UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-19363
------------------------------------------------------------
CELLULAR COMMUNICATIONS INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3221852
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 East 59th Street, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 906-8480
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the issuer's common stock as of June 30,
1998 was 16,585,865.
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Index
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 ............................. 2
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1998 and 1997 ............... 3
Condensed Consolidated Statement of Shareholders'
(Deficiency) - Six months ended June 30, 1998 ................... 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 ......................... 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .............................. 12
PART II. OTHER INFORMATION
- -------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders ............. 18
Item 6. Exhibits and Reports on Form 8-K ................................ 18
SIGNATURES ............................................................... 19
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cellular Communications International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------------------------
(unaudited) (see note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 123,301,000 $ 59,256,000
Marketable securities - 24,871,000
Other 126,000 21,000
------------------------------------
Total current assets 123,427,000 84,148,000
Investment in Omnitel 67,043,000 52,151,000
Equipment, net of accumulated depreciation of
$41,000 (1998) and $40,000 (1997) - 1,000
Deferred financing costs, net of accumulated amortization
of $960,000 (1998) and $2,828,000 (1997) 8,556,000 4,414,000
------------------------------------
Total assets $ 199,026,000 $ 140,714,000
====================================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY)
Current liabilities:
Accounts payable $ - $ 126,000
Accrued expenses 360,000 509,000
Interest payable 1,466,000 -
Taxes payable 1,447,000 1,452,000
Due to NTL Incorporated 77,000 69,000
Current portion of long-term debt 36,692,000 -
------------------------------------
Total current liabilities 40,042,000 2,156,000
Long-term debt 251,412,000 197,327,000
Commitments and contingent liabilities
Shareholders' (deficiency):
Series preferred stock--$.01 par value; authorized
2,500,000 shares, outstanding none - -
Common stock--$.01 par value; authorized 75,000,000
shares; issued and outstanding 16,586,000 (1998)
and 16,359,000 (1997) shares 166,000 164,000
Additional paid-in capital 32,606,000 29,821,000
(Deficit) (125,200,000) (88,754,000)
------------------------------------
(92,428,000) (58,769,000)
------------------------------------
Total liabilities and shareholders' (deficiency) $ 199,026,000 $ 140,714,000
====================================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
2
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity in net income (loss) of Omnitel $ 11,828,000 $ (1,475,000) $ 15,238,000 $ (8,612,000)
COSTS AND EXPENSES
General and administrative expenses 609,000 753,000 1,172,000 1,847,000
Depreciation expense - 5,000 1,000 10,000
Amortization of investment in joint venture 173,000 173,000 346,000 345,000
-------------------------------------------------------------------------
782,000 931,000 1,519,000 2,202,000
-------------------------------------------------------------------------
Operating income (loss) 11,046,000 (2,406,000) 13,719,000 (10,814,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 1,683,000 1,174,000 2,890,000 2,184,000
Interest expense (6,774,000) (6,545,000) (13,967,000) (12,881,000)
Foreign currency translation (losses) (2,582,000) - (1,022,000) -
-------------------------------------------------------------------------
Income (loss) before extraordinary item 3,373,000 (7,777,000) 1,620,000 (21,511,000)
Loss from early extinguishment of debt - - (38,066,000) -
-------------------------------------------------------------------------
Net income (loss) $ 3,373,000 $ (7,777,000) $ (36,446,000) $ (21,511,000)
=========================================================================
Earnings per common share:
Income (loss) before extraordinary item $ .20 $ (.48) $ .10 $ (1.34)
Extraordinary item - - (2.31) -
-------------------------------------------------------------------------
Net income (loss) $ .20 $ (.48) $ (2.21) $ (1.34)
=========================================================================
