Solid Group, Inc. Comprehensive Corporate Disclosure

August 17, 1998 PSE CIRCULAR FOR BROKERS NO. 1905-98 SUBJECT : Solid Group, Inc. Comprehensive Corporate Disclosure Further to Circular No. 1473-98 dated June 29, 1998 pertaining to Solid Group, Inc.'s ("SGI") investment in Destiny, Inc. ("Destiny"), attached herewith is a corporate disclosure from SGI on the following: I. Discussion of the corporate and financial restructuring of SGI; II. Discussion of the Asset-for-Share Swap transaction ("transaction") between SGI and Destiny; III. Reasons for the disposals of SGI's shares in its subsidiaries or affiliates and the acquisition of Destiny; IV. Discussion on the effects of the acquisition of Destiny to SGI; V. Company Background (i.e., capital structure, ownership structure, financial statements, key officers, etc.) of the following entities: 1. Solid Group, Inc.; 2. Destiny, Inc.; 3. Subsidiaries or affiliates of SGI that are involved in the transaction; and 4. Other entities or parties involved. VI. Valuation report on the computation of the value of SGI's investment in the shares of stock of SGI companies; and VII. Projected/pro-forma financial statements of SGI with and without the investment in Destiny. Cdphil Lastly, you may secure copies of the financial statements of the Company and the other parties to the transaction from the Library for reference. For your information. (SGD.) REYNOLD P. ONG Vice President, Listings and Disclosure Group I. Discussion of the corporate and financial restructuring of Solid Group Inc . ("SGI") with plans and proposals : SGI is presently involved in two (2) main lines of business: consumer electronics and property development. Consumer electronics is a mature industry, and the present economic slowdown adversely affects this business. Property development at the moment is in a depressed stage. The negative economic environment is expected to persist for at least two or more years. On the other hand, Destiny, Inc. is into multimedia, an industry with high growth potentials. The recent acquisitions of TCI by AT&T and Comcast by Microsoft in the U.S. highlight this belief. The acquisition of Destiny by SGI is a positive move that brings SGI into an area of high growth. The plan therefore is to consolidate SGI's consumer electronics operations with the multimedia business of Destiny. The combination of SGI's manufacturing, distribution, and servicing resources and capabilities with Destiny's information technology highway creates synergies that significantly enhance the values of the two put together than if they were to remain independent of each other. SGI/Destiny is probably one of the few companies in the whole world that would have this combined capability. SGI will transfer its investment in various subsidiaries engaged in consumer electronics manufacturing, distribution, and servicing (hereinafter referred to as "SGI Companies") to Destiny in exchange for a new issue of Destiny common stock. It is expected that SGI will control over 97% of Destiny immediately after the swap. Thus, Destiny becomes a subsidiary of SGI, and the results of its operations would be consolidated with SGI at the year-end. II. Discussion of the Asset-for-Share Swap transaction between SGI and Destiny : 1. Different agreements pertaining to the transaction, entered into by the following entities: Memorandum of Agreement between SGI and Destiny dated June 15, 1998 (enclosed) 2. Terms of the deal between SGI and Destiny (i.e. no. of shares, purchase price, amount of consideration, terms of payment): a) The transaction will involve the swap of shares of stock of Companies engaged in consumer electronics operations (the SGI Companies) now owned by SGI [recorded as "Investments" in SGI's books] with new issue of Destiny shares. SGI's investments in SGI Companies are accounted for under the equity method in SGI's books but are consolidated with SGI, in accordance with generally accepted accounting principles on consolidation, to come out with the consolidated financial position and operating results of SGI and subsidiaries at end of year. LexLib b) Based on balances recorded in the books of SGI and SGI Companies as at December 31, 1997 and subject to verification by our independent accountants, SGV & Co., the book value of SGI's investment in the SGI Companies amounts to P2,445,459,662. c) The proposed deal is a book to par swap. Thus, SGI will transfer to Destiny its investments in SGI Companies with book value of P2,445,459,662 and will receive the equivalent number of Destiny shares at par (The par value of Destiny shares is presently P1,000. This will be changed to P1). Therefore, at the new par value of Destiny shares, SGI will receive 2,445,459,662 shares of Destiny in exchange for its investments in SGI Companies. No cash will be involved in the transaction as SGI will not pay cash in acquiring Destiny shares, nor will Destiny pay cash to acquire SGI's investments in SGI Companies. d) The asset-for-share swap will take effect upon approval by SEC of the transaction. 3. Valuation of SGI's and Destiny's shares: a) Valuation method used The shares of stock of SGI Companies will be swapped with Destiny shares at the net book value as shown in the December 31, 1997 audited financial statements. This valuation will be certified to by independent accountants, SGV & Co. SGI's shares are not involved in the asset-for-share swap and, hence, no valuation thereof is necessary. Destiny shares will be valued at par. b) Computation of the value of SGI's and Destiny's shares The independent accountants, SGV & Co., will submit a report on the computation of the value of SGI's investment in the shares of stock of SGI Companies. No computation is needed for the valuation of Destiny shares which will be issued at par. LLphil c) Determination of the number of shares issued by and received by SGI SGI will not be issuing any SGI shares to effect the asset-for-share swap. Hence, the number of outstanding SGI share will not change. What will happen is that SGI's investment in the shares of stock of SGI Companies will be swapped and exchanged for Destiny shares. As mentioned earlier, the book value of SGI' investment in the shares of stock of SGI Companies is about P2.445 Billion at December 31, 1997. Assuming that the par value of Destiny shares is P1.00, SGI will receive 2.445 Billion shares of Destiny stock in the transaction. 4. Effects of the transaction: a) Ownership structure of SGI and Destiny before and after the transaction SGI's ownership structure will not change since no SGI shares will be issued in the transaction. The ownership structure of SGI Companies will, however, change as these companies will be directly owned by Destiny after the swap. Nonetheless, the percentage (%) ownership of Destiny in the SGI Companies after the swap will exactly be the same as the present ownership % of SGI in these companies before the swap. With the transaction, Destiny will merely step into the shoes of, substitute and replace SGI as the shareholder in these companies. Cdphil Destiny's ownership structure will change after the swap because Destiny will issue new shares to SGI as consideration for its acquisition of the SGI Companies. Immediately after the swap, it is expected that SGI will own 97.6% of Destiny. b) Ownership structure of SGI in each of its subsidiaries or affiliates that are parties to the transaction before and after the transaction The % ownership of SGI in the "SGI Companies" before the swap, are as follows: SGI Company ownership Comments Solid Corporation 100% Solid Laguna Corp. 100% Solid Distributors, Inc. 100% Solid Electronics Corporation 100% Solid Video Corporation 100% Kita Corporation 100% AA Electronics Corporation 100% ASCOP, Inc. 100% SSEC, Inc. 67.5% owned by Solid Corporation Solid Electronics Services, Inc. 100% owned by Solid Corporation Solid City Ind'l & Comm'l Corp. 100% owned by Solid Corporation Clark Plastics Mfg. Corp. 100% owned by Solid Corporation After the swap, SGI's direct ownership in the said Subsidiaries will be zero. There will, however, be no change in the ownership structure of SSEC, Inc., Solid Electronics Services, Inc., Solid