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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(AMENDMENT NO. 1)
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
Commission file number:
0-14972
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IDB COMMUNICATIONS GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 93-0933098
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 WEST WASHINGTON BOULEVARD 90232-1922
CULVER CITY, CALIFORNIA (Zip code)
(Address of principal
executive offices)
(213) 870-9000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) 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, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 1994, the aggregate market value of voting stock held by
nonaffiliates of the Registrant was $1,249,300,356.
As of March 15, 1994, the Registrant had 74,030,982 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS.
IDB Communications Group, Inc., a Delaware corporation (the "Company" or
"IDB"), operates a domestic and international communications network providing
international private line and public switched long distance telephone services,
facsimile and data connections, television and radio transmission services and
mobile satellite communications capabilities. The Company was established in
1983 by Jeffrey P. Sudikoff, IDB's Chairman and Chief Executive Officer, to
provide transmission of sporting and music events to radio stations nationally.
Aided by the AT&T divestitures in 1984 and the opening of overseas
telecommunications markets, the Company has become a full service provider of
international telecommunications services as well as specialized broadcasting
services. The Company has expanded rapidly through the growth of its existing
businesses as well as through the selective acquisition of complementary
companies which have provided strategic facilities, international operating
agreements and customers. The Company operates through four service units: IDB
WorldCom, IDB Broadcast, IDB Mobile and IDB Systems.
The Company's principal executive offices are located at 10525 West
Washington Boulevard, Culver City, California 90232-1922 and its telephone
number is (213) 870-9000. "IDB" or the "Company", unless the context otherwise
requires, refers to IDB Communications Group, Inc. and its subsidiaries.
IDB WORLDCOM
IDB WorldCom offers international private line and public switched long
distance telephone services to government and commercial organizations
worldwide. IDB WorldCom has private line operating agreements in over 150
countries and has significantly expanded the number of countries with which it
has public switched voice operating agreements from one at the end of 1991 to
over 50 at December 31, 1993. The Company believes it is the fourth largest
U.S.-based provider of international long distance communications services based
on net revenues.
IDB WorldCom provides permanent and temporary domestic and international
private-line services to customers for a number of applications. These
applications generally involve creating private, international point-to-point
communications links for clients who need special services, such as heavy data
and voice usage, lower cost and greater security. IDB WorldCom has private line
operating agreements with over 150 countries and is the carrier for many of the
world's most critical communications links, including the Washington-Moscow
hotline, the nuclear risk reduction circuit and launch control circuits for the
NASA Space Program. IDB WorldCom also provides international private-line
services for a range of financial, airline, commercial and governmental
communications networks. Four U.S. Government agencies, eight international
common carriers and over 850 other customers use IDB's network for private-line
services. These customers include such organizations as ABC, CBS, NBC, CNN, EDS,
General Electric, the Associated Press, Agence France Presse and Intel
Corporation.
IDB WorldCom also offers public switched international telephone services
worldwide and provides direct services to more than 50 countries. IDB sells
telephone services both to corporate customers and to domestic long distance
carriers that lack transmission facilities to locations served by IDB or need
more transmission capacity. Accessing IDB's international switching center via
permanent domestic connections or via dial-up access code, customers can make
international telephone calls. IDB's network also receives inbound calls from
foreign countries.
The Company has received permanent authority from the U.S. Federal
Communications Commission ("FCC") to provide international public switched
telephone service to over 150 countries and has entered into direct operating
agreements with over 50 of these countries. IDB is pursuing traffic agreements
with other U.S. and overseas telephone carriers to provide similar services to
additional countries as well as provide "Phone USA" services and international
800, debit card and calling card services.
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In 1993, the Company significantly expanded its international private line
and public switched long distance international telecommunications presence and
capabilities through the acquisitions of TRT Communications, Inc., a Delaware
corporation ("TRT"), and TC WorldCom AG, a Switzerland corporation ("WorldCom
Europe"). See "Recent Events" below.
For the year ended December 31, 1993, revenues generated from IDB's private
line and public switched telephone services totalled $195,573,000, which
represented approximately 58% of IDB's total 1993 revenues.
IDB BROADCAST
IDB Broadcast provides radio and television broadcast transmission services
for major network, cable, syndication, pay-per-view, sports and special event
programmers. Services are provided domestically and internationally on a
full-time or occasional-use basis using C-band and Ku-band technology, and
include uplink and downlink services, tape playback, scrambling and resale of
satellite transponder time. IDB is also making increased use of terrestrial
fiber transmission to meet its customers' needs. Based on revenues, the Company
believes it is one of the largest suppliers of domestic television and radio
transmission services.
The Company's communications network provides for the transmission and
distribution of a variety of television programming. Currently, television
networks, cable systems, producers of syndicated television programming and home
shopping networks use IDB's network for program distribution or coverage of
late-breaking news and special events from locations throughout the United
States and the world. Customers for IDB Broadcast's services include ABC, CBS,
NBC, ESPN, CNN, Madison Square Garden, USA Network, Lifetime, The Walt Disney
Company, the BBC, Television New Zealand, European Broadcasting Union and the
Tokyo Broadcasting System. IDB is the principal supplier of transmission
services for holders of television rights for Major League Baseball, National
Basketball Association and National Hockey League teams. During 1993, IDB
provided transmission services for approximately 7,000 televised sporting
events. IDB is also a major supplier of transmission services for the
thoroughbred horse racing, harness racing and dog racing industries, providing
such services from over 50 race tracks to Las Vegas, Nevada and other offtrack
betting locations.
IDB distributes radio programming for a wide variety of domestic and
international broadcasting applications. During 1993, IDB provided radio
transmission services for approximately 6,000 sporting events, making IDB the
leading supplier of radio satellite communications services to holders of
broadcast rights for Major League Baseball, National Football League and
National Hockey League teams. IDB also distributes radio programming to more
than 3,500 domestic radio stations affiliated with radio networks such as the
Unistar Radio Network. Radio networks, stations and program syndicators use
IDB's transportable and fly-away earth stations for special events programming
and live coverage of late-breaking news from around the world, including
locations such as the Persian Gulf and the former Soviet Union. Customers for
IDB's radio services include ABC, CBS, Westwood One, the BBC, European
Broadcasting Union, KDD (Japan's telecommunications authority), Digital Cable
Radio and The Walt Disney Company.
To support existing customers and attract new customers, the Company
operates a 24-hour Program Booking Center, which acts as a clearinghouse for
customer utilization of the IDB network. The Program Booking Center is an
ordering and service support organization which provides phone-in, on-demand
scheduling of the full range of services of IDB Broadcast. IDB's customers are
able to place initial orders, change orders, make special service requests and
receive scheduling updates for on-going services. IDB believes that this
centralized clearinghouse for access to its network assists the Company in
providing flexible and responsive service to its customers.
For the year ended December 31, 1993, revenues generated from IDB's
television and radio transmission services totalled $73,723,000, which
represented approximately 22% of IDB's total 1993 revenues.
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The IDB WorldCom and IDB Broadcast customers listed above contributed, in
the aggregate, 5.41% ($18,367,921) of IDB's total consolidated revenues of
$339,364,000 for the fiscal year ended December 31, 1993. No individual customer
contributed ten percent or more of IDB's total consolidated revenues for the
fiscal year ended December 31, 1993.
IDB MOBILE
IDB Mobile is a joint venture of IDB and Teleglobe International (U.S.),
Inc. of Canada. IDB Mobile provides mobile satellite communications services to
commercial and private maritime, aviation and land mobile users, as well as to
AT&T and all other major U.S. telecommunications companies. IDB Mobile also
offers worldwide "turn-key" land mobile satellite services by packaging portable
satellite terminals with Inmarsat satellite transmission.
IDB Mobile provides satellite communications services to connect mobile
units to the IDB communications network which in turn allows the mobile units to
establish a communications link to private communications networks and the
public switched telephone networks. The quality of IDB Mobile's aeronautical
service is superior to the quality of traditional ground mobile and airphone
services which rely on ground-based systems. In 1993, IDB provided satellite
communications services to over 7,500 customers in the shipping, fishing, oil
and cruise ship industries. These services enable ships to have on-board phone,
facsimile and computer connectivity to home offices and communications systems
around the world. IDB Mobile is one of only two companies currently providing
mobile satellite service within all four oceanic regions. The Company has also
provided satellite communications services using portable, 80-pound satellite
terminals which have been used by reporters from the front lines of the Bosnian
conflict, as well as in Somalia and in support of expeditions in Africa, the
former Soviet Union and Antarctica.
For the year ended December 31, 1993, revenues generated from the provision
of mobile satellite communication services totalled $40,931,000, which
represented approximately 12% of IDB's total 1993 revenues.
IDB SYSTEMS
Through its IDB Systems unit, the Company designs, installs and integrates
"turn key" transmission facilities and communications networks primarily for
international customers. Services provided include fixed customer premise earth
stations, network management systems, system integration consulting and project
management. The Company regards these services as an important part of its
business because they allow IDB to increase its customer base and expand network
connectivity.
The Company also provides diagnostic and maintenance services for the
satellite communications facilities it constructs. The Company has recently
completed major installations in the People's Republic of China, Azerbaijan,
Eritrea, Iran, India, Somalia, Syria, Mexico and Italy. This service unit also
designs and assembles fixed earth stations in the IDB satellite communications
network.
For the year ended December 31, 1993, revenues generated from the provision
of systems integration services totalled $20,423,000, which represented
approximately 6% of IDB's total 1993 revenues.