Earnings per common share-Assuming Dilution:
Income (loss) before extraordinary item $ .18 $ (.48) $ .09 $ (1.34)
Extraordinary item - - (2.08) -
-------------------------------------------------------------------------
Net income (loss) $ .18 $ (.48) $ (1.99) $ (1.34)
=========================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders' (Deficiency)
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN
SHARES AMOUNT CAPITAL (DEFICIT)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 16,359,000 $ 164,000 $ 29,821,000 $ (88,754,000)
Exercise of stock options 206,000 2,000 1,945,000
Exercise of warrants 21,000 - 840,000
Net (loss) for the six months
ended June 30, 1998 (36,446,000)
---------------------------------------------------------------
Balance at June 30, 1998 16,586,000 $ 166,000 $ 32,606,000 $ (125,200,000)
===============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------------------
1998 1997
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $ (36,446,000) $ (21,511,000)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities:
Equity in net (income) loss of Omnitel (15,238,000) 8,612,000
Depreciation and amortization expense 347,000 355,000
Loss from early extinguishment of debt 38,066,000 -
Foreign currency translation losses 1,022,000 -
Accretion of original issue discount 11,475,000 11,714,000
Accretion of interest on marketable securities (169,000) (1,189,000)
Amortization of deferred financing costs charged
to interest expense 720,000 629,000
Amortization of debt discount 306,000 537,000
Changes in operating assets and liabilities:
Other current assets (105,000) 839,000
Accounts payable (131,000) (56,000)
Accrued expenses (604,000) (186,000)
Interest payable 1,466,000 -
Taxes payable (5,000) 2,000
Due to NTL Incorporated 8,000 (586,000)
------------------------------------
Net cash provided by (used in) operating activities 712,000 (840,000)
------------------------------------
INVESTING ACTIVITIES
Purchase of marketable securities (5,000,000) (78,618,000)
Proceeds from sale of marketable securities 30,040,000 98,479,000
------------------------------------
Net cash provided by investing activities 25,040,000 19,861,000
------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings, net of financing costs 237,549,000 -
Purchase of Senior Discount Notes (202,043,000) (44,000)
Exercise of stock options and warrants 2,787,000 82,000
------------------------------------
Net cash provided by financing activities 38,293,000 38,000
------------------------------------
Increase in cash and cash equivalents 64,045,000 19,059,000
Cash and cash equivalents at beginning of period 59,256,000 46,759,000
------------------------------------
Cash and cash equivalents at end of period $ 123,301,000 $ 65,818,000
====================================
</TABLE>
See accompanying notes.
5
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A - BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
In March 1998, the Company issued debt denominated in ECU's. Interest expense
has been translated using the average exchange rate for the period and the debt
balance has been translated using the current exchange rate at the balance sheet
date. Foreign currency gains and losses arising from exchange rate fluctuations
are included in the results of operations.
NOTE B - INVESTMENT IN OMNITEL
The investment in Omnitel consists of the following:
JUNE 30, DECEMBER 31,
1998 1997
--------------------------------
(unaudited)
Capital contributions $ 96,805,000 $ 96,805,000
Capitalized costs including interest 9,725,000 9,725,000
Equity in accumulated net loss (37,190,000) (52,428,000)
--------------------------------
69,340,000 54,102,000
Accumulated amortization (2,297,000) (1,951,000)
--------------------------------
$ 67,043,000 $ 52,151,000
================================
In March 1994, the Omnitel-Pronto Italia ("OPI") consortium in which Omnitel
holds a 70% interest was selected as the second GSM cellular telephone licensee
in Italy. The Company, through its 14.667% ownership interest in Omnitel, holds
an indirect 10.267% interest in OPI.
6
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE B - INVESTMENT IN OMNITEL (CONTINUED)
The following financial information of Omnitel and OPI is prepared in accordance
with U.S. generally accepted accounting principles ("U.S. GAAP") and is
reflected in U.S. dollars; the balance sheet information has been translated at
the exchange rate on the balance sheet date (1,776.99 (1998) and 1,767.00 (1997)
lire = $1.00) and the statement of operations information has been translated at
the average exchange rate for the period (1,780.58 (1998) and 1,664.66 (1997)
lire = $1.00).