City Industrial & Commercial Corporation and Clark Plastics Manufacturing Corporation which will continue to be either wholly-owned or majority-owned by Solid Corporation. c) SGI's company and capital structures before and after the transaction There will be no change in the company and capital structures of SGI before and after the transaction. It will be the same as the present structures, as follows: c.1 Authorized Capital Stock: P5,000,000,000.00 c.2 Par Value: P1.00 c.3 Paid-Up Capital: P2,030,975,000.00 c.4 Primary Purpose: To acquire by purchase, exchange, assignment, gift or otherwise, and to hold, own and use for investment or otherwise, and to sell, assign, transfer, exchange, lease, let, develop, mortgage, pledge, traffic, deal in, and with, and otherwise operate, manage, enjoy and dispose of, any and all properties of every kind and description and wherever situated, as and to the extent permitted by law, including, but not limited to, buildings, tenements, warehouses, factories, edifices and structures and other improvements, and bonds, debentures, promissory notes, shares of capital stock, or other securities or obligations created, negotiated or issued by any corporation, association, or other entity, foreign or domestic and while the owner, holder or possessor thereof, to exercise all the rights, powers and privileges of ownership or any other interest therein, including the right to receive, collect and dispose of, any and all rentals, dividends, interests and income, derived therefrom, and the right to vote on any proprietary or other interest, on any shares of the capital stock, and upon any bonds, debentures, or other securities having voting power, so owned or held; and provided that it shall not engage in the business of an open-end or close-end investment company as defined in the Investment Company Act (Republic Act No. 2629). LexLib c.5 Board of Directors Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Jason S. Lim Director Mr. Vincent S. Lim Director Mr. George R. Tan Director Mr. Washington Z. SyCip Director Mr. James H. Uy Director 5. Timetable for the effectivity of the transaction and the issuance of shares It is estimated that the transaction will be effected within a period of three (3) to four (4) months from date hereof, during which time all approvals required from regulatory authorities are expected to have been obtained. III. Reasons for the disposals of SGI's shares in its subsidiaries and affiliates and the acquisition of Destiny : SGI is using its investment in SGI Companies to acquire a majority interest in Destiny. The subsidiaries of SGI will become subsidiaries of Destiny, which in turn will become a subsidiary of SGI. The results of operations of the subsidiaries will therefore still be a part of SGI's consolidated results of operations. Hence, SGI is not really disposing of its investment in its subsidiaries. There are three (3) main reasons for these corporate moves: (1) To provide SGI stockholders the opportunity to participate in a new business with high growth potentials. 2. To realize the synergies from the combination of SGI's manufacturing, distribution, and servicing resources and capabilities with Destiny's capabilities to deliver data, video, etc. through its state-of-the-art information technology highway. (3) To enhance SGI's valuation as a listed issue. IV. Discussion on the effects of the acquisition of Destiny to SGI : SGI will become the parent company of Destiny and will therefore participate in its earnings. Thru Destiny, SGI will be able to enter into a new business (multimedia) with high growth potentials. The multimedia business of Destiny will include: cable TV services bundled with consumer electronic products, internet services (high speed and dial-up) and sale of related products, cable telephony, leased line and other data services that will use Destiny's HFC infrastructure. The integration of SGI's manufacturing, distribution and servicing resources and capabilities with Destiny's capabilities is expected to result to better manufacturing capacity utilization and improved overall profitability. aisadc A strong earnings stream over the medium to long term is expected from SGI's investment in Destiny to offset the initial losses that are expected from Destiny's operations. V. Company Background of the following entities : SOLID GROUP INC . 1. Date of Incorporation and Nature of Business The Company was incorporated on 9th October, 1933 as "United Paracale Mining Company". The Company became a holding company of the SGI Companies with effect from 18th June, 1996 when the Securities & Exchange Commission approved the corporate restructuring of SGI. SGI, through the SGI Companies, is the largest manufacturer and wholesale distributor of consumer electronic products in the Philippines. The principal products of SGI and its subsidiaries are colour televisions, video cassette recorders and various audio products. The Group manufactures consumer electronic products for sale in the Philippines under exclusive license from Sony Corporation under the "SONY" brandname and distributes these products in the Philippines. The Group distributes consumer electronic products and also manufactures consumer electronic products in the Philippines for export under license from Aiwa Co., Ltd. under the "AIWA" brandname. The Group also provides after-sales service for the consumer electronic products it sells which generates service income for the Group. The Group also has substantial real estate holdings and is involved in the development of industrial parks and other real estate in the Philippines. The Group is also engaged in the manufacture of plastic products through injection moulding. 2. Discussion of Major Projects and Investments On 9th May, 1997, SGI entered into a joint venture agreement (JVA) with Sony Corporation for a period of eight (8) years until the year 2005 to jointly invest in and organize a joint venture corporation whose primary purpose is to sell and market in the Philippines certain consumer type electronic products bearing the trademark "Sony". The Company subscribed to 33% of the equity of the joint venture corporation, Sony Philippines, Inc. (SPH), which was incorporated on September 9, 1997. SPH started commercial operations on October 01, 1997 at which date the Company and its subsidiaries ceased all selling activities direct to dealers and transferred this activity to SPH in accordance with the JVA. On March 6, 1998, Sony Corporation transferred its entire 67% equity ownership in SPH to a wholly-owned Dutch subsidiary. Sony Holding (Asia) B.V. LLjur SGI also entered into a Manufacturing Agreement with SPH which has an initial term of two (2) years and provides, among other things, that SPH purchase Sony products, as defined in the agreement, exclusively from SGI. 3. Capital Structure The Company has an authorized capital stock of P5,000,000,000 divided into 5,000,000,000 shares with a par value of P1 per share. Total issued and outstanding shares amount to P2,030,975,000, 4. Ownership Structure The Company is 67% owned by the Lim Family. 5. Subsidiaries and Affiliates (with percentage holdings) (1) AA Electronics Corporation (100%) (2) ASCOP, Inc. (100%) (3) Kita Corporation (100%) (4) Solid Corporation (100%) Solid City Industrial & Commercial Corporation (100%) SSEC, Inc. (67.5%) Solid Electronics Services, Inc. (100%) Interstar Holding Co., Inc. (60%) Laguna International Industrial Park, Inc. (37.5%) Clark Plastics Manufacturing Corporation (100%) (5) Solid Distributors, Inc. (100%) (6) Solid Electronics Corporation (100%) (7) Solid Laguna Corporation (100%) (8) Solid Manila Corporation (100%) Skyworld Corporation (75%) Starworld Corporation (40%) (9) Solid Video Corporation (100%) 6. Board of Directors and Principal Officers Board of Directors: Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. George R. Tan Director Mr. David S. Lim Director Mr. Jason S. Lim Director Mr. Vincent S. Lim Director Mr. Washington Z. SyCip Director Mr. James H. Uy Director Principal Officers: Atty. Elena S. Lim President & Chief Executive Officer Mr. David S. Lim Chief Operating Officer Mr. Vincent S. Lim Chief Financial officer Ms. Susan L. Tan Vice President Ms. Lita Joaquin Comptroller Mr. Irineo D. Tubio Chief Accounting Officer Atty. Roberto V. San Jose Corporate Secretary 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 DESTINY, INC . 