<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1997
[ ] 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
<PAGE> 2
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/A-1 or any
amendment to this Form 10-K/A-1. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates at March 20, 1998, valued by reference to the closing sale price
for the registrant's Common Stock on the Nasdaq Stock Market's National Market,
was approximately $609,730,000.
Number of shares of Common Stock
outstanding as at March 20, 1998: 11,024,868 (16,537,302 as adjusted for the
three-for-two stock split by way of stock
dividend, to be paid on April 14, 1998).
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Document Part of 10-K in which
------------ -----------------------
Incorporated
-------------
Definitive proxy statement for the 1998 Part III
Annual Meeting of the Stockholders of
Cellular Communications International, Inc.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART IV Page
______ -----
ITEM 14 Exhibits, Financial Statements Schedules,
and Reports on Form 8-K ................... 1
Exhibit Index ............................. 2
Signatures ................................ 4
</TABLE>
The annual report on form 10-K of Cellular Communications
International, Inc. for the fiscal year ended December 31, 1997
is being amended by this Form 10-K/A-1 for the following reasons:
(i) to include in Item 14(d) the financial statements of Omnitel
Sistemi Rodiocellulari Italiani S.p.A. and Omnitel Pronto Italia
S.p.A. and (ii) to include as Exhibit 23.1 the consent of Coopers
& Lybrand S.p.A.
<PAGE> 4
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
- ----------------------------------------
SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements - See list of Financial
Statements on F-1.*
(2) Financial Statement Schedules - See list of
Financial Statement Schedules on page F-1.*
(3) Exhibits - See Exhibit Index on page 2.
(b) During the quarter ended December 31, 1997 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
Statement Schedules on page F-1.* See the Financial
Statements of Omnitel Sistemi Radiocellulari Italiani
S.p.A. and Omnitel Pronto Italia S.p.A. following.
- -------------
* previously filed
1
<PAGE> 5
EXHIBIT INDEX
Exhibit No.
- -----------
3.1 Restated Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1, 1991 Form 10-K, File No. O-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).
4.4(a) First Supplemental Indenture, dated as of February 23, 1998, to
Indenture dated as of August 22, 1995.*
10.1 Description of Omnitel Joint Venture Agreement (Incorporated by
reference to Exhibit 10.1, 1996 Form 10-K, File No. 0-19363).*
10.2 Compensation Plan Agreements, as amended and restated effective
June 3, 1997.*
10.3 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.
27.1 Financial Data Schedule, for the year ended December 31, 1997.*
- -------------------
* Previously filed.
2
<PAGE> 6
27.2 Restated Financial Data Schedule, for the quarter ended
September 30, 1997.*
27.3 Restated Financial Data Schedule, for the quarter ended
June 30, 1997.*
27.4 Restated Financial Data Schedule, for the quarter ended
March 31, 1997.*
27.5 Restated Financial Data Schedule, for the quarter ended
December 31, 1996.*
27.6 Restated Financial Data Schedule, for the quarter ended
September 30, 1996.*
27.7 Restated Financial Data Schedule, for the quarter ended
June 30, 1996.*
27.8 Restated Financial Data Schedule, for the quarter ended
March 31, 1996.*
- -------------------
* Previously filed.
3
<PAGE> 7
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.
Dated: April 9, 1997
CELLULAR COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ Stanton N. Williams
-----------------------------------------------
Name: Stanton N. Williams
Title: Vice President-Chief Financial Officer
4
<PAGE> 8
[Letterhead of COOPERS & LYBRAND S.p.A.]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Omnitel Pronto Italia S.p.A.
We have audited the accompanying balance sheets of Omnitel Pronto Italia S.p.A.
("the Company") as of December 31, 1997 and 1996 and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States of
America.
COOPERS & LYBRAND S.p.A.
Milan, Italy
March 25, 1998
S-1
<PAGE> 9
Omnitel Pronto Italia S.p.A.
Statements of Income
(in millions of Italian Lira except per share data)
<TABLE>
<CAPTION>
For the year ended
December 31,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Operating revenues:
National service - outgoing 735.519 241.254 1.322
- incoming 659.087 173.740 1.438
International roaming 118.619 42.970 352
Activations 56.685 36.995 --
Hardware and accessories 251.289 243.707 27.940
Other revenues 14.086 14.876 17.966
---------- ---------- ----------
Total operating revenues 1.835.285 753.542 49.018
---------- ---------- ----------
Operating expenses:
Cost of sales and network 1.166.003 741.138 106.187
Depreciation and amortization 305.251 203.457 35.869
Advertising 140.561 107.536 20.962
General and administrative 159.723 134.990 111.040
Provision for doubtful debtors 65.000 99.197 991
Taxes other than income taxes 3.379 7.943 6.054
---------- ---------- ----------
Total operating expenses 1.839.917 1.294.261 281.103
---------- ---------- ----------
Operating loss (4.632) (540.719) (232.085)
Interest (expenses) income, net (131.747) (95.052) 7.021
Other income, net 30.510 -- --
---------- ---------- ----------
Loss before income tax benefit (105.869) (635.771) (225.064)
Income tax benefit 13.900 196.800 --
---------- ---------- ----------
Net loss (91.969) (438.971) (225.064)
========== ========== ==========
Basic and Diluted loss per common share (88) (479) (345)
========== ========== ==========
Weighted average number of common
shares outstanding 1.050 917 652
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-2
<PAGE> 10
Omnitel Pronto Italia S.p.A.
Balance Sheets
(in millions of Italian Lira except per share data)
<TABLE>
<CAPTION>
ASSETS December 31,
-----------------------------
1997 1996
<S> <C> <C>
Cash and cash equivalents 157.308 24.517
Accounts receivable, net (Note 3) 520.932 255.197
Due from related parties (Note 4) 6.839 103.273
Other current assets (Note 5) 47.952 35.331
Inventories, net (Note 6) 35.676 36.438
Deferred tax asset (Note 13) 154.000 --
------------ ------------
Total current assets 922.707 454.756
------------ ------------
Equipment and furniture 154.115 90.096
Leasehold improvements 50.228 40.928
Network 1.499.305 1.041.890
Construction-in-progress 38.972 34.906
Less: Accumulated depreciation (360.598) (149.669)
------------ ------------
Total property, plant and equipment, net (Note 7) 1.382.022 1.058.151
------------ ------------
Concession and accessory charges, net (Note 8) 711.070 769.881
Other intangible assets (Note 8) 124.576 90.527
Deferred tax asset (Note 13) 56.700 196.800
Other assets (Note 9) 65.659 22.656
------------ ------------
Total non-current assets 2.340.027 2.138.015
------------ ------------
Total assets 3.262.734 2.592.771
============ ============
</TABLE>
"continued"
The accompanying notes are an integral part of these financial statements.
S-3
<PAGE> 11
Omnitel Pronto Italia S.p.A.
