-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O2FlbRAagpH6lCQ2QM05YtWEYXzqQjbRfWYF94E5d97lyXsu7Hz9GfCTYCsG53qo kRx7RS3nj2mv2PsKlsSeGQ== 0000870762-98-000040.txt : 19981118 0000870762-98-000040.hdr.sgml : 19981118 ACCESSION NUMBER: 0000870762-98-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELLULAR COMMUNICATIONS INTERNATIONAL INC CENTRAL INDEX KEY: 0000870762 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 133221852 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19363 FILM NUMBER: 98749740 BUSINESS ADDRESS: STREET 1: 110 E 59TH ST STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129068480 MAIL ADDRESS: STREET 1: 110 EAST 59TH STREET STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL CELLULAR INC DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10Q - SEPTEMBER 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-19363 ------------------------------------------------------------ CELLULAR COMMUNICATIONS INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3221852 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 East 59th Street, New York, New York 10022 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 906-8480 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's common stock as of September 30, 1998 was 16,694,779. Cellular Communications International, Inc. and Subsidiaries Index PART I. FINANCIAL INFORMATION Page - ------ --------------------- ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 ....................... 2 Condensed Consolidated Statements of Operations - Three and nine months ended September 30, 1998 and 1997 ........ 3 Condensed Consolidated Statement of Shareholders' (Deficiency) - Nine months ended September 30, 1998 ............ 4 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997 .................. 5 Notes to Condensed Consolidated Financial Statements ........... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................. 12 PART II. OTHER INFORMATION - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K ............................... 18 SIGNATURES............................................................... 19 - ---------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Cellular Communications International, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------------------------- (unaudited) (see note) ASSETS Current assets: Cash and cash equivalents $ 79,017,000 $ 59,256,000 Marketable securities - 24,871,000 Other 78,000 21,000 --------------------------------- Total current assets 79,095,000 84,148,000 Investment in Omnitel 82,067,000 52,151,000 Equipment, net of accumulated depreciation of $41,000 (1998) and $40,000 (1997) - 1,000 Deferred financing costs, net of accumulated amortization of $1,218,000 (1998) and $2,828,000 (1997) 8,245,000 4,414,000 --------------------------------- Total assets $ 169,407,000 $ 140,714,000 ================================= LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) Current liabilities: Accounts payable $ 200,000 $ 126,000 Accrued expenses 363,000 509,000 Taxes payable 1,447,000 1,452,000 Due to NTL Incorporated 77,000 69,000 --------------------------------- Total current liabilities 2,087,000 2,156,000 Long-term debt 268,037,000 197,327,000 Commitments and contingent liabilities Shareholders' (deficiency): Series preferred stock - $.01 par value; authorized 2,500,000 shares, outstanding none - - Common stock - $.01 par value; authorized 75,000,000 shares; issued and outstanding 16,695,000 (1998) and 16,359,000 (1997) shares 167,000 164,000 Additional paid-in capital 33,970,000 29,821,000 (Deficit) (134,854,000) (88,754,000) --------------------------------- (100,717,000) (58,769,000) --------------------------------- Total liabilities and shareholders' (deficiency) $ 169,407,000 $ 140,714,000 =================================
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. See accompanying notes. 2 Cellular Communications International, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------------- --------------------------------- 1998 1997 1998 1997 -------------------------------- --------------------------------- Equity in net income (loss) of Omnitel $ 15,197,000 $ 984,000 $ 30,435,000 $ (7,628,000) COSTS AND EXPENSES General and administrative expenses 615,000 626,000 1,787,000 2,473,000 Depreciation expense - 4,000 1,000 14,000 Amortization of investment in joint venture 173,000 173,000 519,000 518,000 -------------------------------- --------------------------------- 788,000 803,000 2,307,000 3,005,000 -------------------------------- --------------------------------- Operating income (loss) 14,409,000 181,000 28,128,000 (10,633,000) OTHER INCOME (EXPENSE) Interest income and other, net 1,174,000 1,123,000 4,064,000 3,307,000 Interest expense (5,708,000) (6,763,000) (19,675,000) (19,644,000) Foreign currency translation losses (12,671,000) - (13,693,000) - -------------------------------- --------------------------------- Loss before extraordinary item (2,796,000) (5,459,000) (1,176,000) (26,970,000) Loss from early extinguishment of debt (6,858,000) - (44,924,000) - -------------------------------- --------------------------------- Net loss $ (9,654,000) $ (5,459,000) $ (46,100,000) $ (26,970,000) ================================ ================================= Basic and diluted net loss per common share: Loss before extraordinary item $ (.17) $ (.34) $ (.07) $ (1.67) Extraordinary item (.41) - (2.72) - -------------------------------- --------------------------------- Net loss $ (.58) $ (.34) $ (2.79) $ (1.67) ================================ =================================