1. Date of Incorporation and Nature of Business The Company was incorporated on 11th November, 1994. It is envisioned to be the largest provider of multi-media services in the country, bringing cutting edge technology in multi-media right into the homes of the average Filipino. prLL 2. Discussion of Major Projects and Nature of Business Destiny One On 11th November, 1997, Destiny Cable, Inc. launched the Destiny ONE ("One Network for Everyone") initiative, a program to construct an integrated multimedia network enabling disparate multimedia types to inter-operate (i.e. e-mail-to-fax, fax-to-voice, Internet-to-fax, etc.). Be it cable TV, video-on-demand, telephony, fax, e-mail, Internet, online banking or distance education, one network can seamlessly accommodate them all. To realize the Destiny ONE vision of One Network for Everyone. Destiny Cable seeks to create new markets with pioneering products and services. These are as follows: Destiny Cable's Hybrid Fiber-Coax (HFC) network infrastructure Pioneered HFC network deployment in Metro Manila. Makes possible advanced high-speed interactive multimedia services such as Internet, video conferencing, distance learning, collaborative education, video-on-demand, etc. Destiny Cable Pioneered the bundling of cable TV subscription with a consumer appliance (color TV, radio/mini component, VHS player, videoke) Destiny Online To pioneer high-speed Internet and data communication services using cable modems. Destiny PC To pioneer in offering low-cost, Internet-ready PCs, bundled with cable Internet subscription. Destiny Cable Telephony To pioneer telephone service using the same cable TV coax cable feed. Destiny Interactive To pioneer high-speed online, multimedia information services, distance learning, collaborative education, livelihood training, telecommuting, government services, home shopping, news-on-demand, online banking/trading, etc. cdlex Destiny Pager To pioneer a low-cost paging service using a hybrid FM radio/pager. Destiny PCS To pioneer PCS services over the HFC network. Destiny ONE To pioneer multimedia satellite services. 3. Capital Structure The Company has an authorized capital stock of P100,000,000 divided into 100,000 shares with a par value of P1,000 per share. 4. Ownership Structure Name of Stockholder No. of Shares Amount Subscribed & Paid David S. Lim 17,532 P17,532,000 Vincent S. Lim 16,915 16,915,000 Elena S. Lim 15,424 15,424,000 Susan L. Tan 4,627 4,627,000 Jason S. Lim 4,627 4,627,000 TOTAL 59,125 P59,125,000 ===== ========= 5. Subsidiaries and Affiliates (with percentage holdings) (1) Destiny Cable, Inc. 63% 6. Board of Directors and Principal Officers Board of Directors: Atty. Elena S. Lim Chairman of the Board Mr. David S. Lim Director Ms. Susan L. Tan Director Mr. Jason S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Mr. David S. Lim President & CEO Mr. Vincent S. Lim Treasurer Mr. Irineo D. Tubio, Jr. Corporate Secretary 7. Financial highlights (latest audited and interim financial statements) Please see enclosed Unaudited F/S December 31, 1997 SUBSIDIARIES OR AFFILIATES OF SGI THAT ARE INVOLVED IN THE TRANSACTION (a) AA Electronics Corporation 1. Date of Incorporation and Nature of Business The Company was incorporated and commenced commercial operations on 26th July, 1985. It provides repair capability and service support for SONY audio products and owns and operates a Sony repair and service center. 2. Discussion of Major Projects and Investments None 3. Capital Structure The Company has an authorized capital stock of P500,000 divided into 50,000 shares with a par value P10 per share. Subscribed and paid-up capital amount to P500,000. 4. Ownership Structure The Company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) None 6. Board of Directors and Principal Officers Board of Directors: Atty. Elena S. Lim Chairman of the Board Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. George R. Tan Director Mr. Vincent S. Lim Director Principal Officers: Atty. Elena S. Lim President Ms. Susan L. Tan Vice President Mr. Vincent S. Lim Treasurer Atty. Antonio L. Albano Corporate Secretary 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 (b) ASCOP, Inc . 1. Date of Incorporation and Nature of Business The Company was incorporated and commenced commercial operations on 5th April, 1990. It is the distributor of AIWA audio and video products in the Philippines and also owns and operates AIWA repair and service centers nationwide. 2. Discussion of Major Projects and Investments The Company had been appointed by Aiwa Co., Ltd as a non-exclusive, distributor in the Philippines of certain consumer electronics products bearing the trademark "Aiwa", excluding duty free zones and shops under a Distributorship Agreement executed in 1993. The Distributorship Agreement had been renewed and extended up to December 31, 1998. 3. Capital Structure The Company has an authorized capital stock of P80,000,000 divided into 800,000 shares with a par value P100 per share. Subscribed and paid-up capital amount to P21,250,000. LexLib 4. Ownership Structure The Company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) None 6. Board of Directors and Principal Officers Board of Directors: Atty. Elena S. Lim Chairman of the Board Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Jason S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Mr. William C. Velhagen President & General Manager Mr. Vincent S. Lim Treasurer Atty. Antonio L. Albano Corporate Secretary 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 (c) Kita Corporation 1. Date of Incorporation and Nature of Business The Company was incorporated on 6th April, 1993 and commenced commercial operations on 1st October, 1994. It produces audio and video products under the brandname "AIWA" primarily for export to Asian. European and Middle East countries. 2. Discussion of Major Projects and Investments The Company was granted a non-transferable right and license to manufacture and assemble certain consumer electronic products bearing the trademark "Aiwa" and to sell the same to Aiwa Co., Ltd. under a Purchase Agreement dated September 1, 1994 and License Agreement dated December 1, 1995. The initial terms of these agreements are for periods of one (1) year and three (3) years, respectively. These agreements, however, provide for automatic extension for successive one (1) year periods unless a written notice to the contrary is made by either party. cdlex 3. Capital Structure The Company has an authorized capital stock of P100,000,000 divided into 100,000 shares with a par value of P1,000 per share. Subscribed and paid-up capital amount to P100,000.00. 4. Ownership Structure The Company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) None 6. Board of Directors and Principal Officers Board of Directors: Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Atty. Elena S. Lim President Mr. Jason S. Lim Executive Vice President Mr. Vincent S. Lim Treasurer Mr. Enrique L. Ligeralde Vice President & General Manager Atty. Antonio L. Albano Corporate Secretary 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 (d) Solid Corporation 1. Date of Incorporation and Nature of Business The Company was incorporated on 3rd May, 1965 and commenced commercial operations on 5th May, 1965. It manufactures various audio and video products under the "SONY" brandname in the Philippines. 2. Discussion of Major Projects and Investments None 3. Capital Structure The Company has an authorized capital stock of P265,000,000 divided into 2,650,000 shares with a par value of P100 per share. Subscribed and paid-up capital amount to P192,326,800. prLL 4. Ownership Structure The Company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) Subsidiaries: (1) Solid City Industrial & Commercial Corporation 100.0% (2) SSEC, Inc. 67.5% (3) Solid Electronics Services, Inc. 100.0% (4) Interstar Holdings Co., Inc. 60.0% (5) Laguna International Industrial Park, Inc. 37.5% (6) Clark Plastics Manufacturing Corporation 100.0% 6. Board of Directors and Principal Officers: Board of Directors: Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Atty. Elena S. Lim President Ms. Susan L. Tan VP-Marketing & Manufacturing Mr. David S. Lim VP-Professional Equipment Mr. Jason S. Lim VP-Components Manufacturing Mr. Vincent S. Lim VP-Finance & Treasurer and Corporate Secretary Mr. James H. Uy VP & General Manager Factory Operations 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 (e) Solid Distributors, Inc . 