Balance Sheets
(in millions of Italian Lira except per share data)
"continued"
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
------------------------------
1997 1996
<S> <C> <C>
Short-term debt (Note 10) 68.563 112.968
Trade payables 686.266 546.629
Due to related parties (Note 4) 34.737 49.617
Other current liabilities, accrued liabilities and
deferred income (Note 11) 281.097 140.722
------------- -------------
Total current liabilities 1.070.663 849.936
------------- -------------
Long-term debt (Note 10) 1.511.021 983.369
Accrual for severance pay (Note 12) 26.245 18.157
Other liabilities 3.613 --
------------- -------------
Total liabilities 2.611.542 1.851.462
------------- -------------
Commitments and contingencies (Note 16)
Common stock (No. 1,050,000,000, par value
Lit. 1,000 authorized issued and outstanding) 1.050.000 1.050.000
Additional paid-in capital 400.000 400.000
Accumulated deficit (798.808) (708.691)
------------- -------------
Total stockholders' equity (Note 17) 651.192 741.309
------------- -------------
Total liabilities and stockholders' equity 3.262.734 2.592.771
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-4
<PAGE> 12
Omnitel Pronto Italia S.p.A.
Statements of Cash Flows
(in millions of Italian Lira)
<TABLE>
<CAPTION>
For the year ended
December 31,
-----------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss (91.969) (438.971) (225.064)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 305.251 203.457 35.869
Provision for severance pay 9.458 7.477 3.969
Provision for doubtful debtors 65.000 99.197 991
Realization of deferred tax asset (13.900) (196.800) --
Write off of property, plant and equipment 5.043 3.741 --
Write off of intangible assets 611 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable (330.735) (310.366) (45.019)
Decrease (Increase) in amounts due from related
parties 96.434 (67.158) (32.429)
Increase in other current assets (12.621) (403) (23.578)
Decrease (Increase) in inventories, net 762 1.424 (37.862)
Increase in trade payables 139.637 51.057 119.766
Decrease in amounts due to related parties (14.880) (34.602) (5.480)
Increase in other current liabilities and accrued
liabilities 140.375 113.720 17.490
(Distribution) Transfer of provision for severance
pay (1.370) (387) 3.063
Increase in other liabilities 3.613 -- --
Increase in other assets (8.782) (7.029) (389)
------------- ------------- -------------
Net cash provided by (used in) operating
activities 291.927 (575.643) (188.673)
------------- ------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment (540.726) (571.127) (585.417)
Additions to intangible assets (44.838) (40.942) (81.763)
Increase in trade payables -- -- 349.409
------------- ------------- -------------
Net cash used in investing activities (585.564) (612.069) (317.771)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 650.000 400.000
Proceeds from issuance of stock options 1.852 1.140 --
Tax on common stock subscriptions -- (6.500) (3.980)
Proceeds from loans 2.085.421 983.369 100.000
Repayment of loans (1.496.569) (500.000) --
(Repayments) Proceeds from short-term loans and bank
overdrafts (105.605) 82.373 30.515
Commission and other charges capitalized on
syndicated loan (24.450) -- (39.231)
Deposit of Special Cash Collateral (45.365) (11.144) --
Receipt of Special Cash Collateral 11.144 -- --
------------- ------------- -------------
Net cash provided by financing activities 426.428 1.199.238 487.304
------------- ------------- -------------
Increase in cash and cash equivalents 132.791 11.526 (19.140)
Cash and cash equivalents at the beginning of the year 24.517 12.991 32.131
------------- ------------- -------------
Cash and cash equivalents at the end of the year 157.308 24.517 12.991
============= ============= =============
Supplemental disclosures of Cash Flows information:
Cash paid for: - Interest 121.621 73.018 291
============= ============= =============
- Income taxes -- -- --
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-5
<PAGE> 13
Omnitel Pronto Italia S.p.A.
Statements of Changes in Stockholders' Equity
(in millions of Italian Lira)
<TABLE>
<CAPTION>
Additional
Common stock paid-in Accumulated
Shares Amount capital deficit Total
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 400.0 400.000 -- (35.316) 364.684
Issuance 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 issuance 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
Issuance 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 issuance of common stock -- -- (6.500) (6.500)
Net loss for the period -- -- (438.971) (438.971)
Warrants issued 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
Net loss for the period -- -- (91.969) (91.969)
Warrants issued pursuant to
stock option plans -- -- 1.852 1.852
------------ ------------ ------------ ------------ ------------
Balance as of December 31, 1997 1,050.0 1.050.000 400.000 (798.808) 651.192
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-6
<PAGE> 14
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. ("Omnitel
S.R.I.") and Pronto Italia S.p.A. ("P.I.") and changed its name to Omnitel
Pronto Italia S.p.A. (the "Company").
The Company's corporate purpose is to operate a cellular telephone system
in Italy, based on the GSM standard (Global System for Mobile
Communications).
During 1994, the Company obtained a fifteen year license (the "License")
to operate a cellular telephone network effective February 1, 1995.
Between October 3, 1995 and December 6, 1995, the Company carried out an
experimental service exercise and then launched operational service from
December 7, 1995.
Activities carried out during 1996 mainly related to the construction of
the Company's cellular telephone network ("Network") and launching
operational service. On March 13, 1996, in accordance with provisions of
the License, national roaming access was obtained from Telecom Italia
Mobile S.p.A. ("TIM"), thus granting the Company the same operational
level as TIM, its competitor. On December 7, 1997, the national roaming
agreement was canceled in accordance with the License.
During 1997, the Company has become fully operational from a commercial
standpoint. The Company is continuing the construction of the Network.
As of December 31, 1997 the stockholders of the Company were as follows:
<TABLE>
<S> <C>
Omnitel Sistemi Radiocellulari Italiani S.p.A. 70%
Pronto Italia S.p.A. 30%
---------
Total 100%
=========
</TABLE>
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 Italian law, the Company's financial statements must be
approved at the annual stockholders' meeting. The financial statements for
1997 have not yet been approved.
S-7
<PAGE> 15
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
2. Summary of significant accounting policies
The following is a summary of the 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 conformity with United States Generally Accepted
Accounting Principles ("U.S. GAAP"), which requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the accounting period.
Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates
relate to provision for doubtful debtors, the estimate of
depreciation and amortization for fixed assets and intangibles,
respectively, and the valuation allowance for deferred tax assets.
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
the 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 debtors.
Receivables and payables denominated in foreign currencies are
stated at the year-end exchange rates. The resulting gains or losses
are recorded in the statement of income.
S-8
<PAGE> 16
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
2. Summary of significant accounting policies, continued
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 term,
if shorter. Major replacements and improvements are capitalized.
Maintenance and repairs which do not improve or extend the useful
lives of the respective assets are charged to operations when
incurred. The assets and related accumulated depreciation or
amortization accounts are adjusted for assets retirements or
disposals, with the resulting gain or loss reported within operating
expenses.
2.5 Assets under construction
Assets under construction consist of the direct costs related to the
construction of the network and include costs such as hardware,
software, direct labor 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 were charged to operations when incurred. The
depreciation of completed and operational sites commenced at the
launch date of operations on 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.
2.7 Inventories
Inventories, consisting principally of handsets and accessories
related to the Company's product distribution business, are stated
at the lower of cost (first-in, first-out method) or market.
