EXHIBIT 99.3
VESPER HOLDING, LTD. AND SUBSIDIARIES FINANCIAL STATEMENTS
INTRODUCTION
The financial statements of Vesper Holding, Ltd. and Subsidiaries are
included below as required by Article 3.09 of Regulation S-X. As a result of the
departure from Andersen of persons formerly engaged on the Vesper Holding Ltd.
and Subsidiaries audits, Andersen is no longer in a position to consent to the
inclusion or incorporation by reference in any filing of their report on the
Vesper Holding Ltd. and Subsidiaries' audited financial statements for the
period from January 1, 2001 through November 13, 2001 (date of our acquisition
of a controlling interest in Vesper Holding Ltd. and Subsidiaries) or the year
ended December 31, 2000. Investors in any subsequent offerings for which we use
an Andersen audit report will not be entitled to recovery against Andersen under
Section 11 of the Securities Act of 1933 for any material misstatements or
omissions in those financial statements. Management is not aware of any such
material misstatements or omissions.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NOTE: THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ANDERSEN, THE FORMER
INDEPENDENT PUBLIC ACCOUNTANTS FOR VESPER HOLDING, LTD. AND SUBSIDIARIES. THE
ANDERSEN REPORT REFERS TO CERTAIN FINANCIAL INFORMATION FOR THE PERIOD FROM
NOVEMBER 14, 2001 THROUGH DECEMBER 31, 2001 AND CERTAIN BALANCE SHEET
INFORMATION AT DECEMBER 31, 2001, WHICH ARE NO LONGER INCLUDED IN THE
ACCOMPANYING FINANCIAL STATEMENTS AS THOSE RESULTS HAVE BEEN CONSOLIDATED WITH
QUALCOMM INCORPORATED'S RESULTS SINCE ITS ACQUISITION OF A CONTROLLING INTEREST
IN VESPER HOLDING, LTD. AND SUBSIDIARIES ON NOVEMBER 13, 2001. THE ANDERSEN
REPORT ALSO REFERS TO CERTAIN BALANCE SHEET INFORMATION AT DECEMBER 31, 2000,
WHICH IS NO LONGER INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS AS QUALCOMM
INCORPORATED IS NOT REQUIRED TO INCLUDE VESPER HOLDING, LTD. AND SUBSIDIARIES
SEPTEMBER 30, 2000 BALANCE SHEET INFORMATION IN ITS FORM 10-K. A DISCLOSURE
MODIFICATION WAS MADE IN THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS TO
REFLECT THE CORRECTION OF A TYPOGRAPHICAL ERROR IN NOTE 1, BASIS OF
PRESENTATION, WHERE NOVEMBER 31, 2001 SHOULD HAVE READ NOVEMBER 13, 2001.
ANDERSEN HAS NOT REISSUED THIS REPORT IN CONNECTION WITH THE FILING OF THIS
ANNUAL REPORT ON FORM 10-K.
To the Board of Directors and Shareholders of Vesper Holding, Ltd.:
We have audited the accompanying consolidated balance sheets of Vesper Holding,
Ltd. (a Cayman Islands corporation) and Subsidiaries, and its Predecessor
Companies (see Notes 1, 2 and 3) as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the period from November 14, 2001 through December 31, 2001,
the period from January 1, 2001 through November 13, 2001 and the year ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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.
