The following item was the subject of a Form 12b-25 and is included herein:
Item 8.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to HHHHHHHHHHHHHHHHHHHHHH
COMMISSION FILE NUMBER 0-16560
VANGUARD CELLULAR SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
North Carolina 56-1549590
(STATE OR OTHER JURISDICTION OF INCORPORATION ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2002 Pisgah Church Road, Suite 300,
Greensboro, North Carolina 27455-3314
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (910) 282-3690
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The aggregate market value of the registrant's Common Stock held by those
other than executive officers and directors at March 17, 1997, based on the
NASDAQ closing sale price for the Registrant's Common Stock as of such date, was
approximately $446,510,000.
The number of shares outstanding of the issuer's common stock as of March
17, 1997 was 40,764,522.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its
1997 annual meeting of stockholders are incorporated by reference into Part III
as set forth herein. Such proxy statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's fiscal year
ended December 31, 1996.
TABLE OF CONTENTS
PART II
Item 8. Financial Statements and Supplementary Data.................................................................... 1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 1
Signatures............................................................................................................. 2
Index to Financial Statements and Schedules............................................................................ F-1
Exhibit Index
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to consolidated financial
statements of the Registrant and its subsidiaries are included in this report
following the Index to Financial Statements and Schedules. In addition,
Financial Statements of the Registrant's 50% or less owned significant
subsidiaries are included.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. The financial statements and supplemental schedules
listed in the accompanying Index to Financial Statements and Schedules are filed as a part of this report.
(3) EXHIBITS. Exhibits to this report are listed in the accompanying Index to Exhibits.
(b) REPORTS ON FORM 8-K. There were no reports filed on Form 8-K during the fourth quarter of 1996.
1
SIGNATURES
Pursuant to the requirements of the Section 13 and 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
By: /s/ HAYNES G. GRIFFIN
HAYNES G. GRIFFIN
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CO-CHIEF EXECUTIVE OFFICER
Date: April 15, 1997
2
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Vanguard Cellular Systems, Inc. and Subsidiaries
Consolidated Balance Sheets, December 31, 1996 and 1995.............................................................. F-2
Consolidated Statements of Operations for the Years ended December 31, 1996, 1995 and 1994........................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the Years ended
December 31, 1996, 1995 and 1994.................................................................................. F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and 1994........................... F-5
Notes to Consolidated Financial Statements........................................................................... F-6
Report of Independent Public Accountants............................................................................. F-22
Schedule I -- Condensed Financial Information of the Registrant...................................................... F-23*
Schedule II -- Valuation and Qualifying Accounts..................................................................... F-27
Financial Statements of Certain Significant 50% or less Owned Persons.................................................. F-28**
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
* This schedule is being refiled to correct certain errors in the original
filing.
** Financial Statements of two of the Company's significant 50% or less owned
persons were available and filed on March 31, 1997 as part of this report.
Financial Statements for International Wireless Communications Holdings, Inc.
and Subsidiary and PT Rajasa Hazanah Perkasa and Subsidiary are included
herewith. Financial Statements for Syarikat Telefon Wireless, a foreign
business will be filed by June 30, 1997 as permitted by Rule 3-09.
F-1
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
1996 1995
ASSETS
CURRENT ASSETS:
Cash.............................................................................................. $ 11,180 $ 8,085
Accounts receivable, net of allowances for doubtful accounts of $4,617 and $5,823................. 29,907 31,270
Cellular telephone inventories.................................................................... 15,921 8,957
Deferred income tax asset......................................................................... 2,149 --
Prepaid expenses.................................................................................. 2,057 1,498
Total current assets........................................................................... 61,214 49,810
INVESTMENTS......................................................................................... 333,371 306,760
PROPERTY AND EQUIPMENT, at cost:
Land.............................................................................................. 2,432 1,997
Buildings......................................................................................... 584 536
Cellular telephones held for rental............................................................... 30,040 18,814
Cellular telephone systems........................................................................ 295,376 221,281
Office furniture and equipment.................................................................... 62,866 45,222
391,298 287,850
Less -- Accumulated depreciation.................................................................. 119,470 94,057
271,828 193,793
Construction in progress.......................................................................... 41,972 31,413
313,800 225,206
OTHER ASSETS, net of accumulated amortization of $6,965 and $3,390.................................. 22,196 14,801
Total assets................................................................................... $ 730,581 $ 596,577
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................................. $ 65,497 $ 43,147
Customer deposits................................................................................. 1,679 1,666
Total current liabilities...................................................................... 67,176 44,813
LONG-TERM DEBT...................................................................................... 629,954 522,143
MINORITY INTERESTS.................................................................................. -- 573
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock -- $.01 par value, 1,000,000 shares authorized, no shares issued.................. -- --
Common stock, Class A -- $.01 par value, 250,000,000 shares authorized, and 41,084,522 and
41,312,053 shares issued and outstanding....................................................... 411 413
Common stock, Class B -- $.01 par value, 30,000,000 shares authorized, no shares issued........... -- --
Additional capital in excess of par value......................................................... 237,640 238,662
Net unrealized holding loss....................................................................... (14,570) (16,395)
Accumulated deficit............................................................................... (190,030) (193,632)
Total shareholders' equity..................................................................... 33,451 29,048
Total liabilities and shareholders' equity..................................................... $ 730,581 $ 596,577
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-2
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
REVENUE:
Service revenue..................................................................... $282,694 $217,440 $146,417
Cellular telephone equipment revenue................................................ 15,120 15,647 18,529
Other............................................................................... 4,240 2,984 3,055
302,054 236,071 168,001
COSTS AND EXPENSES:
Cost of service..................................................................... 31,678 27,043 21,008
Cost of cellular telephone equipment................................................ 25,372 25,605 29,933
General and administrative.......................................................... 80,057 60,489 44,019
Marketing and selling............................................................... 62,384 54,906 37,102
Depreciation and amortization....................................................... 48,635 36,170 24,073
248,126 204,213 156,135
INCOME FROM OPERATIONS................................................................ 53,928 31,858 11,866
NET GAINS (LOSSES) ON DISPOSITIONS.................................................... 6,716 1,787 (339)
INTEREST EXPENSE...................................................................... (46,199) (38,293) (22,126)
EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES.............................. (13,816) (2,261) 206
OTHER, net............................................................................ 1,680 (101) (3,399)
INCOME (LOSS) BEFORE INCOME TAXES..................................................... 2,309 (7,010) (13,792)
INCOME TAX BENEFIT.................................................................... 4,109 -- --
INCOME (LOSS) BEFORE MINORITY INTERESTS............................................... 6,418 (7,010) (13,792)
MINORITY INTERESTS.................................................................... 31 (3) (153)
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........................................... 6,449 (7,013) (13,945)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT.......................................... -- -- (8,402)
NET INCOME (LOSS)..................................................................... $ 6,449 $ (7,013) $(22,347)
NET INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM................................. $ 0.16 $ (0.17) $ (0.36)
PER SHARE EFFECT OF EXTRAORDINARY ITEM................................................ -- -- (0.22)
NET INCOME (LOSS) PER SHARE........................................................... $ 0.16 $ (0.17) $ (0.58)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................................ 41,320 41,100 38,628
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
ADDITIONAL
COMMON STOCK CAPITAL IN TOTAL
CLASS A EXCESS OF NET UNREALIZED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAR VALUE HOLDING LOSS DEFICIT EQUITY
BALANCE, January 1, 1994...................... 38,398,080 $384 $ 185,786 $ -- $(164,272) $ 21,898
Shares issued upon exercise of stock
options..................................... 210,719 2 1,061 -- -- 1,063
Shares issued for cash........................ 28,576 -- 499 -- -- 499
Shares issued in exchange for cellular
interests................................... 1,891,959 19 47,385 -- -- 47,404
Net unrealized holding loss................... -- -- -- (9,310) -- (9,310)
Net loss...................................... -- -- -- -- (22,347) (22,347)
BALANCE, December 31, 1994.................... 40,529,334 405 234,731 (9,310) (186,619) 39,207
Shares issued upon exercise of stock
options..................................... 755,906 8 3,294 -- -- 3,302
Shares issued for cash........................ 26,813 -- 637 -- -- 637
Net unrealized holding loss................... -- -- -- (7,085) -- (7,085)
Net loss...................................... -- -- -- -- (7,013) (7,013)
BALANCE, December 31, 1995.................... 41,312,053 413 238,662 (16,395) (193,632) 29,048
Shares issued upon exercise of stock
options..................................... 27,190 -- 448 -- -- 448
Shares issued for cash........................ 279 -- 6 -- -- 6
Shares repurchased and retired................ (255,000) (2) (1,476) -- (2,847) (4,325)
Net unrealized holding gain................... -- -- -- 1,825 -- 1,825
Net income.................................... -- -- -- -- 6,449 6,449
BALANCE, December 31, 1996.................... 41,084,522 $411 $ 237,640 $(14,570) $(190,030) $ 33,451
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ 6,449 $ (7,013) $ (22,347)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 48,635 36,170 24,073
Amortization of deferred financing costs....................................... 1,587 1,322 1,334
Equity in losses (earnings) of unconsolidated affiliates....................... 13,816 2,261 (206)
Amortization of bond investment discount....................................... (714) -- --
Minority interests............................................................. (31) 3 153
Net (gains) losses on dispositions............................................. (6,716) (1,787) 339
Deferred income tax benefit.................................................... (5,000) -- --
Extraordinary loss on extinguishment of debt................................... -- -- 8,402
Stock received for management consulting services.............................. (2,087) (2,436) (2,496)
Changes in current items:
Accounts receivable, net..................................................... 1,363 (8,250) (8,974)
Cellular telephone inventories............................................... (6,964) 1,649 (5,744)
Accounts payable and accrued expenses........................................ 10,614 8,363 7,223
Other, net................................................................... (537) (321) 494
Net cash provided by operating activities.................................... 60,415 29,961 2,251
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... (119,077) (136,149) (51,017)
Proceeds from dispositions of property and equipment.............................. 540 380 109
Payments for acquisition of investments........................................... (38,790) (69,908) (54,813)
Proceeds from dispositions of investments......................................... 4,644 1,413 446
Capital contributions to unconsolidated cellular entities......................... (221) (318) (651)
Net cash used in investing activities........................................ (152,904) (204,582) (105,926)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt.............................................. (193,007) -- (334,006)
Repurchase of common stock........................................................ (4,325) -- --
Net proceeds from issuance of common stock........................................ 454 3,939 1,415
Proceeds of long-term debt........................................................ 300,802 173,494 444,500
Debt issuance costs............................................................... (6,914) (124) (11,180)
Increase in other assets.......................................................... (1,426) (348) (407)
Net cash provided by financing activities.................................... 95,584 176,961 100,322
NET INCREASE (DECREASE) IN CASH..................................................... 3,095 2,340 (3,353)
CASH, beginning of year............................................................. 8,085 5,745 9,098
CASH, end of year................................................................... $ 11,180 $ 8,085 $ 5,745
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR FOR:
INTEREST, net of amounts capitalized.............................................. $ 42,579 $ 32,597 $ 21,914
INCOME TAXES...................................................................... 891 -- --
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- ORGANIZATION
Vanguard Cellular Systems, Inc. ("Vanguard") (a North Carolina corporation)
through its only direct subsidiary, Vanguard Cellular Financial Corp. ("VCFC"),
is a provider of cellular telephone service to various markets in the eastern
United States. The majority of Vanguard's operations are conducted in the
Mid-Atlantic SuperSystem covering areas of Pennsylvania, New York and New
Jersey. The primary activities of Vanguard, VCFC, its wholly owned subsidiaries
and its majority owned cellular entities (collectively referred to as the
Company) include acquiring interests in entities that have been granted
nonwireline Federal Communications Commission ("FCC") permits to construct or
authorizations to operate cellular telephone systems, and constructing and
operating cellular telephone systems.
All of the Company's cellular entities operate under the trade name of
CellularONE(Register mark), which is the trade name many nonwireline carriers
have adopted to provide uniformity throughout the industry. The trade name is
owned by a partnership in which the Company holds a minority ownership interest.
Vanguard is a holding company which is the 100% shareholder of VCFC. This
organization was created to structurally subordinate Vanguard's $200 million in
Senior Debentures to VCFC's Credit Facility. (See Note 4 -- Long-Term Financing
Arrangements.)
Note 2 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vanguard,
VCFC, its wholly owned subsidiaries and the entities in which it has a majority
ownership interest. Investments in which the Company exercises significant
influence but does not exercise control through majority ownership have been
accounted for using the equity method of accounting. Investments in which the
Company does not exercise significant influence or control through majority
ownership have been accounted for using the cost method of accounting. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of these consolidated financial statements and footnote
disclosures required the use of certain estimates by management in determining
the Company's financial position and results of operations. Actual results could
differ from those estimates.
CELLULAR TELEPHONE INVENTORIES
Inventories, consisting primarily of cellular telephones held for resale,
are valued at the lower of first-in, first-out (FIFO) cost or market.
INVESTMENTS
INVESTMENTS IN CELLULAR ENTITIES -- Investments in cellular entities
consist of the costs incurred to acquire FCC licenses or interests in entities
that have been awarded FCC licenses to provide cellular service net of the
Company's share of the fair value of the net assets acquired, payments of other
acquisition related expenses and capital contributions to unconsolidated
cellular entities. The Company's investment in consolidated cellular entities is
being amortized over forty years. Exchanges of minority ownership interests in
cellular entities are recorded based on the fair value of the ownership
interests acquired.
INVESTMENTS IN NONCELLULAR ENTITIES -- Investments in noncellular entities
consist of the Company's investments in International Wireless Communications
Holdings, Inc. ("IWC"), Inter(Bullet)Act Systems, Incorporated
("Inter(Bullet)Act") and Geotek Communications, Inc. ("Geotek"). The investments
in IWC and Inter(Bullet)Act are recorded using the equity method. The investment
in Geotek common stock is considered to be "available for sale" under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly, the
Company's investment in the common stock of Geotek is recorded at its fair value
and the investment in other securities of Geotek is recorded at cost.
F-6
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 2 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued
The Company recognizes, only to the extent of its investment, its pro rata
share of the net income or losses generated by the unconsolidated cellular and
noncellular entities carried on the equity method of accounting.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated on
a straight-line basis for financial reporting purposes over the following
estimated useful lives:
Buildings............................................................................... 20 years
Cellular telephones held for rental..................................................... 3 years
Cellular telephone systems.............................................................. 7-20 years
Office furniture and equipment.......................................................... 3-10 years
At December 31, 1996 and 1995, construction in progress was composed
primarily of the cost of uncompleted additions to the Company's cellular
telephone systems in majority owned cellular markets. The Company capitalized
interest costs of $1.3 million, $1.3 million and $684,000 in 1996, 1995 and
1994, respectively, as part of the cost of cellular telephone systems.
Maintenance, repairs and minor renewals are charged to operations as
incurred. Gains or losses at the time of disposition of property and equipment
are reflected in the statements of operations currently.
Cellular telephones are rented to certain customers generally with a
contract for a minimum stipulated length of service. Such customers have the
option to purchase the cellular telephone at any time during the term of the
agreement.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, the Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Under SFAS No. 121, an impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. No such impairment losses
have been identified by the Company.
OTHER ASSETS
Other assets include deferred financing costs which are being amortized
over the period of the related agreements. Amortization of $1.6 million, $1.3
million and $1.3 million has been included in interest expense in each of the
accompanying December 31, 1996, 1995 and 1994 Statements of Operations,
respectively. In addition, payments related to agreements not to compete in
certain cellular markets are being amortized over the period of the related
agreements. As of December 31, 1995, these agreements had been fully amortized.
Amortization expense relating to these agreements of $40,000 and $160,000 has
been included in the accompanying December 31, 1995 and 1994 Statements of
Operations, respectively. Other assets also include $8.2 million allocated to
the acquired customer bases in connection with the acquisitions of the Logan, WV
(WV-6) RSA in August 1996, the Union, PA (PA-8) RSA in January 1995, and the
Binghamton, NY and Elmira, NY MSAs in December 1994. The customer bases are
being amortized over a four-year period and accordingly amortization of $1.8
million and $1.7 million has been included in the accompanying December 31, 1996
and 1995 Statements of Operations, respectively.
REVENUE RECOGNITION
Service revenue is recognized at the time cellular services are provided
and service fees related to prebilled services are not recognized until earned.
Cellular telephone equipment revenues consist primarily of sales of cellular
telephones to subscribers and are recognized at the time equipment is delivered
to the subscriber.
F-7
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 2 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the use of the "asset and
liability method" of accounting for income taxes. Accordingly, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based upon the weighted average
number of common shares outstanding during the year. Stock options have not been
included in the calculation of net income per share for 1996 as their effect
would not be significant, and have not been included in the calculation of net
loss per share for 1995 and 1994 as their effect would be antidilutive.
In February 1997, SFAS No. 128, "Earnings Per Share" was issued. SFAS No.
128 requires presentation of basic earnings per share and diluted earnings per
share and supersedes or amends all previous earnings per share presentation
requirements. Basic earnings per share will be based on income available to
common shareholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share is also based on income available to
common shareholders divided by the sum of the weighted average number of common
shares outstanding and all diluted potential common shares. SFAS No. 128 is
effective for fiscal years ending after December 15, 1997. Earlier adoption is
not allowed and the Company has not determined the impact on its future earnings
per share presentations.
STATEMENTS OF CASH FLOWS
Additional required disclosures of noncash investing and financing
activities for the years ended December 31, 1996, 1995 and 1994 are as follows:
The Company acquired ownership interests in certain cellular entities and
other investments for cash and noncash consideration, as follows (in thousands):
1996 1995 1994
Fair value of investments acquired........................................... $ 57,272 $ 79,710 $105,742
Fair value of noncash consideration given up:
Cellular licenses and interests............................................ 16,395 7,366 882
Issuance of common stock................................................... -- -- 47,551
Stock received for management consulting services............................ 2,087 2,436 2,496
18,482 9,802 50,929
Cash acquisitions of investments............................................. $ 38,790 $ 69,908 $ 54,813
The Company acquired property and equipment for cash and noncash
consideration, as follows:
Cash......................................................................... $119,077 $136,149 $ 51,017
Increase (decrease) in accounts payable...................................... 11,728 (6,255) 11,615
$130,805 $129,894 $ 62,632
F-8
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 3 -- INVESTMENTS
Investments consist of the following as of December 31, 1996 and 1995 (in
thousands).
1996 1995
INVESTMENTS IN CELLULAR ENTITIES:
Consolidated entities:
License cost......................................................................... $300,780 $272,708
Accumulated amortization............................................................. (36,113) (29,546)
264,667 243,162
Entities carried on the equity method:
Cost................................................................................. 10,193 10,193
Accumulated share of earnings........................................................ 2,056 177
12,249 10,370
Entities carried on the cost method..................................................... 9,993 14,262
286,909 267,794
INVESTMENTS IN NONCELLULAR ENTITIES:
Entities carried on the equity method:
Cost................................................................................. 23,823 17,258
Accumulated share of losses.......................................................... (18,239) (2,545)
5,584 14,713
Investments carried as "available for sale":
Cost................................................................................. 37,736 35,648
Net unrealized holding losses........................................................ (14,570) (16,395)
23,166 19,253
Investment in debentures:
At par............................................................................... 18,000 --
Discount............................................................................. (8,389) --
9,611 --
Other equity investments, at cost....................................................... 8,101 5,000
46,462 38,966
$333,371 $306,760
INVESTMENTS IN CELLULAR ENTITIES
The Company continues to expand its ownership of cellular markets through
strategic acquisitions. The Company's significant activity relating to its
cellular investments is discussed below.
In April 1994, the Company completed the acquisition of the Altoona, PA MSA
and the Chambersburg, PA (PA-10) RSA, which are contiguous to its Mid-Atlantic
SuperSystem in exchange for $4.4 million in cash, the exchange of Hagerstown, MD
cellular market and the Company's minority ownership interest in one cellular
market.
The Company purchased in October 1994, for $6.9 million in cash and $3.3
million in the Company's Class A common stock, the Washington, ME (ME-4) RSA and
three of the four counties of the Mason, WV (WV-1) RSA. The Maine RSA is
approximately 40 miles north of the Portland, ME MSA, which is already operated
by the Company. The West Virginia RSA is contiguous to the Company's Charleston,
WV MSA.
In December 1994, the Company purchased the Binghamton, NY MSA and the
Elmira, NY MSA for a purchase price consisting of 1,766,674 shares of the
Company's Class A common stock and $6.1 million in cash. These markets are
contiguous to the Company's Mid-Atlantic SuperSystem.
F-9
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 3 -- INVESTMENTS -- Continued
In January 1995, the Company purchased the Union, PA (PA-8) RSA for a cash
price of $51.3 million. The PA-8 RSA lies in the center of the Company's
Mid-Atlantic SuperSystem and is an operational cellular system. Pro forma
consolidated results of operations, as if the acquisition of the Union, PA RSA
had occurred January 1, 1994, are as follows (in thousands, except per share
data):
YEARS ENDED
DECEMBER 31,
1995 1994
Revenue................................................................................... $236,578 $173,735
Net loss before extraordinary item........................................................ (7,254) (18,155)
Net loss.................................................................................. (7,254) (26,557)
Net loss per share before extraordinary item.............................................. (0.18) (0.47)
Net loss per share........................................................................ (0.18) (0.69)
In December 1995, the Company completed the acquisition of the remaining
13.24% ownership interests in the Harrisburg, PA MSA in exchange for ownership
interests in cellular markets outside its regional metro-clusters and $2.9
million in cash.
In August 1996, the Company acquired the Logan, WV RSA ("WV-6 RSA") for a
cash purchase price of $16.7 million. The WV-6 RSA is contiguous to the
Company's West Virginia markets and its operations are managed as part of its
West Virginia metro-cluster. Pro forma results of operations, as if the
acquisitions of the WV-6 RSA had occurred January 1, 1995 are as follows (in
thousands, except per share data):
YEARS ENDED
DECEMBER 31,
1996 1995
Revenue................................................................................... $304,196 $239,412
Net income (loss)......................................................................... 4,774 (8,790)
Net income (loss) per share............................................................... 0.12 (0.21)
In the third quarter of 1996, the Company acquired the remaining portions
of the State College, PA and Williamsport, PA MSA's and the PA-10 East RSA in
exchange for $2.8 million in cash. These markets are now 100% owned by the
Company.
In October 1996, the Company exchanged certain cellular properties for four
cellular markets contiguous to its Ohio Valley SuperSystem. In this transaction,
the Company received four markets, OH-9 RSA, OH-10 RSA (excluding Perry and
Hocking counties), Parkersburg-Marietta, WV-OH MSA, and the remaining county in
the WV-1 RSA, in exchange for the Company's Orange County, NY cellular market
and ownership interests in several minority owned cellular markets. The Company
surrendered 324,000 POPs in Orange County and 76,000 POPs in minority owned
markets, and added 542,000 POPs to the Ohio Valley SuperSystem. This transaction
was treated principally as an exchange of similar productive assets and,
therefore, the cellular markets received have been recorded at the historical
cost of the Orange County, NY cellular market, increased for the fair value of
the additional minority ownership interests given up.