1. Date of Incorporation and Nature of Business The Company was incorporated and commenced commercial operations on 20th March, 1972. It provides warehousing and distribution facilities for SONY products nationwide. cdt 2. Discussion of Major Projects and Investments None 3. Capital Structure The Company has an authorized capital stock of P2,000,000 divided into 20,000 shares with a par value of P100 per share. Subscribed and paid-up capital amount to P2,000,000. 4. Ownership Structure The Company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) None 6. Board of Directors and Principal Officers Board of Directors: Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Atty. Elena S. Lim President Ms. Susan L. Tan Vice President Mr. Vincent S. Lim Treasurer Mr. Irineo D. Tubio. Jr. Corporate Secretary 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 (f) Solid Electronics Corporation 1. Date of Incorporation and Nature of Business The Company was incorporated and commenced commercial operations on 9th August, 1982. It owns and operates the SONY repair and service centers in Metro Manila. 2. Discussion of Major Projects and Investments The Company, together with Solid Group Inc. (SGI), entered into After-Sales Service and Network Support Agreements with Sony Philippines, Inc. (SPH) to render in-warranty and out-of-warranty services for Sony products sold in the Philippines, in consideration of which SPH will pay warranty support to cover related expenses. The initial terms of these agreements are two (2) years and one (1) year, respectively. LexLib The Company was also granted by Sony International (Singapore) Ltd. (SONIS) a non-exclusive, non-transferable and non-assignable license to use the stylized service marks "SONY" and "Sony Authorized Service Center" for an initial period of two (2) years up to September 30, 1999. 3. Capital Structure The Company has an authorized capital stock of P1,000,000 divided into 10,000 shares with a par value of P100 per share. Subscribed and paid-up capital amount to P1,000,000. 4. Ownership Structure The Company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) None 6. Board of Directors and Principal Officers Board of Directors: Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Atty. Elena S. Lim President Ms. Susan L. Tan Vice President Mr. Vincent S. Lim Treasurer Atty. Antonio L. Albano Corporate Secretary 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 (g) Solid Laguna Corporation 1. Date of Incorporation and Nature of Business The Company was incorporated on 15th May, 1995 and commenced commercial operations on 1st September, 1995. It produces SONY colour televisions and VCRs. It also produces colour televisions for Destiny Cable, Inc. prLL 2. Discussion of Major Projects and Investments None 3. Capital Structure The Company has an authorized capital stock of P100,000,000 divided into 1,000,000 shares with a par value of P100 per share. Subscribed and paid-up capital amount to P100,000,000. 4. Ownership Structure The Company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) None 6. Board of Directors and Principal Officers: Board of Directors: Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Atty. Elena S. Lim President Ms. Susan L. Tan Vice President Mr. Vincent S. Lim Treasurer & Corporate Secretary Mr. James H. Uy VP & General Manager Manufacturing 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 (h) Solid Video Corporation 1. Date of incorporation and Nature of Business The Company was incorporated and commenced commercial operations on 12th October, 1984. It distributes SONY professional video equipment, accessories and supplies for broadcast networks and film production houses and other companies. 2. Discussion of Major Projects and Investments None 3. Capital Structure The Company has an authorized capital stock of P10,000,000 divided into 100,000 shares with a par value of P100 per share. Subscribed and paid-up capital amount to P3,500,000. 4. Ownership Structure The company is a wholly-owned (100%) subsidiary of Solid Group Inc. 5. Subsidiaries and Affiliates (with percentage holdings) None 6. Board of Directors and Principal Officers: Board of Directors: Mr. Joseph Lim Chairman of the Board Atty. Elena S. Lim Director Ms. Susan L. Tan Director Mr. David S. Lim Director Mr. Vincent S. Lim Director Principal Officers: Atty. Elena S. Lim President Mr. David S. Lim Vice President & Managing Director Mr. Vincent S. Lim Treasurer Atty. Antonio L. Albano Corporate Secretary 7. Financial Highlights (latest audited and interim financial statements) Please see enclosed Audited F/S 31 December 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS March 31, 1998 The Stockholders and the Board of Directors Solid Group Inc. We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Solid Group Inc. and Subsidiaries and have issued our report thereon dated March 31, 1998. Our audit was made for the purpose of expressing an opinion on the basic consolidated financial statements taken as a whole. The accompanying schedule of net book values of subsidiaries engaged in consumer electronic operations is the responsibility of the Company's management and are presented for purposes of additional analysis and is not required as part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements, and in our opinion, is fairly stated in all material respect in relation to the basic consolidated financial statements taken as a whole. This report is issued solely in connection with the Company's application for asset-for-share swap and should not be used for any purpose. (Sgd.) SYCIP, VELAYO PTR No. 1263114 January 15, 1998 Makati City SOLID GROUP INC. SCHEDULE OF NET BOOK VALUES OF SUBSIDIARIES ENGAGED IN CONSUMER ELECTRONIC OPERATIONS DECEMBER 31, 1997 Solid Corporation and Subsidiaries P1,827,226,273 Kita Corporation 274,145,726 Solid Laguna Corporation 205,643,049 Solid Distributors, Inc. 51,596,394 Solid Video Corporation 30,885,963 Ascop, Inc. 29,680,736 Solid Electronics Corporation 24,244,975 AA Electronics Corporation 2,036,546 P2,445,459,662 ============ Certified Correct: (SGD.) MR. IRENEO D. FUBIO, JR. Chief Accounting Officer SOLID GROUP INC. AND SUBSIDIARIES FORECASTED BALANCE SHEETS (Without Destiny, Inc.) December 31 1998 1999 2000 2001 2002 ASSETS Current Assets Cash and cash equivalents P2,965,706,185 P3,306,780,073 P3,432,411,844 P3,510,205,958 P3,857,182,513 Receivables net 1,636,665,432 1,364,386,649 1,177,899,081 1,610,213,785 1,715,462,880 Inventories net 1,985,828,592 1,985,308,199 1,481,582,560 1,780,005,604 2,099,392,788 Other current assets 97,216,126 81,911,845 46,730,336 48,140,953 48,665,249 Total Current Assets 6,685,416,335 6,738,386,766 6,138,623,821 6,948,566,300 7,720,703,430 Advances to Affiliates 2,418,470,394 2,407,024,607 2,398,676,545 2,392,415,498 2,387,719,712 Investments 442,235,289 573,426,393 840,958,071 1,120,904,648 1,405,430,910 Property, Plant and Equipment net 3,843,077,635 3,732,564,883 3,624,232,572 3,516,267,687 3,408,514,740 Other Assets 128,839,400 115,572,116 114,661,007 114,093,812 113,675,833 P13,518,039,053 P13,556,974,765 P13,117,152,016 P14,092,247,945 P15,036,044,625 ============= ============= ============= ============= ============== LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Bank Loans P83,577,982 P83,557,982 P75,220,184 P75,220,184 P75,220,184 Accounts payable and accrued expenses 2,254,689,873 2,239,017,504 2,155,946,587 2,467,176,032 2,668,232,441 Trust receipts and acceptances payable 1,928,903,427 1,611,867,327 978,238,616 1,176,434,397 1,414,097,703 Income tax payable 31,824,940 61,202,052 67,393,003 