The following summarizes the assets, liabilities and stockholders' equity of
Omnitel:
JUNE 30, DECEMBER 31,
1998 1997
----------------------------------
(unaudited)
ASSETS
Current assets $ 6,427,000 $ 7,137,000
Investment in OPI 360,758,000 257,971,000
----------------------------------
$ 367,185,000 $ 265,108,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 140,000 $ 677,000
Other liabilities 51,000 51,000
Stockholders' equity 366,994,000 264,380,000
----------------------------------
$ 367,185,000 $ 265,108,000
==================================
The following summarizes the unaudited results of operations of Omnitel:
SIX MONTHS ENDED JUNE 30
----------------------------------
1998 1997
----------------------------------
Revenues $ - $ -
Costs and expenses (281,000) (972,000)
Equity in net income (loss) of OPI 103,987,000 (58,040,000)
----------------------------------
Operating income (loss) 103,706,000 (59,012,000)
Interest income, net 184,000 293,000
----------------------------------
Net income (loss) $ 103,890,000 $ (58,719,000)
==================================
7
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE B - INVESTMENT IN OMNITEL (CONTINUED)
The following summarizes the assets, liabilities and stockholders' equity of
OPI:
JUNE 30, DECEMBER 31,
1998 1997
----------------------------------
(unaudited)
ASSETS
Current assets $ 622,485,000 $ 522,188,000
Property, plant and equipment, net 929,084,000 782,129,000
Intangible assets, net 457,436,000 472,918,000
Deferred tax asset 46,905,000 32,088,000
Other 46,818,000 37,158,000
----------------------------------
$ 2,102,728,000 $ 1,846,481,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 716,995,000 $ 605,919,000
Long-term debt 851,919,000 855,134,000
Other liabilities 18,445,000 16,898,000
Stockholders' equity 515,369,000 368,530,000
----------------------------------
$ 2,102,728,000 $ 1,846,481,000
==================================
The following summarizes the unaudited results of operations of OPI:
SIX MONTHS ENDED JUNE 30
---------------------------------
1998 1997
---------------------------------
Revenues $ 945,245,000 $ 407,239,000
Costs and expenses 648,993,000 386,595,000
Depreciation and amortization 109,184,000 81,237,000
---------------------------------
758,177,000 467,832,000
---------------------------------
Operating income (loss) 187,068,000 (60,593,000)
Interest (expense), net (30,566,000) (39,955,000)
Income tax (provision) benefit (7,892,000) 17,613,000
---------------------------------
Net income (loss) $ 148,610,000 $ (82,935,000)
=================================
8
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE B - INVESTMENT IN OMNITEL (CONTINUED)
The following financial information of OPI is prepared in accordance with U.S.
GAAP and is reflected in Italian lire.
The following summarizes the assets, liabilities and stockholders' equity of
OPI:
JUNE 30, DECEMBER 31,
1998 1997
---------------------------------
(unaudited)
(in millions of lire)
ASSETS
Current assets 1,106,149 922,707
Property, plant and equipment, net 1,650,973 1,382,022
Intangible assets, net 812,860 835,646
Deferred tax asset 83,350 56,700
Other 83,195 65,659
---------------------------------
3,736,527 3,262,734
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities 1,274,094 1,070,663
Long-term debt 1,513,851 1,511,021
Other liabilities 32,777 29,858
Stockholders' equity 915,805 651,192
---------------------------------
3,736,527 3,262,734
=================================
The following summarizes the unaudited results of operations of OPI:
SIX MONTHS ENDED JUNE 30
---------------------------------
1998 1997
---------------------------------
(in millions of lire)
Revenues 1,683,085 677,914
Costs and expenses 1,155,584 643,549
Depreciation and amortization 194,410 135,232
---------------------------------
1,349,994 778,781
---------------------------------
Operating income (loss) 333,091 (100,867)
Interest (expense), net (54,425) (66,512)
Income tax (provision) benefit (14,053) 29,320
---------------------------------
Net income (loss) 264,613 (138,059)
=================================
9
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE C - LONG-TERM DEBT
Long-term debt consists of:
JUNE 30, DECEMBER 31,
1998 1997
----------------------------------
(unaudited)
13-1/4% Senior Discount Notes
("13-1/4% Notes") $ 37,407,000 $ 201,095,000
Unamortized discount (557,000) (3,768,000)
----------------------------------
36,850,000 197,327,000
9-1/2% Senior Discount Notes
("9-1/2% Notes") 165,004,000 -
6% Convertible Subordinated Notes
("Convertible Notes") 86,250,000 -
----------------------------------
288,104,000 197,327,000
Less current portion 36,692,000 -
----------------------------------
$ 251,412,000 $ 197,327,000
==================================
In February 1998, the Company offered to purchase for cash all of the
outstanding 13-1/4% Notes at the accreted value of $869.12 per $1,000 principal
amount. In March 1998, upon the expiration of the offer, $232,469,000 principal
amount at maturity (book value of $167,829,000) of 13-1/4% Notes were tendered
and the Company paid approximately $202,043,000. The Company recorded an
extraordinary loss from the early extinguishment of debt of $38,066,000 as a
result of this transaction, including the write-off of unamortized deferred
financing costs of $3,392,000. In July 1998, the Company paid cash of
approximately $42,976,000 to redeem $48,822,000 principal amount at maturity
(book value of $36,692,000 at June 30, 1998) of 13-1/4% Notes. The Company
recorded an additional extraordinary loss from the early extinguishment of debt
of approximately $6,800,000 from this redemption in the third quarter of 1998.