CELLULAR ENTITIES ON THE EQUITY METHOD
The Company holds an investment in a joint venture known as Eastern North
Carolina Cellular Joint Venture ("ENCCJV"), owned 50% by the Company, created to
acquire, own and operate various cellular markets located primarily in eastern
North Carolina. The underlying net assets of the joint venture consist
principally of its investment in the FCC licenses in the Wilmington, NC and
Jacksonville, NC MSA cellular markets. The Company recognized $1.9 million,
$284,000 and $206,000 as its proportionate share of the ENCCJV earnings during
the years ended December 31, 1996, 1995 and 1994, respectively.
F-10
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 3 -- INVESTMENTS -- Continued
CELLULAR ENTITIES ON THE COST METHOD
The investment balance of approximately $10.0 million at December 31, 1996
represents the Company's investment in approximately 40 cellular markets with
ownership interests ranging from 0.30% to 5.09%. The Company holds these
ownership interests for investment purposes.
NONCELLULAR INVESTMENTS
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND FOREIGN INVESTMENTS
The Company owns approximately 36% of the outstanding stock of IWC and has
invested an aggregate of $13.8 million. IWC is a development stage company
specializing in securing, building and operating wireless businesses, generally
other than cellular telephone systems, primarily in Asia and Latin America.
During 1996, IWC completed the sale of 14% Senior Secured Discount Notes
due 2001, which have been exchanged for identical notes registered with the
Securities and Exchange Commission ("SEC"), and warrants to purchase shares of
IWC common stock. IWC received approximately $100 million in net proceeds from
this financing which will be used to fund existing projects and the exploration
of other opportunities. As existing and new projects are in the network buildout
phase, the losses of IWC are expected to grow significantly in future years. The
Company records its proportionate share of these losses under the equity method
of accounting. During 1995 and 1996, the Company recognized an amount of losses
on the equity method from IWC that is equal to the Company's equity investment
in IWC. As a result, the Company has suspended the recognition of losses
attributable to IWC until such time that the equity method income is available
to offset the Company's share of IWC's future losses.
Subsequent to December 31, 1996, the Company entered into a stock purchase
agreement to purchase from an unrelated third party 7% of the outstanding shares
of Star Digitel Limited ("SDL"), a Hong Kong company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. Pursuant to the
stock purchase agreement, the Company's purchase of such shares will occur in
two closings, which are subject to the satisfaction of certain conditions, for
an aggregate cash consideration of $8.4 million. IWC also recently acquired and
maintains a 40% ownership interest in SDL.
INTER(BULLET)ACT SYSTEMS, INCORPORATED.
As of December 31, 1996, the Company had invested $10.0 million in
Inter(Bullet)Act for an ownership interest of approximately 26%.
Inter(Bullet)Act is a development stage company that provides consumer product
manufacturers and retailers (currently supermarkets) the ability to offer
targeted promotions to retail customers at the point of entry of a retail outlet
through an interactive multi-media system utilizing ATM-like terminals.
During 1996, Inter(Bullet)Act completed the sale of 142,000 units ("Units")
of 14% Senior Discount Notes due 2003, which have been exchanged for identical
notes registered with the SEC and warrants to purchase shares of common stock at
$.01 per share. The Company purchased for $12.0 million a total of 18,000 Units
consisting of $18.0 million principal amount at maturity of these 14% Senior
Discount Notes and warrants to purchase 132,012 shares of common stock. At
issuance, the Company allocated, based upon the estimated fair values, $8.9
million and $3.1 million to the debentures and warrants purchased by the
Company, respectively. The shares issuable upon the exercise of these warrants
currently represent approximately 2% of Inter(Bullet)Act's outstanding common
stock. In addition, an existing warrant held by the Company was restructured
whereby the Company has the right to acquire at any time prior to May 5, 2005 an
aggregate of 900,113 shares of common stock for $23.50 per share, which shares
presently represent approximately 10% of the outstanding common stock of
Inter(Bullet)Act.
Inter(Bullet)Act has incurred net losses since its inception.
Inter(Bullet)Act received approximately $91 million in net proceeds from the
above financing which will be used to accelerate the roll-out of its systems in
retail supermarkets and, as a result, the net losses incurred by
Inter(Bullet)Act are expected to grow significantly in future years. The Company
records its proportionate share
F-11
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 3 -- INVESTMENTS -- Continued
of these losses under the equity method of accounting. The Company anticipates
that during 1997 its cumulative proportionate share of Inter(Bullet)Act losses
will exceed the remaining portion of its investment in Inter(Bullet)Act.
Accordingly the Company will suspend the recognition of losses attributable to
Inter(Bullet)Act until such time that the equity method income is available to
offset the Company's share of Inter(Bullet)Act's future losses.
In addition to the current ownership held by the Company certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter(Bullet)Act. The aggregate amount
of losses recognized on the equity method of accounting for IWC and
Inter(Bullet)Act are $15.7 million and $2.5 million during 1996 and 1995,
respectively.
GEOTEK COMMUNICATIONS, INC.
In 1994, the Company purchased from Geotek 2.5 million shares of Geotek
common stock for $30 million and received a series of options to purchase
additional shares and entered into a management consulting agreement to provide
operational and marketing support in exchange for 300,000 shares of Geotek
common stock per year. The investment in Geotek common shares is presented in
the above table and is accounted for as "available for sale" pursuant to SFAS
No. 115. As such, the investment is recorded as its market value, and a net
unrealized holding loss of $14.6 million has been recorded as a component of
shareholders' equity as of December 31, 1996. In September 1995, the Company
purchased for $5.0 million in cash 531,463 shares of convertible preferred stock
of Geotek with a stated value of $9.408 per share. The preferred stock
investment is accounted for at cost and is included in Other Equity Investments
in the above table. The stock options previously granted to the Company by
Geotek in 1994 have all expired unexercised. The expiration of the options also
resulted in the termination of the management agreement.
Under the management agreement, the Company earned and recorded as revenue
approximately 201,370 shares with an aggregate value of $2.1 million in 1996,
approximately 300,000 shares with an aggregate value of $2.4 million in 1995 and
approximately 250,000 shares with an aggregate value of $2.5 million in 1994.
The Company currently owns less than 5% of Geotek's outstanding common stock.
FINANCIAL INFORMATION OF EQUITY METHOD INVESTEES
Combined financial position and operating results of the Company's equity
method investees, ENCCJV, IWC and Inter(Bullet)Act as well as certain
significant investees of IWC, for the last three years are as follows (in
thousands):
1996 (1) 1995 (2) 1994 (3)
Current assets.................................................................. $161,974 $ 30,040 $ 14,367
Non-current assets.............................................................. 237,507 119,528 52,530
Current liabilities............................................................. 48,397 19,318 6,462
Non-current liabilities......................................................... 254,073 2,701 353
Redeemable convertible preferred stock.......................................... 103,021 98,845 19,578
Minority interest............................................................... 7,360 335 294
Revenues........................................................................ 29,583 14,050 9,386
Gross profit.................................................................... 2,769 10,418 7,265
Loss from operations............................................................ (54,386) (12,787) (2,773)
Net loss........................................................................ (71,730) (15,081) (3,327)
Information for each investee is summarized from the available financial
information for each entity and is presented only for the years in which the
Company maintained an investment.
(1) Includes information for ENCCJV, Inter(Bullet)Act, IWC and two of IWC's
investees for which the Company's attributable indirect ownership was
determined to be significant.
(2) Includes information for ENCCJV, IWC and Inter(Bullet)Act.
(3) Includes information for ENCCJV only.
F-12
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 4 -- LONG-TERM FINANCING ARRANGEMENTS
The Company's long-term financing arrangements consist primarily of a $675
million Credit Facility and $200 million of Senior Debentures due 2006. The
Credit Facility is senior to the Senior Debentures through the use of structured
subordination whereby Vanguard is the borrower on the Senior Debentures and
VCFC, Vanguard's only direct subsidiary, is the primary obligor on the Credit
Facility.
Long-term debt consists of the following as of December 31, 1996 and 1995
(in thousands):
1996 1995
Debt of VCFC:
Borrowings under the Credit Facility:
Term Loan............................................................................ $325,000 $325,000
Revolving Loan....................................................................... 105,000 197,000
Other Long-Term Debt.................................................................... 137 143
430,137 522,143
Debt of Vanguard:
Senior Debentures due 2006, net of unamortized discount of $183......................... 199,817 --
$629,954 $522,143
The future maturities of the principal amount outstanding of all long-term
financing arrangements at December 31, 1996 were as follows (in thousands):
1997...................................................................................... $ --
1998...................................................................................... 24,512
1999...................................................................................... 40,625
2000...................................................................................... 48,750
2001...................................................................................... 65,000
Thereafter................................................................................ 451,250
$630,137
CREDIT FACILITY OF VCFC
In December 1994, the Company completed the closing of a $675 million
credit facility, pursuant to an Amended and Restated Loan Agreement (the "Credit
Facility"), with various lenders led by The Toronto-Dominion Bank and The Bank
of New York.
The Credit Facility is available to provide the Company with additional
financial and operating flexibility and enable it to pursue business
opportunities that may arise in the future. The Credit Facility refinanced the
Company's then existing $390 million credit facility. In connection with the
refinancing, the Company recorded an extraordinary loss of $8.4 million ($0.22
per share) in 1994, which represented the write-off of all unamortized deferred
financing costs related to the refinanced facility.
The Credit Facility consists of a "Term Loan" and a "Revolving Loan." The
Term Loan, in the amount of $325 million, was used to repay the Company's
borrowings under the prior credit facility. The Revolving Loan, in the amount of
up to $350 million, is available for capital expenditures, to make acquisitions
of and investments in cellular and other wireless communication interests, and
for other general corporate purposes. As of December 31, 1996, $105 million had
been borrowed under the Revolving Loan and the terms of these agreements limit
additional available borrowing during the first quarter of 1997 to $54.0
million.
The outstanding amount of the Term Loan as of March 30, 1998 is to be
repaid in increasing quarterly installments commencing on March 31, 1998 and
terminating at the maturity date of December 31, 2003. The quarterly installment
payments begin at 1.875% of the outstanding principal amount at March 30, 1998
and gradually increase to 5.625% at March 31, 2003. The available borrowings
under the Revolving Loan shall be reduced on a quarterly basis also commencing
on
F-13
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 4 -- LONG-TERM FINANCING ARRANGEMENTS -- Continued
March 31, 1998 and terminating on December 31, 2003. The quarterly reduction
begins at 1.875% of the Revolving Loan commitment at March 30, 1998 and
gradually increases to 5.625% on March 31, 2003. The outstanding borrowings
under the Term Loan are due and the Revolving Loan commitment is reduced
quarterly as follows:
PERCENTAGE OF
OUTSTANDING LOANS
1997............................................................................... --%
1998............................................................................... 7.5
1999............................................................................... 12.5
2000............................................................................... 15.0
2001............................................................................... 20.0
2002............................................................................... 22.5
2003............................................................................... 22.5
100.0%
The Term Loan and the Revolving Loan bear interest at a rate equal to the
Company's choice of the Prime Rate or Eurodollar Rate plus an applicable margin
based upon a leverage ratio for the most recent fiscal quarter. The ranges for
this applicable margin are 0.0% to 0.5% for the Prime Rate and 1.0% to 1.75% for
the Eurodollar Rate. As of December 31, 1996 the leverage ratio, which is
computed as the ratio of Total Debt (as defined) to Adjusted Cash Flow (as
defined), was at such a level as to cause the applicable margins on the
borrowings to be 0.0% and 1.125% per annum for the Prime Rate and Eurodollar
Rate, respectively. At December 31, 1996, the Company's effective interest rate
on its outstanding borrowings was 7.65%.
As security for borrowings under the Credit Facility, VCFC has pledged
substantially all of its tangible and intangible assets and future cash flows.
Among other restrictions, the credit facility restricts the payment of cash
dividends, limits the use of borrowings, limits the creation of additional
long-term indebtedness and requires the maintenance of certain financial ratios.
The requirements of the Credit Facility were established in relation to
projected capital needs and projected results of operations and cash flow. These
requirements generally were designed to require continued improvement in
operating performance such that its cash flow would be sufficient to continue
servicing the debt as repayments are required. VCFC is in compliance with all
loan covenants.
SENIOR DEBENTURES OF VANGUARD
On April 10, 1996, Vanguard issued $200 million aggregate principal amount
of 9 3/8% Senior Debentures due 2006 (the "Debentures") through an underwritten
public offering. The Debentures were issued at a price to the public of 99.901
for a yield of 9.384%. The net proceeds from the sale of the Debentures of
approximately $194.8 million were used to reduce borrowings under the Revolving
Loan portion of the Credit Facility and pay approximately $844,000 of expenses
in connection with an amendment to the Credit Facility. The Credit Facility was
amended to permit issuance of the Debentures and to require the structural
subordination of the Debentures by making VCFC the primary obligor of the Credit
Facility and all liabilities of the Company (other than the Debentures) and the
owner of all stock and partnership interests of the Company's operating
subsidiaries. The Debentures mature in 2006 and are redeemable at the Company's
option, in whole or in part, at any time on or after April 15, 2001. There are
no mandatory sinking fund payments for the Debentures. Interest is payable
semi-annually. Upon a Change of Control Triggering Event (as defined in the
Indenture for the Debentures), the Company will be required to make an offer to
purchase the Debentures at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase.
The Debentures require that the Company limit, among other things, the
incurrence of additional indebtedness, the payment of dividends or the
repurchase of Capital Stock, certain distributions and transfers, and certain
asset sales.
F-14
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 4 -- LONG-TERM FINANCING ARRANGEMENTS -- Continued
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains interest rate swaps and interest rate caps which
provide protection against interest rate risk. At December 31, 1996 the Company
had interest rate cap agreements in place covering a notional amount of $100
million. The interest rate cap agreements provide protection to the extent that
LIBOR exceeds the strike level through the expiration date as follows (in
thousands):
STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE
9.00% 50,000 December 1997
9.75 50,000 December 1997
$ 100,000
The total cost of these interest rate cap agreements of $412,500 has been
recorded in other assets in the accompanying consolidated balance sheet and is
being amortized over the lives of the agreements as a component of interest
expense.
Additionally, the Company maintains interest rate swap agreements that fix
the LIBOR interest rate at 6.01% on a notional amount of $50 million through
July 1997. Under these swap agreements, the Company benefits if LIBOR interest
rates increase above the fixed rates and incurs additional interest expense if
rates remain below the fixed rates. Any amounts received or paid under these
agreements are reflected as interest expense over the period covered.
On December 9, 1996, the Company entered into two 10 year reverse interest
rate swaps with notional amounts totaling $75 million. The reverse swaps
effectively convert $75 million of the Debentures into floating rate debt with
interest payable at the six month LIBOR rate plus 3.1%. Simultaneous with this
transaction, the Company purchased an interest rate cap that limits the total
interest on the $75 million to 10% for the first three years should interest
rates rise. The rate for the first six month period is 8.64% or .735% below the
coupon rate on the Debentures.
The effect of interest rate protection agreements on the operating results
of the Company was to increase interest expense by $464,000, $82,000, and
$95,000 in 1996, 1995 and 1994, respectively. The Company does not hold or issue
financial instruments for trading purposes.
Subsequent to December 31, 1996 the Company entered into additional
interest rate protection agreements. The Company purchased interest rate cap
agreements covering a notional amount of $50 million, having a strike level of
7.5% and having an expiration date of February 1999. The total cost of these
agreements was $141,700. Additionally, the Company entered into two 9 year
reverse interest rate swaps with notional amounts totaling $25 million. The
reverse swaps effectively convert $25 million of the Debentures into floating
rate debt with interest payable at the six-month LIBOR rate plus 2.61%.
Simultaneously with this transaction, the Company purchased an interest rate cap
that limits the total interest on the $25 million to 10% for the first three
years. The rate for the first six month period will be set on April 11, 1997
Note 5 -- COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, furniture, equipment, vehicles and land
under noncancelable operating leases expiring through 2019. As of December 31,
1996, the future minimum rental payments under these lease agreements having an
initial or remaining term in excess of one year were as follows (in thousands):
1997...................................................................................... $ 10,623
1998...................................................................................... 10,014
1999...................................................................................... 9,379
2000...................................................................................... 8,913
2001...................................................................................... 8,176
Thereafter................................................................................ 69,705
$116,810
F-15
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 5 -- COMMITMENTS AND CONTINGENCIES -- Continued
Rent expense under operating leases was $9.3 million, $6.6 million, and
$4.2 million for the years ended December 31, 1996, 1995 and 1994, respectively.
CONSTRUCTION AND CAPITAL COMMITMENTS
Capital expenditures for 1997 are estimated to be approximately $120
million for the Company, and are expected to be funded primarily with internally
generated funds.
Note 6 -- INCOME TAXES
Deferred income taxes are provided for the temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities.
The components of net deferred income taxes as of December 31, 1996 and 1995
were as follows (in thousands):
1996 1995
Deferred income tax assets:
Net operating loss carryforwards........................................................ $129,979 $126,684
Property and equipment.................................................................. -- 13,157
Alternative minimum tax credits......................................................... 891 --
Other liabilities and reserves.......................................................... 3,659 811
Valuation allowance..................................................................... (99,215) (81,388)
Total deferred income tax assets................................................... 35,314 59,264
Deferred income tax liabilities:
Investments and other intangibles....................................................... (29,070) (59,264)
Property and equipment.................................................................. (1,244) --
Total deferred income tax liabilities.............................................. (30,314) (59,264)
Net deferred income taxes................................................................. $ 5,000 $ --
The above amounts have been classified in the consolidated balance sheet as
follows (in thousands):
AS OF DECEMBER
31
1996 1995
Deferred income tax assets:
Current.......................................................................... $2,149 $ --
Non-current, included in Other Assets............................................ 2,851 --
$5,000 $ --
Prior to 1996, the Company incurred significant financial reporting and tax
losses primarily as a result of substantial depreciation, amortization and
interest expenses associated with acquiring and developing its cellular markets
and substantial marketing and other operating costs associated with building its
subscriber base. Although substantial net deferred income tax assets were
generated during these periods, a valuation allowance was established because in
management's assessment the historical operating results made it uncertain
whether the net deferred income tax assets would be realized.
Since inception, the Company has steadily increased its subscriber base and
improved its revenues and operating results at rates consistent with
management's annual internal forecasts. For example, its reported operating
results have improved from an $8.1 million loss from operations in 1992 to $53.9
million of income from operations in 1996. Similarly, pretax results (before
extraordinary items) reflect earnings of $2.3 million in 1996 compared to losses
of $7.0 million and $13.9 million in 1995 and 1994, respectively. Improvements
in the Company's reported taxable income have generally lagged the financial
reporting results; however, this gap is expected to narrow in future periods as
a result of management tax planning and the expected timing of capital
expenditures.
F-16
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 6 -- INCOME TAXES -- Continued
The Company achieved profitability in 1996 for financial reporting
purposes, and management expects improvements in operating results in 1997 and
future periods. Although the Company's ongoing operations have generated Federal
taxable losses since inception, it expects taxable income in 1997 and future
periods. The Company's ability to achieve these expected future financial
reporting and income tax results is dependent on numerous factors, including
general economic conditions, the level of competition from PCS and other service
providers and other factors beyond management's control. Therefore, there can be
no assurance that the Company will achieve improvements in its results of
operations.
In assessing the realizability of the Company's net deferred income tax
assets at December 31, 1996, management considered its historical operating
trends in relation to management expectations of those results, forecasts of
future taxable income and the risks and uncertainties discussed above. Because
of these risks and uncertainties, management concluded that forecasts could be
made with enough certainty to recognize net deferred income tax assets only over
a relatively short-term period. Based upon this analysis, management concluded
that it is "more likely than not" that $5.0 million of its $104.2 million of net
deferred income tax assets at December 31,1996 will be realized. A valuation
allowance of $99.2 million has been provided for the remainder of the Company's
net deferred income tax assets. The Company will continue to assess the
recognition of additional net deferred income tax assets based on its ongoing
evaluation of its actual performance and ability to estimate future performance.
The unrecognized portion of the Company's net deferred income tax assets at
December 31, 1996 includes deferred income tax assets totaling $41.5 million
relating to the net unrealized holding loss on the investment in Geotek and to
additional income tax deductions arising from restricted stock bonuses, stock
options and stock purchase warrants. To the extent the tax benefit of these
amounts is realized in future years, the benefit will be recorded as a direct
addition to shareholders' equity.
The Company's 1996 income tax benefit of $4.1 million includes a current
provision of $891,000 for Federal alternative minimum taxes offset by the
deferred income tax benefit discussed above. In 1995 and 1994, the Company
reported no Federal income tax provision because of the reported losses for
financial reporting and income tax purposes. State income tax planning
strategies have been implemented such that no state income tax provision has
been required for any period.
A reconciliation between income taxes computed at the statutory Federal
rate of 35% and the reported income tax benefit is as follows (in thousands):
DECEMBER 31,
1996 1995 1994
Amount at statutory Federal rate..................................... $ 808 $(2,454) $(4,827)
Net benefit of tax planning strategies............................... (20,814) (9,877) --
Other................................................................ (2,748) 2,779 1,275
Change in valuation allowance........................................ 18,645 9,552 3,552
Income tax benefit................................................... $ (4,109) $ -- $ --
In 1996 and 1995, the Company executed certain tax planning strategies that
had the effect of increasing the total net deferred income tax assets. These
transactions generally resulted in the current utilization of net operating loss
carryforwards in exchange for the creation of income tax basis that will be
deductible in future periods. The realizability of these additional net deferred
tax amounts was evaluated by the Company in the manner discussed above.
The net unrealized holding losses on the investment in Geotek and the
additional income tax deductions arising from the exercise of stock options
created additional net deferred income tax assets of $10.4 million in 1995. The
1996 change in the unrealized holding loss reduced net deferred income tax
assets by $818,000. The valuation allowance has been adjusted to fully offset
these changes in the net deferred income tax asset.
For Federal income tax reporting purposes, the Company had net operating
loss carryforwards of approximately $315 million at December 31, 1996. These
losses may be used to reduce future taxable income, if any, and expire through
2010.
F-17
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 6 -- INCOME TAXES -- Continued
The primary differences between the accumulated deficit for financial reporting
purposes and the income tax loss carryforwards relate to the differences in the
treatment of certain deferred cellular license acquisition costs, certain gains
on dispositions of cellular interests, partnership losses, depreciation methods,
estimated useful lives and compensation earned under the stock compensation
plan. These carryforwards may be subject to annual limitation in the future in
accordance with the Tax Reform Act of 1986 and the ability to use these
carryforwards could be significantly impacted by a future "change of control" of
the Company. The limitations, if any, arising from such future "change in
control" cannot be known at this time.
Note 7 -- CAPITAL STOCK
COMMON STOCK
In July 1994, the Board of Directors declared a 3 for 2 stock split of the
Company's Class A common stock which was effected in the form of a dividend paid
to shareholders of record on August 24, 1994 with cash paid for resultant
fractional shares. The effect of the split has been retroactively applied to all
Class A common stock and per share amounts disclosed in the accompanying
financial statements and footnotes.
ACQUISITION OF CELLULAR INTERESTS
The Company has registered 4,500,000 shares of its Class A common stock and
3,000,000 shares of its Class B common stock. The shares may be offered in
connection with the acquisition of entities which have received or may receive
an authorization or license from the FCC to provide cellular service. Through
December 31, 1996, 2,707,957 of these registered shares of Class A common stock
have been issued in conjunction with the acquisition of cellular markets.
