<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____
F O R M 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ _ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
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
incorporation or organization) Identification No.)
110 East 59th Street, New York, New York 10022
- ----------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 906-8480
--------------
_________
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ _ ] No
Indicate by check mark whether disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ _ ]
<PAGE>
The aggregate market value of the registrant's Common Stock held by non-
affiliates at March 24, 1997, valued by reference to the closing sale price for
the registrant's Common Stock on the Nasdaq Stock Market's National Market, was
approximately $276,042,000.
Number of shares of Common Stock
outstanding as at March 24, 1997: 10,712,241
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Document Part of 10-K in which
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Incorporated
------------
Definitive proxy statement Part III
for the 1997 Annual Meeting
of the Stockholders of
Cellular Communications International, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PART I
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Item 1 Business........................................................... 1
Item 2 Properties......................................................... 4
Item 3 Legal Proceedings.................................................. 5
Item 4 Submission of Matters to a Vote of Stockholders.................... 5
PART II
- -------
Item 5 Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................ 6
Item 6 Selected Financial Data............................................ 7
Item 7 Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................ 8
Item 8 Financial Statements and Supplementary Data........................ 11
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 11
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant................. 12
Item 11 Executive Compensation............................................. 12
Item 12 Security Ownership of Certain Beneficial Owners and Management..... 12
Item 13 Certain Relationships and Related Transactions..................... 12
PART IV
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Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 12
Exhibit Index..................................................................... 13
Signatures........................................................................ 14
Index to Financial Statements..................................................... F-1, S-1
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
- -----------------
GENERAL.
Cellular Communications International, Inc. ("CCII" or the "Company") was
incorporated in Delaware on May 30, 1984 to own and operate cellular telephone
systems in various markets. Prior to 1987, CCII filed applications with the
Federal Communications Commission to provide cellular telephone service in
various markets. Beginning in 1989, CCII entered into joint ventures to obtain
licenses to own and operate mobile telephone networks in various foreign
countries.
CCII's activities to date have focused on participating in strategic joint
ventures to acquire overseas cellular telephone systems.
Currently, CCII's primary asset is its participation in Omnitel-Pronto
Italia ("OPI"), a strategic joint venture consortium that operates the second
Global System for Mobile Communications ("GSM") cellular telephone license in
Italy (including San Marino and Vatican City) (the "License").
OMNITEL AND OPI.
In January, 1995, the award of Italy's second GSM cellular license to OPI
was made official with the publication of an announcement in the Italian public
register. The publication of the award was the final step in the award process
which began in March 1994 when the original announcement of the selection of OPI
was made by the Italian government. CCII holds a 10.267% indirect interest in
OPI through its 14.667% ownership interest in Omnitel-Sistemi Radiocellulari
Italiani S.p.A. ("Omnitel"), a strategic joint venture organized in May 1990 to
apply for the License. The principal other joint venturers in Omnitel are Ing.
C. Olivetti & C., S.p.A., Bell Atlantic International, Inc. and Telia (formerly
Swedish Telecom International, AB).
In February 1994, Omnitel and Pronto Italia S.p.A. ("Pronto Italia")
entered into an agreement to jointly form OPI as their combined applicant for
the License. Pronto Italia is owned principally by AirTouch Communications, Inc.
and Mannesmann AG. Omnitel is a 70% shareholder of OPI and Pronto Italia is a
30% shareholder.
Cellular Service in Italy. The Italian cellular market has been one of the
-------------------------
fastest growing cellular markets in Europe over the past several years, growing
from approximately 3.9 million subscribers in 1995 to approximately 6.4 million
in 1996. OPI competes with Telecom Italia Mobile (which in 1995 was spun out to
shareholders of Telecom Italia, the public switched telephone network ("PSTN")),
for cellular users in Italy. OPI and Telecom Italia Mobile both use the digital
GSM standard, but Telecom Italia Mobile also has nearly 3.8 million subscribers
using the older, analog standard. OPI competes with Telecom Italia Mobile by
stressing the quality of its digital network (which was custom designed for the
GSM standard), the benefits of the GSM standard (pan European roaming, privacy
and security, and advanced features), and the quality of its customer service.
OPI began offering commercial service in December 1995, and OPI has
reported that as of December 31, 1996 it had approximately 713,000 subscribers.
<PAGE>
Performance Bond./1/ OPI has provided an approximate 219 billion lire
----------------
($129.6 million) performance bond to the Italian government linked to OPI's
meeting certain performance goals relating to territory coverage, investment,
employment and payment of license fees. OPI has met all of the requirements of
this bond that have matured to date. OPI must now (i) cover 98% of Italian
territory with its cellular network by May 1998, (ii) invest 1,552 billion lire
($918.7 million) by May 1998, (iii) employ 2,686 people by May 1998 and (iv) pay
an annual license fee of 3.5% of OPI's annual sales, net of amounts paid to
public landline telephone operators for their services. OPI is subject to
monetary penalties for failing to achieve such goals. There can be no assurance
that OPI will be able to achieve all of its performance bond goals. The maximum
liability of CCII under the performance bond would be approximately 22.5 billion
lire ($13.3 million), reflecting its proportionate interest in OPI.
Arrangements with Telecom Italia and Telecom Italia Mobile.
----------------------------------------------------------
Fees and Pricing with Telecom Italia. Pursuant to the License, OPI has
connected its mobile cellular telephone network to the PSTN. The rates charged
by Telecom Italia approximate 200 lire ($.12) per minute, which are among the
highest in Europe. OPI has begun a process of negotiating these rates with the
Italian Ministry of Post and Telecommunications ("MPT"), but there can be no
assurance as to the outcome of this process.
Roaming Agreements. OPI has entered into a mutual roaming agreement with
Telecom Italia Mobile to guarantee all subscribers roaming service throughout
areas covered by only one of the GSM cellular providers. Pursuant to the terms
of the License after the initial two years of OPI's operations, subsequent
agreements on national roaming may not include the capital cities of the Italian
provinces.
OPI has negotiated roaming agreements with other GSM operators throughout
Europe in order to provide customers with Pan-European roaming.
Competition. Competition within the Italian market is substantial. Telecom
-----------
Italia Mobile, which operates the state owned cellular system, has for several
years through its predecessor SIP, S.p.A. ("SIP") operated a 450-MHz analog
cellular system in Italy, and during 1989 began to bring into service a 900-MHz
analog cellular system. The established market presence and recognition of
Telecom Italia Mobile has resulted in Telecom Italia Mobile being a significant
competitor.
Telecom Italia Mobile has approximately 5.7 million subscribers as of
December 31, 1996. Telecom Italia Mobile has certain advantages over OPI which
will continue for the foreseeable future, such as a larger installed customer
base and a wider coverage area. Furthermore, because OPI did not provide
cellular service until December 1995, many potential high usage business
customers were already Telecom Italia Mobile cellular customers. While OPI and
Telecom Italia Mobile are currently the only cellular telephone operators
licensed in Italy, it is anticipated that a third GSM license will be granted in
the future. Moreover, OPI may also face significant potential competition from
other communications technologies that are being or may be developed or
perfected in the future.
Risks of Italian Operations. Business conditions in Italy are generally
---------------------------
viewed by those in the international business community as favorable. CCII does
not perceive any material risk of nationalization of independent
telecommunications service providers in Italy.
The Omnitel Agreement. Reference is made to the description of the Omnitel
---------------------
joint venture agreement (the "Omnitel Agreement") that is attached as exhibit
10.1 to this Form 10-K.
The Omnitel-Pronto Italia Agreement. Omnitel and Pronto Italia have
-----------------------------------
entered into an agreement (the "OPI Agreement") that contains provisions
governing the relationship between the two parties, including, but not limited
to, provisions relating to the governance and financing of OPI.
__________________________
/1/ Italian lire have been translated solely for the convenience of the
reader of this Form 10-K at an exchange rate of 1,689.30 lire = $1.00, the Noon
Buying Rate on March 24, 1997.
2
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CUSTOMER DEPENDENCE AND SEASONALITY.
CCII currently has no customers. OPI is not dependent upon any single
customer for any material portion of its business. The cellular communications
industry is not generally characterized as having a material seasonal element.
The businesses of CCII and OPI are not expected to become seasonal in the
foreseeable future.
OTHER CONSIDERATIONS.
CCII's ability to sell or transfer its ownership interest in Omnitel is
subject to limitations contained in the agreements between the relevant
shareholders. The shareholders of Omnitel have pledged to the MPT pursuant to
the terms of the License to maintain certain levels of ownership in the
respective companies for a period of at least five years from the date of grant
of the License. Such restrictions effectively require 86% of the capital stock
of Omnitel to remain held by the present shareholders for at least five years
from the License grant. There can be no assurance that the MPT or the Italian
government will permit transfers of indirect ownership or that the MPT will not
suspend or terminate the License if such transfers occur.
In addition, Omnitel currently has no publicly traded securities and there
can be no guarantee that there will in the future be either a public or private
market for the securities of Omnitel. As a result, CCII's ability to liquidate
any or all of its investment may be substantially limited.
The Company or its affiliates generally will be subject to tax in the
foreign jurisdictions in which they operate. In addition, such foreign
jurisdictions may impose withholding taxes on distributions (by way of interest,
dividends or otherwise) to the Company. For example, under applicable treaties
currently in effect, dividends distributed by an Italian company to a United
States person would be subject to a withholding tax of 15%, if paid to a United
States company which has owned less than 25% of the voting stock of the company
paying the dividends for a 12-month period ending on the date the dividend is
declared. In general, the Company's ability to claim a foreign tax credit
against its U.S. federal income tax expense for foreign taxes is subject to
various limitations. These limitations and the inability of the Company to
offset losses in one foreign jurisdiction against income earned in another
foreign jurisdiction could result in a high effective tax rate on the Company's
earnings.
Special U.S. tax rules apply to U.S. taxpayers that own stock in a "passive
foreign investment company" (a "PFIC"). In general, a non-U.S. corporation will
be treated as a PFIC if at least 75% of its income is "passive income" or if at
least 50% of its assets are held for the production of "passive income". A non-
U.S. corporation that owns 25% or more of the stock of a non-U.S. subsidiary is
treated as receiving a proportionate share of the income of, and as owning a
proportionate share of the assets of, such subsidiary.
Omnitel may be considered to be a PFIC. Generally, except to the extent the
Company 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 Company owns the
PFIC's stock, (i) the Company would be required to allocate gain recognized upon
the disposition of stock in the PFIC and income recognized upon receiving
certain dividends ratably over the Company's holding period for the stock in the
PFIC, (ii) the amount allocated to each year other than the year of the
disposition or dividend payment would be taxable at the highest U.S. tax rate
applicable to corporations, and an interest charge for the deemed deferral
benefit would be imposed with respect to the tax attributable to each year, and
(iii) gain recognized upon disposition of PFIC shares would be taxable as
ordinary income.
If the Company were to make the QEF election, as described above, the
Company would be required in each year that PFIC qualification tests are met to
include its pro rata share of the QEF's earnings as ordinary income and its pro
rata share of the QEF's net capital gain as long-term capital gain, whether or
not such amounts are actually distributed. The Company has not made any QEF
election with respect to any non-U.S. corporations in which it holds stock,
including Omnitel.
3
<PAGE>
Applicable laws often limit foreign investors to minority equity positions.
CCII's minority voting position may preclude it from affirmatively controlling
the companies in which it has an interest even though CCII is involved in the
management of Omnitel and intends to participate in the future only in operating
companies in which it can participate in management. Thus, CCII may be unable
to cause implementation of strategies it favors.
The acquisition, development, ownership and operation of wireless
communications networks require substantial capital investment. OPI will
require significant amounts of capital to construct its cellular networks and
for its research and development programs, operating expenses, expansion of its
marketing and distribution capabilities, license fees and royalties. Adequate
funds for these purposes, whether through equity or debt financing,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed (including due to a failure by CCII or
another shareholder to provide a required capital contribution) or available on
terms acceptable to OPI. Insufficient funds could require OPI to delay, scale
back or eliminate certain of its planned activities. OPI currently has a
syndicated loan facility of 1,800 billion lire ($1.1 billion) and a credit
agreement with Finnish Export Credit Ltd. in the amount of 306 billion lire
($181.1 million) for financing Nokia Telecommunications equipment. As of
December 31, 1996, OPI has utilized 677 billion lire ($400.8 million) of the
syndicated loan facility and all of the Finnish Export Credit Ltd. credit.
There can be no assurance that the laws or administrative practice relating
to taxation, foreign exchange or otherwise in Italy will not change, and any
such change could have a material adverse effect on the financial affairs of
OPI. The value of CCII's indirect investment in OPI may also be affected by
changes in tax law and other laws and other political, economic, socioeconomic
or diplomatic developments in or affecting Italy.
Omnitel and OPI will receive all of their revenues in Italian lire.
Currently there are no foreign exchange controls in Italy. There can be no
assurance that foreign exchange control restrictions will not be introduced in
the future.
Exchange rates for the lire may fluctuate in relation to the U.S. dollar,
and such fluctuations may have an adverse effect on CCII's earnings or assets
when translating lire into U.S. dollars. Any weakening in the value of the lire
against the U.S. dollar could result in lower revenues and earnings for CCII
when translated into U.S. dollars. In addition, as CCII's primary financing
will be in U.S. dollars and CCII's commitments to Omnitel and OPI are in lire, a
currency exchange rate risk exists. While CCII may consider entering into
transactions to hedge the risk of exchange rate fluctuations, there can be no
assurance that CCII will engage in such transactions, or, if CCII decides to
engage in such transactions, that they will be successful and that shifts in the
currency exchange rates will not have a material adverse effect on CCII.
Wireless communications operations are subject to governmental regulation,
including, among others, price controls and service requirements, which may
change from time to time, including due to changes in the political structure or
government representatives. There can be no assurance that material and adverse
changes in the regulation of OPI will not occur in the future.
EMPLOYEES.
CCII has 22 full and part time employees.
PATENTS, COPYRIGHTS AND LICENSES.
Neither CCII, OPI nor Omnitel has any material patents or copyrights in
their businesses. CCII does not believe patents or copyrights play a material
role in its business or any potential business of OPI or Omnitel. OPI has a
license to provide cellular service from the appropriate governmental
authorities.
ITEM 2. PROPERTIES.
- -------------------
CCII leases office space, which is adequate to meet its needs at present
from one of its former affiliates, NTL Incorporated, and is charged for its
share of the rent by NTL.
4
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
OPI is engaged in ordinary legal disputes and court proceedings that have
arisen in the course of its operations, none of which is expected to have a
material effect on its operations. OPI and Telecom Italia Mobile have each
filed lawsuits in Italy against each other involving various competitive
matters. The outcome of these lawsuits are not presently expected to have a
material effect on OPI's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
- --------------------------------------------------------
There were no matters that were submitted to a vote of CCII's stockholders
during the quarter ended December 31, 1996.
5
<PAGE>
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
- -------------------------------------------------------------
STOCKHOLDER MATTERS.
-------------------
CCII's Common Stock trades on the Nasdaq Stock Market's National Market under
the symbol "CCIL". The following table sets forth for the periods indicated the
high and low last sales prices as reported on the Nasdaq Stock Market's National
Market.
<TABLE>
<CAPTION>
LAST SALE PRICE
HIGH LOW
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<S> <C> <C>
1995
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First Quarter $50.50 $36.25
Second Quarter 41.75 34.25
Third Quarter 43.25 36.00
Fourth Quarter 42.75 34.00
1996
----
First Quarter 40.25 31.25
Second Quarter 37.00 31.75
Third Quarter 35.75 24.75
Fourth Quarter 34.00 25.50
1997
----
First Quarter (through March 24) 32.75 26.75
</TABLE>
On March 24, 1997, the closing price for the Common Stock, as reported on
the Nasdaq Stock Market's National Market, was $28.00. As of March 24, 1997,
there were approximately 359 record holders of the Common Stock. This figure
does not reflect beneficial ownership of shares held in nominee names.
CCII has never paid cash dividends on its Common Stock and does not intend
to pay cash dividends in the foreseeable future on shares of its Common Stock.
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The following table sets forth certain financial data for the years ended
December 31, 1996, 1995, 1994, 1993, and 1992. This information should be read
in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
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(1)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue $ - $ - $ - $ - $ -
Income (loss) before extraordinary
item (50,968) 6,815 (8,509) (875) (497)
Net income (loss) (50,968) 5,341 (8,509) (875) (497)
Income (loss) before extraordinary
item per common share (2) (4.85) .57 (.84) (.09) (.05)
Net income (loss) per common
share (2) (4.85) .45 (.84) (.09) (.05)
Weighted average number of common
shares (2) 10,509 11,808 10,094 9,989 9,959
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
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1996 1995 1994 1993 1992
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(3)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $ 79,392 $ 75,840 $(24,575) $11,417 $13,013
Total assets 146,307 175,290 38,301 13,545 14,336
Bank loan payable - - 29,980 - -
Long-term debt 172,052 149,869 - - -
Shareholders' (deficiency) equity (28,561) 21,167 6,774 13,148 14,011
</TABLE>
(1) 1995 includes a gain on sale of investment in joint venture of
$25,286,000, net of tax of $13,615,000 ($2.14 per common share) and a
charge of $1,474,000, net of income tax benefit of $794,000, from early
extinguishment of debt (($.12) per common share).