77,948,090 90,229,937 Total Current Liabilities 4,298,996,223 3,995,664,865 3,276,798,390 3,796,778,703 4,247,780,265 Advances from Affiliates 1,519,622,452 1,519,622,451 1,373,255,240 1,373,255,240 1,373,255,240 Minority Interest 96,118,005 109,695,895 131,683,721 147,551,410 161,297,182 Stockholders' Equity Capital stock P1 par value 2,030,975,000 2,030,975,000 2,030,975,000 2,030,975,000 2,030,975,000 Additional paid-in capital 4,589,076,596 4,589,076,596 4,589,076,596 4,589,076,596 4,589,076,596 Retained earnings 983,250,777 1,321,939,958 1,715,363,069 2,154,610,996 2,633,660,342 7,603,302,373 7,941,991,554 8,335,414,665 8,774,662,592 9,253,711,938 P13,518,039,053 P13,556,974,765 P13,117,152,016 P14,092,247,945 P15,036,044,625 See accompanying Summary of Significant Forecast Assumptions and Accounting Policies. SOLID GROUP INC. AND SUBSIDIARIES FORECASTED STATEMENTS OF INCOME AND RETAINED EARNINGS (Without Destiny, Inc.) Years Ended December 31 1998 1999 2000 2001 2002 REVENUES Net Sales P7,537,678,939 P5,724,937,428 P4,540,225,862 P5,475,290,279 P6,604,879,923 Services 192,700,592 245,948,699 274,867,585 307,586,403 344,675,836 Interest 191,548,601 210,582,453 231,513,609 254,607,225 280,094,108 Equity in net earnings (losses) of affiliates (22,464,408) (26,523,318) 94,045,816 89,112,128 74,608,369 Rentals 21,749,293 54,315,618 56,639,774 59,371,073 61,841,905 Others 51,595,381 43,976,013 48,254,431 53,612,245 60,294,430 7,972,808,398 6,253,236,893 5,245,547,077 6,239,579,353 7,426,394,571 COST AND EXPENSES Cost of goods sold 6,991,850,275 5,149,390,337 3,996,131,512 4,817,381,124 5,809,656,788 Cost of Services 117,314,460 144,138,669 159,528,943 176,663,291 195,759,178 Operating expenses 531,426,585 489,244,921 542,331,919 635,882,946 747,662,293 Others 26,486,151 48,249,435 57,336,966 68,228,392 81,292,084 7,667,077,471 5,831,023,362 4,755,329,340 5,698,155,753 6,834,370,343 INCOME BEFORE INCOME TAX AND MINORITY INTEREST 305,730,927 422,213,531 490,217,737 541,423,600 592,024,228 PROVISION FOR INCOME TAX 39,282,686 69,946,460 74,806,800 86,307,984 99,229,110 INCOME BEFORE MINORITY INTEREST 266,448,241 352,267,071 415,410,937 455,115,616 492,795,118 MINORITY INTEREST (3,302,412) 13,577,890 21,987,826 15,867,689 13,745,772 NET INCOME 269,750,653 338,689,181 393,423,111 439,247,927 479,049,346 RETAINED EARNINGS AT BEGINNING OF YEAR 713,500,124 983,250,777 1,321,939,958 1,715,363,069 2,154,610,996 RETAINED EARNINGS AT END OF YEAR P983,250,777 P1,321,939,958 P1,715,363,069 P2,154,610,996 P2,633,860,342 See accompanying Summary of Significant Forecast Assumptions and Accounting Policies. SOLID GROUP INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT FORECASTS ASSUMPTIONS AND ACCOUNTING POLICIES (Without Destiny, Inc.) Forecast Objectives and Assumptions The financial forecasts represent, to the best of management's knowledge and belief, the Company's expected financial position and results of operations for the forecast periods. Accordingly, the forecasts reflect management's judgment as of August 11, 1998, the date of the forecasts, of the expected conditions and expected courses of action. The assumptions disclosed herein are those which management believes are significant to the forecasts or are key factors that affect the financial results of the Company. There will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. The forecasts have been prepared in connection with the proposed asset-for-share swap transaction between Solid Group Inc. and Destiny, Inc. Summary of Significant Accounting Policies The financial forecasts have been prepared on the basis of generally accepted accounting principles expected to be used in the historical financial statements covering the forecasted periods, which are the same as those used to prepare the historical financial statements for the year ended December 31, 1998. Principles of Consolidation and Investments The consolidated financial statements include the accounts of Solid Group Inc. and its wholly owned subsidiaries. The subsidiaries of Solid Group Inc. are: Solid Corporation and Subsidiaries Solid Video Corporation Ascop Inc. Kita Corporation Solid Laguna Corporation Solid Distributors, Inc. Solid Electronics Corporation AA Electronics Corporation Solid Manila Corporation and Subsidiary Solid Corporation and Subsidiaries include: Percentage of Ownership Clark Plastics Manufacturing Corporation 100.0 Solid City Industrial and Commercial Corporation 100.0 Solid Electronics Services, Inc. 100.0 SSEC. Inc. 67.5 Interstar Holding Company, Inc. 60.0 The account of Solid Manila Corporation and Subsidiary includes 75%-owned Skyworld Corporation. The Company's 33% investment in Sony Philippines, Inc. (SPH), acquired in 1997, and Solid Corporation's 22.5% investment in Laguna International Industrial Park, Inc. are carried under the equity method. Under the equity method, the cost of investments is adjusted for the Company's equity in net earnings or losses of the investees and for dividends received since the dates of acquisition. LexLib Other investments are stated at cost. Cash Equivalents The Company and certain subsidiaries consider all highly liquid debt instruments purchased with a maturity of three months or less from date of acquisition to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is generally determined by the moving average method. Property, Plant and Equipment Land, buildings and improvements, and machinery and equipment of certain subsidiaries acquired prior to March 15, 1996, are stated at appraised values as determined by an independent firm of appraiser in April 1996. Subsequent acquisitions and all other property, plant and equipment are stated at cost. The net appraisal increment resulting from the revaluation was credited to the "Revaluation increment in property"' account as shown under the Stockholders' Equity section of the balance sheets of the subsidiaries. There is no corresponding Revaluation increment in property in the Stockholders' Equity section of the parent company and the consolidated accounts since the revaluation was made before the Company's acquisition of the subsidiaries and the Company shares issued in exchange for the subsidiaries' shares of stock were valued at the subsidiaries' book values which already included the revaluation increment. LLpr Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or over the term of the lease, in case of leasehold improvements, whichever is shorter. The cost of maintenance and repairs is charged to income as incurred; significant renewals and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in current operations. Royalty Income Royalty income is recognized upon shipment by the operator of the minerals using the exchange rate prevailing at the time of shipment. Deferred Charges and Preoperating Expenses All expenses incurred prior to the start of prematurity period, including depreciation and amortization of property and equipment, were deferred and are amortized over 5 years from the start of prematurity period. cdlex Other costs incurred in anticipation of a fully operating system during the prematurity period are either expensed or deferred based on the number of subscribers as a proportion to a specified predetermined subscriber level. Costs that are being deferred will be amortized over the life of the cable system equipment after the end of prematurity period. Income Tax Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using the tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Pension Plan Pension expense is generally determined using the projected unit credit method. This method reflects service rendered by employees to the date of valuation and incorporate assumptions concerning employees' projected salaries. Unrecognized experience adjustments and past service costs are amortized over the expected working lives of employees, in compliance with "Accounting Standard Council's Statement No. 24", Retirement Benefit Costs. cdlex Foreign Exchange Transactions Gains or losses arising from foreign currency-denominated transactions are generally credited or charged to current operations, except from the restatement of foreign currency-denominated liabilities related to the importation of inventories at the closing rate, which are included as part of the carrying value of inventories. Earnings Per Share Earnings per share are computed based on weighted average number of outstanding shares after giving retroactive effect to any stock dividends declared during the year. Interest Capitalization Interest and other financial charges incurred during the installation of cable system equipment are capitalized as part of the cost of the asset. Summary of Significant Forecast Assumptions ; The Company has adopted the following general assumptions in the preparation of the financial forecasts: 1. There will be no material change in the existing political, legal, fiscal and economic conditions in the areas wherein the Company will carry on business that may have material impact in the financial operating results. 