STOCK COMPENSATION PLANS
During 1994, the Board adopted the 1994 Long-Term Incentive Plan (the 1994
Plan). Under the provisions of the 1994 Plan, the Company may grant up to
3,000,000 shares of the Company's Class A common stock to officers, directors
and key employees in the form of nonqualified stock options, incentive stock
options, stock appreciation rights, unrestricted stock, restricted stock and
performance shares. All stock options must require exercise prices of not less
than the fair market value of the Company's Class A common stock on the date of
the grant, except that certain incentive stock options must require exercise
prices of not less than 110% of fair market value of the Company's Class A
common stock on the date of the grant. Options granted under the 1994 Plan may
not have a term greater than ten years from the date of grant and are not
transferable except upon death. As of December 31, 1996, 21,575 shares were
available for future grants.
Upon adoption of the 1994 Plan, the Company's previously adopted stock
option and stock compensation plans were terminated. Options granted and
outstanding under these previous plans are still exercisable, but no further
grants may be made under these plans.
RESTRICTED STOCK BONUSES
During 1987, the Board granted restricted stock bonuses for a total of
3,469,554 shares of Class A common stock (i) to three key officers for 1,077,768
shares each and (ii) to a director and a key employee for an aggregate of
236,250 shares. In the event of a change in control of the Company prior to
December 31, 1998, the participants will be reimbursed for certain individual
income tax payments, as defined, on the shares vesting after February 1991. As
of December 31, 1996, all of the shares have vested.
STOCK OPTIONS
Under the terms of the Company's previous and current stock compensation
plans, the Board has granted incentive stock options and nonqualified stock
options requiring exercise prices approximating the fair market value of the
Company's Class A common stock on the date of the grant.
In January 1997, the Board of Directors authorized the cancellation of
certain options with higher exercise prices and the reissuance of fewer options
at a lower exercise price. Options for 896,000 shares with exercise prices
ranging from $24.75 to
F-18
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 7 -- CAPITAL STOCK -- Continued
$25.125 were canceled and new options for 717,200 shares with an exercise price
of $15.69 were issued. In addition, options for 1,403,750 shares with an
exercise price ranging from $21.50 and $21.625 were canceled and new options for
1,263,375 shares with an exercise price of $15.69 were issued. The exercise
price for all of these new options reflects the fair market value at the time of
issuance.
Stock option activity under the plans was as follows:
NUMBER OF SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE
Balance, January 1, 1994..................................................... 2,862,425 $11.41
Granted...................................................................... 1,140,743 20.73
Exercised.................................................................... (210,719) 5.05
Forfeited.................................................................... (15,332) 15.47
Balance, December 31, 1994................................................... 3,777,117 14.57
Granted...................................................................... 907,500 25.12
Exercised.................................................................... (760,765) 4.36
Forfeited.................................................................... (20,750) 19.06
Balance, December 31, 1995................................................... 3,903,102 18.96
Granted...................................................................... 1,331,925 18.40
Exercised.................................................................... (27,190) 16.56
Forfeited.................................................................... (6,450) 24.57
Balance, December 31, 1996................................................... 5,201,387 $18.82
Of the total options outstanding at December 31, 1996, 2,871,637 have an
exercise price in the range of $13.17 and $19.25 with a weighted-average
exercise price of $15.58 and a weighted-average contractual life of 6.6 years.
1,907,484 of those options are exercisable at December 31, 1996. 2,314,750 of
the total outstanding options at December 31, 1996 have an exercise price in the
range of $21.50 and $25.13 with a weighted-average exercise price of $22.94 and
a weighted-average contractual life of 8.2 years. 10,000 of those options are
exercisable at December 31, 1996. The remaining 15,000 options have an exercise
price of $2.22 and a one year remaining contractual life. All of those options
are exercisable at December 31, 1996.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. SFAS No. 123 encourages companies to adopt the fair value method for
compensation expense recognition related to employee stock options. Existing
accounting requirements of Accounting Principles Board Opinion No. 25 ("APB No.
25") use the intrinsic value method in determining compensation expense which
represents the excess of the market price of the stock over the exercise price
on the measurement date. The Company elected to remain under the APB No. 25
rules for stock options, and is required to provide pro forma disclosures of
what net income and earnings per share would have been had the Company adopted
the new fair value method for recognition purposes. The following information is
presented as if the Company had adopted SFAS No. 123 and restated its results
(in thousands, except per share data):
1996 1995
Net income (loss):
As reported........................................................ $6,449 $ (7,013)
Pro forma.......................................................... $ 163 $(11,056)
Net income (loss) per share:
As reported........................................................ $ 0.16 $ (0.17)
Pro forma.......................................................... $ -- $ (0.27)
For the above information, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in fiscal 1996 and 1995, respectively:
risk free rates of
F-19
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 7 -- CAPITAL STOCK -- Continued
6.0% to 6.6% and 6.5% to 7.4%, expected volatility of 35% and 30%, and expected
lives of 7 years in both years. The weighted-average grant date fair value of
options granted during 1996 and 1995 was $9.19 and $12.45, respectively.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the above pro forma amounts may not be
representative of the compensation costs to be expected in future years.
SHARES RESERVED FOR ISSUANCE
At December 31, 1996, 5,222,962 shares of the Company's Class A common
stock are reserved for exercise and grant under the Company's stock compensation
plans. In addition, 1,792,043 shares of Class A common stock and 3,000,000
shares of Class B common stock are reserved for issuance in conjunction with the
acquisition of cellular interests discussed above.
SHARE REPURCHASE
On November 11, 1996, the Company's Board of Directors authorized the
repurchase of up to 2,500,000 shares of its Class A Common Stock from time to
time in open market or other transactions. As of December 31, 1996 the Company
had repurchased 255,000 shares of its Class A Common Stock at an average price
of approximately $17.00.
Note 8 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were composed of the following at
December 31, 1996 and 1995 (in thousands):
1996 1995
Accounts payable............................................................................ $42,775 $25,451
Accrued expenses:
Interest.................................................................................. 6,279 4,631
Payroll and commissions................................................................... 10,449 7,880
Other..................................................................................... 5,994 5,185
$65,497 $43,147
Note 9 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments for which it is practicable to
estimate that value:
CELLULAR ENTITIES CARRIED ON THE COST METHOD -- The fair value of these
instruments is estimated based upon recent transactions from this portfolio.
INVESTMENT IN GEOTEK -- The fair value of publicly-traded securities is
based upon quoted market price. The fair value of the remaining securities
approximates the carrying value.
INTER(BULLET)ACT DEBENTURES AND WARRANTS -- The fair value of the combined
investment in Inter(Bullet)Act debentures and warrants is based upon the quoted
market price.
INTEREST RATE PROTECTION AGREEMENTS -- The fair value of interest rate cap
and swap agreements is based on quoted market prices as if the agreements were
entered into on the measurement date.
BORROWINGS UNDER CREDIT FACILITY -- The fair value of the borrowings under
the VCFC Credit Facility approximates the carrying value.
VANGUARD SENIOR DEBENTURES -- The fair value of the Vanguard Senior
Debentures is based upon quoted market price.
F-20
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 9 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
The estimated fair values of the Company's financial assets (liabilities)
are summarized as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
Cellular entities carried on the cost method................... $ 9,993 $ 21,038 $ 13,853 $ 24,300
Investment in Geotek........................................... 28,166 28,166 24,253 24,253
Inter(Bullet)Act debentures and warrants....................... 12,712 9,000 -- --
Interest rate protection agreements............................ 137 (2,114) 380 (400)
Borrowings under Credit Facility............................... (430,000) (430,000) (522,000) (522,000)
Senior Debentures of Vanguard.................................. (199,817) (202,000) -- --
Note 10 -- QUARTERLY INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
1996 QUARTERS FIRST SECOND THIRD FOURTH TOTAL
Revenue............................................................... $66,017 $75,621 $79,623 $80,793 $302,054
Income from operations................................................ 11,872 16,861 17,600 7,595 53,928
Net income (loss)..................................................... 2,621 4,772 2,888 (3,832) 6,449
Net income (loss) per share........................................... 0.06 0.12 0.07 (0.09) 0.16
1995 QUARTERS FIRST SECOND THIRD FOURTH TOTAL
Revenue............................................................... $49,817 $58,754 $62,704 $64,796 $236,071
Income from operations................................................ 1,963 7,928 13,805 8,162 31,858
Net income (loss)..................................................... (7,157) (1,327) 3,291 (1,820) (7,013)
Net income (loss) per share........................................... (0.18) (0.03) 0.08 (0.04) (0.17)
F-21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vanguard Cellular Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Vanguard
Cellular Systems, Inc. (a North Carolina corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vanguard Cellular Systems,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
consolidated financial statements and schedules are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. The schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
February 26, 1997.
F-22
VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED PARENT COMPANY BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1996 1995
ASSETS
Cash............................................................................................. $ 586 $ --
Investments...................................................................................... 230,970 29,048
Other Assets, net of accumulated amortization of $450............................................ 5,552 --
Total assets.............................................................................. $ 237,108 $ 29,048
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued interest................................................................................. $ 3,840 $ --
Long-Term Debt, net of discount of $183.......................................................... 199,817 --
Total liabilities......................................................................... 203,657 --
Shareholders' Equity:
Preferred stock -- $.01 par value, 1,000,000 shares authorized, no shares issued............... -- --
Common stock, Class A -- $.01 par value, 250,000,000 shares authorized, 41,084,522 and
41,312,053 shares issued and outstanding.................................................... 411 413
Common stock, Class B -- $.01 par value, 30,000,000 shares authorized, no shares issued........ -- --
Additional capital in excess of par value...................................................... 237,640 238,662
Net unrealized holding loss.................................................................... (14,570) (16,395)
Accumulated deficit............................................................................ (190,030) (193,632)
Total shareholders' equity................................................................ 33,451 29,048
Total liabilities and shareholders' equity................................................ $ 237,108 $ 29,048
The accompanying notes to condensed parent company financial statements are an
integral part of these balance sheets.
F-23
VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER
31,
1996 1995 1994
Interest expense............................................................................ $(13,940) $ -- $ --
Equity in earnings (losses) of Vanguard Cellular Financial Corp............................. 20,389 (7,013) (22,347)
Net income (loss)........................................................................... $ 6,449 $(7,013) $(22,347)
The accompanying notes to condensed parent company financial statements are an
integral part of these statements.
F-24
VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................................... $ 6,449 $(7,013) $ (22,347)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred debt issuance costs...................................... 450 -- --
Equity in earnings (losses) of Vanguard Cellular Financial Corp................... (20,389) 7,013 22,347
Amortization of bond investment discount 15 -- --
Change in accrued interest........................................................ 3,840 -- --
Net cash used in operating activities........................................... (9,635) -- --
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from dividends of investee.................................................. 13,960 -- --
Investment in Vanguard Cellular Financial Corp....................................... (193,668) (3,939) (1,415)
Net cash used in investing activities........................................... (179,708) (3,939) (1,415)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock........................................... 454 3,939 1,415
Repurchase of stock.................................................................. (4,325) -- --
Proceeds of long-term debt........................................................... 199,802 -- --
Debt issuance costs.................................................................. (6,002) -- --
Net cash provided by financing activities....................................... 189,929 3,939 1,415
NET INCREASE IN CASH................................................................... 586 -- --
CASH, BEGINNING OF YEAR................................................................ -- -- --
CASH, END OF YEAR...................................................................... $ 586 $-- $ --
The accompanying notes to condensed parent company financial statements are an
integral part of these statements.
F-25
VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. PRESENTATION
These condensed financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
2. ORGANIZATION
Vanguard Cellular Systems, Inc. ("Vanguard") is a holding company which is
the 100% shareholder of Vanguard Cellular Financial Corp. ("VCFC"). This
organization was created in April 1996 to structurally subordinate Vanguard's
$200 million in Senior Debentures to VCFC's Credit Facility. Prior to that time,
operations of the Company were conducted by Vanguard. For purposes of this
condensed financial information, the reorganization has been treated in a manner
similar to a pooling-of-interests. As a result, this condensed financial
information has been prepared as if Vanguard were a holding company in all
periods.
3. LONG-TERM DEBT
On April 10, 1996, Vanguard issued $200 million aggregate principal amount
of 9 3/8% Senior Debentures due 2006 (the "Debentures") through an underwritten
public offering. The Debentures were issued at a price to the public of 99.901
for a yield of 9.384%. The net proceeds from the sale of the Debentures of
approximately $194.8 million were contributed to VCFC primarily to reduce
borrowings under the VCFC Credit Facility and were used by Vanguard to pay other
expenses. The VCFC Credit Facility was amended to permit issuance of the
Debentures and require the structural subordination of the Debentures by making
VCFC the primary obligor of the Credit Facility and all liabilities of Vanguard
(other than the Debentures) and the owner of all stock and partnership interests
of Vanguard's operating subsidiaries. The Debentures mature in 2006 and are
redeemable at Vanguard's option, in whole or in part, at any time on or after
April 15, 2001. There are no mandatory sinking fund payments for the Debentures.
Interest is payable semi-annually. Upon a Change of Control Triggering Event (as
defined in the Indenture for the Debentures), Vanguard will be required to make
an offer to purchase the Debentures at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase.
The Debentures require that Vanguard and its subsidiaries limit, among
other things, the incurrence of additional indebtedness, the payments of
dividends or the repurchase of Capital Stock, certain distributions and
transfers, and certain asset sales.
4. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL DISCLOSURES.
F-26
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE PROVISION
AT CHARGED TO
BEGINNING COSTS AND
OF PERIOD EXPENSES DEDUCTIONS(1) OTHER(2)
Allowance for doubtful accounts:
Year ended December 31, 1994................................... $ 1,771 $3,059 $(2,134) $ 65
Year ended December 31, 1995................................... 2,761 6,166 (3,154) 50
Year ended December 31, 1996................................... 5,823 5,860 (7,113) 47
BALANCE AT
END OF
PERIOD
Allowance for doubtful accounts:
Year ended December 31, 1994................................... $2,761
Year ended December 31, 1995................................... 5,823
Year ended December 31, 1996................................... 4,617
(1) Accounts written off during the period.
(2) Represents allowance for doubtful accounts for entities acquired during the
period.
F-27
INDEPENDENT AUDITORS' REPORT
The Board of Directors
International Wireless Communications Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
International Wireless Communications Holdings, Inc. and subsidiary ("IWC
Holdings") as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of IWC Holdings'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of PT Rajasa Hazanah Perkasa ("RHP"), an investment which is
reflected in the accompanying consolidated financial statements using the
equity method of accounting as of and for the years ended December 31, 1995
and 1996 (see Note 5). The investment in this company represents 25% and 17%
of consolidated assets as of December 31, 1995 and 1996, respectively. The
equity in its net loss was approximately $1,310,000 and $4,746,000 for the
years ended December 31, 1995 and 1996, respectively. Those statements were
audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for that company, is
based on the report of other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, based on our audit and the report of other auditors
for 1995 and 1996, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IWC
Holdings as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Jose, California
April 11, 1997
F-28
INDEPENDENT AUDITORS' REPORT
REPORT NO. 27181S
The Board of Directors and Stockholders
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
We have audited the consolidated balance sheets of PT Rajasa Hazanah
Perkasa and Subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income and deficit and cash flows for the years
then ended (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards
established by the Indonesian Institute of Accountants, which are
substantially similar to the generally accepted auditing standards in the
United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PT
Rajasa Hazanah Perkasa and its subsidiary as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles in the
Republic of Indonesia.
Generally accepted accounting principles in Indonesia vary in certain
respects with those in the United States of America. A description of the
significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net income and
stockholders' equity are set forth in Notes 22 and 23 to the consolidated
financial statements (not presented separately herein).
PRASETIO, UTOMO & CO.
Drs M.P. Sibarani
License No. SI.570/MK.17/1993
March 24, 1997
F-29
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(In thousands, except share data)
ASSETS
1995 1996
---- ----
Current assets:
Cash and cash equivalents................ $25,398 $41,657
Accounts receivable...................... -- 348
Notes receivable from affiliates......... 338 813
Note receivable.......................... -- 1,431
Advances to affiliate.................... 728 99
License deposit.......................... -- 5,255
Investment in affiliate held for sale.... -- 2,062
Other current assets..................... 387 2,743
-------- --------
Total current assets................. 26,851 54,408
Property and equipment, net................ 4,269 18,426
Investments in affiliates.................. 52,280 68,394
Telecommunication licenses and other
intangibles, net......................... 12,186 18,484
License deposit............................ -- 3,042
Debt issuance costs, net................... -- 6,431
Other assets............................... 57 173
-------- --------
Total assets......................... $95,643 $169,358
-------- --------
-------- --------
LIABILITIES, MINORITY INTERESTS, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.... $5,757 $7,313
Notes payable to related party........... 1,800 --
Note payable............................. 4,000 --
-------- --------
Total current liabilities............ 11,557 7,313
Long-term debt, net........................ -- 75,466
-------- --------
Total liabilities.................... 11,557 82,779
Minority interests in consolidated
subsidiaries............................. -- 5,685
Redeemable convertible preferred stock, $.01
par value per share; 21,541,480 shares
designated; 15,698,400 and 15,973,200
shares issued and outstanding in 1995 and
1996, respectively; net of note receivable
from stockholder of $26 in 1995 and 1996;
liquidation and minimum redemption value
of $107,399 in 1996...................... 98,845 103,021
Commitments and contingencies (Note 13)
Stockholders' deficit:
Convertible preferred stock, $.01 par
value per share; 1,200,000 shares
designated; 1,200,000 and 933,200
shares issued, and outstanding in 1995
and 1996, respectively; liquidation
value of $793.......................... 12 9
Common stock, $.01 par value per share;
26,000,000 shares authorized;
328,000 and 636,720 shares issued and
outstanding in 1995 and 1996,
respectively........................... 3 6
Additional paid-in capital................. 749 31,060
Note receivable from stockholder........... (152) (152)
Unrealized gain on investments............. -- 68
Cumulative translation adjustment.......... (1) 271
Accumulated deficit........................ (15,370) (53,389)
-------- --------
Total stockholders' deficit.......... (14,759) (22,127)
-------- --------
Total liabilities, minority
interests, redeemable convertible
preferred stock and stockholders'
deficit............................ $95,643 $169,358
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
F-30
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(In thousands)
1994 1995 1996
---- ---- ----
Operating revenue ................. $- $- $869
Cost of revenue - - 1,948
------- -------- --------
- - (1,079)
Operating expenses:
Selling, general and
administrative expenses ...... 2,481 6,365 17,333
Equity in losses of affiliates . - 3,756 11,783
Minority interests in losses of
consolidated subsidiaries .... - - (275)
------- -------- --------
Loss from operations ...... (2,481) (10,121) (29,920)
Other income (expense):
Interest income ................ 106 232 1,823
Interest expense ............... (115) (1,354) (6,790)
Other .......................... (13) (28) (1,021)
------- -------- --------
Net loss ..................$(2,503) $(11,271) $(35,908)
------- -------- --------
------- -------- --------
See accompanying notes to consolidated financial statements.
F-31
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(In thousands, except share data)
Note
Convertible Additional receivable
preferred stock Common Stock paid-in from
--------------------------- ------------------------------
Shares Amount Shares Amount capital stockholder
------------- ------------ ---------------- ------------ --------------- ----------------
Balances as of December 31,
1993......................... 1,229,240 $ 11 1,200,000 $ 12 $ 1,407 $ -
Conversion of Series A
preferred stock to
Series B redeemable
preferred stock............. (1,229,240) (11) - - (933) -
Conversion of common
stock to Series A
preferred stock............. 1,200,000 12 (1,200,000) (12) - -
Issuance of common stock..... - - 76,080 1 151 (152)
Accretion of redeemable
preferred stock............. - - - - - -
Net loss..................... - - - - - -
------------- ------------ ---------------- ------------ --------------- ----------------
Balances as of December 31,
1994......................... 1,200,000 12 76,080 1 625 (152)
Issuance of common stock..... - - 251,920 2 124 -
Accretion of redeemable
preferred stock............. - - - - - -
Foreign currency
translation................. - - - - - -
Net loss..................... - - - - - -
------------- ------------ ---------------- ------------ --------------- ----------------
Balances as of December 31,
1995......................... 1,200,000 12 328,000 3 749 (152)
Conversion of Series A
preferred stock to
common stock................ (266,800) (3) 266,800 3 - -
Exercise of stock options.... - - 41,920 - 11 -
Issuance of warrants......... - - - - 30,300 -
Unrealized gain on
investments................. - - - - - -
Foreign currency
translation................. - - - - - -
Accretion of redeemable
preferred stock............. - - - - - -
Net loss..................... - - - - - -
------------- ------------ ---------------- ------------ --------------- ----------------
Balances as of December 31,
1996......................... 933,200 $ 9 636,720 $ 6 $ 31,060 $ (152)
------------- ------------ ---------------- ------------ --------------- ----------------
------------- ------------ ---------------- ------------ --------------- ----------------
Total
Unrealized Cumulative stockholders'
gain on translation Accumulated equity
investments adjustment deficit (deficit)
-------------- ------------ ------------------ -------------
Balances as of December 31,
1993......................... $ - $ - $ (1,005) $ 425
Conversion of Series A
preferred stock to
Series B redeemable
preferred stock............. - - - (944)
Conversion of common
stock to Series A
preferred stock............. - - - -
Issuance of common stock..... - - - -
Accretion of redeemable
preferred stock............. - - (132) (132)
Net loss..................... - - (2,503) (2,503)
------------- ------------ ---------------- ------------
Balances as of December 31,
1994......................... - - (3,640) (3,154)
Issuance of common stock..... - - - 126
Accretion of redeemable
preferred stock............. - - (459) (459)
Foreign currency
translation................. - (1) - (1)
Net loss..................... - - (11,271) (11,271)
------------- ------------ ---------------- ------------
Balances as of December 31,
1995......................... - (1) (15,370) (14,759)
Conversion of Series A
preferred stock to
common stock................ - - - -
Exercise of stock options.... - - - 11
Issuance of warrants......... - - - 30,300
Unrealized gain on
investments................. 68 - - 68
Foreign currency
translation................. - 272 - 272
Accretion of redeemable
preferred stock............. (2,111) (2,111)
Net loss..................... (35,908) (35,908)
------------- ------------ ---------------- ------------
Balances as of December 31,
1996......................... $ 68 $ 271 $ (53,389) $ (22,127)
------------- ------------ ---------------- ------------
------------- ------------ ---------------- ------------
See accompanying notes to consolidated financial statements.