See accompanying notes. 3 Cellular Communications International, Inc. and Subsidiaries Condensed Consolidated Statement of Shareholders' (Deficiency) (Unaudited)
COMMON STOCK ADDITIONAL ------------------------- PAID-IN SHARES AMOUNT CAPITAL (DEFICIT) -------------------------------------------------------------- Balance at December 31, 1997 16,359,000 $ 164,000 $ 29,821,000 $ (88,754,000) Exercise of stock options 312,000 3,000 3,232,000 Exercise of warrants 24,000 - 917,000 Net (loss) for the nine months ended September 30, 1998 (46,100,000) -------------------------------------------------------------- Balance at September 30, 1998 16,695,000 $ 167,000 $ 33,970,000 $ (134,854,000) ==============================================================
See accompanying notes. 4 Cellular Communications International, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 --------------------------------- 1998 1997 --------------------------------- OPERATING ACTIVITIES Net (loss) $ (46,100,000) $ (26,970,000) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Equity in net (income) loss of Omnitel (30,435,000) 7,628,000 Depreciation and amortization expense 520,000 532,000 Loss on disposal of equipment - 3,000 Loss from early extinguishment of debt 44,924,000 - Foreign currency translation losses 13,693,000 - Accretion of original issue discount 15,531,000 17,862,000 Accretion of interest on marketable securities (169,000) (1,446,000) Amortization of deferred financing costs charged to interest expense 1,057,000 960,000 Amortization of debt discount 313,000 820,000 Changes in operating assets and liabilities: Other current assets (57,000) 942,000 Accounts payable 19,000 (156,000) Accrued expenses (601,000) (194,000) Taxes payable (5,000) (2,000) Due to NTL Incorporated 8,000 (411,000) --------------------------------- Net cash (used in) operating activities (1,302,000) (432,000) --------------------------------- INVESTING ACTIVITIES Purchase of marketable securities (5,000,000) (97,560,000) Proceeds from sale of marketable securities 30,040,000 110,327,000 --------------------------------- Net cash provided by investing activities 25,040,000 12,767,000 --------------------------------- FINANCING ACTIVITIES Proceeds from borrowings, net of financing costs 236,890,000 - Redemption of Senior Discount Notes (245,019,000) (44,000) Exercise of stock options and warrants 4,152,000 921,000 --------------------------------- Net cash provided by (used in) financing activities (3,977,000) 877,000 --------------------------------- Increase in cash and cash equivalents 19,761,000 13,212,000 Cash and cash equivalents at beginning of period 59,256,000 46,759,000 --------------------------------- Cash and cash equivalents at end of period $ 79,017,000 $ 59,971,000 ================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest $ 2,774,000 $ -
See accompanying notes. 5 Cellular Communications International, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PREPARATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. In March 1998, the Company issued debt denominated in ECU's. Interest expense has been translated using the average exchange rate for the period and the debt balance has been translated using the current exchange rate at the balance sheet date. Foreign currency gains and losses arising from exchange rate fluctuations are included in the results of operations. In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company has adopted SFAS No. 130, which had no effect on the consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company is assessing whether changes in reporting will be required upon the adoption of this new standard. The Company will adopt SFAS No. 131 for fiscal year ending December 31, 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in fiscal years beginning after June 15, 1999. Management does not anticipate that the adoption of this new standard will have a significant effect on earnings or the financial position of the Company. 