.2938,
respectively, as adjusted and (ii) any declared but unpaid dividends
thereon. Holders of Series B, C, D, E and F preferred stock shall
next be entitled to receive the product of (1) .50 multiplied by (2)
an amount per share of .9193, 2.223, 6.55, 6.55 and 9.375,
respectively, as adjusted.
Upon the completion of the distribution to the holders of the Series
B, C, D, E, F, G and H preferred stock, holders of the Series A
preferred stock shall be entitled to receive an amount per share
equal to .85, as adjusted, plus any declared but unpaid dividends
thereon. After the distributions described above, and after
F-30
<PAGE>
the distribution related to common stock described below, the remaining
assets of the Company shall be distributed among the holders of the
preferred stock and common stock pro rata assuming full conversion of
preferred stock into common stock.
- DISTRIBUTIONS
The holders of preferred stock are entitled to receive noncumulative
dividends at the same time and on the same basis as holders of common
stock when, and if, declared by the Board of Directors. No dividends
had been declared through December 31, 1997.
- REDEMPTION
Each share of Series B, C, D, E, F, G and H preferred stock is
redeemable at any time on or after December 31, 1998, but within 45
days after the receipt by the Company of a written request from the
holders of a majority of the then outstanding shares of Series B, C,
D, E, F, G and H preferred stock. The Company shall redeem all such
shares by paying in cash a sum per share equal to the greater of (1)
the then fair market value of such share of preferred stock on an
as-converted basis, or (2) the redemption value of such share of
preferred stock (hereinafter referred to as the redemption price). In
the event the assets of the Company are insufficient to effect such
redemption in full, the shares of preferred stock not redeemed shall
remain outstanding and entitled to all the rights and preferences
provided herein.
In addition to the above redemption, at any time on or after December
31, 2000, but within 45 days after the receipt by the Company of a
written request from the majority of the holders of Series F
preferred stock, the Company shall redeem all outstanding shares of
such stock by paying, in cash, an amount per share equal to the
redemption price of such stock.
Upon the occurrence of a change of control of the Company that is not
approved by certain directors designated by the holders of Series F
preferred stock, the holders of a majority of the shares of Series F
preferred stock then outstanding shall have the right, by written
demand to the Company, to require the Company to redeem immediately
all the shares of Series F preferred stock then outstanding at a
price per share equal to the redemption price of the Series F
preferred stock.
In addition, at any time on or after the later of (i) the Pakistan
Bridge Facility Payment Date (as defined), (ii) the Series G or
Series H Exchange Date (as defined), (iii) December 31, 1998 or (iv)
a Series F Redemption (as defined), but within 45 days after the
receipt by the Company of a written request from the majority of the
Series G or Series H preferred stock, the Company shall redeem all
outstanding shares of such stock by paying, in cash, an amount per
share equal to the redemption price of such stock.
In addition, in the case of any redemption request made by the
holders of a majority of the Series F, G or H redeemable convertible
preferred stock, the holders of a majority of such other series of
preferred stock will be deemed to have made a redemption request
unless they decline such redemption by giving the Company written
notice to that effect within 10 days after delivery of the related
redemption notice.
- CONVERSION AND VOTING RIGHTS
Each share of preferred stock is convertible, at the option of the
holder, into such number of fully paid and nonassessable shares of
common stock as is determined by dividing the original preferred
stock issue price by the conversion price applicable to such
preferred share. Series A, B, C, D, E, F-1, G-1 and H-1 preferred
stock is convertible into Class 1 common stock, while Series F-2, G-2
and H-2 preferred stock is convertible into Class 2 common stock. In
addition each share of Series F-2, G-2 and H-2 preferred stock can be
converted into Series F-1, G-1 and H-1 preferred stock, respectively,
at any time. The conversion price per share for each series of
preferred stock is equal to the preferred stock issue price of the
respective series of preferred stock, subject to adjustment under
certain circumstances. An automatic conversion into common stock will
occur in the event of a firm commitment underwritten public offering
of at least $13.10 per share, as adjusted, and $8,000,000 in the
aggregate. However, the Series F preferred stock shall not
automatically be converted in Common Stock unless: (i) the
underwritten public offering is consummated
F-31
<PAGE>
on or prior to December 31, 1998, (ii) the public offering per share is at
least $18.75, as adjusted, and (iii) the aggregate offering price is not
less than $25,000,000.
Each share of preferred stock has voting rights equal to that of
common stock on an "as if converted" basis. The holder of Series E
preferred stock is entitled to elect three directors to the Company's
Board of Directors, and, for so long as 20% of the shares of Series F
preferred stock remain outstanding, the holders of Series F preferred
stock are entitled to elect three directors. The holders of the
Series G-1 and H-1 preferred stock are entitled to elect one
director. However, if the holders of more than 10% of Series G and H
stock are entitled to elect a director by virtue of holding any other
Series of preferred stock, such right to elect a director may not be
exercised. As of December 31, 1997, the Company had 16,915,076 shares
of common stock reserved for the conversion of preferred stock.
PREFERRED STOCK TRANSACTIONS
- THE SERIES D FINANCING
In connection with the issuance of bridge notes on April 6, 1995, the
Company issued warrants (the "April Bridge Warrants") to purchase
10,760 shares, of which 5,960 related to Vanguard, of Series D
preferred stock at $6.55 per share. The warrants issued to Vanguard
were included in the May 1997 Vanguard Warrant/Option Exchange (see
Note 6). The remaining warrants are outstanding and are exercisable
until April 6, 1998.
In July 1995, convertible secured bridge financing notes issued on
April 24, 1995 were converted into 1,147,600 shares of Series D
preferred stock for an aggregate purchase price of $7,517,000 (a
purchase price of $6.55 per share).
In connection with the Series D Financing, Vanguard loaned $1.8
million to the Company in exchange for two convertible notes in the
amount of $900,000 each. Each note was due upon the earlier of April
26, 1996 or the occurrence of certain events which did not occur
prior to that date. On April 26, 1996, Vanguard converted both notes
including accrued interest into an aggregate of 274,800 shares of
Series D redeemable convertible preferred stock.
In July 1995, the Company entered into a merger agreement with
Vanguard and VIT, a wholly-owned subsidiary of Vanguard, whereby VIT
would merge their international interests in a number of
international wireless projects into the Company in exchange for
3,972,240 shares of Series E preferred stock. This merger was
completed on December 18, 1995, concurrent with the issuance of
Series F preferred stock (see Note 6).
In connection with the Vanguard Merger, the Company entered into an
agreement with an investor to amend previously existing warrant
agreements granted in connection with the Series C Financing. The
investor's original warrant to purchase 50,440 shares of Series C
preferred stock was amended to extend the warrant through December
18, 1997. The investor's original warrant to purchase 222,200 shares
of preferred stock was amended to increase the number of shares to
393,120 and to define the preferred stock as Series D preferred stock
at $6.55 per share. The warrant was exercisable until December 18,
1997. The investor's original warrant to purchase 444,360 shares of
preferred stock was amended to decrease the number of shares to
273,440 and to define the preferred stock as Series C preferred stock
at $2.22 per share. The warrant was exercisable until May 15, 1997.
In May 1997, the Series C and D Vanguard Merger warrants were
exchanged in the Vanguard Warrant/Option Exchange (see Note 6).
- THE SERIES F FINANCING
In connection with the issuance of a note payable to Vanguard in July
1995, the Company issued for a purchase price of $15,000, a warrant
to purchase 32,000 shares of Series F preferred stock at an exercise
price of $9.38 per share. The number of shares and the exercise price
are subject to adjustment in certain circumstances. The warrant is
exercisable until December 18, 1998.
F-32
<PAGE>
Concurrent with the July 1995 Financing, for an aggregate purchase
price of $72,000, the Company issued warrants to purchase an
aggregate of 153,800, of which 32,120 related to Vanguard, shares of
Series F preferred stock (not including the warrant issued to
Vanguard in connection with the first July 1995 note) at an exercise
price of $9.38 per share. All share amounts and the exercise price
are subject to adjustment in certain circumstances. The warrants are
exercisable until December 18, 1998. In May 1997, all of Vanguard's
Series F Warrants were exchanged in the Vanguard Warrant/Option
Exchange (see Note 6).
On August 15, 1995 pursuant to a Note and Warrant Purchase Agreement
dated as of August 14, 1995, the Company issued for a purchase price
of $50,000 a warrant (the "First Warrant") to purchase 106,680 shares
of Series F preferred stock at an exercise price of $9.38 per share,
with the number of shares and exercise price subject to adjustment in
certain circumstances. The First Warrant is exercisable until
December 18, 1998.
Pursuant to a Loan Agreement dated August 14, 1995 between the
Company and an investor, the Company issued a second warrant (the
"Second Warrant") to purchase 106,680 shares of Series F preferred
stock at an exercise price of $9.38 per share, with the number of
shares and the exercise price subject to adjustment in certain
circumstances. The Second Warrant is exercisable until December 18,
1998, with the date being subject to change in the same
circumstances.
On December 18, 1995, the Company sold and issued 5,356,480 shares of
Series F preferred stock for $50,217,000. Prior to the share issuance
of the Series F preferred stock, the Company entered into bridge
financing agreements with certain existing shareholders. Certain
bridge loans were repaid with proceeds from the issuance of shares of
Series F preferred stock, while the remaining bridge loans were
converted into 1,147,600 shares of Series D preferred stock.
WARRANTS
On or prior to June 12, 1997 holders of warrants to purchase an
aggregate of 28,800 shares of Series D redeemable convertible preferred stock
exercised such warrants pursuant to the cashless "net-exercise" provisions
thereof. Upon such exercises, such warrantholders received an aggregate of
8,676 shares of Series D redeemable convertible preferred stock.
During 1997, pursuant to the terms of the Unit Warrants, the
number of additional shares of the Company's common stock issuable upon
exercise of the Unit Warrants increased by an aggregate of 92,987 shares to
an aggregate of 2,902,732 shares as a result of the issuance by the Company
of warrants to purchase the Company's common stock in connection with the
Pakistan Bridge Facility and the Vanguard Star Digitel Guarantee.
F-33
<PAGE>
The Company had the following warrants outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
PREFERRED AND WARRANTS EXERCISE
COMMON STOCK OUTSTANDING PRICE EXPIRATION
- ------------------------------------ ------------------ -------------- ---------------------------
<S> <C> <C> <C>
Series D preferred................. 4,800 $ 6.55 April 6, 1998(1)
Series F preferred................. 335,040 9.38 December 18, 1998(1)
Unit Warrants...................... 2,902,732 0.01 August 15, 2001
Pakistan Warrants.................. 693,576 0.01 August 18, 2007
Mobilink Finder's Fee Warrant...... 81,982 0.01 September 17, 2007
Vanguard Star Digitel Guarantee
warrant......................... 120,683 0.01 September 18, 2007
Vanguard Warrant/Option Exchange
options......................... 501,420 9.38 May 5, 2007
Vanguard Warrant/Option Exchange
Warrant......................... 249,970 .25 May 5, 2007(1)
------------------
4,890,203
------------------
------------------
</TABLE>
- -----------
(1) Warrants expire in the event of an IPO.
COMMON STOCK
In the event of a liquidation, holders of common stock will be entitled
to receive an amount equal to $.50 per share, as adjusted, plus any declared
and unpaid dividends, after completion of distributions to the holders of
preferred stock.
The remaining assets of the Company, after satisfaction of the
stipulated distribution requirements related to the various preferred stock
and common stock liquidation preferences, will be distributed on a pro rata
basis among all of the holders of common stock and all of the holders of the
preferred stock, assuming full conversion of the preferred stock into common
stock.
STOCK OPTION/STOCK ISSUANCE PLAN
Under the Company's 1994 Stock Option/Stock Issuance Plan (the "Plan")
incentive stock options may be granted to employees and officers, and
non-qualified (supplemental) stock options may be granted to employees,
officers, directors, and consultants to purchase shares of the Company's
common stock. Accordingly, the Company, as of December 31, 1995, had reserved
a total of 1,000,000 shares of the Company's common stock for issuance upon
the exercise of options granted pursuant to the Plan. Options granted under
the Plan generally expire 10 years following the date of grant and are
subject to limitations on transfer. During 1996, the Board of Directors
approved the amendment to and restatement of the Plan, the 1996 SO/SIP, and
authorized this issuance of an additional 1,400,000 shares of common stock
thereunder. In May 1997, the stockholders of the Company approved a further
amendment to the 1996 SO/SIP increasing the aggregate number of shares of
Common Stock available for issuance over the term of the plan by 411,526
shares to a total of 2,811,526 shares.
Option grants under the 1996 SO/SIP are subject to various vesting
provisions, all of which are contingent upon the continuous service of the
optionee and may not impose vesting criterion more restrictive than 20% per
year. The exercise price of options granted under the 1996 SO/SIP must equal
or exceed the fair market value of the Company's common stock on the date of
grant. Unless otherwise terminated by the Board of Directors, the 1996 SO/SIP
automatically terminates in January 2004.
The Company has elected to use the intrinsic value-based method of APB
Opinion No. 25 to account for stock options issued to employees. Accordingly,
no compensation cost has been recognized in the accompanying consolidated
financial statements for the 1996 SO/SIP because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as
of the grant date for each option. The Company has
F-34
<PAGE>
adopted the pro forma disclosure provisions of SFAS No. 123. Pro forma
results may not be representative of the effects on reported net loss for
future years. Had compensation cost for the Company's stock-based
compensation plans been determined in a manner consistent with the fair value
approach described in SFAS No. 123, the Company's net loss would be increased
to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net loss As reported..................... $ (11,271) (35,908) (123,650)
Pro forma....................... (11,290) (36,110) (124,029)
</TABLE>
Pro forma net loss reflects only options granted in 1995, 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts above
because compensation cost is reflected over the options' vesting period of
four to five years and compensation cost for options granted prior to January
1, 1995 is not considered.
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for granted options in 1995, 1996 and 1997, respectively:
zero dividend yield; zero expected volatility; risk-free interest rates of
5.91%, 5.88% and 6.14%; and weighted average expected lives of 2.65 years,
2.04 years and 2.87 years.
A summary of the status of the Company's Plan as of December 31, is as
follows:
F-35
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------- -------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------------- -------------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year...... 761,920 $ 0.41 881,920 $ 1.51 1,982,000 $ 5.52
Granted................ 160,000 6.41 1,142,000 8.43 936,296 10.00
Exercised.............. -- -- (41,920) 0.25 (180,000) 0.25
Canceled............... (40,000) 0.25 -- -- (237,239) 9.15
----------- -------------- ---------------
Outstanding at
end of year............ 881,920 1.51 1,982,000 5.52 2,501,057 7.23
----------- -------------- ---------------
----------- -------------- ---------------
Options exercisable at
end of year............ 433,001 568,080 950,184
Shares available for
grant..................
118,080 376,080 88,549
Weighted average fair
value of options
granted during the
year...................