F-32
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1994, 1995 AND 1996
(In thousands)
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
Net loss ................................................ $(2,503) $(11,271) $(35,908)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation .......................................... 15 37 732
Amortization of telecommunication licenses and other
intangibles ......................................... 40 294 1,103
Amortization of debt issuance costs ................... - - 369
Amortization of long-term debt discount ............... - - 5,764
Equity in losses of affiliates ........................ - 3,756 11,783
Minority interest in losses of consolidated subsidiaries - - 275
Unrealized gain on investments ........................ - - 68
Changes in operating assets and liabilities:
Accounts receivable ................................ - - (138)
Other current assets ............................... 5 (350) (2,342)
Accounts payable and accrued expenses .............. 45 5,557 1,246
-------- -------- --------
Net cash used in operating activities ............ (2,398) (1,977) (17,048)
-------- -------- --------
Cash flows from investing activities:
Issuances of notes receivable from affiliates ......... - - (1,058)
Repayment of notes receivable from affiliates ......... (2,245) (113) 583
Issuance of note receivable ........................... - - (3,231)
Repayment of note receivable .......................... - - 1,800
Advances to affiliate ................................. - (728) (1,921)
Purchases of property and equipment ................... (88) (4,218) (8,657)
Purchase of TeamTalk Limited .......................... - - (3,198)
Investments in affiliates ............................. (3,704) (19,589) (31,943)
Minority interest in consolidated subsidiaries ........ - - 5,410
Purchase of telecommunication licenses
and other intangibles ................................ - (12,153) (5,772)
License deposits ...................................... - - (8,297)
Other assets .......................................... (169) 70 100
-------- -------- --------
Net cash used in investing activities ............ (6,206) (36,731) (56,184)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable ............... 5,180 28,138 -
Repayment of notes payable ............................ (2,060) (2,050) (4,000)
Net proceeds from issuance of stock and warrants ...... 15,122 27,720 30,300
Proceeds from revolving credit facility ............... - - 7,000
Repayment of revolving credit facility ................ - - (7,000)
Exercise of stock options ............................. - - 11
Debt issuance costs ................................... - - (6,800)
Proceeds from issuance of long-term debt .............. - - 69,702
-------- -------- --------
Net cash provided by financing activities ........ 18,242 53,808 89,213
-------- -------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents ................................... - - 278
-------- -------- --------
Net increase in cash and cash equivalents ................ 9,638 15,100 16,259
Cash and cash equivalents at beginning of year ........... 660 10,298 25,398
-------- -------- --------
Cash and cash equivalents at end of year ................. $10,298 $25,398 $41,657
-------- -------- --------
-------- -------- --------
F-33
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1994, 1995 AND 1996
(In thousands)
1994 1995 1996
---- ---- ----
Supplemental cash flow information:
Cash paid for interest ................................. $103 $949 $662
-------- -------- --------
-------- -------- --------
Noncash financing and investing activities:
Conversion of loans to equity ............................ $3,380 $24,307 $2,052
-------- -------- --------
-------- -------- --------
Conversion of note receivable to investment in affiliate . - $2,020 -
-------- -------- --------
-------- -------- --------
Note receivable from sale of stock ....................... $178 - -
-------- -------- --------
-------- -------- --------
Exchange of preferred stock for investment in affiliates . - $25,000 -
-------- -------- --------
-------- -------- --------
Exchange of common stock for investment in CTP ........... - $125 -
-------- -------- --------
-------- -------- --------
Note payable assumed in connection with RHP investment ... - $4,000 -
-------- -------- --------
-------- -------- --------
Effect of net assets of TeamTalk Limited previously
accounted for by the equity method ...................... - - $4,395
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statement.
F-34
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
International Wireless Communications Holdings, Inc. ("IWC Holdings")
was incorporated in Delaware in July 1996 as a holding company whose primary
assets are all of the issued and outstanding capital stock of International
Wireless Communications, Inc. ("IWC" or "the Company") and a note receivable
from IWC in a principal amount equal to the net proceeds from the Debt
Offering (see Note 9). IWC was incorporated in Delaware in January 1992 and
develops, owns and operates wireless communications companies in emerging
markets in Asia and Latin America. These local wireless businesses ("LWBs")
provide a variety of communications services, including enhanced capacity
trunked radio ("ECTR"), wireless local loop ("WLL"), cellular and paging.
Together with local and strategic partners, IWC has interests in Brazil,
China, India, Indonesia, Malaysia, Mexico, New Zealand, Pakistan, Peru, and
the Philippines.
The Company's operations to date have principally been in the early
stage development of LWBs. In addition, the Company intends to pursue
aggressively additional investment opportunities. The Company's existing
cash balance is sufficient to meet its operating and contractual obligations
for the next fiscal year. It is not sufficient, however, to meet the
Company's business objective of participation in additional equity rounds to
finance the infrastructure buildout of its operating and nonoperating LWBs.
The ability of the Company to make additional investments is dependent on
available external financing. In the event the Company is unable to obtain
external financing it may ultimately be unable to either maintain its
existing ownership interests or fully realize the underlying LWBs potential.
Subsequent to the formation of IWC Holdings, IWC Holdings and IWC
completed a reorganization in which IWC became a wholly owned subsidiary of
IWC Holdings through the conversion of each share of the then outstanding
capital stock of IWC into forty shares of the corresponding class and series
of stock of IWC Holdings (the "Stock Conversion"). All data related to shares
and per share amounts for all periods presented have been adjusted to reflect
the effect of the reorganization and the Stock Conversion.
Consistent with industry practice, the Company considers itself to be
operating in one business segment.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of IWC, its wholly owned subsidiaries, Servicos de Radio
Comunicacoes Ltda. ("SRC"), TeamTalk Limited ("TeamTalk"), New Zealand
Wireless Limited ("New Zealand Wireless"), International Wireless
Communications Asia Holdings, B.V. ("IWC Asia") and International Wireless
Communications Latin America Holdings, Limited ("IWC Latin America"), and
four majority owned subsidiaries, M/S Mobilcom (Pte) Ltd. ("Mobilcom
Pakistan"), PeruTel S.A. ("PeruTel"), Star Telecom Overseas (Cayman Islands)
Limited ("STOL"), and Promociones Telefonicas S.A. ("Protelsa"). In February
1996, the Company, through a joint venture agreement, entered into a wireless
data business and established Wireless Data Services, Ltd. ("WDS"). This
entity, although 50% owned by the Company, has also been consolidated in the
accompanying consolidated financial statements. Effective April 30, 1996, the
Company acquired the remaining 50% interest of TeamTalk, and as such, the
accompanying consolidated balance sheet as of December 31, 1996 also includes
the accounts of TeamTalk. The consolidated statement of operations for the
year ended December 31, 1996 also includes the accounts of the now wholly
owned TeamTalk subsidiary since April 30, 1996, the effective date of the
acquisition (see Note 5). Prior to May 1, 1996, the consolidated financial
statements reflect TeamTalk as an investment accounted for under the equity
method. In August 1996, IWC acquired a 70% interest in STOL, and as such,
the accompanying consolidated balance sheet as of December 31, 1996 also
includes the accounts of STOL. The consolidated statement of operations for
the year ended December 31, 1996 also includes the accounts of STOL since the
date of acquisition. In December 1996, IWC acquired a 66% interest in
Protelsa, and as such, the accompanying consolidated balance sheet as of
December 31, 1996 also includes the accounts of Protelsa. The consolidated
statement of operations for the year ended December 31, 1996 also includes
the accounts of Protelsa since the date of acquisition. All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-35
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operating entities
is the applicable local currency, except for those entities located in highly
inflationary countries. Translation from the applicable foreign currencies to
U.S. dollars is performed for monetary assets and liabilities using current
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period.
The gains or losses, net of applicable deferred income taxes, resulting from
such translation, if material, are included in stockholders' equity. Gains or
losses resulting from foreign currency transactions are included in other
income. For non-operating foreign investees and for the Company's investee in
Brazil, a highly inflationary country, the functional currency is the U.S.
dollar. Remeasurement adjustments for foreign entities, where the U.S. dollar
is the functional currency, and exchange gains and losses arising from
transactions denominated in a currency other than the functional currency,
are included in other income and are not material in any of the years
presented.
REVENUE RECOGNITION
Revenue includes primarily access and usage charges for subscriber
units under service agreements with the Company's consolidated subsidiaries
that have commenced operations. The terms of these service agreements range
from monthly to 36 month periods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity
of 90 days or less at the time of acquisition to be cash equivalents.
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and has classified its investments in certain
debt and equity securities as "available for sale". Such investments are
recorded at fair value, with unrealized gains and losses reported as a
separate component of stockholders' deficit. The cost of securities sold is
based upon the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at original cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the respective assets, generally three to five years for
non-telecommunication equipment and ten years for telecommunication equipment.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies consist of the costs incurred to
acquire development stage projects or interests in entities that have been
awarded telecommunication licenses to provide various wireless
telecommunication services.
The cost method of accounting is used for the Company's investments
in affiliated companies where the Company's voting interest is less than 20%
and the Company does not exert significant influence. Under the cost method,
the investment is recorded at cost, and income is recognized only to the
extent distributed by the investee as dividends. No such dividends were
declared or distributed for the years ended December 31, 1994, 1995 and 1996.
Write-downs to the recorded historical cost are recognized when the Company
believes that a permanent impairment in value has occurred.
Where the Company's voting interest is 20% to 50% and the Company
does not exercise control, the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize the Company's share of net earnings or losses of the investee,
limited, in the case of losses, to the extent of the Company's investment
therein, and the amortization of telecommunication licenses and other
intangibles, if any. The amount of the purchase price that exceeded the fair
value of the Company's percentage ownership of the equity investee's tangible
assets at the date of acquisition reflects the existence of intangible assets
of the equity investee. The primary intangible asset of each equity investee
consists of the equity investee's telecommunication licenses or rights to
participate in such licenses. Amounts attributable to other intangibles, such
as workforce, customer lists, and agreements with local
F-36
companies for transmitter and antenna locations, are not material.
Accordingly, the Company has accounted for the excess purchase price as
attributable to primarily telecommunication licenses and participation rights
and amortizes such intangibles generally over a period of 20 years. To the
extent that goodwill exists, the Company believes that the difference in
amortization lives between telecommunication licenses and goodwill would not
have a material effect on the accompanying financial statements. In some
cases, the terms of the licenses held by the equity investees are less than
twenty years. However, the Company believes that it will be able to renew the
licenses indefinitely if it builds out the infrastructure and establishes
commercial service. The costs of license renewal are expected to be nominal.
The Company consolidates entities it controls, generally through
greater than 50% ownership interest.
TELECOMMUNICATION LICENSES AND OTHER INTANGIBLES
The Company has acquired majority ownership interest in various LWBs.
These acquisitions have been accounted for under the purchase method and are
included in the accompanying consolidated financial statements. The amount of
the purchase price that exceeded the underlying fair value of the Company's
pro rata ownership in the LWB's net tangible assets at the date of
acquisition represents the level of intangible assets of the LWB. The primary
intangible asset of each LWB consists of the LWB's telecommunication licenses
or rights to participate in such licenses. Given the early stage nature of
the acquired entities, amounts attributable to other intangibles, such as
workforce, customer lists, and agreements with local companies for
transmitter and antenna locations, are not deemed material. Accordingly, the
Company has accounted for the excess purchase price as attributable primarily
to telecommunication licenses and participation rights. To the extent that
goodwill exists, the Company believes that the difference in amortization
lives between licenses and goodwill would not have a material effect on the
accompanying financial statements. Licenses are amortized generally over a
period of 20 years, commencing upon the date of completion of the
acquisition. In some cases, the terms of the licenses held by the LWB's are
less than twenty years. However, the Company believes that it will be able to
renew the licenses indefinitely if it builds out the infrastructure and
establishes commercial service. The costs of license renewal are expected to
be nominal. Amortization expense was approximately $40,000, $294,000, and
$1,103,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value-based method of Accounting
Principles Board ("APB") Opinion No. 25 to account for all of its employee
stock-based compensation plans.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from these estimates.
BUSINESS AND CREDIT CONCENTRATIONS AND RISK FACTORS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents. The
Company's investments are comprised of investment grade short-term debt
instruments. Management believes that the financial risks associated with
such deposits are minimal.
F-37
Included in the Company's consolidated balance sheet as of December
31, 1995 and 1996, are long-term investments in various LWBs in such
developing countries as Brazil, China, India, Indonesia, Malaysia, Pakistan,
New Zealand, Peru, and the Philippines (see Note 14). These investments make
up a significant portion of IWC's balance sheet (see Note 5).
Each IWC affiliate has a unique and distinct market, operating
environment, and local economy with different subscription rates and costs to
build and operate the systems. Achieving each operating plan is dependent
upon successfully contending not only with normal risks associated with
constructing and operating wireless properties, but also risks unique to
operating in foreign emerging countries, such as regulatory compliance,
contractual restrictions, labor laws, expropriation, nationalization,
political, economic or social instability, and confiscatory taxation.
The Company anticipates that it will often have a minority interest
in operating companies, in part because applicable laws often limit foreign
investors to minority equity positions. As such, the Company may be unable to
access the cash flow, if any, of its operating companies. Additionally, the
Company's ability to sell or transfer its ownership interest in its operating
companies is generally subject to limitations based on agreements with its
strategic and financial partners, as well as provisions in local operating
licenses and local government regulations that may prohibit or restrict the
transfer of the Company's ownership interest in such operating companies.
The Company's ability to retain and exploit its existing
telecommunication licenses, and to obtain new licenses in the future, is
essential to the Company's operations. However, these licenses are typically
granted by governmental agencies in developing countries, and there can be no
assurance that these governmental agencies will not seek to unilaterally
limit, revoke, or otherwise adversely modify the terms of these licenses in
the future, any of which could have a material adverse effect on the Company,
and the Company may have limited or no legal recourse if any of these events
were to occur. In addition, licenses typically require renewal from time to
time and there can be no assurance that renewals to these licenses will be
granted.
Most of the LWBs currently operating have incurred operating losses
and negative cash flow from operations since inception, and the Company
expects that most of its operating companies will continue to generate
operating losses and negative cash flow from operations for the foreseeable
future and accordingly, the Company expects its losses to increase. Most of
these operating companies have only recently initiated providing commercial
services and have a limited subscriber base. This is not uncommon in the
wireless telecommunications industry, which requires significant capital
investments in the initial years prior to obtaining a sufficient subscriber
revenue base to support operations. Achievement of positive cash flow from
operations will depend on successful execution of management's business
plans. Those plans assume significant additional capital investment, in some
cases, to expand the wireless network. There can be no assurance that such
funding capacity will be available in the future.
RECOVERABILITY OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No.
121 ("SFAS 121"), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, the Company reviews for the impairment
of long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Under SFAS 121, an impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. In 1996, the
Company wrote off its investments in HFCL Mobile Radio, Ltd. ("HFCL") and PT
Binamulti Visualindo ("PTBV") of $320,000 and $205,000, respectively, based
on management's decisions to no longer pursue such projects.
The recoverability of property and equipment, investments in equity
and cost investee companies is dependent upon the successful build-out of
system infrastructure, obtaining additional licenses by investee companies,
and successful development of systems in each of the respective markets in
which the Company's investees operate or through the sale of such assets.
ACQUISITION, TRANSACTION, AND DEVELOPMENT COSTS
The Company expenses direct and incremental costs incurred relative
to pursuing potential investments due to the relative uncertainty of the
future realization of such costs principally due to the nature of early stage
development projects in foreign countries.
F-38
RECLASSIFICATIONS
Certain amounts in the accompanying 1994 and 1995 consolidated
financial statements have been reclassified to conform with the 1996
consolidated financial statement presentation.
(2) CASH AND CASH EQUIVALENTS
The Company has invested in a variety of short-term, highly liquid
investments all with original maturities of 90 days or less. As of December
31, 1995, the Company had cash of $449,000 and cash equivalents consisting of
money market mutual funds totaling $24,949,000. As of December 31, 1996, the
Company had cash of $11,811,000, and cash equivalents consisting of money
market mutual funds and U.S. government and agency obligations totaling
$3,009,000 and $26,837,000, respectively. Unrealized gains on U.S.
government and agency obligations of $68,000 is included as a component of
stockholders' deficit on the accompanying consolidated balance sheet as of
December 31, 1996.
F-39
(3) BALANCE SHEET COMPONENTS
Balance sheet components as of December 31 are as follows (in
thousands):
1995 1996
---- ----
Other current assets
Employee receivables.................. $109 $179
Taxes receivables..................... - 820
Other receivables..................... 153 1,373
Prepaid expenses and other............ 125 371
------- --------
$387 $2,743
------- --------
------- --------
Property and equipment
Furniture and fixtures................ $40 $320
Computer and office equipment......... 126 935
Automobiles........................... 34 197
Leasehold improvements................ - 276
Telecommunication equipment........... - 9,930
Construction in process............... 4,125 7,620
------- --------
4,325 19,278
Less accumulated depreciation......... 56 852
------- --------
Property and equipment, net........ $4,269 $18,426
------- --------
------- --------
Telecommunication licenses and other
intangibles
SRC/Via 1 project..................... $6,714 $6,680
Mobilcom Pakistan..................... 5,439 5,439
TeamTalk.............................. - 1,760
STOL.................................. - 3,965
Protelsa.............................. - 1,557
WDS................................... - 221
Other................................. 200 200
------- --------
12,353 19,822
Less accumulated amortization......... 167 1,338
------- --------
Telecommunication licenses and
other intangibles, net........... $12,186 $18,484
------- --------
------- --------
Accounts payable and accrued expenses
Accounts payable...................... $ - $5,163
Professional services................. 3,041 718
Employee compensation and benefits.... 189 619
Equipment purchases................... 1,719 27
Remaining TeamTalk purchase price..... - 156
Payable to UTS........................ - 178
Other................................. 808 452
------- --------
$5,757 $7,313
------- --------
------- --------
F-40
(4) INVESTMENTS IN AFFILIATE HELD FOR SALE
In June 1996, the Company entered into a put-call agreement (the
Agreement) with various other shareholders of Corporacion Mobilcom, S.A. de
C.V. ("Mobilcom Mexico") with the intention of selling its entire 2.23%
shareholding of Mobilcom Mexico to one of the other shareholders of Mobilcom
Mexico. The sale of the Company's investment will be triggered by any one of
a variety of put events (as defined) in the Agreement, the earliest of which
will occur on October 24, 1997, which is one year after the effective date of
the Agreement. The Company carries this investment at its historical cost of
$2,062,000. The Company anticipates that the sale price of this investment
will exceed its historical cost.
(5) INVESTMENTS IN AFFILIATES
The Company's investments in affiliates represent interests in various
LWBs in several developing countries. These investments are accounted for
under the equity or cost methods of accounting.
EQUITY INVESTMENTS
For those investments in companies in which the Company's voting
interest is 20% to 50%, or for investments in companies in which the Company
exerts significant influence through board representation and management
authority even if its ownership is less than 20%, the equity method of
accounting is used. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's share of losses of affiliates,
limited to the extent of the Company's investment in and advances to
affiliates, including any debt guarantees or other contractual funding
commitments. All affiliated companies have fiscal years ended December 31.
Investments in affiliated companies are as follows as of December 31, 1995
and 1996 (dollars in thousands):
F-41
Investments
Percentage in affiliated Equity in losses of affiliates
Affiliated of companies Additional -------------------------------
Country Company ownership 1994 investment Amortization Losses (gains)
- --------- ---------- ----------- ------------- ---------- ------------ --------------
Syarikat Telefon Wireless
Malaysia ("STW") 30% (1) $1,400 $20,770 $ 638 $ 1,291
PT Rajasa Hazanah Perkasa
Indonesia ("RHP") 25% - 25,530 319 991
New Zealand TeamTalk 50% 284 2,569 7 508
India HFCL 49% - 243 1 -
Indonesia PTBV 49% - 206 1 -
------ -------- ------- -------
$1,684 $49,318 $ 966 $2,790
------ -------- ------- -------
------ -------- ------- -------
Portion of
investment
exceeding the
Company's share
Investments of the underlying
in affiliated historical
Affiliated companies net assets
Country Company 1995 1995
- ---------- ---------- ------------- -----------------
Malaysia STW $ 20,241 $ 16,821
Indonesia RHP 24,220 23,361
New Zealand TeamTalk 2,338 1,526
India HFCL 242 242
Indonesia PTBV 205 205
--------- -------
$47,246 $42,155
--------- -------
--------- -------
Investments
Percentage in affiliated Equity in losses of affiliates
Affiliated of companies Additional ------------------------------
Country Company ownership 1995 investment Amortization Losses (gains)
- --------- ---------- ----------- ------------- ---------- ------------ --------------
Malaysia STW 30% (1) $20,241 $ 1,201 (2) $ 969 $ 3,563
Indonesia RHP 28% (3) 24,220 8,556 (3) 1,278 3,468
Star Digitel Limited
China ("SDL") 40% - 20,000 347 1,000
Universal Telecommunications
Philippines Service, Inc. ("UTS") 19% - 1,906 (4) 51 (20)
New Zealand TeamTalk 100% (5) 2,338 (1,736) - 602
India HFCL 49% (6) 242 78 320 -
Indonesia PTBV 49% (6) 205 - 205 -
------- -------- ------- -------
$47,246 $30,005 $3,170 $8,613
------- -------- ------- -------
------- -------- ------- -------
Portion of
investment
exceeding the
Company's share
Investments of the underlying
in affiliated historical
Affiliated companies net assets
Country Company 1996 1996
- ---------- ---------- ------------- -----------------
Malaysia STW $ 16,910 $ 15,852
Indonesia RHP 28,030 28,030
China SDL 18,653 10,653
Philippines UTS 1,875 882
New Zealand TeamTalk - -
India HFCL - -
Indonesia PTBV - -
--------- -------
$65,468 $55,417
--------- -------
--------- -------
- -------------------------
(1) The Company, along with other STW shareholders, agreed to provide
certain support in connection with a Malaysian Ringgit 91,000,000
(approximately $35,968,000) senior credit facility obtained by STW
from a Malaysian bank (see Note 13).
(2) In October 1996, the Board approved and the Company funded $1,201,000 to
STW as the Company's pro rata share of a capital call.
(3) In October 1996, the Company paid $8,556,000 to increase its interest in
RHP to 29.2%, thereby increasing its indirect interest in Mobisel to
20.4%. In December 1996, Nissho Iwai International (Singapore) Pte. Ltd.
purchased 3% of RHP, diluting the Company's ownership in RHP to 28.3%,
thereby decreasing its indirect interest in Mobisel to 19.8%.
(4) Reflects an additional investment of $532,000, of which $354,000 was
paid in 1996 and the remainder was paid in January 1997, pursuant to an
agreement dated September 25, 1996. This investment was previously
accounted for as a cost investment.
(5) Reflects acquisition of the remaining 50% of Team Talk, effective
April 30, 1996, pursuant to an agreement dated June 24, 1996.
(6) This investment was fully written off during 1996 based on management's
decision to no longer pursue the project.
F-42
The Company acquired its interest in RHP, HFCL, and PTBV during 1995
and accounted for them using the purchase method.
In June 1996, the Company entered into an agreement with the other
50% owner of TeamTalk to acquire their 1,700,000 shares of TeamTalk's common
stock, as well as to assume TeamTalk's indebtedness to the shareholder
totaling $3,022,000, for a purchase price of approximately $3,198,000. The
transaction was accounted for by the purchase method effective April 30,
1996, with the majority of the purchase price paid in July 1996. As of
December 31, 1996, TeamTalk is consolidated into the financial statements of
the Company as a wholly owned subsidiary. In connection with the incremental
investment, the Company reclassified the associated unamortized portion of
investment exceeding the Company's share of underlying historical net assets
to telecommunication licenses and other intangibles. The fair value of the
assets acquired and the liabilities assumed in connection with the
acquisition were $8,327,000 and $3,584,000, respectively.