As discussed in Note 2 to the consolidated financial statements, the Company has
incurred significant operating and net losses, negative cash flows from
operations, and has negative working capital. Additionally, during 2002 the
Company expects to incur substantial losses and negative cash flows from
operations in order to complete the planned development and expansion of its
business. In May 2002, the Company's majority shareholder expressed intent to
provide up to $100 million of additional bridge financing to fund the Company's
operations, and began advancing a portion of the funds under a bridge loan
agreement. If $100 million of bridge financing is provided, the Company believes
it can sustain operations through 2002, at which time additional financing will
be needed. The majority shareholder is under no legal obligation to provide such
funding, and other sources of financing may not be available on terms acceptable
to the Company, if at all. Management's plans regarding these matters are also
discussed in Note 2.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vesper Holding, Ltd. and
Subsidiaries, and its Predecessor Companies, as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for the period from
November 14, 2001 through December 31, 2001, the period from January 1, 2001
through November 13, 2001 and the year ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Diego, California
May 20, 2002
2
VESPER HOLDING, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands)
Period from
January 1, 2001
through Year Ended
November 13, 2001 December 31, 2000
----------------- -----------------
(Predecessor (Predecessor
Companies) Companies)
REVENUES $ 114,384 $ 71,122
--------- ---------
OPERATING EXPENSES:
Cost of revenues 201,691 203,793
Selling, general and administrative 141,905 132,102
Foreign currency transaction (gain)
loss, net 249,988 56,845
Depreciation and amortization 129,542 66,506
--------- ---------
Total operating expenses 723,126 459,246
--------- ---------
OPERATING LOSS (608,742) (388,124)
INTEREST EXPENSE, net (113,154) (96,847)
--------- ---------
NET LOSS $(721,896) $(484,971)
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
VESPER HOLDING, LTD. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
(in thousands)
Accumulated
Receivable Other Total
Capital from Accumulated Comprehensive Shareholders'
Stock QUALCOMM Deficit Income (Loss) Equity
--------- -------- ----------- ------------- -------------
(Predecessor Companies)
Balance, December 31, 1999 $ 183,234 $ -- $ (55,712) $ 436 $ 127,958
Net loss -- -- (484,971) -- (484,971)
Cumulative translation adjustment -- -- -- (9,091) (9,091)
---------
Comprehensive loss (494,062)
---------
Funding from shareholders 423,936 -- -- -- 423,936
--------- ------- ----------- -------- ---------
Balance, December 31, 2000 607,170 -- (540,683) (8,655) 57,832
Net loss -- -- (721,896) -- (721,896)
Cumulative translation adjustment -- -- -- 13,225 13,225
---------
Comprehensive loss (708,671)
---------
Advances from shareholders prior to the
Restructuring (Note 2) 60,337 60,337
Funding from shareholders 330,386 -- -- -- 330,386
--------- ------- ----------- -------- ---------
Balance, November 13, 2001 $ 997,893 $ -- $(1,262,579) $ 4,570 $(260,116)
========= ======= =========== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
VESPER HOLDING, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Period from
January 1, 2001 Year Ended
through December 31,
November 13, 2001 2000
----------------- ------------
(Predecessor (Predecessor
Companies) Companies)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(721,896) $(484,971)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 129,542 66,506
Loss on disposal of property and
equipment 24,554 26,323
Allowance for doubtful accounts
receivable 46,046 10,506
Foreign currency transaction (gain)
loss 249,988 56,845
Increase (decrease) in cash resulting
from changes in:
Accounts receivable (12,560) (73,734)
Recoverable taxes 49,326 (6,023)
Inventories (2,148) --
Prepaid expenses and other 1,321 (3,882)
Other assets (1,245) (38,945)
Accounts payable 16,673 1,567
Accrued expenses (12,110) (3,874)
Amounts due related parties (22,603) (33,912)
Deferred revenues (9,135) 21,899
Other liabilities (18,767) --
--------- ---------
Net cash used in operating
activities (283,014) (461,695)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (72,085) (386,806)
Acquisition of licenses and intangibles -- (36,369)
--------- ---------
Net cash used in investing
activities (72,085) (423,175)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Fundings from shareholders 330,386 423,936
Proceeds from shareholders related to
restructuring (Note 2) 60,337 --
Net proceeds (repayment) on vendor
financing and loans (40,797) 407,321
Payments to Vendors related to restructuring (Note 2) -- --
--------- ---------
Net cash provided by financing
activities 349,926 831,257
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (15,592) (2,873)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (20,765) (56,486)
CASH AND CASH EQUIVALENTS, beginning of
period 38,102 94,588
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 17,337 $ 38,102
========= =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Assets acquired under debt obligations:
Property, plant and equipment $ 66,861 $ 300,628
Licenses and intangibles -- 14,261
The accompanying notes are an integral part of these consolidated financial
statements.
5
VESPER HOLDING, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
1. Company, Operations and Basis of Presentation
Company
Vesper Holding, Ltd. ("VHL") was incorporated in the Cayman Islands on
October 11, 2001 as a holding company for the purpose of acquiring and
restructuring its current subsidiaries, Vesper Holding S.A. ("Vesper
Northeast") and Vesper Holding Sao Paulo ("Vesper Sao Paulo") (together,
the "Predecessor Companies") (see Note 2).