(2) After giving retroactive effect to the 3-for-2 stock split by way of a
stock dividend, which was paid on May 13, 1994.
(3) In 1995, CCII issued $281,571,000 aggregate principal amount of 13-1/4%
Senior Discount Notes due 2000 at a price to the public of 52.783% or
$148,622,000.
CCII did not declare or pay any cash dividends during the years indicated.
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
- -----------------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION.
----------------------------------
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
- --------------------------------------
Equity in net loss of Omnitel increased to $29,850,000 from $14,636,000
because of the increase in the net loss of Omnitel. The increase is due to an
increase in Omnitel's share of OPI's net loss to $201,622,000 from $98,428,000.
OPI's net loss increased to $284,557,000 from $138,168,000 as a result of the
increase in all costs due to the commencement of operations in December 1995.
OPI began depreciation and amortization of certain previously capitalized costs
in December 1995 upon the commencement of operations.
General and administrative expenses decreased to $3,397,000 from $3,805,000
primarily because, as of December 1995, CCII no longer participates in an entity
that owns one of the two GSM cellular licenses for Delhi, India, and CCII
reduced its efforts to obtain new cellular licenses.
Amortization of investments in joint ventures increased to $691,000 from
$537,000 as a result of the amortization of additional costs capitalized in
connection with the investment in Omnitel.
Interest and other income increased to $5,125,000 from $1,963,000 primarily
because of an increase in funds available for investment.
Interest expense increased to $23,330,000 from $7,230,000 primarily due to
the interest on the Senior Discount Notes. Interest expense in 1995 does not
include interest of $5,571,000 which was capitalized during the year ended
December 31, 1995. The Company discontinued interest capitalization in December
1995 upon the commencement of OPI's operations.
The fees to the Company's former parent company, Cellular Communications,
Inc. ("CCI"), in connection with the bank loan decreased to none from $101,000
as a result of the termination of the CCI guarantee in July 1995. This expense
does not include fees to CCI of $1,220,000 which were capitalized during the
year ended December 31, 1995.
The income tax benefit in 1996 of $1,200,000 is the result of net operating
loss carrybacks to 1995.
Years Ended December 31, 1995 and 1994
- --------------------------------------
Equity in net loss of Omnitel increased to $14,636,000 from $2,421,000
because of the increase in the net loss of Omnitel. The increase is due to an
increase in Omnitel's share of OPI's net loss to $98,428,000 from $15,407,000.
OPI's net loss increased to $138,168,000 from $19,531,000 as a result of the
increase in all costs due to the construction of OPI's cellular network, the
creation of an organization to prepare for the provision of service to customers
and the commencement of operations in December 1995. Depreciation and
amortization of certain previously capitalized costs began in December 1995 upon
the commencement of operations.
General and administrative expenses increased to $3,805,000 from $3,394,000
primarily due to an increase in expenses related to CCII's participation in an
entity that owns one of the two GSM cellular licenses for Dehli, India and an
increase in payroll costs. In December 1995, CCII waived and released its claim
to participate in this entity and will no longer incur costs associated with the
cellular business in Delhi.
CCII capitalizes costs incurred in connection with potential new licenses
until a license is awarded or CCII determines it will not be successful in
obtaining a license. In 1995 and 1994, investments in joint ventures of
$602,000 and $481,000, respectively, and deferred costs of $1,167,000 and
$376,000, respectively, were written-off in connection with unsuccessful efforts
to obtain licenses.
8
<PAGE>
Depreciation expenses increased to $28,000 from $9,000 due to the
depreciation of equipment acquired in 1995.
Amortization of investments in joint ventures increased to $537,000 from
$96,000 as a result of the amortization of costs capitalized in connection with
the investment in Omnitel.
Interest and other income increased to $1,963,000 from $211,000 primarily
because of an increase in funds available for investment from the proceeds of
the Senior Discount Notes.
Interest expense increased to $7,230,000 from $1,848,000 primarily due to
the issuance of the Senior Discount Notes. Interest expense does not include
interest of $5,571,000 and $1,312,000 which was capitalized during the years
ended December 31, 1995 and 1994, respectively. Interest expense in 1995
consists principally of Senior Discount Notes interest of $5,263,000,
amortization of deferred financing costs of $1,523,000 and amortization of debt
discount of $264,000.
The fees to CCI in connection with the bank loan were $101,000 and $95,000
in 1995 and 1994, respectively. This expense does not include fees to CCI of
$1,220,000 and $679,000 which were capitalized during the years ended December
31, 1995 and 1994, respectively.
In December 1995, CCII waived and released its claim to participate in an
entity that owns one of the two GSM cellular licenses for Delhi, India in
exchange for $40,000,000 in cash. CCII recorded a gain on this transaction of
$38,901,000.
In connection with the repayment of debt, CCII recorded as an extraordinary
loss the write-off of $2,268,000 ($1,474,000 net of income tax benefit) of
unamortized deferred financing costs and debt discount.
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 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.
As a result of the award of Italy's second GSM cellular license to OPI, OPI
requires capital to construct its cellular system and to fund its operations.
OPI has a syndicated bank loan facility for 1,800 billion lire ($1.1 billion)
and has received capital contributions of 1,450 billion lire ($858 million) from
its partners (1,015 billion lire ($601 million) from Omnitel and 435 billion
lire ($257 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 ($616 million). The Company's total
cumulative contribution to Omnitel was approximately 152.5 billion lire ($96.8
million at the exchange rates in effect at the time of each contribution).
OPI has provided an approximate 219 billion lire ($129.6 million)
performance bond that requires payments to the Italian government if OPI fails
to meet certain operational targets. There can be no assurance that OPI will be
able to achieve all of its performance bond goals. The Company's maximum
liability under the performance bond is approximately 22.5 billion lire ($13.3
million), reflecting its proportionate interest in OPI.
OPI is anticipating an approximately 200 billion lire ($118 million)
increase in OPI's paid-in capital in 1997. Omnitel's shares of this increase is
70% of the OPI increase or 140 billion lire ($83 million) and CCII would be
required to make capital contributions to Omnitel of approximately 20.53 lire
($12.2 million) in order to fund the Company's 14.667% share of the capital
requirements of Omnitel. These additional capital contributions would require
capital calls by Omnitel which are expected to occur during 1997. OPI will also
require additional debt financing in excess of the amount available from the
syndicated bank loan and the 1997 capital calls. The Company currently expects
that OPI would obtain such additional financing from bank
9
<PAGE>
borrowings.
The Company has not recently 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 obtaining 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 information in the preceding paragraphs include projections; in
reviewing such information it should be kept in mind that actual results may
differ materially from those in such projections. These projections were based
on various factors and were derived utilizing numerous assumptions. Important
assumptions and factors that could cause actual results to differ materially
from those in these projections include OPI's ability to continue to design
network routes, install facilities, obtain and maintain any required
governmental 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. Other factors and assumptions not identified above were also involved
in the derivation of these projections, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. The Company assumes no
obligation to update these projections to reflect actual funding requirements,
capital expenditures and results, changes in assumptions or changes in other
factors affecting such projections.
In August 1995, the Company issued $281,571,000 aggregate principal amount
of 13-1/4% Senior Discount Notes due 2000 (the "Notes") and 281,571 warrants to
purchase 317,049 shares of common stock. The Notes were issued at a price to the
public of 52.783% or $148,622,000. The original issue discount accretes at a
rate of 13-1/4%, compounded semiannually, to an aggregate principal amount of
$281,571,000 by August 15, 2000. The Notes are senior unsecured obligations of
the Company and rank senior in right of payment to all future subordinated
indebtedness of the Company. The indenture governing the Notes contains
restrictions relating to, among other things: (i) the incurrence of additional
indebtedness, (ii) the issuance of preferred stock, (iii) dividends and other
payments and (iv) mergers, consolidations and sales of assets.
The indenture required that $51,800,000 of the proceeds be placed in an
escrow account until it was needed to finance the Company's additional capital
contribution obligations to Omnitel, provided that Omnitel was not in default of
any obligation to fund capital contributions of OPI. The Company utilized the
entire escrow account balance plus interest to make its required capital
contributions to Omnitel in 1995 and 1996.
Pursuant to the Notes Indenture, any net proceeds from an asset sale that
are not applied within 12 months after such asset sale to an investment in a
related business will be deemed excess proceeds. When the aggregate amount of
excess proceeds exceeds $5,000,000, the Company is required to make an offer to
purchase the maximum principal amount of Notes that may be purchased using the
excess proceeds, at an offer price in cash equal to 100% of the accreted value
of the Notes. As a result of the Company's waiver and release of its claim to
participate in an entity that owns one of the two GSM cellular licenses for
Delhi, India in December 1995 in exchange for cash of approximately $40,000,000,
the Company had approximately $38,900,000 of excess proceeds in December 1996.
The Company made an offer to purchase Notes at the accreted value of $635.65 per
$1,000 Note. In January 1997, upon the expiration of the offer, $70,000
principal amount of Notes were tendered and the Company paid approximately
$44,500.
To the extent that the Company obtains financing in U.S. dollars and the
Company's future commitments to Omnitel are in Italian lire, it will encounter
currency exchange rate risks. Omnitel's revenues will be received in Italian
lire and currently there are no foreign exchange controls in Italy. There can be
no assurance that foreign exchange restrictions will not be introduced in the
future.
The Company expects that cash on hand is sufficient to meet all obligations
of the Company at least through the next twelve months.
10
<PAGE>
The Company is primarily a holding company with limited business operations
of its own. The Company's assets consist primarily of cash, marketable
securities 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 affiliate 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 currently have any cash flow and does not
expect any cash flow for the foreseeable future, its ability to repay the 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 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.
Cash used in operating activities was $2,282,000 and $3,858,000 in 1996 and
1995, respectively. The decrease in cash used in operating activities is
because the Company no longer participates in the entity that owns one of the
two GSM cellular licenses for Delhi, India and the Company reduced its efforts
to obtain new cellular licenses. Cash used in investing activities was
$15,112,000 in 1996 as a result of purchases of marketable securities, net of
proceeds from sales.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------------------------------------------------------
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ----------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
-----------------------------------
Not applicable.
11
<PAGE>
PART III
--------
ITEMS 10, 11, 12, AND 13.
- -------------------------
The information required by PART III (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive proxy statement
involving the election of directors which the Company expects to file, pursuant
to Regulation 14A, within 120 days following the end of its fiscal year.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
- ---------------------------------------
SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------
(a) (1) Financial Statements - See list of Financial Statements
on page F-1.
(2) Financial Statement Schedules - See list of Financial
Statements on page F-1.
(3) Exhibits - See Exhibit Index on page 13.
(b) During the quarter ended December 31, 1996, there were
no Current Reports on Form 8-K filed by CCII.
(c) Exhibits - The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial Statement Schedules - See list of Financial
Statements on page F-1. See the Index to Financial
Statements of Omnitel Sistemi Radiocellulari Italiani
S.p.A. and Omnitel Pronto Italia S.p.A. on page S-1.
12
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
3.1 Restated Certificate of Incorporation (Incorporated by Reference to
Exhibit 3.1, 1991 Form 10-K, File No. 0-19363).
3.1(a) Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by Reference to Exhibit 3.1(a), 1991
Form 10-K, File No. 0-19363).
3.1(c) Certificate of Designation of Series B Preferred Stock (Incorporated
by reference to Exhibit 3.1(c), File No. 33-90980).
3.2 Amended By-Laws (Incorporated by Reference to Exhibit 3.2, File No.
33-38398).
4.1 Specimen of Common Stock Certificate (Incorporated by Reference to
Exhibit 4.1, 1991 Form 10-K, File No. 0-19363).
4.2 Rights Agreement, dated as of December 19, 1990, between CCII and
Continental Stock Transfer Trust Company as the Rights Agent
(Incorporated by Reference to Exhibit 4.2, File No. 33-38398).
4.3 Warrant dated July 25, 1994, between CCII and Cellular
Communications, Inc. (Incorporated by Reference to Exhibit 4.3.,
1994 Form 10-K, File No. 0-19363)
4.4 Indenture dated as of August 22, 1995 between CCII and Chemical Bank
as Trustee (Incorporated by Reference to Exhibit 4.2, File No.33-
90980).
10.1 Description of Omnitel Joint Venture Agreement.
10.2 Compensation Plan Arrangement - Cellular Communications
International, Inc. 1991 Stock Option Plan (amended and restated
effective June 2, 1994). (Incorporated by Reference to Exhibit
10.2., 1994 Form 10-K, File No. 0-19363)
10.3 Compensation Plan Arrangement - Cellular Communications
International, Inc. Non-Employee Directors Stock Option Plan
(amended and restated effective June 2, 1994) (Incorporated by
Reference to Exhibit 10.3., 1994 Form 10-K, File No. 0-19363)
10.4 Warrant Agreement between the Company and CCII Funding, Inc.
(Incorporated by reference to Exhibit 10.10, File No. 33-90980).
11 Statement re Computation of Per Share Earnings
23 Consent of Ernst & Young LLP.
23.1 Consent of Coopers & Lybrand S.p.A.
27 Financial Data Schedule.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 27, 1997
By: /s/ William B. Ginsberg
-------------------------------------------
William B. Ginsberg
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/William B. Ginsberg
- -------------------------
William B. Ginsberg President, Chairman of
the Board, Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/ J. Barclay Knapp
- -------------------------
J. Barclay Knapp Executive Vice President
and Director
/s/ Gregg Gorelick
- -------------------------
Gregg Gorelick Vice President-Controller March 27, 1997
(Principal Accounting
Officer)
/s/ Stanton N. Williams Vice President and Chief
- -------------------------
Stanton N. Williams Financial Officer
(Principal Financial
Officer)
/s/ Sidney R. Knafel
- -------------------------
Sidney R. Knafel Director
/s/ Ted H. McCourtney
- -------------------------
Ted H. McCourtney Director
14
<PAGE>
/s/ Del Mintz
- -------------------------
Del Mintz Director
/s/ Alan J. Patricof
- -------------------------
Alan J. Patricof Director
/s/ Warren Potash
- -------------------------
Warren Potash Director
15
<PAGE>
Form 10-K--Item 14(a)(1) and (2)
Cellular Communications International, Inc. and Subsidiaries
Index to Consolidated Financial Statements
The following consolidated financial statements of Cellular Communications
International, Inc. and Subsidiaries are included in Item 8:
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets--December 31, 1996 and 1995................... F-3
Consolidated Statements of Operations--Years Ended
December 31, 1996, 1995 and 1994......................................... F-4
Consolidated Statement of Shareholders' (Deficiency) Equity--Years Ended
December 31, 1996, 1995 and 1994......................................... F-5
Consolidated Statements of Cash Flows--Years Ended
December 31, 1996, 1995 and 1994......................................... F-6
Notes to Consolidated Financial Statements................................ F-8
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Cellular Communications International, Inc.