In September 1996, IWC entered into a subscription agreement (the
"SDL Subscription Agreement") with Star Telecom Holding Limited ("STHL"), the
Company's partner in STOL, to purchase a 40% equity interest in SDL for an
aggregate purchase price of $20 million and accounted for by the purchase
method. Pursuant to the Subscription Agreement, in September 1996, IWC also
entered into an escrow agreement (the "SDL Escrow Agreement") and deposited,
in escrow, $9 million of the $20 million purchase price. In November 1996,
in connection with the closing of the Company's acquisition of an equity
interest in SDL, the $9,000,000 held in escrow pursuant to the SDL
Subscription Agreement and the SDL Escrow Agreement was released to STHL, and
the Company funded an additional $11,000,000 to acquire its 40% interest in
SDL for an aggregate purchase price of $20,000,000 and assigned $11,000,000
representing the amount of the purchase price that exceeded the fair value of
the Company's percentage ownership of SDL's tangible net assets to
participation rights in SDL's underlying projects.
In October 1996, the Company paid $8,556,000 to increase its interest
in RHP to 29.2% and accounted for this additional acquisition using the
purchase method. The Company assigned the entire amount of the purchase
price to the telecommunication license as the purchase price exceeded the
fair value of the Company's percentage ownership of RHP's tangible net assets
in full at the date of purchase. In December 1996, Nissho Iwai International
(Singapore) Pte. Ltd. Purchased 3% of RHP, diluting the Company's ownership
interest in RHP down to 28.3%.
In October 1996, the Company paid $1,000,000 for an option to
purchase 50% of Laranda Sdn Bhd, a 10% shareholder of STW, for an exercise
price of $7,200,000 and certain other contractual rights. The Company, at
its discretion, allowed the option to lapse on November 6, 1996 and
subsequently expensed the entire $1,000,000, which is classified as other
expense in the accompanying consolidated statement of operations.
The following condensed financial statement data, presented in
accordance with U.S. generally accepted accounting principles and stated in
U.S. dollars for significant affiliated companies accounted for by the equity
method, has been derived from audited financial statements. The financial
information pertaining to RHP was derived from financial statements audited
by other auditors. This information is as follows (in thousands):
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
-----------------
STW RHP(A) TEAMTALK
--- ------ --------
Current assets........................ $2,611 $5,316 $213
Noncurrent assets..................... 33,299 21,336 6,307
Current liabilities................... 2,988 17,496 3,933
Noncurrent liabilities................ 21,925 6,257 1,492
Net revenues.......................... 749 5,463 348
Net loss.............................. (5,898) (3,186) (1,490)
F-43
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996
-----------------
STW RHP TEAMTALK(B) SDL
--- ------ -------- ---
Current assets........................ $820 $13,354 - $11,215
Noncurrent assets..................... 41,686 64,556 - 55,617
Current liabilities................... 6,909 23,341 - 12,460
Noncurrent liabilities................ 33,526 63,834 - 47,817
Net revenues.......................... 1,858 10,268 - 436
Net loss.............................. (11,873) (12,072) - (2,618)
- -------------
(A) For the period March 28, 1995 through December 31, 1995. Net revenues
and net loss for the period from January 1, 1995 through March 27, 1995
were $1,821,000 and $387,000, respectively.
(B) Effective April 30, 1996, TeamTalk became a wholly owned subsidiary of
the Company. Net revenues and net loss for the period from January 1,
1996 through April 30, 1996 were $282,000 and $645,000, respectively.
COST INVESTMENTS
The Company uses the cost method of accounting for two other
investments as of December 31, 1996. They are PT Mobilkom Telekomindo
("Mobilkom") and RPG Paging Services Limited ("RPSL"), the latter of which
the Company acquired in August 1996 as part of IWC's acquisition of STOL. As
of December 31, 1996, the Company's indirect ownership percentages in these
entities are 15% and 7%, respectively. Both are operating entities.
Prior to September 25, 1996, the Company accounted for UTS as a cost
investment. On September 25, 1996, the Company increased its ownership
interest to 19%, excluding its 3% incentive option, and as such, changed its
method of accounting to the equity method, as the Company felt it commenced
to exert significant influence. It is anticipated that the Company will
further increase its ownership percentage in the future.
The Company's carrying value of these investments as of December 31
are as follows (in thousands):
1995 1996
---- ----
Mobilcom Mexico.......... $ 2,062 $ -
Mobilkom................. 1,500 1,500
UTS...................... 1,472 -
RPSL..................... - 1,426
------- ------
$ 5,034 $2,926
------- ------
------- ------
The Company considers these investments to be long-term in nature and
are not held for trading purposes. During 1996, the Company decided to offer
Mobilcom Mexico for sale and has reclassified this investment as a current
asset (see Note 4).
PRO FORMA SUMMARY
The following unaudited pro forma summary combines the consolidated
results of operations of the Company as if (i) TeamTalk had been a wholly
owned consolidated subsidiary since January 1, 1995, (ii) ownership in STW
and RHP had been 30% and 28.3%, respectively, since January 1, 1995, (iii)
the merger with Vanguard International Telecommunications, Inc. ("VIT"), a
wholly owned subsidiary of Vanguard (see Note 6) had occurred on January 1,
1995, (iv) the acquisition of STOL had occurred at January 1, 1995, (v) the
acquisition of SDL had occurred at January 1, 1995, and (vi) the acquisition
of Protelsa had occurred at January 1, 1995.
This pro forma summary does not necessarily reflect the results of
operations as they would have been if the Company had acquired the entities
as of January 1, 1995.
F-44
Unaudited pro forma consolidated results of operations for the
various acquisitions and mergers as described above are as follows (in
thousands):
FOR THE YEAR ENDED
DECEMBER 31,
------------
1995 1996
---- ----
Revenues ............................................ $369 $1,161
Net loss ............................................ (17,068) (40,830)
(6) RELATED PARTY TRANSACTIONS
ADVANCES TO AFFILIATES
The advances to affiliate as of December 31, 1995 represented
advances to TeamTalk in the amount of $728,000. As a result of the
acquisition of the remaining 50% interest in TeamTalk, the Company eliminates
advances to TeamTalk in consolidation.
In January 1996, the Company advanced Philippine Peso 2,612,000 or
approximately $99,000 to UTS. The advance is interest-free with no stated
terms. Management believes the advance will be repaid during 1997.
NOTES RECEIVABLE FROM AFFILIATES
Notes receivable from affiliates as of December 31, 1995, consisted
primarily of a note due from Mobilcom Mexico for $158,000, which earns
interest at 6% per annum; and an interest-free note due from RHP for
$128,000.
Notes receivable from affiliates as of December 31, 1996, consisted
primarily of the note due from Mobilcom Mexico for $158,000, plus cumulative
accrued interest of $20,000; and a series of interest-free promissory notes
loaned to PT Mobile Selular Indonesia ("Mobisel"), an entity which the
Company indirectly owns 19.8% through its investment in RHP, totaling
$635,000. In April 1997, the Company collected the $635,000 note receivable
from Mobisel. The Company expects to collect the note receivable from
Mobilcom Mexico during 1997.
NOTES PAYABLE TO RELATED PARTY
Notes payable to a related party as of December 31, 1995, consisted
of two notes payable to Vanguard Cellular Operating Corp. ("Vanguard"), the
Company's largest stockholder, each in the amount of $900,000 plus accrued
interest and bearing interest at 9% compounded annually. The notes were due
on the earlier of April 26, 1996 or the close of an initial public offering.
On April 26, 1996, these notes, plus $252,000 of accrued interest, were
converted into 274,800 shares of the Company's Series D Redeemable
Convertible Preferred Stock.
VANGUARD MERGER
On December 18, 1995, the Company merged with Vanguard International
Telecommunications, Inc. ("VIT") (See Note 11), a wholly owned subsidiary of
Vanguard. Prior to this merger, Vanguard owned 10.46% of the Company and
provided a variety of services relating to the formation, development and
operation of the Company's wireless communication businesses. In exchange for
3,972,240 shares of Series E Redeemable Convertible Preferred Stock with a
liquidation preference of $6.29 per share, the Company acquired VIT's
interests in TeamTalk and VIT's rights to acquire an interest in various
international LWBs. The liquidation value was equal to the fair market value
of the Series E preferred stock on the date of the merger. The resulting
total value of $25,000,000, was allocated to the various LWBs based on their
respective stage of development and an independent valuation study of the
LWBs. As a result of this merger, Vanguard increased its ownership position
to approximately 36% and continues to provide the services described above.
The original cost to Vanguard of the net assets acquired by IWC in the merger
was approximately $550,000. The value of these assets, however, appreciated
significantly over time as licenses were subsequently granted, joint ventures
and other strategic alliances formed and business plans developed.
F-45
The excess of the allocated portion of the merger value to TeamTalk
over the net book value of TeamTalk was attributed to telecommunication
licenses and other intangibles. This excess amounted to $1,712,000 and is
amortized on a straight-line basis over 20 years.
The Company also acquired VIT's rights to participate in RHP, SRC,
Mobilcom, HFCL and PTBV and other yet to be developed projects. Approximately
$23,288,000 in aggregate was allocated to telecommunication licenses and
other intangibles in the LWBs based on their relative stage of development.
These amounts are amortized on a straight-line basis over 20 years.
REVOLVING CREDIT FACILITY
On July 26, 1996, the Company entered into a Loan Agreement (the
"1996 TD Loan Agreement") with Toronto Dominion (Texas), Inc., an affiliate
of Toronto Dominion Capital (U.S.A.), Inc., a stockholder of the Company,
providing for a $10.0 million revolving credit facility. Subject to the terms
and conditions of the 1996 TD Loan Agreement, IWC was able to borrow funds in
an initial amount of at least $2,000,000 and additional amounts in multiples
of at least $1,000,000. All borrowings were evidenced by a promissory note
bearing interest at a specified base rate plus a margin increasing from 2.25%
to 3.75% over the term of the facility or a specified LIBOR rate plus a
margin increasing from 3.5% to 5.0% over the term of the facility and were
due in July 1997, subject to mandatory repayment, without premium, from the
net proceeds from any public or private sale of debt or equity securities,
the net proceeds from certain asset sales by the Company or its subsidiaries,
or certain other events. The obligations of the Company under the 1996 TD
Loan Agreement and the note issued pursuant thereto were secured by a pledge
by the Company of all capital stock of the Company's subsidiaries and
affiliates. On July 26, 1996, IWC borrowed $7,000,000 under the 1996 TD Loan
Agreement. On August 15, 1996, this amount, plus interest and fees, was
repaid in full with the proceeds from the Debt Offering (see Note 9).
OTHER RELATED PARTY TRANSACTIONS
The Company has entered into arrangements with certain of the
operating companies whereby the Company is reimbursed for direct costs,
primarily salary and out-of-pocket costs, associated with technical,
financial and administrative support provided by the Company. These amounts
have been recorded as an offset to general and administrative expenses on the
accompanying consolidated statements of operations. For the years ended
December 31, 1994, 1995 and 1996, expense reimbursements were not material.
(7) NOTE RECEIVABLE
On June 6, 1996, the Company loaned $3,080,000 to a co-shareholder of
Mobilcom Mexico, a trunked radio services operator in Mexico. The loan, in
the form of a promissory note, accrues interest at 13% per annum and is due
upon written demand by the Company. The Company believes that this loan may
facilitate future strategic investments in projects in which this
co-shareholder is involved. As of December 31, 1996, the co-shareholder had
repaid $1,800,000 of the total amount loaned, bringing the remaining
principal plus interest owed to $1,431,000. In April 1997, the Company
collected an additional $900,000 and expects to collect the remainder of the
note receivable during 1997.
(8) LICENSE DEPOSITS
In June 1996, the Company deposited $3,042,000 with a Taiwanese
corporation that is pursuing telecommunication licenses in Taiwan. This
deposit represents a 20% interest in a number of telecommunication license
applications currently being pursued. During the application process, the
deposit will be held in an interest-bearing escrow account in the name of
IWC. Once a license is granted, the deposit will become the Company's initial
capital contribution to the venture that is ultimately formed. If the
Taiwanese corporation is unsuccessful in securing these applications, the
Company's deposit, less its pro rata share of application related expenses,
will be returned to the Company.
In August 1996, the Company deposited $2,250,000 for a 10% interest
in a Taiwan paging project. Concurrently, STOL deposited $3,005,000 for a
20% interest in the Taiwan Paging Project. The total consolidated deposit is
$5,255,000. Had a national paging license been granted to the project, the
deposit would have become the Company's initial capital contribution to the
venture that would ultimately have been formed to pursue the paging
F-46
business in Taiwan. In early February 1997 it was announced, that this bid
was unsuccessful, and the Company and STOL are expecting their deposits to be
returned during 1997. The Company has, therefore, classified these deposits
as a current asset.
(9) LONG-TERM DEBT AND DEBT ISSUANCE COSTS
In August 1996, the Company issued 196,720 units, each consisting of
a $1,000 principal amount 14% Senior Secured Discount Note due 2001 (a "Note"
and, collectively, the "Notes") and one warrant to purchase 11.638 shares of
common stock, $0.01 par value, for total gross proceeds of $100 million (the
"Debt Offering"). Net proceeds, after repayment of $7.4 million, including
interest and fees, borrowed under the 1996 TD Loan Agreement (see Note 6) and
other offering expenses, totaled $86,602,000. Of the $100 million gross
proceeds, $30.3 million was allocated to additional paid-in capital as the
fair value of the warrants issued in the Debt Offering. Long-term debt is
presented net of unamortized discount of $121,254,000 on the accompanying
consolidated balance sheet as of December 31, 1996.
The aggregate principal amount of the Notes is $196,720,000. The
Notes are due on August 15, 2001 and bear interest at an effective interest
rate of 22.05%, compounded semi-annually. There are no scheduled cash
interest payments on the Notes. The Notes are senior secured obligations of
the Company and will rank PARI PASSU in right of payment with all existing
and future senior indebtedness of the Company and senior to all subordinated
indebtedness of the Company. The Notes are effectively subordinated to all
indebtedness and other liabilities (including trade payables) of the
Company's subsidiaries and affiliated companies. The collateral securing the
Notes consists of a pledge of all of the capital stock of the Company.
There are no sinking fund requirements with respect to the principal
of or the interest on the Notes. Upon the occurrence of a change of control
(as defined in the indenture governing the Notes), each holder of the Notes
will have the option to require the Company to repurchase all or a portion of
such holder's Notes at 101% of the accreted value thereof to the date of
repurchase.
In connection with the Debt Offering, the Company entered into the
Indenture, which contains certain covenants that, among other things, limits
the ability of the Company and its subsidiaries and affiliates to incur
additional indebtedness, limits the ability of the Company to merge,
consolidate or sell substantially all of its assets; and limits the ability
to make investments. In addition, the Indenture prohibits making restricted
payments (as defined) and creating certain liens (as defined) (see Note 16).
The Indenture also contained a provision that in the event the
Company does not complete an initial public offering ("IPO") of common stock
on or prior to May 15, 1997, each unexercised warrant, issued in connection
with the Debt Offering, will entitle the holder thereof to purchase an
additional 2.645 shares of common stock. The Company expects to issue such
additional warrants as it does not expect to complete an IPO of its common
stock prior to May 15, 1997 (see Note 16).
The costs related to the issuance of the long-term debt were
capitalized and are being amortized to interest expense using the effective
interest method over the life of the debt. Debt issuance costs are presented
net of amortization of $369,000 on the accompanying consolidated balance
sheet as of December 31, 1996.
In November 1996, the Company exchanged new 14% Senior Secured
Discount Notes due 2001 (the "Exchange Notes") which were registered under
the Securities Act of 1933, as amended (the "1933 Act"), for its outstanding
Notes that were issued and sold in a transaction exempt from registration
under the 1933 Act. The terms of the Exchange Notes are substantially
identical (including principal amount, interest rate, maturity, security and
ranking) to the terms of the Notes.
(10) MINORITY INTEREST
In February 1996, the Company formed WDS, a joint venture, to
develop, install and support mobile data systems throughout the Pacific Rim.
The Company has a 50% equity interest in WDS, and funded its operations on a
pro rata basis for total equity funding during 1996 of $433,000. The Company
anticipates that it will increase its equity interest in WDS in the future.
F-47
In August 1996, the Company acquired a 70% equity interest in STOL
for an aggregate purchase price of $13,500,000 which has been accounted for
using the purchase method. STOL holds a minority interest in a paging
project in India (RPSL) and is currently pursuing additional paging
opportunities in Indonesia, Thailand and Taiwan. The Company's partner in
STOL is STHL, the Company's partner in SDL. The Company allocated $3,965,000
of the purchase price to participation rights.
In December 1996, the Company paid $1,600,000 to acquire a 66% equity
interest in Protelsa, which has been awarded a national license to provide
paging services in Peru and accounted for the acquisition using the purchase
method. The Company allocated $1,557,000 of the purchase price to the
telecommunication license.
Minority shareholders' interests in the equity of WDS, STOL and
Protelsa as of December 31, 1996 totaled approximately $198,000, $5,315,000
and $172,000, respectively.
(11) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
The Company is authorized to issue 23,080,000 shares of preferred
stock, of which 21,541,480 are designated redeemable convertible preferred
stock, 1,200,000 are designated nonredeemable convertible preferred stock,
338,520 are undesignated, and 26,000,000 shares of common stock, each with a
par value of $0.01 per share.
Nonredeemable convertible preferred stock as of December 31, 1995 and
1996, was comprised of 1,200,000 and 933,200 issued and outstanding shares of
Series A preferred stock, respectively. In August 1996, a stockholder of the
Company converted 266,800 shares of Series A preferred stock into 266,800
shares of common stock. Series A preferred stock has a liquidation value per
share of $.85 and an aggregate liquidation value of $793,000.
Redeemable convertible preferred stock as of December 31, 1996, was
comprised of the following (in thousands except share and per share amounts):
SHARES ISSUED LIQUIDATION AGGREGATE
REDEEMABLE CONVERTIBLE SHARES AND VALUE PER LIQUIDATION
PREFERRED STOCK: DESIGNATED OUTSTANDING SHARE VALUE
---------- ----------- ----- -----
Series B ............. 1,229,240 1,229,240 .9652 $1,186
Series C ............. 2,460,000 1,762,280 2.3343 4,114
Series D ............. 5,800,000 3,652,960 6.8775 25,123
Series E ............. 3,972,240 3,972,240 6.7365 26,759
Series F ............. 8,080,000 5,356,480 9.3750 50,217
---------- ---------- --------
21,541,480 15,973,200 $107,399
---------- ---------- --------
---------- ---------- --------
Each series of redeemable preferred stock is being accreted
to its respective minimum redemption amount, which is equal to the
liquidation value.
The rights, preferences, and privileges of the holders of preferred
stock are as follows:
- LIQUIDATION
In the event of Company liquidation, holders of Series F
preferred stock shall be entitled to receive, prior and in
preference to the holders of Series A, B, C, D and E preferred
stock ("Junior preferred stock") and common stock an amount per
share equal to the sum of (i) the product of (A) .50 multiplied by
(B) the liquidation value per share specified above, as adjusted,
and (ii) any declared but unpaid dividends thereon. Holders of
Series B, C, D and E preferred stock shall next be entitled to
receive an amount per share equal to the sum of (i) the product of
(A) .55 multiplied by (B) an amount per share of .9193, 2.223, 6.55
and 6.2938, respectively, as adjusted and (ii) any declared but
unpaid dividends thereon. Holders of the Junior preferred stock and
Series F preferred stock shall next be entitled to receive the
product of (1) .50 multiplied by (2) an amount per share of .9193,
2.223, 6.55, 6.55 and 9.375, respectively, as adjusted.
F-48
Holders of the Series A preferred stock shall be entitled
to receive an amount per share equal to the liquidation value per
share specified above, as adjusted, plus any declared but unpaid
dividends thereon. After the distributions described above, and
after the distribution related to common stock described below, the
remaining assets of the Company shall be distributed among the
holders of the preferred stock and common stock pro rata assuming
full conversion of preferred stock into common stock.
- DISTRIBUTIONS
The holders of preferred stock are entitled to receive
noncumulative dividends at the same time and on the same basis as
holders of common stock when, and if, declared by the Board of
Directors. No dividends had been declared through December 31,
1996.
- REDEMPTION
Each share of Series B, C, D, E, and F preferred stock is
redeemable at any time on or after December 31, 1998, but within 45
days after the receipt by the Company of a written request from the
holders of a majority of the then outstanding shares of Series B,
C, D, E and F preferred stock. The Company shall redeem all such
shares by paying in cash a sum per share equal to the greater of
(1) the then fair market value of such share of preferred stock on
an as-converted basis, or (2) the redemption value of such share of
preferred stock (hereinafter referred to as the redemption price).
In the event the assets of the Company are insufficient to effect
such redemption in full, the shares of preferred stock not redeemed
shall remain outstanding and entitled to all the rights and
preferences provided herein.
In addition to the above redemption, at any time on or
after December 31, 2000, but within 45 days after the receipt by
the Company of a written request from the majority of the holders
of Series F preferred stock, the Company shall redeem all
outstanding shares of such stock by paying, in cash, an amount per
share equal to the redemption price of such stock.
Upon the occurrence of a change of control of the Company
that is not approved by certain directors designated by the holders
of Series F preferred stock, then the holders of a majority of the
shares of Series F preferred stock then outstanding shall have the
right, by written demand to the Company, to require the Company to
redeem immediately all the shares of Series F preferred stock then
outstanding, at a price per share equal to the redemption price of
the Series F preferred stock.
- CONVERSION AND VOTING RIGHTS
Each share of preferred stock is convertible, at the option
of the holder, into such number of fully paid and nonassessable
shares of common stock as is determined by dividing the original
preferred stock issue price by the conversion price applicable to
such preferred share. The conversion price per share for each
series of preferred stock is equal to the preferred stock issue
price of the respective series of preferred stock, subject to
adjustment under certain circumstances. An automatic conversion
into common stock will occur in the event of a firm commitment
underwritten public offering of at least $13.10 per share, as
adjusted, and $8,000,000 in the aggregate. However, the Series F
preferred stock shall not automatically be converted in Common
Stock unless: (i) the underwritten public offering is consummated
on or prior to December 31, 1998, (ii) the public offering per
share is at least $18.75, as adjusted and (iii) the aggregate
offering price is not less than $25,000,000.
Each share of preferred stock has voting rights equal to
that of common stock on an "as if converted" basis. The holder of
Series E preferred stock is entitled to elect three directors to
the Company's Board of Directors, and, for so long as 20% of the
shares of Series F preferred stock remain outstanding, the holders
of Series F preferred stock are entitled to elect three directors.
As of December 31, 1996, the Company had 16,906,400 shares of
common stock reserved for the conversion of preferred stock.
PREFERRED STOCK TRANSACTIONS
F-49
- THE SERIES A AND B FINANCINGS
In January 1994, each share of then outstanding common
stock was converted to an equal number of shares of Series A
preferred stock. Concurrently, shares of Series A preferred stock
were converted into an equal number of shares of Series B preferred
stock.
- THE SERIES C FINANCING
In a series of transactions during January and February
1994, the Company sold an aggregate of 1,762,280 shares of Series C
preferred stock for an aggregate purchase price of $3,918,000 (a
purchase price of $2.22 per share), (the "Series C Financing"),
including cancellation of notes payable to investors totaling
$1,351,000.
In connection with the Series C Financing, the Company
issued to an investor warrants to purchase (a) 50,440 shares of
Series C preferred stock at an exercise price of $2.22 per share
(b) 222,200 shares of preferred stock at an exercise price of $7.15
per share, and (c) 444,360 shares of preferred stock at an exercise
price of $3.58 per share. Warrants (a), (b) and (c) were
exercisable until December 18, 1995, April 15, 1995 and January 15,
1995, respectively. The warrants were subsequently amended in July
1995 (see below).