Vesper Northeast and Vesper Sao Paulo were previously formed by VeloCom
Inc. ("VeloCom"), Bell Canada International, Inc. ("BCI") and QUALCOMM,
Incorporated ("QUALCOMM") to act as holding companies and to establish
the operating companies Vesper S.A. and Vesper Sao Paulo S.A. Vesper
Northeast and Vesper Sao Paulo were organized under the laws of Brazil
as corporations in September 1998 and May 1999, respectively. The
operating companies are subject to the laws and regulations governing
telecommunication services in effect in Brazil.
Operations
Vesper Northeast and Vesper Sao Paulo submitted bids for two competitive
local exchange carrier licenses (the "Licenses") for commercial
operations of switched fixed telephone services, one in Rio de Janeiro
and the North and Northeast regions of Brazil comprised of sixteen
Brazilian states, and one for the State of Sao Paulo, Brazil,
respectively. Commercial switched fixed telephone operations started in
January 2000 for Vesper Northeast and February 2000 for Vesper Sao
Paulo.
Basis of Presentation
The accompanying financial statements for the year ended December 31,
2000, and for the period from January 1, 2001 to November 13, 2001
represent the historical combined consolidated financial statements of
the Predecessor Companies.
All significant intercompany accounts and transactions have been
eliminated in combination and consolidation.
2. Recapitalization, Debt Restructuring and Financial Condition
Recapitalization
On November 13, 2001, QUALCOMM, VeloCom, and BCI (collectively, the
"Shareholders"), entered into a restructuring agreement (the
"Restructuring Agreement") to exchange all of their equity interests in
Vesper Northeast and Vesper Sao Paulo for 2,523,674 ordinary shares and
1,155,152 special voting shares of VHL.
As part of the same transaction, QUALCOMM and VeloCom converted other
previously existing advances totaling $60.3 million to Vesper Northeast
and Vesper Sao Paulo into 12,177,290 ordinary shares of VHL. QUALCOMM
and VeloCom also agreed to purchase 57,720,404 ordinary shares of VHL
for an aggregate purchase price of $286.1 million. As of December 31,
2001, cash proceeds totaling $222.5 million out of the total due of
$286.1 million had been received by VHL from QUALCOMM and VeloCom. At
December 31, 2001, the remaining $63.6 million was due and payable by
QUALCOMM on an as-needed basis, and is reflected in the accompanying
statement of shareholders' equity as a receivable from QUALCOMM.
Subsequent to December 31, 2001, approximately $63 million of this
receivable was collected by the Company. An additional 1,010,026
ordinary shares were issued related to $5 million of direct costs of the
Restructuring.
As a result of the recapitalization, QUALCOMM, VeloCom, and BCI became
approximately 74%, 24%, and 2% shareholders in VHL, respectively, and
Vesper Northeast and Vesper Sao Paulo became wholly owned subsidiaries
of VHL. QUALCOMM holds a 49.9% ownership interest in VeloCom and
consequently, at December 31, 2001, QUALCOMM's direct and indirect
ownership of VHL was approximately 86%. Subsequent to December 31, 2001,
the Company sold 2,020,202 shares to a new investor in exchange for $10
million in cash.
Debt Restructuring
Effective November 13, 2001, VHL agreed with the Predecessor Companies
and a group of vendors (Nortel, Ericsson, Lucent, Harris Corporation and
QUALCOMM (collectively, the "Vendors")) to acquire and retire previously
existing Vendor financing loans made to the Predecessor Companies as
part of the Restructuring Agreement. VHL acquired the loans for $135
million and such proceeds were paid to the Vendors in exchange for a
release in full of any claims against VHL and its shareholders,
including the Vendor financing loans approximating $1 billion at face
value on November 13, 2001. In addition to the cash payment, the
Vendors, with
6
the exception of QUALCOMM, received warrants to purchase 5,687,717
ordinary shares of VHL, which expire on November 9, 2006 and have an
exercise price of $4.96 per share. The warrants were assigned a fair
value of approximately $5 million, and is recorded as a component of
shareholders' equity at December 31, 2001. The fair value of the loans
($140 million) was recorded by VHL as a component of liabilities
acquired under the purchase method of accounting.