2. The Company's operations will not be adversely affected by shortages of materials, labor disputes or significant fluctuations in raw materials prices. LLpr 3. All licenses and permits necessary for the operations of the Company, granted by the Philippine Government, will be maintained. 4. There will be no substantial fluctuations in the prices of equipment and materials needed for the completion of the Company's current effort to expand present facilities. 5. The completion of the expansion program refined to above will not be delayed by shortages of materials, labor disputes, acceleration of costs, exceptional adverse weather conditions, and undue delay in planning or similar approvals. Specific Assumptions Revenue Revenues are forecasted generally based on historical data transactions and agreements with main suppliers. Costs and Expenses Cost of sales Cost and expenses is forecasted generally using historical data. Cost elements are expected to increase in proportion to increase in production. Price and rates of major cost elements are assumed to behave normally and fluctuations are anticipated to increase at an annual rate of 10%. Operating expenses The major expenses included in the analysis are salaries and wages, financing costs, commission, advertising, utilities, insurance, transportation, depreciation and amortization and provision for doubtful accounts. aisadc The above expenses are forecasted using historical data, taking into account actual manpower requirements, current and forecasted salary increases and their behavior in relation to revenues. Inflation rate is expected to increase at an annual rate of 10%. Other income This account includes interest income on short term bank deposits and interest expense on various loans obtained, computed at an average annual rate of 22%. Income tax Certain subsidiaries of the Company are registered with Clark Development Corporation under the Bases Conversion and Development Act of 1992 (Section 15 of Republic Act No. 7227, Section 5 of Executive Order No. 80 and Proclamation No. 163), as Clark Special Economic Zone (CSEZ) enterprises primarily engaged in the business of manufacturing consumer electronic products. As registered CSEZ enterprises, these subsidiaries are entitled to tax and duty free importation of raw materials, capitals, equipment, household and personal items, and are exempted from national and local taxes. These subsidiaries shall pay to the government a certain amount equivalent to 5% of its gross income as defined under R.A. No. 7227 and its implementing regulations. On December 11, 1997, Republic Act No. 8424 (Act) entitled "An Act Amending the National Internal Revenue Code, As Amended, and For Other Purposes," was passed into law effective January 1, 1998. Among others, the Act includes the following significant revisions to the current rules of taxation: a. Change in the corporate income tax rate to 34% in 1998, 33% in 1999 and 32% in 2000 and onwards; b. Imposition of minimum corporate income tax of 2% of gross income, as defined; c. Imposition on the employer of final tax on the grossed up monetary value of fringe benefits granted to employees (except rank and file) at the following rates 34% in 1998 and 33% in 1999 and 32% in 2000 and onwards; d. Reduction of the interest expense allowed as deductible expense by an amount equivalent to a certain percentage of the interest income subjected to final tax as follows 41% starting January 1, 1998, 39% starting January 1, 1999 and 38% starting January 1, 2000 and onwards; and, e. Introduction of a three-year net operating loss carryover. Cash equivalents Excess cash will be invested in short-term money market placements at an expected 12% interest a year before the 20% final withholding tax. Receivables Forecast of receivables for other subsidiaries is based on the historical ratio of receivables to sales. LexLib Inventories Projected inventory is generally based on the ratio of inventories to cost of goods sold considering the lead time using historical data. Property and equipment This account increases basically from the on-going and planned expansion of services of Destiny Cable, Inc. Other assets This account consists mainly of preoperating expenses, deferred charges and franchise costs. Accounts payable and accrued expenses Trade payables is basically based on historical and average monthly purchases and payment schedule. Output tax is to be remitted on a monthly basis. SOLID GROUP INC. AND SUBSIDIARIES FORECASTED BALANCE SHEETS (Without Destiny, Inc.) December 31 1998 1999 2000 2001 2002 ASSETS Current Assets Cash and cash equivalents P2,960,772,058 P3,352,227,998 P3,506,935,100 P3,795,273,899 P4,579,106,516 Receivables net 1,632,095,420 1,387,618,040 1,267,962,376 1,827,946,644 2,161,271,579 Inventories net 2,133,210,762 2,155,387,569 1,708,404,931 2,052,222,375 2,392,729,158 Other current assets 143,213,552 127,909,271 92,727,762 94,138,378 94,662,675 Total Current Assets 6,869,291,792 7,023,142,878 6,576,030,169 7,769,581,296 9,227,769,928 Advances to Affiliates 2,677,536,572 2,666,090,786 2,657,742,723 2,651,481,677 2,646,785,891 Investments 666,900,261 907,911,316 1,227,362,319 1,624,849,883 2,085,134,499 Property, Plant and Equipment net 5,152,049,741 6,326,281,909 6,986,436,854 7,298,630,400 7,476,642,622 Other Assets 533,776,275 503,728,917 486,037,735 468,690,467 458,734,040 P15,899,554,641 P17,427,155,806 P17,933,609,800 P19,813,233,723 P21,895,066,980 ============= ============= ============= ============= ============== LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Bank Loans P173,000,000 P P P P Accounts payable and accrued expenses 3,559,820,808 5,291,137,552 6,046,569,682 6,980,392,360 7,705,001,683 Trust receipts and acceptances payable 2,020,819,187 1,611,867,327 978,238,616 1,176,434,397 1,414,097,703 Income tax payable 31,824,940 61,202,052 67,393,003 77,948,090 90,229,937 Total Current Liabilities 5,785,464,935 6,964,206,931 7,092,201,301 8,234,774,847 9,209,329,323 Advances from Affiliates 1,452,091,207 1,452,091,207 1,305,723,996 1,305,723,996 1,305,723,996 Long Term Debt 100,000,000 100,000,000 100,000,000 Minority Interest 1,019,198,620 1,057,538,200 1,131,445,350 1,264,854,027 1,454,358,152 Stockholders' Equity Capital stock P1 par value 2,030,975,000 2,030,975,000 2,030,975,000 2,030,975,000 2,030,975,000 Additional paid-in capital 4,589,076,596 4,589,076,596 4,589,076,596 4,589,076,596 4,589,076,596 Retained earnings (deficit) 922,748,283 1,233,267,872 1,684,187,557 2,387,829,257 3,305,603,913 7,542,799,879 7,853,319,468 8,304,239,153 9,007,880,853 9,925,655,509 P15,899,554,641 P17,427,155,806 P17,933,609,800 P19,813,233,723 P21,895,066,980 See accompanying Summary of Significant Forecast Assumptions and Accounting Policies. SOLID GROUP INC. AND SUBSIDIARIES FORECASTED STATEMENTS OF INCOME AND RETAINED EARNINGS (With Destiny, Inc.) Years Ended December 31 1998 1999 2000 2001 2002 REVENUES Net Sales P7,561,533,485 P5,948,573,792 P5,005,098,376 P6,322,104,591 P7,760,012,030 Services 353,285,587 918,346,540 1,800,928,582 3,158,331,380 4,846,112,701 Interest 191,548,601 192,151,124 231,513,609 254,607,225 280,094,108 Equity in net earnings (losses) of affiliates 94,979,588 119,276,678 171,727,286 232,698,158 272,808,262 Rentals 21,749,293 54,315,618 