- THE SERIES D FINANCING
In connection with bridge financing obtained in May 1994,
the purchasers received warrants exercisable for an aggregate of
46,440 shares of Series D preferred stock. The warrants have an
exercise price of $6.55 per share and are exercisable until May 6,
1997.
In a series of transactions in September and October 1994,
the Company sold an aggregate of 2,230,560 shares of Series D
preferred stock for an aggregate purchase price, net of a $26,000
note receivable, of approximately $14,584,000 (a purchase price of
$6.55 per share), (the "Series D Financing"), including
cancellation of notes payable in the principal amount of
$2,029,000.
In connection with the issuance of bridge notes on April 6,
1995, the Company issued warrants (the "April Bridge Warrants") to
purchase 10,720 shares of Series D preferred stock at $6.55 per
share. The April Bridge Warrants are outstanding and are
exercisable until April 6, 1998 or, if earlier, upon the closing of
the Company's initial public offering.
In July 1995, convertible secured bridge financing notes
issued on April 24, 1995 were converted into 1,147,600 shares of
Series D preferred stock for an aggregate purchase price of
$7,517,000 (a purchase price of $6.55 per share).
In connection with the Series D Financing, Vanguard loaned
$1.8 million to the Company in exchange for two convertible notes
in the amount of $900,000 each. Each note was due upon the earlier
of April 26, 1996 or the occurrence of certain events which did not
occur prior to that date. On April 26, 1996, Vanguard converted
both notes including accrued interest into an aggregate of 274,800
shares of Series D Redeemable Convertible preferred stock (see
Note 6).
- THE SERIES E FINANCING
In July 1995, the Company entered into a merger agreement
with Vanguard and VIT, a wholly-owned subsidiary of Vanguard,
whereby VIT would merge their international interests in a number
of international wireless projects into the Company in exchange for
3,972,240 shares of Series E preferred stock. This merger was
completed on December 18, 1995, concurrent with the issuance of
Series F preferred stock (see Note 6).
In connection with the Vanguard Merger, the Company entered
into an agreement with an investor to amend previously existing
warrant agreements granted in connection with the Series C
Financing. The investor's original warrant to purchase 50,440
shares of Series C preferred stock was amended to extend the
warrant through December 18, 1997. The investor's original
warrant to purchase 222,200 shares of preferred stock was amended
to increase the number of shares to 393,120 and to define the
preferred stock as Series D preferred stock at $6.55 per share. The
warrant is exercisable until December 18, 1997. The investor's
original
F-50
warrant to purchase 444,360 shares of preferred stock was
amended to decrease the number of shares to 273,440 and to define
the preferred stock as Series C preferred stock at $2.22 per share.
The warrant is exercisable until May 15, 1997.
- THE SERIES F FINANCING
In connection with the issuance of a note payable to an
investor in July 1995, the Company issued for a purchase price of
$15,000, a warrant to purchase 32,000 shares of Series F preferred
stock at an exercise price of $9.38 per share. The number of shares
and the exercise price are subject to adjustment in certain
circumstances. The warrant is exercisable until December 18, 1998.
Concurrent with the July 1995 Financing, for an aggregate
purchase price of $72,000, the Company issued warrants to purchase
an aggregate of 153,760 shares of Series F preferred stock (not
including the warrant issued to Vanguard in connection with the
first July 1995 note) at an exercise price of $9.38 per share. All
share amounts and the exercise price are subject to adjustment in
certain circumstances. The warrants are exercisable until December
18, 1998.
On August 15, 1995 pursuant to a Note and Warrant Purchase
Agreement dated as of August 14, 1995, the Company issued for a
purchase price of $50,000 a warrant (the "First Warrant") to
purchase 106,680 shares of Series F preferred stock at an exercise
price of $9.38 per share, with the number of shares and exercise
price subject to adjustment in certain circumstances. The First
Warrant is exercisable until December 18, 1998.
Pursuant to a Loan Agreement dated August 14, 1995 between
the Company and an investor, the Company issued a second warrant
(the "Second Warrant") to purchase 106,680 shares of Series F
preferred stock at an exercise price of $9.38 per share, with the
number of shares and the exercise price subject to adjustment in
certain circumstances. The Second Warrant is exercisable until the
same date, with the date being subject to change in the same
circumstances, as the First Warrant.
On December 18, 1995, the Company sold and issued 5,356,480
shares of Series F preferred stock for $50,217,000. Prior to the
share issuance of the Series F preferred stock, the Company entered
into bridge financing agreements with certain existing
shareholders. Certain bridge loans were repaid with proceeds from
the issuance of shares of Series F preferred stock, while the
remaining bridge loans were converted into 1,147,600 shares of
Series D preferred stock.
Pursuant to the Series F Purchase Agreement, the Company
agreed to covenants customary in financing transactions of such
type, including limits on incurring debt and granting liens and
pledges and other negative covenants including limitations on
payments, dividends, investments, mergers, asset sales, amendments
of its Certificate of Incorporation or Bylaws that would adversely
impact the rights of the Series F preferred, changes to its
business, changes in control, and sales of equity securities.
F-51
WARRANTS
The Company had the following warrants outstanding as of
December 31, 1996:
WARRANTS EXERCISE
PREFERRED AND COMMON STOCK OUTSTANDING PRICE EXPIRATION
- -------------------------- ----------- ----- ----------
Series D preferred ............ 45,880 $6.55 May 6, 1997
Series C preferred ............ 273,440 2.22 May 15, 1997
Series D preferred ............ 393,120 6.55 May 15, 1997
Series D preferred ............ 440 6.55 May 23, 1997
Series D preferred ............ 120 6.55 June 12, 1997
Series C preferred ............ 50,440 2.22 December 18, 1997
Series D preferred ............ 10,760 6.55 April 6, 1998
Series F preferred ............ 399,160 9.38 December 18, 1998
Common stock ..... ............ 2,289,421 0.01 August 15, 2001
---------
3,462,781
---------
---------
COMMON STOCK
In the event of a liquidation, holders of common stock will be
entitled to receive an amount equal to $.50 per share, as adjusted, plus any
declared and unpaid dividends, after completion of distributions to the
holders of preferred stock.
The remaining assets of the Company, after satisfaction of the
stipulated distribution requirements related to the various preferred stock
and common stock liquidation preferences, will be distributed on a pro rata
basis among all of the holders of common stock and all of the holders of the
preferred stock, assuming full conversion of the preferred stock into common
stock.
In January 1994, the Company entered into an agreement to acquire a
70% interest in Corporate Technology Partners ("CTP"), a partnership
established to develop a Personal Communications Services ("PCS") business,
in exchange for 251,920 shares of common stock in the Company. CTP was owned,
in part, by officers of the Company. This agreement was completed on December
18, 1995, concurrent with the issuance of Series F preferred stock. A total
of 45,360 of these shares remain in escrow as of December 31, 1996 pending
finalization of an ex-employee matter. The Company wrote-off its investment
in 1995 as CTP was unsuccessful in obtaining any Federal Communications
Commission PCS licenses.
In October 1994, the Company loaned a Director of the Company,
$178,000 to purchase 76,080 shares of common stock at a purchase price of
$2.00 per share and 3,920 shares of redeemable convertible Series D preferred
stock at a purchase price of $6.55 per share. The note bears interest at
7.69% per annum. Principal and accrued interest are due in October 2004. The
note is secured by a pledge of the stock by the Director and is non-recourse
to the Director. The note principal is included as a component of
stockholders' equity and redeemable convertible preferred stock on the
accompanying consolidated balance sheets as of December 31, 1995 and 1996.
STOCK OPTION/STOCK ISSUANCE PLAN
During 1994, the Board of Directors adopted the 1994 Stock
Option/Stock Issuance Plan (the "Plan") under which incentive stock options
may be granted to employees and officers and nonqualified (supplemental)
stock options may be granted to employees, officers, directors, and
consultants to purchase shares of the Company's common stock. Accordingly,
the Company, as of December 31, 1995, had reserved a total of 1,000,000
shares of the Company's common sock for issuance upon the exercise of options
granted pursuant to the Plan. Options granted under the Plan generally expire
10 years following the date of grant and are subject to limitations on
transfer. During 1996, the Board of Directors approved the amendment to and
restatement of the Plan, and authorized this issuance of an additional
1,400,000 shares of common stock thereunder.
F-52
Option grants under the Plan are subject to various vesting
provisions, all of which are contingent upon the continuous service of the
optionee and may not impose vesting criterion more restrictive than 20% per
year. The exercise price of options granted under the Plan must equal or
exceed the fair market value of the Company's common stock on the date of
grant. Unless otherwise terminated by the Board of Directors, the Plan
automatically terminates in January 2004.
The Company has elected to use the intrinsic value-based method of
APB Opinion No. 25 to account for the Plan. Accordingly, no compensation
cost has been recognized in the accompanying consolidated financial
statements for the Plan because the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date
for each option.
The Company has adopted the pro forma disclosure provisions of SFAS
No. 123. Pro forma results may not be representative of the effects on
reported net loss for future years. Had compensation cost for the Company's
stock-based compensation plans been determined in a manner consistent with
the fair value approach described in SFAS No. 123, the Company's net loss
would be increased to the pro forma amounts indicated below (in thousands):
1995 1996
---- ----
Net loss As reported $(11,271) $(35,908)
Pro forma $(11,290) $(36,110)
Pro forma net loss reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts above because compensation cost is reflected over the options'
vesting period of 4-5 years and compensation cost for options granted prior
to January 1, 1995 is not considered.
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing minimum value method model with the
following weighted-average assumptions used for granted options in 1995 and
1996, respectively: zero dividend yield; zero expected volatility; risk-free
interest rates of 5.91% and 5.88%, respectively; and weighted average
expected lives of 2.65 years and 2.04 years, respectively.
A summary of the status of the Company's Plan as of December 31,
1994, 1995 and 1996 is as follows:
1994 1995 1996
---------------- ----------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- ------ -------- ------ --------
Outstanding at beginning of year - $ - 761,920 $0.41 881,920 $1.51
Granted 761,920 0.41 160,000 6.41 1,142,000 8.43
Exercised - - - - (41,920) 0.25
Canceled - - (40,000) 0.25 - -
------- ------- ---------
Outstanding at end of year 761,920 0.41 881,820 1.51 1,982,000 5.52
------- ------- ---------
------- ------- ---------
Options exercisable at end of year - 433,001 568,080
Shares available for grant 238,080 118,080 376,080
Weighted average fair value of
options granted during the year $0.90 $0.93
F-53
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGES OF OUTSTANDING CONTRACTUAL EXERCISE OUTSTANDING EXERCISE
EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE
- -------------- ----------- ----------- -------- ----------- --------
$0.25 612,000 7.36 $ 0.25 460,331 $0.25
From $2.00 to $2.50 68,000 6.55 2.09 42,750 2.08
From $6.25 to $9.38 1,302,000 8.05 8.18 64,999 6.40
--------- -------
From $0.25 to $9.38 1,982,000 7.78 5.52 568,080 1.09
--------- -------
--------- -------
(12) INCOME TAXES
The Company has incurred net losses since inception and has not
recorded any provision for income taxes. The reconciliation between the
amount computed by applying the U.S. federal statutory tax rate of 34% to net
loss before income taxes and the actual provision for income taxes as of
December 31, 1994, 1995, and 1996 follows (in thousands):
1994 1995 1996
----- ---- ----
Income tax (benefit) at statutory rate .......... $(851) $(3,832) $(12,208)
License amortization ............................ - 341 302
Other ........................................... - - 18
Net operating loss and temporary differences
for which no tax benefit was recognized ........ 851 3,791 11,888
----- ------- --------
$ - $ - $ -
----- ------- --------
----- ------- --------
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities as of
December 31, 1995 and 1996 are as follows (in thousands):
1995 1996
---- ----
Deferred tax assets:
Loss carryovers and deferred start-up expenditures ............ $4,642 $12,788
Equity in foreign investments ................................. - 501
------ -------
Total gross deferred tax assets ............................ 4,642 13,289
Less valuation allowance ................................... (655) (9,948)
------ -------
Total deferred tax assets ............................... 3,987 3,341
Deferred tax liabilities:
Fixed assets .................................................. - (153)
Equity in foreign investments ................................. (3,987) -
License fees .................................................. - (3,103)
Debt issuance costs ........................................... - (85)
------ -------
Total deferred tax liabilities .......................... (3,987) (3,341)
------ -------
Net deferred tax assets ................................. $ - $ -
------ -------
------ -------
Management has established a valuation allowance for the
portion of deferred tax assets for which realization is uncertain. The
valuation allowances as of December 31, 1995 and 1996 were $655,000 and
$9,948,000, respectively. The net changes in valuation allowance during 1995
and 1996 was a decrease of $705,000 for 1995 and an increase of $9,293,000
for 1996.
F-54
As of December 31, 1996, the Company has cumulative U.S. federal net
operating losses of approximately $26,300,000, which can be used to offset
future income subject to federal income taxes. The federal tax loss
carryforwards will expire from 2008 through 2011. The Company has cumulative
California net operating losses of approximately $17,800,000, which can be
used to offset future income subject to California income taxes. The
California tax loss carryforwards will expire from 1998 through 2001.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. Most of the U.S. federal and California net
operating loss carryforwards are subject to limitation as a result of these
restrictions. The ownership change restrictions are not expected to impair
the Company's ability to utilize the affected carryforward items. If there
should be a subsequent ownership change, as defined, of the Company, its
ability to utilize its carryforwards could be reduced.
The Company's foreign subsidiaries have aggregate net operating
losses of approximately $2,130,000. The foreign loss carryovers expire over
periods varying from six years to indefinitely.
(13) COMMITMENTS AND CONTINGENCIES
LEASE AND OTHER COMMITMENTS
The Company and its consolidated subsidiaries lease their facilities
and certain equipment under noncancelable operating lease agreements expiring
through 2001. Future minimum lease payments due under noncancelable operating
leases total approximately $768,000, $705,000, $637,000, $605,000 and
$573,000 in 1997 through 2001, respectively.
Total rent expense was approximately $47,000, $60,000 and $324,000
for the years ended December 31, 1994, 1995, and 1996, respectively.
In October 1996, SRC entered into a contract with Nokia
Telecommunications Oy to acquire approximately $12.3 million of trunking
equipment and related services in six phases. It is anticipated that this
contract will be assigned to Via 1 upon the legal formation of the joint
venture, which is anticipated to occur during the second quarter of 1997.
CAPITAL CONTRIBUTIONS
In order to protect the Company's investments in affiliates from
ownership dilution, the Company has committed to make additional capital
contributions to the LWBs as needed. During 1997, the Company anticipates
making additional investments in various operating and nonoperating companies
totaling $24,597,000.
NOTE PAYABLE
The Company was jointly and severally liable on a $16,000,000 note
payable to an unrelated party in connection with its RHP investment. The note
bore interest at 6.95% with principal and interest due October 10, 1996. The
Company had recorded its pro rata share of this note on the accompanying
consolidated balance sheet. In October 1996, the Company paid its $4,000,000
pro rata share of this note, plus $278,000 of accrued interest and the other
shareholders of RHP paid their pro rata share.
CONTINGENT LIABILITY OF CONSOLIDATED SUBSIDIARY
During 1996, the Company entered into an agreement with the major
supplier of TeamTalk, agreeing to a moratorium on payments for work performed
prior to April 30, 1996. Subsequent to the agreement, invoices relating to
assets purchased prior to the cut-off period were submitted by the supplier
and are currently in dispute by TeamTalk. TeamTalk has not recognized any
liability pertaining to those invoices. The Company and TeamTalk expect to
resolve this matter without any material adverse consequence.
F-55
GUARANTEE OF DEBT OF EQUITY INVESTEE
In connection with a Malaysian Ringgit 91,000,000 (approximately
$35,968,000 as translated using effective exchange rates at December 31,
1996) senior credit facility with a Malaysian bank obtained by the Company's
30% equity investee, STW, the Company along with other STW shareholders,
executed a financial "keep well" covenant pursuant to which they have agreed
(i) to ensure that STW will remain solvent and be able to meet its financial
liabilities when due and (ii) to ensure that the project is timely completed
and to make additional debt and equity investments in STW to meet cost
overruns. The loan is repayable by STW in eleven semi-annual installments
beginning October 8, 1997. The Company and other STW shareholders have
separately executed an agreement, whereby each shareholder has agreed to
share in the liability on a pro rata basis in relation to their interest in
STW. In the event that the bank were to seek repayment from the STW
shareholders and the other shareholders were unable to honor their pro rata
share in the liability, the Company might be liable for the full amount of
the outstanding amount of the loan. As of December 31, 1996, the balance on
this loan was Ringgit 91,000,000 or $35,968,000.
The Company does not believe it is practicable to estimate the fair
value of the guarantee and does not believe exposure to loss is likely.
Accordingly, no provision has been made in the accompanying consolidated
financial statements.
The Company, indirectly through its affiliate, New Zealand Wireless
Limited, owns 15% of PT Mobilkom Telekomindo (Mobilkom). Mobilkom expects to
fund the continued buildout of its network and the acquisition of subscriber
terminals primarily through a seven-year $50 million revolving/reducing
credit facility which it has obtained from a syndicate of Thai banks.
Borrowings under the credit facility bear interest at a floating rate based
on LIBOR and are secured by substantially all of Mobilkom's assets and a
pledge of all the capital stock held by the Company and Mobilkom's other
shareholders. Another Mobilkom shareholder has guaranteed borrowings of up to
$25 million under the credit facility. As of December 31, 1996, borrowings of
approximately $20,210,000 were outstanding under this facility.
The Company indirectly owns a 19.8% equity interest in PT Mobile
Selular Indonesia ("Mobisel"), a provider of cellular services in Indonesia
through its 28.3% ownership in RHP. Mobisel has obtained a six-year $60
million credit facility from Nissho Iwai International (Singapore) Pte. Ltd.
("Nissho Iwai") to finance the construction of its network. Borrowings under
the credit facility bear interest at a floating rate based on LIBOR and are
secured by all of Mobisel's assets and a pledge of all the capital stock held
by RHP and Mobisel's other shareholders. RHP has also guaranteed the credit
facility. As of December 31, 1996, borrowings of approximately $60 million
were outstanding under this facility.
F-56
(14) GEOGRAPHIC INFORMATION
Information about the Company's consolidated operations in different
geographic areas for the three years ended December 31, 1994, 1995 and 1996
is as follows (in thousands):
1994 1995 1996
---- ---- ----
Revenues:
Latin America ............. $- $- $-
Southeast Asia ........... - - -
Pacific and Far East ..... - - 869
United States ............ - - -
-------- --------- ---------
$- $- $869
-------- --------- ---------
-------- --------- ---------
Operating loss:
Latin America ........... $- $(154) $(3,844)
Southeast Asia .......... - - (692)
Pacific and Far East .... - (3,756) (13,717)
United States ........... (2,481) (6,211) (11,667)
-------- --------- ---------
$(2,481) $(10,121) $(29,920)
-------- --------- ---------
-------- --------- ---------
Identifiable assets:
Latin America ........... $2,157 $ 13,017 $19,712
Southeast Asia .......... 10 5,658 6,541
Pacific and Far East .... 3,429 50,017 104,966
United States ........... 12,828 26,951 38,139
-------- --------- ---------
$18,424 $95,643 $169,358
-------- --------- ---------
-------- --------- ---------
The Company's consolidated operations in Latin America are in Brazil
and Peru. The Company's consolidated operations in Southeast Asia are in
Pakistan. The Company's consolidated operations in Pacific and Far East are
in New Zealand and China. The Company's equity method and cost investees are
included in the geographic areas in which principal operations exist or will
exist (see Note 5).
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, notes
receivable from and advances to affiliates, accounts payable and accrued
expenses, notes payable to related party and note payable approximates the
fair market value due to the relatively short maturity of these instruments.
The fair value of other financial instruments is described below.
The following methods and assumptions were used to estimate the fair
value of each category of financial instruments for which it is practicable
to estimate that value:
INVESTMENT IN AFFILIATE HELD FOR SALE -- The fair value of this
instrument is determined by management to be the same as its carrying amount.
INVESTMENTS IN AFFILIATES CARRIED ON THE COST METHOD -- The fair
value of these instruments is estimated based upon recent transactions in
this portfolio (see Note 5).
LONG-TERM DEBT, NET -- The fair value of the Exchange Notes was
estimated by management to be the same as the carrying amount as no change in
prevailing interest rates had occurred since the August 1996 issuance of the
Notes.
The estimated fair values of the Company's financial assets
(liabilities) as of December 31 are summarized as follows (in thousands):
F-57
1996
---------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
Investment in affiliate held for sale .... $2,062 $2,062
Investment in affiliates carried on
the cost method ......................... 2,926 3,833
Long-term debt, net ...................... (75,466) (75,466)
(16) SUBSEQUENT EVENTS
In January 1997, STOL acquired an additional 9% of RPSL for
$2,100,000.
In March 1997, the Company loaned $3,500,000 to SDL. The loan, in
the form of a promissory note, accrues interest at 9% per annum and is due
upon written demand by the Company.
As discussed above, the holders of the Warrants issued in connection
with the Debt Offering are entitled to purchase 11.638 shares of common
stock per Warrant, representing in the aggregate approximately 10.0% of the
outstanding stock of the Company on a fully-diluted basis as of August 15,
1996 (see Note 9). In the event that a qualified initial public offering of
common stock in which the Company raises at least $50 million in net cash
proceeds does not occur on or prior to May 15, 1997, each unexercised Warrant
will entitle the holder thereof to purchase an additional 2.645 shares of
common stock. On March 27, 1997, the Board of Directors determined, based on
discussions with the Company's prospective underwriters, that it was unlikely
that the Company will complete such an offering on or prior to May 15, 1997.
The Company was not in compliance with its bond indenture covenants
to submit audited consolidated financial statements and a compliance
certificate within 90 days of the Company's fiscal year end. The Trustee has
indicated that it would not consider this matter to be an event of default
and that such noncompliance is curable upon the delivery of this document and
the compliance certificate to the Trustee prior to April 30, 1997.
F-58
INDEPENDENT AUDITORS' REPORT
Report No. 27181S
THE BOARD OF DIRECTORS AND STOCKHOLDERS
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
We have audited the consolidated balance sheets of PT Rajasa Hazanah
Perkasa and Subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income and deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with auditing standards established by
the Indonesian Institute of Accountants, which are substantially similar to the
generally accepted auditing standards in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PT Rajasa
Hazanah Perkasa and Subsidiary as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles in the Republic of Indonesia.
Generally accepted accounting principles in Indonesia vary in certain
respects with those in the United States of America. A description of the
significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net income and
stockholders' equity are set forth in Notes 22 and 23 to the consolidated
financial statements.
PRASETIO, UTOMO & CO.