$ 0.90 $ 0.93 $ 1.56
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE PRICE OUTSTANDING EXERCISE
EXERCISE PRICES OPTIONS LIFE OPTIONS PRICE
---------------- --------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.25......................... 432,000 6.50 $ 0.25 384,998 $ 0.25
From $0.25 to $2.50........... 68,000 6.83 2.09 56,750 2.08
From $2.51 to $8.13........... 979,916 8.08 7.87 463,401 7.77
From $8.14 to $9.38 .......... 845,457 9.14 9.38 45,035 9.38
From $9.39 to $12.48.......... 175,684 9.77 12.48 -- --
---------------- ----------------
From $0.25 to $12.48.......... 2,501,057 8.25 7.23 950,184 4.46
---------------- ----------------
---------------- ----------------
</TABLE>
(12) INCOME TAXES
The Company has incurred net losses since inception and has not recorded
any provision for income taxes. The reconciliation between the amount
computed by applying the U.S. federal statutory tax rate of 34% to net loss
before income taxes and the actual provision for income taxes as of December
31 follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ -----------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate................................ $ (3,832) (12,208) (36,244)
License amortization.................................................. 341 302 --
Other................................................................. -- 18 35
Net operating loss and temporary differences for which no tax benefit
was recognized..................................................... 3,791 11,888 36,209
---------- ------------ -----------
$ -- -- --
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
F-36
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------------- ---------------
<S> <C> <C>
Deferred tax assets:
Loss carryovers and deferred start-up expenditures.................... $12,788 31,953
Equity in foreign investments......................................... 501 23,618
Debt issuance costs................................................... -- 2,497
---------------- ---------------
Total gross deferred tax assets...................................... 13,289 58,068
Less valuation allowance............................................ (9,948) (55,614)
---------------- ---------------
Total deferred tax assets.......................................... 3,341 2,454
Deferred tax liabilities:
Fixed assets.......................................................... (153) (266)
Equity in foreign investments......................................... -- --
License fees.......................................................... (3,103) (2,188)
Debt issuance costs................................................... (85) --
---------------- ---------------
Total deferred tax liabilities................................... (3,341) (2,454)
---------------- ---------------
Net deferred tax assets............................................ $ -- --
---------------- ---------------
---------------- ---------------
</TABLE>
Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The valuation
allowances as of December 31, 1996 and 1997 were $9,948,000 and $55,614,000,
respectively. The net changes in valuation allowance during 1996 and 1997 was
an increase of $9,293,000 for 1996 and an increase of $45,666,000 for 1997.
As of December 31, 1997, the Company has cumulative U.S. federal net
operating losses of approximately $64,631,000, which can be used to offset
future income subject to federal income taxes. The federal tax loss
carryforwards will expire from 2008 through 2012. The Company has cumulative
California net operating losses of approximately $37,400,000, which can be
used to offset future income subject to California income taxes. The
California tax loss carryforwards will expire from 1998 through 2002.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. Most of the U.S. federal and California net
operating loss carryforwards are subject to limitation as a result of these
restrictions. The ownership change restrictions are not expected to impair
the Company's ability to utilize the affected carryforward items. If there
should be a subsequent ownership change, as defined, of the Company, its
ability to utilize its carryforwards could be reduced.
The Company's foreign subsidiaries have aggregate net operating
losses of approximately $22,456,768. The foreign loss carryovers expire
over periods varying from six years to indefinitely.
(13) COMMITMENTS AND CONTINGENCIES
LEASE AND OTHER COMMITMENTS
The Company and its consolidated subsidiaries lease their facilities and
certain equipment under noncancelable operating lease agreements expiring
through 2001. Future minimum lease payments due under noncancelable operating
leases total approximately $1,752,000, $1,227,000, $667,000, $406,000 and
$129,000 in 1998 through 2002, respectively.
Total rent expense was approximately $60,000, $324,000 and $1,341,000
for the years ended December 31, 1995, 1996, and 1997, respectively.
In October 1996, SRC entered into a contract with Nokia
Telecommunications Oy to acquire approximately $12.3 million of trunking
equipment and related services in six phases. It is anticipated that this
contract will be
F-37
<PAGE>
assigned to Via 1 upon the legal formation of the joint venture, which is
anticipated to occur during 1998. In the event the Company is unable to fund
this subscription, the Company will suffer significant dilution in its
ownership interest.
CAPITAL CONTRIBUTIONS
The Company, indirectly through its wholly owned subsidiary, IWC China,
owns a 40% equity interest in Star Digitel. The Company, including the
Designated Assignee of IWC, IWC China, amended the Subscription Agreement,
dated as of September 23, 1996, among Star Digitel and STHL. The Amendment
and Waiver modified certain provisions in the Star Digitel Subscription
Agreement, including waiving the fulfillment of the conditions precedent to
its obligations to enter into and complete a second subscription of Star
Digitel shares for an aggregate subscription price of $19,000,000. Pursuant
to the Amendment and Waiver, IWC China is required to fund the second
subscription of Star Digitel shares no later than June 17, 1998. In the event
the Company is unable to fund this subscription, the Company will suffer
significant dilution in its ownership interest.
In order to protect the Company's investments in affiliates from
ownership dilution, the Company has committed to make additional capital
contributions to the LWBs as needed besides the second subscription of shares
in Star Digitel. Subject to the availability of necessary additional
financing, for the year ended December 31, 1998, the Company anticipates
making additional investments in various operating and nonoperating companies
totaling approximately $38,500,000.
NOTE PAYABLE
The Company was jointly and severally liable on a $16,000,000 note
payable to an unrelated party in connection with its RHP investment. The note
bore interest at 6.95% with principal and interest due October 10, 1996. The
Company had recorded its pro rata share of this note on the accompanying
consolidated balance sheet. In October 1996, the Company paid its $4,000,000
pro rata share of this note, plus $278,000 of accrued interest and the other
shareholders of RHP paid their pro rata share.
GUARANTEE OF DEBT OF EQUITY INVESTEE
In connection with a Malaysian Ringgit 91,000,000 (approximately
$23,393,000 as translated using effective exchange rates at December 31,
1997) senior credit facility with a Malaysian bank obtained by the Company's
22.5% cost investee, Prismanet, the Company along with other Prismanet
shareholders, executed a financial "keep well" covenant pursuant to which
they have agreed (i) to ensure that Prismanet will remain solvent and be able
to meet its financial liabilities when due and (ii) to ensure that the
project is timely completed and to make additional debt and equity
investments in Prismanet to meet cost overruns. The loan is repayable by
Prismanet in eleven semi-annual installments beginning October 8, 1997. The
Company and other Prismanet shareholders have separately executed an
agreement, whereby each shareholder has agreed to share in the liability on a
pro rata basis in relation to their interest in Prismanet. In the event that
the bank were to seek repayment from the Prismanet shareholders and the other
shareholders were unable to honor their pro rata share in the liability, the
Company might be liable for the full amount of the outstanding amount of the
loan. As of December 31, 1997, this facility has been fully drawn down. In
December 1997, the Company recorded its pro rata share of this facility
associated with the "keep well" covenant totaling $5,000,000 due to the
likelihood of the bank enforcing the "keep well". This is reflected as bank
liability on the accompanying consolidated balance sheet as of December 31,
1997.
The Company indirectly owns a 19.8% equity interest in Mobisel, a
provider of cellular services in Indonesia through its 28.3% ownership in
RHP. Mobisel has obtained a six-year $60 million credit facility from Nissho
Iwai to finance the construction of its network. Borrowings under the credit
facility bear interest at a floating rate based on LIBOR and are secured by
all of Mobisel's assets and a pledge of all the capital stock held by RHP and
Mobisel's other shareholders. RHP has also guaranteed the credit facility. As
of December 31, 1997, this facility has been fully drawn down.
The Company, through its subsidiary, IWC China, owns 40% of Star
Digitel. Star Digitel has obtained a $7 million credit facility from Bank
Bira, which it has used to continue the roll-out of its network. Borrowings
under this facility are secured by substantially all of Star Digitel's assets
and guarantees from its shareholders, including IWC China, on a pro rata
basis. The guarantee by IWC China is non-recourse to the Company. As of
December 31, 1997, this facility has been fully drawn down.
F-38
<PAGE>
In September 1997, at the request of IWC China, Vanguard guaranteed
$8,000,000 of indebtedness to be reimbursed by Star Digitel (see Note 6). On
the occurrence of certain events, including an IPO of equity securities by
the Company or certain related entities and the receipt of a specified amount
of cash proceeds from private equity issuances or asset sales by the Company
or certain related entities, IWC China will be required to pay an additional
guarantee fee equal to 4.0% of the outstanding Star Digitel Shares as of the
date of such event unless Vanguard's obligations under the guarantee are
permanently released and discharged.
LICENSES AND INTERCONNECTION
Mobilink holds a non-exclusive nationwide license to provide cellular
services in Pakistan. The license has a term of 15 years, and expires in
2007, at which time Mobilink will be required to seek governmental approval
to renew the license. The license by its terms contains certain conditions on
construction and operation of the network. Mobilink may not be in technical
compliance with certain requirements of the license.
MOBILINK OPTION
As of December 31, 1997, the Company had expended approximately $26.1
million to acquire its 20% indirect equity interest in, and to make capital
contributions and shareholder loans to, Mobilink. Pursuant to the
Shareholder's Agreement dated August 18, 1997, among the shareholders of
Mobilink, the Company holds an option (the "Mobilink Put-Call Option") to
purchase an additional 5.71% interest in IWCPL from APC for an aggregate
purchase price of approximately $6.0 million, which amount is subject to
adjustment based upon the capital contributions and shareholder loans made by
APC in respect of such 5.71% interest and the period of time elapsed between
the date APC originally purchased such 5.71% and the date that the option is
exercised. APC has a corresponding right to put such interest to the Company
at the same purchase price at any time during the term of the option. The
Mobilink Put-Call may be exercised only once by the Company or APC and will
expire on December 31, 1998, unless sooner exercised. Upon exercise of the
Mobilink Put-Call Option in its entirety, the Company's indirect equity
interest in IWCPL would increase to 39.79%, and its corresponding indirect
equity interest in Mobilink would increase to 23.35%.
F-39
<PAGE>
(14) GEOGRAPHIC INFORMATION
Information about the Company's consolidated operations in different
geographic areas as of and for the years ended December 31 is as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Latin America...................................... $ -- -- 26
Southeast Asia..................................... -- -- --
Pacific and Far East............................... -- 869 3,249
United States...................................... -- -- --
---------------- -------------- --------------
$ -- 869 3,275
---------------- -------------- --------------
---------------- -------------- --------------
Operating loss:
Latin America...................................... $ (154) (3,844) (7,301)
Southeast Asia..................................... -- (692) (7,090)
Pacific and Far East............................... (3,756) (13,717) (66,413)
United States...................................... (6,211) (11,667) (16,002)
---------------- -------------- --------------
$ (10,121) (29,920) (96,806)
---------------- -------------- --------------
---------------- -------------- --------------
Identifiable assets:
Latin America...................................... $ 13,017 19,712 22,937
Southeast Asia..................................... 5,658 6,541 29,316
Pacific and Far East............................... 50,017 104,966 60,026
United States...................................... 26,951 38,139 11,090
---------------- -------------- --------------
$ 95,643 169,358 123,369
---------------- -------------- --------------
---------------- -------------- --------------
</TABLE>
The Company's consolidated operations in Latin America are in Brazil and
Peru. The Company's consolidated operations in Southeast Asia are in
Pakistan. The Company's consolidated operations in Pacific and Far East are
in New Zealand. The Company's equity method and cost investees are included
in the geographic areas in which principal operations exist or will exist
(see Note 5).
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, notes
receivable from and advances to affiliates, accounts payable and accrued
expenses, notes payable to related party and note payable approximates the
fair market value due to the relatively short maturity of these instruments.
The fair value of other financial instruments is described below.
The following methods and assumptions were used to estimate the fair
value of each category of financial instruments for which it is practicable
to estimate that value:
INVESTMENT IN AFFILIATE HELD FOR SALE -- The fair value of this
instrument is determined by management to be the same as its carrying amount.
INVESTMENTS IN AFFILIATES CARRIED ON THE COST METHOD -- The fair value
of these instruments is estimated based upon recent transactions in this
portfolio (see Note 5).
LONG-TERM DEBT, NET -- The fair value of the Exchange Notes was based on
recent trading prices of the related debt. The fair value of the Pakistan
Bridge Facility was estimated by management to be the same as the carrying
amount as no significant change in prevailing interest rates had occurred
since the issuance of the debt facility.
The estimated fair values of the Company's financial assets
(liabilities) as of December 31 are summarized as follows (in thousands):
F-40
<PAGE>
<TABLE>
<CAPTION>
1997
-------------------------------------
CARRYING AMOUNT ESTIMATED
FAIR VALUE
------------------ ---------------
<S> <C> <C>
Investment in affiliate held for sale...... $ 1,873 1,873
Investment in affiliates carried on the
cost method............................. 9,369 10,383
Long-term debt, net........................ 75,466 74,754
</TABLE>
(16) SUBSEQUENT EVENTS
In January 1998, the Board of Directors granted options to an employee
to purchase 165,000 shares of common stock at an exercise price of $9.60 per
share under the 1996 SO/SIP.
In January 1998, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), a wholly owned subsidiary of IWC merged with and into
Radio Movil Digital Americas, Inc. ("RMDA"). RMDA is a company engaged in the
acquisition and operation of ESMR wireless dispatch communications services
and the sale, lease and servicing of related equipment in certain countries
of South America, particularly Brazil, Venezuela and Argentina. The aggregate
consideration paid by IWC pursuant to the Merger Agreement, after giving
effect to various purchase price adjustments set forth in the Merger
Agreement, consisted of 5,381,009 shares of the Company's Series I redeemable
convertible preferred stock with an aggregate liquidation preference of
$73,871,000 and $4,800,000 in cash (collectively, the "Consideration"). Of
the shares of Series I redeemable convertible preferred stock issued pursuant
to the Merger Agreement, 4,652,608 shares were issued to the former security
holders of RMDA, and the remaining 728,438 shares were deposited in escrow,
pending future release to the former security holders of RMDA or to the
Company in accordance with the Merger Agreement. All outstanding capital
stock of RMDA as of January 23, 1998, was surrendered and the RMDA
shareholders received their pro rata share of the equity portion of the
Consideration paid by the Company, net of the escrowed shares. After closing
of the merger, RMDA became a wholly-owned subsidiary of IWC. In the event of
Company liquidation, the holders of Series I redeemable convertible preferred
stock will be subordinate to Series G, H, J and F shareholders and PARI PASSU
with the rights of Series B, C, D and E shareholders. Series I redeemable
convertible preferred stock is redeemable at any time on or after the later
of (i) such date as all of the Company's Exchange Notes and the Pakistan
Bridge Facility have been repaid in full and (ii) December 31, 1998.
The cash portion of the Consideration paid by the Company was financed
using funds borrowed pursuant to an Amended and Restated Senior Secured Note
and Warrant Purchase Agreement (the "RMDA Loan Agreement"), dated January 23,
1998, among the Company, RMDA and BT Foreign Investment Corporation. The RMDA
Loan Agreement, which provides up to $35.0 million, works as a three-tiered
facility, with (i) the first $15.0 million being a refinancing of existing
RMDA Subordinated Convertible Notes, (ii) the next $10.0 million issued
immediately upon closing of the Merger (the "Initial Closing", and together
with the Subordinated Convertible Notes, the "Senior Secured Note") and (iii)
another $10.0 million being available at such place and on such date in the
future as may be mutually agreeable by the parties involved. The $25.0
million Senior Secured Note has a stated interest rate of 14.5% per annum
with interest paid quarterly beginning May 23, 1998 (with the first payment
including any accrued but unpaid interest on the previously existing
Subordinated Convertible Notes) and principal due the earlier of August 23,
1999 or an Event of Default (as defined). The Senior Secured Note is
collateralized by certain Brazilian assets of the Company. A warrant to
purchase 155,840 shares of IWC's common stock at an exercise price of $0.01
per share was also issued in connection with the RMDA Loan Agreement (the
"RMDA Loan Agreement Warrant").