S-9
<PAGE> 17
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
2. Summary of significant accounting policies, continued
2.8 Income taxes
Deferred income tax balances reflect temporary differences between
the carrying amount of assets and liabilities in the financial
statements and their corresponding tax bases. They are stated at the
enacted tax rates expected to be in effect when the taxes are
actually paid or recovered. If it is more likely than not that some
portion or all of a deferral tax asset will not be realized, a
valuation allowance is recognized.
2.9 Accrual for severance pay
Under Italian law, deferred compensation accrues in favor 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 (approximately 1/12th of total
remuneration) and is subject to annual revaluations based on
increases in the Italian cost-of-living index ("ISTAT").
2.10 Financial instruments
The Company utilizes derivative financial instruments such as
interest rate swaps, collars, caps and forward rate agreements to
limit exposure to changing interest rates. The Company 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, collars, caps and forward rate
agreements are reflected as an increase or decrease of the interest
expense during the period.
2.11 Commissions on loan facilities
Up-front costs such as commissions incurred in respect of the
Facility Agreement and the Amended and Restated Facility Agreement
(refer to note 10) have been capitalized and are being amortized on
a straight-line basis over the period of planned utilization of the
Facility, which approximates the interest method. Amortization may
be increased on a pro-rata basis based upon the Company's excess
cash flows, as stipulated in the Amended and Restated Facility
Agreement.
S-10
<PAGE> 18
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
2. Summary of significant accounting policies, continued
2.12 Revenue recognition
Operating revenues for communications services, which exclude value
added tax and other sales tax are recognized when the services are
rendered. Unbilled revenues resulting from cellular services
provided to customers are calculated from the billing cycle date to
the end of each month. Amounts received from subscribers for prepaid
traffic or "Rechargeable" cellular cards are reported as deferred
revenue, until such time as the subscriber utilizes the traffic.
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 charged to operations as incurred.
2.14 Advertising costs
Advertising costs are charged to the statement of income in the
period in which the advertisement is released to the market.
2.15 Impairment of assets
Management regularly reviews individual tangible and intangible
assets by evaluating the future cash flows of the business to
determine the recoverability of the assets and recognizes, on a
current basis, any diminution in value.
2.16 Stock options
The Company accounts for stock based compensations, granted in the
form of stock warrants, in accordance with APB Opinion No. 25
"Accounting for Stock Issued to Employees." Disclosures have been
made in accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation".
2.17 Litigation matters
Periodically, the Company is involved in litigious matters.
Management of the Company evaluates these matters and records a
provision, when determined necessary.
S-11
<PAGE> 19
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
2. Summary of significant accounting policies, continued
2.18 New accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" ("SFAS 128"), which is required to be adopted
for all financial statements issued for periods ending after
December 15, 1997. SFAS 128 redefines the principles for calculating
earnings per share ("EPS") and requires presentation of Basic EPS
and Diluted EPS for those entities with complex capital structures.
SFAS 128 also requires that all prior period earnings per share data
presented with the current year's data is restated in accordance
with the new provisions. The adoption of SFAS 128 had no effect upon
the current year's or the prior years' earnings per share data.
2.19 Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation.
3. Accounts receivable, net
Accounts receivable, net consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
<S> <C> <C>
Subscribers - communication services 274.526 160.382
Other communication services 343.362 155.492
Dealers - product distribution business 68.232 39.511
Less: Provision for bad debts (165.188) (100.188)
----------- ------------
520.932 255.197
=========== ============
</TABLE>
S-12
<PAGE> 20
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
4. Transactions with related parties
Related party balances, including V.A.T., are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------- -------------------------
Receivables Payables Receivables Payables
<S> <C> <C> <C> <C>
Omnitel S.R.I 200 -- -- --
P.I 21 -- -- --
Omnitel Gestioni S.p.A 2.004 (1.041) 1.776 (172)
Olivetti Group # 4.338 (32.062) 101.374 (43.975)
AirTouch International* -- (499) 6 (1.873)
Bell Atlantic* 247 (491) 89 (2.600)
Telia International* -- (174) -- (346)
C.C.I.* 28 -- 28 --
Lehman Brothers* -- -- -- (453)
Mannesmann* -- (469) -- (198)
------- ------- ------- -------
Total 6.838 (34.736) 103.273 (49.617)
======= ======= ======= =======
</TABLE>
* - Shareholders of Omnitel S.R.I. or P.I.
# - Included within the Olivetti Group is Ing.C.Olivetti S.p.A., which is
a shareholder of Omnitel S.R.I.
As of December 31, 1996, the Company was owed approximately Lit. 99
billion from Olivetti Group companies primarily related to V.A.T.. In
1997, the Company began to pay V.A.T. to the Ministry of Finance.
The analysis of amounts charged to/by the Company by/to related parties,
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
Costs Income Costs Income Costs Income
<S> <C> <C> <C> <C> <C> <C>
Omnitel S.R.I -- 200 -- -- -- --
P.I -- -- -- -- 1.700 --
Omnitel Gestioni 1.742 7.796 2.100 4.014 -- --
Olivetti Group 50.185 2.528 58.029 2.422 54.555 65
AirTouch International 2.606 6 5.913 6 12.259 13
Bell Atlantic 1.838 182 4.365 57 5.989 --
Telia International -- -- 586 -- 2.313 --
C.C.I -- -- 4 -- 486 --
Lehman Brothers -- -- 453 -- -- --
Mannesmann 2.197 10.082 265 -- 314 --
---------- ---------- ---------- ---------- ---------- ----------
Total 58.568 20.794 71.715 6.499 77.616 78
========== ========== ========== ========== ========== ==========
</TABLE>
S-13
<PAGE> 21
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
4. Transactions with related parties, continued
The amounts charged by related parties in 1997 included Lit. 32 billion
for hardware, software and other costs, that have been capitalized. The
other expenses were primarily for network costs, general and
administrative expenses and consultancy fees. The income amounts were
mainly for international roaming, traffic and hardware sales.
5. Other current assets
The balances as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
V.A.T. and recoverable withholding tax 12.915 14.855
Prepaid rent 21.511 15.112
Prepaid financial charges 1.834 1.175
Accrued financial income 4.777 136
Advances to suppliers 5.262 3.241
Other 1.653 812
------------ ------------
47.952 35.331
============ ============
</TABLE>
Prepaid rent primarily relates to contracts for the utilization of Telecom
Italia S.p.A.'s network and to the Network.
Prepaid financial charges include Lit. 697 million as of December 31, 1997
and Lit. 996 million as of December 31, 1996 relating to the deferral of
premiums paid in order to obtain interest rate swaps (see note 15).