6 Cellular Communications International, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE B - INVESTMENT IN OMNITEL The investment in Omnitel consists of the following: SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------------------------- (unaudited) Capital contributions $ 96,805,000 $ 96,805,000 Capitalized costs including interest 9,725,000 9,725,000 Equity in accumulated net loss (21,993,000) (52,428,000) --------------------------------- 84,537,000 54,102,000 Accumulated amortization (2,470,000) (1,951,000) --------------------------------- $ 82,067,000 $ 52,151,000 ================================= In March 1994, the Omnitel-Pronto Italia ("OPI") consortium in which Omnitel holds a 70% interest was selected as the second GSM cellular telephone licensee in Italy. The Company, through its 14.667% ownership interest in Omnitel, holds an indirect 10.267% interest in OPI. The following financial information of Omnitel and OPI is prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and is reflected in U.S. dollars; the balance sheet information has been translated at the exchange rate on the balance sheet date (1,650.55 (1998) and 1,767.00 (1997) lire = $1.00) and the statement of operations information has been translated at the average exchange rate for the period (1,766.42 (1998) and 1,697.13 (1997) lire = $1.00). The following summarizes the assets, liabilities and stockholders' equity of Omnitel: SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------------------------- (unaudited) ASSETS Current assets $ 6,721,000 $ 7,137,000 Investment in OPI 498,580,000 257,971,000 --------------------------------- $ 505,301,000 $ 265,108,000 ================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 137,000 $ 677,000 Other liabilities 55,000 51,000 Stockholders' equity 505,109,000 264,380,000 --------------------------------- $ 505,301,000 $ 265,108,000 ================================= 7 Cellular Communications International, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE B - INVESTMENT IN OMNITEL (CONTINUED) The following summarizes the unaudited results of operations of Omnitel: NINE MONTHS ENDED SEPTEMBER 30 -------------------------------- 1998 1997 -------------------------------- Revenues $ - $ - Costs and expenses (488,000) (991,000) Equity in net income (loss) of OPI 207,736,000 (51,447,000) -------------------------------- Operating income (loss) 207,248,000 (52,438,000) Interest income, net 261,000 425,000 -------------------------------- Net income (loss) $ 207,509,000 $ (52,013,000) ================================ The following summarizes the assets, liabilities and stockholders' equity of OPI: SEPTEMBER 30, DECEMBER 31, 1998 1997 ---------------------------------- (unaudited) ASSETS Current assets $ 961,684,000 $ 522,188,000 Property, plant and equipment, net 1,117,700,000 782,129,000 Intangible assets, net 483,374,000 472,918,000 Deferred tax asset 25,249,000 32,088,000 Other 56,524,000 37,158,000 ---------------------------------- $ 2,644,531,000 $ 1,846,481,000 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 993,653,000 $ 605,919,000 Long-term debt 917,180,000 855,134,000 Other liabilities 21,440,000 16,898,000 Stockholders' equity 712,258,000 368,530,000 ---------------------------------- $ 2,644,531,000 $ 1,846,481,000 ================================== The following summarizes the unaudited results of operations of OPI: NINE MONTHS ENDED SEPTEMBER 30 --------------------------------- 1998 1997 --------------------------------- Revenues $ 1,671,816,000 $ 703,027,000 Costs and expenses 1,125,071,000 606,160,000 Depreciation and amortization 176,162,000 126,086,000 --------------------------------- 1,301,233,000 732,246,000 --------------------------------- Operating income (loss) 370,583,000 (29,219,000) Interest (expense), net (46,190,000) (61,988,000) Income tax (provision) benefit (27,507,000) 17,661,000 --------------------------------- Net income (loss) $ 296,886,000 $ (73,546,000) ================================= 8 Cellular Communications International, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE B - INVESTMENT IN OMNITEL (CONTINUED) The following financial information of OPI is prepared in accordance with U.S. GAAP and is reflected in Italian lire. The following summarizes the assets, liabilities and stockholders' equity of OPI: SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------------------ (unaudited) (in millions of lire) ASSETS Current assets 1,587,307 922,707 Property, plant and equipment, net 1,844,820 1,382,022 Intangible assets, net 797,833 835,646 Deferred tax asset 41,675 56,700 Other 93,296 65,659 ------------------------------ 4,364,931 3,262,734 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities 1,640,075 1,070,663 Long-term debt 1,513,851 1,511,021 Other liabilities 35,388 29,858 Stockholders' equity 1,175,617 651,192 ------------------------------ 4,364,931 3,262,734 ============================== The following summarizes the unaudited results of operations of OPI: NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ 1998 1997 ------------------------------ (in millions of lire) Revenues 2,953,129 1,193,129 Costs and expenses 1,987,348 1,028,733 Depreciation and amortization 311,176 213,985 ------------------------------ 2,298,524 1,242,718 ------------------------------ Operating income (loss) 654,605 (49,589) Interest (expense), net (81,591) (105,202) Income tax (provision) benefit (48,589) 29,973 ------------------------------ Net income (loss) 524,425 (124,818) ============================== 9 Cellular Communications International, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE C - LONG-TERM DEBT Long-term debt consists of:
SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------------------------- (unaudited) 13-1/4% Senior Discount Notes ("13-1/4% Notes") $ 166,000 $ 201,095,000 Unamortized discount - (3,768,000) --------------------------------- 166,000 197,327,000 9-1/2% Senior Discount Notes ("9-1/2% Notes") 181,621,000 - 6% Convertible Subordinated Notes ("Convertible Notes") 86,250,000 - --------------------------------- $ 268,037,000 $ 197,327,000 =================================
In March and July 1998, the Company redeemed an aggregate of $281,291,000 principal amount at maturity (book value of $204,630,000 when redeemed) of 13-1/4% Notes for cash of $245,019,000. The Company recorded an extraordinary loss from the early extinguishment of debt of $44,924,000 as a result of these transactions, including the write-off of unamortized deferred financing costs of $4,025,000. The original issue discount of the 13-1/4% Notes outstanding subsequent to these redemptions accretes at a rate of 13-1/4%, compounded semiannually, to an aggregate principal amount at maturity of $210,000 on August 15, 2000. In March 1998, the Company issued ECU 235,000,000 ($276,572,000) aggregate principal amount of 9-1/2% Senior Discount Notes due 2005 and $86,250,000 aggregate principal amount of 6% Convertible Subordinated Notes due 2005. The 9-1/2% Notes were issued at a price of 62.455% or ECU 146,769,000 ($159,553,000 on the date of issuance). The Company received net proceeds of ECU 142,366,000 ($154,766,000 on the date of issuance) and $83,447,000, after discounts and commissions, from the issuance of the 9-1/2% Notes and the Convertible Notes, respectively. Discounts, commissions and other fees incurred of $8,913,000 were included in deferred financing costs. The Company used most of the proceeds to repurchase its 13-1/4% Notes. The original issue discount of the 9-1/2% Notes accretes at a rate of 9-1/2% compounded semiannually, to an aggregate principal amount of ECU 235,000,000 ($276,572,000) by April 1, 2003. Interest will thereafter accrue at 9-1/2% per annum, payable semiannually beginning on October 1, 2003. The 9-1/2% Notes are unsecured obligations of the Company and are effectively subordinated to all existing and future indebtedness and other liabilities of the Company and the Company's subsidiaries. The 9-1/2% Notes may be redeemed at the Company's option, in whole or in part, at any time on or after April 1, 2002 at a redemption price of 104.75% that declines annually to 100% in 2005, plus accrued and unpaid interest to the date of redemption. The Indenture governing the 9-1/2% Notes contains restrictions relating to, among other things: (i) incurrence of additional indebtedness and the issuance of preferred stock, (ii) dividend and other payment restrictions and (iii) mergers, consolidations and sales of assets. 10 Cellular Communications International, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE C - LONG-TERM DEBT (CONTINUED) Interest payments on the Convertible Notes began on October 1, 1998 and interest is payable every six months thereafter. The Convertible Notes mature on April 1, 2005. The Convertible Notes are unsecured obligations convertible into shares of common stock prior to maturity at a conversion price of $39.95 per share, subject to adjustment. There are approximately 2,159,000 shares of common stock reserved for issuance upon conversion of the Convertible Notes. The Convertible Notes are redeemable, in whole or in part, at the option of the Company at any time on or after April 4, 2001 at a redemption price of 103.429% that declines annually to 100% in 2005, in each case together with accrued and unpaid interest to the redemption date. NOTE D - NET LOSS PER COMMON SHARE The following table sets forth the computation of basic and diluted net loss per common share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------------------------------------------------- 1998 1997 1998 1997 ---------------------------------------------------------------------- Numerator: Loss before extraordinary item $ (2,796,000) $ (5,459,000) $ (1,176,000) $ (26,970,000) Extraordinary item (6,858,000) - (44,924,000) - ---------------------------------------------------------------------- Net loss $ (9,654,000) $ (5,459,000) $ (46,100,000) $ (26,970,000) ---------------------------------------------------------------------- Denominator for basic net loss per common share 16,637,000 16,221,000 16,541,000 16,126,000 Effect of dilutive securities - - - - ---------------------------------------------------------------------- Denominator for diluted net loss per common share 16,637,000 16,221,000 16,541,000 16,126,000 ---------------------------------------------------------------------- Basic and diluted net loss per common share: Loss before extraordinary item $ (.17) $ (.34) $ (.07) $ (1.67) Extraordinary item (.41) - (2.72) - ---------------------------------------------------------------------- Net loss $ (.58) $ (.34) $ (2.79) $ (1.67) ======================================================================