In January 1998, as a result of the RMDA Loan Agreement Warrant and
pursuant to the terms of the Unit Warrants, the number of shares of the
Company's common stock issuable upon exercise of the Unit Warrants increased
by 14,594 shares to an aggregate of 2,917,326 shares.
In February 1998, pursuant to the terms of the IWCH Pakistan Facility,
the number of shares of the Company's common stock issuable upon exercise of
the Initial Pakistan Warrants increased by 196,018 shares to an
F-41
<PAGE>
aggregate of 889,594. As a result, pursuant to the terms of the Unit
Warrants, the number of shares of the Company's common stock issuable upon
exercise of the Unit Warrants increased by 18,334 shares to an aggregate of
2,935,660 shares.
In February 1998, the Company signed a binding letter of intent with an
unrelated third party to sell PeruTel and RMDA's interests in Ecuador and
Chile for total cash consideration of $3,125,000 subject to adjustments as
outlined in the letter of intent.
In March 1998, the Company signed a letter agreement with an unrelated
third party to sell RMDA's interests in Venezuela for total cash
consideration of $19,500,000, subject to adjustments as outlined in the
letter of intent.
In March 1998, the Company agreed on a repayment plan for its $500,000
note receivable to an unrelated third party that was issued in March 1997 and
received the first installment of $100,000. The Company expects to collect
the remainder of the note during 1998.
In March 1998, the Company completed the first closing (the "First
Closing") of its Series J Preferred Stock and Warrant financing (the "Series
J Financing") with a $10.0 million investment from Vanguard by issuing
789,266 shares of its Series J redeemable convertible preferred stock (the
"Vanguard Series J Preferred Stock and Warrant Purchase Agreement"). The
Company expects to raise up to a total of $18.0 million (the "Face Amount")
from the Series J Financing. Vanguard committed to and funded $10.0 million
of the facility with all existing IWC shareholders having the option to
participate at their pro rata share of the $18.0 million Face Amount to raise
up to an additional $8.0 million (the "Second Closing"). The Second Closing
is expected to close 45 days after the First Closing. In the event of Company
liquidation, the holders of Series J redeemable convertible preferred stock
will be subordinate to Series G and H shareholders and be superior to the
rights of all other shareholders. Series J redeemable convertible preferred
stock is redeemable at any time on or after the later of (i) such date as all
of the Company's Exchange Notes and the Pakistan Bridge Facility have been
repaid in full and (ii) December 31, 1998. In connection with the Series J
Financing, the Company issued a warrant to purchase shares of the Company's
common stock at an exercise price of $0.01 per share (the "Series J Financing
Warrant"). The number of shares issuable of the Company's common stock at the
First Closing upon exercise of such warrant is initially set at 173,638 and
increases upon the occurrence of certain events. Additional warrants will be
issued upon the Second Closing.
As part of the Vanguard Series J Preferred Stock and Warrant Purchase
Agreement, Vanguard shall have the right to exchange (the "Exchange Right"),
upon the closing of an IPO, its direct or indirect equity interests in Star
Digitel and Mobilink and any other of the Company's core investments (as
defined) that Vanguard may acquire an interest in (collectively, the
"Vanguard Assets"), into the Company's common stock. Such Exchange Right is
contingent upon, but shall occur prior to an IPO, to allow the Company to
include the Vanguard Assets in the offering document. The conversion of the
Vanguard Assets shall be valued on a per share basis at the midpoint of the
underwriter's valuation for the Vanguard Assets entities which form the basis
of the IPO pricing, net of any discounts applicable to the Company's
interests.
Concurrent with the Series J Financing, the Company entered into a
Support Services Agreement with Vanguard (the "Vanguard Support Services
Agreement") whereby Vanguard will assist Star Digitel for a period of up to
one year in (i) completing its proposed unit offering of notes and warrants
or alternative financing, and (ii) entering into an equipment financing
agreement with a vendor in exchange for a warrant to purchase 323,408 shares
of common stock at an exercise price of $0.01 per share (the "Vanguard
Support Services Agreement Warrant"). Such warrant will vest (i) 50% upon
Star Digitel raising $50.0 million in the proposed unit offering or
alternative financing and (ii) 50% upon Star Digitel entering into an
equipment supply agreement with a vendor with financing up to $150.0 million
for such equipment.
In March 1998, as a result of the Series J Financing Warrant and the
Vanguard Support Services Agreement Warrant pursuant to the terms of the Unit
Warrants, the number of shares of the Company's common stock issuable upon
exercise of the Unit Warrants increased by 45,339 shares to 2,980,999 shares.
In March 1998, pursuant to the terms of the Vanguard Star Digitel
Guarantee, the number of shares of the
F-42
<PAGE>
Company's common stock issuable upon exercise of the Vanguard Star Digitel
Guarantee warrant increased by 52,080 shares to an aggregate of 172,763. As a
result, pursuant to the terms of the Unit Warrants, the number of shares of
the Company's common stock issuable upon exercise of the Unit Warrants
increased by 4,825 shares to an aggregate of 2,985,824 shares.
F-43
<PAGE>
NOTE 17 -- ADDITIONAL SUBSEQUENT EVENTS (UNAUDITED)
On September 3, 1998, the Company and its wholly-owned subsidiaries,
International Wireless Communications, Inc., Radio Movil Digital Americas,
Inc., ("RMDA"), International Wireless Communications Latin America Holdings,
Ltd. and Pakistan Wireless Holdings Limited (collectively with the Company, the
"Debtors"), commenced voluntary cases under Chapter 11 of the U.S. Bankruptcy
Code, as amended, in the District of Delaware (Case No. 98-2007 (MFW)). Since
that date the Debtors have continued to operate as debtors-in possession,
subject to supervision of the Bankruptcy Court. Subsequently, the Debtors filed
a Second Amended Joint Chapter 11 Plan of Reorganization (the "Plan") and a
Second Amended Disclosure Statement relating thereto with the Bankruptcy Court
(the "Disclosure Statement"). On December 21, 1998, the Bankruptcy Court
determined that the Disclosure Statement contained "adequate information" in
accordance with Section 1125 of the Bankruptcy Code. The Disclosure Statement,
among other things, describes events leading to the Debtors' Chapter 11 filings
and summarizes various claims against the Debtors, including litigation (as of
the Disclosure Statement date) stayed against the Debtors by the bankruptcy
filings described above. The Plan and Disclosure Statement were submitted to
parties in the bankruptcy cases in connection with voting on the Plan.
On February 3-4, 1999, hearings were held before the Bankruptcy Court to
consider confirmation of the Plan, which has been further amended or modified
(the "Amended Plan") to reflect, among other things, settlements of the claims
of BT Foreign Investment Corporation ("BTFIC"), of Toronto Dominion
Investments, Inc. ("TDI") and Asia Pacific Cellphone Co. ("APC"). Posthearing
briefs have been filed, and as of March 2, 1999, the matter has been submitted
to the Bankruptcy Court for a determination as to whether the Amended Plan will
be confirmed. If the Amended Plan is not confirmed, the Debtors may attempt to
file a further amended plan or, if such a plan should prove infeasible, the
Debtors may become subject to liquidation.
On or about March 15, 1999, the Debtors also moved for Court approval of
a stipulation ("Stipulation") that provides in substance, among other things,
that the Debtors agree to cooperate in connection with the collection and
issuance of certain financial information and consents required in connection
with the SEC filings in connection with a merger between the Company's largest
shareholder, Vanguard Cellular Systems, Inc. ("Vanguard") and a subsidiary of
AT&T Corp., that Vanguard will pay the Debtors $2 million plus certain
out-of-pocket expenses and indemnify the Debtors and their officers and
directors with respect to matters arising from their performance of their
obligations as described above, and that a further plan modification would be
filed deleting from the Amended Plan releases of Vanguard and its officers
and directors and certain officers and directors of the Debtors from direct
claims held by shareholders of the Company relating to the Debtors. On March
19, 1999, the Bankruptcy Court approved the Stipulation.
As a result of the Chapter 11 filings, any of the debt of the Debtors
(existing as of September 3, 1998) that was not previously in default became in
default. If the Amended Plan is confirmed, it is anticipated that all
prepetition claims will be restructured or converted into equity of the
Reorganized Debtors. All of the existing equity of the Company would be canceled
and the Company's preferred and common shareholders would be entitled to receive
certain warrants.
The Plan also incorporates a settlement between the Debtors and Vanguard
Cellular Systems, Inc. ("Vanguard"), the Debtors' largest shareholder. Under
the Amended Plan, Vanguard and the Debtors have agreed that Vanguard will:
(i) waive all distributions under the Amended Plan in respect to certain
pre-petition claims; (ii) permit the Debtors to repay and satisfy all
obligations in respect to a $4.6 million "debtor-in-possession" loan facility
via a distribution of new IWCH common stock; (iii) transfer to the Debtors
100% of its equity interests in Vanguard Pakistan, Inc. ("Vanguard Pakistan");
(iv) provide the Debtors with a 17.5% interest in a company ("New Vanguard Sub")
holding an interest in Star Digitel Limited ("Star Digitel"); (v) through
New Vanguard Sub, receive 100% of the Debtors' remaining equity interests in
Star Digitel; (vi) provide credit support for certain obligations of the
Reorganized Debtors (as such term is used in the Amended Plan) that will
provide the Debtors with approximately $7,000,000 of needed post-bankruptcy
funds for operations; (vii) re-allocate its pro rata distribution of certain
warrants; (viii) receive certain releases provided in the Amended Plan; and
(ix) receive certain warrants to purchase shares of common stock of
Reorganized IWCH and of a New Pakistan Warrant Issuing Entity.
F-44
<PAGE>
The Disclosure Statement describes the background to the Chapter 11
filings and certain of the transactions entered into by the Debtors prior to
and during the bankruptcy and up to December 21, 1998, the date the Bankruptcy
Court approved the Disclosure Statement. Certain but not necessarily all of the
transactions that took place during the period subsequent to December 31, 1997
and prior to the date of the approval of the Disclosure Statement are the
following (certain of these transactions were also substantially superseded by
the bankruptcy proceedings):
(i) In February 1998, the Company entered into an agreement with Vanguard
Pakistan, pursuant to which Vanguard Pakistan agreed to make on behalf of the
Company the Company's pro rata share of a $3.6 million IWCPL capital call.
Vanguard Pakistan granted the Company the right to purchase this equity
interest for $1.2 million (Vanguard Pakistan Option). The Company never
effected such purchase; however, if the Amended Plan is confirmed, all of
Vanguard's interests in Vanguard Pakistan will be assigned to the Debtors
subject to a lien held by TDI and other lenders.
In June 1998 one of the Company's subsidiaries failed to meet the Mobilink
Put-Call Option. Under the terms of the Mobilink Put-Call Option, the
subsidiary was obligated on certain terms and conditions to purchase from APC
an additional 5.71% interest in IWCPL for an aggregate purchase price of
approximately $6.4 million. The subsidiary defaulted on such obligation;
however, if the Amended Plan is confirmed, APC will receive a distribution in
respect of the subsidiary's default and the Mobilink Put-Call Option will
expire unexercised.
Prior to the Chapter 11 filing, the Company had met all of its capital
call requirements under the terms of the Mobilink Side Letter.
(ii) In March 1998, the Company completed the first closing of its Series
J Preferred Stock and Warrant financing (the "Series J Financing") with a $10.0
million investment from Vanguard by issuing 789,266 shares of its Series J
redeemable convertible preferred stock. In April 1998, the Company completed
the second Closing (the "Second Closing") of its Series J Financing by issuing
102,605 shares of its Series J redeemable preferred stock and certain warrants
to certain existing shareholders in exchange for $1.3 million in cash. The
shares and warrants will be canceled if the Chapter 11 plan is confirmed, with
the holders entitled to receive certain warrants issued by the Reorganized
Debtors.
(iii) In June 1998, a subsidiary of the Company failed to fund the second
subscription for Star Digitel shares for the aggregate subscription price of
$19.0 million under the terms of the Amendment and Waiver between IWC China,
Star Digitel and STHL. This resulted in dilution of the Company's indirect
interest in Star Digitel from 40% to approximately 23%. Although a dispute
currently exists regarding the Company's indirect ownership interest and rights
with respect to Star Digitel, the Company's failure to meet a July 1998 capital
call by Star Digitel resulted in the Company's indirect ownership being further
diluted to approximately 19%, at most. Under the Chapter 11 plan, the Debtors
(and Vanguard) would transfer their interests in Star Digitel to New Vanguard
Sub, and the Debtors would receive a warrant to purchase 17.5% of that entity's
common stock on a fully diluted basis at an exercise price of one cent per
share. It is not certain, however, what, if any, value such interest will have
to the Reorganized Debtors.
(iv) The Company fully wrote-off its indirect investment in Mobisel in
fiscal 1997.
(v) A receiver was appointed for Prismanet in or about October 1998. The
Company had written off its investment in Prismanet during 1997 and had also
recorded a reserve in respect of its pro-rata share of the joint and several
Prismanet "keep-well" covenant. The Company believes that its liabilities, if
any, in respect of the "keep-well" covenant will be discharged by confirmation
of the Amended Plan.
(vi) As part of restructuring efforts in 1998 and 1999, the Company sold
certain investments in order to raise operating capital and dispose of
interests in subsidiaries or affiliates. A summary of certain of the more
significant sales and other events related to investments follows:
o In May 1998, the Company sold all of its interests in PeruTel and in
Comovec S.A., an Ecuadorian company, to an unrelated third party for $2.8
million and $0.3 million, respectively, resulting in a gain of $2.3
million.
o In May 1998, the Company disposed of all of its interests in Uniworld to
a related party for a nominal amount, resulting in a loss of $4.3 million.
o The Company expects its investment in Mobilkom Indonesia, to be
liquidated and to receive no proceeds therefrom.
o In July 1998, the Company sold 49% of the Venezuelan wireless
communications assets (including RMD Venezuela C.A., RMD Venezuela
Holdings, Digicom, Venezolana de Telecommunicaciones Venetel, C.A. and
Venezuela Trunking Services, C.A.), with the purchaser acquiring an option
to purchase the remaining 51% interest at a nominal amount.
F-45
<PAGE>
The sale price was $15.0 million, plus up to an additional $4.25 million
to be paid incrementally as additional channel ownership is confirmed.