THE IDB COMMUNICATIONS NETWORK
IDB uses its communications network to provide its customers with
international private line and public switched long distance telephone services,
television and radio transmission services, facsimile and data connections and
mobile satellite communications capabilities. Such services are provided through
the Company's network of domestic terrestrial and trans-oceanic fiber optic
cables, fixed and transportable satellite earth stations and leased satellite
transponder capacity.
The Company has made considerable investment in computerized monitoring
systems, redundant circuits and back-up power systems to help ensure reliable
and high quality service to its customers. On December 31, 1993, the Company
employed over 300 engineers and technicians. The
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Company's engineers and technicians are based at key locations in the IDB
network to monitor network transmissions and perform earth station and equipment
installations, preventive maintenance and repairs.
IDB provides network services for a spectrum of applications by creating
several kinds of communications circuits. These include point-to-point
transmissions, such as phone calls, data and facsimile connections between
offices, and transmission of sporting, news or special events from the event
site to the studios of IDB's radio or television customers, who then broadcast
the event. IDB also provides point-to-multipoint transmissions, or program
distribution, in which, for example, IDB transmits a data signal to a network of
small antennas or transmits the radio or television programming of a network or
program syndicator to its affiliated stations. For point-to-multipoint
transmission, satellites generally are superior to other technologies because
they disperse a signal throughout a large geographic area for cost-effective
transmission. Satellites also permit signal transmission from remote sites where
no other communications facilities are available and are used particularly for
television signals that cannot be transmitted through conventional phone lines.
For point-to-point applications, the increasing availability of fiber optic
cable, which has sound quality comparable to satellite circuits without the
disadvantage of propagation delay (the approximately one-quarter second delay
between the time a person speaks and is heard by the other party), has expanded
significantly IDB's routing options and network connectivity.
FACILITIES
The Company has international teleports in Los Angeles and New York. These
teleports, which include 22 international gateway earth stations and
approximately 50 domestic earth stations, enable IDB to provide radio,
television, private line and public switched telephone communications to and
from locations throughout the world. The Company believes that these teleports
represent the largest concentration of satellite transmission equipment in the
United States. The Company also owns fixed earth stations located in 33 other
metropolitan areas, including seven international gateway earth stations in San
Francisco and Washington, D.C., which serve as central collection points for
domestic traffic and connect the network with international satellites. The
Company owns a number of transportable earth stations (which are mounted on
trucks or trailers) and fly-away earth stations (which can be air-freighted to
an event site and quickly assembled). These mobile earth stations, most of which
were assembled by IDB, enable the Company to provide transmission services to
and from virtually any location in the world.
The Company owns fiber optic facilities on most major international cable
systems in the Pacific and Atlantic Ocean regions, providing fiber optic cable
connections between the United States and the Pacific Rim and the United States
and Europe. The Company also owns fiber optic cable for services to the former
Soviet Union and in 1994 will purchase fiber optic cable facilities to Latin
America. Domestically, the Company leases fiber optic cabling to connect various
U.S. cities, including New York City, Los Angeles, Washington, D.C., Boston, San
Francisco, Philadelphia, and Chicago. These domestic fiber optic facilities,
which are connected to the fiber networks of GTE and Williams Telecommunications
Group, expand facilities and transmission options available to IDB's customers.
The Company also has relationships with numerous suppliers of transmission
services who provide television transmission services to IDB for sports and
special events. Some of these firms are under contract with the Company and are
sometimes used by IDB when such firms have transmission facilities which can
more readily reach the location of a sporting event.
IDB leases 35 full-time transponders on domestic and international
satellites. To augment its leased time, the Company also purchases transponder
time at discounted rates under bulk time commitments from satellite owners such
as AT&T, GTE Spacenet, Hughes Communications Galaxy, GE Americom, Telesat
Canada, Inmarsat, PanAmSat, Intelsat and Intersputnik. Under certain transponder
agreements, the Company receives favorable rates if its purchases of transponder
space exceed certain minimum requirements, subject to retroactive charges if the
minimum levels are not satisfied. In May 1990, IDB entered into an agreement
with Communications Satellite Corporation
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under which IDB committed to purchase a minimum of $35,000,000 in maritime and
aeronautical transponder services over a five-year period that commenced in
September 1991. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 7 of Notes to Consolidated Financial
Statements of the Company.
SALES AND MARKETING
On December 31, 1993, IDB employed over 200 sales and marketing personnel.
The Company's sales and marketing personnel concentrate their efforts within one
of the Company's four service units. The Company has developed specific
marketing programs and sales commission plans for each of its units. Commission
plans reward sales personnel for renewal business from existing customers,
additional services for existing customers and business from new customers. Each
salesperson is assigned specific existing accounts and is responsible for
targeting new customers in the assigned market.
IDB employs several marketing channels. Due to the high percentage of
recurring services provided to its customers, IDB focuses on maintaining and
increasing the usage level of its current clients. In attracting major new
accounts, the Company benefits from the active involvement of senior management.
Other marketing efforts include focused telemarketing and attendance at major
conventions for targeted user groups. In all of its marketing efforts, IDB
tailors its activities to the specific market being addressed.
COMPETITION
Historically, the Company has emphasized customized communications services
and applications where the Company could offer solutions with significant
improvements in transmission quality or ease of use. As the Company's network
has expanded to serve a broader range of users, IDB has increasingly encountered
competition from major domestic and international communications companies,
including AT&T, MCI Communications Corporation ("MCI") and U.S. Sprint
Communications, Ltd. ("U.S. Sprint"), many of which have significantly greater
resources and more extensive domestic and international satellite and fiber
optic communications networks than the Company.
For television transmission services, IDB competes with Keystone
Communications, Inc. and Reuters Television. Various local teleports and small
communications companies also compete with certain of the Company's broadcasting
applications. Many cable networks own their own transmission facilities. The
Company believes that its extensive network of facilities and its ability to
react quickly to customers' technical requirements and service needs are
competitive advantages in this market.
In providing radio transmission services and transmission of live and
special events radio programming, IDB generally competes with satellite service
companies. In the distribution of programming to radio stations, IDB competes
primarily with ABC Radio Network and National Public Radio, which provide
satellite distribution of radio programming for several program producers.
For resale of transponder capacity, the Company primarily competes with
satellite owners such as AT&T, GE Americom, GTE Spacenet and Hughes
Communications, all of which have significantly greater resources than the
Company. The Company also competes with other resellers of transponder capacity.
For international transponder services, the Company competes with Comsat, which
enjoys a government granted monopoly controlling access to the Inmarsat and
Intelsat international satellite systems. The Company uses both of these and
other satellite systems to meet its customers' requirements.
In providing mobile satellite services, the Company's most significant
competition is from Comsat, British Telecom, Inc. and KDD. With respect to the
maritime services currently offered by the Company, price and convenience of
service are the principal competitive factors. In providing private-line
telephone, facsimile and data communications services, the Company's most
significant competition is from AT&T, MCI and U.S. Sprint.
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For most of the Company's communications services, the factors critical to a
customer's choice of a service provider are cost, ease of use, speed of
installation, broadcast quality, reputation and, in some cases, geography and
network size. The Company has built a reputation as one of the most responsive
service providers, particularly when providing customized communications
services. IDB's array of communications facilities and international
relationships, together with its extensive engineering and operations
capability, provide the Company with considerable flexibility in tailoring
cost-effective communications services to meet its customers' requirements. This
network allows IDB to implement complex permanent and temporary communications
circuits to and from virtually any location in the world. The Company believes
that this responsiveness has often been the determining factor in a customer's
selection of IDB. The Company's size also allows it to provide services more
promptly and conveniently, particularly when customer's needs require rapid
installation of service or unique solutions. Many markets which are important to
IDB are not large enough for a substantially larger competitor to focus the
resources necessary to provide cost competitive and responsive service. In
addition, IDB's understanding of international telecommunications technical and
regulatory issues has often allowed IDB to provide prompt solutions to the
diverse communications needs of multinational corporations, government entities
and news organizations.
EMPLOYEES
On December 31, 1993, the Company had approximately 780 full-time employees,
of whom approximately 470 provided operational and technical services. The
balance of the Company's employees are engaged in sales and marketing,
administration and accounting. A majority of the Company's employees are not
represented by any labor union. Certain TRT employees are covered by a
collective bargaining agreement that expires on April 30, 1994. From time to
time, the Company supplements its labor force with part-time employees who
operate transportable and fly-away earth stations during periods of heavy demand
for these services. The Company considers its employee relations to be good and
has not experienced any work stoppages or labor difficulties.
GOVERNMENT REGULATION
The Company's communications operations and services are subject to
regulation by the FCC. Transmissions from earth stations to all satellites,
transmissions from microwave and other transmitters, reception from
international satellites, and transmission of international traffic by any
means, including satellite and undersea cable, must be pursuant to a license or
other authorization granted by the FCC. FCC licensing decisions or changes in
U.S. government policies increasing or decreasing access to non-Intelsat
satellites or other network components could adversely affect the Company. No
FCC authorization or any consent other than from the owner of the material
received is required for reception via domestic satellites from points within
the United States. The Company can rely on a third party's license or
authorization when it transmits domestic traffic through earth stations operated
by that third party.
The FCC prescribes technical standards for transmission equipment which
change from time to time. The FCC also requires a coordination process for earth
stations operating in the frequency band used by some of the satellites on which
the Company provides services to demonstrate that the earth station will not
interfere with land based microwave systems. This requirement in some cases
restricts how close an earth station can be located to a customer and thus may
require a telephone line or other terrestrial link to be installed between the
customer and the earth station. Transmission equipment must also be installed
and operated in a manner that avoids exposing humans to harmful levels of radio
frequency radiation.