The original issue discount of the 13-1/4% Notes outstanding subsequent to this
redemption accretes at a rate of 13-1/4%, compounded semiannually, to an
aggregate principal amount of $210,000 by August 15, 2000.
In March 1998, the Company issued ECU 235,000,000 ($257,137,000) aggregate
principal amount of 9-1/2% Senior Discount Notes due 2005 and $86,250,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2005. The
9-1/2% Notes were issued at a price to the public of 62.455% or ECU 146,769,000
($159,553,000 on the date of issuance). The Company received net proceeds of ECU
142,366,000 ($154,766,000 on the date of issuance) and $83,447,000 after
discounts and commissions from the issuance of the 9-1/2% Notes and the
Convertible Notes, respectively. Discounts, commissions and other fees incurred
of $8,254,000 were included in deferred financing costs. The Company used most
of the proceeds to repurchase its 13-1/4% Notes.
The original issue discount of the 9-1/2% Notes accretes at a rate of 9-1/2%
compounded semiannually, to an aggregate principal amount of ECU 235,000,000
($257,137,000) by April 1, 2003. Interest will thereafter accrue at 9-1/2% per
annum, payable semiannually beginning on October 1, 2003. The 9-1/2% Notes are
unsecured obligations of the Company and are effectively subordinated to all
existing and future indebtedness and other liabilities of the Company and the
Company's subsidiaries. The 9-1/2% Notes may be redeemed at the Company's
option, in whole or in part, at any time on or after April 1, 2002 at a
redemption price of 104.75%
10
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE C - LONG-TERM DEBT (CONTINUED)
that declines annually to 100% in 2005, plus accrued and unpaid interest to the
date of redemption. The Indenture governing the 9-1/2% Notes contains
restrictions relating to, among other things: (i) incurrence of additional
indebtedness and the issuance of preferred stock, (ii) dividend and other
payment restrictions and (iii) mergers, consolidations and sales of assets.
Interest payments on the Convertible Notes begin on October 1, 1998 and interest
is payable every six months thereafter. The Convertible Notes mature on April 1,
2005. The Convertible Notes are unsecured obligations convertible into shares of
common stock prior to maturity at a conversion price of $39.95 per share,
subject to adjustment. There are approximately 2,159,000 shares of common stock
reserved for issuance upon conversion of the Convertible Notes. The Convertible
Notes are redeemable, in whole or in part, at the option of the Company at any
time on or after April 4, 2001 at a redemption price of 103.429% that declines
annually to 100% in 2005, in each case together with accrued and unpaid interest
to the redemption date.