The Company did not record a gain or loss in respect of this sale.
o In November 1998, an action was filed to liquidate Incredible
Telecommunications Ltd. ("ITL"), a New Zealand company 100% owned by the
Company. Incredible owes its creditors approximately $0.3 million. The
Company believes that any liabilities that it may have in respect of ITL
will be settled in connection with its bankruptcy proceedings.
o In December 1998, the Company sold all of its interests in RMD Argentina,
S.A. and in Radio Servicios, S.A. to an unrelated third party for $1.7
million (net of non-cash working capital adjustment and payments to
vendors and management), with an additional $0.2 million held in escrow,
to be paid if certain outstanding issues can be resolved. The sale
resulted in a loss of $1.6 million.
o In December 1998, the Company sold all of its interests in TeamTalk to a
management-led buyout group for a nominal amount. In fiscal 1998 the
Company fully wrote off any investment or assets associated with
TeamTalk as a result of its disposition.
o In February 1999, the Company sold all of its interests in WDS to the
general manager for $0.1 million, resulting in a loss of approximately $1
million.
The Company believes that each of its Operating Companies and their
associated tangible and intangible assets may have become materially impaired,
compared to their status as of December 31, 1997, as a result inter alia of
economic conditions occurring subsequent to December 31, 1997 in the countries
in which such entities operate and the Company's liquidity constraints.
In December 1998, a group of the Company's shareholders initiated an
action in the United States District Court for the District of Delaware against
certain former and current officers and directors of the Company. LOEB PARTNERS
CORP. ET AL., V. GRIFFIN ET AL., Case No. 98-701 (D. Del.). The Company is not
named as a defendant in this action. Plaintiffs in this case are certain former
shareholders of RMDA, and claim, among other things, that they were defrauded
in connection with their purchase of the Company's Series I preferred stock and
their exchange of the shares of RMDA. The basis for the alleged fraud is
purported misrepresentations as to the financial condition of the Company and
certain of its subsidiaries. While the Company is not a defendant in this
action, certain defendants have asserted claims for indemnification against the
Company in excess of $3.5 million that such parties claim may have
administrative expense priority (an assertion that the Debtors dispute). In
addition, certain of the plaintiffs in this action have filed Proofs of Claim
against the Company asserting claims for fraud arising out of the Transaction.
During January 1999, certain other Series I preferred shareholders of the
Company initiated an action in the Supreme Court of the State of New York,
County of New York, against various parties, including Vanguard, certain
directors of Vanguard, and certain former and current officers and directors of
the Company. WARBURG DILLON REED, LLC ET AL. V. VANGUARD CELLULAR SYSTEMS,
INC., Index No. 600362/99 (Sup. Ct. N.Y. Co.). The Company is not named as a
defendant in this action although it is accused of unlawfully aiding and
abetting the alleged fraud referred to below. Plaintiffs claim, inter alia,
that they were defrauded in connection with their purchase of the Company's
Series I preferred stock and their exchange of the shares of RMDA and allege,
among other things, fraud, aiding and abetting fraud, negligent
misrepresentation and violations of the North Carolina, Delaware and California
Blue Sky Laws. While the Company is not a defendant in this action, certain
defendants have asserted claims for indemnification against the Company that
such parties claim may have administrative expense priority (an assertion that
the Debtors dispute). In addition, certain plaintiffs in this action have filed
Proofs of Claim with the Bankruptcy Court against the Company and RMDA asserting
claims, among other things, for fraud, negligent misrepresentation and violation
of securities laws arising out of the Transaction. Further, certain of such
plaintiffs have also filed Proofs of Claim against the Company asserting, among
other things, claims for breach of the Company's obligations under the Eighth
Amended and Restated Investor Rights Agreement, dated as of March 9, 1998.
In connection with the bankruptcy proceedings, the Debtors have also been
informed by certain shareholders that they have retained counsel and are
examining the possibility of further litigation against Vanguard and certain of
the officers and directors of the Debtors and Vanguard based upon allegations
that Vanguard, among other things, dominated and controlled the Debtors to its
own advantage and to the detriment of the Debtors and the Shareholders. No such
lawsuit has been commenced to date; however, certain Shareholders have made
similar allegations in the bankruptcy proceedings, particularly in opposition
to confirmation of the Amended Plan.
If the Amended Plan is confirmed by the Bankruptcy Court, Vanguard, certain
of its officers and directors and certain officers and directors of the Debtors
would be released from claims held by the Debtors and creditors of the Debtors,
while direct claims against such releasees held by shareholders of the Company
would not be released; however, there is no certainty that the Amended Plan will
be confirmed or, if confirmed, that the release provisions of the Amended Plan
will be approved by Bankruptcy Court.
F-46
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
We have audited the consolidated balance sheets of PT Rajasa Hazanah
Perkasa and Subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income and deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with auditing standards established by
the Indonesian Institute of Accountants, which are substantially similar to the
generally accepted auditing standards in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PT Rajasa
Hazanah Perkasa and Subsidiary as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles in the Republic of Indonesia.
Generally accepted accounting principles in Indonesia vary in certain
respects with those in the United States of America. A description of the
significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net loss and
stockholders' equity (capital deficiency are set forth in Notes 22 and 23 to the
consolidated financial statements.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina
March 24, 1997
F-47
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
NOTES RP RP U.S. $ (NOTE 3)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ 2,4,9,13 5,543,708,243 15,676,909,861 6,578,645
Accounts receivable
Trade -- net of allowance for doubtful accounts of Rp
568,483,998 in 1995 and Rp 7,600,569,741 in 1996.... 2,5,9,13 2,617,547,345 5,099,085,512 2,139,776
Others................................................. 79,039,898 681,504,236 285,986
Inventories -- net of allowance for obsolescence of Rp
3,858,732,612 in 1995 and Rp 2,282,225,057 in 1996..... 2,6,9 3,462,954,359 1,316,129,149 552,299
Prepaid taxes............................................ 296,370,438 2,404,474 1,008
Prepaid expenses......................................... 2 270,883,931 3,341,430,541 1,402,195
Advances................................................. 19 -- 5,704,584,928 2,393,867
Total Current Assets..................................... 12,270,504,214 31,822,048,701 13,353,776
PROPERTY AND EQUIPMENT................................... 2,7,9,13,19
Cost 51,107,776,543 109,776,610,466 46,066,559
Accumulated depreciation................................. (2,491,591,496) (7,180,710,614) (3,013,307)
Net Book Value........................................... 48,616,185,047 102,595,899,852 43,053,252
OTHER ASSETS
Advance for purchase of equipment........................ 8 -- 45,064,135,670 18,910,673
Long-term prepayments.................................... 2 410,858,052 4,390,264,725 1,842,327
Claims for tax refund.................................... -- 1,001,401,054 420,227
Refundable deposits...................................... 160,401,084 756,401,377 317,416
Preoperating expenses.................................... 2 55,000,000 29,000,000 12,170
Total Other Assets....................................... 626,259,136 51,241,202,826 21,502,813
Total Assets............................................. 61,512,948,397 185,659,151,379 77,909,841
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Short-term loans......................................... 9 9,475,366,558 15,485,200,000 6,498,196
Accounts payable
Trade.................................................. 10 564,424,841 11,585,958,918 4,861,921
Others................................................. 11 15,094,628,251 73,413,519 30,807
Taxes payable............................................ 2,12 4,923,954,854 8,716,465,563 3,657,770
Accrued expenses......................................... 1,683,945,836 17,950,552,254 7,532,754
Current maturities of long-term debts.................... 13 8,638,028,690 1,809,565,256 759,364
Total Current Liabilities................................ 40,380,349,030 55,621,155,510 23,340,812
LONG-TERM DEBTS -- NET OF CURRENT MATURITIES............. 13 2,291,291,579 143,010,194,291 60,012,671
DUE TO STOCKHOLDERS...................................... 2,14 -- 6,003,518,250 2,519,311
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY... 12,150,167,821 2,953,733,963 1,239,502
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock -- Rp 1,000,000 par value
Authorized and issued -- 25,000 shares................. 15 25,000,000,000 25,000,000,000 10,490,978
Deficit.................................................. (18,308,860,033) (46,929,450,635) (19,693,433)
Total Stockholders' Equity (Capital Deficiency).......... 6,691,139,967 (21,929,450,635) (9,202,455)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)..................................... 61,512,948,397 185,659,151,379 77,909,841
</TABLE>
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-48
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
NOTES RP RP U.S. $ (NOTE 3)
<S> <C> <C> <C> <C>
REVENUES....................................................... 2,16 16,812,363,798 24,469,261,033 10,268,259
COST OF REVENUES............................................... 2,17 7,831,126,477 27,290,182,329 11,452,028
GROSS PROFIT (LOSS)............................................ 8,981,237,321 (2,820,921,296) (1,183,769)
OPERATING EXPENSES............................................. 11,777,729,953 25,209,636,409 10,578,949
LOSS FROM OPERATIONS........................................... (2,796,492,632) (28,030,557,705) (11,762,718)
OTHER INCOME (CHARGES)
Interest income................................................ 403,155,251 2,029,190,074 851,527
Interest expense............................................... (4,813,937,236) (8,750,900,607) (3,672,220)
Loss on foreign exchange -- net................................ 2 (507,805,347) (2,555,505,519) (1,072,390)
Gain (loss) on disposal of property and equipment -- net....... 2 344,054,448 (113,865,638) (47,782)
Miscellaneous -- net........................................... 2,971,641,507 (395,385,065) (165,919)
Other Charges -- Net........................................... (1,602,891,377) (9,786,466,755) (4,106,784)
LOSS BEFORE PROVISION FOR INCOME TAX........................... (4,399,384,009) (37,817,024,460) (15,869,502)
PROVISION FOR INCOME TAX....................................... 12 4,173,487,000 -- --
LOSS BEFORE MINORITY INTEREST.................................. (8,572,871,009) (37,817,024,460) (15,869,502)
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY.................... 326,750,179 9,196,433,858 3,859,183
NET LOSS....................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
DEFICIT AT BEGINNING OF YEAR................................... (10,062,739,203) (18,308,860,033) (7,683,114)
DEFICIT AT END OF YEAR......................................... (18,308,860,033) (46,929,450,635) (19,693,433)
</TABLE>
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-49
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation......................................................... 786,350,586 7,096,919,730 2,978,145
Provision for doubtful accounts...................................... 62,739,169 8,102,437,967 3,400,100
Provision for inventory obsolescence................................. 2,967,643,196 (1,576,507,555) (661,564)
Minority interest in net loss of consolidated subsidiary............. (326,750,179) (9,196,433,858) (3,859,183)
Amortization of deferred charges..................................... 4,819,331,622 -- --
Amortization of preoperating expenses................................ -- 29,000,000 12,170
Loss (gain) on disposal of property and equipment.................... (344,054,448) 113,865,638 47,782
Changes in operating assets and liabilities:
Accounts receivable............................................... 196,000,856 (11,186,440,472) (4,694,268)
Inventories....................................................... 348,812,887 3,751,126,484 1,574,119
Prepaid taxes..................................................... (232,806,380) 383,684,761 161,009
Prepaid expenses.................................................. (164,817,811) (7,139,672,080) (2,996,086)
Advances.......................................................... -- (5,704,584,928) (2,393,867)
Refundable deposits............................................... (160,401,084) (596,000,293) (250,105)
Claims for tax refund............................................. -- (1,001,401,054) (420,227)
Advance for purchase of equipment................................. -- (45,064,135,670) (18,910,674)
Accounts payable.................................................. 10,709,592,486 (3,999,680,655) (1,678,422)
Taxes payable..................................................... (3,402,494,577) 3,792,510,709 1,591,486
Accrued expenses.................................................. (5,876,403,564) 16,266,606,418 6,826,104
Net Cash Used in Operating Activities.................................. 1,136,621,929 (74,549,295,460) (31,283,800)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of property and equipment...................... 498,794,393 209,161,024 87,772
Acquisitions of property and equipment................................. (6,259,361,352) (61,427,454,916) (25,777,362)
Addition in preoperating expenses...................................... (55,000,000) (3,000,000) (1,259)
Addition in deferred charges........................................... 38,150,067,797 -- --
Increase in minority interest.......................................... 12,476,918,000 -- --
Net Cash Provided by (Used in) Investing Activities.................... 44,811,418,838 (61,221,293,892) (25,690,849)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in long-term debts................................. (16,727,237,705) 133,890,439,278 56,185,665
Increase (decrease) in short-term loans................................ (6,347,377,490) 6,009,833,442 2,521,961
Decrease in due to stockholders........................................ (52,342,326,140) 6,003,518,250 2,519,311
Proceeds from capital stock issuance................................... 24,000,000,000 -- --
Decrease in due from stockholders...................................... 4,041,764,800 -- --
Net Cash Provided by (Used in) Financing Activities.................... (47,375,176,535) 145,903,790,970 61,226,937
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (1,427,135,768) 10,133,201,618 4,252,288
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 6,970,844,011 5,543,708,243 2,326,357
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... 5,543,708,243 15,676,909,861 6,578,645
</TABLE>
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-50
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PT Rajasa Hazanah Perkasa (the Company) was established on December 17,
1984 based on notarial deed No. 22 of Pariwondo Soekarno SH. The deed of
establishment was approved by the Ministry of Justice (MOJ) in its decision
letter No. C2-2666-HT.01.01.TH'85 dated May 8, 1985, registered at the South
Jakarta Court of Justice under No. 503/Not/1985/PN.JKT.SEL on July 24, 1985 and
was published in the State Gazette No. 82, Supplement No. 1199 dated October 14,
1986. The Company's articles of association have been amended from time to time,
most recently by notarial deed No. 106 of Sinta Susikto SH dated January 24,
1997 (see Note 15).
According to Article No. 3 of the Company's articles of association, the
Company is engaged in supplying non-wire telecommunication services and
installing and operating domestic telephone lines.
The Company changed its status to foreign capital investment based on the
approval of Investment Coordinating Board No. 22/V/PMA/1995 dated May 26, 1995
and No. 1226/A.6/1995 dated September 28, 1995.
On November 30, 1995, as covered by notarial deed No. 210 dated November
30, 1995 of Sinta Susikto SH, the Company, PT Telekomunikasi Indonesia (Telkom)
and Yayasan Dana Pensiun Pegawai Telkom (YDPP Telkom) established a joint
venture company named PT Mobile Selular Indonesia (Mobisel). In accordance with
the joint venture agreement, the Company transferred network assets to
Subsidiary as capital contribution.
Under existing regulation, Subsidiary can only operate upon the approval of
its articles of associations by MOJ. As such, the following arrangements and
conditions are adopted with respect to the transfer and assumption of the
operations of, and recognition and sharing of revenues being generated from, the
above-mentioned assets transferred to Subsidiary:
a. The operations of the network assets will be transferred to and assumed
by Subsidiary effective on the 20th day of the month of approval of its articles
of association by MOJ, with the condition that if the approval is made exactly
on the 20th day of the said month, then the transfer shall be effective on that
date.
b. Revenues generated from the operations of the transferred assets can
only be recognized by Subsidiary starting from the effectivity date of the
transfer being referred to in point (a). Prior to the said date, all revenues
generated are recognized by the Company.
c. The revenue sharing agreement between Telkom and the Company covering
the transferred assets is still valid as long as the condition in point (a) is
not yet fulfilled.
The Company, as a joint venture company, was granted an approval in
principle to engage in providing facilities for mobile cellular phone services
by the Ministry of Tourism, Posts and Telecommunications of the Republic of
Indonesia on April 28, 1995, based on the letter No. PB.301/1/25/MPPT-95.