As a condition precedent to the closing of the Restructuring Agreement,
vendor supply agreements were terminated. Thus, VHL and its subsidiaries
are no longer committed to acquire the remaining balances of equipment
and services that would have been required under the original vendor
supply agreements.
Financial Condition
From inception to November 13, 2001, the Predecessor Companies generated
an accumulated deficit of approximately $1.3 billion and negative cash
flows from operations totaling approximately $771 million. After the
completion of the restructuring agreements, the liquidity and financial
position of the Company improved significantly. However, VHL expects to
incur substantial future losses and negative cash flows from operations
in order to complete the planned development and expansion of its
business. If this plan is successfully completed, the Company believes
that it will obtain a sufficient number of new customers to allow the
Company to generate sufficient revenues to cover operating expenses.
However, management does not expect to achieve positive cash flows until
sometime after 2002. Until that time, management and shareholders of VHL
believe that additional funding, in the form of equity capital,
shareholder loans, debt financing or other instruments, will be needed.
In particular, additional financing will be necessary to purchase
telecommunications capital equipment, fund costs associated with
acquiring new subscriber customers, fund principal and interest payments
under debt and lease agreements and to fund other fixed operating costs
until such time, if ever, that the Company is able to generate positive
cash flows from operations.
Considering the Company's current financing needs and future business
plans, QUALCOMM issued a letter to the Company in which it informed the
Company that QUALCOMM's Board of Directors had authorized bridge loans
to the operating subsidiaries of up to $100 million. On April 16, 2002,
the Company executed $60 million of bridge loans payable to QUALCOMM,
against which approximately $33.3 million has been advanced to the
Company as of May 20, 2002. Any amounts that are advanced under the
bridge loans totaling $60 million are due and payable on December 27,
2002. QUALCOMM's letter to the Company states that it will continue
making additional advances throughout 2002 on an as-needed basis up to
the $100 million limit and, if required, will consider providing
additional financing beyond 2002 as a backstop to other sources of
funding. If all of the QUALCOMM bridge financing is provided, which
management believes is probable, the Company believes it can sustain
operations through the end of 2002 by carefully controlling cash
expenditures and, if necessary, by not making expenditures currently
planned for telecommunications capital equipment, costs associated with
acquiring new subscriber customers and other discretionary costs.
Management believes that additional financing will be needed sometime in
2003. The Company is also currently in discussions with the Brazilian
Development Bank to obtain $100 million to $150 million in convertible
debt financing and management believes that this financing could be
completed during the second half of 2002.
There can be no assurance that the proposed financing transactions
discussed above will be completed, and other sources of financing may
not be available, on terms acceptable to the Company, if at all. If
additional financing is not obtained, or if such financing is adequate
to sustain operations only through the end of 2002, management intends
to modify its business plan by suspending capital expenditures and
cutting variable costs in selling, general and administrative functions.
However, based on the Company's fixed cost structure, there can be no
assurance that these cost cutting measures would result in sufficient
cash resources to allow the Company to continue operating during 2003.
3. Accounting for the Restructuring and Acquisition Transactions
The restructuring and acquisition transactions involving VHL and its
Predecessor Companies (see Notes 1 and 2) have been accounted for using
the purchase method of accounting, including certain adjustments for
push-down accounting from the Company's majority shareholder. The assets
acquired and liabilities assumed as of November 13, 2001 were recorded
at their estimated fair values. The net purchase price on a push-down
basis reflects the majority shareholders' historical basis in advances
to the Predecessor Companies, including equity method losses recorded
prior to the November 13, 2001 acquisition. The excess of the estimated
fair value of the net assets acquired over the purchase price paid was
recorded as a reduction of the fair value of property, plant and
equipment and intangible assets on a pro rata basis, and was calculated
as follows:
Estimated fair values of assets acquired $ 899,010
Estimated fair values of liabilities
assumed (361,269)
---------
Net assets acquired 537,741
Net purchase price (241,928)
---------
Excess of net assets acquired over
purchase price $ 295,813
=========
7
4. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenues
Revenues for usage charges, network usage charges and other customer
services are recognized when the services are provided.