We have audited the consolidated balance sheets of Cellular Communications
International, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' (deficiency) equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of Omnitel Sistemi
Radiocellulari Italiani S.p.A. ("Omnitel") (a corporation in which the Company
has a 14.667% interest) have been audited by other auditors whose report has
been furnished to us; insofar as our opinion on the consolidated financial
statements relates to data included for Omnitel, it is based solely on their
report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cellular
Communications International, Inc. and Subsidiaries at December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 18, 1997
F-2
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 46,759,000 $ 62,965,000
Marketable securities 34,404,000 17,068,000
Other 1,045,000 61,000
-------------------------------
Total current assets 82,208,000 80,094,000
Cash held in escrow - 43,616,000
Investment in Omnitel 58,363,000 44,726,000
Equipment, net of accumulated depreciation of
$50,000 (1996) and $43,000 (1995) 19,000 51,000
Deferred financing costs, net of accumulated amortization
of $1,525,000 (1996) and $387,000 (1995) 5,717,000 6,803,000
----------------------------
$146,307,000 $175,290,000
============================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Accounts payable $ 156,000 $ 202,000
Accrued expenses 630,000 872,000
Taxes payable 1,444,000 3,076,000
Due to Cellular Communications, Inc. - 81,000
Due to NTL Incorporated 586,000 23,000
----------------------------
Total current liabilities 2,816,000 4,254,000
Long-term debt, less unamortized discount of $4,881,000
(1996) and $5,850,000 (1995) 172,052,000 149,869,000
Commitments and contingent liabilities
Shareholders' (deficiency) equity:
Series preferred stock--$.01 par value; authorized 2,500,000
shares, outstanding none - -
Common stock--$.01 par value; authorized 25,000,000
shares; issued and outstanding
10,708,000 (1996) and 10,344,000 (1995) shares 107,000 103,000
Additional paid-in capital 28,737,000 27,501,000
(Deficit) (57,405,000) (6,437,000)
----------------------------
(28,561,000) 21,167,000
----------------------------
$146,307,000 $175,290,000
============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Equity in net loss of Omnitel $ 29,850,000 $ 14,636,000 $ 2,421,000
General and administrative expenses 3,397,000 3,805,000 3,394,000
Write-off of investments in joint venture - 602,000 481,000
Write-off of deferred costs - 1,167,000 376,000
Depreciation expense 25,000 28,000 9,000
Amortization of investments in joint ventures 691,000 537,000 96,000
------------------------------------------
Operating (loss) (33,963,000) (20,775,000) (6,777,000)
Other income (expense):
Interest and other income 5,125,000 1,963,000 211,000
Interest expense (23,330,000) (7,230,000) (1,848,000)
Cellular Communications, Inc. fees in
connection with the bank loan - (101,000) (95,000)
Gain on sale of investment in joint venture - 38,901,000 -
------------------------------------------
Income (loss) before income taxes and
extraordinary item (52,168,000) 12,758,000 (8,509,000)
Income tax benefit (provision) 1,200,000 (5,943,000) -
------------------------------------------
Income (loss) before extraordinary item (50,968,000) 6,815,000 (8,509,000)
Loss from early extinguishment of debt, net
of income tax benefit of $794,000 - (1,474,000) -
------------------------------------------
Net income (loss) $(50,968,000) $ 5,341,000 $(8,509,000)
==========================================
Net income (loss) per common share:
Income (loss) before extraordinary item $(4.85) $.57 $(.84)
Extraordinary item - (.12) -
------------------------------------------
Net income (loss) $(4.85) $.45 $(.84)
==========================================
Weighted average number of common
shares used in computation of net
income (loss) per share including
common stock equivalents 10,509,000 11,808,000 10,094,000
==========================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Consolidated Statement of Shareholders' (Deficiency) Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN
SHARES AMOUNT CAPITAL (DEFICIT)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 6,666,000 $ 66,000 $16,351,000 $ (3,269,000)
Exercise of stock options 177,000 2,000 323,000
Issuance of warrants to Cellular
Communications, Inc. in connection
with the bank loan 1,810,000
Stock split 3,339,000 34,000 (34,000)
Net (loss) for the year ended
December 31, 1994 (8,509,000)
-----------------------------------------------------
Balance at December 31, 1994 10,182,000 102,000 18,450,000 (11,778,000)
Exercise of stock options 162,000 1,000 1,024,000
Issuance of warrants 6,182,000
Costs incurred in connection with the
issuance of warrants (312,000)
Income tax benefit from the exercise
of stock options 2,157,000
Net income for the year ended
December 31, 1995 5,341,000
-----------------------------------------------------
Balance at December 31, 1995 10,344,000 103,000 27,501,000 (6,437,000)
Exercise of stock options 364,000 4,000 1,238,000
Costs incurred in connection with the
1995 issuance of warrants (2,000)
Net (loss) for the year ended
December 31, 1996 (50,968,000)
-----------------------------------------------------
Balance at December 31, 1996 10,708,000 $107,000 $28,737,000 $(57,405,000)
=====================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (50,968,000) $ 5,341,000 $ (8,509,000)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Equity in net loss of Omnitel 29,850,000 14,636,000 2,421,000
Depreciation and amortization expense 716,000 565,000 105,000
Write-off of deferred costs and investments
in joint venture - 1,769,000 857,000
Loss from early extinguishment of debt - 2,268,000 -
Loss on sale of property, plant and equipment 7,000 - -
Gain on sale of investment in joint venture - (38,901,000) -
Accretion of original issue discount 21,214,000 5,263,000 -
Accretion of interest on marketable securities (2,224,000) - -
Interest on cash held in escrow (562,000) (932,000) -
Amortization of deferred financing costs
charged to interest expense 1,138,000 1,523,000 1,748,000
Amortization of debt discount 969,000 264,000 -
Changes in operating assets and liabilities:
Other current assets (984,000) (338,000) (58,000)
Accounts payable (46,000) 39,000 (4,000)
Accrued expenses (242,000) 468,000 164,000
Taxes payable (1,632,000) 5,166,000 -
Interest payable - (58,000) 5,000
Due to Cellular Communications, Inc. (81,000) (954,000) 272,000
Due to NTL Incorporated 563,000 23,000 -
---------------------------------------------
Net cash (used in) operating activities (2,282,000) (3,858,000) (2,999,000)
---------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment - (52,000) (32,000)
Purchase of marketable securities (140,222,000) (38,080,000) (6,357,000)
Proceeds from sale of marketable securities 125,110,000 23,503,000 8,814,000
Cash held in escrow - (51,800,000) -
Proceeds from sale of investment in joint venture - 40,097,000 -
Additional investments in joint ventures - (19,779,000) (29,213,000)
Deferred costs incurred - (981,000) (280,000)
---------------------------------------------
Net cash (used in) investing activities (15,112,000) (47,092,000) (27,068,000)
---------------------------------------------
</TABLE>
F-6
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from warrants and borrowings, net of financing costs $ - $204,429,000 $27,279,000
Principal payments - (95,911,000) -
Payment of financing costs (54,000) - -
Exercise of stock options 1,242,000 1,025,000 325,000
---------------------------------------------
Net cash provided by financing activities 1,188,000 109,543,000 27,604,000
---------------------------------------------
Increase (decrease) in cash and cash equivalents (16,206,000) 58,593,000 (2,463,000)
Cash and cash equivalents at beginning of year 62,965,000 4,372,000 6,835,000
---------------------------------------------
Cash and cash equivalents at end of year $ 46,759,000 $ 62,965,000 $ 4,372,000
=============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest exclusive
of $3,411,000 (1995) capitalized $ - $ 1,112,000 $ 95,000
Income taxes paid 1,242,000 - -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Cash held in escrow used for capital contributions
to Omnitel $ 44,178,000 $ 9,116,000 $ -
Interest expense capitalized as investment in
Omnitel - 3,380,000 -
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Warrants issued to Cellular Communications, Inc.
in connection with the bank loan $ - $ - $ 1,810,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION
Cellular Communications International, Inc. ("CCII" or the "Company") was
incorporated on May 30, 1984 to own and operate telephone systems in various
markets. Prior to July 31, 1991, CCII was a wholly-owned subsidiary of Cellular
Communications, Inc. ("CCI"). On July 25, 1990, CCI entered into a Merger and
Joint Venture Agreement, as amended as of December 14, 1990 with AirTouch
Communications, Inc. ("AirTouch") whereby CCII was distributed to CCI's
shareholders on July 31, 1991 (the "Distribution"). CCII's principal line of
business is its participation in Omnitel, a joint venture that owns 70% of OPI,
the consortium that owns and operates a cellular telephone network in Italy, San
Marino and Vatican City.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CCII and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were $46,418,000 and
$62,209,000 at December 31, 1996 and 1995, respectively. At December 31, 1996
and 1995, cash equivalents consisted of money market instruments.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are carried at
fair value. Unrealized holding gains and losses on securities, net of tax, are
carried as a separate component of shareholders' equity. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest and other
income. Realized gains and losses and declines in value judged to be other than
temporary will be included in interest and other income. The cost of securities
sold or matured is based on the specific identification method. Interest on
securities is included in interest and other income.
F-8
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1996 and 1995, the cost and the aggregate fair market value of
marketable securities was $34,404,000 and $17,068,000, respectively. Marketable
securities at December 31, 1996 and 1995 consists of U.S. Treasury securities,
obligations of U.S. government agencies and U.S. corporate debt securities.
During the years ended December 31, 1996 and 1995, there were no realized gains
or losses on sales of securities. Primarily all of the marketable securities as
of December 31, 1996 had a contractual maturity of less than one year.
INVESTMENTS IN JOINT VENTURES
Capital contributions and costs directly incurred in connection with investments
in joint ventures to acquire licenses are capitalized. Costs applicable to
unsuccessful joint ventures are charged to expense at such time as CCII
determines that the joint venture will be denied a license or the joint venture
decides not to pursue its license application. In 1995 and 1994, $602,000 and
$481,000, respectively, was written-off in connection with unsuccessful efforts
to obtain licenses. Additional costs applicable to successful joint ventures,
once a license is awarded or operations commence, are charged to expense. For
joint ventures that are awarded a license, the difference between CCII's
investment in the joint venture and CCII's underlying equity in the joint
venture's net assets, which is primarily the capitalized costs directly incurred
by CCII in connection with the joint venture, are amortized over the life of the
license from the date of commencement of operations (OPI license--15 years).
Investments in joint ventures in which the Company exercises significant
influence but does not have control through majority ownership are accounted for
using the equity method of accounting.
CAPITALIZED INTEREST
Interest was capitalized as a component of the cost of the investment in Omnitel
through the start of OPI's operations in December 1995. Interest of $5,571,000
and $1,312,000 and fees to CCI in connection with the bank loan of $1,220,000
and $679,000 were capitalized in 1995 and 1994, respectively.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires impairment losses to be recorded on long-lived assets when
indicators of impairment are present and the
F-9
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
undiscounted cash flows are not sufficient to recover the assets' carrying
amount. The Company adopted SFAS No. 121 in 1995, which had no material effect
on the Company's financial statements. The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable.
EQUIPMENT
Equipment is stated at cost. Depreciation is computed by the straight-line
method over the estimated useful lives of the assets. Estimated useful lives
range from three to five years.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred for the issuance of debt and
are amortized over the term of the related debt.
DEFERRED COSTS
Costs incurred in connection with potential new licenses are capitalized. Costs
applicable to successful new licenses will be amortized over the estimated life
of the license from the date of commencement of operations. When CCII determines
that it will not be successful in obtaining a license, the related capitalized
costs are charged to expense. In 1995 and 1994, $1,167,000 and $376,000,
respectively, was written off in connection with unsuccessful efforts to obtain
licenses.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average number of
common shares outstanding during the periods presented, including common stock
equivalents in the net income per share computation. Common stock equivalents
are excluded from the net loss per share computations because they are
antidilutive.
RECLASSIFICATION
Certain of the prior year amounts have been reclassified to conform to the 1996
presentation.
F-10
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for stock-based employee compensation plans
(including stock option plans). Under the fair value based method, compensation
cost is measured at the grant date based upon the value of the award and is
recognized over the service period. The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans.
3. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
RISKS INHERENT IN FOREIGN INVESTMENT
There can be no assurance that the laws or administrative practice relating to
taxation, foreign exchange or other matters in Italy will not change. The value
of CCII's interest in Omnitel may also be affected by changes in tax and other
laws and other political, economic, socioeconomic or diplomatic developments in
or affecting Italy.
CURRENCY RISKS
To the extent that CCII obtains financing in U.S. dollars and CCII's commitments
to Omnitel are in Italian lire, it will encounter currency exchange rate risks.
Omnitel's revenues are received in Italian lire and currently there are no
foreign exchange controls in Italy. There can be no assurance that foreign
exchange restrictions will not be introduced in the future.
LICENSE CONDITIONS
OPI must comply with the standards of service, territorial coverage goals and
other conditions contained in its Italian cellular license. The failure to meet
these requirements could result in the loss of the license.
COMPETITION FOR CELLULAR LICENSES
CCII has not recently been successful in obtaining any new cellular licenses
since there is more competition for licenses and the costs of obtaining them has
increased. There can be no assurance that CCII will be successful in obtaining
new cellular licenses or in developing other opportunities in the future.
F-11
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT IN OMNITEL
The investment in Omnitel consists of the following:
DECEMBER 31
1996 1995
-----------------------------
Capital contributions $ 96,805,000 $ 52,627,000
Capitalized costs including interest 9,725,000 9,725,000
Equity in accumulated net loss (46,907,000) (17,057,000)
-----------------------------
59,623,000 45,295,000
Accumulated amortization (1,260,000) (569,000)
-----------------------------
$ 58,363,000 $ 44,726,000
=============================
In May 1990, CCII entered into a joint venture with Ing. C. Olivetti & C.,
S.p.A., Bell Atlantic International, Inc., Shearson Lehman Hutton Eurocell Inc.
and Swedish Telecom International AB, to build, own and operate a cellular
mobile telephone network and to offer mobile telephone services in Italy, San
Marino and Vatican City ("Omnitel"). In February 1994, Omnitel and Pronto Italia
S.p.A. ("Pronto") entered into an agreement to jointly form a new consortium
("OPI") as their combined applicant for the second GSM cellular license in
Italy. Omnitel is a 70% shareholder of OPI and Pronto a 30% shareholder. The
award of Italy's second GSM cellular license to OPI was made official with the
publication of an announcement in the January 31, 1995 issue of the Italian
public register. The publication of the award was the final step in the award
process which began in March 1994 when the original announcement of the
selection of OPI was made by the Italian government. CCII, through its 14.667%
ownership interest in Omnitel, holds a 10.267% interest in OPI.
The following financial information of Omnitel and OPI is prepared in accordance
with U.S. generally accepted accounting principles and is reflected in U.S.
dollars; the balance sheet information has been translated at the exchange rate
on the balance sheet date and the statement of operations information has been
translated at the average exchange rate for the period. The following
information of Omnitel and OPI as of and for the year ended December 31, 1995
has been reclassified.
F-12
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT IN OMNITEL (CONTINUED)
The following summarizes the assets, liabilities and stockholders' equity of
Omnitel:
DECEMBER 31
1996 1995
------------------------------
ASSETS
Current assets $ 9,542,000 $ 5,912,000
Investment in OPI 341,842,000 236,635,000
------------------------------
$351,384,000 $242,547,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,400,000 $ 1,258,000
Stockholders' equity 349,984,000 241,289,000
------------------------------
$351,384,000 $242,547,000
==============================
The following summarizes the results of operations of Omnitel:
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------------------
Revenues $ - $ - $ -
Costs and expenses (784,000) (862,000) (1,951,000)
Equity in net loss of OPI (201,622,000) (98,428,000) (15,407,000)
------------------------------------------------
Operating loss (202,406,000) (99,290,000) (17,358,000)
Interest income, net 543,000 859,000 1,842,000
------------------------------------------------
Net loss $(201,863,000) $(98,431,000) $(15,516,000)
================================================
F-13
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT IN OMNITEL (CONTINUED)
The following summarizes the assets, liabilities and stockholders' equity of
OPI:
DECEMBER 31
1996 1995
----------------------------------
ASSETS
Current assets $ 299,576,000 $ 104,718,000
Property, plant and equipment, net 697,069,000 388,341,000
Intangible assets, net 566,804,000 566,968,000
Deferred tax asset 129,644,000 -
Other 14,925,000 2,829,000
----------------------------------
$1,708,018,000 $1,062,856,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 559,905,000 $ 402,264,000
Long term debt 647,806,000 315,557,000
Other liabilities 11,961,000 6,985,000
Stockholders' equity 488,346,000 338,050,000
----------------------------------
$1,708,018,000 $1,062,856,000
==================================
The following summarizes the results of operations of OPI:
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------------------
Revenues $ 488,472,000 $ 30,092,000 $ -
Costs and expenses 707,098,000 150,550,000 28,036,000
Depreciation and amortization 131,888,000 22,020,000 1,088,000
----------------------------------------------
838,986,000 172,570,000 29,124,000
----------------------------------------------
Operating loss (350,514,000) (142,478,000) (29,124,000)
Interest income (expense), net (61,616,000) 4,310,000 9,593,000
Income tax benefit 127,573,000 - -
----------------------------------------------
Net loss $(284,557,000) $(138,168,000) $(19,531,000)
==============================================
In 1996, based on an evaluation of the business plan of OPI, expectation of
future market conditions and operating performance, management of OPI determined
that a substantial portion of the valuation allowance on net deferred income tax
assets was not required.
F-14
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. GAIN ON SALE OF INVESTMENT IN JOINT VENTURE
In March 1992, CCII entered into an agreement to create a joint venture called
Sterling Cellular Ltd. ("Sterling") for the purpose of developing new wireless
communication business opportunities in India. In 1993, Sterling was selected as
one of the two GSM cellular licensees for the city of Delhi, India and was
awarded the license in December 1994. In December 1995, CCII waived and released
its claim to participate in Sterling in exchange for approximately $40,000,000
in cash. CCII recorded a gain on this transaction of $38,901,000.