6. Inventories
Inventories, net of the obsolescence reserve, consist of:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
<S> <C> <C>
Cellular phones and accessories 36.538 37.884
Cellular phones obsolescence reserve (6.375) (5.448)
Sim cards 5.513 4.002
-------- --------
35.676 36.438
======== ========
</TABLE>
S-14
<PAGE> 22
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
7. Property, plant and equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 Estimated
at cost at cost useful lives
<S> <C> <C> <C>
Technical instruments and equipment 20.740 14.425 5-5.55 years
Office furniture, equipment and other 54.770 41.751 5-8.33 years
Electrical equipment 78.605 33.920 5.55 years
Lease term or life
Leasehold improvements 50.228 40.928 of asset, if shorter
------------- -------------
204.343 131.024
------------- -------------
Network:
Specific plant 49.675 29.093 6.67 years
Radio and transmission equipment 566.416 398.955 6.67 years
Computer and electronic equipment 371.829 202.820 5.55 years
Fixtures 46.040 35.031 10 years
Know-how 236.567 204.656 Life of concession
Improvements to Network Lease term or life
properties 228.778 171.335 of asset, if shorter
------------- -------------
1.499.305 1.041.890
------------- -------------
Total cost 1.703.648 1.172.914
Less: Accumulated depreciation (360.598) (149.669)
------------- -------------
1.343.050 1.023.245
Assets under construction 38.972 34.906
------------- -------------
Net property, plant and equipment 1.382.022 1,058,151
============= =============
</TABLE>
S-15
<PAGE> 23
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
8. Intangible assets
The balances for intangible assets as of December 31, 1997 and 1996 can be
detailed as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 Estimated
at cost 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
bridge loan and performance bond 46.141 46.141
------------ ------------
Concession and accessory charges 832.724 832.724 15 years
Less: accumulated amortization (121.654) (62.843)
------------ ------------
Concession and accessory charges, net 711.070 769.881
------------ ------------
Other intangible assets
Software usage rights and other 123.628 79.573 5 years
Less: accumulated amortization (48.314) (23.763)
------------ ------------
Software usage rights and other, net 75.314 55.810
------------ ------------
Commission on syndicated loan and
other charges 63.681 39.231 10 years *
Less: accumulated amortization (14.419) (4.514)
------------ ------------
Commission on syndicated loan and
other charges, net 49.262 34.717
------------ ------------
Total other intangible assets, net 124.576 90.527
------------ ------------
Total intangible assets 835.646 860.408
============ ============
</TABLE>
* The maximum number of years is 10, however based upon excess cash
flows, as defined by the Amended and Restated Facility Agreement
(see note 10), the rate of amortization is increased accordingly.
The Company has capitalized an additional Lit. 32 billion during 1997
related to purchases of internal I.T. systems and Lit. 8 billion for the
license of software for the Network. In connection, with the Amended and
Restated Facility Agreement (see note 10), the Company has capitalized an
additional Lit. 24 billion mainly for commissions.
On November 30, 1994, the Company made a lump-sum payment (Lit. 750,000
million) for the concession by the Ministry of Communications ("M.O.C.")
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-16
<PAGE> 24
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
9. Other assets
The balances as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
<S> <C> <C>
Deposit paid to the M.O.C. for the Concession 3.000 3.000
Special Cash Collateral 45.365 11.144
Investment in Omnitel Gestioni S.p.A 3.200 3.200
Long-term receivables and others 14.094 5.312
-------- --------
65.659 22.656
======== ========
</TABLE>
The deposit paid to the M.O.C. will remain in place throughout the
duration of the concession and earned interest at 1.75% in 1997 and 3.5%
in 1996. Special cash collateral consists of deposits with banks to serve
as guarantees for purposes of securing the obligations of the Company in
connection with the Amended and Restated Facility Agreement (see note 10).
Omnitel Gestioni S.p.A. is a subsidiary that manages the mobile phone
retail shops. The shares of the Company are pledged as collateral to the
Lender Banks of the Amended and Restated Facility Agreement.
Long-term receivables relate to "Dealer Stations", to be received within
36 months after the date of installation, and amounts owed from
subscribers for sales of handsets, to be collected pro-rata during the
subsequent 24 months after the date of sale.
10. Debt
The amount due to banks and financial institutions as of December 31, 1997
and 1996 can be further detailed as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
<S> <C> <C>
Short-term debt:
Bank overdrafts 7.363 24.968
Short-term bank loans -- 88.000
FEC Credit Agreement 61.200 --
------------ ------------
Total short-term debt 68.563 112.968
------------ ------------
Long-term debt:
Facility Agreement 727.421 677.369
EIB Credit Agreement 500.000 --
EIF Subordinated Loan Agreement 100.000 --
FEC Credit Agreement 183.600 306.000
------------ ------------
Total long-term loan 1.511.021 983.369
------------ ------------
Total debt 1.579.584 1.096.337
============ ============
</TABLE>
S-17
<PAGE> 25
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
10. Debt, continued
10.1 Facility agreement
On August 29, 1997, the Company signed an amendment (the "Amended
and Restated Facility Agreement" or the "Facility") to its original
syndicated loan facility of Lit. 1,800 billion dated November 30,
1995 (the "Facility Agreement").
The Amended and Restated Facility Agreement increased the available
facility amount from Lit. 1,800 billion to Lit. 2,800 billion.
Consequently, short-term banks loans were repaid.
The facility consists of two tranches, one of Lit. 1,000 billion
linked to LIBOR (London Inter-Bank Offered Rate) ("Tranche A") and
the second tranche of Lit. 1,800 billion linked to RIBOR (Rome
Inter-Bank Offered Rate) ("Tranche B"). The margins over the LIBOR
and RIBOR rates are linked to the ratio of financial indebtedness
("F.I.") over annualized earnings before interest, tax depreciation
and amortization ("E.B.I.T.D.A") for the previous 6 months. These
margins were initially set at 1.00%, subsequently falling to a
minimum of 0.30% as the F.I./E.B.I.T.D.A. ratio declines. The first
reduction of the margins to 0.90% took place on September 16, 1997
and the second reduction to 0.40% occurred on December 16, 1997.
Commitment fees, payable quarterly in arrears, were due from the
Company on the unused amount of the Facility at a rate of 0.325% per
annum from September 1997 to December 1997 and then at the rate
which is half the margin level.
Tranche A consists of a facility for a maximum amount of Lit. 840
billion, available by way of term loan advances and/or the issue of
guarantees, and a maximum of Lit. 160 billion of revolving
short-term advances. Tranche A is available in predetermined freely
available multicurrencies, subject to appropriate currency hedging.
As of December 31, 1997, a portion of this tranche has been utilized
to serve as a guarantee required by the European Investment Bank for
a total amount of Lit. 527,500 million. Another Lit. 45,365 million
has been used for a guarantee advance which was denominated/drawn
down in Japanese Yen.
Tranche B, for a maximum amount of Lit. 1,510 billion, is available
by way of term loan advances in Italian Lira and/or the issue of
guarantees, and a maximum amount of Lit. 290 billion of revolving
short term advances in Italian Lira. As of December 31, 1997, a
portion of this tranche has been utilized to serve as guarantees
required by Finnish Export Credit Ltd. ("FEC") for a total amount of
Lit. 267,444 million and Lit. 682,056 million has been drawn down as
term loan advances.
S-18
<PAGE> 26
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
10. Debt, continued
10.1 Facility agreement, continued
The Facility and the Facility Agreement have a combined duration of
10 years. The Company can utilize drawn-downs for the first 4 years
(1995 - 1999). After a grace period of 1 year, semiannual repayment
installments will start in November, for a period of 4.5 years and
ending in November 2005.