The services of telecommunications common carriers must be offered at just
and reasonable rates and on a nondiscriminatory basis, but the FCC does not
currently regulate market entry or exit by competitive domestic carriers such as
the Company. The Company is deemed a common carrier for many of its services,
but even if it were deemed to be a common carrier for all of its services, the
Company does not believe that there would be any material impact on its business
operations or profitability. The transmission of international traffic for
customers, whether by satellite or undersea
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cable, and the operation of satellite earth stations that communicate with
international satellites are subject to more detailed regulation based upon
special statutory provisions and foreign policy considerations. As a result, the
Company is subject to entry and exit regulations, restrictions on the number and
type of transmissions it may provide using certain international satellites and
various filing and reporting requirements with respect to its international
operations.
The Company holds numerous FCC licenses and other authorizations required
for the operation of its business. Earth station and microwave licenses of the
type described below are normally granted for a period of ten years, except that
authorizations for certain transportable earth stations are granted for a one
year period. Generally, authorizations to provide service are of indefinite
duration and are valid until revoked or surrendered, except that cable landing
license authorizations are issued for a period of twenty-five years. Under
current regulations, the conduct of the Company's business requires a continuing
process of applying for new, modified and renewed licenses and authorizations
from the FCC. Although the Company has never had a license application denied,
there can be no assurance that the Company will receive all authorizations or
licenses necessary for new communications services or that delays in the
licensing process will not adversely affect the Company's business.
The Company's rates and practices are subject to review in the event of a
third party complaint to the FCC or on the FCC's own motion. The Company has
been the subject of certain third party complaints, but none has had or is
expected to have a materially adverse impact on the Company or its business. To
the extent that the Company is a common carrier, FCC equal employment
opportunity requirements apply.
A federal statute prohibits the issuance of the kind of transmission
licenses the Company's operations require to any corporation with any officer or
director who is not a U.S. citizen or more than 20% of whose stock is owned of
record or voted by noncitizens or a foreign government or its representatives.
The statute would also bar the subsidiaries from holding licenses if any officer
or more than one-fourth of the Company's directors were noncitizens or more than
one-fourth of the Company's shares of stock were owned of record or voted by
noncitizens or a foreign government or its representatives and the FCC found
that the public interest would be served by the refusal or revocation of the
licenses under those circumstances. In order to allow foreign ownership of the
Company to exceed 25% without risk of refusal or revocation of licenses pursuant
to the Communications Act, on December 17, 1992, the Company's subsidiaries that
had been holding the transmission licenses used by the Company, after seeking
and obtaining required approvals from the FCC, assigned all of their common
carrier earth station and microwave licenses to Southwest Communications, Inc.
("SCI"). Messrs. Jeffrey P. Sudikoff, Edward R. Cheramy and Peter F. Hartz, the
Chief Executive Officer, President and Senior Vice President, Sales and
Marketing of the Company, own 49%, 40%, and 11%, respectively, of the capital
stock of SCI. The Company entered into Operator Agreements with SCI on December
17, 1992. These Operator Agreements have initial terms of ten years and provide
for SCI to be the operator and FCC licensee of the satellite earth stations and
microwave stations owned by the Company. After the initial term, the Operator
Agreements will continue on a year to year basis. The Company's foreign
ownership does not currently exceed 25%, but it has exceeded that level in the
past and may do so again in the future. The Operator Agreements with SCI allow
the Company's Common Stock to be freely traded without the risk that purchases
by foreigners will create a violation of the statutory restriction on alien
ownership.
The placement of earth stations or other antennas is typically subject to
regulation under local zoning ordinances. The export of certain
telecommunications equipment requires the authorization of the United States
Department of Commerce, the United States Treasury Department or the United
States Department of State. The Company is subject to foreign regulation in
certain countries, particularly those countries where the Company operates its
own facilities. To the extent required, the Company has obtained the requisite
authority to operate in such countries.
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RECENT EVENTS
On December 30, 1993, the Company consummated its acquisition of WorldCom
Europe in exchange for $10 million in cash, plus other consideration. IDB
previously held 40% of the capital stock of WorldCom Europe, which it received
in connection with its acquisition of World Communications, Inc. ("WorldCom") in
December 1992. WorldCom Europe, a provider of international private line and
public switched long distance telephone services, is now part of IDB WorldCom.
The acquisition of WorldCom Europe expanded the Company's domestic and
international private line, public switched long distance and satellite
transmission services. The results of this acquisition will be reflected in the
Company's revenues and results of operations for fiscal 1994 and are expected to
be positive.
On February 4, 1994, the Company effected a 3.15-to-1 Common Stock split in
the form of a 215% Common Stock dividend, payable on the Common Stock of the
Company outstanding at the close of business on January 21, 1994. The
stockholders received cash in lieu of fractional share interests.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes.
GENERAL
The following table shows the percentage relationship to total revenues of
certain items included in Selected Financial Data for each of the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Total revenues....................................... 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Cost of sales...................................... 63.7 66.0 68.8
Selling, general and administrative................ 14.1 12.2 11.0
Depreciation....................................... 7.0 6.2 5.1
Amortization....................................... 2.7 2.2 1.4
Streamlining charge................................ -- -- 1.7
------ ------ ------
Total costs and expenses......................... 87.5 86.6 88.0
------ ------ ------
Operating income..................................... 12.5 13.4 12.0
Interest expense, net................................ 8.1 4.1 1.9
------ ------ ------
Income before minority interest and income taxes and
extraordinary item.................................. 4.4 9.3 10.1
Minority interest.................................... -- (0.1) 0.1
Provision for income taxes........................... 1.7 3.7 4.2
------ ------ ------
Income before extraordinary item and preferred stock
dividend............................................ 2.7 5.5 5.8
Extraordinary item................................... (1.2) -- (2.3)
Preferred stock dividend............................. -- -- 0.4
------ ------ ------
Net income........................................... 1.5% 5.5% 3.1%
------ ------ ------
------ ------ ------
</TABLE>
RESULTS OF OPERATIONS
The Company derived 1993 revenues principally from international private
line and public switched long distance telephone services, radio and television
transmission services, mobile communications and systems integration services
provided on the Company's domestic and international communications network. See
"Business."
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1993 COMPARED TO 1992
Operating results for 1993 resulted in the highest revenues and income
before extraordinary item and preferred stock dividend in the Company's history.
Total revenues and income before extraordinary item and preferred stock dividend
for 1993 were $339,364,000 and $20,139,000, respectively, versus $155,344,000
and $8,528,000, respectively, for 1992.
Revenues for 1993 increased $184,020,000 or 119% over 1992 revenue
principally from an increase of $159,294,000 in international private line and
international public switched long distance telephone services resulting from
the acquisitions of WorldCom on December 31, 1992 and TRT on September 30, 1993
(the "Acquisitions", See Note 9 of Consolidated Financial Statements of the
Company) and the growth in IDB Mobile's communications services of $19,205,000.
These services comprised 70% of total revenues in 1993 compared to 35% in 1992.
Broadcast revenues, which declined slightly in 1993 compared to 1992 due to the
Company's decision not to renew certain less profitable customer contracts,
comprised 22% of total revenue in 1993 compared to 49% in 1992. The Company also
earned fees of $8,000,000 and $7,700,000 in 1993 and 1992, respectively, from
operational assistance and other consulting services provided to WorldCom during
1992 and TRT during 1993. The fees earned in connection with the operational
assistance and consulting services ended upon completion of the acquisition of
TRT in September 1993.
Costs of sales increased $131,039,000 in 1993 or 128% over 1992 due to
higher levels of revenue provided by the Acquisitions. Cost of sales as a
percentage of revenue improved slightly due to the Company's changing revenue
mix. The fastest growing revenue element, international long distance services,
has lower cost of sales than the private line and broadcast services
historically provided by the Company. This is somewhat offset by higher cost of
sales related to IDB Mobile and IDB Systems integration activities.
Selling, general and administrative expenses increased to $37,381,000 in
1993 from $18,889,000 in 1992 principally due to the Acquisitions. Selling,
general and administrative expenses as a percentage of revenue declined slightly
due to economies of scale resulting from higher revenue levels and the Company's
efforts to control administrative costs during the integration of the WorldCom
and TRT acquisitions offset by higher selling and marketing costs related to the
Company's efforts to further expand its international private line and long
distance telephone services.
Depreciation expense as a percentage of revenues decreased to 5.1% in 1993
from 6.2% in 1992 as a result of increased utilization of the Company's network
facilities. Depreciation expense increased from $9,587,000 in 1992 to
$17,269,000 principally due to the Acquisitions.
Amortization expense increased to $4,669,000 in 1993 from $3,507,000 in 1992
principally due to the amortization of additional intangible assets acquired in
connection with the Acquisitions. Amortizable assets consist primarily of
intangibles including goodwill, bank loan fees and satellite transmission and
customer contracts.
Streamlining charge represents $5,920,000 of charges related to the
Company's plans approved in the fourth quarter of 1993 to streamline its
operations, primarily related to the planned termination of certain Broadcast
Audio activities. Approximately $4.3 million of the streamlining charge related
to the recognition of a loss on an Audio customer contract and the write-off of
certain Broadcast Audio related assets. In addition, the streamlining charge
included $617,000 related to costs of Broadcast video facilities which were
terminated in early 1994. The remainder primarily relates to employee
termination payments made to employees involved in the above activities as well
as at WorldCom where a number of employees were terminated to effect a
reorganization.
Interest expense net of interest income for 1993 of $6,350,000 remained
consistent with 1992 due to higher average outstanding debt ($142,807,000 in
1993 versus $90,542,000 in 1992) offset by a lower effective interest rate (8.1%
in 1993 versus 10.9% in 1992) and the Company's ability to invest excess cash in
interest earning investments ($2,055,000 increase in interest income in 1993).