Government Regulation No. 8 of 1993, which governs the Provision of
Telecommunications Services, stipulates that the establishment of cooperation
which aims to provide basic telecommunications services can be in the form of
joint venture, joint operation or contract management. The said regulation
further provides that entities cooperating with the domestic and/or
international telecommunications organizing bodies must use the organizing
bodies' existing telecommunications networks. If the telecommunications networks
are not available, the government regulation requires that the cooperation shall
be in the form of a joint venture capable of constructing the necessary
networks.
According to Article 3 of Subsidiary's articles of association, the scope
of activities of Subsidiary comprises operating and providing facilities for
Mobile Cellular Phone Services (Jasa Sambungan Telepon Bergerak Selular) in
accordance with existing laws.
Subsidiary's deed of establishment was approved by MOJ in its decision
letter No. C2-1238.HT.01.01-TH'96 dated January 31, 1996. Accordingly, the
Company is still entitled to the pulse sharing revenue until February 20, 1996.
F-51
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared on the historical
cost basis of accounting, except for inventory which are valued at the lower of
cost or net realizable value (market).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 70% owned Subsidiary, PT Mobile Selular Indonesia (Mobisel). Mobisel was
legally established on January 31, 1996. In recognition of its change in legal
status as explained in Note 1 and for comparative purposes, the Company restated
the 1995 accounts previously reported as if Subsidiary was legally established
in 1995 and accordingly consolidated in 1995.
All significant intercompany accounts and transactions have been
eliminated.
CASH EQUIVALENTS
Time deposits with maturities of three months or less at the time of
placement or purchase are considered as "Cash Equivalents".
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance are provided for doubtful accounts based on a review of the
status of the individual receivable accounts at the end of the year.
PREPAID EXPENSES
Prepaid expenses are amortized over the periods benefited using the
straight-line method. Prepaid expenses which benefited more than one year are
classified in "Other Assets -- Long-term Prepayments".
INVENTORIES
Inventories are stated at the lower of cost or net realizable value
(market). Cost is determined by the first-in, first-out method. The Company
provides an allowance for obsolescence on inventories based on a periodic review
of their condition.
TRANSACTIONS WITH RELATED PARTIES
The Company and its Subsidiary have transactions with entities which are
regarded as having special relationship as defined under Statement of Financial
Accounting Standards No. 7, "Related Party Disclosures".
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
The Company and its Subsidiary use double-declining balance method and
straight-line methods, respectively, for computing the depreciation, based on
the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Vehicles........................................................................... 2-4
Furniture and fixtures............................................................. 2-4
Building improvements.............................................................. 4
Computer equipment................................................................. 4
Cellular mobile telephones......................................................... 4
Machinery and equipment............................................................ 4
Maintenance and installer equipment................................................ 4
Telecommunication network.......................................................... 7
</TABLE>
F-52
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Telecommunication network represents capitalized system costs for the
development of the Subsidiary's cellular mobile telephone systems. This includes
the costs of the construction, direct labor cost spent on the construction, and
interest on loans used to finance the construction. Capitalization of interest
ceases when the construction is completed and ready for its intended use.
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, their costs and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in income
for the period.
CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. The accumulated costs are
reclassified to the appropriate property and equipment accounts when the
construction is completed and ready for its intended use.
PREOPERATING EXPENSES
Preoperating expenses are amortized over three years up to 1998, in
accordance with the Statement of Financial Accounting Standards No. 6,
"Accounting and Reporting for a Development Stage Company".
REVENUE AND EXPENSE RECOGNITION
Revenue is recorded as earned when products are delivered to the customers
or when services are rendered. Expenses are recognized when they are incurred.
Revenue is obtained from three primary sources:
-- connecting fee for each new line sold
-- pulse-sharing
-- sales, repair, maintenance and rental of outstations and accessories
FOREIGN CURRENCY TRANSACTIONS AND BALANCES
Transactions involving foreign currencies are recorded at the rates of
exchange prevailing at the time the transactions are made. At the balance sheet
date, assets and liabilities denominated in foreign currencies are adjusted to
reflect the middle rate of Bank Indonesia prevailing at such date and the
resulting gains or losses are credited or charged to operations of the current
year.
PROVISION FOR INCOME TAX
Provision for income tax is determined on the basis of estimated taxable
income for the year. No deferred tax is provided for the timing differences in
the recognition of income and expenses in the financial statements for financial
reporting and income tax purposes.
3. TRANSLATIONS OF INDONESIAN RUPIAH AMOUNTS INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Indonesian rupiah. The translations
of Indonesian rupiah amounts into United States dollars are included solely for
the convenience of the readers, using the average buying and selling rates
published by Bank Indonesia (Central Bank) on December 31, 1996 of Rp 2,383 to
U.S.$ 1. The convenience translations should not be construed as representations
that the Indonesian rupiah amounts have been, could have been, or could in the
future be, converted into United States dollars at this or any other rate of
exchange.
F-53
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Cash on hand....................................................................... Rp 22,438,597 Rp 28,161,045
Cash in banks...................................................................... 830,916,549 10,169,998,816
Cash equivalents
Time deposits, with annual interest rates ranging from 4.5% -- 6.06% for U.S.
Dollar time deposit and 17% for Rupiah time deposit.............................. 4,690,353,097 5,478,750,000
Total.............................................................................. Rp 5,543,708,243 Rp 15,676,909,861
</TABLE>
A portion of cash and cash equivalents amounting to Rp 4,740,770,937 and Rp
3,009,678,457 as of December 31, 1995 and 1996, respectively, are used as
collateral for the short-term loans and long-term debts (see Notes 9 and 13).
5. ACCOUNTS RECEIVABLE -- TRADE
The details of this account are as follows:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Pulse revenue receivables.......................................................... Rp 2,579,752,929 Rp 12,093,378,485
Outstation receivables............................................................. 606,278,414 606,276,768
Total.............................................................................. 3,186,031,343 12,699,655,253
Less allowance for doubtful accounts............................................... 568,483,998 7,600,569,741
Net................................................................................ Rp 2,617,547,345 Rp 5,099,085,512
</TABLE>
Trade receivables are used as collaterals to secure the short-term loans
and long-term debts (see Notes 9 and 13).
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Cellular mobile telephones........................................................ Rp 5,009,533,582 Rp 1,342,094,659
Optional equipment................................................................ 2,286,941,570 2,256,259,547
Mobile telephones in transit...................................................... 25,211,819 --
Total............................................................................. 7,321,686,971 3,598,354,206
Less allowance for obsolescence................................................... (3,858,732,612) (2,282,225,057)
Net............................................................................... Rp 3,462,954,359 Rp 1,316,129,149
</TABLE>
Certain inventories are used as collateral to secure certain short-term
loans (see Note 9).
Allowance for inventory obsolescence is made for non-moving inventory of
old and out-modelled mobile telephone equipment.
F-54
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. PROPERTY AND EQUIPMENT
The details of property and equipment are as follows:
<TABLE>
<CAPTION>
1995 BEGINNING ENDING
(RESTATED) BALANCE ADDITIONS DEDUCTIONS BALANCE
(SEE NOTE 2) RP RP RP RP
<S> <C> <C> <C> <C>
Cost
Vehicles......................................... 2,452,282,407 739,187,868 710,052,795 2,481,417,480
Furniture and fixtures........................... 403,108,997 121,921,924 2,276,940 522,753,981
Building improvements............................ 474,708,473 -- -- 474,708,473
Computer equipment............................... 513,888,700 137,193,300 41,667,500 609,414,500
Cellular mobile telephones....................... 325,786,242 -- 146,149,131 179,637,111
Machinery and equipment.......................... 203,951,126 1,035,000 -- 204,986,126
Construction in progress......................... 41,374,835,612 5,260,023,260 -- 46,634,858,872
Total............................................ 45,748,561,557 6,259,361,352 900,146,366 51,107,776,543
Accumulated Depreciation
Vehicles......................................... 1,654,460,019 519,139,456 676,943,561 1,496,655,914
Furniture and fixtures........................... 234,032,459 62,877,847 1,759,910 295,150,396
Building improvements............................ 261,340,006 53,342,117 -- 314,682,123
Computer equipment............................... 149,419,287 96,819,502 18,620,970 227,617,819
Cellular mobile telephones....................... 68,304,517 21,353,642 48,081,980 41,576,179
Machinery and equipment.......................... 83,091,043 32,818,022 -- 115,909,065
Total............................................ 2,450,647,331 786,350,586 745,406,421 2,491,591,496
Net Book Value................................... 43,297,914,226 48,616,185,047
</TABLE>
<TABLE>
<CAPTION>
BEGINNING ENDING
BALANCE ADDITIONS DEDUCTIONS BALANCE
1996 RP RP RP RP
<S> <C> <C> <C> <C>
Cost
Vehicles......................................... 2,481,417,480 2,429,220,000 1,198,837,868 3,711,799,612
Furniture and fixtures........................... 522,753,981 428,694,854 300,167,427 651,281,408
Building improvements............................ 474,708,473 -- 474,708,473 --
Computer equipment............................... 609,414,500 668,892,120 423,421,488 854,885,132
Cellular mobile telephones....................... 179,637,111 -- 179,637,111 --
Machinery and equipment.......................... 204,986,126 -- 181,848,626 23,137,500
Maintenance and installer equipment.............. -- 131,800,000 -- 131,800,000
Telecommunication network........................ -- 45,916,993,858 -- 45,916,993,858
Construction in progress......................... 46,634,858,872 57,754,810,761 45,902,956,677 58,486,712,956
Total............................................ 51,107,776,543 107,330,411,593 48,661,577,670 109,776,610,466
Accumulated Depreciation
Vehicles......................................... 1,496,655,914 678,632,031 1,025,531,138 1,149,756,807
Furniture and fixtures........................... 295,150,396 209,480,847 300,167,427 204,463,816
Building improvements............................ 314,682,123 160,026,350 474,708,473 --
Computer equipment............................... 227,617,819 359,585,023 423,421,488 163,781,354
Cellular mobile telephones....................... 41,576,179 18,953,045 60,529,224 --
Machinery and equipment.......................... 115,909,065 30,671,297 123,442,862 23,137,500
Maintenance and installer equipment.............. -- 2,745,834 -- 2,745,834
Telecommunication network........................ -- 5,636,825,303 -- 5,636,825,303
Total............................................ 2,491,591,496 7,096,919,730 2,407,800,612 7,180,710,614
Net Book Value................................... 48,616,185,047 102,595,899,852
</TABLE>
F-55
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. PROPERTY AND EQUIPMENT -- Continued
Depreciation charged to operations amounted to Rp 786,350,586 and Rp
7,096,919,730 for the year ended December 31, 1995 and 1996, respectively. The
Company's property and equipment are used as collateral to the short-term loans
and long-term debts (see Notes 9 and 13).
8. ADVANCES FOR PURCHASE OF EQUIPMENT
This account represents deposits in Deutsche Bank to secure letters of
credit issued for purchase of certain equipment.
9. SHORT-TERM LOANS
This account represents loans obtained from the following:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Nissho Iwai........................................................................ Rp -- Rp 10,485,200,000
PT Bank Umum Servitia.............................................................. -- 5,000,000,000
PT Bank Utama...................................................................... 9,475,000,000 --
PT Lippobank....................................................................... 366,558 --
Total.............................................................................. Rp 9,475,366,558 Rp 15,485,200,000
</TABLE>
As of December 31, 1996, the credit facility obtained from Nissho Iwai
amounted to U.S.$ 4,400,000 and bears interest at 2.5% above LIBOR. The Company
has pledged 773 of its ordinary shares as collateral for this credit. The credit
is used to pay certain liabilities which are owed by the Company to Bank Utama.
The credit facility obtained from PT Bank Utama bears annual interest
ranging from 20% to 24%. The loan is collateralized with certain cash,
receivables, inventories, property and equipment, and corporate guarantee from
PT Bina Reksa Perdana, a stockholder, and certain property and equipment of PT
Panutan Duta, affiliate.
The loan facility obtained from PT Bank Umum Servitia bears interest at an
annual rate of 23% and is collateralized on a pari passu basis with collaterals
of long-term debt obtained from Nissho Iwai International (Singapore) Pte., Ltd.
(see Note 13).
10. ACCOUNTS PAYABLE -- TRADE
This account represents liabilities to:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Nokia Telecommunications Oy, Finland................................................. Rp -- Rp 3,884,753,279
PT Telekomunikasi Indonesia (Telkom)................................................. -- 3,494,041,002
Ericsson Radio System AB............................................................. -- 2,093,452,328
PT Indonesian Satellite Corporation -- 962,996,540
Directorate General of Posts and Telecommunications.................................. -- 222,774,250
PT Satelit Palapa Indonesia.......................................................... -- 192,475,201
EDS Management Consulting............................................................ -- 141,875,000
Nokia Telecommunications, Jakarta.................................................... -- 131,879,987
Others (each below Rp 100 million)................................................... 564,424,841 461,711,331
Total................................................................................ Rp 564,424,841 Rp 11,585,958,918
</TABLE>
F-56
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. ACCOUNTS PAYABLE -- OTHERS
As of December 31, 1995, this account mainly represents amounts due to a
former stockholder and PT Telekomunikasi Indonesia (Telkom) of Rp 6,145 million
and Rp 6,610 million, respectively. The amount due to Telkom represents the
difference between the agreed price of Telkom's portion on the network assets
transferred to Subsidiary and Telkom's share of the capital contribution in
Subsidiary. As of December 31, 1996, the above liabilities have been settled.
12. TAXES PAYABLE
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Estimated income tax payable (less tax prepayment of
Rp 97,784,316 in 1995)............................................................ Rp 4,075,702,684 Rp --
Income tax
Article 21........................................................................ 268,692,322 583,665,864
Article 23........................................................................ 361,833,151 542,096,601
Article 25 and 29................................................................. 43,107,840 4,071,033,731
Article 26........................................................................ 174,618,857 2,618,090,566
Value added tax..................................................................... -- 901,578,801
Total............................................................................... Rp 4,923,954,854 Rp 8,716,465,563
</TABLE>
No provision was made for income tax for the year ended December 31, 1996
since the Company and its Subsidiary are in a fiscal loss position.