NOTE D - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $ 3,373,000 $ (7,777,000) $ 1,620,000 $ (21,511,000)
Extraordinary item - - (38,066,000) -
-------------------------------------------------------------------------
Net income (loss) $ 3,373,000 $ (7,777,000) $ (36,446,000) $ (21,511,000)
-------------------------------------------------------------------------
Denominator for basic net income (loss) per
common share 16,563,000 16,088,000 16,492,000 16,077,000
Effect of dilutive securities:
Stock options 1,671,000 - 1,556,000 -
Warrants 330,000 - 280,000 -
-------------------------------------------------------------------------
Denominator for diluted net income (loss) per
common share 18,564,000 16,088,000 18,328,000 16,077,000
-------------------------------------------------------------------------
Basic net income (loss) per common share:
Income (loss) before extraordinary item $ .20 $ (.48) $ .10 $ (1.34)
Extraordinary item - - (2.31) -
-------------------------------------------------------------------------
Net income (loss) $ .20 $ (.48) $ (2.21) $ (1.34)
=========================================================================
Diluted net income (loss) per common share:
Income (loss) before extraordinary item $ .18 $ (.48) $ .09 $ (1.34)
Extraordinary item - - (2.08) -
-------------------------------------------------------------------------
Net income (loss) $ .18 $ (.48) $ (1.99) $ (1.34)
=========================================================================
</TABLE>
11
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
In June 1998, the Ministry of Communications (the "MOC") in Italy announced that
the Wind consortium was the winning bidder for the third nationwide GSM license.
Wind is owned by Deutsche Telekom, France Telecom and Enel SpA, the state-owned
Italian electric company. According to press reports, the Wind consortium plans
to launch its complete cellular phone services by March 1999. Wind will begin
technical tests in Rome and Milan and the first commercial services could be
ready by December in those two cities. The MOC intends to begin the process for
a fourth mobile license tender, which could begin by the end of 1998.
Three Months Ended June 30, 1998 and 1997
- -----------------------------------------
Equity in net income (loss) of Omnitel increased to income of $11,828,000 from a
loss of $1,475,000. The change is due to the change in Omnitel's share of OPI's
net income (loss) to income of $80,735,000 from a loss of $9,456,000. OPI's net
income (loss) changed to income of $115,393,000 from a loss of $13,529,000 as a
result of a 137% increase in operating revenues with only a 94% increase in
operating expenses (percentage changes are calculated based on the results of
operations in Italian lire). OPI reported that it had approximately 3,900,000
and 1,255,000 subscribers as of June 30, 1998 and 1997, respectively.
General and administrative expenses decreased to $609,000 from $753,000
primarily because CCII reduced its efforts to obtain new licenses.
Interest income and other, net, increased to $1,683,000 from $1,174,000
primarily because of an increase in funds available for investment.
Interest expense increased to $6,774,000 from $6,545,000 due to the issuance of
the 9-1/2% Notes and Convertible Notes in March 1998. This increase was offset
by a decrease in interest expense due to the purchase of $232,469,000 principal
amount at maturity of 13-1/4% Notes in March 1998.
Foreign currency translation losses of $2,582,000 in 1998 are due to the
issuance of new debt denominated in ECU's in March 1998 and unfavorable changes
in the exchange rate subsequent to the issuance.
Six Months Ended June 30, 1998 and 1997
- ---------------------------------------
Equity in net income (loss) of Omnitel increased to income of $15,238,000 from a
loss of $8,612,000. The change is due to the change in Omnitel's share of OPI's
net income (loss) to income of $103,987,000 from a loss of $58,040,000. OPI's
net income (loss) changed to income of $148,610,000 from a loss of $82,935,000
as a result of a 148% increase in operating revenues with only a 73% increase in
operating expenses (percentage changes are calculated based on the results of
operations in Italian lire).
General and administrative expenses decreased to $1,172,000 from $1,847,000
primarily because CCII reduced its efforts to obtain new licenses.
12
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
Interest income and other, net, increased to $2,890,000 from $2,184,000
primarily because of an increase in funds available for investment.
Interest expense increased to $13,967,000 from $12,881,000 due to the issuance
of the 9-1/2% Notes and Convertible Notes in March 1998. This increase was
offset by a decrease in interest expense due to the purchase of $232,469,000
principal amount at maturity of 13-1/4% Notes in March 1998.
Foreign currency translation losses of $1,022,000 in 1998 are due to the
issuance of new debt denominated in ECU's in March 1998 and unfavorable changes
in the exchange rate subsequent to the issuance.