10
<PAGE>
Extraordinary item in 1993 represents a $7,949,000 charge, net of $5,639,000
income tax benefit, redemption premiums and the unamortized portion of debt
issuance costs associated with the repayment and defeasance of substantially all
of the Company's then existing debt.
The Company's provision for income taxes as a percentage of income before
taxes increased to 41.5% in 1993 from 40.5% in 1992 primarily as a result of the
increase in the federal statutory income tax rate to 35%.
1992 COMPARED TO 1991
Revenues in 1992 increased $50,907,000, or 48.7%, to $155,344,000. This
increase was primarily attributable to a $15,964,000 increase in revenues from
IDB Mobile, resulting from its first full year of operations and its success in
capturing a growing share of the maritime communications market. IDB Systems'
revenues increased $11,167,000 in 1992 primarily from increased sales activity
in Europe, China and Africa. Additionally, in its first year of providing
international long distance telephone services, IDB generated approximately
$8,000,000 in such revenues in 1992. IDB Broadcast's revenues, which accounted
for approximately 49% of total revenues in 1992 and 66% in 1991, increased
$6,500,000 in 1992 principally due to additional fulltime video transmission
services. The Company also earned $5,000,000 in fees generated from services
provided under an operational assistance agreement with WorldCom and $2,700,000
in fees earned from sales and engineering support and management provided to
WorldCom during 1992.
Cost of sales has historically included a relatively high percentage of
fixed costs, consisting primarily of employee salaries, satellite transponder
costs and satellite and telephone line charges provided through the facilities
of outside vendors. Cost of sales as a percentage of revenues increased from
63.7% in 1991 to 66.0% in 1992. The increase reflects a change in the mix of the
Company's business during 1992. The Company's systems integration activities,
mobile communications services to the maritime market and certain fulltime video
services carry higher cost of sales than the services historically provided by
the Company. In addition, a joint venture agreement which had provided for
reduced rates on satellite transponder capacity expired in March 1992. These
factors are partially offset by relatively lower cost of sales on international
long distance services.
Selling, general and administrative expenses increased to $18,889,000 in
1992 from $14,688,000 in 1991, primarily from the consolidation of IDB Mobile
and Houston International Teleport, Inc. and the investment the Company made in
1992 in enhancing its internal systems. However, selling, general and
administrative expenses decreased as a percentage of revenues from 14.1% in 1991
to 12.2% in 1992 due to economies of scale from higher revenue levels and
improved operating efficiencies.
Depreciation expense as a percentage of revenues decreased to 6.2% in 1992
from 7.0% in 1991 as a result of increased utilization of the Company's network
facilities. Depreciation expense increased from $7,305,000 in 1991 to $9,587,000
in 1992 principally due to the addition of network facilities (including
undersea fiber optic cable and earth stations) to support the Company's revenue
growth.
Amortization expense increased by $662,000 from 1991 to 1992 primarily as a
result of amortization of foreign carrier license costs incurred by IDB Mobile
and public switched long distance telephone services. Amortizable assets consist
primarily of intangibles, bank loan fees and satellite transmission and customer
contracts. Amortization expense as a percentage of revenues decreased to 2.2% in
1992 from 2.7% in 1991 as a result of increased revenues and the fixed nature of
these costs.
Interest expense decreased by $2,026,000 from 1991 to 1992 primarily as a
result of lower effective interest rates (10.9% in 1992 versus 11.5% in 1991)
and a decrease in the average debt outstanding ($90,542,000 in 1992 versus
$93,792,000 in 1991). In addition, capitalized interest increased in 1992 due to
a greater level of construction in progress on the Company's transmission and
related facilities.
11
<PAGE>
On March 2, 1992, the Company completed the private placement of $50,000,000
of senior secured notes ("Senior Notes") and a $15,000,000 revolving line of
credit ("Revolver"). A portion of the proceeds was used to repay all amounts
outstanding under the Company's previous credit facility, including a term loan
of $43,000,000 and a revolving facility of $15,000,000. Repayment of the
revolving facility and term loan resulted in an extraordinary charge of
$1,283,000 in 1991, net of $820,000 of income tax benefit, which represented the
unamortized portion of costs incurred in connection with borrowings under the
credit facility.
The Company's provision for income taxes as a percentage of income before
taxes remained relatively constant at 40.5% in 1992 as compared to 39.0% in
1991. See Note 6 of Notes to Consolidated Financial Statements of the Company.
SEASONALITY AND INFLATION
Historically, the Company's business has been seasonal because its
transmission services have been purchased in larger volumes during periods of
favorable weather when more sporting and special events are held. Increases in
full-time radio and television distribution services, private line telephone and
data services, satellite-based mobile services and international public switched
long distance telephone services have substantially lessened the impact of this
seasonality.
Since its inception, the Company's results of operations have not been
materially affected by inflation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed growth through borrowings, cash generated from
profitable operations and sales of shares of its Common Stock and 5% Convertible
Subordinated Notes due 2003 (the "Subordinated Notes"). Prior to August 20,
1993, the Company borrowed funds under a $25,000,000 revolving credit facility
(the "Revolver"), issued $50,000,000 of senior secured notes (the "Senior
Notes") and $26,000,000 principal amount of 13% Senior Subordinated Notes due
1998 (the "1998 Notes"). On December 21, 1992, the Company also assumed a
$15,000,000 loan payable by WorldCom to TeleColumbus U.S.A., Inc (the "Assumed
Loan"). Substantially all outstanding borrowings of the Company were repaid and
defeased by September 1993, using a portion of the proceeds of the public
offering of $195,500,000 in aggregate principal amount of Subordinated Notes in
August 1993 and the public offering of an aggregate of 4,724,997 shares of
Common Stock in May 1993. The Assumed Loan was repaid by the Company upon the
consummation of the acquisition of WorldCom Europe in December 1993.
The Subordinated Notes issued in August 1993 are convertible at any time
prior to maturity, unless previously redeemed, into Common Stock of the Company
at a conversion price of $18.15 per share, as adjusted to reflect the
3.15-to-one Common Stock split in the form of a 215% Common Stock dividend paid
on February 1994 and subject to further adjustment in certain events. The
Subordinated Notes bear interest at a rate of 5% per annum and interest is
payable on February 15 and August 15 of each year. The Subordinated Notes are
redeemable at any time after August 15, 1996, in whole or in part, at the option
of the Company, at declining redemption prices plus accrued interest. The
Subordinated Notes are unsecured and subordinated to all existing and future
senior indebtedness of the Company and will be effectively subordinated to all
indebtedness and other liabilities of subsidiaries of the Company. The
Subordinated Notes contain no limitation on the incurrence of additional
indebtedness by the Company and its subsidiaries.
In November 1993, Bank of America National Trust and Savings Association
agreed to make a $15,000,000 line of credit available to the Company (the "Line
of Credit"). Advances made pursuant to the Line of Credit bear interest at a
floating rate based, at the option of the Company, on a domestic index or an
offshore index. All advances and letters of credit made under the Line of Credit
mature on October 31, 1995 and the Line of Credit expires on such date. The
Company may at any time terminate the Line of Credit by payment of all
outstanding advances and other obligations under the Line of Credit and cash
collateralization of all letters of credit existing at that time. As of December
31,
12
<PAGE>
1993, there were no amounts outstanding under the Line of Credit. In addition,
the Company has ongoing discussions with several financial institutions
regarding credit facilities, committed and uncommitted.
During 1993, the Company's capital expenditures, including improvements,
replacements and additions of communications equipment and facilities, were
approximately $48,300,000. The Company historically has invested significantly
to build its communications network. See "Business -- The IDB Communications
Network" and "Business -- Facilities."
Net cash provided by operating activities in 1993 decreased to $2,040,000,
compared to net cash provided by operating activities of $27,763,000 in 1992
principally due to increases in accounts receivables associated with the
Acquisitions. Cash provided by financing activities in 1993 was $129,576,000, as
compared to cash provided by financing activities of $16,694,000 in 1992 and
principally relate to the sale of Subordinated Notes offset by the repayments or
defeasance of substantially all of the Company's then existing debt. Net cash
used in investing activities in 1993 was $78,323,000, as compared to $45,900,000
in 1992, principally due to property and equipment expenditures for additional
facilities in the IDB network, the purchase of short-term investments, and costs
incurred in connection with the Acquisitions.
In May 1990, the Company entered into an agreement with Comsat, Inc.
("Comsat") under which it may obtain satellite transponder capacity for maritime
and aeronautical services offered or to be offered by IDB Mobile, at long-term
fixed rates over a five-year period that commenced in September 1991. As of
December 31, 1993, IDB's minimum remaining total commitment under the agreement
was to purchase 8 million minutes of transponder capacity (representing
aggregate costs of approximately $20,400,000, calculated at the rate set forth
in the agreement, which the Company would pay in 1996 to satisfy any remaining
volume commitment under the agreement that the Company did not purchase by that
time). Based on current and projected usage, the Company believes that it will
meet the minimum purchase commitment under the agreement. If the Company were to
materially breach the agreement (including provisions relating to interference
with the operation of the satellites), the Company would not be entitled to the
rates set forth in the agreement, but would be required, from the date of such
material breach, to pay higher rates for satellite transponder capacity for
maritime and aeronautical services. See "Business -- Facilities" and Note 7 of
Notes to Consolidated Financial Statements of the Company.