Customer activation fee revenues and related costs are deferred and
amortized over the period of the customer relationship, which is
estimated to be two years.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Restricted Cash
Restricted cash consists of compensating balance arrangements in
connection with bank loans.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost (see Notes 1 and 3)
and are depreciated or amortized using the straight-line method over
their estimated useful lives. Buildings and improvements are depreciated
for up to 23 years, equipment and vehicles are depreciated over 4 to 18
years, furniture and office equipment are depreciated over 5 to 10 years
and computer software is depreciated over 3 to 4 years. Leasehold
improvements are amortized over the shorter of their estimated useful
lives or the remaining terms of the related leases. Maintenance,
repairs, and minor renewals and betterments are charged to expense as
incurred. Upon the retirement or disposition of property, plant and
equipment, the related cost and accumulated depreciation and
amortization are removed and any resulting gain or loss is recorded in
operations.
Capital leases and sale leaseback transactions are recorded as vendor
financing and loans payable. The purchase price is recorded as property,
plant and equipment, and lease payable amounts as financing liabilities.
Interest is expensed as incurred.
Construction in progress includes labor, material, transmission and
related equipment, engineering, site development, capitalized interest
and other costs relating to the construction and development of switched
fixed telephone networks. The Company reclassifies construction in
progress and begins depreciating related equipment upon commencement of
commercial operations of the equipment.
Intangible Assets
Intangible assets consist primarily of Licenses for spectrum, customer
lists and trade name. The Licenses were allocated conditionally through
January 2019 and May 2019 and are each renewable for an additional
twenty-year period. The Licenses are renewable provided that the Company
has complied with applicable rules and policies of Agencia Nacional de
Telecommunicacoes (ANATEL), the Brazilian Government regulatory body,
and upon payment of an additional fee based on a specific formula.
Licenses are being amortized on a straight-line basis over their initial
20 year terms. Customer lists and trade name assets are being amortized
on a straight-line basis over 5 and 18 years, respectively.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances indicate that
the carrying amount of an asset may not be recovered. An impairment loss
is recognized when the undiscounted cash flows expected to be generated
by an asset (or group of assets) is less than its carrying amount. Any
required impairment loss is measured as the amount by which the asset's
carrying value exceeds its fair value, and is recorded as a reduction in
the carrying value of the related asset and a charge to operating
results.
8
Start-up Activities and Organization Costs
Costs of start-up activities and organization costs are expensed as
incurred.
Foreign Currency
The functional currency of VHL is the U.S. dollar. The functional
currency of Vesper Northeast and Vesper Sao Paulo is the Brazilian real.
Assets and liabilities of Vesper Northeast and Vesper Sao Paulo are
translated to U.S. dollars at year-end rates; revenues, expenses, gains
and losses are translated at rates of exchange that approximate the
rates in effect at the transaction date. Resulting translation gains or
losses are recognized as a component of other comprehensive income
(loss). Transactions denominated in currencies other than the functional
currency are recorded based on the exchange rate at the time such
transactions occur. Subsequent changes in exchange rates result in
transaction gains and losses that are recognized as a component of net
loss.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for
the expected future income tax consequences, based on enacted tax laws,
of temporary differences between the financial reporting and tax bases
of assets, liabilities and carryovers. Net deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance if management
believes it is more likely than not that some or all of the net deferred
tax assets will not be realized.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events
and circumstances from non-owner sources, including foreign currency
translation adjustments. VHL presents other comprehensive income (loss)
in its consolidated statements of shareholders' equity.
Concentration of Operations
The Company's operating entities are located in Brazil. The Company is
exposed to credit and currency risks resulting from adverse general
economic conditions, which may affect Brazil and Latin America in
general. The Company has not entered into any foreign currency forward
contracts, hedges or other instruments to mitigate currency risks.
Fair Value of Financial Instruments
Fair values of cash equivalents and other current accounts receivable
and payable approximate their carrying amounts due to their short-term
nature. Carrying amounts under vendor financing and loans payable
approximate fair value based on borrowing arrangements available to the
Company (see Note 5).