Drs M.P. Sibarani
License No. SI.570/MK.17/1993
March 24, 1997
F-59
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
1995
(RESTATED)
(SEE NOTE 2) 1996
NOTES RP RP U.S. $ (NOTE 3)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ 2,4,9,13 5,543,708,243 15,676,909,861 6,578,645
Accounts receivable
Trade -- net of allowance for doubtful accounts of Rp
568,483,998 in 1995 and Rp 7,600,569,741 in 1996.... 2,5,9,13 2,617,547,345 5,099,085,512 2,139,776
Others................................................. 79,039,898 681,504,236 285,986
Inventories -- net of allowance for obsolescence of Rp
3,858,732,612 in 1995 and Rp 2,282,225,057 in 1996..... 2,6,9 3,462,954,359 1,316,129,149 552,299
Prepaid taxes............................................ 296,370,438 2,404,474 1,008
Prepaid expenses......................................... 2 270,883,931 3,341,430,541 1,402,195
Advances................................................. 19 -- 5,704,584,928 2,393,867
Total Current Assets..................................... 12,270,504,214 31,822,048,701 13,353,776
PROPERTY AND EQUIPMENT................................... 2,7,9,13,19
Cost 51,107,776,543 109,776,610,466 46,066,559
Accumulated depreciation................................. (2,491,591,496) (7,180,710,614) (3,013,307)
Net Book Value........................................... 48,616,185,047 102,595,899,852 43,053,252
OTHER ASSETS
Advance for purchase of equipment........................ 8 -- 45,064,135,670 18,910,673
Long-term prepayments.................................... 2 410,858,052 4,390,264,725 1,842,327
Claims for tax refund.................................... -- 1,001,401,054 420,227
Refundable deposits...................................... 160,401,084 756,401,377 317,416
Preoperating expenses.................................... 2 55,000,000 29,000,000 12,170
Total Other Assets....................................... 626,259,136 51,241,202,826 21,502,813
Total Assets............................................. 61,512,948,397 185,659,151,379 77,909,841
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Short-term loans......................................... 9 9,475,366,558 15,485,200,000 6,498,196
Accounts payable
Trade.................................................. 10 564,424,841 11,585,958,918 4,861,921
Others................................................. 11 15,094,628,251 73,413,519 30,807
Taxes payable............................................ 2,12 4,923,954,854 8,716,465,563 3,657,770
Accrued expenses......................................... 1,683,945,836 17,950,552,254 7,532,754
Current maturities of long-term debts.................... 13 8,638,028,690 1,809,565,256 759,364
Total Current Liabilities................................ 40,380,349,030 55,621,155,510 23,340,812
LONG-TERM DEBTS -- NET OF CURRENT MATURITIES............. 13 2,291,291,579 143,010,194,291 60,012,671
DUE TO STOCKHOLDERS...................................... 2,14 -- 6,003,518,250 2,519,311
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY... 12,150,167,821 2,953,733,963 1,239,502
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock -- Rp 1,000,000 par value
Authorized and issued -- 25,000 shares................. 15 25,000,000,000 25,000,000,000 10,490,978
Deficit.................................................. (18,308,860,033) (46,929,450,635) (19,693,433)
Total Stockholders' Equity (Capital Deficiency).......... 6,691,139,967 (21,929,450,635) (9,202,455)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)..................................... 61,512,948,397 185,659,151,379 77,909,841
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-60
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995
(RESTATED)
(SEE NOTE 2) 1996
NOTES RP RP U.S. $ (NOTE 3)
REVENUES....................................................... 2,16 16,812,363,798 24,469,261,033 10,268,259
COST OF REVENUES............................................... 2,17 7,831,126,477 27,290,182,329 11,452,028
GROSS PROFIT (LOSS)............................................ 8,981,237,321 (2,820,921,296) (1,183,769)
OPERATING EXPENSES............................................. 11,777,729,953 25,209,636,409 10,578,949
LOSS FROM OPERATIONS........................................... (2,796,492,632) (28,030,557,705) (11,762,718)
OTHER INCOME (CHARGES)
Interest income................................................ 403,155,251 2,029,190,074 851,527
Interest expense............................................... (4,813,937,236) (8,750,900,607) (3,672,220)
Loss on foreign exchange -- net................................ 2 (507,805,347) (2,555,505,519) (1,072,390)
Gain (loss) on disposal of property and equipment -- net....... 2 344,054,448 (113,865,638) (47,782)
Miscellaneous -- net........................................... 2,971,641,507 (395,385,065) (165,919)
Other Charges -- Net........................................... (1,602,891,377) (9,786,466,755) (4,106,784)
LOSS BEFORE PROVISION FOR INCOME TAX........................... (4,399,384,009) (37,817,024,460) (15,869,502)
PROVISION FOR INCOME TAX....................................... 12 4,173,487,000 -- --
LOSS BEFORE MINORITY INTEREST.................................. (8,572,871,009) (37,817,024,460) (15,869,502)
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY.................... 326,750,179 9,196,433,858 3,859,183
NET LOSS....................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
DEFICIT AT BEGINNING OF YEAR................................... (10,062,739,203) (18,308,860,033) (7,683,114)
DEFICIT AT END OF YEAR......................................... (18,308,860,033) (46,929,450,635) (19,693,433)
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-61
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation......................................................... 786,350,586 7,096,919,730 2,978,145
Provision for doubtful accounts...................................... 62,739,169 8,102,437,967 3,400,100
Provision for inventory obsolescence................................. 2,967,643,196 (1,576,507,555) (661,564)
Minority interest in net loss of consolidated subsidiary............. (326,750,179) (9,196,433,858) (3,859,183)
Amortization of deferred charges..................................... 4,819,331,622 -- --
Amortization of preoperating expenses................................ -- 29,000,000 12,170
Loss (gain) on disposal of property and equipment.................... (344,054,448) 113,865,638 47,782
Changes in operating assets and liabilities:
Accounts receivable............................................... 196,000,856 (11,186,440,472) (4,694,268)
Inventories....................................................... 348,812,887 3,751,126,484 1,574,119
Prepaid taxes..................................................... (232,806,380) 383,684,761 161,009
Prepaid expenses.................................................. (164,817,811) (7,139,672,080) (2,996,086)
Advances.......................................................... -- (5,704,584,928) (2,393,867)
Refundable deposits............................................... (160,401,084) (596,000,293) (250,105)
Claims for tax refund............................................. -- (1,001,401,054) (420,227)
Advance for purchase of equipment................................. -- (45,064,135,670) (18,910,674)
Accounts payable.................................................. 10,709,592,486 (3,999,680,655) (1,678,422)
Taxes payable..................................................... (3,402,494,577) 3,792,510,709 1,591,486
Accrued expenses.................................................. (5,876,403,564) 16,266,606,418 6,826,104
Net Cash Used in Operating Activities.................................. 1,136,621,929 (74,549,295,460) (31,283,800)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of property and equipment...................... 498,794,393 209,161,024 87,772
Acquisitions of property and equipment................................. (6,259,361,352) (61,427,454,916) (25,777,362)
Addition in preoperating expenses...................................... (55,000,000) (3,000,000) (1,259)
Addition in deferred charges........................................... 38,150,067,797 -- --
Increase in minority interest.......................................... 12,476,918,000 -- --
Net Cash Provided by (Used in) Investing Activities.................... 44,811,418,838 (61,221,293,892) (25,690,849)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in long-term debts................................. (16,727,237,705) 133,890,439,278 56,185,665
Increase (decrease) in short-term loans................................ (6,347,377,490) 6,009,833,442 2,521,961
Decrease in due to stockholders........................................ (52,342,326,140) 6,003,518,250 2,519,311
Proceeds from capital stock issuance................................... 24,000,000,000 -- --
Decrease in due from stockholders...................................... 4,041,764,800 -- --
Net Cash Provided by (Used in) Financing Activities.................... (47,375,176,535) 145,903,790,970 61,226,937
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (1,427,135,768) 10,133,201,618 4,252,288
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 6,970,844,011 5,543,708,243 2,326,357
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... 5,543,708,243 15,676,909,861 6,578,645
See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.
F-62
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PT Rajasa Hazanah Perkasa (the Company) was established on December 17,
1984 based on notarial deed No. 22 of Pariwondo Soekarno SH. The deed of
establishment was approved by the Ministry of Justice (MOJ) in its decision
letter No. C2-2666-HT.01.01.TH'85 dated May 8, 1985, registered at the South
Jakarta Court of Justice under No. 503/Not/1985/PN.JKT.SEL on July 24, 1985 and
was published in the State Gazette No. 82, Supplement No. 1199 dated October 14,
1986. The Company's articles of association have been amended from time to time,
most recently by notarial deed No. 106 of Sinta Susikto SH dated January 24,
1997 (see Note 15).
According to Article No. 3 of the Company's articles of association, the
Company is engaged in supplying non-wire telecommunication services and
installing and operating domestic telephone lines.
The Company changed its status to foreign capital investment based on the
approval of Investment Coordinating Board No. 22/V/PMA/1995 dated May 26, 1995
and No. 1226/A.6/1995 dated September 28, 1995.
On November 30, 1995, as covered by notarial deed No. 210 dated November
30, 1995 of Sinta Susikto SH, the Company, PT Telekomunikasi Indonesia (Telkom)
and Yayasan Dana Pensiun Pegawai Telkom (YDPP Telkom) established a joint
venture company named PT Mobile Selular Indonesia (Mobisel). In accordance with
the joint venture agreement, the Company transferred network assets to
Subsidiary as capital contribution.
Under existing regulation, Subsidiary can only operate upon the approval of
its articles of associations by MOJ. As such, the following arrangements and
conditions are adopted with respect to the transfer and assumption of the
operations of, and recognition and sharing of revenues being generated from, the
above-mentioned assets transferred to Subsidiary:
a. The operations of the network assets will be transferred to and assumed
by Subsidiary effective on the 20th day of the month of approval of its articles
of association by MOJ, with the condition that if the approval is made exactly
on the 20th day of the said month, then the transfer shall be effective on that
date.
b. Revenues generated from the operations of the transferred assets can
only be recognized by Subsidiary starting from the effectivity date of the
transfer being referred to in point (a). Prior to the said date, all revenues
generated are recognized by the Company.
c. The revenue sharing agreement between Telkom and the Company covering
the transferred assets is still valid as long as the condition in point (a) is
not yet fulfilled.
The Company, as a joint venture company, was granted an approval in
principle to engage in providing facilities for mobile cellular phone services
by the Ministry of Tourism, Posts and Telecommunications of the Republic of
Indonesia on April 28, 1995, based on the letter No. PB.301/1/25/MPPT-95.
Government Regulation No. 8 of 1993, which governs the Provision of
Telecommunications Services, stipulates that the establishment of cooperation
which aims to provide basic telecommunications services can be in the form of
joint venture, joint operation or contract management. The said regulation
further provides that entities cooperating with the domestic and/or
international telecommunications organizing bodies must use the organizing
bodies' existing telecommunications networks. If the telecommunications networks
are not available, the government regulation requires that the cooperation shall
be in the form of a joint venture capable of constructing the necessary
networks.
According to Article 3 of Subsidiary's articles of association, the scope
of activities of Subsidiary comprises operating and providing facilities for
Mobile Cellular Phone Services (Jasa Sambungan Telepon Bergerak Selular) in
accordance with existing laws.
Subsidiary's deed of establishment was approved by MOJ in its decision
letter No. C2-1238.HT.01.01-TH'96 dated January 31, 1996. Accordingly, the
Company is still entitled to the pulse sharing revenue until February 20, 1996.
F-63
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared on the historical
cost basis of accounting, except for inventory which are valued at the lower of
cost or net realizable value (market).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 70% owned Subsidiary, PT Mobile Selular Indonesia (Mobisel). Mobisel was
legally established on January 31, 1996. In recognition of its change in legal
status as explained in Note 1 and for comparative purposes, the Company restated
the 1995 accounts previously reported as if Subsidiary was legally established
in 1995 and accordingly consolidated in 1995.
All significant intercompany accounts and transactions have been
eliminated.
CASH EQUIVALENTS
Time deposits with maturities of three months or less at the time of
placement or purchase are considered as "Cash Equivalents".
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance are provided for doubtful accounts based on a review of the
status of the individual receivable accounts at the end of the year.
PREPAID EXPENSES
Prepaid expenses are amortized over the periods benefited using the
straight-line method. Prepaid expenses which benefited more than one year are
classified in "Other Assets -- Long-term Prepayments".
INVENTORIES
Inventories are stated at the lower of cost or net realizable value
(market). Cost is determined by the first-in, first-out method. The Company
provides an allowance for obsolescence on inventories based on a periodic review
of their condition.
TRANSACTIONS WITH RELATED PARTIES
The Company and its Subsidiary have transactions with entities which are
regarded as having special relationship as defined under Statement of Financial
Accounting Standards No. 7, "Related Party Disclosures".
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
The Company and its Subsidiary use double-declining balance method and
straight-line methods, respectively, for computing the depreciation, based on
the estimated useful lives of the assets as follows:
YEARS
Vehicles........................................................................... 2-4
Furniture and fixtures............................................................. 2-4
Building improvements.............................................................. 4
Computer equipment................................................................. 4
Cellular mobile telephones......................................................... 4
Machinery and equipment............................................................ 4
Maintenance and installer equipment................................................ 4
Telecommunication network.......................................................... 7
F-64
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Telecommunication network represents capitalized system costs for the
development of the Subsidiary's cellular mobile telephone systems. This includes
the costs of the construction, direct labor cost spent on the construction, and
interest on loans used to finance the construction. Capitalization of interest
ceases when the construction is completed and ready for its intended use.
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, their costs and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in income
for the period.
CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. The accumulated costs are
reclassified to the appropriate property and equipment accounts when the
construction is completed and ready for its intended use.
PREOPERATING EXPENSES
Preoperating expenses are amortized over three years up to 1998, in
accordance with the Statement of Financial Accounting Standards No. 6,
"Accounting and Reporting for a Development Stage Company".
REVENUE AND EXPENSE RECOGNITION
Revenue is recorded as earned when products are delivered to the customers
or when services are rendered. Expenses are recognized when they are incurred.
Revenue is obtained from three primary sources:
-- connecting fee for each new line sold
-- pulse-sharing
-- sales, repair, maintenance and rental of outstations and accessories
FOREIGN CURRENCY TRANSACTIONS AND BALANCES
Transactions involving foreign currencies are recorded at the rates of
exchange prevailing at the time the transactions are made. At the balance sheet
date, assets and liabilities denominated in foreign currencies are adjusted to
reflect the middle rate of Bank Indonesia prevailing at such date and the
resulting gains or losses are credited or charged to operations of the current
year.
PROVISION FOR INCOME TAX
Provision for income tax is determined on the basis of estimated taxable
income for the year. No deferred tax is provided for the timing differences in
the recognition of income and expenses in the financial statements for financial
reporting and income tax purposes.
3. TRANSLATIONS OF INDONESIAN RUPIAH AMOUNTS INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Indonesian rupiah. The translations
of Indonesian rupiah amounts into United States dollars are included solely for
the convenience of the readers, using the average buying and selling rates
published by Bank Indonesia (Central Bank) on December 31, 1996 of Rp 2,383 to
U.S.$ 1. The convenience translations should not be construed as representations
that the Indonesian rupiah amounts have been, could have been, or could in the
future be, converted into United States dollars at this or any other rate of
exchange.
F-65
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
1995
(RESTATED)
(SEE NOTE 2) 1996
Cash on hand....................................................................... Rp 22,438,597 Rp 28,161,045
Cash in banks...................................................................... 830,916,549 10,169,998,816
Cash equivalents
Time deposits, with annual interest rates ranging from 4.5% -- 6.06% for U.S.
Dollar time deposit and 17% for Rupiah time deposit.............................. 4,690,353,097 5,478,750,000
Total.............................................................................. Rp 5,543,708,243 Rp 15,676,909,861
A portion of cash and cash equivalents amounting to Rp 4,740,770,937 and Rp
3,009,678,457 as of December 31, 1995 and 1996, respectively, are used as
collateral for the short-term loans and long-term debts (see Notes 9 and 13).
5. ACCOUNTS RECEIVABLE -- TRADE
The details of this account are as follows:
1995
(RESTATED)
(SEE NOTE 2) 1996
Pulse revenue receivables.......................................................... Rp 2,579,752,929 Rp 12,093,378,485
Outstation receivables............................................................. 606,278,414 606,276,768
Total.............................................................................. 3,186,031,343 12,699,655,253
Less allowance for doubtful accounts............................................... 568,483,998 7,600,569,741
Net................................................................................ Rp 2,617,547,345 Rp 5,099,085,512
Trade receivables are used as collaterals to secure the short-term loans
and long-term debts (see Notes 9 and 13).
6. INVENTORIES
Inventories consist of the following:
1995
(RESTATED)
(SEE NOTE 2) 1996
Cellular mobile telephones........................................................ Rp 5,009,533,582 Rp 1,342,094,659
Optional equipment................................................................ 2,286,941,570 2,256,259,547
Mobile telephones in transit...................................................... 25,211,819 --
Total............................................................................. 7,321,686,971 3,598,354,206
Less allowance for obsolescence................................................... (3,858,732,612) (2,282,225,057)
Net............................................................................... Rp 3,462,954,359 Rp 1,316,129,149
Certain inventories are used as collateral to secure certain short-term
loans (see Note 9).
Allowance for inventory obsolescence is made for non-moving inventory of
old and out-modelled mobile telephone equipment.
F-66
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. PROPERTY AND EQUIPMENT
The details of property and equipment are as follows:
1995 BEGINNING ENDING
(RESTATED) BALANCE ADDITIONS DEDUCTIONS BALANCE
(SEE NOTE 2) RP RP RP RP
Cost
Vehicles......................................... 2,452,282,407 739,187,868 710,052,795 2,481,417,480
Furniture and fixtures........................... 403,108,997 121,921,924 2,276,940 522,753,981
Building improvements............................ 474,708,473 -- -- 474,708,473
Computer equipment............................... 513,888,700 137,193,300 41,667,500 609,414,500
Cellular mobile telephones....................... 325,786,242 -- 146,149,131 179,637,111
Machinery and equipment.......................... 203,951,126 1,035,000 -- 204,986,126
Construction in progress......................... 41,374,835,612 5,260,023,260 -- 46,634,858,872
Total............................................ 45,748,561,557 6,259,361,352 900,146,366 51,107,776,543
Accumulated Depreciation
Vehicles......................................... 1,654,460,019 519,139,456 676,943,561 1,496,655,914
Furniture and fixtures........................... 234,032,459 62,877,847 1,759,910 295,150,396
Building improvements............................ 261,340,006 53,342,117 -- 314,682,123
Computer equipment............................... 149,419,287 96,819,502 18,620,970 227,617,819
Cellular mobile telephones....................... 68,304,517 21,353,642 48,081,980 41,576,179
Machinery and equipment.......................... 83,091,043 32,818,022 -- 115,909,065
Total............................................ 2,450,647,331 786,350,586 745,406,421 2,491,591,496
Net Book Value................................... 43,297,914,226 48,616,185,047
BEGINNING ENDING
BALANCE ADDITIONS DEDUCTIONS BALANCE
1996 RP RP RP RP
Cost
Vehicles......................................... 2,481,417,480 2,429,220,000 1,198,837,868 3,711,799,612
Furniture and fixtures........................... 522,753,981 428,694,854 300,167,427 651,281,408
Building improvements............................ 474,708,473 -- 474,708,473 --
Computer equipment............................... 609,414,500 668,892,120 423,421,488 854,885,132
Cellular mobile telephones....................... 179,637,111 -- 179,637,111 --
Machinery and equipment.......................... 204,986,126 -- 181,848,626 23,137,500
Maintenance and installer equipment.............. -- 131,800,000 -- 131,800,000
Telecommunication network........................ -- 45,916,993,858 -- 45,916,993,858
Construction in progress......................... 46,634,858,872 57,754,810,761 45,902,956,677 58,486,712,956
Total............................................ 51,107,776,543 107,330,411,593 48,661,577,670 109,776,610,466
Accumulated Depreciation
Vehicles......................................... 1,496,655,914 678,632,031 1,025,531,138 1,149,756,807
Furniture and fixtures........................... 295,150,396 209,480,847 300,167,427 204,463,816
Building improvements............................ 314,682,123 160,026,350 474,708,473 --
Computer equipment............................... 227,617,819 359,585,023 423,421,488 163,781,354
Cellular mobile telephones....................... 41,576,179 18,953,045 60,529,224 --
Machinery and equipment.......................... 115,909,065 30,671,297 123,442,862 23,137,500
Maintenance and installer equipment.............. -- 2,745,834 -- 2,745,834
Telecommunication network........................ -- 5,636,825,303 -- 5,636,825,303
Total............................................ 2,491,591,496 7,096,919,730 2,407,800,612 7,180,710,614
Net Book Value................................... 48,616,185,047 102,595,899,852
F-67
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. PROPERTY AND EQUIPMENT -- Continued
Depreciation charged to operations amounted to Rp 786,350,586 and Rp
7,096,919,730 for the year ended December 31, 1995 and 1996, respectively. The
Company's property and equipment are used as collateral to the short-term loans
and long-term debts (see Notes 9 and 13).
8. ADVANCES FOR PURCHASE OF EQUIPMENT
This account represents deposits in Deutsche Bank to secure letters of
credit issued for purchase of certain equipment.
9. SHORT-TERM LOANS
This account represents loans obtained from the following:
1995
(RESTATED)
(SEE NOTE 2) 1996
Nissho Iwai........................................................................ Rp -- Rp 10,485,200,000
PT Bank Umum Servitia.............................................................. -- 5,000,000,000
PT Bank Utama...................................................................... 9,475,000,000 --
PT Lippobank....................................................................... 366,558 --
Total.............................................................................. Rp 9,475,366,558 Rp 15,485,200,000
As of December 31, 1996, the credit facility obtained from Nissho Iwai
amounted to U.S.$ 4,400,000 and bears interest at 2.5% above LIBOR. The Company
has pledged 773 of its ordinary shares as collateral for this credit. The credit
is used to pay certain liabilities which are owed by the Company to Bank Utama.
The credit facility obtained from PT Bank Utama bears annual interest
ranging from 20% to 24%. The loan is collateralized with certain cash,
receivables, inventories, property and equipment, and corporate guarantee from
PT Bina Reksa Perdana, a stockholder, and certain property and equipment of PT
Panutan Duta, affiliate.
The loan facility obtained from PT Bank Umum Servitia bears interest at an
annual rate of 23% and is collateralized on a pari passu basis with collaterals
of long-term debt obtained from Nissho Iwai International (Singapore) Pte., Ltd.
(see Note 13).
10. ACCOUNTS PAYABLE -- TRADE
This account represents liabilities to:
1995
(RESTATED)
(SEE NOTE 2) 1996
Nokia Telecommunications Oy, Finland................................................. Rp -- Rp 3,884,753,279
PT Telekomunikasi Indonesia (Telkom)................................................. -- 3,494,041,002
Ericsson Radio System AB............................................................. -- 2,093,452,328
PT Indonesian Satellite Corporation -- 962,996,540
Directorate General of Posts and Telecommunications.................................. -- 222,774,250
PT Satelit Palapa Indonesia.......................................................... -- 192,475,201
EDS Management Consulting............................................................ -- 141,875,000
Nokia Telecommunications, Jakarta.................................................... -- 131,879,987
Others (each below Rp 100 million)................................................... 564,424,841 461,711,331
Total................................................................................ Rp 564,424,841 Rp 11,585,958,918
F-68
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. ACCOUNTS PAYABLE -- OTHERS
As of December 31, 1995, this account mainly represents amounts due to a
former stockholder and PT Telekomunikasi Indonesia (Telkom) of Rp 6,145 million
and Rp 6,610 million, respectively. The amount due to Telkom represents the
difference between the agreed price of Telkom's portion on the network assets
transferred to Subsidiary and Telkom's share of the capital contribution in
Subsidiary. As of December 31, 1996, the above liabilities have been settled.