The shares issuable upon the exercise of stock options and warrants and the shares issuable upon conversion of convertible securities are excluded from the calculation of net loss per common share as their effect would be antidilutive. 11 Cellular Communications International, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. RESULTS OF OPERATIONS OPI ended the third quarter with approximately 5 million subscribers representing an estimated market share of 28%. In June 1998, the Ministry of Communications (the "MOC") in Italy announced that Wind SpA was the winning bidder for the third nationwide GSM license. Wind is owned by Deutsche Telekom AG, France Telecom SA and Enel SpA, the state-owned Italian electric company. According to press reports, Wind plans to launch its complete cellular phone services by mid 1999. Wind will begin technical tests in Rome and Milan and the first commercial services could be ready by December in those two cities. The MOC intends to begin the process for a fourth mobile license tender, which is expected to begin by the middle of 1999. THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - ---------------------------------------------- Equity in net income of Omnitel increased to $15,197,000 from $984,000. The increase is due to the increase in Omnitel's equity in net income of OPI to $103,749,000 from $6,593,000. OPI's net income increased to $148,276,000 from $9,392,000 as a result of a 147% increase in operating revenues with only a 104% increase in operating expenses (percentage changes are calculated based on the results of operations in Italian lire). OPI reported that it had approximately 5,000,000 and 1,730,000 subscribers as of October 3, 1998 and September 30, 1997, respectively. General and administrative expenses decreased to $615,000 from $626,000 as a result of decreases in payroll and certain corporate expenses. Interest income and other, net, increased to $1,174,000 from $1,123,000 primarily because of an increase in interest earned on funds available for investment. Interest expense decreased to $5,708,000 from $6,763,000 due to the reduction in interest rates on the outstanding debt. Foreign currency translation losses of $12,671,000 in 1998 are due to unfavorable changes in the exchange rate subsequent to the issuance in March 1998 of new debt denominated in ECU's. The Company recorded an extraordinary loss of $6,858,000 from the redemption of a portion of the 13-1/4% Notes. NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - --------------------------------------------- Equity in net income (loss) of Omnitel increased to income of $30,435,000 from a loss of $7,628,000. The change is due to the change in Omnitel's equity in net income (loss) of OPI to income of $207,736,000 from a loss of $51,447,000. OPI's net income (loss) changed to income of $296,886,000 from a loss of $73,546,000 as a result of a 148% increase in operating revenues with only an 85% increase in operating expenses (percentage changes are calculated based on the results of operations in Italian lire). 12 Cellular Communications International, Inc. and Subsidiaries General and administrative expenses decreased to $1,787,000 from $2,473,000 primarily because CCII reduced its efforts to obtain new licenses. Interest income and other, net, increased to $4,064,000 from $3,307,000 primarily because of an increase in funds available for investment. Interest expense increased to $19,675,000 from $19,644,000 due to the issuance of the 9-1/2% Notes and Convertible Notes in March 1998, offset by a decrease in interest expense due to the redemption of the 13-1/4% Notes in 1998. Foreign currency translation losses of $13,693,000 in 1998 are due to unfavorable changes in the exchange rate subsequent to the issuance in March 1998 of new debt denominated in ECU's. The Company recorded an extraordinary loss of $44,924,000 from the redemption of the 13-1/4% Notes. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily based upon the agreements and requirements of the joint ventures in which it is now or may become a participant. The Company also requires capital to pay for corporate overhead expenses, personnel costs, interest and taxes, as well as capital to explore other opportunities that may arise. The Company has no material commitments for capital expenditures, except as described below. The Company has not been successful in obtaining any new cellular licenses since there is more competition for licenses and the costs of obtaining them has increased. This has occurred because more companies recognize the potential value of cellular licenses and governments increasingly realize they can extract some part of this value from license applicants. There can be no assurance that the Company will be successful in obtaining new cellular licenses or in developing other opportunities in the future. The Company expects that cash and cash equivalents on hand will be sufficient to meet all obligations of the Company at least through the next twelve months. Italian lire and ECU's have been translated solely for the convenience of the reader at an exchange rate of 1,671.00 lire per U.S. dollar and $1.1624 per ECU, the Noon Buying Rates on November 9, 1998. As a result of the award of Italy's second GSM cellular license to OPI, OPI required capital to construct its cellular system and to fund its operations. OPI received capital contributions of 1,450 billion lire ($868 million) from its partners - 1,015 billion lire ($607 million) from Omnitel and 435 billion lire ($260 million) from Pronto Italia. Omnitel funded its share of OPI capital contributions plus its own capital needs through capital contributions from its shareholders of 1,040 billion lire ($622 million). The Company's total cumulative contribution to Omnitel is approximately 152.5 billion lire ($96.8 million at the exchange rates in effect at the time of each contribution). In addition, OPI has a syndicated bank loan facility for 2,800 billion lire ($1.7 billion). As of September 30, 1998, OPI had approximately 1,200 billion lire ($718 million) available under its facilities. 13 Cellular Communications International, Inc. and Subsidiaries In 1997, the Board of Directors of Omnitel approved a proposal to make available to OPI a subordinated credit facility of 70 billion lire ($42 million) as soon as OPI's indebtedness amounts to 2,200 billion lire ($1.3 billion) or in the event of default by OPI under the facility. OPI has provided an approximate 219 billion lire ($131 million) performance bond that requires payments to the Italian government if OPI fails to meet certain operational targets. In July 1998, OPI issued a letter to the Ministry of Communications stating that the parameters required by May 1998 specified in the performance bond were successfully achieved. OPI is required to pay royalties to the MOC in amounts not less than 51 billion lire ($31 million) for 1998 and 77.1 billion lire ($46 million) for 1999, subject in each year to reduction only due to any proportionate reduction of the royalty percentage to less than 3.5%. OPI is also required to maintain the declared stockholding majority of OPI until February 1, 2000, the performance bond's date of maturity. Failure to achieve the objectives specified in the performance bond could result in charges to OPI. The Company's maximum liability under the performance bond is approximately 22.5 billion lire ($13 million), reflecting its proportionate interest in OPI. Omnitel has committed to purchase 70% of OPI's forfeited stock warrants granted to OPI executives in connection with OPI's stock option plan. The warrants could be sold in the period between March 30, 2000 and March 31, 2001. The Board of Directors of OPI have approved a valuation of the warrants equal to lire 12,729, determined as if the purchase would take place on June 30, 1998. In August 1995, the Company issued $281,571,000 aggregate principal amount at maturity of 13-1/4% Senior Discount Notes due 2000 and 422,356 warrants to purchase 475,573 shares of common stock. The 13-1/4% Notes were issued at a price to the public of 52.783% or $148,622,000. In March and July 1998, the Company redeemed an aggregate of $281,291,000 principal amount at maturity of 13-1/4% Notes for cash of $245,019,000. The original issue discount of the 13-1/4% Notes outstanding subsequent to these redemptions accretes at a rate of 13-1/4%, compounded semiannually, to an aggregate principal amount at maturity of $210,000 on August 15, 2000. In March 1998, the Company issued ECU 235,000,000 ($273,164,000) aggregate principal amount of 9-1/2% Senior Discount Notes due 2005 and $86,250,000 aggregate principal amount of 6% Convertible Subordinated Notes due 2005. The 9-1/2% Notes were issued at a price of 62.455% or ECU 146,769,000 ($159,553,000 on the date of issuance). The Company received net proceeds of ECU 142,366,000 ($154,766,000 on the date of issuance) and $83,447,000, after discounts and commissions, from the issuance of the 9-1/2% Notes and the Convertible Notes, respectively. The original issue discount of the 9-1/2% Notes accretes at a rate of 9-1/2% compounded semiannually, to an aggregate principal amount of ECU 235,000,000 ($273,164,000) by April 1, 2003. Interest will thereafter accrue at 9-1/2% per annum, payable semiannually beginning on October 1, 2003. The 9-1/2% Notes are unsecured obligations of the Company and are effectively subordinated to all existing and future indebtedness and other liabilities of the Company and the Company's subsidiaries. The 9-1/2% Notes may be redeemed at the Company's option, in