VHL's Brazilian operating subsidiaries have certain agreements with
suppliers of network interface units for the supply of network equipment
manufactured locally, under which the acquisition cost of related
products are denominated in U.S. dollars. The Company does not enter
into currency hedging arrangements, thus exposing the Company to
currency rate risk on related amounts payable in U.S. dollars.
Transaction gains and losses arising from such purchases are recorded in
the determination of net loss.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business
Combinations" and "Goodwill and Other Intangible Assets," respectively.
FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting
prospectively. It also provides guidance on purchase accounting related
to the recognition of intangible assets and accounting for negative
goodwill. FAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Under FAS 142,
goodwill will be tested annually and whenever events or circumstances
occur indicating that goodwill might be impaired. FAS 141 and FAS 142
are effective for all business combinations completed after June 30,
2001.
VHL's acquisition of Vesper Northeast and Vesper Sao Paulo has been
accounted for in accordance with the provisions of FAS 141. The Company
adopted FAS 142 on January 1, 2002. The adoption of FAS 142 did not have
a material effect on its consolidated financial position and results of
operations. No goodwill is recorded in the accompanying balance sheets
and intangible assets were recorded at fair value on November 13, 2001.
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." FAS 144 replaces FAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The FASB issued FAS 144 to establish a single accounting
model, based on the framework established in FAS 121, as FAS 121 did not
address the accounting for a segment of a business accounted for as a
discontinued operation under APB 30, "Reporting The Results of
Operations -- Reporting The Effects of
9
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." FAS 144 also resolves
significant implementation issues related to FAS 121. VHL will adopt FAS
144 as of January 1, 2002 and does not expect that the adoption of FAS
144 will have a material effect on its consolidated financial position
or results of operations.
5. Vendor Financing and Loans Payable
In December 1999, Vesper Northeast entered into a series of agreements
with Nortel, Ericsson, Harris Corporation and QUALCOMM to issue up to
$997 million in aggregate principal of long-term vendor financing.
Interest on these notes was payable quarterly in arrears commencing
March 2000 at LIBOR plus 6% per annum. In December 1999 Vesper Sao Paulo
entered into agreements with Lucent to issue up to $782 million of
long-term vendor financing (available in three separate tranches).
Interest on these notes was payable quarterly, at the option of the
Vesper Companies, at LIBOR plus 6% for tranch A and 8% for tranch C or a
compounded rate of 5.5% plus the higher of prime rate or the Federal
Funds effective rate. All long-term vendor financing, other than
financing provided under an agreement with QUALCOMM, was restructured
and retired in November 2001 as part of the Restructuring Agreement (see
Note 2).
Vesper Northeast and Vesper Sao Paulo hired specialized companies to
supply infrastructure and telecommunication equipment, which will be
delivered ready for use at the sites indicated by Vesper Northeast and
Vesper Sao Paulo. When the equipment is delivered to the respective
sites, the property, plant and equipment balance is recorded and the
related liability is recorded in trade accounts payable as a long-term
liability, the balance of which, after the definitive acceptance of the
site, is converted into financing, according to the conditions noted
above.
As of December 31, 2001, bank loans that are denominated in Brazilian
real are due from 2003 through 2006, payable semi-annually and bearing
CDI Brazilian interbank floating interest rate plus 1.5% per annum
(approximately 19% at December 31, 2001). Such loans are guaranteed by
cash collateral of 15% totaling $16.5 million and a substantial portion
of property, plant and equipment.
Equipment leases are subject to interest from 11% to 14.5% or LIBOR plus
additional interest varying from 1.5% to 8%.
Payments due on bank loans and equipment leases as of December 31, 2001
are as follows:
2002 $ 17,994
2003 21,629
2004 24,694
2005 67,180
2006 1,335
---------
$ 132,832
=========
6. Composition of Certain Financial Statement Captions
Accounts Receivable
Unbilled accounts receivable related to services rendered that have not
been invoiced as of the balance sheet date.
Recoverable Taxes
Recoverable taxes are mainly comprised of Value Added Taxes (VAT)
incurred on the acquisition of property and equipment, which is
recoverable against VAT payable on operation revenues. Beginning January
1, 2001, new VAT legislation requires that VAT tax credit generated
after January 2, 2001 will be recovered in forty-eight monthly
installments, if VAT tax payment is applicable.