The Company recorded an extraordinary loss of $38,066,000 from the purchase of
the 13-1/4% Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily based upon the agreements and
requirements of the joint ventures in which it is now or may become a
participant. The Company also requires capital to pay for corporate overhead
expenses, personnel costs, interest and taxes, as well as capital to explore
other opportunities that may arise. The Company has no material commitments for
capital expenditures, except as described below. The Company expects that cash
and cash equivalents on hand will be sufficient to meet all obligations of the
Company at least through the next twelve months. Italian lire and ECU's have
been translated solely for the convenience of the reader at an exchange rate of
1,753.30 lire per U.S. dollar and $1.1062 per ECU, the Noon Buying Rates on
August 7, 1998.
As a result of the award of Italy's second GSM cellular license to OPI, OPI
required capital to construct its cellular system and to fund its operations.
OPI received capital contributions of 1,450 billion lire ($827 million) from its
partners - 1,015 billion lire ($579 million) from Omnitel and 435 billion lire
($248 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 ($593 million). The Company's total
cumulative contribution to Omnitel is approximately 152.5 billion lire ($96.8
million at the exchange rates in effect at the time of each contribution). In
addition, OPI originally arranged a syndicated bank loan facility for 1,800
billion lire ($1.03 billion). On August 29, 1997, OPI signed an Amended and
Restated Facility Agreement which, among other things, provided for an increase
in the facility of 1,000 billion lire ($570 million) from 1,800 billion lire to
2,800 billion lire ($1.6 billion). OPI also has a number of other credit and
subordinated debt facilities totaling approximately 1,000 billion lire. As of
June 30, 1998, OPI had approximately 1,500 billion lire ($856 million) available
under its facilities.
On October 2, 1997, the Board of Directors of Omnitel approved a proposal to
make available to OPI a subordinated credit facility of 70 billion lire ($40
million) as soon as OPI's indebtedness amounts to 2,200 billion lire ($1.3
billion) or in the event of default by OPI under the facility.
13
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
OPI has provided an approximate 219 billion lire ($125 million) performance bond
that requires payments to the Italian government if OPI fails to meet certain
operational targets. In July 1998, OPI issued a letter to the Ministry of
Communications stating that the parameters required by May 1998 specified in the
performance bond were successfully achieved. OPI is required to pay royalties to
the MOC in amounts not less than 51 billion lire ($29 million) for 1998 and 77.1
billion lire ($44 million) for 1999, subject in each year to reduction only due
to any proportionate reduction of the royalty percentage to less than 3.5%. OPI
is also required to maintain the declared stockholding majority of OPI until
February 1, 2000, the performance bond's date of maturity. Failure to achieve
the objectives specified in the performance bond could result in charges to OPI.
The Company's maximum liability under the performance bond is approximately 22.5
billion lire ($13 million), reflecting its proportionate interest in OPI.
Omnitel has committed to purchase 70% of OPI's forfeited stock warrants granted
to OPI executives in connection with OPI's stock option plan. The warrants could
be sold in the period between March 30, 2000 and March 31, 2001. On March 25,
1998, the Board of Directors of OPI approved a valuation of the warrants equal
to lire 12,729, determined as if the purchase would take place on June 30, 1998.
The Company has not been successful in obtaining any new cellular licenses since
there is more competition for licenses and the costs of obtaining them has
increased. This has occurred because more companies recognize the potential
value of cellular licenses and governments increasingly realize they can extract
some part of this value from license applicants. There can be no assurance that
the Company will be successful in obtaining new cellular licenses or in
developing other opportunities in the future.
In August 1995, the Company issued $281,571,000 aggregate principal amount at
maturity of 13-1/4% Senior Discount Notes due 2000 and 422,356 warrants to
purchase 475,573 shares of common stock. The 13-1/4% Notes were issued at a
price to the public of 52.783% or $148,622,000. In March 1998, pursuant to the
Company's offer to purchase for cash all of the outstanding 13-1/4% Notes at the
accreted value of $869.12 per $1,000 principal amount, $232,469,000 principal
amount at maturity of 13-1/4% Notes were purchased for cash of approximately
$202,043,000. In July 1998, the Company paid cash of approximately $42,976,000
to redeem $48,822,000 principal amount at maturity of 13-1/4% Notes. The
original issue discount of the 13-1/4% Notes outstanding subsequent to this
redemption accretes at a rate of 13-1/4%, compounded semiannually, to an
aggregate principal amount of $210,000 by August 15, 2000.