In accordance with the Facility, utilization is limited to Lit.
2,400 billion for the period ending December 31, 1997 and then
increasing to Lit. 2,800 billion in June 1998. The Facility includes
several financial (i.e. ratios such as EBIT/Interest expense, Net
Financial Indebtedness/12 month EBITDA, 12 month EBITDA/12 month
total debt service, 12 month operating cashflow/12 month fixed
charges and current payments on EIF facility) and operating
covenants such as dividend distribution restrictions (based upon
excess cash flows), minimum territory coverage percentages (70% by
December 31, 1997). There are also provisions for the use of several
pledged Special Cash Collateral accounts under the terms of the
Facility (See note 9).
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 insurance
policies. This pledge is in favor of the financial institutions
providing the Facility.
10.2 EIB Credit Agreement
As provided by the Facility, OPI entered into a term advance
facility agreement on October 8, 1997 with the European Investment
Bank ("EIB") for a total of Lit. 796 billion. As of October 16,
1997, Lit. 500 Billion had been drawn down and was guaranteed by
Tranche A. Interest matures at LIBOR less 0.17% for advances up to
the first Lit. 500 billion and at the EIB Rate (as determined by the
Board of Directors of EIB) for advances on the remaining Lit. 296
billion. This facility is repayable in 10 predetermined semiannual
amounts, commencing on September 15, 2000. The Company received Lit.
45,365 million as Special Cash Collateral from certain underlying
banks in connection with the guarantee given by the Company for
Tranche A.
S-19
<PAGE> 27
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
10. Debt, continued
10.3 EIF Subordinated loan
Under the provisions of the Facility, the Company also finalized in
October 1997 an interest current subordinated loan agreement for
Lit. 100 billion with the European Investment Fund ("EIF"). OPI has
an obligation to pay an initial commission of 1.375% a year and
thereafter declining to 0.875% as the F.I./E.B.I.T.D.A. ratio
declines. As of December 31, 1997, the commission was 0.875%. The
Company pays interest at the rate of RIBOR, plus 0.125%. This
facility is repayable in 10 predetermined semiannual amounts,
commencing June 30, 2001.
10.4 Stockholders' Subordinated Loan
The Board of Directors of Omnitel S.R.I. and P.I. approved to make
available to OPI a subordinated credit facility of Lit. 100 billion,
when the Company's indebtedness amounts to Lit. 2,200 billion or in
any event of default of OPI under the Facility.
10.5 Nokia/Finnish Export Credit Ltd.
A commercial contract between the Company and Nokia included a
financing agreement for Lit. 306 billion signed on December 31, 1995
with FEC, a wholly owned subsidiary of the Finnish Government.
Interest is payable at LIBOR plus 0.255% during the "draw down"
period (1996) and at a fixed rate of 9% thereafter. The facility is
repayable in equal semi-annual installments over 5 years, commencing
from the completion date of October 1996. As of December 31, 1997,
the total amount owed to FEC was Lit. 244,800 million. As required
by the agreement, Lit. 61,200 million of the loan will be repaid
during 1998. This facility is guaranteed by Tranche B of the
Facility for Lit. 267,444 million (109.25% of the credit line).
10.6 Other
At December 31, 1997 the Company had unused short-term credit
facilities with several financial institutions totaling Lit. 328
billion.
The Company's weighted average interest rates for all debts
instruments that were outstanding during 1997, 1996 and 1995 were
10.42%, 13.37% and 11.23% per annum, respectively.
S-20
<PAGE> 28
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
11. Other current liabilities, accrued liabilities and deferred income
These liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
<S> <C> <C>
Tax withheld at source and annual tax on
stockholders' equity 5.371 4.556
Other tax payable 70.329 59.135
Bank interest and commission fees accrued 16.709 14.888
Payable to social security institutions 9.857 10.973
Accrued payroll 25.314 15.224
Deposits from GSM subscribers 33.000 25.600
Unutilized traffic on prepaid cards 72.665 --
Deferred monthly fees and other 18.088 6.428
Deferred credit notes 19.276 --
Other 10.488 3.918
------------ ------------
281.097 140.722
============ ============
</TABLE>
Other tax payables includes Lit. 17,702 million relating to the government
concession tax collected monthly from each customer, Lit. 14,229 million
relating to V.A.T. and Lit. 38,356 million relating to the annual
concession charge computed on GSM service gross revenues (see note 16.1).
Deposits from GSM subscribers represents the required amount to be
deposited when a subscriber opens a new GSM account and does not pay with
a direct charge to the subscriber's credit card. This amount serves as
collateral for payment of the subscriber's account if necessary and is
reimbursed to when the subscriber's account is terminated or transferred
to a direct credit card charge.
The amount representing unutilized traffic on prepaid cards represents
deferred revenue for amounts received from subscribers associated with the
new prepaid "Rechargeable" cellular cards.
12. Accrual for severance pay
Under Italian law, deferred compensation accrues in favor 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 ISTAT.
S-21
<PAGE> 29
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
12. Accrual for severance pay, continued
The balances as of year end consist of:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
Employee severance pay 25.725 17.860
Agents leaving indemnities 520 297
------------ ------------
26.245 18.157
============ ============
</TABLE>
13. Income taxes
Effective December 24, 1997, the Italian parliament enacted a new tax
decree ("IRAP"). IRAP became effective January 1, 1998 and had no effect
upon the current year's income tax calculation. The effect was that the
local tax of 16.2% ("ILOR"), as well as other taxes (i.e. tax on equity),
were abolished and replaced by IRAP at a rate of 4.25%. The national tax
of 37% ("IRPEG") remained unchanged, resulting in the new tax rate of
approximately 41.25%. The enacted tax rate for the Company for the years
1997 and 1996 was 53.2%, comprising "ILOR" tax at 16.2% and "IRPEG" tax at
37%. The largest impact of this new legislation is that it will change the
nature upon which certain items are taxed or non-tax deductible. The
calculation of taxable income for IRPEG purposes remains the same. However
in order to calculate income for IRAP purposes, certain adjustments are
necessary for items that are now non-tax deductible (generally all
employee costs, interest and certain accruals).
The deferred tax assets and liabilities as of December 31, 1997 have been
adjusted due to the enactment of IRAP. This revaluation resulted in a
reduction of deferred tax assets of approximately Lit. 50 billion.
Based on the statutory results and the estimate of investment incentive
deductions as of December 31, 1997, the Company has net operating loss
carryforwards of Lit. 1,427 billion (1996: Lit. 1,366 billion) which
expire in the years 1999 through 2002. Approximately Lit. 797 billion are
the result of investment incentives granted in the form of deductions from
taxable income.
A tax benefit has been recorded in 1997 and 1996, as management has
determined that it is more likely than not, that a portion of these assets
will be realized. No provision for current period income taxes is
necessary as the Company is in a net loss position for tax purposes.