whole or in part, at any time on or after 14 Cellular Communications International, Inc. and Subsidiaries April 1, 2002 at a redemption price of 104.75% that declines annually to 100% in 2005, plus accrued and unpaid interest to the date of redemption. The Indenture governing the 9-1/2% Notes contains restrictions relating to, among other things: (i) incurrence of additional indebtedness and the issuance of preferred stock, (ii) dividend and other payment restrictions and (iii) mergers, consolidations and sales of assets. Interest payments on the Convertible Notes began on October 1, 1998 and interest is payable every six months thereafter. The Convertible Notes mature on April 1, 2005. The Convertible Notes are unsecured obligations convertible into shares of common stock prior to maturity at a conversion price of $39.95 per share, subject to adjustment. There are approximately 2,159,000 shares of common stock reserved for issuance upon conversion of the Convertible Notes. The Convertible Notes are redeemable, in whole or in part, at the option of the Company at any time on or after April 4, 2001 at a redemption price of 103.429% that declines annually to 100% in 2005, in each case together with accrued and unpaid interest to the redemption date. To the extent that the Company obtains financing in U.S. dollars and ECU's and the Company's future commitments to Omnitel are in Italian lire, it will encounter currency exchange rate risks. OPI's revenues are received in Italian lire. Currently there are no foreign exchange controls in Italy. Thus, although no such payments have been made to date, the current foreign exchange rules would allow Omnitel and OPI to export cash, representing dividends, interest or repayment of loans. There can be no assurance that foreign exchange restrictions will not be introduced in the future. The Company is primarily a holding company with limited business operations of its own. The Company's assets consist primarily of cash and cash equivalents and its ownership interest in Omnitel. The Company does not hold, nor is it likely that the Company will hold, a majority interest in any operating systems. The Company's minority voting position in Omnitel currently precludes it from controlling Omnitel or OPI, even though the Company is involved in the management of Omnitel and intends to participate in the future only in operating companies in which it can be involved in management. Thus, the Company may be unable to cause the implementation of strategies that it favors and, in the event of a disagreement between the Company and one or more of its partners, the strategies adopted and actions taken by an affiliated company may in some cases be contrary to the Company's preferred strategies and actions. In addition, the Company may be unable to access the cash flow of affiliated companies since: (i) it does not have the requisite control to cause such entities to pay dividends, (ii) substantially all of such entities are expected to be parties to credit or other borrowing agreements that severely restrict or prohibit the payment of dividends, and such entities are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future and (iii) some countries tax payment and repatriation of dividends. As a result, the Company does not expect to receive significant cash through dividends or other distributions from an affiliate in the foreseeable future. Because the Company does not expect significant cash flow in the foreseeable future, its ability to repay the 9-1/2% Notes and the Convertible Notes at maturity will be dependent on developing one or more sources of cash at or prior to maturity. The Company may (i) seek to refinance all or a portion of the Notes at maturity through sales of additional debt or equity securities of the Company, (ii) if possible and subject to the appropriate consents and approvals and certain other limitations set forth in the OPI Agreement and the Omnitel Agreement, seek to sell all or a portion of its interest in Omnitel, (iii) negotiate with its partners to permit any cash produced by OPI to be distributed to equity holders 15 Cellular Communications International, Inc. and Subsidiaries rather than invested in the business and/or (iv) seek to invest in companies that will make substantial cash distributions on or before the maturity of the Notes. There can be no assurance that (i) there will be a market for the debt or equity securities of the Company in the future, (ii) the Company will be permitted to sell particular assets or be able to sell assets in a timely manner or on commercially acceptable terms or in an amount that (giving effect to the substantial corporate income taxes which could be due in the event of such a sale) will be sufficient to repay the Notes when due, (iii) the Company will be able to persuade its partners that cash generated by the operations of its affiliated entities should be distributed to equity holders (in fact, the Company expects that Omnitel and OPI will utilize