In March 1998, the Company issued ECU 235,000,000 ($259,957,000) aggregate
principal amount of 9-1/2% Senior Discount Notes due 2005 and $86,250,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2005. The
9-1/2% Notes were issued at a price to the public of 62.455% or ECU 146,769,000
($159,553,000 on the date of issuance). The Company received net proceeds of ECU
142,366,000 ($154,766,000 on the date of issuance) and $83,447,000, after
discounts and commissions, from the issuance of the 9-1/2% Notes and the
Convertible Notes, respectively.
The original issue discount of the 9-1/2% Notes accretes at a rate of 9-1/2%
compounded semiannually, to an aggregate principal amount of ECU 235,000,000
($259,957,000) by April 1, 2003. Interest will thereafter accrue at 9-1/2% per
annum, payable semiannually beginning on October 1, 2003. The 9-1/2% Notes are
unsecured obligations of the Company and are effectively subordinated to all
existing
14
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
and future indebtedness and other liabilities of the Company and the Company's
subsidiaries. The 9-1/2% Notes may be redeemed at the Company's option, in whole
or in part, at any time on or after April 1, 2002 at a redemption price of
104.75% that declines annually to 100% in 2005, plus accrued and unpaid interest
to the date of redemption. The Indenture governing the 9-1/2% Notes contains
restrictions relating to, among other things: (i) incurrence of additional
indebtedness and the issuance of preferred stock, (ii) dividend and other
payment restrictions and (iii) mergers, consolidations and sales of assets.
Interest payments on the Convertible Notes begin on October 1, 1998 and interest
is payable every six months thereafter. The Convertible Notes mature on April 1,
2005. The Convertible Notes are unsecured obligations convertible into shares of
common stock prior to maturity at a conversion price of $39.95 per share,
subject to adjustment. There are approximately 2,159,000 shares of common stock
reserved for issuance upon conversion of the Convertible Notes. The Convertible
Notes are redeemable, in whole or in part, at the option of the Company at any
time on or after April 4, 2001 at a redemption price of 103.429% that declines
annually to 100% in 2005, in each case together with accrued and unpaid interest
to the redemption date.
To the extent that the Company obtains financing in U.S. dollars and ECU's and
the Company's future commitments to Omnitel are in Italian lire, it will
encounter currency exchange rate risks. OPI's revenues are received in Italian
lire. Currently there are no foreign exchange controls in Italy. Thus, although
no such payments have been made to date, the current foreign exchange rules
would allow Omnitel and OPI to export cash, representing dividends, interest or
repayment of loans. There can be no assurance that foreign exchange restrictions
will not be introduced in the future.
The Company is primarily a holding company with limited business operations of
its own. The Company's assets consist primarily of cash and cash equivalents and
its ownership interest in Omnitel. The Company does not hold, nor is it likely
that the Company will hold, a majority interest in any operating systems. The
Company's minority voting position in Omnitel currently precludes it from
controlling Omnitel or OPI, even though the Company is involved in the
management of Omnitel and intends to participate in the future only in operating
companies in which it can be involved in management. Thus, the Company may be
unable to cause the implementation of strategies that it favors and, in the
event of a disagreement between the Company and one or more of its partners, the
strategies adopted and actions taken by an affiliated company may in some cases
be contrary to the Company's preferred strategies and actions. In addition, the
Company may be unable to access the cash flow of affiliated companies since: (i)
it does not have the requisite control to cause such entities to pay dividends,
(ii) substantially all of such entities are expected to be parties to credit or
other borrowing agreements that severely restrict or prohibit the payment of
dividends, and such entities are likely to continue to be subject to such
restrictions and prohibitions for the foreseeable future and (iii) some
countries tax payment and repatriation of dividends. As a result, the Company
does not expect to receive significant cash through dividends or other
distributions from an affiliate in the foreseeable future.