S-22
<PAGE> 30
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
13. Income taxes, continued
Deferred tax balances as at December 31, 1997 and 1996 can be summarized
as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
<S> <C> <C>
Deferred tax assets
Start-up costs 51.653 86.866
Advertising costs 22.483 29.051
Allowance for doubtful debtors 63.803 53.856
Other 13.716 16.828
Net operating loss carryforwards 527.903 506.866
---------- ----------
Total gross deferred tax assets 679.558 693.467
---------- ----------
Deferred tax liabilities
Difference in rates of amortization of the government
concession (14.224) (21.943)
---------- ----------
Net deferred tax assets 665.334 671.524
---------- ----------
Less: Valuation allowance (454.634) (474.724)
---------- ----------
Net carrying value amount 210.700 196.800
========== ==========
</TABLE>
14. Statement of income
The following table has been included to provide additional detail of the
individual components within Cost of sales and network, which are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
Roaming costs 41.361 25.462 84
Interconnection fees 289.033 120.060 996
Hardware and accessories 271.595 266.482 62.617
Costs of Network 298.241 132.533 1.727
Commercial costs 180.526 140.272 32.665
Commissions 61.521 43.401 6.036
Other 23.726 12.928 2.062
--------- --------- ---------
1.166.003 741.138 106.187
========= ========= =========
</TABLE>
S-23
<PAGE> 31
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
15. Financial instruments
The Company has entered into interest rate swaps, caps and collars and
forward rate agreements to manage the impact of interest rate
fluctuations.
At December 31, 1997 and 1996 the Company was party to interest rate swap
agreements for hedging purposes, to periodically exchange variable rate
payments for fixed rate payments 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, and 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. During 1997,
the Company entered into forward rate agreements. These contracts are used
for hedging purposes, to lower the impact of interest rate fluctuations.
The Company recognizes gains and losses associated with the contracts in
relationship to the maturity dates of the underlying debt.
At December 31, 1997 and 1996 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%. The total notional principal
amounts are Lit. 150,000 million and the agreements will terminate on
May 31, 2000.
The Company had a cap agreement outstanding with total notional principal
amounting to Lit. 50,000 million and a strike rate of 12.50% as of
December 31, 1997 and 1996. This agreement terminates on May 31, 2000.
The Company had two collar agreements outstanding, with total notional
principal amounting to Lit. 100,000 million and an average strike cap rate
of 9.105% as of December 31, 1997 and 1996. These agreements have a
beginning strike floor rate of 8.25% declining quarterly to 7.5% starting
from April 1997 and will terminate on July 15, 1998. The floor strike rate
for the quarter from October 15, 1997 to January 15, 1998 was 7.5%. The
three month market rate was 5.94% as of December 31, 1997.
At December 31, 1997, the Company had 11 forward rate agreements ("FRA")
outstanding which have already settled, with total notional principal
amounts totaling 1,467,000 million. The fixed rates vary from 5.97% to
6.57%, with maturity dates ranging from January 16, 1998 to March 30,
1998. As the relevant maturity dates of the FRAs are in some instances
sequentially linked, the actual effect of these FRAs has been to hedge a
floating average amount equal to Lit. 1,167,000 million.
S-24
<PAGE> 32
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
16. Commitments and contingencies
16.1 Commitments deriving from the concession
In connection with the License, the Company is obligated to pay to
the M.O.C. an annual concession charge, for the term of the License,
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 the remaining two years, as follows:
<TABLE>
<S> <C>
1998 51.000
1999 77.100
-------
Total minimum payments 128.100
=======
</TABLE>
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 License. Failure to meet these requirements could result in
cancellation of the License. In addition, the Company has to fulfill
some obligations as prescribed by the License and the Performance
Bond (see note 16.2).
16.2 Guarantees provided on behalf of the Company
As of December 31, 1997 and 1996, the Company has Lit. 1,201 billion
and Lit. 669,105 million, respectively, for guarantees issued to
financial and ministerial institutions as below:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
<S> <C> <C>
FEC guarantees - Tranche B 267.444 334.305
EIB guarantees - Tranche A 527.500 --
Performance bond 219.400 219.400
Other guarantees 186.863 115.400
---------- ----------
1.201.207 669.105
========== ==========
</TABLE>
As collateral for the loan from FEC, the Company obtained letters of
credit from banks, subsequently canceled after issue of the
guarantee provided by the Facility- Tranche B. As described in note
10, Tranche A gave guarantees to EIB for the corresponding facility
of Lit. 500 billion.
S-25
<PAGE> 33
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
16. Commitments and contingencies, continued
16.2 Guarantees provided on behalf of the Company, continued
A performance bond of Lit. 219,400 million was provided by Banca
Commerciale Italiana to the M.O.C., as a guarantee for the
fulfillment of the obligations prescribed by the Concession. OPI is
required to cover 98% of the Italian territory with its cellular
network by May 1998, invest Lit. 1,552 billion by May 1998, employ
2,686 people by May 1998, pay royalties to the M.O.C. in amounts not
less than Lit. 25.4 billion for 1997; Lit. 51 billion for 1998; and
Lit. 77.1 billion for 1999, subject in each year to reduction only
due to any proportionate reduction of the royalty percentage to less
than 3.5% and 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 the Company.
Other guarantees mainly include Lit. 106.6 billion of bank
guarantees and a Lit. 64.5 billion guarantee by an insurance company
to the V.A.T. office in order to obtain V.A.T. repayments.
16.3 Nokia commitments
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. The Company fulfilled its purchase
obligation related to this commitment. In the course of 1997, two
additional memorandums were signed, stating a minimum commitment of
Lit. 426 billion for the purchase of further telecommunications
equipment. At December 31, 1997, the remaining purchase commitment
outstanding for these memorandums amounted to Lit. 383 billion.
16.4 Rent and leasing commitments
The Company rents buildings utilized for operations and the Network
and leases vehicles assigned to certain employees, with future
minimum rentals as follows:
<TABLE>
<CAPTION>
Year ending: Operating leases
<S> <C>
1998 51.688
1999 50.555
2000 47.908
2001 36.381
2002 26.267
Thereafter 39.707
-------
Total minimum lease payments 252.506
=======
</TABLE>
S-26
<PAGE> 34
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
16. Commitments and contingencies, continued
16.5 Dealers commitments to the Company
The Company received bank guarantees on behalf of dealers. These
guarantees amounted to Lit. 44.3 billion and Lit. 25.7 billion at
December 31, 1997 and 1996, respectively.
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.
During 1996 the Company issued 325 million of 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 to Lit. 643,500
million.
Under Italian tax legislation the Company was liable to an annual tax of
0.75% on the value of the stockholders' equity in 1996. This amount was
charged to the income statement. No amount was due in 1997. See note 10
for application in 1998 and thereafter.
18. Stock option program
In December 1996, the Company launched a stock option program to grant
warrants in favor of certain executives of the Company. These warrants,
which each carry the right to purchase one common stock unit, will be
exercisable 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 is additional
paid-in capital. Early exercise of warrants is not permitted.