all of their respective cash flow for debt repayment or internal development opportunities for the foreseeable future) or (iv) the Company will be able to locate and invest in companies that will be mature enough to make substantial cash distributions to investors prior to the maturity of the Notes. Special U.S. income tax rules apply to U.S. taxpayers that own stock in a passive foreign investment company (a "PFIC"). Among other things, gain recognized upon disposition of PFIC shares would be taxable as ordinary income, except to the extent a taxpayer makes an election to treat a PFIC in which it owns stock as a "qualified electing fund" (a "QEF") in the first taxable year in which the taxpayer owns the PFIC's stock. The Company acquired shares in Omnitel in 1990, but did not make a QEF election prior to the regular deadline for such election in 1991. The Company is seeking a ruling from the Internal Revenue Service pursuant to temporary regulations issued by the Treasury Department in 1997 that would allow the Company to make a retroactive QEF election. If the Company cannot make the QEF election retroactively, then upon a sale of its Omnitel shares or the receipt of certain dividends from Omnitel, the Company would be subject to more federal income tax than would have otherwise been charged, and to an interest charge on that tax. Cash used in operating activities was $1,302,000 and $432,000 in 1998 and 1997, respectively. The increase in cash used in operating actrivities is due to the increase in cash paid for interest to $2,774,000 in 1998 from zero in 1997. Cash provided by investing activities was $25,040,000 in 1998 as a result of proceeds from sales of marketable securities, net of purchases. Proceeds from borrowing, net of financing costs of $236,890,000 in 1998 is comprised of the proceeds from the issuance of the 9-1/2% Notes and the Convertible Notes of $245,803,000, net of financing costs paid of $8,913,000. YEAR 2000 Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. OPI has informed the Company that it is assessing both the internal readiness of its computer systems and the readiness of the systems of certain significant customers and vendors for handling the year 2000. The Company believes, based on its knowledge of OPI's information technology practices, that OPI will implement successfully the systems and programming changes necessary to address year 2000 issues, and the Company does not believe that the cost of such actions will have a material adverse effect on OPI. The Company can make no assurance, however, that there will not be a delay in, or increased costs associated with, the implementation of such changes, and the inability to implement such changes could have an adverse effect on OPI. In addition, the failure of certain of OPI's significant customers and vendors to address the year 2000 issue could have a material adverse effect on OPI. 16 Cellular Communications International, Inc. and Subsidiaries SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained herein constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. When used herein, the words, "believe," "anticipate," "should," "intend," "plan," "will," "expects," "estimates," "projects," "positioned," "strategy," and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those contemplated, projected, forecasted, estimated or budgeted, whether expressed or implied, by such forward-looking statements. Such factors include the following: general economic and business conditions in Italy, industry trends, OPI's ability to continue to design and build its network, install facilities, obtain and maintain any required government licenses or approvals and finance construction and development, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, as well as assumptions about customer acceptance, churn rates, overall market penetration and competition from providers of alternative services, the impact of new business opportunities requiring significant up-front investment, and availability, terms and deployment of capital. 17 Cellular Communications International, Inc. and Subsidiaries PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27. Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended September 30, 1998. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CELLULAR COMMUNICATIONS INTERNATIONAL, INC. Date: November 10, 1998 By: /s/ Stanton N. Williams ------------------------------ Stanton N. Williams Executive Vice President and Chief Financial Officer Date: November 10, 1998 By: /s/ Gregg Gorelick ------------------------------ Gregg Gorelick Vice President-Controller (Principal Accounting Officer) 19 EX-27 2 QUARTERLY FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 79,017,000 0 0 0 0 78,000 41,000 (41,000) 169,407,000 2,087,000 268,037,000 0 0 167,000 (100,884,000) 169,407,000 0 30,435,000 0 0 1,787,000 0 19,675,000 (1,176,000) 0 (1,176,000) 0 (44,924,000) 0 (46,100,000) (2.79) (2.79)
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