Because the Company does not expect significant cash flow in the foreseeable
future, its ability to repay the 9-1/2% Notes and the Convertible Notes at
maturity will be dependent on developing one or more sources of cash at or prior
to maturity. The Company may (i) seek to refinance all or a portion of the Notes
at maturity through sales of additional debt or equity securities of the
Company, (ii) if possible
15
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
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 provided by operating activities was $712,000 in 1998 and cash used in
operating activities was $840,000 in 1997. This change is primarily due to an
increase in interest income and a decrease in general and administrative
expenses. Cash provided by investing activities was $25,040,000 in 1998 as a
result of proceeds from sales of marketable securities, net of purchases.
Proceeds from borrowing, net of financing costs of $237,549,000 in 1998 is
comprised of the proceeds from the issuance of the 9-1/2% Notes and the
Convertible Notes of $245,803,000, net of financing costs paid of $8,254,000.
YEAR 2000
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. OPI has informed the Company that
it is assessing both the internal readiness of its computer systems and the
compliance of the computer systems of certain significant customers and vendors
for handling the year 2000. The Company believes, based on its knowledge of
OPI's information technology practices, that OPI will implement successfully the
systems and programming changes necessary to address year 2000 issues, and the
Company does not believe that the cost of such actions will have a material
adverse effect on OPI. The Company can make no assurance, however, that there
will not be a delay in, or increased costs associated with, the implementation
of such changes, and OPI's inability to implement such changes could have an
adverse effect on OPI. In addition, the failure of certain of OPI's significant
customers and vendors to address the year 2000 issue could have a material
adverse effect on OPI.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein constitute "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995.
When used herein, the words, "believe," "anticipate," "should," "intend,"
"plan," "will," "expects," "estimates," "projects," "positioned," "strategy,"
and similar expressions identify such forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from those
contemplated, projected, forecasted, estimated or budgeted, whether expressed or
implied, by such forward-looking statements. Such factors include the following:
general economic and business
16
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
conditions in Italy, industry trends, OPI's ability to continue to design and
build its network, install facilities, obtain and maintain any required
government licenses or approvals and finance construction and development, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions, as well as assumptions about customer acceptance, churn rates,
overall market penetration and competition from providers of alternative
services, the impact of new business opportunities requiring significant
up-front investment, and availability, terms and deployment of capital.
17
<PAGE>
Cellular Communications International, Inc. and Subsidiaries
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 3, 1998, the Company held its annual meeting of stockholders.
The following management proposals were adopted: (i) the reelection of
Sidney R. Knafel and Del Mintz to the Board of Directors, (ii) the
ratification of the selection of Ernst & Young LLP as the Company's
independent auditors for 1998 and (iii) an amendment of the Fourth
Article of the Company's Restated Certificate of Incorporation.
The stockholders approved the election of Sidney R. Knafel by a vote
of 10,529,039 shares in favor and 21,065 shares withheld from voting.
The stockholders approved the election of Del Mintz by a vote of
10,532,339 shares in favor and 17,765 shares withheld from voting. The
stockholders approved the second proposal by a vote of 10,538,052
shares in favor, 9,213 shares against and 2,839 shares abstaining from
voting. The stockholders approved the third proposal by a vote of
9,826,296 shares in favor, 585,049 shares against and 4,359 shares
abstaining from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1998, the Company filed a current
report on Form 8-K dated June 4, 1998, reporting under Item 5, Other
Events, that the Company amended its Restated Certificate of
Incorporation to increase its authorized common stock to 75,000,000
shares, par value $.01 per share, from 25,000,000 shares, par value
$.01 per share. No financial statements were filed with this report.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLULAR COMMUNICATIONS INTERNATIONAL, INC.
Date: August 10, 1998 By: /s/ Stanton N. Williams
-------------------------------
Stanton N. Williams
Executive Vice President and
Chief Financial Officer
Date: August 10, 1998 By: /s/ Gregg Gorelick
-------------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
19
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