The Company's capital commitments, as of March 16, 1994, consisted primarily
of outstanding purchase orders (some of which are cancelable at the Company's
option) to acquire approximately $30,900,000 of equipment, including long term
commitments on undersea fiber optic cables of $20,500,000, which will be
financed by cash from operations and bank borrowings. It is anticipated that the
Company's 1994 expenditures will exceed that amount. The Company expects that
cash flow from operations, its current holdings of cash and marketable
securities and its borrowing capabilities under its current credit facility will
satisfy its projected working capital and capital expenditure requirements
through fiscal 1994. The Company may seek additional debt or equity financing
from time to time to supplement cash generated from operations and finance
future growth opportunities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements and supplementary financial information
appear in this Annual Report on Form 10-K beginning on page F-1, immediately
after the Signature Page hereof, and such information is incorporated in this
Item 8 by reference thereto.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
IDB COMMUNICATIONS GROUP, INC.
Dated: November 21, 1994 By: /s/ RUDY WANN
-----------------------------------
Rudy Wann
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
IDB COMMUNICATIONS GROUP, INC:
We have audited the accompanying consolidated balance sheets of IDB
Communications Group, Inc. and its subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1993. Our audits also included the financial statement schedules listed at Item
14. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We did not audit the balance sheet of World Communications, Inc. (a
consolidated subsidiary) as of December 31, 1992, which statement reflects total
assets constituting 24% of consolidated total assets as of December 31, 1992.
This statement was audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for World
Communications, Inc. as of December 31, 1992, is based solely on the report of
such 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of IDB Communications Group, Inc. and its subsidiaries at
December 31, 1993 and 1992, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993 in
conformity with generally accepted accounting principles. Also in our opinion,
based on our audits and the report of the other auditors, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE
March 7, 1994
F-1A
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
World Communications, Inc.
New York, New York
We have audited the consolidated balance sheet of World Communications, Inc.
(a wholly-owned subsidiary of IDB Communications Group, Inc.) as of December 31,
1992. This financial statement, not separately presented herein, is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit 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 is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. 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 balance sheet referred to above present
fairly, in all material respects, the consolidated financial position of World
Communications, Inc. at December 31, 1992 in conformity with generally accepted
accounting principles.
BDO SEIDMAN
New York, New York
March 17, 1993
F-1B
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1992 1993
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 1,319,000 $ 54,612,000
Short-term investments............................ -- 12,672,000
Accounts receivable, less allowance for doubtful
accounts of $2,449,000 in 1992 and $5,751,000 in
1993............................................. 43,625,000 108,445,000
Unbilled revenues................................. 10,033,000 13,900,000
Inventory......................................... 5,132,000 1,992,000
Prepaid expenses and other current assets (Note
8)............................................... 8,332,000 21,147,000
------------ ------------
Total current assets............................ 68,441,000 212,768,000
------------ ------------
Property and equipment:
Land.............................................. 2,489,000 2,489,000
Buildings and improvements........................ 6,757,000 6,567,000
Equipment......................................... 212,032,000 270,410,000
Construction in progress.......................... 24,890,000 39,850,000
------------ ------------
Total property and equipment.................... 246,168,000 319,316,000
Less accumulated depreciation and
amortization................................... 32,273,000 49,251,000
------------ ------------
Net property and equipment...................... 213,895,000 270,065,000
Intangible assets -- net (Note 2)................... 68,576,000 152,786,000
Other assets........................................ 20,744,000 23,773,000
Deferred income taxes (Note 6)...................... -- 62,797,000
------------ ------------
Total assets.................................... $371,656,000 $722,189,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 38,752,000 $ 55,095,000
Other accrued liabilities (Note 3)................ 42,198,000 119,805,000
Current portion of senior debt (Note 4)........... 2,467,000 --
------------ ------------
Total current liabilities....................... 83,417,000 174,900,000
Long-term liabilities (Note 9).................... 16,800,000 38,369,000
Deferred income taxes (Note 6).................... 9,309,000 --
Senior and subordinated debt (Note 4)............. 106,334,000 --
Convertible subordinated debt (Note 4)............ -- 195,500,000
------------ ------------
Total liabilities............................... 215,860,000 408,769,000
------------ ------------
Commitments and contingencies (Note 7)
Minority interest................................... 19,941,000 23,285,000
------------ ------------
Shareholders' equity (Notes 5 and 9):
Preferred stock, 5,000,000 shares authorized;
34,000 shares issued and outstanding in 1992 and
none outstanding in 1993......................... 17,444,000 --
Common stock, $.01 par value, 200,000,000 shares
authorized; shares issued and outstanding,
14,227,733 in 1992 and 71,713,076 in 1993........ 142,000 717,000
Additional paid-in capital........................ 112,553,000 272,744,000
Retained earnings................................. 5,716,000 16,674,000
------------ ------------
Total shareholders' equity...................... 135,855,000 290,135,000
------------ ------------
Total liabilities and shareholders' equity.... $371,656,000 $722,189,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Transmission services................. $ 94,533,000 $127,399,000 $304,779,000
Systems integration and other
income............................... 9,904,000 20,245,000 26,585,000
Fees earned from WorldCom and TRT
(Note 9)............................. -- 7,700,000 8,000,000
------------ ------------ ------------
Total revenues...................... 104,437,000 155,344,000 339,364,000
------------ ------------ ------------
Costs and expenses:
Cost of sales......................... 66,514,000 102,485,000 233,524,000
Selling, general and administrative... 14,688,000 18,889,000 37,381,000
Depreciation.......................... 7,305,000 9,587,000 17,269,000
Amortization.......................... 2,845,000 3,507,000 4,669,000
Streamlining charge (Note 11)......... -- -- 5,920,000
------------ ------------ ------------
Total costs and expenses............ 91,352,000 134,468,000 298,763,000
------------ ------------ ------------
Operating income........................ 13,085,000 20,876,000 40,601,000
Interest expense........................ (8,618,000) (6,533,000) (8,525,000)
Interest income......................... 179,000 120,000 2,175,000
------------ ------------ ------------
Income before minority interest, income
taxes and extraordinary item........... 4,646,000 14,463,000 34,251,000
Minority interest....................... -- (135,000) 174,000
------------ ------------ ------------
Income before income taxes and
extraordinary item..................... 4,646,000 14,328,000 34,425,000
Provision for income taxes (Note 6)..... 1,811,000 5,800,000 14,286,000
------------ ------------ ------------
Income before extraordinary item........ 2,835,000 8,528,000 20,139,000
Extraordinary item (net of income tax
benefit of $820,000 in 1991 and
$5,639,000 in 1993) (Note 4)........... (1,283,000) -- (7,949,000)
------------ ------------ ------------
Net income before preferred stock
dividend............................... 1,552,000 8,528,000 12,190,000
Preferred stock dividend................ -- -- 1,232,000
------------ ------------ ------------
Net income available to common
shareholders........................... $ 1,552,000 $ 8,528,000 $ 10,958,000
------------ ------------ ------------
------------ ------------ ------------
Primary earnings per share:
Income available to common
shareholders before extraordinary
item................................. $0.11 $0.24 $0.35
Extraordinary item (Note 4)........... (0.05) -- (0.14)
----- ---- -----
Net income available to common
shareholders......................... $0.06 $0.24 $0.21
----- ---- -----
----- ---- -----
Fully diluted earnings per share:
Income before extraordinary item...... $0.11 $0.24 $0.32
Extraordinary item (Note 4)........... (0.05) -- (0.13)
----- ---- -----
Net income before preferred stock
dividend............................. $0.06 $0.24 $0.19
----- ---- -----
----- ---- -----
Weighted average common shares
outstanding:
Primary............................... 24,976,000 35,548,000 57,881,000
------------ ------------ ------------
Fully diluted......................... 25,540,000 36,162,000 63,652,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------- ------------------------ ADDITIONAL
NUMBER NUMBER PAID-IN RETAINED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL EARNINGS
---------- -------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1990...................... 6,345,579 $ 63,000 -- -- $ 29,061,000 $ 5,703,000
Issuance of common stock.......................... 2,407,698 25,000 -- -- 31,075,000 --
5% stock dividend................................. 320,990 3,000 -- -- 2,886,000 (2,894,000)
Net income........................................ -- -- -- -- -- 1,552,000
---------- -------- --------- ------------ ------------ -----------
Balance -- December 31, 1991...................... 9,074,267 91,000 -- -- 63,022,000 4,361,000
Issuance of common stock (Note 9)................. 4,634,201 46,000 -- -- 42,363,000 --
Issuance of preferred stock....................... -- -- 34,000 17,444,000 -- --
5% stock dividend................................. 519,265 5,000 -- -- 7,168,000 (7,173,000)
Net income........................................ -- -- -- -- -- 8,528,000
---------- -------- --------- ------------ ------------ -----------
Balance -- December 31, 1992...................... 14,227,733 142,000 34,000 17,444,000 112,553,000 5,716,000
Issuance of common stock (Note 9)................. 6,583,177 66,000 -- -- 143,256,000 --
Conversion of preferred stock..................... 1,955,146 20,000 (34,000) (17,444,000) 17,424,000 --
3.15-to-one stock split (Note 5).................. 48,947,020 489,000 -- -- (489,000) --
Net income before preferred stock dividend........ -- -- -- -- -- 12,190,000
Preferred stock dividend.......................... -- -- -- -- -- (1,232,000)
---------- -------- --------- ------------ ------------ -----------
Balance -- December 31, 1993...................... 71,713,076 $717,000 -0- $ -0- $272,744,000 $16,674,000
---------- -------- --------- ------------ ------------ -----------
---------- -------- --------- ------------ ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year................... $ 1,219,000 $ 2,762,000 $ 1,319,000
------------ ------------ ------------
Cash flows from operating activities:
Net income before preferred stock