6. BANK LOAN PAYABLE AND CREDIT AGREEMENT
CCII obtained an $85,000,000 line of credit in April 1994. Amounts borrowed
under the line of credit accrued interest, at CCII's election, either at the
bank's prime rate or LIBOR plus .12%. The terms also included an unused
commitment fee of .14% per annum. This line of credit expired on July 26, 1994,
at which time CCII refinanced the $22,226,000 principal amount outstanding.
CCII obtained a $60,000,000 line of credit in July 1994. The terms of the line
of credit included interest, at CCII's election, either at the bank's prime rate
or LIBOR plus .75%. The terms also included an unused commitment fee of .25% per
annum and a one-time facility fee of $120,000. This line of credit expired, and
amounts borrowed plus unpaid interest and fees were paid on July 17, 1995.
On June 9, 1995, the Company entered into an agreement (the "Bridge Agreement")
with CCII Funding, Inc. ("DLJ Bridge"), an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation, which provided for the purchase of up to
$80,000,000 in the aggregate principal amount of senior unsecured notes (the
"Bridge Notes"). The Bridge Notes were scheduled to mature no later than June
12, 1996. DLJ Bridge purchased $50,000,000 of Bridge Notes on July 17, 1995,
the proceeds of which were used to repay the bank loan and related fees to CCI
(see Note 8) of approximately $48,750,000 and to pay fees incurred in connection
with the Bridge Notes of approximately $1,250,000. The Company incurred costs of
$1,293,000 in connection with the Bridge Agreement.
7. LONG-TERM DEBT
In August 1995, the Company issued $281,571,000 aggregate principal amount of
13-1/4% Senior Discount Notes due 2000 (the "Notes") and 282,000 warrants to
purchase 317,000 shares of common stock. The Notes were issued at a price to the
public of 52.783% or $148,622,000. The Company incurred $7,554,000 in fees and
expenses in connection with the issuance of the Notes and warrants, of which
$7,242,000 is included in deferred financing costs and $312,000 reduced paid-in
capital.
F-15
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
The original issue discount accretes at a rate of 13-1/4%, compounded
semiannually, to an aggregate principal amount of $281,571,000 by August 15,
2000. In 1996 and 1995, $21,214,000 and $7,097,000, respectively, of the
original issue discount was added to principal. The fair value of the Notes
based on quoted market prices was $188,653,000 and $156,272,000 as of December
31, 1996 and 1995, respectively.
The warrants were valued at $21.96 each, resulting in deferred debt discount and
a corresponding addition to paid-in capital of $6,182,000. In 1996 and 1995,
$969,000 and $332,000, respectively, of the deferred discount was amortized.
The Notes are senior unsecured obligations of the Company and rank senior in
right of payment to all future subordinated indebtedness of the Company. The
indenture governing the Notes contains restrictions relating to, among other
things: (i) the incurrence of additional indebtedness, (ii) the issuance of
preferred stock, (iii) dividends and other payments and (iv) mergers,
consolidations and sales of assets.
The indenture required that $51,800,000 of the proceeds be placed in an escrow
account until it was needed to finance the Company's additional capital
contribution obligations to Omnitel. In 1996 and 1995, cash of $44,178,000 and
$9,116,000, respectively, was used for additional contributions to Omnitel. The
remaining $420,000 in the escrow account was released to the Company in 1996.
Proceeds from the issuance of the Notes and warrants of $50,000,000 were used to
repay the Bridge Notes. In connection with the repayment of the Bridge Notes,
the Company recorded as an extraordinary loss the write-off of $2,268,000
($1,474,000 net of income tax benefit) consisting of unamortized deferred
financing costs and debt discount.
Pursuant to the Notes indenture, any net proceeds from an asset sale that are
not applied within 12 months after such asset sale to an investment in a related
business will be deemed excess proceeds. When the aggregate amount of excess
proceeds exceeds $5,000,000, the Company is required to make an offer to
purchase the maximum principal amount of Notes that may be purchased using the
excess proceeds, at an offer price in cash equal to 100% of the accreted value
of the Notes. As a result of the Company's waiver and release of its claim to
participate in Sterling in December 1995 in exchange for cash of approximately
$40,000,000, the Company had approximately $38,900,000 of excess proceeds in
December 1996. The Company made an offer to purchase Notes at the accreted value
of $635.65 per $1,000 Note. In January 1997, upon the expiration of the offer,
$70,000 principal amount of Notes were tendered and the Company paid
approximately $44,500.
F-16
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS
CCI provided management, financial, legal and technical services to CCII.
Amounts charged to CCII consist of salaries directly attributable to CCII, and
indirect costs allocated utilizing direct labor hours as reported by the common
officers and employees of CCI and CCII. For the years ended December 31, 1996,
1995 and 1994, CCI charged CCII $232,000, $896,000 and $914,000, respectively,
which is included in general and administrative expenses. In August 1996, upon
the merger of CCI with AirTouch, NTL Incorporated ("NTL") (formerly
International CableTel Incorporated) commenced providing management, financial,
legal and technical services to CCII. Amounts charged to CCII consist of
salaries directly attributable to CCII, and indirect costs allocated utilizing
direct labor hours as reported by the common officers and employees of NTL and
CCII. In 1996, NTL charged CCII $351,000, which is included in general and
administrative expenses. It is not practicable to determine the amounts of these
expenses that would have been incurred had CCII operated as an unaffiliated
entity. However, in the opinion of management of CCII, the allocation method is
reasonable.
In January 1997, CCII and NTL agreed to a change in NTL's fee for the provision
of management, financial, legal and technical services to CCII. NTL will charge
CCII for direct costs where identifiable and a fixed percentage of its corporate
overhead beginning January 1, 1997.
In connection with the Distribution, CCI was obligated to guarantee certain CCII
indebtedness through July 31, 1994 if requested by CCII. As a result, CCI had
guaranteed CCII's obligations under the $85,000,000 line of credit note. CCI
earned a guarantee fee based upon the amount of indebtedness guaranteed. In
June 1994, CCII reached an agreement with CCI for an extension of CCI's
guarantee of up to $60,000,000 of CCII indebtedness until July 1995. This
agreement provided for the payment of a guarantee fee to CCI on the amount drawn
down under the guarantee, the reimbursement to CCI of a portion of the unused
commitment fee that CCI paid to its banks, and the issuance to CCI of common
stock warrants to purchase 133,000 shares of CCII common stock at fair market
value on the effective date of the agreement. The fees to CCI of $2,094,000 were
paid in July 1995. In July 1994, in exchange for CCII's payment of $2,400,000 to
AirTouch, AirTouch gave its required consent to this extension pursuant to the
CCI certificate of incorporation and as the sole holder of CCI's Class A
Preference Stock.
Pursuant to the above referenced agreement, CCII issued warrants to CCI to
purchase 133,000 shares of CCII common stock at an exercise price of $30.25 per
share in July 1994. The value of these warrants was determined to be $1,810,000
which is included in deferred financing costs.
F-17
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The 1996 income tax benefit differs from the statutory rate because no deferred
tax benefit was recorded for the Company's net operating loss carryforwards and
deductible temporary differences. The 1996 income tax benefit primarily
represents the carryback of 1996 federal tax loss to 1995.
The 1995 income tax provision differs from the statutory rate principally
because no deferred tax benefit was recorded for the Company's deductible
temporary differences. The provision for income taxes in 1995 consists of
current federal income taxes.
In 1995, the Company recorded an income tax benefit to additional paid-in
capital of $2,157,000 attributable to the exercise of stock options including a
portion of its income tax loss carryforward attributable to stock options.
The 1994 income tax provision differs from the statutory rate as no benefit has
been given for the losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
CCII's deferred tax assets and liabilities are as follows:
DECEMBER 31
1996 1995
----------------------------
Deferred tax assets:
Equity in net loss of Omnitel $ 13,650,000 $ 3,714,000
Net operating loss carryforward 5,978,000 -
Other 122,000 140,000
----------------------------
Total deferred tax assets 19,750,000 3,854,000
Valuation allowance for deferred tax
assets (19,750,000) (3,854,000)
----------------------------
Net deferred tax assets - -
Deferred tax liabilities - -
----------------------------
Net deferred taxes $ - $ -
============================
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $17,000,000 for U.S. federal income tax purposes that expires in
2011.
10. SHAREHOLDERS' EQUITY
STOCK SPLIT
On April 21, 1994, the Company declared a 3-for-2 stock split by way of stock
dividend, which was paid on May 13, 1994. All common stock data in the
Consolidated Financial Statements give effect to the stock split.
F-18
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
SHAREHOLDER RIGHTS PLAN
On November 8, 1990, the Board of Directors adopted a Rights Agreement which
provides that one Right will be issued with each share of common stock. The
Rights are not exercisable until the occurrence of certain potential takeover
events and will expire on July 31, 2001 unless previously redeemed by CCII. When
exercisable, each Right entitles the owner to purchase from CCII one one-
hundredth of a share of Series A Junior Participating Preferred Stock ("Series A
Preferred Stock") at a purchase price of $88.
The Series A Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of $.01 per share and will be entitled to an
aggregate dividend of 100 times the dividend, if any, declared per share of
common stock. In the event of liquidation, the holders of Series A Preferred
Stock will be entitled to a minimum preferential liquidation payment of $1 per
share and will be entitled to an aggregate payment of 100 times the payment made
per share of common stock. Each share of Series A Preferred Stock will have 100
votes and will vote together with the common stock. In the event of any merger,
consolidation or other transactions in which shares of common stock are changed
or exchanged, each share of Series A Preferred Stock will be entitled to receive
100 times the amount received per share of common stock. The rights are
protected by customary antidilution provisions.
There are 1,000,000 shares of Series A Preferred Stock designated from the
2,500,000 authorized shares of Series Preferred Stock. No shares of Series A
Preferred Stock are issued or outstanding.
WARRANTS
In August 1995, 282,000 warrants to purchase 317,000 shares of common stock at
$37.00 per share were issued in connection with the 13-1/4% Senior Discount
Notes. The warrants expire in August 2003. Warrants to purchase 133,000 shares
of common stock at $30.25 per share were issued to CCI in July 1994 in
connection with the bank loan. These warrants expire in July 1999.
STOCK OPTIONS
There are 2,284,500 shares of common stock reserved for issuance under the 1991
Stock Option Plan (the "Plan"). The Plan provides that incentive stock options
be granted at fair market value of CCII's common stock on the date of grant, and
nonqualified stock options be granted at not less than 85% of the fair market
value of CCII's common stock on the date of grant. Options are exercisable as
to 20% of the shares subject thereto on the date of grant and become exercisable
as to an additional 20% of the shares subject thereto on each January 1
thereafter, while the optionee remains an employee of CCII. Options will
expire ten years after the date of the grant.
F-19
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
There are 150,000 shares of CCII common stock reserved for issuance to members
of the Board of Directors who are not CCII employees under the Non-Employee
Directors Stock Option Plan (the "Directors Plan"). The Directors Plan provides
that all options be granted at the fair market value of CCII's common stock on
the date of grant. Options are exercisable as to 20% of the shares subject
thereto on the date of grant and become exercisable as to an additional 20% of
the shares subject thereto on each anniversary of the grant date, while the
optionee remains a director of CCII. Options will expire ten years after the
date of the grant. The Directors Plan provides for the automatic grant of
options to purchase 7,500 shares to each member of the Board of Directors who is
not an employee of CCII in 1997.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995: risk-free interest rates of 6.56% and 6.61%,
respectively, dividend yield of 0%, volatility factor of the expected market
price of the Company's common stock of .388 and a weighted-average expected life
of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Following is
the Company's pro forma information:
Year ended December 31
1996 1995
--------------------------
Pro forma net income (loss) $(52,933,000) $3,957,000
Pro forma net income (loss) per share $(5.04) $0.34
F-20
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information for the
years ended December 31, follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year 1,888,000 $11.70 1,782,000 $ 6.78 1,481,000 $ 2.37
Granted 139,000 33.25 268,000 41.22 486,000 18.33
Exercised (364,000) 3.41 (162,000) 6.35 (183,000) 1.77
Forfeited 0 0.00 0 0.00 (2,000) 2.36
----------- ----------- -----------
Outstanding-end of year 1,663,000 $15.32 1,888,000 $ 11.70 1,782,000 $ 6.78
=========== =========== ===========
Exercisable at end of year 1,161,000 $ 9.99 1,281,000 $ 6.09 1,107,000 $ 3.90
=========== =========== ===========
</TABLE>
Weighted-average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1996 and 1995 is $20.83 and $25.88,
respectively.
The following table summarizes the status of the stock options outstanding and
exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
- ------------------------------------------------------------------------------ ------------------------------
Weighted- Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices of Options Life Price of Options Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.19 to $0.91 186,000 4.5 Years $0.552 186,000 $0.552
$1.03 to $1.92 235,000 4.5 Years $1.746 235,000 $1.746
$2.17 to $4.25 398,000 5.3 Years $2.945 352,000 $2.926
$13.42 to $17.33 405,000 7.5 Years $17.208 233,000 $17.203
$27.50 to $38.25 209,000 9.0 Years $34.491 63,000 $35.179
$41.75 230,000 8.5 Years $41.750 92,000 $41.750
- --------------------------------------------------------------------------------------------------------------------
Total 1,663,000 1,161,000
====================================================================================================================
</TABLE>
F-21
<PAGE>
Form 10-K--Item 14(d)
Index to Financial Statements
Omnitel Sistemi Radiocellulari Italiani S.p.A.
<TABLE>
<S> <C>
Report of Independent Accountants........................................................................................ S-2
Statement of Income - Years Ended December 31, 1996 and 1995............................................................. S-3
Balance Sheet - December 31, 1996 and 1995............................................................................... S-4
Statement of Cash Flows - Years Ended December 31, 1996 and 1995......................................................... S-6
Statement of Changes in Stockholders' Equity - Years Ended December 31, 1996 and 1995.................................... S-7
Notes to the Financial Statements........................................................................................ S-8
Omnitel Pronto Italia S.p.A
Report of Independent Accountants........................................................................................ S-18
Statement of Income - Years Ended December 31, 1996 and 1995............................................................. S-19
Balance Sheet - December 31, 1996 and 1995............................................................................... S-20
Statement of Cash Flows - Years Ended December 31, 1996 and 1995......................................................... S-22
Statement of Changes in Stockholders' Equity - Years Ended December 31, 1996 and 1995.................................... S-23
Notes to the Financial Statements........................................................................................ S-24
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Omnitel Sistemi Radiocellulari Italiani S.p.A.
We have audited the accompanying balance sheets of Omnitel Sistemi
Radiocellulari Italiani S.p.A. ("the Company") as of December 31, 1996 and 1995,
and the related statements of income, stockholders' equity and cash flows for
each of the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Omnitel Sistemi Radiocellulari
Italiani S.p.A. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
COOPERS & LYBRAND S.p.A.
Turin, Italy
February 28, 1997
S-2
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Statements of Income
(in millions of Italian Lira except per share data)
For the years ended
December 31,
-------------------------
1996 1995
Income - 75
Operating expenses:
- third parties (1,210) (1,455)
- related parties - (24)
Equity in loss of Omnitel
Pronto Italia S.p.A. (311,032) (160,331)
-------- --------
Operating loss (312,242) (161,735)
Interest income, net 838 1,400
-------- --------
Net loss (311,404) (160,335)
-------- --------
Net loss per common share 471 337
======== ========
Weighted average number of common
shares outstanding 661 475
======== ========
The accompanying notes are an integral part of these financal statements.
S-3
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Balance sheets
(in millions of Italian Lira)
December 31, December 31,
ASSETS 1996 1995
----------------- ---------------
Cash and cash equivalents (Note 3) 13,519 8,632
Receivables from related parties (Note 8) 90 98
Other current assets 876 637
------- -------
Total current assets 14,485 9,367
------- -------
Investment in Omnitel Pronto Italia S.p.A.
(Note 4) 518,916 374,948
------- -------
Total non-current assets 518,916 374,948
------- -------
Total assets 533,401 384,315
======= =======
The accompanying notes are an integral part of these financial statements.
S-4
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Balance sheets
(in millions of Italian Lira)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, December 31,
- ------------------------------------ 1996 1995
------------ ------------
Accounts payable 141 54
Due to related parties (Note 8) 214 36
Other current liabilities (Note 5) 1,681 1,903
-------- --------
Total current liabilities 2,036 1,993
-------- --------
Deposit payable (Note 6) 90 -
-------- --------
Total Liabilities 2,126 1,993
-------- --------
Commitments and contingencies (Note 9)
Common stock (1996 757,500,000 and 1995 525,000,000
shares, par value Lit.1,000, authorized issued and
outstanding) 757,500 525,000
Additional paid in capital 282,500 50,000
Accumulated deficit (508,725) (192,678)
-------- --------
Total stockholders' equity (Note 10) 531,275 382,322
-------- --------
Total liabilities and stockholders' equity 533,401 384,315
======== ========
The accompanying notes are an integral part of these financial statements.