56,639,774 70,331,836 73,350,707 Others 52,144,901 46,066,936 48,254,431 53,612,245 60,294,430 8,275,241,455 7,278,730,688 7,314,162,058 10,091,685,435 13,292,672,238 COST AND EXPENSES Cost of goods sold 7,008,873,175 5,319,619,337 4,279,846,512 5,384,811,124 6,604,058,788 Cost of Services 215,972,787 287,081,352 539,660,440 931,641,693 1,445,648,043 Operating expenses 745,831,137 1,111,430,230 1,732,753,874 2,695,887,686 3,862,958,223 Interest 14,477,124 36,227,893 41,050,398 20,456,825 25,185,519 Others 26,414,803 83,527,942 95,455,053 109,484,704 125,872,234 8,011,569,026 6,837,886,754 6,688,766,277 9,142,282,032 12,063,722,807 INCOME BEFORE INCOME TAX AND MINORITY INTEREST 263,672,429 440,843,934 625,395,781 949,403,403 1,228,949,431 PROVISION FOR INCOME TAX 39,282,686 69,946,460 74,806,799 86,307,984 99,229,110 INCOME BEFORE MINORITY INTEREST 224,389,743 370,897,474 550,588,982 863,095,419 1,129,720,321 MINORITY INTEREST 15,141,584 60,377,885 99,669,297 159,453,719 211,945,665 NET INCOME 209,248,159 310,519,589 450,919,685 703,641,700 917,774,656 RETAINED EARNINGS AT BEGINNING OF YEAR 713,500,124 922,748,283 1,233,267,872 1,684,187,557 2,387,829,257 RETAINED EARNINGS AT END OF YEAR P922,748,283 P1,233,267,872 P1,684,187,557 P2,387,829,257 P3,305,603,913 See accompanying Summary of Significant Forecast Assumptions and Accounting Policies. SOLID GROUP INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT FORECASTS ASSUMPTIONS AND ACCOUNTING POLICIES (With Destiny, Inc.) Forecast Objectives and Assumptions The financial forecasts represent, to the best of management's knowledge and belief, the Company's expected financial position and results of operations for the forecast periods. Accordingly, the forecasts reflect management's judgment as of August 11, 1998, the date of the forecasts, of the expected conditions and expected courses of action. The assumptions disclosed herein are those which management believes are significant to the forecasts or are key factors that affect the financial results of the Company. There will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. The forecasts have been prepared in connection with the proposed asset-for-share swap transaction between Solid Group Inc. and Destiny, Inc. Summary of Significant Accounting Policies The financial forecasts have been prepared on the basis of generally accepted accounting principles expected to be used in the historical financial statements covering the forecasted periods, which are the same as those used to prepare the historical financial statements for the year ended December 31, 1998. Principles of Consolidation and Investments The consolidated financial statements include the accounts of Solid Group Inc. and its wholly owned subsidiaries, and Destiny Inc. and a subsidiary, Destiny Cable, Inc. The subsidiaries of Solid Group Inc. are: Destiny, Inc. and its wholly owned subsidiary Solid Corporation and Subsidiaries Solid Video Corporation Ascop, Inc. Kita Corporation Solid Laguna Corporation Solid Distributors, Inc. Solid Electronics Corporation AA Electronics Corporation Solid Manila Corporation and Subsidiary Solid Corporation and Subsidiaries include: Percentage of Ownership Clark Plastics Manufacturing Corporation 100.0 Solid City Industrial and Commercial Corporation 100.0 Solid Electronics Services, Inc. 100.0 SSEC, Inc. 67.5 Interstar Holding Company, Inc. 60.0 The account of Solid Manila Corporation and Subsidiary includes 75%-owned Skyworld Corporation. The Company's 33% investment in Sony Philippines, Inc. (SPH), acquired in 1997, and Solid Corporation's 22.5% investment in Laguna International Industrial Park, Inc. are carried under the equity method. Under the equity method, the cost of investments is adjusted for the Company's equity in net earnings or losses of the investees and for dividends received since the dates of acquisition. cdlex Other investments are stated at cost. Cash Equivalents The Company and certain subsidiaries consider all highly liquid debt instruments purchased with a maturity of three months or less from date of acquisition to be cash equivalents. Prematurity Period and Costs Recognition Prematurity period refers to the period wherein the cable system equipment is partially in service. Prematurity period begins with the first earned subscriber revenue and generally ends based on plans for completion of first major construction period or achievement of a specified predetermined subscriber level. The first earned subscriber was on January 1, 1997. During the prematurity period, costs incurred to obtain subscribers such as subscriber-related costs and general and administrative expenses are charged to current operations whereas the costs of constructing and installing the cable system equipment are capitalized. Other costs incurred in anticipation of a fully operating system during the prematurity period are partially capitalized and partially expensed. The portion expensed is based on the number of subscribers attained relative to the total number of subscribers expected at the end of the prematurity period. Costs that are being capitalized as deferred charges will be amortized over the life of the cable system equipment after the end of prematurity period. LLjur Revenue-Recognition . During the prematurity period, installation fees charged to subscribers are recognized as revenue of the current period only to the extent of direct selling costs (commissions, direct selling costs, and other costs incurred in obtaining new subscribers). The remainder of these fees are deferred and recognized as revenue over the average subscription period. Inventories Inventories are stated at the lower of cost or market. Cost is generally determined by the moving average method. Property, Plant and Equipment Land, buildings and improvements, and machinery and equipment of certain subsidiaries acquired prior to March 15, 1996, are stated at appraised values as determined by an independent firm of appraisers in April 1996. Subsequent acquisitions and all other property, plant and equipment are stated at cost. The net appraisal increment resulting from the revaluation was credited to the "Revaluation increment in property" account as shown under the Stockholders' Equity section of the balance sheets of the subsidiaries. There is no corresponding Revaluation increment in property in the Stockholders' Equity section of the parent company and the consolidated accounts since the revaluation was made before the Company's acquisition of the subsidiaries and the Company shares issued in exchange for the subsidiaries' shares of stock were valued at the subsidiaries' book values which already included the revaluation increment. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or over the term of the lease, in case of leasehold improvements, whichever is shorter. Depreciation of cable system equipment and headed equipment during the prematurity period is based on the number of subscribers as a proportion to a specified predetermined subscriber level over its estimated useful life. After prematurity period, depreciation of cable system equipment and headed equipment will be computed on the straight line method. Depreciation and amortization of video and audio equipment are computed using the straight line method based on the subscription agreement of 2 years. The cost of maintenance and repairs is charged to income as incurred, significant renewals and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is related in current operations. Royalty Income Royalty income is recognized upon shipment by the operator of the minerals using the exchange rate prevailing at the time of shipment. cdll Franchise Costs The costs of obtaining successful franchise applications were deferred and are amortized by the straight line method over the estimated economic life of the franchise or 40 years, whichever is shorter. Deferred Charges and Preoperating Expenses All expenses incurred prior to the start of prematurity period, including depreciation and amortization of property and equipment were deferred and are amortized over 5 years from the start of prematurity period. Other costs incurred in anticipation of a