dividend............................ 1,552,000 8,528,000 12,190,000
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary item, net of income
tax benefit of $820,000 in 1991
and $5,639,000 in 1993............ 1,283,000 -- 7,949,000
Depreciation expense............... 7,305,000 9,587,000 17,269,000
Amortization expense............... 2,417,000 3,005,000 4,158,000
Amortization of loan fees and
discounts......................... 428,000 502,000 512,000
Provision for doubtful accounts
receivable........................ 502,000 364,000 1,725,000
Deferred income taxes.............. 1,356,000 6,672,000 6,869,000
Gain on sale of assets............. (21,000) (477,000) (12,000)
Minority interest.................. -- 135,000 (174,000)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.............. 1,599,000 (14,624,000) (34,366,000)
Unbilled revenues................ (2,505,000) (1,921,000) (1,163,000)
Inventory........................ (373,000) (2,463,000) 3,237,000
Prepaid expenses and other
assets.......................... (4,313,000) 425,000 (8,969,000)
Accounts payable and accrued
expenses........................ 6,490,000 8,834,000 (1,487,000)
Other liabilities................ (446,000) 9,196,000 (5,698,000)
------------ ------------ ------------
Total adjustments.................... 13,722,000 19,235,000 (10,150,000)
------------ ------------ ------------
Net cash provided by operating
activities.......................... 15,274,000 27,763,000 2,040,000
------------ ------------ ------------
Cash flows provided by financing
activities:
Proceeds from issuance of common
stock............................. 31,095,000 2,281,000 53,994,000
Borrowings of senior debt.......... 5,175,000 62,040,000 10,500,000
Repayments of senior debt.......... (21,589,000) (58,754,000) (83,066,000)
Borrowings of convertible
subordinated debt................. -- -- 189,550,000
Repayments and defeasance of senior
subordinated and subordinated
debt.............................. -- -- (34,580,000)
Payment of debt redemption
premiums.......................... -- -- (9,257,000)
Preferred stock dividend payment... -- -- (1,083,000)
Increase in advance from minority
shareholder of subsidiary......... -- 11,127,000 3,518,000
------------ ------------ ------------
Net cash provided by financing
activities.......................... 14,681,000 16,694,000 129,576,000
Cash flows used in investing
activities:
Additions to property and
equipment......................... 20,085,000 26,912,000 48,328,000
Purchases of short-term
investments, net.................. -- -- 12,672,000
Investment in and advances to joint
venture........................... 6,216,000 -- --
Proceeds from disposition of
property.......................... (255,000) -- (584,000)
Increase in other assets........... 2,298,000 10,831,000 7,979,000
Payment for acquisitions, net of
cash acquired..................... -- 2,669,000 9,908,000
Purchase of other intangible
assets............................ 68,000 5,488,000 20,000
------------ ------------ ------------
Net cash used in investing
activities.......................... 28,412,000 45,900,000 78,323,000
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents.................. 1,543,000 (1,443,000) 53,293,000
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 2,762,000 $ 1,319,000 $ 54,612,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IDB Communications Group, Inc., a Delaware corporation, and its subsidiaries
(together referred to herein as the "Company"), operate a domestic and
international communications network which provides their customers with
international private-line and switched long distance telephone services, radio
and television transmission services, facsimile and data connections and mobile
satellite communications capabilities.
CONSOLIDATION -- The consolidated financial statements include the accounts
of IDB Communications Group, Inc. and its subsidiaries. Effective December 31,
1992, the Company acquired WorldCom (see Note 9). As a result, the balance sheet
of WorldCom has been consolidated as of December 31, 1992 and the operations of
WorldCom were consolidated beginning January 1, 1993. Effective September 30,
1993, the Company acquired TRT (see Note 9). The operations of TRT were
consolidated beginning October 1, 1993. All significant intercompany balances
and transactions have been eliminated in consolidation.
REVENUE RECOGNITION -- The Company generally recognizes revenues when
transmission and distribution services are provided. For switched long distance
telephone services, revenues are recorded on the basis of minutes of traffic
processed and contracted fees. The Company also performs systems integration
services consisting of design and installation of transmission equipment and
systems for its customers. Revenues and the related costs for these services are
recorded under the percentage of completion method. Unbilled revenues under
customer contracts represent revenues earned under the percentage of completion
method but not yet billable under the terms of the contract.
The Company has retroactively reclassified payments to foreign telephone
companies to complete calls made from the United States by the Company's
customers. These payments in the amount of $28,656,000, which previously were
classified as direct reductions of transmission services revenue, are now
classified as cost of sales. Operating income, net income available to common
shareholders and the balance sheet are not affected. This change was made to
conform with industry reporting practices.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS -- The Company considers all
highly liquid investments purchased with a maturity of ninety days or less to be
cash equivalents. Similar investments with original maturities beyond ninety
days are considered short-term investments and carried at cost, which
approximates market value. Short-term investments principally consist of tax
exempt municipal bonds and corporate bonds. The Company believes that the
carrying amount of this category is a reasonable estimate of its fair value.
INVENTORY -- Consists principally of equipment used in the Company's systems
integration services group in the assembly of earth station equipment for
customers. Inventories are stated at the lower of cost or market; cost is
determined using the specific identification method.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the assets. The estimated useful lives of the
assets are 5 to 25 years for equipment and cable and 10 to 25 years for
buildings and improvements. In 1991, the Company revised its estimates of the
depreciable lives of certain assets resulting in additional income before income
taxes of approximately $359,000 and net income before extraordinary items of
approximately $213,000 ($.01 earnings per share for the year ended December 31,
1991).
CONSTRUCTION IN PROGRESS -- The Company constructs certain of its own
transmission systems and related facilities. All internal costs directly related
to the construction of such facilities, including
F-6
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interest and salaries of certain employees, are capitalized. Such costs were
$5,320,000 ($2,347,000 in interest), $7,656,000 ($3,490,000 in interest) and
$8,271,000 ($3,126,000 in interest) in 1991, 1992 and 1993, respectively.
DEFERRED FINANCING COSTS -- The Company defers all direct costs incurred in
obtaining long term financing and amortizes these costs over the term of the
related debt.
INTANGIBLE ASSETS -- These assets consist principally of intangible assets
acquired in acquisitions accounted for by the purchase method and are being
amortized using the straight-line method over the lives of the related assets,
which vary from 6 to 40 years.
MINORITY INTEREST -- In 1990, the Company and Teleglobe International
(U.S.), Inc. ("Teleglobe"), a wholly-owned subsidiary of Teleglobe, Inc., a
Canadian data communications products, systems integration and
telecommunications company, formed IDB Mobile Communications, Inc. ("IDB
Mobile"), a provider of mobile satellite voice and data communication services
to the maritime and aeronautical markets. The Company and Teleglobe each have a
50% equity interest in IDB Mobile. Effective January 1, 1992, the assets and
liabilities of IDB Mobile were consolidated with those of the Company and
Teleglobe's interest is included in the Company's consolidated financial
statements as minority interest.
INCOME TAXES -- Effective January 1, 1992, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. The
cumulative effect of the change was insignificant. Deferred income taxes
represent the amounts which will be paid or received in future periods based on
the income tax rates that are expected to be in effect when the temporary
differences are scheduled to reverse.
EARNINGS PER SHARE -- Earnings per share is based upon the weighted average
number of common shares and common stock equivalents (common stock options, when
dilutive) outstanding during each year. Fully diluted earnings per share assumes
the conversion of the preferred stock into common stock and also reflects
additional dilution related to common stock options when the use of the market
price at the end of the period is higher than the average price for the period.
The effect on earnings per share of the conversion of the convertible
subordinated debt is antidilutive. Earnings per share for the years ended
December 31, 1991, 1992 and 1993 have been adjusted to reflect 5% stock
dividends declared and paid in each of 1991 and 1992 and the 3.15-to-one common
stock split of February 4, 1994 (Note 5).
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
years' financial statements to conform to the current year's classifications.
2. INTANGIBLE ASSETS
Intangible assets at December 31, 1992 and 1993 consist of the following:
<TABLE>
<CAPTION>
1992 1993
----------- ------------
<S> <C> <C>
Satellite transmission and customer contracts........ $16,060,000 $ 16,060,000
Goodwill and other intangible assets................. 61,907,000 146,015,000
----------- ------------
Total intangible assets.............................. 77,967,000 162,075,000
Less accumulated amortization........................ 9,391,000 9,289,000
----------- ------------
Total.............................................. $68,576,000 $152,786,000
----------- ------------
----------- ------------
</TABLE>
Fully amortized intangible assets of $3,582,000 were eliminated from the
above balances in 1993.
F-7
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1992 and 1993 consist of the
following:
<TABLE>
<CAPTION>
1992 1993
----------- ------------
<S> <C> <C>
Settlements with domestic and foreign carriers....... $14,642,000 $ 62,140,000
Acquisition allowances, current...................... 10,696,000 23,494,000
Other................................................ 16,860,000 34,171,000
----------- ------------
Total.............................................. $42,198,000 $119,805,000
----------- ------------
----------- ------------
</TABLE>
Acquisition allowances relate principally to duplicate facility and
severance costs related to acquired operations (See Note 9).
4. LONG TERM DEBT
On August 20, 1993, the Company issued $195,500,000 of convertible
subordinated notes (the "Notes"), proceeds of which were approximately
$189,550,000 net of direct fees and expenses. Interest on the Notes is payable
semiannually on February 15 and August 15 of each year at an interest rate of 5%
per annum. The Notes are convertible at the option of the holder at anytime
prior to maturity into Common Stock of the Company at $18.15 per share. The
Notes include certain antidilution rights and rights with regard to changes in
control. At its option, the Company may redeem the Notes at any time after
August 1996, but will incur a redemption premium. The Notes mature and are due
in full on August 15, 2003.