S-5
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Statements of cash flows
(in millions of Italian Lira)
For the years ended
December 31,
--------------------
1996 1995
Cash flows from operating activities:
- ------------------------------------
Net loss (311,404) (160,335)
Adjustment to reconcile net loss to net cash
used in operating activities:
Equity in loss of Omnitel Pronto Italia S.p.A. 311,032 160,331
Change in operating assets and liabilities
(Increase) decrease in receivables from related parties 8 21,313
(Increase) decrease in other current assets (239) (194)
Increase (decrease) in accounts payable 87 (906)
Increase (decrease) in other current liabilities (222) 477
Increase (decrease) in due to related parties 178 (9,239)
-------- --------
Net cash used in/provided by operating activities (560) 11,447
======== ========
Cash flows from investing activities:
- ------------------------------------
Investment in Omnitel Pronto Italia S.p.A. (455,000) (280,000)
Increase (decrease) in deposit payable 90 -
-------- --------
Net cash used in investing activities (454,910) (280,000)
======== ========
Cash flows from financing activities:
- ------------------------------------
Proceeds from issue of common stock 465,000 275,000
Tax on issue of common stock (4,643) (2,747)
-------- --------
Net cash provided by financing activities 460,357 272,253
======== ========
Increase (decrease) in cash and cash equivalents 4,887 3,700
Cash and cash equivalents at beginning of the year 8,632 4,932
-------- --------
Cash and cash equivalents at the end of the year 13,519 8,632
======== ========
Supplemental cash flow data:
Cash paid during the year for:
Interest - 2
======== ========
Income taxes - -
======== ========
The accompanying notes are an integral part of these financial statements.
S-6
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Statements of changes in Stockholders' equity
(in millions of Italian Lira)
<TABLE>
<CAPTION>
ADDITIONAL PAID ACCUMULATED TOTAL
COMMON STOCK IN CAPITAL DEFICIT
------------ --------------- ------------ --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1994 300,000 - (29,596) 270,404
Issue of common stock
- - January 26, 1995 175,000 - - 175,000
- - September 29, 1995 50,000 50,000 - 100,000
Tax on issue of common stock - - (2,747) (2,747)
Net loss for the year - - (160,335) (160,335)
------- ------- -------- --------
Balance as of December 31, 1995 525,000 50,000 (192,678) 382,322
Issue of common stock
- - January 30, 1996 52,500 52,500 - 105,000
- - March 28, 1996 52,500 52,500 - 105,000
- - July 5, 1996 52,500 52,500 - 105,000
- - September 5, 1996 40,000 40,000 - 80,000
- - September 30, 1996 35,000 35,000 - 70,000
Tax on issue of common stock - - (4,643) (4,643)
Net loss for the year - - (311,404) (311,404)
------- ------- -------- --------
Balance as of December 31, 1996 757,500 282,500 (508,725) 531,275
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-7
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Notes to financial statements
(in millions of Italian Lira unless otherwise stated)
1. DESCRIPTION AND OWNERSHIP OF THE BUSINESS
Omnitel Sistemi Radiocellulari Italiani S.p.A. ("the Company" or "Omnitel
S.R.I.") was established on June 19, 1990 with the objective of
constructing and operating cellular mobile telephone networks.
The Company owns a 70% interest in Omnitel Pronto Italia S.p.A. ("OPI") a
start up company until December 6, 1995 that was awarded a fifteen year
license to operate a mobile cellular system based on the GSM standard on
the Italian territory effective from February 1, 1995. Revenue from
operations commenced at the end of 1995 following the launch of a fully
operational service on December 7, 1995.
Although the Company owns 70% of the shares of OPI, both the statutes of
OPI and the stockholders' agreement between Omnitel Sistemi Radiocellulari
Italiani S.p.A. and Pronto Italia S.p.A. stipulate significant restrictions
on the Company's ability to control OPI. Among the restrictions are the
requirements that members of the Board of Directors designated by other
stockholders approve any changes in the companies' corporate purpose,
management, auditors, issuance or redemption of stock, payment of
dividends, and annual budget. In addition, transactions not included in the
annual budget and exceeding certain immaterial amounts regarding the
purchase of assets, the assumption of debt, the subjection of the
companies' assets to liens or pledges, the extension of guarantees to third
parties, the acceptance of any terms and conditions necessary to obtain or
renew a license, require approval by members of the Board of Directors
designated by other stockholders. Consequently OPI is accounted for on an
equity basis.
OPI must comply with the standards of service, territorial coverage goals
and other conditions contained in its Italian cellular concession. The
failure to meet these requirements could result in the loss of the
concession.
The Company's stockholders are Ing. C. Olivetti S.p.A., Bell Atlantic
International Inc., Cellular Communication International Inc., Telia
International AB and Lehman Brothers Holding Inc.
On December 23, 1996 Ing. C. Olivetti S.p.A. sold 62,567,265 of its common
stock to Bell Atlantic International Inc., increasing the latters holding
in the Company to 24.93%.
S-8
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Notes to financial statements
(in millions of Italian Lira unless otherwise stated)
Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the most significant accounting policies used
by the Company to prepare the financial statements.
2.1 BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
In order to conform with accounting principles generally accepted in
the United States of America ("US GAAP"), certain adjustments are
reflected in the financial statements which are not recorded in the
Italian books of account. These adjustments relate primarily to the
recording of the loss on equity for the investment in OPI for US GAAP
purposes (see Note 11.).
2.2 CASH AND CASH EQUIVALENTS
The Company considers all highly liquid monetary instruments with
original maturities of three months or less to be cash equivalents.
Short-term securities held under purchase and resale agreements are
valued at cost plus the accrued difference between purchase and resale
price matured as of the balance sheet date. The related income is
classified as interest income.
2.3 RECEIVABLES AND PAYABLES
Receivables and payables are reflected at their stated value.
Receivables are reduced to their expected realizable value by an
allowance for doubtful accounts.
Receivables and payables denominated in foreign currencies are stated
using the year-end exchange rates. The resulting gains or losses are
recorded in the Statement of Income.
S-9
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Notes to financial statements
(in millions of Italian Lira unless otherwise stated)
Continued
2.4 INCOME TAXES
The Company is subject to income taxes in the Republic of Italy.
The provision for current income taxes is based on an estimate of
taxable income for the year.
Deferred income tax balances reflect the impact of temporary
differences between the carrying amount of assets and liabilities and
their tax bases and are stated at enacted tax rates expected to be in
effect when taxes are actually paid or recovered.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense
is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
2.5 NET LOSS PER COMMON SHARE
Net loss per common share is calculated by dividing the net loss by
the weighted average number of common stock shares outstanding.
3. CASH AND CASH EQUIVALENTS
December 31, December 31,
1996 1995
------------ ------------
Cash and cash equivalents consist of:
- Cash and bank balances 423 1,636
- Italian state bonds 13,096 6,996
------ -----
Total 13,519 8,632
====== =====
The Italian state bonds are subject to a purchase and resale agreement
which provides that the Company resell them at a pre-determined price.
S-10
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Notes to financial statements
(in millions of Italian Lira
unless otherwise stated)
Continued
4. INVESTMENTS
The movements in the investment account during 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance as of December 31, 1995 374,948
Increase in common stock of OPI and Additional
paid in capital (January 30, March 28, July 5,
September 5 and September 30, 1996) 455,000
Equity in loss of OPI for the year (311,032)
--------
Balance as of December 31, 1996 518,916
========
</TABLE>
As of December 31, 1996 and 1995 the Company held 735,000,000 and
507,500,000 shares of OPI respectively representing 70% of its outstanding
common stock.
The following is a summary of the financial information of OPI for the
twelve months ended December 31, 1996 and 1995:
S-11
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Notes to financial statements
(in millions of Italian Lira
unless otherwise stated)
Continued
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C>
Total operating revenues 753,542 49,018
Operating expenses 1,090,804 245,234
Depreciation and amortization 203,457 35,869
Interest expenses (revenues), net 95,052 (7,021)
Income tax expenses (revenues) (196,800) -
--------- ---------
Net loss 438,971 225,064
========= =========
Omnitel S.R.I. - 70% share of net loss 307,280 157,545
- 70% share of tax on common
stock subscriptions and other 3,752 2,786
--------- ---------
Equity in loss of OPI for the year 311,032 160,331
========= =========
Current assets 454,756 165,924
Non current assets 2,138,015 1,518,171
--------- ---------
Total assets 2,592,771 1,684,095
========= =========
Current liabilities 849,936 637,388
Non current liabilities 1,001,526 511,067
--------- ---------
Total liabilities 1,851,462 1,148,455
========= =========
Net assets 741,309 535,640
========= =========
Omnitel S.R.I. 70% share of equity 518,916 374,948
========= =========
</TABLE>
S-12
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Notes to financial statements
(in millions of Italian Lira
unless otherwise stated)
Continued
<TABLE>
<CAPTION>
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
December 31,
1996 1995
----- -----
<S> <C> <C>
- V.A.T. - 146
- Tax on issue of common stock 1,500 990
- Tax on stockholders' equity 138 680
- Other 43 87
----- -----
1,681 1,903
===== =====
</TABLE>
S-13
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A
Notes to financial statements
(in millions of Italian Lira
unless otherwise stated)
Continued
6. DEPOSIT PAYABLE
On September 18, 1996 the Company signed an agreement with a former
employee of OPI and member of the Board of Directors of Omnitel S.R.I.
giving him an option, for an amount totalling Lit. 90 million, to buy from
Omnitel S.R.I. 262,500 shares of OPI for a price of Lit. 5,500 per share.
The option will be exercisible during July 2000.
7. INCOME TAXES
No provision for current income taxes has been made as the Company is in a
loss position.
Significant components of the Company's deferred tax accounts are as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets 268,386 85,296
Valuation allowance (268,386) (85,296)
-------- -------
Net deferred tax assets - -
======== =======
</TABLE>
The deferred tax asset of Lit. 268,386 million and Lit.85,296 million
relates principally to the temporary differences arising from the
adjustment of the investment in OPI to the equity method at the
period end for financial reporting purposes but not for fiscal purposes.
Full valuation allowance has been provided at December 31, 1996 and 1995
since it is not possible as at either date to establish that it is more
likely than not that the assets will be realized.
S-14
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A
Notes to financial statements
(in millions of Italian Lira
unless otherwise stated)
Continued
8. RELATED PARTY TRANSACTIONS
The Company does not have its own personnel and utilized the resources of
its stockholders, in particular Olivetti and its subsidiaries in the prior
period.
In the periods ended December 31, 1996 and 1995 transactions with related
parties have been as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
------ ------
<S> <C> <C>
Services rendered or reinvoicing of
expenses (excluding VAT figures):
- Olivetti Group - 24
- Telia International AB - 25
- Cellular Communications
International Inc. - 25
- Bell Atlantic International Inc. - 25
Amounts due from or (to) as of December 31, 1996 and 1995 (amounts include VAT):
December 31,
1996 1995
------ ------
Ing. C. Olivetti S.p.A. (203) 23
Cellular Communications International Inc. 30 25
Telia International AB 30 25
Bell Atlantic International Inc. 30 25
Other (11) (36)
</TABLE>
S-15
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A.
Notes to financial statements
(in millions of Italian Lira
unless otherwise stated)
Continued
9. COMMITMENTS AND CONTINGENCIES
As required by the terms of OPI's cellular concession, the Banca
Commerciale Italiana has issued a guarantee to the Italian Ministry of Post
and Telecommunications as of December 31, 1996 and 1995 on behalf of OPI
for Lit.219.4 billion. The Company has provided a counter guarantee to the
Banca Commerciale Italiana as of December 31, 1996 and 1995 in the amount
of Lit.153.6 billion.
10. STOCKHOLDERS' EQUITY
On March 24, 1995, the Board of Directors approved, on the basis of
authorization obtained from the stockholders a share capital increase up to
Lit.757,500 million by means of the issue of new shares of Lit.1,000 par
value with a share premium of Lit.1,000 each for a total paid up capital of
Lit.1,040,000 million. The subscription and payment of these amounts was
completed before December 31, 1996.
11. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ITALY
("ITALIAN GAAP")
In order to conform with accounting principles generally accepted in the
United States of America, certain adjustments are reflected in the
financial statements which are not recorded in the Italian statutory
financial statements.
S-16
<PAGE>
OMNITEL SISTEMI RADIOCELLULARI ITALIANI S.p.A
Notes to financial statements
(in millions of Italian Lira
unless otherwise stated)
Continued
As of December 31, 1996 and 1995 these adjustments which principally
related to a different treatment of the investment in OPI, are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
NET INCOME
Net loss for the years ended December 31, 1996
and 1995 as reported (311,404) (160,335)
Tax on common stock subscriptions capitalized
as an intangible asset under Italian GAAP (2,072) (1,143)
Loss on investment in OPI 311,032 160,331
--------- --------
Net adjustments 308,960 159,188
--------- --------
Net loss under Italian GAAP (2,444) (1,147)
--------- --------
STOCKHOLDERS' EQUITY
Stockholders' equity 531,275 382,322
Tax on common stock subscriptions capitalized
as an intangible asset under Italian GAAP 6,551 3,980
Loss on investment in OPI 496,196 185,164
--------- --------
Net adjustments 502,747 189,144
--------- --------
Stockholders' equity under Italian GAAP 1,034,022 571,466
========= ========
</TABLE>
S-17
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Omnitel Pronto Italia S.p.A.
We have audited the accompanying balance sheets of Omnitel Pronto Italia S.p.A.
as of December 31, 1996 and 1995 and the related statements of income,
stockholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Omnitel Pronto Italia S.p.A. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the each of the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
COOPERS & LYBRAND S.p.A.
/s/ [SIGNATURE APPEARS HERE]
Turin, Italy
February 28, 1997
S-18
<PAGE>
Omnitel Pronto Italia S.p.A.
Statement of Income
(in millions of Italian Lira except per share data)
<TABLE>
<CAPTION>
For the year ended
December 31,
------------------------------
1996 1995
<S> <C> <C>
Operating revenues:
National service - outgoing 241,254 1,322
- incoming 173,740 1,438
International roaming 42,970 352
Activations 36,995 -
Hardware and accessories 243,707 27,940
Other revenues 14,876 17,966
-------- ------
Total operating revenues 753,542 49,018
======== ======
Operating expenses:
Cost of sales and network
maintenance 667,739 69,566
Depreciation and amortization 203,457 35,869
Advertising 113,368 20,962
Selling, general and
administrative 202,557 147,661
Provision for bad debt 99,197 991
Taxes other than income taxes 7,943 6,054
--------- -------
Total operating expenses 1,294,261 281,103
--------- -------
Operating loss 540,719 232,085
Interest expenses (income), net 95,052 (7,021)
-------- -------
Loss before income taxes 635,771 225,064
Income tax expenses (benefit) (196,800) -
-------- -------
Net loss 438,971 225,064
======== =======
Net loss per common share 479 345
==== ====
Weighted average number of
common shares outstanding 917 652
==== ====
</TABLE>
The accompanying notes are an integral part of these Financial Statements
S-19
<PAGE>
Omnitel Pronto Italia S.p.A.
Balance Sheet
(in millions of Italian Lira except per share data)
<TABLE>
<CAPTION>
ASSETS December 31, 1996 December 31, 1995
- ------ ----------------- -----------------
<S> <C> <C>
Cash and cash equivalents 24,517 12,991
Accounts receivable, net (Note 3) 255,197 44,028
Due from related parties (Note 4) 103,273 36,115
Other current assets (Note 5) 35,331 34,928
Inventories (Note 6) 36,438 37,862
---------- -----------
Total current assets 454,756 165,924
---------- -----------
Equipment and furniture 90,096 60,852
Leasehold improvements 40,928 30,114
Network 1,041,890 479,234
Construction in progress 34,906 70,532
Less:
----
Accumulated depreciation (149,669) (25,405)
---------- -----------
Total property, plant and equipment,
net (Note 7) 1,058,151 615,327
---------- -----------
Concession and accessory charges, net
(Note 8) 769,881 828,855
Other intangibles assets,
net (Note 8) 90,527 69,506
Deferred Tax asset (Note 13) 196,800 -
Other assets (Note 9) 22,656 4,483
---------- -----------
Total non-current assets 2,138,015 1,518,171
--------- -----------
Total assets 2,592,771 1,684,095
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
S-20
<PAGE>
Omnitel Pronto Italia S.p.A.