A reconciliation between loss before provision for income tax, as shown in
the statement of income, and estimated taxable income for the year ended
December 31, 1995 is as follows:
<TABLE>
<S> <C> <C>
Loss before provision for income tax per consolidated statement of income.............................. Rp (4,399,384,009)
Loss of Subsidiary before provision for income tax..................................................... 1,089,167,264
Gain on sale of telecommunication network.............................................................. 10,967,490,528
Income before provision for income tax................................................................. 7,657,273,783
Timing differences:
Amortization of deferred charges..................................................................... 4,819,331,622
Provision for inventory obsolescence................................................................. 2,967,643,196
Difference in beginning balance of property and equipment as regulated by Directorate General of
Taxes Circular Letter No. 44/1995................................................................. 1,211,445,061
Depreciation......................................................................................... 473,000,943
Provision for uncollectible trade receivables........................................................ 62,739,169
Gain on disposal of telecommunication network........................................................ (5,856,159,247)
Gain on disposal of property and equipment........................................................... (401,162,201)
Permanent differences:
Donation............................................................................................. 2,090,349,100
Employees' benefits in kind.......................................................................... 599,409,987
Entertainment........................................................................................ 461,698,721
Interest expense..................................................................................... 206,746,361
Tax penalty and interest............................................................................. 17,415,989
Non-taxable income
Interest already subjected to final income tax....................................................... (368,942,024)
Estimated taxable income............................................................................... Rp 13,940,790,460
</TABLE>
F-57
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. TAXES PAYABLE -- Continued
The provision for income tax and computation of the estimated corporate
income tax payable for the year ended December 31, 1995 are as follows:
<TABLE>
<S> <C> <C>
Estimated taxable income (rounded-off).................................................................. Rp 13,940,790,000
Provision for income tax................................................................................ 4,173,487,000
Prepayments of income tax
Article 22............................................................................................ 52,898,433
Article 23............................................................................................ 1,350,000
Article 25............................................................................................ 43,535,883
97,784,316
Estimated corporate income tax payable.................................................................. Rp 4,075,702,684
</TABLE>
13. LONG-TERM DEBTS
This account represents long-term debts as follows:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Rupiah
PT Bank Indonesia Raya........................................................ Rp 1,718,555,179 Rp 1,718,555,179
PT Bank Tamara................................................................ 676,853,686 --
PT Lippobank.................................................................. 350,942,390 --
Others (each below Rp 100 million)............................................ 211,173,942 121,204,368
U.S. Dollar
Nissho Iwai International Pte. Ltd., Singapore................................ -- 142,980,000,000
Svenska Handelsbanken, Singapore.............................................. 7,971,795,072 --
10,929,320,269 144,819,759,547
Less current maturities......................................................... 8,638,028,690 1,809,565,256
Long-term portion............................................................... Rp 2,291,291,579 Rp 143,010,194,291
</TABLE>
On March 12, 1996, Subsidiary obtained a loan from Nissho Iwai
International (Singapore) Pte. Ltd. (Nissho Iwai) with a maximum facility
amounting to U.S.$ 60,000,000 to finance the construction and implementation of
the NMT-450 Network in Bandar Lampung in Sumatra, Java, Bali and Lombok. The
loan, which term is five years and inclusive of a two years grace period on
principal payment, is repayable in six equal semi-annual installments. Proceeds
from collections of Subsidiary's receivables are deposited directly into escrow
accounts maintained with certain banks as chosen and agreed-upon by both
parties.
Based on the Joint Venture Agreement No. PKS 234/HK.810/UTA-00/95 dated
November 30,1995 between the Company, Telkom and Yayasan Dana Pensiun Pegawai
Telkom (YDPP Telkom), the Company transferred the balance of the loan from
Svenska Handelsbanken, Singapore to Subsidiary as of June 30, 1995 amounting Rp
10,752,598,140.
The above loans are collateralized with cash and cash equivalents,
receivables, and property and equipment of the Company and Subsidiary, corporate
guarantee from the Company and shares of Subsidiary. The Rupiah loans bear
interest at rates ranging from 20% to 23% per annum. The loan from Nissho Iwai
bears interest at an annual rate of 2.5% above LIBOR. The loan from Svenska
Handelsbanken, Singapore bears annual interest at 0.55% above one month SIBOR.
Certain loan agreements contain terms and conditions restricting the
Company and Subsidiary from, without prior consent from the lenders, taking
additional loans, entering into any investment, merger, consolidation,
reorganization and changing ownership. In addition, the Company has to maintain
certain financial ratios.
F-58
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. DUE TO STOCKHOLDERS
Due to stockholders represents unsecured and non-interest bearing loans
from:
<TABLE>
<CAPTION>
1996
<S> <C> <C>
PT Bina Reksa Perdana.................................................................................... Rp 2,383,000,000
International Wireless Communications, Inc............................................................... 2,345,613,250
PT Deltona Satya Dinamika................................................................................ 1,274,905,000
Total.................................................................................................... Rp 6,003,518,250
</TABLE>
15. CAPITAL STOCK
The stockholders and their respective stockholdings as of December 31, 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT
<S> <C> <C> <C> <C>
PT Bina Reksa Perdana............................................... 12,500 50% Rp 12,500,000,000
International Wireless Communications, Inc.......................... 6,250 25 6,250,000,000
PT Deltona Satya Dinamika........................................... 6,250 25 6,250,000,000
Total............................................................... 25,000 100% Rp 25,000,000,000
</TABLE>
Based on notarial deed of Sinta Susikto SH No. 106 dated January 24, 1997,
the Company changed certain parts of its Articles of Association including the
change in authorized and issued capital stock from Rp 25,000,000,000 to Rp
25,773,000,000 and the change in share ownership. The notarial deed has been
approved by MOJ in its decision letter No. C2-1331.HT.01.04.Th.97 dated February
27, 1997. Accordingly, the stockholders and their respective stockholdings after
the above mentioned transaction are as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT
<S> <C> <C> <C> <C>
PT Bina Reksa Perdana............................................... 11,450 44.43% Rp 11,450,000,000
International Wireless Communications, Inc.......................... 7,300 28.32 7,300,000,000
PT Deltona Satya Dinamika........................................... 6,250 24.25 6,250,000,000
Nissho Iwai......................................................... 773 3.00 773,000,000
Total............................................................... 25,773 100.00% Rp 25,773,000,000
</TABLE>
The Company will receive U.S.$ 8,500,000 from Nissho Iwai for the
additional issued capital. As of December 31, 1996, the Company has received
U.S.$ 4,400,000 from Nissho Iwai as a prepayment for the issuance of the new
shares. As agreed with Nissho Iwai, the prepayment has been treated as a loan
and bears interest at 2.5% above LIBOR per annum after the MOJ approval has been
obtained (see Note 9).
16. REVENUES
Revenues are as follows:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Pulse sharing, monthly subscription charges and airtime.......................... Rp 12,249,170,887 Rp 23,149,038,764
Sales of outstations............................................................. 4,113,518,256 811,013,167
Connecting fee................................................................... 126,500,000 342,000,000
Repair, maintenance and others................................................... 323,174,655 167,209,102
Total............................................................................ Rp 16,812,363,798 Rp 24,469,261,033
</TABLE>
F-59
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. COST OF REVENUES
Cost of revenues are as follows:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C> <C>
Pulse sharing and airtime.......................................................... Rp 5,465,526,989 Rp 24,884,675,582
Cost of outstations................................................................ 2,055,407,793 2,365,219,867
Repair, maintenance and others..................................................... 310,191,695 40,286,880
Total.............................................................................. Rp 7,831,126,477 Rp 27,290,182,329
</TABLE>
18. CONTINGENT LIABILITY
The Company is in a dispute with PT Larikerindo relating to the settlement
of a loan. On August 9, 1994, the court dismissed the claim against the Company.
However, PT Larikerindo filed an appeal concerning the court decision. On
December 29, 1995, the higher court again dismissed the claim. In the event the
case is reappealed, the management believes that the Company will win the case
and incur no significant cost.
19. CONSULTANCY AGREEMENTS
Subsidiary had agreements with several parties in connection with the
installation and development of infrastructure of the STKB-C (Cellular mobile
telephone network) project. The agreements, made prior to the approval of
Subsidiary's articles of association by MOJ, were entered into by the Company on
behalf of Subsidiary. These agreements are as follows:
a. Consultancy service agreement with Telecon Ltd. (Telecon), Finland,
whereby Telecon agreed to provide an expert to work in Jakarta as a training
manager in radio network planning of NMT 450i for Subsidiary. Telecon will
charge U.S. $18,500 per month and Subsidiary provides accommodation. The work
started in September 1996 and has a duration of six months.
b. Technical support agreement with Broadcast Communications Limited (BCL),
New Zealand, whereby BCL agreed to provide technical support services concerning
the development of cellular mobile radio telecommunication and related business
in Indonesia. The agreement commenced on May 20, 1996 and has a duration of 12
months. The fee for the services amounted to U.S.$ 32,839 per month (excluding
Value Added Tax) and Subsidiary provides accommodation as defined under the
agreement.
c. Supply contract and technical support agreement with Nokia
Telecommunications Oy, Finland, in connection with NMT-470 Network Expansion and
Transmission System in order to provide new network coverage for NMT mobile
telephone system. These contracts were made on January 19, 1996. Supply contract
has a contract price of U.S.$ 20.9 million, while technical support is charged
on a fixed annual fee basis as defined and set forth in the agreement. The fee
amounted to U.S.$ 91,871 for the year 1996 and with approximate U.S.$ 1 million
per year for the years 1997-2001.
d. Service contract with Nokia Telecommunications Pte. Ltd., Singapore, for
a contract price of U.S.$ 4.54 million. This is also in connection with NMT-470
Network Expansion and Transmission System in order to provide new network
coverage for NMT mobile telephone system. This contract was made on January 19,
1996.
e. Cooperation agreement on network interconnection of Subsidiary's Mobile
Cellular Phone (STBS) with Telkom's Public Service Telephone Network (PSTN).
This agreement contains the interconnection configuration points and capacities,
operation and maintenance of interconnection equipment, other facilities and
services, joint services and financial settlement. This agreement was entered
into on August 21, 1996 and may be terminated at any time subject to the express
written approval of both parties or their respective successors and permitted
assigns.
f. Service agreement with Telkom whereby Telkom will provide billing and
collection service to the Company. As compensation, the Company will pay 1% of
its collected revenue to Telkom. The agreement will expire on March 31, 1997.
F-60
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
19. CONSULTANCY AGREEMENTS -- Continued
g. Subsidiary also has several agreements with contractors which among
others include agreements for establishing telecommunication towers in Jakarta,
Depok, Cikarang, East Java, Lampung and Bali with aggregate cost approximately
amounting to Rp 5 billion and for interior design of Subsidiary's new office
with total contract cost amounting to Rp 3.1 billion.
h. The Company appointed CV Aporindo Consultant to assist the Company in
handling the settlement of the corporate income tax for the year 1995 for a
total amount Rp 3,800,000,000, inclusive of the consultant's fee. The Company
has paid Rp 1,300,000,000 to December 31, 1996 and the fee is recorded as
"Advance" in the consolidated balance sheet.
Fees related to the installation and development of infrastructure of
STKB-C are capitalized and recorded under "Property and Equipment" in the
consolidated balance sheet.
20. COMMITMENTS
a. Subsidiary has agreed to take over service equipment, spareparts and
outstations owned by the Company amounting to Rp 1,453,000,000, as appraised by
PT Aditya Appraisal Bhakti. As of December 31, 1996, only service equipment
amounting to Rp 131,800,000 has been transferred to Subsidiary.
b. As of December 31, 1996, Subsidiary has unused credit facilities
aggregating to Rp 5,000,000,000 from PT Bank Umum Servitia.
21. SUBSEQUENT EVENTS
a. Based on notarial deed No.106 of Sinta Susikto SH dated January 24,
1997, the Company's authorized capital stock was changed from Rp 25,000,000,000
divided into 25,000 shares with a par value of Rp 1,000,000 per share to Rp
25,773,000,000 divided into 25,773 shares of the same par value and other
changes in the capital structure. The changes in the authorized capital stock
was approved by the Ministry of Justice in its decision letter No.
C2-1331.HT.01.04.Th.97 dated February 27, 1997 (see Note 14).
b. On January 29, 1997, Subsidiary entered into a syndicated short-term
notes facility agreement made with PT Bank Umum Servitia (BUS), as arranger.
Under the agreement, the syndicated banks have agreed to purchase short-term
notes amounting to Rp 60,000,000,000 and interest notes amounting to Rp
15,000,000,000 issued by the Company. Subsidiary is required to pay these loans
prior to payment for all other loans.
These short-term notes will be used to finance the working capital and
expansion of Subsidiary prior to the issuance of the convertible bonds; while
the interest notes will be used to finance any accrued interest payments on the
short-term notes or the interest notes.
c. Based on the decree No. KM.5/PR.301/MPPT-97 of Ministry of Tourism,
Posts and Telecommunications of the Republic of Indonesia dated January 1, 1997,
Subsidiary, as one of mobile cellular phone services providers, is entitled to
get:
-- 100% of long-distance interconnection fee from owned STBS to owned STBS
which use owned network.
-- 30% of long-distance call pulse from owned STBS to owned STBS which use
PSTN network.
-- 15% of long-distance call pulse from owned STBS to other STBS, and
vice-versa, which use PSTN network.
-- 40% of long-distance call pulse from owned STBS to PSTN which use owned
network.
-- 15% of long-distance call pulse from PSTN to owned STBS which use PSTN
network.
F-61
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
22. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY
THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES THE FINANCIAL
STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH INDONESIAN GAAP WHICH
DIFFER IN CERTAIN RESPECTS FROM U.S. GAAP.
THE DIFFERENCES ARE REFLECTED IN THE APPROXIMATIONS PROVIDED IN NOTE 26 AND
ARISE DUE TO THE ITEMS DISCUSSED IN THE FOLLOWING PARAGRAPHS:
A. INCOME TAXES
Under Indonesian GAAP, it is acceptable to recognize Income Tax expense
based upon the estimated current Income Tax liability on the current year's
earnings. When income and expense recognition for Income Tax purposes does not
occur in the same year as income and expense recognition for financial reporting
purposes, the resulting temporary differences are not considered in the
computation of Income Tax expense for the year.
Under U.S. GAAP, the liability method is used to calculate the Income Tax
provision. Under the liability method, deferred tax assets or liabilities are
recognized for differences between the financial reporting and tax bases of
assets and liabilities at each reporting date.
b. REGULATION
The Company provides telephone service in Indonesia and therefore is
subject to the regulatory control of the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia. Rates for services are
tariff-regulated. Although changes in rates for services are authorized and
computed based on a decree issued by the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia, these are not based on a fixed
rate of return and are not designed to provide for the recovery of the Company's
cost of services. Accordingly, the requirements of U.S. GAAP related to a
business whose rates are regulated on the basis of its actual costs are not
applicable to the Companies' financial statements.
c. PRESENTATION OF THE STATEMENTS OF STOCKHOLDERS' EQUITY
Under Indonesian GAAP, except for public companies, it is not required to
present statements of retained earnings. Under U.S. GAAP, the Companies are
required to present statements of stockholders' equity.