S-27
<PAGE> 35
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
18. Stock option program, continued
The detail plan activity and information relating to 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
Weighted- Weighted-
average average
Number grant Number grant
of date of date
Warrants price* Warrants price*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance - January 1 3.324.000 343 -- --
Granted during the
year 882.591 2.097 3.324.000 343
Canceled or forfeited
during the year (196.000) 343 -- --
------------ ------------ ------------ ------------
Balance - December 31 4.010.591 729 3.324.000 343
============ ============ ============ ============
</TABLE>
* - In Lira
The Company has utilized the "Minimum Value" method for valuing the equity
instruments issued to employees. The following assumptions were utilized
when determining the Minimum Values at the grant dates:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Risk free rate 5.024% - 7.350% 6.84% - 7.57%
=============== ==============
Expected life (years) 3.5 - 4 4.56
=============== ==============
</TABLE>
Assuming the provisions of SFAS 123 would have been adopted, the impact on
the Company's net loss and earnings per share would have been immaterial.
19. Litigation matters
National roaming agreement
Access under the national roaming agreement is currently being disputed by
TIM in connection with OPI's territorial coverage percentage at the date
of launching operations on December 7, 1995. The M.O.C. confirmed that OPI
achieved the necessary coverage percentage. However, the Italian State
Council has overturned this decision and informed the M.O.C. that they
should have used additional information when calculating OPI's coverage
percentage. OPI is disputing this decision and has counterclaimend seeking
damages for TIM's delay in permitting national roaming.
S-28
<PAGE> 36
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
19. Litigation matters, continued
Compensative measures
TIM has recently filed an action attempting to recover Lit. 60 billion
that they were required to pay to OPI by the European Commission.
20. Disclosures about fair values of financial instruments
The following methods and assumptions were used to estimate the fair
values 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 amounts approximate the fair value due to the short-term
maturity of these instruments. This includes the short-term bank loans.
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:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
---------------------- -------------------- ------------------
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
<S> <C> <C> <C> <C> <C> <C>
Debt 1.579.584 1.579.584 1.096.337 1.096.337 530.595 530.595
Interest rate
swaps -- (23.636) -- (24.858) -- (8.784)
Collars -- (1.173) -- (2.030) -- --
</TABLE>
S-29
<PAGE> 37
Omnitel Pronto Italia S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
21. Reconciliation to Generally Accepted Accounting Principles in Italy
("Italian GAAP")
In order to comply with GAAP, certain adjustments are reflected in the
financial statements which are not recorded in the Italian statutory
financial statements.
As of December 31, 1997, 1996 and 1995 these adjustments, which
principally related to the application of SFAS 109 and to a different
treatment of costs sustained when the Company was in the "development
stage", are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
<S> <C> <C> <C>
NET LOSS
Net loss for the year, as reported (91.969) (438.971) (225.064)
Tax on common stock subscriptions
capitalized as an intangible asset
under Italian GAAP (2.892) (2.892) (1.592)
Net change in start-up costs capitalized
under Italian GAAP (38.061) 3.938 130.863
Net change of advertising costs
capitalized under Italian GAAP (101) 38.786 15.821
Concession and accessory charges
amortization 6.768 6.926 (48.176)
Deferred income taxes: SFAS 109 application (13.900) (196.800) --
-------- -------- --------
Net adjustments (48.186) (150.042) 96.916
-------- -------- --------
Net loss under Italian GAAP (140.155) (589.013) (128.148)
======== ======== ========
</TABLE>
The reconciliation of stockholders' equity as of December 31, 1997, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY
Stockholders' equity, as reported 651.192 741.309 535.640
Tax on common stock subscriptions
capitalized as an intangible asset
under Italian GAAP 6.289 9.180 5.573
Net book value of start-up costs
capitalized under Italian GAAP 125.220 163.281 159.343
Net book value of advertising costs
capitalized under Italian GAAP 54.505 54.607 15.821
Concession and accessory charges
amortization (34.482) (41.250) (48.176)
Deferred income taxes: SFAS 109
application (210.700) (196.800) --
-------- -------- --------
Net adjustments (59.168) (10.982) 132.561
-------- -------- --------
Stockholders' equity under
Italian GAAP 592.024 730.327 668.201
======== ======== ========
</TABLE>
S-30
<PAGE> 38
[LETTERHEAD OF COOPERS & LYBRAND]
REPORT OF INDEPENDENT ACCOUNTANTS
To the 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, 1997 and 1996
and the related statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with accounting principles generally accepted in
the United States of America.
COOPERS & LYBRAND S.p.A.
Milan, Italy
March 25, 1998
S-31
<PAGE> 39
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Statements of Income
(in millions of Italian Lira except per share data)
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------------
1997 1996 1995
<S> <C> <C> <C>
Income -- -- 75
Operating expenses:
- third parties (1.567) (1.210) (1.455)
- related parties (200) -- (24)
Equity loss in Omnitel Pronto Italia S.p.A (63.132) (311.032) (160.331)
-------- -------- --------
Operating loss (64.899) (312.242) (161.735)
-------- -------- --------
Other expenses, net (48) -- --
Interest income, net 831 838 1.400
-------- -------- --------
Net loss (64.116) (311.404) (160.335)
======== ======== ========
Basic and Diluted loss per common share (85) (471) (337)
======== ======== ========
Weighted average number of common
shares outstanding 758 661 475
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-32
<PAGE> 40
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Balance Sheets
(in millions of Italian Lira)
<TABLE>
<CAPTION>
ASSETS December 31,
-----------------
1997 1996
<S> <C> <C>
Cash and cash equivalents (Note 3) 11.769 13.519
Receivables from related parties (Note 8) -- 90
Other current assets 842 876
------- -------
Total current assets 12.611 14.485
------- -------
Investment in Omnitel Pronto Italia S.p.A. (Note 4) 455.834 518.916
------- -------
Total non-current assets 455.834 518.916
------- -------
Total assets 468.445 533.401
======= =======
</TABLE>
"continued"
The accompanying notes are an integral part of these financial statements.