fully operating system during the prematurity period are either expensed or deferred based on the number of subscribers as a proportion to a specified predetermined subscriber level. Costs that are being deferred will be amortized over the life of the cable system equipment after the end of prematurity period. Preoperating Expenses Expenses incurred by certain subsidiaries prior to the start of commercial operations were deferred and are generally amortized over five years. aisadc Income Tax Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using the tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Pension Plan Pension expense is generally determined using the projected unit credit method. This method reflects service rendered by employees to the date of valuation and incorporate assumptions concerning employees' projected salaries. Unrecognized experience adjustments and past service costs are amortized over the expected working lives of employees, in compliance with "Accounting Standard Council's Statement No. 24", Retirement Benefit Costs. Foreign Exchange Transactions Gains or losses arising from foreign currency-denominated transactions are generally credited or charged to current operations, except from the restatement of foreign currency-denominated liabilities related to the importation of inventories at the closing rate, which are included as part of the carrying value of inventories. Earnings Per Share Earnings per share are computed based on weighted average number of outstanding shares after giving retroactive effect to any stock dividends declared during the year. Interest Capitalization Interest and other financial charges incurred during the installation of cable system equipment are capitalized as part of the cost of the asset. LexLib Summary of Significant Forecast Assumptions The Company has adopted the following general assumptions in the preparation of the Financial forecasts: 1. There will be no material change in the existing political, legal, fiscal and economic conditions in the areas wherein the Company will carry on business that may have material impact in the financial operating results. 2. The Company's operations will not be adversely affected by shortages of materials, labor disputes or significant fluctuations in raw materials prices. 3. All licenses and permits necessary for the operations of the Company, granted by the Philippine Government, will be maintained. 4. There will be no substantial fluctuations in the prices of equipment and materials needed for the completion of the Company's current effort to expand present facilities. cdlex 5. The completion of the expansion program referred to above will not be delayed by shortages of materials, labor disputes, acceleration of costs, exceptional adverse weather conditions, and undue delay in planning or similar approvals. Specific Assumptions Revenue Revenues are forecasted generally based on historical data transactions and agreements with main suppliers. Subscription revenues Sources of subscription revenues include cable and on-line services. Growth rate of subscriber base for five-year period is based on the implementation schedule of the proposed service areas, considering the number of homes to be passed and marketability of the product. Subscriber base as of December 31 1998 1999 2000 2001 2002 Cable services 31,709 80,179 175,632 282,669 407,669 On-line services High speed 500 10,000 11,500 13,800 17,250 Dial up 1,500 15,000 25,000 50,000 70,000 The Company will start operating its on-line services on October 1, 1998. Costs and Expenses Cost of sales Cost and expenses is forecasted generally using historical data. Cost elements are expected to increase in proportion to increase in production. Price and rates of major cost elements are assumed to behave normally and fluctuations are anticipated to increase at an annual rate of 10%. Cost of services rendered Cost of services is forecasted based on analysis of significant and direct cost elements. Prices and rates of major cost elements are assumed to behave normally and inflation rate is expected to increase at an annual rate of 10%. Cost of cable systems for the expansion program is based on total strand miles, homes to be passed and number of nodes per area. Operating expenses The major expenses included in the analysis are salaries and wages, financing costs, commission, advertising, utilities, insurance, transportation, depreciation and amortization and provision for doubtful accounts. The above expenses are forecasted using historical data, taking into account actual manpower requirements, current and forecasted salary increases and their behavior in relation to revenues Inflation rate is expected to increase at an annual rate of 10%. Other income This account includes interest income on short term bank deposits and interest expense on various loans obtained, computed at an average annual rate of 22%. Income tax The Company is registered with the Board of Investments (BOI) as a pioneer enterprise in Cable Hybrid Fiber-Coax (HFC) network infrastructure and is entitled to income tax holiday for six years starting from January 1, 1997. LLpr Certain subsidiaries of the Company are registered with Clark Development Corporation under the Bases Conversion and Development Act of 1992 (Section 15 of Republic Act No. 7227, Section 5 of Executive Order No. 80 and Proclamation No. 163), as Clark Special Economic Zone (CSEZ) enterprises primarily engaged in the business of manufacturing consumer electronic products. As registered CSEZ enterprises, these subsidiaries are entitled to tax and duty free importation of raw materials, capital goods, equipment, household and personal items, and are exempted from national and local taxes. These subsidiaries shall pay to the government a certain amount equivalent to 5% of its gross income as defined under R.A. No. 7227 and its implementing regulations. On December 11, 1997, Republic Act No. 8424(Act) entitled "An Act Amending the National Internal Revenue Code. As Amended, and For Other Purposes," was passed into law effective January 1, 1998. Among, others, the Act includes the following significant revisions to the current rules of taxation: a. Change in the corporate income tax rate to 34% in 1998, 33% in 1999 and 32% in 2000 and onwards; b. Imposition of minimum corporate income tax of 2% of gross income, as defined; c. Imposition on the employer of final tax on the grossed up monetary value of fringe benefits granted to employees (except rank and file) at the following rates 34% in 1998 and 33% in 1999 and 32% in 2000 and onwards; cdll d. Reduction of the interest expense allowed as deductible expense by an amount equivalent to a certain percentage of the interest income subjected to final tax as follows: 41% starting January 1, 1998, 39% starting January 1, 1999 and 38% starting January 1, 2000 and onwards; and, e. Introduction of a three-year net operating loss carryover. Cash equivalents Excess cash will be invested in short-term money market placements at an expected 12% interest a year before the 20% final withholding tax. Receivables Receivables are expected to increase due to increase in subscription base of on-line services wherein collectibility is expected at 75% of gross revenues all throughout the five-year period. Forecast of receivables for other subsidiaries is based on the historical ratio of receivables to sales. Inventories Projected inventory is generally based on the ratio of inventories to cost of goods sold considering the lead time using historical data. Property and equipment This account increases basically from the on-going and planned expansion of services of Destiny Cable, Inc. Other assets This account consists mainly of preoperating expenses, deferred charges and franchises costs. Accounts payable and accrued expenses Trade payables is basically based on historical and average monthly purchases and payment schedule. Output tax is to be remitted on a monthly basis. Advances from subscribers This account is basically coming from the 24-month advanced collection strategy financed by credit card companies or banks decreased by corresponding revenue earned for the year