10
7. Transactions with Related Parties
(in thousands)
December 31,
-----------------------
2001 2000
-------- -------
(VHL) (Predecessor
Companies)
Current liabilities:
Bell Canada International (BCI) (a) $ -- $14,426
CGI Brasil (BCI related party) (b) 9,186 12,122
CGI Telecom
International (b) 1,754 4,555
QUALCOMM do
Brasil (c) 69 76
QUALCOMM International (d) -- 325
VeloCom do Brasil (c) -- 540
VeloCom International (d) -- 1,210
Accrued interest on note
payable to QUALCOMM (e) 1,695 --
-------- -------
$ 12,704 $33,254
======== =======
Non-current liabilities:
Note payable to QUALCOMM (e) $108,164 $ --
======== =======
(a) In connection with a royalty agreement cancelled in November 2001
(see Note 11).
(b) In connection with the development and implementation of billing,
accounting and other systems and software and information technology
services.
(c) In connection with loans between the parties. Interest is based on
market rates.
(d) Related to the Company's inception costs.
(e) The note payable to QUALCOMM is an unsecured note bearing interest
at 12% payable bi-annually, principal due in November 2007.
8. VAT Financing
Vesper Northeast has a line of credit agreement with the Rio de Janeiro
State Government and Banco do Brasil, as the financing agent, in the
amount of R$940 million (US$405 million using the prevailing exchange
rate on December 31, 2001) for a period of sixty months, valid from the
date of the first authorization, to be used at the beginning of the VAT
taxation. Such financing will be equivalent to 60% of the effective VAT
paid over operating revenues. Financing has a grace period of
eighty-four months, an amortization period of sixty months, interest
rates of 4.5% and service tax equivalent to 1% over each installment.
9. Shareholders' Equity
Share Capital
VHL's authorized share capital consists of 498,844,848 authorized
ordinary shares and 1,155,152 authorized special voting shares. All
authorized shares have a par value of $0.0001. As of December 31, 2001,
73,431,394 ordinary shares and 1,155,152 special voting shares were
issued and outstanding. During the period from January 1, 2002 to April
30, 2002, 2,020,202 additional ordinary shares were issued to a new
shareholder at $4.96 per share for a total of $10 million. In the same
period, under the commitments described in Note 2, QUALCOMM funded $63
million of the $63.6 million receivable from QUALCOMM.
Ordinary shares and special voting shares have the same rights and
privileges except that each ordinary share is entitled to one vote, and
each special voting share is entitled to four votes per share. In
addition, each special voting share shall be convertible into one
ordinary share at the option of the Company any time after January 1,
2002, or at the option of the special shareholder any time after January
1, 2002, subject to applicable laws or regulations governing the Company
and its Licenses.
Warrants
As of December 31, 2001, there are 5,687,717 outstanding and exercisable
warrants for ordinary shares of VHL, which expire on November 9, 2006
and have an exercise price of $4.96 per share.
11
Stock Options
On April 30, 2002 the Company adopted the 2002 Stock Option Plan (the
"2002 Plan"). The 2002 Plan provides for the granting of up to 4,171,802
ordinary shares to officers, employees, directors and outside
consultants of the Company. The Plan is administered by the Board of
Directors or its designees and provides that options granted under the
Plan will be exercisable at such times and under such conditions as may
be determined by the Board of Directors at the time of the grant. The
terms of the Plan provide for the granting of options at an exercise
price not less than the fair value of the ordinary shares, as determined
by the Board of Directors on the date of grant. Options expire 10 years
from the grant date.
On April 30, 2002, a total of 2,569,830 options with exercise prices of
$4.95 per share were issued as approved by the Company's Board of
Directors. The terms of the options granted can be summarized in three
tranches including 1,159,760 options granted to employees who were
employed by the Predecessor Companies, 75,093 options granted to
employees hired after the Restructuring, and 1,334,977 options granted
to the Company's Chief Executive Officer.
For options granted to employees who were employed by the Predecessor
Companies, options granted were generally 25% vested on the date of
grant, with the remaining 75% vesting monthly beginning on December 1,
2002 over 36 months. For employees hired subsequent to the
Restructuring, the options generally vest 25% on the first anniversary
of employment, with the remaining 75% vesting monthly thereafter over 36
months.