F-62
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED UNDER
INDONESIAN AND U.S. GAAP THE FOLLOWING IS A SUMMARY OF THE SIGNIFICANT
ADJUSTMENTS TO NET INCOME FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
TO STOCKHOLDERS' EQUITY AS OF DECEMBER 31, 1995 AND 1996 WHICH WOULD BE REQUIRED
IF U.S. GAAP HAD BEEN APPLIED INSTEAD OF INDONESIAN GAAP IN THE FINANCIAL
STATEMENTS:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C>
RP RP U.S. $ (NOTE 3)
Net loss according to the financial statements prepared under Indonesian
GAAP................................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
Adjustments due to:
Income tax............................................................. 4,245,298,915 11,253,159,872 4,722,266
Valuation allowance.................................................... (4,245,298,915) (11,400,961,024) (4,784,289)
Approximate net loss in accordance with U.S. GAAP........................ (8,246,120,830) (28,768,391,754) (12,072,342)
Stockholders' equity (capital deficiency) according to the financial
statements prepared under Indonesian GAAP.............................. 6,691,139,967 (21,929,450,635) (9,202,455)
Adjustments due to:
Income tax............................................................. 5,127,282,969 16,380,442,841 6,873,875
Valuation allowance.................................................... (5,127,282,969) (16,528,243,993) (6,935,898)
Approximate stockholders' equity (capital deficiency) in accordance with
U.S. GAAP.............................................................. 6,691,139,967 (22,077,251,787) (9,264,478)
</TABLE>
Regarding the consolidated balance sheets and statements of income and
deficit, the following significant captions determined under U.S. GAAP would
have been presented:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C>
RP RP U.S. $ (NOTE 3)
Balance sheets:
Current assets........................................................ 12,270,504,214 31,822,048,701 13,353,776
Total assets.......................................................... 61,512,948,397 185,659,151,379 77,909,841
Current liabilities................................................... 40,380,349,030 55,621,155,510 23,340,812
Total liabilities..................................................... 54,821,808,430 207,736,403,166 87,174,319
Statements of income and deficit:
Loss from operations.................................................. 2,796,492,632 28,030,557,705 11,762,718
</TABLE>
F-63
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
24. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP
The following information is presented on the basis of U.S. GAAP:
INCOME TAX
The tax effect on significant temporary differences is as follows:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C>
RP RP U.S. $ (NOTE 3)
Deferred tax assets -- current:
Allowance for inventory obsolescence..................................... 1,157,619,784 684,667,517 287,313
Allowance for doubtful accounts.......................................... 170,545,199 2,280,170,922 956,849
1,328,164,983 2,964,838,439 1,244,162
Valuation allowance...................................................... (1,328,164,983) (2,964,838,439) (1,244,162)
Total deferred tax assets -- current -- net.............................. -- -- --
</TABLE>
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C>
RP RP U.S. $ (NOTE 3)
Deferred tax assets -- non-current:
Tax loss carryforwards................................................... 98,024,916 10,453,429,119 4,386,668
Property and equipment................................................... 3,701,093,070 3,105,626,435 1,303,242
Preoperating expenses.................................................... -- 4,350,000 1,825
3,799,117,986 13,563,405,554 5,691,735
Valuation allowance...................................................... (3,799,117,986) (13,563,405,554) (5,691,735)
Total deferred tax assets -- non-current -- net.......................... -- -- --
Deferred tax liabilities -- non-current:
Property and equipment................................................... -- 51,079,045 21,435
Prepaid long-term rent................................................... -- 96,722,107 40,588
Deferred tax liabilities -- non current.................................. -- 147,801,152 62,023
Deferred tax -- net...................................................... -- 147,801,152 62,023
</TABLE>
The temporary differences, on which deferred tax assets have been computed
are not deductible for income tax purposes until the provision for inventory
obsolescence and provision for uncollectible trade receivable are written-off.
The differences between the book and tax bases of property and equipment,
prepaid long-term rent and preoperating expenses are due to the differing
recognition methods for Income Tax and financial reporting purposes.
F-64
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
24. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S.
GAAP -- Continued
The Income Tax provision recorded under U.S. GAAP differs from the expected
provision at U.S. statutory rates due to certain permanent differences detailed
below:
<TABLE>
<CAPTION>
1995
(RESTATED)
(SEE NOTE 2) 1996
<S> <C> <C> <C>
RP RP U.S. $ (NOTE 3)
Approximate loss before Income Tax in accordance
with U.S. GAAP......................................................... (4,399,384,009) (37,817,024,460) (15,869,502)
Effect of permanent differences:
Donation............................................................... 2,090,349,100 34,041,756 14,285
Expenses incurred during preoperating stage of Subsidiary.............. 762,417,085 -- --
Employees' benefits in kind............................................ 599,499,987 47,837,543 20,075
Entertainment.......................................................... 461,698,721 33,906,969 14,229
Interest expense....................................................... 206,746,361 2,114,346,227 887,262
Tax penalty and interest............................................... 17,415,989 104,353,376 43,791
Interest income which was already subjected to final tax............... (368,942,024) (2,027,994,320) (851,026)
3,769,185,219 306,491,551 128,616
Approximate loss before Income Tax in accordance
with U.S. GAAP......................................................... (630,198,790) (37,510,532,909) (15,740,886)
Provision for income tax (on tax loss) in accordance with U.S. GAAP
before adjustment...................................................... (197,809,637) (11,253,159,872) (4,722,266)
Adjustment for enacted changes in tax rates.............................. 125,997,722 -- --
Increase in valuation allowance.......................................... 4,245,298,915 11,400,961,024 4,784,289
Provision for income tax (on tax loss) in accordance with U.S. GAAP after
adjustment............................................................. 4,173,487,000 147,801,152 62,023
</TABLE>
Donations amounting to Rp 2,079,486,000 were given to Yayasan Dana Pensiun
Pegawai (YDPP) Telkom (Pension Fund of Telkom) as YDPP Telkom's contribution in
Subsidiary.
b. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts for the years
ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
FOR THE YEARS ENDED YEAR EXPENSES DEDUCTIONS YEAR
<S> <C> <C> <C> <C>
RP RP RP RP
December 31, 1995.......................................... 505,744,829 62,739,169 -- 568,483,998
December 31, 1996.......................................... 568,483,998 8,102,437,967 1,070,352,224 7,600,569,741
</TABLE>
Activity in the Company's allowance for inventory obsolescence for the
years ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
FOR THE YEARS ENDED YEAR EXPENSES DEDUCTIONS YEAR
<S> <C> <C> <C> <C>
RP RP RP RP
December 31, 1995........................................ 891,089,416 2,967,643,196 -- 3,858,732,612
December 31, 1996........................................ 3,858,732,612 -- 1,576,507,555 2,282,225,057
</TABLE>
F-65
<PAGE>
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
25. RECLASSIFICATIONS OF ACCOUNTS
Certain accounts in the 1995 financial statements have been reclassified to
conform with the presentation of accounts in the 1996 financial statements.
F-66
<PAGE>
26. UNAUDITED SUBSEQUENT EVENTS
a. The Subsidiary was unable to pay the interest and principal loan from
Nissho Iwai, the major creditor, which became due and payable and,
therefore, is in a default position. The Subsidiary is negotiating to
reschedule the payments of such interest and principal loan with the
creditor. Based on the last correspondence from Nissho Iwai dated March
18, 1998, Nissho Iwai is unofficially reconsidering the rescheduling of
the Subsidiary's loan, subject to certain conditions which include, among
others, the injection of fresh capital by the Company and Company's
stockholder, International Wireless Communications, Inc. (IWC) to the
Subsidiary amounting to U.S. $10 million by June 1998. Such rescheduling
arrangement, being unofficial, are still subject to the approval of the
management of Nissho Iwai.
Relative to the above, the Subsidiary has attempted to secure the
additional funding from, inter alia, IWC. If funding from IWC or some other
sources becomes available, Nissho Iwai is willing to consider the
Subsidiary's request to reschedule the payments of its interest and loan
principal obligations to the former. Through March 15, 1999, there have
been no significant developments with respect to the foregoing matters.
Based on the loan agreement, Nissho Iwai may declare all the outstanding
loan principal and related accrued interest and any and all sums of
whatsoever nature due from the Subsidiary to be immediately due and payable
(without demand, protest or notice upon the Subsidiary) in the event that
the Subsidiary fails to comply with its obligations. In the mean time,
Nissho Iwai has decided not to immediately declare an "Event of Default".
In view of this, the whole outstanding amount of the long-term loan from
Nissho Iwai has been reclassified to current liability in the Subsidiary's
financial statements as of December 31, 1997 and subsequent thereto.
On September 3, 1998, IWC and its wholly-owned subsidiaries,
International Wireless Communications, Inc., Radio Movil Digital Americas,
Inc., ("RMDA"), International Wireless Communications Latin America
Holdings, Ltd. and Pakistan Wireless Holdings Limited (collectively with
IWC, the "Debtors"), commenced voluntary cases under Chapter 11 of the U.S.
Bankruptcy Code, as amended, in the District of Delaware (Case No. 98-2007
(MFW)). Since that date, the Debtors have continued to operate as debtors-in
possession, subject to supervision of the Bankruptcy Court. Subsequently,
the Debtors filed a Second Amended Joint Chapter 11 Plan of Reorganization
(the "Plan") and a Second Amended Disclosure Statement relating thereto with
the Bankruptcy Court (the "Disclosure Statement"). On December 21, 1998, the
Bankruptcy Court determined that the Disclosure Statement contained
"adequate information" in accordance with Section 1125 of the Bankruptcy
Code. The Disclosure Statement, among other things, describes events leading
to the Debtors' Chapter 11 filings and summarizes various claims against the
Debtors, including litigation (as of the Disclosure Statement date) stayed
against the Debtors by the bankruptcy filings described above. The Plan and
Disclosure Statement were submitted to parties in the bankruptcy cases in
connection with voting on the Plan.
On February 3-4, 1999, hearings were held before the Bankruptcy Court to
consider confirmation of the Plan, which has been further amended (the
"Amended Plan") to reflect, among other things, settlements of the claims of
BT Foreign Corporation ("BTFC"), of Toronto Dominion Investments, Inc.
("TDI") and Asia Pacific Cellphone Co. ("APC"). Post-hearing briefs have
been filed, and as of March 2, 1999, the matter has been submitted to the
Bankruptcy Court for a determination as to whether the Amended Plan will be
confirmed. If the Amended Plan is not confirmed, the Debtors may attempt to
file a further amended plan or, if such a plan should prove infeasible, the
Debtors may become subject to liquidation.
b. Since mid-1997, many Asia Pacific countries, including Indonesia, are
experiencing continuing adverse economic condition mainly resulting from
currency devaluation in the region, the principal consequences of which
have been an extreme lack of liquidity and highly volatile exchange and
interest rates. The crisis has also involved declining prices in shares
listed in the Indonesian stock exchanges, tightening of available credit,
stoppage or postponement of certain construction projects, and a growing
oversupply of real property. Volatility in exchange and interest rates has
adversely affected the Subsidiary's cost of and sources of funds, as well
as its capacity to service its debts, given that the balances of the
Subsidiary's borrowings denominated in U.S. dollars have increased
significantly in Rupiah terms, and interest rates on Rupiah-denominated
loans have increased significantly. Also, since 1996 up to the present, the
Company and Subsidiary have incurred significant operating losses, foreign
exchange losses and interest charges, which resulted in a significant net
capital deficiency position. The Subsidiary has received various claims,
however, no formal litigation or legal matters have yet been filed against
the Subsidiary through March 15, 1999. The effects of the continuing adverse
economic condition on the financial condition of the Subsidiary's customers
have reduced its revenues and increased credit risk inherent in the
collection of receivables from its customers.
In response to these economic events, the Subsidiary's management
initiated the following:
-- Renegotiating the Subsidiary's short-term loan agreements with banks,
as well as suppliers' agreements.
-- Negotiating with prospective investors for additional funding.
Resolution of the continuing adverse economic conditions is dependent on
the fiscal and monetary measures that will be undertaken by the Indonesian
government, actions which are beyond the Company and Subsidiary's control, to
achieve ecomomic recovery. It is not possible to determine the future effects a
continuation of the adverse economic conditions may have on the Company and
Subsidiary's liquidity and earnings, including the effects from their
investors, customers, and suppliers.
<PAGE>
ATTACHMENT I
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
CAPITAL STOCK STOCKHOLDERS'
(ISSUED AND FULLY PAID) DEFICIT EQUITY
DESCRIPTION RP RP RP
<S> <C> <C> <C>
BALANCE as of January 1, 1995............................... 1,000,000,000 (10,062,739,203) (9,062,739,203)
Approved during the Extraordinary General Meeting of the
Stockholders on November 9, 1995: Increase in the issued
and fully paid-up capital from Rp 1,000,000,000 to Rp
25,000,000,000............................................ 24,000,000,000 -- 24,000,000,000
Net loss for 1995 (restated)................................ -- (8,246,120,830) (8,246,120,830)
BALANCE as of December 31, 1995 (restated).................. 25,000,000,000 (18,308,860,033) 6,691,139,967
Net loss for 1996........................................... -- (28,620,590,602) (28,620,590,602)
BALANCE as of December 31, 1996............................. 25,000,000,000 (46,929,450,635) (21,929,450,635)
</TABLE>
F-67
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
*3(a) Articles of Incorporation of Registrant as amended through July
25, 1995, filed as Exhibit 1 to the Registrant's Form 8-K/A dated
July 25, 1995.
*3(b) Bylaws of Registrant (compilation of July 25, 1995), filed as
Exhibit 2 to the Registrant's Form 8-K/A dated July 25, 1995.
*4(a) Specimen Common Stock Certificate, filed as Exhibit 4(a) to the
Registrant's Registration Statement on Form S-1(File No. 33-18067).
*4(b)(1) Amended and Restated Loan Agreement between the Registrant and
various lenders led by The Bank of New York and The
Toronto-Dominion Bank as agents, dated as of December 23, 1994,
filed as Exhibit 2(a) to the Registrant's Current Report on Form
8-K dated as of December 23, 1994.
*4(b)(2) Security Agreement between the Registrant and various lenders led
by The Bank of New York and The Toronto-Dominion Bank, as Secured
Party, dated as of December 23, 1994, filed as Exhibit 2(b) to the
Registrant's Current Report on Form 8-K dated as of December 23,
1994.
*4(b)(3) Master Subsidiary Security Agreement between the Registrant,
certain of its subsidiaries and various lenders led by The Bank of
New York and The Toronto-Dominion Bank, as Secured Party, dated as
of December 23, 1994, filed as Exhibit 2(c) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*4(b)(4) Second Amended and Restated Loan Agreement between Vanguard
Cellular Operating Corp. and various lenders led by The Bank of New
York and The Toronto-Dominion Bank as agents, dated as of April 10,
1996, filed as Exhibit 4(d)(1) to the Registrant's Form 10-Q/A
dated March 31, 1996.
*4(b)(5) VCOC Security Agreement between Vanguard Cellular Operating Corp.
and various lenders led by The Bank of New York and The
Toronto-Dominion Bank as Secured Party, dated as of April 10, 1996,
filed as Exhibit 4(d)(2) to the Registrant's Form 10-Q/A dated
March 31, 1996.
*4(b)(6) Second Amended and Restated Master Subsidiary Security Agreement
between certain subsidiaries of the Registrant and various lenders
led by The Bank of New York and The Toronto-Dominion Bank, as
Secured Party, dated as of April 10, 1996, filed as Exhibit 4(d)(3)
to the Registrant's Form 10-Q/A dated March 31, 1996.
*4(b)(7) Assignment, Bill of Sale and Assumption Agreement by and between
Registrant and Vanguard Cellular Financial Corp., dated as of April
10, 1996, filed as Exhibit 4(d)(4) to the Registrant's Form 10-Q/A
dated March 31, 1996.
*4(b)(8) Indenture dated as of April 1, 1996 between Registrant and The Bank
of New York as Trustee, filed as Exhibit 4(e)(1) to the
Registrant's Form 10-Q/A dated March 31, 1996.
*4(b)(9) First Supplemental Indenture, dated as of April 1, 1996 between
registrant and The Bank of New York as Trustee, filed as Exhibit
4(e)(2) to the Registrant's Form 10-Q/A dated March 31, 1996.