The Company used the proceeds of this issue, together with the proceeds of a
May 1993 common stock issuance (see Note 5) to repay and defease substantially
all of its then existing debt. Total debt repayments in 1993 were approximately
$89,000,000 while $18,000,000 of debt was defeased. The repayment and defeasance
of this debt resulted in an extraordinary charge of $7,949,000, net of income
tax benefit of $5,639,000, which represents payment of debt redemption premiums
and the write-off of unamortized debt issuance costs.
In connection with the debt repayment, the Company canceled its revolving
line of credit. In November, 1993, the Company established a new $15,000,000
line of credit ("Line of Credit"). The Line of Credit bears interest at a
floating rate based, at the option of the Company, on a domestic index or
offshore index. The Line of Credit expires October 31, 1995. As of December 31,
1993, there were no amounts outstanding under the Line of Credit.
The fair values of financial instruments, other than the Notes, closely
approximate their carrying value. At December 31, 1993, the estimated fair value
of the Notes, based on reference to quoted market prices, exceeded the carrying
value by $31,000,000.
In connection with the acquisition of WorldCom (see Note 9), the Company
assumed a $15 million loan payable by WorldCom to TeleColumbus USA, Inc. This
debt was unsecured and subordinated to all of the Company's senior debt. No
interest accrued for two years from the date of each advance and any interest
accruing was payable quarterly in arrears, at LIBOR plus 2% per annum, beginning
June 30, 1994. The principal was repayable in five equal annual installments
beginning June 30, 1995. In order to reflect the effect of the non-interest
bearing period, the Company discounted the note to $13,400,000 at December 31,
1992. In December 1993, the Company repaid the $15 million subordinated debt
owed to TeleColumbus at its carrying value of $14,030,000.
F-8
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG TERM DEBT (CONTINUED)
Senior and subordinated debt at December 31, 1992 consisted of the
following:
<TABLE>
<S> <C>
Notes payable to banks.......................................... $ 14,500,000
Senior notes, net of unamortized issuance costs of $2,196,000... 47,804,000
Subordinated debt............................................... 38,090,000
Other........................................................... 8,407,000
------------
Total senior and subordinated debt.............................. 108,801,000
Less current portion of senior debt............................. (2,467,000)
------------
Long-term portion of senior and subordinated debt............... $106,334,000
------------
------------
</TABLE>
On March 2, 1992, the Company completed the private placement of $50,000,000
of senior secured notes ("Senior Notes") and a $15,000,000 revolving line of
credit ("Revolver"). A portion of the proceeds was used to repay all amounts
outstanding under the Company's previous credit facility, including a term loan
of $43,000,000 and a revolving facility of $15,000,000. Repayment of the
revolving facility and term loan resulted in an extraordinary charge of
$1,283,000 in 1991, net of $820,000 of income tax benefit, which represented the
unamortized portion of costs incurred in connection with borrowings under the
credit facility.
5. SHAREHOLDERS' EQUITY
The Company has established three stock option plans, the 1986 Incentive
Stock Plan, the 1992 Incentive Stock Plan and the 1992 Nonemployee Director Plan
(the "Plans"). The exercise price of all options and purchase price for
restricted stock under the Plans is equal to or greater than 100% of the fair
market of the Company's common stock on the date of the grant. The Company also
may grant stock options outside of the Plans.
The following summarizes all stock option activity for the three years ended
December 31, 1993:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF OPTIONS PER SHARE
---------- -------------
<S> <C> <C>
Outstanding at December 31, 1990..................... 3,190,248 $ .14-2.52
Granted.............................................. 1,041,377 1.51-4.69
Exercised............................................ (354,009) .14-2.02
Canceled............................................. (16,503) 1.51
---------- -------------
Outstanding, December 31, 1991....................... 3,861,113 1.51-4.69
Granted.............................................. 1,144,379 1.51-4.38
Exercised............................................ (1,318,420) 1.51-3.59
Canceled............................................. (59,598) 1.51
---------- -------------
Outstanding, December 31, 1992....................... 3,627,474 1.51-4.69
Granted.............................................. 2,442,825 11.98-14.37
Exercised............................................ (1,502,301) 1.51-4.69
Canceled............................................. (25,011) .14-12.62
---------- -------------
Outstanding, December 31, 1993....................... 4,542,987 $ 1.51-14.37
---------- -------------
---------- -------------
</TABLE>
Options to purchase 3,806,725 shares under the Plans were outstanding at
December 31, 1993, of which options to purchase 116,642 were fully exercisable.
At December 31, 1993, 307,651 options were available to be issued under the
Plans. The total number of options outstanding outside the Plans as of December
31, 1993 were 736,262, of which options to purchase 383,424 shares were fully
exercisable.
F-9
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
In November, 1993, certain officers of the Company were granted options to
purchase 5,906,250 shares of the Company's common stock at an exercise price of
$14.37 per share, subject to shareholder approval which has not yet been
received. The exercise price of the options is at the fair market value of the
common stock on the date of grant.
In connection with a secondary offering of stock, TeleColumbus U.S.A., Inc.
("TC USA") converted 31,458 shares of its preferred stock into 5,698,256 shares
of common stock. In December 1993, TC USA converted the remaining 2,542 shares
of preferred stock into 460,454 shares of common stock.
In May 1993, the Company sold 4,724,997 shares of Common Stock, of which
proceeds were approximately $51,000,000. In November 1991, the Company sold
7,607,250 shares of Common Stock, the net proceeds of which were $30,598,000.
All share amounts and per share prices have been adjusted to reflect the 5%
stock dividends paid in each of 1991 and 1992 and the 3.15-to-one common stock
split effective on February 4, 1994.
6. INCOME TAXES
As described in Note 1, the Company changed its method of accounting for
income taxes in 1992 from the deferred method to the asset and liability method.
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1991 1992 1993
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal.................................. $ 325,000 $1,097,000 $ 5,304,000
State.................................... 130,000 49,000 2,113,000
---------- ---------- -----------
455,000 1,146,000 7,417,000
Deferred:
Federal.................................. 1,130,000 3,599,000 6,150,000
State.................................... 226,000 1,055,000 719,000
---------- ---------- -----------
1,356,000 4,654,000 6,869,000
---------- ---------- -----------
Total...................................... $1,811,000 $5,800,000 $14,286,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-10
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred income tax assets and (liabilities) resulting from temporary
differences between accounting for financial reporting and tax purposes and the
benefit of net operating loss carryforwards included in the Company's balance
sheet are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1992 1993
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................... $(18,186,000) $(20,900,000)
Other liabilities................................ (543,000) (634,000)
------------ ------------
(18,729,000) (21,534,000)
------------ ------------
Deferred tax assets:
Acquisition basis differences.................... -- 64,570,000
State income taxes............................... 553,000 307,000
Federal and state net operating loss
carryforward.................................... 6,453,000 18,323,000
Alternative minimum tax credit carryforward...... 1,639,000 --
Other assets..................................... 775,000 1,131,000
------------ ------------
9,420,000 84,331,000
------------ ------------
Total.......................................... $ (9,309,000) $ 62,797,000
------------ ------------
------------ ------------
</TABLE>
The acquisition adjustment relates principally to the difference between the
financial statement and income tax basis of the assets and liabilities acquired
in connection with the WorldCom, HIT and TRT acquisitions (see Note 9). The
deferred tax asset has been recorded upon the Company's belief, based upon
available evidence, that the income tax benefit will be realized.
The Company's effective income tax rate differs from the Federal statutory
income tax rate due to the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate.................. 34.0% 34.0% 35.0%
State taxes, net of federal benefit................ 5.0 5.0 5.3
Amortization of goodwill........................... 1.6 .5 1.5
Other, net......................................... (1.6) 1.0 (0.3)
------ ------ ------
Effective tax rate............................... 39.0% 40.5% 41.5%
------ ------ ------
------ ------ ------
</TABLE>
The Company has a net operating loss carryforward for Federal income tax
purposes of $47,366,000 which begin to expire in varying amounts between 2002
and 2008.
7. COMMITMENTS AND CONTINGENCIES AND OTHER
The Company has entered into leases for office space, certain of its ground
facilities, fiber lines and equipment. Rental expense under operating leases was
$3,309,000, $4,227,000, and $15,048,000 for 1991, 1992 and 1993, respectively.
Future minimum lease payments under long-term operating leases and commitments
as of December 31, 1993 are as follows: 1994, $17,369,000; 1995, $15,968,000;
1996, $15,697,000; 1997, $14,869,000; 1998, $8,913,000; thereafter, $54,127,000.
Certain of the Company's facility leases include renewal options, and all
leases include provisions for rent escalation to reflect increased operating
costs and/or require the Company to pay certain maintenance and utility costs.
F-11
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES AND OTHER (CONTINUED)
Under certain transponder agreements, the Company receives favorable rates
if its purchases of transponder space exceed certain minimum requirements. The
Company is charged, and accrues expenses, for transponder space at a price
computed based upon the assumption that its purchases will exceed the minimum
levels. If the Company's subsequent use of transponder space falls below the
minimum levels, the Company will be subject to retroactive charges for the
transponder space. To date, the Company has met all minimum usage requirements.
In May 1990, the Company entered into an agreement under which it may obtain
satellite transponder capacity for maritime and aeronautical services offered by
IDB Mobile at long-term fixed rates over a five-year period which commenced on
September 9, 1991. The minimum remaining total commitment, at December 31, 1993,
of approximately $20,400,000 is subject to increase if the Company does not
perform certain obligations under the agreement.
At December 31, 1993, the Company had outstanding purchase orders and
agreements (some of which are cancelable) to acquire approximately $30,900,000
of equipment, including $20,500,000 in long term commitments for undersea fiber
optic cable.