Balance Sheet
(in millions of Italian Lira except per share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, December 31,
- ------------------------------------ 1996 1995
------------ ------------
<S> <C> <C>
Short term debt (Note 10) 112,968 30,595
Trade payables 546,629 495,572
Due to related parties (Note 4) 49,617 84,219
Other current liabilities and accrued
liabilities (Note 11) 140,722 27,002
--------- ---------
Total current liabilities 849,936 637,388
--------- ---------
Long term debt (Note 10) 983,369 500,000
Accrual for severance pay (Note 12) 18,157 11,067
---------- ---------
Total liabilities 1,851,462 1,148,455
--------- ---------
Commitments and contingencies (Note 16)
Common stock (1996 n. 1,050,000,000 and
1995 n. 725,000,000, par value Lit. 1,000
authorized issued and outstanding) 1,050,000 725,000
Additional paid in capital 400,000 75,000
Accumulated deficit (708,691) (264,360)
---------- ---------
Total stockholders' equity (Note 17) 741,309 535,640
--------- ---------
Total liabilities and stockholders' equity 2,592,771 1,684,095
========= =========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
S-21
<PAGE>
Omnitel Pronto Italia S.p.A.
Statement of Cash Flows
(in millions of Italian Lira)
<TABLE>
<CAPTION>
For the year ended
December 31,
------------------------------
1996 1995
<S> <C> <C>
Cash flows from operating activities:
- ------------------------------------
Net loss (438,971) (225,064)
Adjustments to reconcile net loss to net
cash used in operating activities
. Depreciation and amortization 203,457 35,869
. Provision for severance pay 7,477 3,969
. Provision for bad debt 99,197 991
. Increase to deferred tax asset (196,800) -
Changes in assets and liabilities, exclusive of
investing and financing activities:
. (Increase) Decrease in accounts receivable (310,366) (45,019)
. (Increase) Decrease in amounts due from related
parties (67,158) (32,429)
. (Increase) Decrease in other current
assets (403) (23,578)
. (Increase) Decrease in inventories 1,424 (37,862)
. Increase (Decrease) in trade payables 51,057 119,766
. Increase (Decrease) in amounts due to related parties (34,602) (5,480)
. Increase (Decrease) in other current
liabilities and accrued liabilities 113,720 17,490
. Increase (Decrease) in accrual for severance pay (387) 3,063
. Write-off of property, plant and equipment 3,741 -
--------- --------
Net cash used in operating activities (568,614) (188,284)
========= ========
Cash flows from investing activities:
- -------------------------------------
Additions to property, plant and equipment (571,127) (585,417)
Additions to intangible assets (40,942) (81,763)
Additions to other assets (18,173) (389)
Increase (Decrease) in trade payables - 349,409
--------- --------
Net cash used in investing activities (630,242) (318,160)
========= ========
Cash flows from financing activities:
- -------------------------------------
Proceeds from issuance of common stock and additional
paid in capital 650,000 400,000
Proceeds from issuance of stock options 1,140 -
Tax on common stock subscriptions (6,500) (3,980)
Proceeds from loans 983,369 100,000
Repayment of Bridge loan (500,000)
Proceeds from short term loans and bank overdrafts 82,373 30,515
Commission on syndicated loan and other charges - (39,231)
--------- --------
Net cash provided by financing activities 1,210,382 487,304
========= ========
Increase (Decrease) in cash and cash equivalents 11,526 (19,140)
Cash and cash equivalents at the
beginning of year 12,991 32,131
--------- --------
Cash and cash equivalents at the end of
the period 24,517 12,991
========= ========
Supplemental cash flow data:
Cash paid for interest, net of Lit. 42,776
capitalized in 1995. 73,018 291
========= ========
Income taxes - -
========= ========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
S-22
<PAGE>
Omnitel Pronto Italia S.p.A.
Statement of Changes in Stockholders' Equity
(in millions of Italian Lira unless otherwise stated)
<TABLE>
<CAPTION>
Additional
paid in Accumulated
Common stock capital deficit Total
------------ ----------- ----------- --------
Shares Amount
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1994 0.2 200 - 160 360
Issue of common stock:
- - February 22, 1994 199.8 199,800 - - 199,800
- - May 18, 1994 200.0 200,000 - - 200,000
Tax on issue of common stock - - - (3,997) (3,997)
Net loss for the period - - - (31,479) (31,479)
------ --------- ------- -------- -------
Balance as of December 31, 1994 400.0 400,000 - (35,316) 364,684
Issue of common stock:
- - January 26, 1995 250.0 250,000 - - 250,000
- - September 29, 1995 75.0 75,000 75,000 - 150,000
Tax on issue of common stock - - - (3,980) (3,980)
Net loss for the period - - - (225,064) (225,064)
------ --------- ------- -------- -------
Balance as of December 31, 1995 725.0 725,000 75,000 (264,360) 535,640
Issue of common stock:
- - January 30, 1996 75.0 75,000 75,000 - 150,000
- - March 28, 1996 75.0 75,000 75,000 - 150,000
- - July 5, 1996 75.0 75,000 75,000 - 150,000
- - September 5, 1996 50.0 50,000 50,000 - 100,000
- - September 30, 1996 50.0 50,000 50,000 - 100,000
Tax on issue of common stock - - - (6,500) (6,500)
Net loss for the period - - - (438,971) (438,971)
Issuance pursuant to stock
option plans - - - 1,140 1,140
------- --------- ------- -------- -------
Balance as of December 31, 1996 1,050.0 1,050,000 400,000 (708,691) 741,309
======= ========= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these Financial Statements
S-23
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
1. Description and ownership of the business
The Company was established in 1985 as a subsidiary of the Olivetti
Group. It remained substantially dormant until February 22, 1994 when it
was acquired by Omnitel Sistemi Radiocellulari Italiani S.p.A. and
Pronto Italia S.p.A. and changed its name to Omnitel Pronto Italia
S.p.A.
The Company's corporate purpose is to construct and operate a mobile
cellular system in Italy based on the GSM standard (Group Special
Mobile).
During 1994 Omnitel Pronto Italia S.p.A. obtained a fifteen year license
to operate the cellular mobile telephone network effective February 1,
1995. In the course of 1995, the Company carried out an experimental
service exercise between October 3, 1995 and December 6, 1995 and
launched a full operational service from December 7, 1995.
Activities carried out during 1996 were mainly related to the
construction of the network and to the launch of operational service. In
accordance with the clauses of the license, on March 13, 1996 the
National roaming access was obtained from Telecom Italia Mobile S.p.A.,
thus granting to the Company the same operational level as its
competitor.
As of December 31, 1996, the stockholders of Omnitel Pronto Italia
S.p.A. were as follows:
Omnitel Sistemi Radiocellulari Italiani (Omnitel S.R.I.) S.p.A. 70%
Pronto Italia (P.I.) S.p.A. 30%
-----
Total 100%
====
The Company currently purchases predominantly all of the hardware and
software for the construction of the network from Nokia
Telecommunications Italia, although alternative suppliers are readily
available.
In accordance with the Italian law, the Financial Statements must be
approved by the annual stockholders' meeting. The present financial
statements have not yet been approved by the above meeting.
In the course of 1996, the Italian Government was empowered by the
Parliament which propose to modify the fiscal tax rules related to local
tax ("ILOR"). Temporary differences considered for the computation for
deferred tax assets and liabilities do not consider potential changes to
the existing tax rules, in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes".
S-24
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
2. Summary of significant accounting policies
The following is a summary of the most significant accounting policies
used by the Company to prepare the financial statements.
2.1 Basis of presentation and preparation of financial statements
The financial statements are prepared under the historical cost
convention and in accordance with applicable accounting
principles. The preparation of the Company's financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. The most significant areas which
require the use of management's estimates relate to provision
for bad debt and the estimate of depreciation of fixed assets.
Prior to December 7, 1995, the Company was considered to be in a
development stage in accordance with the requirements of
Statement of Financial Accounting Standards No. 7 "Accounting
and Reporting by Development stage Enterprises". The deficit
accumulated during the development stage was Lit. 222,311
million.
2.2 Cash and cash equivalents
The Company considers all highly liquid monetary instruments
with original maturities of three months or less to be cash
equivalents.
Short-term securities held under purchase and resale agreements
(Repos) are valued at cost plus the accrued difference between
purchase and resale price matured as of the balance sheet date.
The related income is classified as interest income.
S-25
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
2.3 Receivables and payables
Receivables and payables are reflected at their stated value. Receivables
are reduced to their expected realizable value by an allowance for bad
debt.
Receivables and payables denominated in foreign currencies are stated
using the year-end exchange rates. The resulting gains or losses are
recorded in the statement of income.
2.4 Equipment and Leasehold Improvements
Equipment and Leasehold Improvements are stated at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated
useful lives (five to eight years) or lease life. Major replacements and
improvements are capitalized, and maintenance and repairs which do not
improve or extend the useful lives of the respective assets are charged
to operations. The assets and related accumulated depreciation or
amortization accounts are adjusted for assets retirement or disposal with
the resulting gain or loss shown in operating expenses.
Expenditure for maintenance, repairs and minor replacements are charged
to current operations. Expenditure for major replacements and
improvements are capitalized.
2.5 Assets under construction
Assets under construction consist of the direct costs relating to the
construction of the network. These include costs such as hardware,
software, direct labour costs incurred in construction, as well as other
costs relating to Network Planning and Implementation. All costs not
directly related to the development and construction of the network have
been charged to current operations. The depreciation of completed and
operational sites started from the launch date of December 7, 1995.
2.6 Intangible assets
The direct and indirect costs incurred to obtain the concession as well
as the interest on the related bank loan up to inception of service were
capitalized in 1995 and are amortized over the license period starting
from the month in which the commercial telephone service began. All other
intangible assets are amortized on a straight-line basis over their
estimated useful lives.
S-26
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
2.7 Inventories
Inventories, consisting principally of those related to the
Company's product distribution business, are stated at the lower
of cost (first-in, first-out method) or market.
2.8 Income taxes
The provision for current income taxes is based on the taxable
income for the year.
Deferred income tax balances reflect the impact of temporary
differences between the carrying amount of assets and
liabilities and their tax bases and are stated at enacted tax
rates expected to be in effect when taxes are actually paid or
recovered.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
2.9 Accrual for severance pay
Under Italian law, deferred compensation accrues in favour of
employees which they (or in the event of their death, their
heirs) are entitled to collect upon termination of employment.
The amount payable related to each year's service is calculated
on the basis of the remuneration for that year and will be
subject to annual revaluations based on increases in the Italian
cost-of-living index (ISTAT). Provision for the effect of such
revaluations is made as increases in the cost-of-living index
are realized.
2.10 Financial Instruments
The company utilizes derivative financial instruments such as
interest rate swap, interest rate collar and cap agreements to
limit its exposure to changing interest rates but does not hold
or issue such financial instruments for trading purposes.
Premiums to obtain interest rate caps are deferred and applied
over the period of the related commitment and are included in
prepaid financial charges within other current assets. Net cash
paid or received on interest rate swaps and interest rate collar
and cap agreements are reflected as an increase or decrease of
the interest expense during the period.
S-27
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
2.11 Commission on Syndicated loan facility
Up-front costs such as commission incurred in respect of the
Syndicated loan facility (see Note 8) have been capitalized and
are being amortized on a straight-line basis over the period of
the facility, which approximates the interest method.
2.12 Revenue Recognition
Operating revenues for communications services, which exclude
value added tax and other sales tax, are recognized as services
are rendered. Unbilled revenues resulting from cellular services
provided from the billing cycle date to the end of each month
are calculated and recorded.
Operating revenues for the Company's product distribution
business are recognized upon delivery of products to customers.
2.13 Software costs
Software costs are capitalized and amortized over five years.
Software development costs are expensed as incurred.
2.14 Advertising costs
In accordance with SOP 93-7, advertising costs are charged to
the statement of income in the period in which they are
occurred.
2.15 Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes the
accounting standards for the impairment of long-lived assets
acquired to be held and used, and for long-lived assets and
certain intangible assets to be disposed of. During 1996, the
statement became effective; management have applied the
provisions of SFAS 121 and are satisfied that this has not had
any impact on the financial statements.
S-28
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
2.16 Stock option
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123 "Accounting for Stock-Based Compensation".
This Statement defines a fair value based method of accounting
for stock-based employee compensation plans. Although all
entities are encouraged to adopt this method of accounting for
all employee stock compensation plans, SFAS 123 allows an entity
to continue to measure compensation costs for its plans as
prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees". The company intends to follow the option that
permits entities to apply APB Opinion No. 25.
2.17 Net loss per common share
Net loss per common share is computed by dividing the net loss
as reported in the statements of income by the weighted average
number of common shares outstanding during the period.
2.18 Reclassification of statement of income
Certain amounts in the 1995 financial statements have been
reclassified to conform with the 1996 presentation. These
reclassification have no effect on previously reported net loss
or stockholders' equity.
3. Accounts receivable, net
Accounts receivable, net, consisted of the following (in millions of
Italian Lira):
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ -------------
<S> <C> <C>
Subscribers - communication
services 315,874 8,550
Dealers - product distribution
business 39,511 36,469
Less:
Provision for bad debts (100,188) (991)
----------- --------
255,197 44,028
=========== =======
</TABLE>
S-29
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
4. Transactions with related parties
As of December 31, 1996 and 1995 the analysis of related parties balances,
including VAT, was as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Receivables Payables Receivables Payables
<S> <C> <C> <C> <C>
Omnitel S.R.I. - - -
P.I. - - (1,700)
Omnitel Gestioni 1,776 (172) - -
Olivetti group 2,626 (43,677) 116 (71,524)
AirTouch Int.l 6 (1,873) 88 (6,912)
Bell Atlantic 89 (2,600) 23 (1,155)
Telia International - (346) - (2,215)
C.C.I. 28 - 23 (189)
Lehman Brothers - (453) - -
Mannesmann - (198) - (362)
Current accounts
with Olivetti group
companies 98,748 (298) 35,865 (162)
------ ----- ------ -------
Total 103,273 (49,617) 36,115 (84,219)
======= ======== ====== ========
</TABLE>
Accounts with Olivetti group companies are regulated by written contract
and mainly relate to the payment of payroll costs performed at group level
and to V.A.T. balances, paid in accordance with Italian law at group
level. The debit balance is due primarily to the V.A.T. position.
On the basis of the contract, the VAT debit balance will be repaid
beginning January 1, 1997.
S-30
<PAGE>
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
The analysis of amounts charged to the Company by related parties, is
as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
Costs Income Costs Income
<S> <C> <C> <C> <C>
P.I. - - 1,700 -
Omnitel Gestioni 2,100 4,014 - -
Olivetti group 58,029 2,422 54,555 65
AirTouch Intl. 5,913 6 12,259 13
Bell Atlantic 4,365 57 5,989 -
Telia International 586 - 2,313 -
C.C.I. 4 - 486 -
Lehman Brothers 453 - - -
Mannesmann 265 - 314 -
------- ----- ------ ------
Total 71,715 6,499 77,616 78
======= ===== ====== ======
</TABLE>
Related party expenses relate principally to the services of personnel
rendered to the Company. In addition, the Company has a relationship
with Ing. C. Olivetti & Co. S.p.A. who provide payroll services to the
Company on an ongoing basis.
The amounts debited by related parties in 1996 include Lit. 39,776
million of network services, Lit. 20,740 million of general and
administrative expenses, Lit. 10,746 million of cost of sales and
network maintenance and Lit. 453 million of consultant fees. The
revenues include local services outgoing for an amount of Lit. 1,572
million, hardware sales for a total amount of Lit. 4,600 million, other
revenues for a total amount of Lit. 327 million.
S-31
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
5. Other current assets
The balances as of December 31, 1996 and 1995 are analyzed as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ -------------
<S> <C> <C>
V.A.T. and withholding
tax recoverable 14,855 19,191
Prepaid rents 15,112 5,378
Prepaid financial charges 1,175 1,296
Advance to suppliers 3,241 7,896
Other 948 1,167
------ ------
Total 35,331 34,928
====== ======
</TABLE>
Prepaid rents mainly relate to the contracts for the utilization of the
fixed network of Telecom S.p.A. and to the sites utilized for the
network.
Prepaid financial charges included Lit. 996 million relating to the
deferral of premium paid in order to obtain interest rate swaps (see
Notes 2.10 and 15).