<PAGE>
*4(b)(10) First Amendment to Second Amended and Restated Loan Agreement
between Vanguard Operation Corp. and various lenders led by the
Bank of New York and The Toronto-Dominion Bank as agents, dated as
of July 31, 1996, filed as Exhibit 4(d)(5) to the Registrant's Form
10-Q dated September 30, 1996 and confirmed electronically as
Exhibit 4(d)(5) to the Registrant's 10-Q/A dated September 30,
1996.
*4(b)(11) Second Amendment to Second Amended and Restated Loan Agreement
between Vanguard Cellular Operating Corp. and various lenders led
by the Bank of New York and The Toronto-Dominion Bank as agents,
dated as of October 30, 1996 and confirmed electronically as
Exhibit 4(d)(6) to the Registrant's 10-Q/A dated September 30,
1996.
*4(b)(12) Third Amendment to Second Amended and Restated Loan Agreement
between Vanguard Cellular Operating Corp. and various lenders led
by the Bank of New York and The Toronto-Dominion Bank as agents,
dated as of March 31, 1997 and filed as Exhibit 4(b)(7) to the
Registrant's Form 10-Q dated September 30, 1996.
*4(b)(13) Third Amended and Restated Facility A Loan Agreement between
Vanguard Cellular Financial Corp. and various lenders led by the
Bank of New York, and The Toronto-Dominion Bank, and NationsBank of
Texas, N.A. as agents, dated February 20, 1998, filed as Exhibit
4(b)(8) to the Registrant's Form 10-Q dated March 31, 1998.
*4(b)(14) Facility B Loan Agreement between Vanguard Cellular Financial Corp.
and various letters led by The Bank of New York, and The
Toronto-Dominion Bank, and NationsBank of Texas, N.A. as agents,
dated February 20, 1998, filed as Exhibit 4(b)(9) to the
Registrant's Form 10-Q dated March 31, 1998.
*4(b)(15) Borrower Pledge Agreement between Vanguard Cellular Financial Corp.
and Toronto-Dominion (Texas), Inc. as collateral agent, dated
February 20, 1998, filed as Exhibit 4(b)(10) to the Registrant's
Form 10-Q dated March 31, 1998.
*4(b)(16) VCOC Guaranty between Vanguard Cellular Operating Corp. and various
lenders led by The Bank of New York, and The Toronto- Dominion
Bank, and NationsBank of Texas, N.A. as Secured Parties, dated
February 20, 1998, filed as Exhibit 4(b)(11) to the Registrant's
Form 10-Q dated March 31, 1998.
*4(b)(17) Vanguard Guaranty between Vanguard Cellular Operating Corp. and
various lenders led by the Bank of New York, and the Toronto-
Dominion Bank, and NationsBank of Texas, N.A. as Secured Parties,
dated February 20, 1998, filed as Exhibit 4(b)(12) to the
Registrant's Form 10-Q dated March 31, 1998.
*4(b)(18) Vanguard Pledge Agreement between Registrant and Toronto- Dominion
(Texas), Inc. as collateral agent, dated February 20, 1998, filed
as Exhibit 4(b)(13) to the Registrant's Form 10-Q dated March 31,
1998.
*10(a)(1) Amended and Restated Stock Compensation Plan of the Registrant
approved April 22, 1987 by the Shareholders of the Registrant, with
forms of stock bonus and stock option agreements attached, filed as
Exhibit 10 (a) to the Registrant's Registration Statement, on Form
S-1 (File No. 33-18067).
*10(a)(2) Amendment to Amended and Restated Stock Compensation Plan of the
<PAGE>
Registrant approved May 2, 1989 by the Shareholders of the
Registrant, filed as Exhibit 4(h)(2) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1989.
*10(a)(3) Form of Restricted Stock Bonus Agreements dated March 23, 1987
between the Registrant and Stuart S. Richardson, Haynes G. Griffin,
L. Richardson Preyer, Jr., Stephen R. Leeolou and Stephen L.
Holcombe, and form of amendments dated October 12, 1987 to
agreements with Messrs. Richardson, Griffin, Preyer and Leeolou,
filed as Exhibit 10(a)(3) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988.
*10(a)(4) Form of Restricted Stock Bonus Agreements dated October 12, 1987
between the Registrant and Haynes G. Griffin, Stephen R. Leeolou
and L. Richardson Preyer, Jr., filed as Exhibit 10(a)(4) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
*10(a)(5) Form of Amendment to Restricted Stock Bonus Plan Agreements dated
as of March 1, 1990 by and between Haynes G. Griffin, L. Richardson
Preyer, Jr., Stephen R. Leeolou, and Stephen L. Holcombe and the
Registrant, amending the Restricted Stock Bonus Plan Agreements
dated as March 23, 1987, filed as Exhibit 10(a)(5) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
*10(a)(6) Form of Amendment to Restricted Stock Bonus Plan Agreements dated
as of March 1, 1990 by and between Haynes G. Griffin, L. Richardson
Preyer, Jr. and Stephen R. Leeolou and the Registrant, amending the
Restricted Stock Bonus Plan Agreements dated as October 12, 1987,
filed as Exhibit 10(a)(6) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
*10(a)(7) Form of Second Amendment to Restricted Stock Bonus Plan Agreements
dated February 22, 1991 between the Registrant and Haynes G.
Griffin, Stephen R. Leeolou, and L. Richardson Preyer, Jr.,
amending the Restricted Stockx Bonus Agreements dated October 12,
1987, filed as Exhibit 10(a)(7) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990.
*10(a)(8) Form of Third Amendment to Restricted Stock Bonus Plan Agreements
dated February 22, 1991 between the Registrant and Haynes G.
Griffin, Stephen R. Leeolou, L. Richardson Preyer, Jr., and Stephen
L. Holcombe, amending the Restricted Stock Bonus Agreements dated
March 23, 1987, filed as Exhibit 10(a)(8) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
*10(a)(9) Form of Third Amendment to Restricted Stock Bonus Plan Agreement
dated February 22, 1991 between the Registrant and Stuart S.
Richardson, amending the Restricted Stock Bonus Plan Agreement
dated March 23, 1987, filed as Exhibit 10(a)(9) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
*10(a)(10) Employment Agreement dated March 1, 1995 by and between the
Registrant and Haynes G. Griffin, filed as Exhibit 10(a)(10) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
*10(a)(11) Employment Agreement dated March 1, 1995 by and between the
Registrant and L. Richardson Preyer, Jr., filed as Exhibit
10(a)(11) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
<PAGE>
*10(a)(12) Employment Agreement dated March 1, 1995 by and between the
Registrant and Stephen R. Leeolou, filed as Exhibit 10(a)(12) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
*10(a)(13) Executive Officer Long-Term Incentive Compensation Plan adopted
October 1, 1990 by the Registrant, filed as Exhibit 10(a)(13) to
the Registrant's Annual Report on Form 10-K to the fiscal year
ended December 31, 1990.
*10(a)(14) Form on Nonqualified Option Agreements dated October 12, 1987
between the Registrant and Stephen L. Holcombe, Ralph E. Hiskey,
John F. Dille, Jr., Charles T. Hagel, L. Richardson Preyer, Sr. and
Robert A. Silverberg, filed as Exhibit 10(a)(5) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988.
*10(a)(15) Nonqualified Option Agreements dated October 12, 1987 between the
Registrant and Robert M. DeMichele, John F. Dille, Jr., L.
Richardson Preyer, Sr., Robert A. Silverberg and Thomas I. Storrs,
filed as Exhibit 10(a)(8) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988.
*10(a)(16) Form of Incentive Stock Option Agreements dated March 3, 1988
between the Registrant and Stephen L. Holcombe and Richard C.
Rowlenson, filed as Exhibit 10(a)(9) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
*10(a)(17) Form of Incentive Stock Option Agreements dated June 23, 1988
between the Registrant and Charles T. Hagel, Haynes G. Griffin, L.
Richardson Preyer, Jr., and Stephen R. Leeolou, filed as Exhibit
10(a)(10) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
*10(a)(18) Amended and restated 1994 Long-Term Incentive Plan, approved by the
Registrant's Board of Directors on February 26, 1997.
*10(a)(19) Senior Management Severance Plan of the Registrant adopted March 8,
1995, filed as Exhibit 10(a)(19) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
*10(a)(20) Form of Severance Agreement for Senior Management Employees of the
Registrant, filed as Exhibit 10(a)(20) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
*10(a)(21) Form of Incentive Stock Agreement dated March 7, 1995 between the
Registrant and Haynes G. Griffin, Steven L. Holcombe, Richard C.
Rowlenson and Stuart S. Richardson filed as Exhibit 10(a)(21) to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995.
*10(a)(22) Form of Nonqualified Option Agreement dated March 7, 1995 between
the Registrant and Haynes G. Griffin, Stephen R. Leeolou, L.
Richardson Preyer, Jr., Stephen L. Holcombe, Richard C. Rowlenson
and Stuart S. Richardson, filed as Exhibit 10(a)(22) to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995.
*10(b))(1) Loan Agreement between the Registrant and various lenders led by
The Bank of New York and The Toronto-Dominion Bank as agents, dated
as of December 23, 1994, filed as Exhibit 2(a) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*10(b)(2) Security Agreement between the Registrant and various lenders led
by The Bank
<PAGE>
of New York and The Toronto-Dominion Bank, as Secured Party, dated
as of December 23, 1994, filed as Exhibit 2(b) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*10(b)(3) Master Subsidiary Security Agreement between the Registrant,
certain of its subsidiaries and various lenders led by The Bank of
New York and The Toronto-Dominion Bank, as Secured Party, dated as
of December 23, 1994 filed as Exhibit 2(c) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*10(d))(1) 1989 Stock Option Plan of the Registrant approved by the Board of
Directors of the Registrant on December 21, 1989, and approved by
Shareholders at a meeting held on May 10, 1990, filed as Exhibit
10(h)(1) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989.
*10(d)(2) Form of Nonqualified Stock Option Agreements dated March 1, 1990
between the Registrant and Haynes G. Griffin, L. Richardson Preyer,
Jr., Stephen R. Leeolou, Stephen L. Holcombe and Stuart S.
Richardson, filed as Exhibit 10(h)(2) to the Registrant's annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
*10(d)(3) Form of Incentive Stock Option Agreement dated March 1, 1990
between the Registrant and Richard C. Rowlenson, filed as Exhibit
10(h)(2) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989.
*10(d)(4) Form of Incentive Stock Option Agreement dated July 30, 1990
between the Registrant and Stephen L. Holcombe, Richard C.
Rowlenson, Sunir Kochhar and Timothy G. Biltz, filed as Exhibit
10(f)(4) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.
*10(d)(5) Stock Option Agreement dated November 28, 1990 between the
Registrant and Stuart Smith Richardson, filed as Exhibit 10(f)(5)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.
*10(d)(6) Form of Stock Option Agreements dated November 28, 1990 between the
Registrant and Haynes G. Griffin, Stephen R. Leeolou, L. Richardson
Preyer, Jr. and Stephen L. Holcombe, filed as Exhibit 10(f)(6) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.
*10(d)(7) Incentive Stock Option Agreements dated November 28, 1990 between
the Registrant and Richard C. Rowlenson, filed as Exhibit 10(f)(7)
to the Registrant's December 31, 1990.
*10(e)(1) Joint Venture Agreement by and among W&J Metronet, Inc., Vanguard
Cellular Systems of Coastal Carolina, Inc., Providence Journal
Telecommunications and the Registrant dated as of January 19, 1990,
filed as Exhibit 10(j) to the Registrant's Registration Statement
on Form S-4 (File No. 33-35054).
*10(e)(2) First Amendment and Assumption Agreement dated as of the 28th day
of December, 1990 to Joint Venture Agreement by and among W&J
Metronet, Inc., Vanguard Cellular Systems of Coastal Carolina,
Inc., Providence Journal Telecommunications and the Registrant
dated as of January 19, 1990, filed as Exhibit 10(g)(2) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
*10(f)(1) Stockholders Voting Agreement dated as of February 23, 1994, filed
as Exhibit 7
<PAGE>
to Amendment 1 of Schedule 13D dated February 23, 1994 with respect
to the Common Stock of Geotek Communications,
*10(g)(1) Nonqualified Deferred Compensation Plan with Form of Salary
Reduction Agreement filed as Exhibit 10(g(1) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
**11 Calculation of diluted net income per share for the years ended
December 31, 1997, 1996, and 1995.
**22 Subsidiaries of the Registrant.
**23(a) Consent of Arthur Andersen LLP
**23(b) Consent of KPMG LLP
**23(c) Consent of Prasetio, Utomo & Co.
23(d) Consent of KPMG LLP
23(e) Consent of Arthur Andersen & Co.
23(f) Consent of Arthur Andersen LLP
**27 Financial Data Schedule.
- ------------------
* Incorporated by reference to the statement or report indicated.
** Previously filed as Exhibits to Form 10-K.
Exhibit 23(d)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Vanguard Cellular Systems, Inc.,:
We consent to the incorporation by reference in the previously filed
registration statements on Form S-4 (No. 33-35054), Form S-3 (No. 33-61295),
Form S-8 (No. 33-22866), Form S-8 (No. 33-53559), Form S-8 (No. 33-69824), Form
S-8 (No. 333-34771), Form S-8 (No. 333-34785), Form S-8 (No.33-36986), and Form
S-8 (No. 333-34787) of Vanguard Cellular Systems, Inc. of our report dated April
10, 1998, with respect to the consolidated balance sheets of International
Wireless Communications Holdings, Inc. and subsidiary (the Company) as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1997, which report appears in the
Form 10-K/A of Vanguard Cellular Systems, Inc. dated March 22, 1999.
Our report dated April 10, 1998, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has a net
capital deficiency, which raise substantial doubt about its ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
KPMG LLP
Mountain View, California
March 22, 1999
Exhibit 23(e)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated April 3, 1998 (except with respect to the matters discussed
in Note 21(c), (d), (e), (f), (g), (h), (i), and (j) as to which the date is
March 22, 1999) on the financial statements of Star Digitel Limited, included in
this Form 10-K/A, into Vanguard Cellular Systems, Inc.'s previously filed Form
S-4 Registration Statement No. 33-35054, Form S-3 Registration Statement No.
33-61295, Form S-8 Registration Statement No. 33-22866, Form S-8 Registration
Statement No. 33-36986, Form S-8 Registration Statement No. 33-53559, Form S-8
Registration Statement No. 33-69824, Form S-8 Registration Statement No.
333-34771, Form S-8 Registration Statement No. 333-34785, and Form S-8
Registration Statement No. 333-34787.
Arthur Andersen & Co.
Hong Kong,
March 22, 1999
Exhibit 23 (f)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 24, 1997 on the financial statements of PT Rajasa
Hazanah Perkasa and subsidiary, included in this Form 10-K/A, into Vanguard
Cellular Systems, Inc.'s previously filed Form S-4 Registration Statement No.
33-35054, Form S-3 Registration Statement No. 33-61295, Form S-8 Registration
Statement No. 33-22866, Form S-8 Registration Statement No. 33-36986, Form S-8
Registration Statement No. 33-53559, Form S-8 Registration Statement No.
33-69824, Form S-8 Registration Statement No. 333-34771, Form S-8 Registration
Statement No. 333-34785, and Form S-8 Registration Statement No. 333-34787.
Arthur Andersen LLP
Greensboro, North Carolina,
March 22, 1999