12. TAXES PAYABLE
1995
(RESTATED)
(SEE NOTE 2) 1996
Estimated income tax payable (less tax prepayment of
Rp 97,784,316 in 1995)............................................................ Rp 4,075,702,684 Rp --
Income tax
Article 21........................................................................ 268,692,322 583,665,864
Article 23........................................................................ 361,833,151 542,096,601
Article 25 and 29................................................................. 43,107,840 4,071,033,731
Article 26........................................................................ 174,618,857 2,618,090,566
Value added tax..................................................................... -- 901,578,801
Total............................................................................... Rp 4,923,954,854 Rp 8,716,465,563
No provision was made for income tax for the year ended December 31, 1996
since the Company and its Subsidiary are in a fiscal loss position.
A reconciliation between loss before provision for income tax, as shown in
the statement of income, and estimated taxable income for the year ended
December 31, 1995 is as follows:
Loss before provision for income tax per consolidated statement of income.............................. Rp (4,399,384,009)
Loss of Subsidiary before provision for income tax..................................................... 1,089,167,264
Gain on sale of telecommunication network.............................................................. 10,967,490,528
Income before provision for income tax................................................................. 7,657,273,783
Timing differences:
Amortization of deferred charges..................................................................... 4,819,331,622
Provision for inventory obsolescence................................................................. 2,967,643,196
Difference in beginning balance of property and equipment as regulated by Directorate General of
Taxes Circular Letter No. 44/1995................................................................. 1,211,445,061
Depreciation......................................................................................... 473,000,943
Provision for uncollectible trade receivables........................................................ 62,739,169
Gain on disposal of telecommunication network........................................................ (5,856,159,247)
Gain on disposal of property and equipment........................................................... (401,162,201)
Permanent differences:
Donation............................................................................................. 2,090,349,100
Employees' benefits in kind.......................................................................... 599,409,987
Entertainment........................................................................................ 461,698,721
Interest expense..................................................................................... 206,746,361
Tax penalty and interest............................................................................. 17,415,989
Non-taxable income
Interest already subjected to final income tax....................................................... (368,942,024)
Estimated taxable income............................................................................... Rp 13,940,790,460
F-69
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. TAXES PAYABLE -- Continued
The provision for income tax and computation of the estimated corporate
income tax payable for the year ended December 31, 1995 are as follows:
Estimated taxable income (rounded-off).................................................................. Rp 13,940,790,000
Provision for income tax................................................................................ 4,173,487,000
Prepayments of income tax
Article 22............................................................................................ 52,898,433
Article 23............................................................................................ 1,350,000
Article 25............................................................................................ 43,535,883
97,784,316
Estimated corporate income tax payable.................................................................. Rp 4,075,702,684
13. LONG-TERM DEBTS
This account represents long-term debts as follows:
1995
(RESTATED)
(SEE NOTE 2) 1996
Rupiah
PT Bank Indonesia Raya........................................................ Rp 1,718,555,179 Rp 1,718,555,179
PT Bank Tamara................................................................ 676,853,686 --
PT Lippobank.................................................................. 350,942,390 --
Others (each below Rp 100 million)............................................ 211,173,942 121,204,368
U.S. Dollar
Nissho Iwai International Pte. Ltd., Singapore................................ -- 142,980,000,000
Svenska Handelsbanken, Singapore.............................................. 7,971,795,072 --
10,929,320,269 144,819,759,547
Less current maturities......................................................... 8,638,028,690 1,809,565,256
Long-term portion............................................................... Rp 2,291,291,579 Rp 143,010,194,291
On March 12, 1996, Subsidiary obtained a loan from Nissho Iwai
International (Singapore) Pte. Ltd. (Nissho Iwai) with a maximum facility
amounting to U.S.$ 60,000,000 to finance the construction and implementation of
the NMT-450 Network in Bandar Lampung in Sumatra, Java, Bali and Lombok. The
loan, which term is five years and inclusive of a two years grace period on
principal payment, is repayable in six equal semi-annual installments. Proceeds
from collections of Subsidiary's receivables are deposited directly into escrow
accounts maintained with certain banks as chosen and agreed-upon by both
parties.
Based on the Joint Venture Agreement No. PKS 234/HK.810/UTA-00/95 dated
November 30,1995 between the Company, Telkom and Yayasan Dana Pensiun Pegawai
Telkom (YDPP Telkom), the Company transferred the balance of the loan from
Svenska Handelsbanken, Singapore to Subsidiary as of June 30, 1995 amounting Rp
10,752,598,140.
The above loans are collateralized with cash and cash equivalents,
receivables, and property and equipment of the Company and Subsidiary, corporate
guarantee from the Company and shares of Subsidiary. The Rupiah loans bear
interest at rates ranging from 20% to 23% per annum. The loan from Nissho Iwai
bears interest at an annual rate of 2.5% above LIBOR. The loan from Svenska
Handelsbanken, Singapore bears annual interest at 0.55% above one month SIBOR.
Certain loan agreements contain terms and conditions restricting the
Company and Subsidiary from, without prior consent from the lenders, taking
additional loans, entering into any investment, merger, consolidation,
reorganization and changing ownership. In addition, the Company has to maintain
certain financial ratios.
F-70
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. DUE TO STOCKHOLDERS
Due to stockholders represents unsecured and non-interest bearing loans
from:
1996
PT Bina Reksa Perdana.................................................................................... Rp 2,383,000,000
International Wireless Communications, Inc............................................................... 2,345,613,250
PT Deltona Satya Dinamika................................................................................ 1,274,905,000
Total.................................................................................................... Rp 6,003,518,250
15. CAPITAL STOCK
The stockholders and their respective stockholdings as of December 31, 1995
and 1996 are as follows:
STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT
PT Bina Reksa Perdana............................................... 12,500 50% Rp 12,500,000,000
International Wireless Communications, Inc.......................... 6,250 25 6,250,000,000
PT Deltona Satya Dinamika........................................... 6,250 25 6,250,000,000
Total............................................................... 25,000 100% Rp 25,000,000,000
Based on notarial deed of Sinta Susikto SH No. 106 dated January 24, 1997,
the Company changed certain parts of its Articles of Association including the
change in authorized and issued capital stock from Rp 25,000,000,000 to Rp
25,773,000,000 and the change in share ownership. The notarial deed has been
approved by MOJ in its decision letter No. C2-1331.HT.01.04.Th.97 dated February
27, 1997. Accordingly, the stockholders and their respective stockholdings after
the above mentioned transaction are as follows:
STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT
PT Bina Reksa Perdana............................................... 11,450 44.43% Rp 11,450,000,000
International Wireless Communications, Inc.......................... 7,300 28.32 7,300,000,000
PT Deltona Satya Dinamika........................................... 6,250 24.25 6,250,000,000
Nissho Iwai......................................................... 773 3.00 773,000,000
Total............................................................... 25,773 100.00% Rp 25,773,000,000
The Company will receive U.S.$ 8,500,000 from Nissho Iwai for the
additional issued capital. As of December 31, 1996, the Company has received
U.S.$ 4,400,000 from Nissho Iwai as a prepayment for the issuance of the new
shares. As agreed with Nissho Iwai, the prepayment has been treated as a loan
and bears interest at 2.5% above LIBOR per annum after the MOJ approval has been
obtained (see Note 9).
16. REVENUES
Revenues are as follows:
1995
(RESTATED)
(SEE NOTE 2) 1996
Pulse sharing, monthly subscription charges and airtime.......................... Rp 12,249,170,887 Rp 23,149,038,764
Sales of outstations............................................................. 4,113,518,256 811,013,167
Connecting fee................................................................... 126,500,000 342,000,000
Repair, maintenance and others................................................... 323,174,655 167,209,102
Total............................................................................ Rp 16,812,363,798 Rp 24,469,261,033
F-71
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. COST OF REVENUES
Cost of revenues are as follows:
1995
(RESTATED)
(SEE NOTE 2) 1996
Pulse sharing and airtime.......................................................... Rp 5,465,526,989 Rp 24,884,675,582
Cost of outstations................................................................ 2,055,407,793 2,365,219,867
Repair, maintenance and others..................................................... 310,191,695 40,286,880
Total.............................................................................. Rp 7,831,126,477 Rp 27,290,182,329
18. CONTINGENT LIABILITY
The Company is in a dispute with PT Larikerindo relating to the settlement
of a loan. On August 9, 1994, the court dismissed the claim against the Company.
However, PT Larikerindo filed an appeal concerning the court decision. On
December 29, 1995, the higher court again dismissed the claim. In the event the
case is reappealed, the management believes that the Company will win the case
and incur no significant cost.
19. CONSULTANCY AGREEMENTS
Subsidiary had agreements with several parties in connection with the
installation and development of infrastructure of the STKB-C (Cellular mobile
telephone network) project. The agreements, made prior to the approval of
Subsidiary's articles of association by MOJ, were entered into by the Company on
behalf of Subsidiary. These agreements are as follows:
a. Consultancy service agreement with Telecon Ltd. (Telecon), Finland,
whereby Telecon agreed to provide an expert to work in Jakarta as a training
manager in radio network planning of NMT 450i for Subsidiary. Telecon will
charge U.S. $18,500 per month and Subsidiary provides accommodation. The work
started in September 1996 and has a duration of six months.
b. Technical support agreement with Broadcast Communications Limited (BCL),
New Zealand, whereby BCL agreed to provide technical support services concerning
the development of cellular mobile radio telecommunication and related business
in Indonesia. The agreement commenced on May 20, 1996 and has a duration of 12
months. The fee for the services amounted to U.S.$ 32,839 per month (excluding
Value Added Tax) and Subsidiary provides accommodation as defined under the
agreement.
c. Supply contract and technical support agreement with Nokia
Telecommunications Oy, Finland, in connection with NMT-470 Network Expansion and
Transmission System in order to provide new network coverage for NMT mobile
telephone system. These contracts were made on January 19, 1996. Supply contract
has a contract price of U.S.$ 20.9 million, while technical support is charged
on a fixed annual fee basis as defined and set forth in the agreement. The fee
amounted to U.S.$ 91,871 for the year 1996 and with approximate U.S.$ 1 million
per year for the years 1997-2001.
d. Service contract with Nokia Telecommunications Pte. Ltd., Singapore, for
a contract price of U.S.$ 4.54 million. This is also in connection with NMT-470
Network Expansion and Transmission System in order to provide new network
coverage for NMT mobile telephone system. This contract was made on January 19,
1996.
e. Cooperation agreement on network interconnection of Subsidiary's Mobile
Cellular Phone (STBS) with Telkom's Public Service Telephone Network (PSTN).
This agreement contains the interconnection configuration points and capacities,
operation and maintenance of interconnection equipment, other facilities and
services, joint services and financial settlement. This agreement was entered
into on August 21, 1996 and may be terminated at any time subject to the express
written approval of both parties or their respective successors and permitted
assigns.
f. Service agreement with Telkom whereby Telkom will provide billing and
collection service to the Company. As compensation, the Company will pay 1% of
its collected revenue to Telkom. The agreement will expire on March 31, 1997.
F-72
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
19. CONSULTANCY AGREEMENTS -- Continued
g. Subsidiary also has several agreements with contractors which among
others include agreements for establishing telecommunication towers in Jakarta,
Depok, Cikarang, East Java, Lampung and Bali with aggregate cost approximately
amounting to Rp 5 billion and for interior design of Subsidiary's new office
with total contract cost amounting to Rp 3.1 billion.
h. The Company appointed CV Aporindo Consultant to assist the Company in
handling the settlement of the corporate income tax for the year 1995 for a
total amount Rp 3,800,000,000, inclusive of the consultant's fee. The Company
has paid Rp 1,300,000,000 to December 31, 1996 and the fee is recorded as
"Advance" in the consolidated balance sheet.
Fees related to the installation and development of infrastructure of
STKB-C are capitalized and recorded under "Property and Equipment" in the
consolidated balance sheet.
20. COMMITMENTS
a. Subsidiary has agreed to take over service equipment, spareparts and
outstations owned by the Company amounting to Rp 1,453,000,000, as appraised by
PT Aditya Appraisal Bhakti. As of December 31, 1996, only service equipment
amounting to Rp 131,800,000 has been transferred to Subsidiary.
b. As of December 31, 1996, Subsidiary has unused credit facilities
aggregating to Rp 5,000,000,000 from PT Bank Umum Servitia.
21. SUBSEQUENT EVENTS
a. Based on notarial deed No.106 of Sinta Susikto SH dated January 24,
1997, the Company's authorized capital stock was changed from Rp 25,000,000,000
divided into 25,000 shares with a par value of Rp 1,000,000 per share to Rp
25,773,000,000 divided into 25,773 shares of the same par value and other
changes in the capital structure. The changes in the authorized capital stock
was approved by the Ministry of Justice in its decision letter No.
C2-1331.HT.01.04.Th.97 dated February 27, 1997 (see Note 14).
b. On January 29, 1997, Subsidiary entered into a syndicated short-term
notes facility agreement made with PT Bank Umum Servitia (BUS), as arranger.
Under the agreement, the syndicated banks have agreed to purchase short-term
notes amounting to Rp 60,000,000,000 and interest notes amounting to Rp
15,000,000,000 issued by the Company. Subsidiary is required to pay these loans
prior to payment for all other loans.
These short-term notes will be used to finance the working capital and
expansion of Subsidiary prior to the issuance of the convertible bonds; while
the interest notes will be used to finance any accrued interest payments on the
short-term notes or the interest notes.
c. Based on the decree No. KM.5/PR.301/MPPT-97 of Ministry of Tourism,
Posts and Telecommunications of the Republic of Indonesia dated January 1, 1997,
Subsidiary, as one of mobile cellular phone services providers, is entitled to
get:
-- 100% of long-distance interconnection fee from owned STBS to owned STBS
which use owned network.
-- 30% of long-distance call pulse from owned STBS to owned STBS which use
PSTN network.
-- 15% of long-distance call pulse from owned STBS to other STBS, and
vice-versa, which use PSTN network.
-- 40% of long-distance call pulse from owned STBS to PSTN which use owned
network.
-- 15% of long-distance call pulse from PSTN to owned STBS which use PSTN
network.
F-73
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
22. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY
THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES THE FINANCIAL
STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH INDONESIAN GAAP WHICH
DIFFER IN CERTAIN RESPECTS FROM U.S. GAAP.
THE DIFFERENCES ARE REFLECTED IN THE APPROXIMATIONS PROVIDED IN NOTE 26 AND
ARISE DUE TO THE ITEMS DISCUSSED IN THE FOLLOWING PARAGRAPHS:
A. INCOME TAXES
Under Indonesian GAAP, it is acceptable to recognize Income Tax expense
based upon the estimated current Income Tax liability on the current year's
earnings. When income and expense recognition for Income Tax purposes does not
occur in the same year as income and expense recognition for financial reporting
purposes, the resulting temporary differences are not considered in the
computation of Income Tax expense for the year.
Under U.S. GAAP, the liability method is used to calculate the Income Tax
provision. Under the liability method, deferred tax assets or liabilities are
recognized for differences between the financial reporting and tax bases of
assets and liabilities at each reporting date.
b. REGULATION
The Company provides telephone service in Indonesia and therefore is
subject to the regulatory control of the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia. Rates for services are
tariff-regulated. Although changes in rates for services are authorized and
computed based on a decree issued by the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia, these are not based on a fixed
rate of return and are not designed to provide for the recovery of the Company's
cost of services. Accordingly, the requirements of U.S. GAAP related to a
business whose rates are regulated on the basis of its actual costs are not
applicable to the Companies' financial statements.
c. PRESENTATION OF THE STATEMENTS OF STOCKHOLDERS' EQUITY
Under Indonesian GAAP, except for public companies, it is not required to
present statements of retained earnings. Under U.S. GAAP, the Companies are
required to present statements of stockholders' equity.
F-74
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED UNDER
INDONESIAN AND U.S. GAAP THE FOLLOWING IS A SUMMARY OF THE SIGNIFICANT
ADJUSTMENTS TO NET INCOME FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
TO STOCKHOLDERS' EQUITY AS OF DECEMBER 31, 1995 AND 1996 WHICH WOULD BE REQUIRED
IF U.S. GAAP HAD BEEN APPLIED INSTEAD OF INDONESIAN GAAP IN THE FINANCIAL
STATEMENTS:
1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)
Net loss according to the financial statements prepared under Indonesian
GAAP................................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
Adjustments due to:
Income tax............................................................. 4,245,298,915 11,253,159,872 4,722,266
Valuation allowance.................................................... (4,245,298,915) (11,400,961,024) (4,784,289)
Approximate net loss in accordance with U.S. GAAP........................ (8,246,120,830) (28,768,391,754) (12,072,342)
Stockholders' equity (capital deficiency) according to the financial
statements prepared under Indonesian GAAP.............................. 6,691,139,967 (21,929,450,635) (9,202,455)
Adjustments due to:
Income tax............................................................. 5,127,282,969 16,380,442,841 6,873,875
Valuation allowance.................................................... (5,127,282,969) (16,528,243,993) (6,935,898)
Approximate stockholders' equity (capital deficiency) in accordance with
U.S. GAAP.............................................................. 6,691,139,967 (22,077,251,787) (9,264,478)
Regarding the consolidated balance sheets and statements of income and
deficit, the following significant captions determined under U.S. GAAP would
have been presented:
1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)
Balance sheets:
Current assets........................................................ 12,270,504,214 31,822,048,701 13,353,776
Total assets.......................................................... 61,512,948,397 185,659,151,379 77,909,841
Current liabilities................................................... 40,380,349,030 55,621,155,510 23,340,812
Total liabilities..................................................... 54,821,808,430 207,736,403,166 87,174,319
Statements of income and deficit:
Loss from operations.................................................. 2,796,492,632 28,030,557,705 11,762,718
F-75
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
24. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP
The following information is presented on the basis of U.S. GAAP:
INCOME TAX
The tax effect on significant temporary differences is as follows:
1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)
Deferred tax assets -- current:
Allowance for inventory obsolescence..................................... 1,157,619,784 684,667,517 287,313
Allowance for doubtful accounts.......................................... 170,545,199 2,280,170,922 956,849
1,328,164,983 2,964,838,439 1,244,162
Valuation allowance...................................................... (1,328,164,983) (2,964,838,439) (1,244,162)
Total deferred tax assets -- current -- net.............................. -- -- --
1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)
Deferred tax assets -- non-current:
Tax loss carryforwards................................................... 98,024,916 10,453,429,119 4,386,668
Property and equipment................................................... 3,701,093,070 3,105,626,435 1,303,242
Preoperating expenses.................................................... -- 4,350,000 1,825
3,799,117,986 13,563,405,554 5,691,735
Valuation allowance...................................................... (3,799,117,986) (13,563,405,554) (5,691,735)
Total deferred tax assets -- non-current -- net.......................... -- -- --
Deferred tax liabilities -- non-current:
Property and equipment................................................... -- 51,079,045 21,435
Prepaid long-term rent................................................... -- 96,722,107 40,588
Deferred tax liabilities -- non current.................................. -- 147,801,152 62,023
Deferred tax -- net...................................................... -- 147,801,152 62,023
The temporary differences, on which deferred tax assets have been computed
are not deductible for income tax purposes until the provision for inventory
obsolescence and provision for uncollectible trade receivable are written-off.
The differences between the book and tax bases of property and equipment,
prepaid long-term rent and preoperating expenses are due to the differing
recognition methods for Income Tax and financial reporting purposes.
F-76
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
24. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S.
GAAP -- Continued
The Income Tax provision recorded under U.S. GAAP differs from the expected
provision at U.S. statutory rates due to certain permanent differences detailed
below:
1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)
Approximate loss before Income Tax in accordance
with U.S. GAAP......................................................... (4,399,384,009) (37,817,024,460) (15,869,502)
Effect of permanent differences:
Donation............................................................... 2,090,349,100 34,041,756 14,285
Expenses incurred during preoperating stage of Subsidiary.............. 762,417,085 -- --
Employees' benefits in kind............................................ 599,499,987 47,837,543 20,075
Entertainment.......................................................... 461,698,721 33,906,969 14,229
Interest expense....................................................... 206,746,361 2,114,346,227 887,262
Tax penalty and interest............................................... 17,415,989 104,353,376 43,791
Interest income which was already subjected to final tax............... (368,942,024) (2,027,994,320) (851,026)
3,769,185,219 306,491,551 128,616
Approximate loss before Income Tax in accordance
with U.S. GAAP......................................................... (630,198,790) (37,510,532,909) (15,740,886)
Provision for income tax (on tax loss) in accordance with U.S. GAAP
before adjustment...................................................... (197,809,637) (11,253,159,872) (4,722,266)
Adjustment for enacted changes in tax rates.............................. 125,997,722 -- --
Increase in valuation allowance.......................................... 4,245,298,915 11,400,961,024 4,784,289
Provision for income tax (on tax loss) in accordance with U.S. GAAP after
adjustment............................................................. 4,173,487,000 147,801,152 62,023
Donations amounting to Rp 2,079,486,000 were given to Yayasan Dana Pensiun
Pegawai (YDPP) Telkom (Pension Fund of Telkom) as YDPP Telkom's contribution in
Subsidiary.
b. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts for the years
ended December 31, 1995 and 1996 are as follows:
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
FOR THE YEARS ENDED YEAR EXPENSES DEDUCTIONS YEAR
RP RP RP RP
December 31, 1995.......................................... 505,744,829 62,739,169 -- 568,483,998
December 31, 1996.......................................... 568,483,998 8,102,437,967 1,070,352,224 7,600,569,741
Activity in the Company's allowance for inventory obsolescence for the
years ended December 31, 1995 and 1996 are as follows:
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
FOR THE YEARS ENDED YEAR EXPENSES DEDUCTIONS YEAR
RP RP RP RP
December 31, 1995........................................ 891,089,416 2,967,643,196 -- 3,858,732,612
December 31, 1996........................................ 3,858,732,612 -- 1,576,507,555 2,282,225,057
F-77
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
25. RECLASSIFICATIONS OF ACCOUNTS
Certain accounts in the 1995 financial statements have been reclassified to
conform with the presentation of accounts in the 1996 financial statements.
F-78
ATTACHMENT I
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
CAPITAL STOCK STOCKHOLDERS'
(ISSUED AND FULLY PAID) DEFICIT EQUITY
DESCRIPTION RP RP RP
BALANCE as of January 1, 1995............................... 1,000,000,000 (10,062,739,203) (9,062,739,203)
Approved during the Extraordinary General Meeting of the
Stockholders on November 9, 1995: Increase in the issued
and fully paid-up capital from Rp 1,000,000,000 to Rp
25,000,000,000............................................ 24,000,000,000 -- 24,000,000,000
Net loss for 1995 (restated)................................ -- (8,246,120,830) (8,246,120,830)
BALANCE as of December 31, 1995 (restated).................. 25,000,000,000 (18,308,860,033) 6,691,139,967
Net loss for 1996........................................... -- (28,620,590,602) (28,620,590,602)
BALANCE as of December 31, 1996............................. 25,000,000,000 (46,929,450,635) (21,929,450,635)
F-79
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
23(a) Consent of Arthur Andersen LLP
23(b) Consent of KPMG Peat Marwick LLP
23(c) Consent of Prasetio, Utomo & Co.