Options granted to the Chief Executive Officer vested 25% on the date of
grant with 45% vesting monthly thereafter over 32 months. The remaining
30% vest upon achievement of fiscal 2002 performance objectives as
follows:
Vesting December 31,
Objective 2003 2004
--------- ---- ----
Obtain $100 million of non-recourse to
shareholders financing 3.75% 3.75%
Achieve EBITDA loss less than $207 million 3.75% 3.75%
Obtain full mobile phone service rights 7.50% 7.50%
10. Income Taxes
The tax rates in Brazil for calendar year 2001 and 2002 are 25% for
federal income tax and 9% for social contribution tax. Beginning in
2003, the social contribution tax rate will be reduced to 8%. Tax losses
can be carried forward without expiration but utilization is limited to
30% of annual taxable income.
A reconciliation of the income tax benefit based on statutory rates to
the Company's income tax provision is as follows (in thousands):
Period from
January 1, 2001
through Year Ended
November 13, December 31,
2001 2000
-------------- -------------
(Predecessor (Predecessor
Companies) Companies)
Income tax benefit at
statutory rates $ 238,226 $ 160,040
Effect of currency
translation (55,938) (19,636)
Non-deductible tax expenses (22,064) --
Other (10,242) --
Change in valuation
allowance (149,982) (140,404)
--------- ---------
Income tax provision $ -- $ --
========= =========
11. Commitments and Contingencies
Legal Matters
The Company is engaged in legal matters arising in the ordinary course
of its business and believes that the ultimate outcome of these actions
will not have a material adverse effect on its financial position or
results of operations.
12
Operating Leases
The Company leases certain facilities and equipment under non-cancelable
operating leases. Future minimum lease payments under non-cancelable
operating lease obligations are as follows: $20 million in 2002; $16
million in 2003; $15 million in 2004; $9 million in 2005; $6 million in
2006; and $3 million thereafter.
Know-How and Transfer of Technical Service Agreement
The Predecessor Companies had a royalty agreement with a shareholder,
BCI, in connection with the transfer of know-how and technology, under
which royalty fees were payable. The agreement was cancelled as part of
the Restructuring (see Note 2). For the period from January 1, 2001
through November 13, 2001 and for the year ended December 31, 2000,
royalty expense totaled $2 million and $6 million, respectively.
Licenses
The Company has commitments within the terms of its Licenses and certain
regulatory requirements, including achievement of minimum levels of
network service coverage areas and telecommunication services offerings.
If such commitments are not met, the Company could be subject to fines
and potential revocation of the Licenses.
12. Employee Benefits
VHL and subsidiaries do not maintain a private pension plan for their
employees, but Vesper Northeast and Vesper Sao Paulo contribute monthly,
based on payroll, to the government pension, social security, and
severance indemnity plans as required by local labor legislation.
Contributions totaled $17.5 million and $29 million for the period from
January 1, 2001 through November 13, 2001 and for the year ended
December 31, 2000, respectively.
13. Operating Segments
The Company is organized based on geographical location. Reportable
segments are as follows: Rio de Janeiro (Vesper Northeast) and Sao Paulo
(Vesper Sao Paulo).
The Company evaluates the performance of segments based on net income
(loss). There are no intersegment revenues. Reconciling items are
comprised of eliminations of intersegment receivables. Segment assets
are primarily comprised of cash and cash equivalents, accounts
receivable, recoverable taxes, property, plant and equipment and
intangible assets.
The table below presents information about reported segments (in
thousands):
Vesper Vesper Reconciling
Northeast Sao Paulo Items Total
--------- --------- ----------- -----
(Predecessor Companies)
January 1, 2001 through
November 13, 2001
- -----------------------
Revenues $ 66,605 $ 47,779 $ -- $ 114,384
Operating loss (348,950) (259,792) -- (608,742)
Net loss (410,070) (311,826) -- (721,896)
Year ended December 31, 2000
- ----------------------------
Revenues $ 41,147 $ 29,975 $ -- $ 71,122
Operating loss (192,704) (195,420) -- (388,124)
Net loss (251,735) (233,236) -- (484,971)
Long-lived assets 609,609 463,943 -- 1,073,552
Total assets 741,863 550,459 (212) 1,292,110
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