8. RELATED PARTY TRANSACTIONS
The Company paid approximately $1,000,000 and $3,600,000 related to the use
of aircraft owned by two officers in 1992 and 1993, respectively. The use of the
aircraft was approved by the Board of Directors in both years. During 1991, 1992
and 1993, IDB Mobile made progress payments of $1,750,000, $1,798,000 and
$832,000, respectively, to an entity controlled by two officers of the Company.
The progress payments were made under an agreement, which ended December 31,
1993, to purchase $4,380,000 of satellite transmission equipment for use on
airplanes. In November 1993, the entity paid IDB Mobile $3,441,000 to repurchase
the remaining equipment inventory. Included in prepaid expenses and other
current assets at December 31, 1993, is a $1,400,000 receivable from an officer
of the Company. The receivable bears interest at 5% per annum and was repaid in
March, 1994. Also included in prepaid expenses and other current assets is a
$300,000 receivable from an entity controlled by two officers of the Company.
The amount is due within one year and bears interest at 5% per annum. In 1992,
two officers of the Company borrowed $250,000 each. The loans are due in equal
annual installments of $50,000 each, beginning in December 1993, and bear
interest at 5% per annum.
In August 1993, the Company purchased a $1,500,000 note receivable from a
director of the Company. The note is secured by a deed of trust related to a
facility the Company currently leases. The note receivable bears interest at a
rate of prime plus 3% and is due in December 1995. The Company purchased the
loan for $500,000 in cash and issued a note payable to the director for
$1,000,000. The note payable is due in equal annual installments of $100,000 or
upon demand, and bears interest at a rate of prime plus 2%.
9. ACQUISITIONS
TRT COMMUNICATIONS INC.
In 1993, the Company entered into an Exchange Agreement (the "Exchange
Agreement") with Pacific Telecom, Inc. ("PTI"), and two of its subsidiaries,
International Communications Holdings, Inc. ("ICHI") and PTI Harbor Bay, Inc.
("Harbor Bay"), to acquire all of the outstanding capital stock of TRT
Communications, Inc., a subsidiary of ICHI ("TRT"), and Niles Canyon Earth
Station, Inc. ("Niles Canyon"), a subsidiary of Harbor Bay. Pursuant to the
first phase of the Exchange Agreement, effective January 22, 1993, the Company
issued to ICHI and Harbor Bay a total of 4,095,000 shares of Common Stock
(adjusted for the Stock Split, see Note 5) and acquired all of the outstanding
common stock of Niles Canyon. On September 23, 1993, the Company completed the
F-12
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS (CONTINUED)
second phase of the Exchange Agreement, and issued and paid to ICHI and Harbor
Bay a total of 10,080,000 shares of Common Stock and $1,000,000 in cash in
exchange for all of the outstanding stock of TRT.
During the first phase of the Exchange Agreement, ICHI made loans totalling
$4.4 million to TRT which were repaid by the Company at the closing of the
second phase. Also as part of the Exchange Agreement, the Company agreed to
assist in operations of, and provide certain support services to, TRT and ICHI
for aggregate monthly fees of approximately $1,000,000 per month through the
completion of the second phase of the acquisition. The Company earned
approximately $8,000,000 in such fees in 1993 and in addition charged TRT
$1,088,000 in costs incurred on their behalf.
The purchase price of $80,000,000 represents the $1,000,000 cash plus the
estimated fair market value of the Common Stock of the Company. Additionally,
$27,500,000 in other accrued liabilities and long-term liabilities have been
recorded to reflect direct acquisition costs, estimated costs related to closing
duplicate facilities, employee severance costs and other nonrecurring
duplicative costs expected to be incurred in the integration of TRT into the
operations of the Company. In addition, TRT had a retirement plan and provided
health care and life insurance benefits to eligible retired employees under a
defined post retirement benefit plan. Included in long term liabilities is $19
million which is an estimate of the excess of the accumulated post retirement
benefit obligation over the fair value of the plan assets and other pension
obligations. The Company is in the process of resolving the final status of the
plan and of obtaining an actuarial determination of the ultimate liability. The
acquisition, which was accounted for under the purchase method of accounting,
resulted in a preliminary allocation of approximately $39,000,000 (net of tax
benefits of $41,047,000) to intangible assets, which will be amortized over
periods up to 40 years.
WORLDCOM COMMUNICATIONS, INC.
In 1992, the Company acquired all of the outstanding stock of World
Communications, Inc. ("WorldCom") and Houston International Teleport ("HIT")
from TeleColumbus USA, Inc. ("TC USA"), a subsidiary of TeleColumbus AG, a Swiss
based telecommunications company, in a two-tiered, stock-for-stock transaction.
Pursuant to the first phase of the acquisition, the Company issued to TC USA
3,181,500 shares of Common Stock (adjusted for the Stock Split, see Note 5) in
exchange for 52.02% of the issued and outstanding shares of HIT common stock. In
December 1992, the Company completed the second phase of the acquisition and
acquired the remaining 47.98% of HIT common stock and all of the issued and
outstanding common stock of WorldCom from TC USA in exchange for 9,889,425
shares of Common Stock (adjusted for the Stock Split, see Note 5) and 34,000
shares of the Company's convertible preferred stock ("Preferred Stock"), having
an aggregate liquidation preference of $34,000,000 and an annual cash dividend
yield of 4%. In November 1993, the Common Stock and 31,458 shares of Preferred
Stock (subsequently converted to Common Stock) issued in connection with the
acquisition of WorldCom and HIT were sold by TC USA in a secondary public
offering.
Also as part of the first phase of the acquisition of WorldCom, the Company
agreed to assist in operations of, and provide certain support services to, TC
USA and WorldCom for aggregate monthly fees of approximately $500,000 per month
through the completion of the second phase of the acquisition. The Company
earned approximately $5,000,000 in such fees in 1992. The Company also earned
$2,700,000 in fees for sales and engineering management and support, sold
$327,000 in services to WorldCom and purchased $1,401,000 in transmission
services from WorldCom in 1992.
The purchase price of $59,300,000 represents the fair market value of the
Common Stock and Preferred Stock of the Company discounted to reflect
restrictions on the sale of such stock and
F-13
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS (CONTINUED)
acquisition expenses. Additionally, $26,700,000 in accrued expenses and
long-term liabilities have been included to reflect direct acquisition costs and
estimated costs related to closing duplicate facilities, employee severance
costs and other nonrecurring duplicative costs expected to be incurred in the
integration of WorldCom and HIT into the operations of the Company. The
acquisition, which was accounted for under the purchase method, resulted in an
allocation of $38,600,000 (net of tax benefits of $34,897,000) to intangible
assets, which are being amortized over periods up to 40 years.
The following unaudited pro forma results of continuing operations assume
TRT, HIT and WorldCom were acquired as of the beginning of the respective years
presented after giving effect to certain adjustments including the elimination
of intercompany revenues and expenses among the Company, TRT, Worldcom and HIT,
and certain historical operating and selling, general and administrative
expenses representing duplicate costs to be eliminated upon the integration of
TRT, WorldCom and HIT.
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Revenue............................................. $301,669,000 $457,341,000
Income (loss) available to common shareholders
before extraordinary item.......................... (8,341,000) 17,295,000
Net income (loss) before preferred stock dividend... (8,341,000) 10,578,000
Net income (loss) available to common
shareholders....................................... (8,341,000) 9,346,000
Primary earnings (loss) per share before
extraordinary item................................. ($0.13) $0.26
Fully diluted earnings (loss) per share before
extraordinary item................................. ($0.13) $0.26
Primary earnings (loss) per share................... ($0.13) $0.14
Fully diluted earnings (loss) per share............. ($0.13) $0.14
</TABLE>
The pro forma financial information does not purport to be indicative of the
results of operations that would have occurred had the transactions taken place
at the beginning of the periods presented or of future results of operations.
TC WORLDCOM AG
On December 31, 1993, the Company acquired the remaining 60% interest in TC
WorldCom AG ("WorldCom Europe"), a company that provides public switched and
private line telephone services in Europe, for $10,517,000 in cash. The
acquisition was accounted for under the purchase method. Pro forma information
for this acquisition is not presented as its effect is not significant.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for:
Interest expense............................ $8,757,000 $9,114,000 $8,272,000
Income taxes................................ 72,000 739,000 1,326,000
</TABLE>
In 1993, the Company issued 14,175,000 shares of Common Stock to acquire
100% of the issued and outstanding Common Stock of TRT.
In 1993, 34,000 shares of preferred stock were converted into 6,158,710
shares of common stock (Note 5).
F-14
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
In 1993, the Company purchased the remaining 60% interest in TC WorldCom AG
for $10,517,000. In conjunction with the acquisition, liabilities were assumed
as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................... $ 17,907,000
Cash paid........................................................ (10,517,000)
------------
Liabilities assumed.............................................. $ 7,390,000
------------
------------
</TABLE>
In 1992, the Company issued 13,070,925 shares of Common Stock and 34,000
shares of Preferred Stock to acquire 100% of the issued and outstanding common
stock of World Communications, Inc. and Houston International Teleport.
In 1992, the Company entered into capital leases for equipment totalling
$2,350,000. The Company, in turn, sold the equipment through sales type leases
recording receivables of $3,497,000, unearned interest of $670,000 and a gain on
sale of $477,000.
11. STREAMLINING CHARGE
During 1993, plans were approved to reduce the Company's cost structure and
to improve productivity. Such plan includes a reduction in the number of
employees and the disposition of certain assets. The consolidated statement of
income for 1993 includes a charge of $5,920,000 relating to this program.
F-15