6. Inventories
Inventories, net of obsolescence reserve, consist of:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Cellular phones and accessories 37,884 36,640
Cellular phones obsolescence reserve (5,448) (193)
Sim cards 4,002 1,415
------ -----
Total 36,438 37,862
====== ======
</TABLE>
S-32
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
7. Property, plant and equipment
Property, plant and equipment as of December 31, 1996 and 1995 consist
of the following:
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995 Estimated
at cost at cost useful lives
--------- --------- ------------
<S> <C> <C> <C>
Technical instruments and
equipment 14,425 10,772 5 years
Office furniture and equipment 41,751 30,609 5-8.33 years
Electrical equipment 33,920 19,471 5.55 years
Leasehold improvements 40,928 30,114 lease term or
--------- --------- life of assets,
if shorter
131,024 90,966
--------- ---------
Network:
- specific plant 29,093 10,239 6.67 years
- radio and transmission
equipment 398,955 165,953 6.67 years
- computer and electronic
equipment 202,820 99,321 5.55 years
- fixtures 35,031 10,994 10 years
- know-how 204,656 125,915 life of the
concession
- improvements to network
properties 171,335 66,812 lease term or
--------- --------- life of assets,
if shorter
1,041,890 479,234
--------- ---------
Total cost 1,172,914 570,200
Less: Accumulated depreciation (149,669) (25,405)
---- --------- ---------
1,023,245 544,795
Assets under construction 34,906 70,532
--------- ---------
1,058,151 615,327
========= =========
</TABLE>
S-33
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
8. Intangible assets
The balances for intangible assets as of December 31, 1996 and 1995 can
be detailed as follows:
<TABLE>
<CAPTION>
December 31, December 31, Estimated
1996 - at cost 1995 - at cost Useful lives
-------------- -------------- ------------
<S> <C> <C> <C>
Concession and accessory charges
Concession fee 750,000 750,000
Bid preparation costs incurred by:
- Omnitel S.R.I. and P.I. 27,784 27,784
- Other 8,799 8,799
Interest and commission relating to the
bridging loan and performance bond 46,141 46,141
------- --------
Concession and accessory charges 832,724 832,724 15 years
Less: Accumulated amortization (62,843) (3,869)
-------- ---------
Concession and accessory charges, net 769,881 828,855
======== =========
Other intangible assets
Cost of usage rights of software and others 79,573 38,631 5 years
Less accumulated amortization (23,763) (7,854)
-------- ---------
Cost of usage rights of software and others,
net 55,810 30,777
-------- ---------
Commission on syndicated loan and other
charges 39,231 39,231 10 years
Less: Accumulated amortization (4,514) (502)
-------- ---------
Commission on syndicated loan and other
charges, net 34,717 38,729 10 years
-------- ---------
Total other intangible assets, net 90,527 69,506
======== =========
Total intangible assets 860,408 898,361
======== =========
</TABLE>
On November 30, 1994, the Company made a lump-sum payment (Lit.750,000
million) for the concession by the Ministry for Post and
Telecommunications for the installation and operation, on a non-
exclusive basis, of the GSM service on the Italian territory. The
concession was effective from February 1, 1995 and will have a duration
of fifteen years.
S-34
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
9. Other assets
The balances as of December 31, 1996 and 1995 are analyzed as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Deposit paid to the Ministry for
the release of the concession 3,000 3,000
Special cash collateral 11,144 -
Investment in Omnitel Gestioni S.p.A. 3,200 200
Long term receivable and others 5,312 1,283
------- ------
Total 22,656 4,483
======= ======
</TABLE>
The deposit paid to the Ministry of Post and Telecommunications will
remain in place throughout the duration of the concession and earns
interest at the annual rate of 3.5%.
Special cash collateral consists of remunerative pledged accounts
issued for the purposes of securing the obligations of the Company
towards the Principal Issuing Banks of the Syndicated loan facility
(see Note 10.1).
Omnitel Gestioni S.p.A. is a subsidiary that manages mobile phone
retail shops. The shares of the Company are pledged in favour of the
Agent Bank of the Syndicated loan facility, in accordance with the
clauses of the facility contract.
Long term receivables relate to display corners sold to the Company's
dealers. Payment is received in instalments.
S-35
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
10. Debt
The amount due to banks and financial institutions as of December 31,
1996 and 1995 can be further detailed as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Short term debt:
- Bank overdrafts 24,968 20,595
- Short term bank loan 88,000 10,000
------- ------
Total short term debt 112,968 30,595
------- ------
Long term debt:
- Bridge loan -- 500,000
- Syndicated loan agreement 677,369 --
- Finnish Export Credit loan 306,000 --
------- -------
Total long term loan 983,369 500,000
------- -------
Total Debt 1,096,337 530,595
========= =======
</TABLE>
The short term bank loan relates to a loan granted for a period not
exceeding one month.
The bridge loan jointly granted by three Italian banks (Banca di Roma,
Banca Commerciale Italiana and Crediop) was repaid on February 13, 1996
using the first drawdown of the Syndicated Loan Agreement. As the
Company signed the Syndicated Loan facility on November 30, 1995 and
the agreement provided for the first drawdown to be used to repay the
above bank loan, this bridge loan was classified in 1995 as a long term
liability as required by Statement of Financial Accounting Standards
No. 6 "Classification of Short Term Obligations expected to be
refinanced".
10.1 Syndicated loan facility
On November 30, 1995 the Company signed a Syndicated loan
facility amounting to Lit.1,800 billion with a number of
financial institutions.
S-36
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
The facility consists of three tranches, being two tranches of
Lit.1,000 billion and Lit. 200 billion linked to LIBOR (London
Inter-Bank Offered Rate) and the third tranche of Lit. 600
billion linked to RIBOR (Rome Inter-Bank Offered Rate). The
interest rate of the facility is linked to the cash flows of
the Company. The rate was initially set at the interbank rate
plus 1.75%, subsequently falling to a minimum of 0.625% with
increasing operating cash flows.
This was reduced to 1.625% on December 7, 1995 due to the
Company achieving 40% territory coverage. Commitment fees are
due from the Company on the unutilized amount of the facility
at a rate of 0.5% per annum, payable quarterly in arrears.
The two LIBOR tranches consist of a facility for a maximum
amount of Lit. 1,000 billion available by way of term loan
advances and of a revolving short term advances facility for a
maximum amount of Lit. 200 billion. The two facilities are
available in predetermined freely available multicurrencies
subject to appropriate hedging. The total borrowed under these
two facilities as at December 31, 1996 amounts to Lit. 667,021
million and was completely drawn down in yen.
The RIBOR tranche, for a maximum amount of Lit. 600 billion,
is available by way of term loan advances in Italian Lira
and/or the issue of guarantees. The tranche has been utilised
for outstanding guarantees required by Finnish Export Credit
Ltd. (FEC) for a total amount of Lit. 334,305 million and by
Lit. 10,348 million for a term loan advance.
The facility has a duration of 10 years of which the first 4
years relate only to utilization. Repayment is at increasing
rates commencing from the end of the fifth year.
In accordance with the contract, the aggregate of advances
outstanding was limited to Lit. 1,400 billion for the period
ending December 31, 1996, stepping-up to Lit. 1,600 billion up
to June 1997 and Lit. 1,800 billion thereafter.
The facility includes several financial and operating
covenants such as dividend distribution restrictions, minimum
territory coverage, and restrictions over changes in direct
and indirect ownership of the Company. There are also
provisions for the use of several pledged cash collateral
accounts under the terms of the facility.
S-37
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
As a requirement of the above facility, the Company entered
into an insurance security agreement, whereby the Company
pledged all of its present and future rights arising from a
number of the Company's insurance policies. This pledge is in
favour of the financial institutions providing the facility.
10.2 Nokia/Finnish Export Credit Ltd.
The Company signed an agreement with Nokia during 1994 for the
supply of basic telecommunications equipment for a minimum
expected purchase value of Lit. 360,000 million.
The contract included a financing agreement with Finnish
Export Credit Ltd (FEC), a wholly owned subsidiary of the
Finnish Government, for 85% of the amounts involved. On
December 31, 1995 the credit agreement with Finnish Credit
Export Ltd for a total value of Lit. 306,000 million was
signed.
The credit facility has been fully utilized in 1996. Interest
is payable at LIBOR plus 0.225% during the drawingdown period
and at a fixed rate of 9% thereafter. The facility is
repayable in equal semi-annual instalments over 5 years from
the completion date of October 1996. A portion of the loan
will be repayed in the course of 1997 (Lit. 61,200 million).
This loan is completely classified as a long term liability in
accordance with Statement of Financial Accounting Standards
No. 6 "Classification of Short Term Obligations expected to be
refinanced".
The credit facility is collateralized by a guarantee from the
Syndicated Loan Facility for Lit. 334,305 million (109.25% of
the credit line).
The agreement provides for the use of a pledged cash
collateral account, partially utilized in the course of 1996.
10.3 Other
The Company has entered into interest rate swap agreements
(see Note 15) in order to manage its exposure to interest rate
fluctuations.
At December 31, 1996 the Company had short-term credit
facilities with several financial institutions totalling Lit.
228 billion of which Lit. 139 billion were unused.
S-38
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
The Company's weighted average interest rates calculated as at
December 31, 1996 and as of December 31, 1995 were 13.37% and 11.23%
per annum respectively.
11. Other current liabilities and accrued liabilities
Other current liabilities are analyzed as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------------ ----------------
<S> <C> <C>
Tax withheld at source and
annual tax on stockholder's equity 4,556 6,757
Other tax payable 59,135 2,025
Bank interest and commission fees accrued 14,888 6,087
Payable to social security institutions 10,973 6,735
Accrued payroll 15,224 5,182
Advances from GSM subscribers 25,600 -
Other 10,346 216
------- ------
Total 140,722 27,002
======= ======
</TABLE>
Other tax payable includes Lit. 30,230 million relating to the
government concession tax collected monthly from each customer, Lit.
14,429 million of stamp duty on new contracts and Lit. 12,445 million
relating to the annual concession charge computed on GSM service gross
revenues (see Note 16.1).
S-39
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
12. Accrual for severance pay
Under Italian law, deferred compensation accrues in favour of employees
which they (or in the event of their death, their heirs) are entitled
to collect upon termination of employment. The amount payable related
to each year's service is calculated on the basis of the remuneration
for that year and will be subject to annual revaluations based on
increases in the Italian cost-of-living index (ISTAT). Provision for
the effect of such revaluations is made as increases in the
cost-of-living index are realized. The balance consists of:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------------- ----------------
<S> <C> <C>
Employee severance pay 17,860 10,946
Agents leaving indemnities 297 121
------- --------
Total 18,157 11,067
======= ========
</TABLE>
13. Income taxes
A tax credit has been recorded in 1996. No provision for income taxes
has been made for 1995.
Based on the statutory results and the estimate of investment incentive
deductions as of December 31, 1996 the Company has net operating loss
carryforwards at that date of Lit. 1,366,000 million (1995: Lit.
844,000 million) which expire in the years 1999 through 2001.
Approximately Lit. 50,000 million (1995: Lit. 699,000 million) are the
result of investment incentives granted in the form of deductions from
taxable income.
The enacted corporation tax rate for the Company in the years 1996 and
1995 was 53.2% comprising local ("ILOR") tax at 16.2% and national
("IRPEG) tax at 37%. For IRPEG purposes only, net operating losses may
be carried forward and applied against the taxable income of the
following 5 years. No such loss carryforward facility exists for ILOR
purposes.
For 1996 and 1995, deferred tax assets and liabilities arising from
temporary differences have been computed at the full rate of 53.2%; the
asset represented by net operating loss carryforwards has been computed
at the IRPEG rate of 37%.
S-40
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
Deferred tax balances as at December 31, 1996 and 1995 can be summarized
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Deferred tax assets
Start up and other costs
deductible in future periods 120,079 96,630
Net operating loss carryforwards 505,541 275,630
---------- ----------
Total gross deferred tax assets 625,620 372,260
Deferred tax liabilities
Amortization of the government
concession for fiscal purposes
only (21,943) (25,630)
---------- ----------
Net deferred tax assets 603,677 346,630
Less: Valuation allowance (406,877) (346,630)
---------- ----------
Net carrying value amount 196,800 -
========== ==========
</TABLE>
A valuation allowance was provided against the total deferred tax assets
as of December 31, 1995 as the Company had not sufficient assurance that
the assets would be realized.
In 1996, based on an evaluation of the business plan, expectation of
future market conditions and operating performance, management determined
that a substantial portion of the valuation allowance was not required. A
valuation allowance of Lit. 406,877 million has been maintained primarily
for remaining tax loss carryforwards for which it is more likely than not
that the deferred tax assets will not be realized.
14. Statement of Income
As specified in note 2.18, the 1995 statement of income amounts have been
reclassified in order to permit a better comparability with the 1996
amounts.
S-41
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
15. Financial instruments
The Company has entered into interest rate swap, cap and collar
agreements to manage the impact of interest rate fluctuations.
At December 31, 1996 and December 31, 1995, the Company was party to
interest rate swap agreements, for hedging purposes, to exchange
variable rate payments for fixed rate payments periodically over the
life of the agreements. At the same dates, the Company was also party
to a cap agreement, whereby the Company is protected in the event that
interest rates rise over the relevant strike level. At December 31,
1996 the Company was party to collar agreements under which the Company
buys a cap in order to protect itself in the event interest rates
increase and writes a floor, in order to reduce the cost of buying a
cap.
The Company recognizes gains and losses in relationship to the maturity
dates of the underlying debt.
At December 31, 1996 and 1995 the Company had outstanding interest rate
swap agreements which converted variable rate debt to fixed rate debt
with a weighted average interest rate of 11.69% while, at the same
date, the three month market rate was 7.23%. The total notional
principal amounted to Lit.150,000 million at the year end. The
agreements all terminate on May 31, 2000.
At December 31, 1996 and 1995 the Company had a cap agreement
outstanding, with total notional principal amounting to Lit. 50,000
million, at a strike rate of 12.50% which terminates on May 31, 2000.
At December 31, 1996 the Company had two collar agreements outstanding,
with total notional principal amounting to Lit. 100,000 million, at an
average strike cap rate of 9.105% and at a beginning strike floor rate
of 8.25% declining quarterly up to 7.5% starting from April 1997. The
agreements will terminate on July 15, 1998. The floor strike rate for
the quarter from October 15, 1996 to January 15, 1997 was 8%. As at
December 31, 1996, the three month market rate was 7.19%.
S-42
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
16. Commitments and contingencies
16.1 Commitments deriving from the concession
Under the concession awarded for the GSM public mobile
telephone service, the Company undertakes to pay to the
Ministry an annual concession charge corresponding to 3.5% of
the GSM service gross revenues, net of all service charges
paid to the other public telephone network license holder. The
concession charge cannot be lower than a minimum annual
amount, established for each of the next three years of the
concession, as follows:
1997 25,400
1998 51,000
1999 77,100
-------
Total minimum payments 153,500
=======
The Company must guarantee a minimum coverage of 70% of the
Italian territory and 90% of the population within 5 years
from the date of the concession. Failure to meet these
requirements could result in cancellation of the concession.
In addition under the Concession, the company has to fulfill
some obligations prescribed by the Performance Bond (see
16.2).
16.2 Guarantees provided by financial institutions on behalf of the
Company
As of December 31, 1996 and 1995 the Company has an
undertaking of Lit.669,105 and Lit. 491,599 million
respectively for guarantees issued by financial and
ministerial institutions as analyzed below:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
FEC guarantee 334,305 266,250
Performance bond 219,400 219,400
Other guarantees 115,400 5,949
------- -------
Total 669,105 491,599
======= =======
</TABLE>
S-43
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
As collateral for the loan obtained by Finnish Export Credit
Ltd, the Company obtained letters of credit from banks,
subsequently cancelled after the issuance of the guarantee
provided by the Syndicated Loan (see Notes 10.1 and 10.2).
The performance bond of Lit. 219,400 million was provided by
Banca Commerciale Italiana to the Ministry of Post and
Telecommunications as a guarantee for the fulfillment of the
obligations prescribed by the above mentioned concession,
including, but not limited to, employment levels, achievement
of minimum territorial coverage (at least 98% of the Italian
territory by May 1998) and minimum cumulative investments (at
least Lit.1,552 billion by May 1998). The performance bond
matures on June 30, 2000. Failure to achieve the objectives
specified in the performance bond could result in charges to
the Company.
Other guarantees mainly include (Lit. 106.6 billion) bank
guarantees granted to the V.A.T. office in order to obtain
V.A.T. repayments.
16.3 Other commitments and contingencies
16.3.1 Nokia
The Company signed an agreement with Nokia in 1994 for the
supply of basic telecommunication equipment for a minimum
expected purchase value of Lit. 360 billion. Prior to 31
December, 1996, the Company fulfilled its purchase obligation
related to the original commitment . In the course of 1996,
amendments were signed to the original contract. One amendment
stated a commitment of Lit. 290 billion for the purchase of
further telecommunication equipment. At December 31, 1996 the
remaining purchase commitment outstanding in relation to this
amendment amounted to some Lit. 170 billion.
S-44
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
16.3.2 Rent and leasing commitments
The Company rents buildings utilized for operations and
network sites and leases vehicles assigned to certain
employees, with future minimum rentals as follows:
<TABLE>
<CAPTION>
Operating
leases
---------
<S> <C>
Year ending in:
. 1997 36,939
. 1998 36,510
. 1999 35,493
. 2000 33,150
. 2001 22,359
Thereafter 30,248
-------
Total minimum lease payments 194,699
=======
</TABLE>
17. Stockholders' equity
A stockholders' meeting held on January 30, 1995 authorized the Board
of Directors to increase the Company's share capital up to a maximum of
Lit.1,050 billion by means of the issue of a maximum of 400 million
shares at a value of Lit.2,000 per share, consisting of Lit.1,000 par
value plus Lit.1,000 share premium. This increase was approved by the
Board of Directors at a meeting on March 24, 1995. The issue of these
shares was at the discretion of the Board of Directors and was valid
until December 31, 1996.
The first tranche of these shares was issued in 1995 for a total amount
of 75 million common shares.
In the course of 1996 the Company issued a total amount of 325 million
common stock shares with a par value of Lit. 1,000 each, and Lit. 1,000
additional paid in capital. This increased the Company's issued common
stock to Lit. 1,050,000 million and its additional paid in capital to
Lit. 400,000 million. The proceeds from the issues of 1996, net of
taxation, amounted Lit. 643,500 million.
Under Italian tax legislation the company is liable to an annual tax of
0.75% on the value of the stockholders' equity as reported under
Italian GAAP, which is accounted for as a charge to the income
statement.
S-45
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
In December 1996, the Company launched a stock option program in favour
of some executives of Omnitel Pronto Italia. On the basis of the
program the executives subscribed 3,324,000 warrants for a total amount
of Lit. 1,140 million. The warrants which each carry the right to
purchase one common stock unit will be exercisible on June 30, 2001.
The price payable on exercise of the warrant is a total of Lit. 5,500
per warrant of which Lit. 4,500 additional paid in capital. Early
exercise of warrants is not permitted.
18. Subsequent events
National roaming agreement
Access under the National roaming agreement is currently being disputed
by Telecom Italia Mobile in connection with OPI's territorial coverage.
The Ministry have confirmed that OPI have achieved the coverage
necessary for obtaining access.
19. Disclosures about Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Values of Financial Instruments" ("SFAS 107"), as amended by
Statement of Financial Accounting Standards No. 119 "Disclosure about
Derivative Financial Instruments and fair value of financial
instruments" requires certain disclosures about the fair values of all
financial instruments, including both assets and liabilities.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value:
Cash and cash equivalents, Accounts receivable, Trade payables, Amounts
due to and from related parties
The carrying amount approximates the fair value due to the short term
maturity of these instruments. This includes the short term bank loans.
S-46
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
Accrual for severance pay
The accrual for severance pay required under Italian legislation
equates to the present value of vested benefits to which the employee
is immediately entitled on termination of their employment. Upon this
basis, the carrying amount approximates to the fair value of this
financial instrument.
Interest rate swap agreements
The fair value of interest rate swap agreements is the estimated amount
that the Company would pay or receive to terminate the agreements at
the balance sheet date, taking into account current interest rates.
The estimated fair values of the Company's financial instruments are as
follows (Lit./millions):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Fair value Carrying Fair value
value value
<S> <C> <C> <C> <C>
Cash and cash equivalents 24,517 24,517 12,991 12,991
Accounts receivable 255,197 255,197 44,028 44,028
Due from related parties 103,273 103,273 36,115 36,115
Other current assets 35,331 34,340 34,928 34,928
Debt 1,096,337 1,096,337 530,595 530,595
Trade payables 546,629 546,629 495,572 495,572
Due to related parties 49,617 49,617 84,219 84,219
Other current liabilities 140,722 140,722 27,002 27,002
Accrual for severance pay 18,157 18,157 11,067 11,067
Interest rate swaps - (24,858) - (8,784)
Collars - (2,030) - -
</TABLE>
S-47
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
20. Reconciliation to Generally Accepted Accounting Principles in Italy
("Italian GAAP")
In order to comply with the accounting principles generally accepted in
the United States of America, certain adjustments are reflected in the
financial statements which are not recorded in the Italian statutory
financial statements.
As of December 31, 1996 and 1995 these adjustments which principally
related to the application of SFAS 109 and to a different treatment of
costs sustained during the development stage respectively, are
summarized as follows:
<TABLE>
<CAPTION>
NET LOSS 1996 1995
<S> <C> <C>
Net loss for the years ended December 31, 1996 and
1995 as reported (438,971) (225,064)
Tax on common stock subscriptions capitalized as an
intangible asset under Italian GAAP (2,892) (1,592)
Net book value of start-up costs capitalized under
Italian GAAP 3,938 130,863
Net book value of advertising costs capitalized under
Italian GAAP 38,786 15,821
Concession and accessory charges amortization 6,926 (48,176)
Deferred income taxes: SFAS 109 application (196,800) -
--------- ----------
Net adjustments (150,042) 96,916
Net loss under Italian GAAP (589,013) (128,148)
========= =========
</TABLE>
S-48
<PAGE>
Omnitel Pronto Italia S.p.A.
Notes to the Financial Statements
(in millions of Italian Lira unless otherwise stated)
Continued
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
STOCKHOLDERS' EQUITY
Stockholders' equity 741,309 535,640
Tax on common stock subscriptions capitalized as an
intangible asset under Italian GAAP 9,180 5,573
Net book value of start-up costs capitalized under
Italian GAAP 163,281 159,343
Net book value of advertising costs capitalized under
Italian GAAP 54,607 15,821
Concession and accessory charges amortization (41,250) (48,176)
Deferred income taxes: SFAS 109 application (196,800) -
--------- ---------
Net adjustments (10,982) 132,561
Stockholders' equity under Italian GAAP 730,327 668,201
======== ========
</TABLE>
S-49
<PAGE>
EXHIBIT 10.1
DESCRIPTION OF THE OMNITEL AGREEMENT
In May 1990, each of the co-venturers purchased shares of Omnitel stock in
consideration for the payment to Omnitel of a deposit of 30 percent of their
respective initial capitalization obligations. Under the terms of the Omnitel
Agreement, if the chairman of Omnitel's board of directors determines that funds
in addition to the initial 30 percent deposit are required, he may, with no
further action on the part of the coventurers, direct that notice of a capital
call (a "Call") be sent to each co-venturer requiring that such co-venturer
contribute the additional cash capital contribution specified therein up to such
co-venturer's respective initial capitalization obligation. Any capital call
(an "Overcall") relating to amounts in excess of the initial capitalization
obligation must be unanimously agreed to by the Omnitel board of directors.
Unless a co-venturer otherwise consents, its financial liability with respect to
a Call or an Overcall or any other commitment to provide funds to Omnitel shall
be limited to its pro rata ownership interest therein.
Management of Omnitel. The Omnitel board of directors consists of nine
members, with one member designated by each of Bell Atlantic, International,
SLHE and Swedish Telecom and five members initially designated by Olivetti with
Olivetti designating the chairman of the board of directors with the consent of
all the other board members.
Certain Transfers of Omnitel Stock. Under the Omnitel Agreement, a co-
venturer may, without the consent of the other co-venturers, transfer its
Omnitel stock to its affiliates, other co-venturers or the affiliates of other
co-venturers. A co-venturer may not, however, sell, assign, transfer, pledge,
encumber or otherwise dispose of any of its Omnitel stock to a party who is not
an affiliate, a co-venturer or an affiliate of a co-venturer without prior
written consent of all the other co-venturers. All transfers of Omnitel stock
other than to affiliates, other co-venturers or affiliates of other co-venturers
are subject to a right of first refusal by the other co-venturers. If more than
one co-venturer exercises the right of first refusal, each of the co-venturers
may purchase a pro rata portion of such Omnitel stock (based upon the total
number of shares owned by all co-venturers exercising the right of first
refusal). Such rights of first refusal may be exercised at the price indicated
by the transferring co-venturer in a notice that must be sent by the
transferring co-venturer to the remaining co-venturers prior to effecting a
transfer that gives rise to a right of first refusal. For the first three years
of the Omnitel Agreement, a co-venturer exercising its right of first refusal
may object to such price, in which case the price shall be determined by
arbitration in accordance with the terms of the Omnitel Agreement.
Change in Control of a Co-Venturer; Rights of First Refusal. If more than
50 percent of the shares of voting securities of a co-venturer (the "Selling Co-
Venturer") are transferred to a third party (or parties) that is not an
affiliate (a "Change in Control"), each co-venturer (a "Buying Co-Venturer")
shall have the non-assignable right to purchase all or a pro rata portion (based
upon the total number of shares owned by co-venturers exercising such right to
purchase) of the Selling Co-Venturer's shares of Omnitel stock at a price
indicated by the Selling Co-Venturer. In the event a Buying Co-Venturer objects
to the price so indicated, it shall be settled by arbitration in accordance with
the terms of the Omnitel Agreement. The acquisition
<PAGE>
of control of any parent company of a co-venturer which owns or operates
substantial other businesses or entities in addition to the Venture is not
deemed to constitute a Change in Control under the Omnitel Agreement.
Required Sale upon Default in Required Capital Contribution. The Omnitel
Agreement provides that if a co-venturer willfully fails to make required
capital contributions, the other co-venturers shall have the non-assignable
option to purchase such co-venturer's Omnitel stock for a cash price equal to
the paid-in-capital represented by such stock.
Additional Required Sales. Pursuant to the Omnitel Agreement, the
following may also give rise to the granting of a non-assignable option to
purchase a co-venturer's Omnitel stock: (i) the failure by a co-venturer to
perform in any material respect any material obligation under the Omnitel
Agreement; (ii) the filing of a Petition for bankruptcy or reorganization by or
against a co-venturer or a co-venturer admitting in writing that it is unable to
pay its debts as they come due; or (iii) a knowing and willful violation or
breach by a co-venturer of any of the covenants or other requirements in the
Omnitel Agreement.
Covenant not to Compete. The co-venturers have agreed that, at all times
during which they own Omnitel stock and for two years following the disposition
thereof, they will not engage in the business of building, owning or operating a
cellular mobile telephone network or providing mobile telecommunications
services (a "Competing Business") in Italy without the consent of Olivetti and
at least all but one of the other co-venturers, which consent is not to be
unreasonably withheld; provided, however, that a co-venturer may own less than
10 percent of a Competing Business if the co-venturer is not represented on the
board and has no active role in the management of the Competing Business. The
Omnitel Agreement provides that each of the co-venturers and their affiliates
may, however, engage in or possess an interest in any other business in Italy or
any Competing Business outside of Italy.
<PAGE>
EXHIBIT 11
CELLULAR COMMUNICATIONS INTERNATIONAL, INC.
CALCULATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Weighted Average Number of Shares
----------------------------------------------
Date Total Year Ended Year Ended Year Ended
Issued Description of Issuance Outstanding 31-Dec-96 31-Dec-95 31-Dec-94
- ------------- ----------------------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
01/01/94 Common Stock 9,999,458 9,999,458 9,999,458 9,999,458
01/12/94 Common Stock 150 150 150 145
01/25/94 Common Stock 900 900 900 838
03/18/94 Common Stock 750 750 750 592
04/28/94 Common Stock 10,504 10,504 10,504 7,108
05/10/94 Common Stock 5,001 5,001 5,001 3,220
05/13/94 Common Stock 5,414 5,414 5,414 3,441
05/16/94 Common Stock 6,011 6,011 6,011 3,771
05/18/94 Common Stock 51,626 51,626 51,626 32,107
05/19/94 Common Stock 3,006 3,006 3,006 1,861
05/20/94 Common Stock 1,601 1,601 1,601 987
05/25/94 Common Stock 53,166 53,166 53,166 32,045
05/26/94 Common Stock 333 333 333 200
05/27/94 Common Stock 5,000 5,000 5,000 2,986
06/01/94 Common Stock 2,500 2,500 2,500 1,459
06/08/94 Common Stock 700 700 700 395
07/06/94 Common Stock 250 250 250 122
07/25/94 Common Stock 467 467 467 203
07/28/94 Common Stock 150 150 150 64
08/19/94 Common Stock 250 250 250 92
11/29/94 Common Stock 8,700 8,700 8,700 763
11/30/94 Common Stock 984 984 984 84
12/01/94 Common Stock 18,200 18,200 18,200 1,496
12/07/94 Common Stock 7,500 7,500 7,500 493
01/06/95 Common Stock 750 750 738
01/12/95 Common Stock 225 225 218
01/30/95 Common Stock 626 626 575
02/02/95 Common Stock 2,334 2,334 2,123
02/23/95 Common Stock 626 626 533
04/17/95 Common Stock 1,400 1,400 990
08/04/95 Common Stock 225 225 92
08/07/95 Common Stock 1,500 1,500 600
08/21/95 Common Stock 416 416 150
08/23/95 Common Stock 6,750 6,750 2,404
09/12/95 Common Stock 105,600 105,600 31,825
09/28/95 Common Stock 7,500 7,500 1,932
10/10/95 Common Stock 21,000 21,000 4,718
11/07/95 Common Stock 1,300 1,300 192
11/22/95 Common Stock 1,125 1,125 120
12/06/95 Common Stock 100 100 7
12/11/95 Common Stock 4,500 4,500 246
12/13/95 Common Stock 1,700 1,700 84
12/18/95 Common Stock 875 875 31
12/29/95 Common Stock 3,000 3,000 16
01/11/96 Common Stock 600 582
02/13/96 Common Stock 2,501 2,200
03/06/96 Common Stock 376 308
03/08/96 Common Stock 2,000 1,628
03/12/96 Common Stock 6,667 5,355
05/16/96 Common Stock 4,375 2,737
06/13/96 Common Stock 121,500 66,725
06/14/96 Common Stock 113,250 61,885
06/17/96 Common Stock 43,197 23,251
11/06/96 Common Stock 50 8
11/25/96 Common Stock 1,501 148
12/26/96 Common Stock 2,500 239
12/31/96 Common Stock 65,250 0
Weighted average number of ----------------------------------------------
common shares 10,707,940 10,509,239 10,230,215 10,093,930
----------------------------------------------
Net effect of dilutive
stock options 1,326,725
Net effect of dilutive
stock warrants 251,133
----------------------------------------------
Total 10,707,940 10,509,239 11,808,073 10,093,930
==============================================
</TABLE>
<PAGE>
CELLULAR COMMUNICATIONS INTERNATIONAL, INC.
CALCULATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
31-Dec-96 31-Dec-95 31-Dec-94
-----------------------------------------
<S> <C> <C> <C>
Income (loss) before extraordinary item ($50,968,000) $6,815,000 ($8,509,000)
Loss from early extinguishment of debt - (1,474,000) -
-----------------------------------------
Net income (loss) ($50,968,000) $5,341,000 ($8,509,000)
=========================================
Net income (loss) per common share:
Income (loss) before extraordinary item ($4.85) $0.57 ($0.84)
Extraordinary item - (0.12) -
-----------------------------------------
Net income (loss) ($4.85) $0.45 ($0.84)
=========================================
</TABLE>
---------------------------------------------------------------
Note: Adjusted to give retroactive effect to the 3-for-2 stock
split by way of a stock dividend paid on May 13, 1994.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the (i) Registration Statements
(Forms S-8 No. 33-41528, No. 33-78846, No. 33-55442, No. 33-89368, No. 33-55440,
No. 33-78840, No. 33-89370 and No. 33-89366) of Cellular Communications
International, Inc. (the "Company") and (ii) Registration Statement (Form S-3
No. 33-90980) of the Company and in the related Prospectus of our report dated
March 18, 1997, with respect to the consolidated financial statements of the
Company included in the Annual Report (Form 10-K) for the year ended December
31, 1996.
ERNST & YOUNG LLP
New York, New York
March 27, 1997
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the (i) Registration Statements
(Form S-8 No. 33-41528, No. 33-78846 and No. 33-89366) pertaining to the 1991
Employee Stock Option Plan of Cellular Communications International Inc. (ii)
Registration Statements (Form S-8 No. 33-55442 and No. 33-89368) pertaining to
Non-Employee Director Stock Option Plan of Cellular Communications
International, Inc. and (iii) Registration Statements (Form S-8 No. 33-55440,
No. 33-78840 and No. 33-89370) pertaining to Non-Qualified Stock Option
Agreements of Cellular Communications International, Inc. and (iv) Registration
Statement (Form S-3 No. 33-90980) pertaining to the registration of 281,571
Units consisting of 13 1/4% Senior Discount Notes and Warrants to purchase
Common Stock and the related Prospectus of our report dated February 28, 1997 on
our audit of the financial statements of Omnitel Sistemi Radiocellulari Italiani
S.p.A as of December 31, 1996 and for the year then ended, and our report dated
February 28, 1997 on our audit of the financial statements of Omnitel Pronto
Italia S.p.A as of December 31, 1996 and for the year then ended, which reports
are included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand S.p.A
COOPERS & LYBRAND S.p.A
Turin, Italy.
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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0
0
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</TABLE>