S-33
<PAGE> 41
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Balance Sheets
(in millions of Italian Lira except per share data)
"continued"
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
--------------------
1997 1996
<S> <C> <C>
Accounts payable 151 141
Due to related parties (Note 8) 200 214
Other current liabilities (Note 5) 845 1.681
-------- --------
Total current liabilities 1.196 2.036
-------- --------
Deposit payable (Note 6) 90 90
-------- --------
Total liabilities 1.286 2.126
-------- --------
Commitments and contingencies (Note 9)
Common stock (No. 757,500,000, par value Lit
1,000 authorized issued and outstanding) 757.500 757.500
Additional paid-in capital 282.500 282.500
Accumulated deficit (572.841) (508.725)
-------- --------
Total stockholders' equity 467.159 531.275
-------- --------
Total liabilities and stockholders' equity 468.445 533.401
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-34
<PAGE> 42
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Statements of Cash Flows
(in millions of Italian Lira)
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss (64.116) (311.404) (160.335)
Adjustment to reconcile net loss to net cash
(used in) provided by operating activities:
Equity loss in Omnitel Pronto Italia S.p.A 63.132 311.032 160.331
Changes in operating assets and liabilities:
Decrease in receivables from related parties 90 8 21.313
Decrease (Increase) in other current assets 34 (239) (194)
Increase (Decrease) in accounts payable 10 87 (906)
(Decrease) Increase in other current liabilities (836) (222) 477
(Decrease) Increase in due to related parties (14) 178 (9.239)
-------- -------- --------
Net cash (used in) provided by operating activities (1.700) (560) 11.447
-------- -------- --------
Cash flows from investing activities:
Increase in investment in Omnitel Pronto Italia S.p.A (50) (455.000) (280.000)
Increase in deposit payable -- 90 --
-------- -------- --------
Net cash used in investing activities (50) (454.910) (280.000)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 465.000 275.000
Tax on issuance of common stock -- (4.643) (2.747)
-------- -------- --------
Net cash provided by financing activities -- 460.357 272.253
-------- -------- --------
(Decrease) Increase in cash and cash equivalents (1.750) 4.887 3.700
Cash and cash equivalents at the beginning of the year 13.519 8.632 4.932
-------- -------- --------
Cash and cash equivalents at the end of the year 11.769 13.519 8.632
======== ======== ========
Supplemental disclosures of Cash Flows information:
Cash paid for interest -- -- 2
======== ======== ========
Income taxes -- -- --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-35
<PAGE> 43
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Statements of Changes in Stockholders' Equity
(in millions of Italian Lira)
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated
stock capital deficit Total
<S> <C> <C> <C> <C>
Balance as of December 31, 1994 300.000 -- (29.596) 270.404
Issuance of common stock:
January 26, 1995 175.000 -- -- 175.000
September 29, 1995 50.000 50.000 -- 100.000
Tax on issuance 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
Issuance 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 issuance 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
Net loss for the year -- -- (64.116) (64.116)
-------- -------- -------- --------
Balance as of December 31, 1997 757.500 282.500 (572.841) 467.159
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-36
<PAGE> 44
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the 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 operating
cellular telephone networks.
The Company owns a 70% interest in Omnitel Pronto Italia S.p.A. ("OPI").
The remaining 30% interest is held by Pronto Italia S.p.A. ("P.I."). OPI
was awarded a fifteen year license to operate a cellular telephone system
based on the GSM (Global System for Mobile Communications) standard in
Italy, effective from February 1, 1995. OPI began generating revenues from
operations at the end of 1995, following the launch of operational service
on December 7, 1995. In 1997, OPI has become fully operational from a
commercial standpoint and is continuing the construction of its cellular
telephone network.
Although the Company owns 70% of the shares of OPI, both the statutes of
OPI and the stockholders' agreement between Omnitel S.R.I. and P.I.
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, must approve any changes
in OPI's 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 OPI's assets to liens or pledges, the extension of
guarantees to third parties and 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 certain service standards, territorial coverage
requirements, and other conditions contained in its Italian cellular
cencession. The failure to meet these requirements could result loss of
the concession.
In 1997, Ing. C. Olivetti S.p.A. transferred all its shares of Omnitel
S.R.I. to the newly incorporated Olivetti Mobile Telephony Services B.V.
("O.M.T.S."). On December 12, 1997, Ing. C. Olivetti S.p.A. sold to
Mannesmann 25% of the shares of O.M.T.S., which resulted in O.M.T.S.
changing its name to OliMan Holding B.V..
As of December 31, 1997, the Company's stockholders are OliMan Holding
B.V., Bell Atlantic International Inc., Cellular Communication
International Inc., Telia International AB and Lehman Brothers Holding
Inc..
S-37
<PAGE> 45
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
1. Description and ownership of the business, continued
In accordance with Italian law, the Company financial statements must be
approved at the annual stockholders' meeting. The financial statements for
1997 have not yet been approved.
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 preparation of financial statements in conformity with United
States Generally Accepted Accounting Principles ("US GAAP") 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 US GAAP, certain adjustments need to be
recorded in the financial statements, which may or may not be
recorded in the Italian books of account. These adjustments relate
primarily to the equity basis of accounting for the investment in
OPI (see Note 10).
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 the
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.
S-38
<PAGE> 46
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
2.3 Receivables and payables, continued
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 Income taxes
The Company is subject to income taxes in the Republic of Italy.
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. If it is
more likely than not that some portion or all of a deferred tax
asset will not be realized, a valuation allowance is recognized.
2.5 Purchase of OPI forfeited stock warrants
The Company purchases 70% of OPI's stock warrants that are forfeited
by employees of OPI. The price paid for the warrant is equal to the
original grant date price plus accrued interest. The amount paid is
charged directly to the equity investment in OPI.
2.6 New accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"), which is required to be adopted for all
financial statements issued for periods ending after December 15,
1997. SFAS 128 redefines the principles for calculating earnings per
share ("EPS") and requires presentation of Basic EPS and Diluted EPS
for those entities with complex capital structures. SFAS 128 also
requires that all prior period earnings per share data presented
with the current year's data is restated in accordance with the new
provisions. The adoption of SFAS 128 had no effect upon the current
year's or the prior years' earnings per share data.
S-39
<PAGE> 47
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
3. Cash and cash equivalents
Cash and cash equivalents consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
<S> <C> <C>
Cash and bank balances 168 423
Italian Government bonds 11.601 13.096
---------- ----------
Total 11.769 13.519
========== ==========
</TABLE>
The Italian government bonds are subject to purchase and resale
agreements, which provide that the Company resell them at
pre-determined prices.
4. Investments
The movements in the investment in OPI during 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Balance as of January 1 518.916 374.948
Increase in common stock of OPI
and additional paid-in capital -- 455.000
Stock option subscription 50 --
Equity loss in OPI for the year (63.132) (311.032)
---------- ----------
Balance as of December 31 455.834 518.916
========== ==========
</TABLE>
As of December 31, 1997 and 1996 the Company held 735,000,000 shares
of OPI representing 70% of the outstanding common stock.
S-40
<PAGE> 48
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
4. Investments, continued
The following is a summary of the financial information of OPI for
the twelve months ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Total operating revenues 1.835.285 753.542 49.018
Operating expenses (1.534.666) (1.090.804) (245.234)
Depreciation and amortization (305.251) (203.457) (35.869)
Interest (expenses) income, net (131.747) (95.052) 7.021
Other income, net 30.510 -- --
Income tax benefit 13.900 196.800 --
---------- ---------- ----------
Net loss (91.969) (438.971) (225.064)
========== ========== ==========
Omnitel S.R.I. - 70% share of
OPI's net loss (64.378) (307.280) (157.545)
70% share of forfeited OPI
stock warrants (50) -- --
70% share of OPI stock option
warrants granted 1.296 798 --
70% share of tax on OPI common
stock subscription -- (4.550) (2.786)
---------- ---------- ----------
Equity loss in OPI for the year (63.132) (311.032) (160.331)
========== ========== ==========
</TABLE>
The following is a summary of financial information of OPI as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
<S> <C> <C>
Current assets 922.707 454.756
Non current assets 2.340.027 2.138.015
--------- ---------
Total assets 3.262.734 2.592.771
========= =========
</TABLE>
S-41
<PAGE> 49
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
4. Investments, continued
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
<S> <C> <C>
Current liabilities 1.070.663 849.936
Non current liabilities 1.540.879 1.001.526
--------- ---------
Total liabilities 2.611.542 1.851.462
========= =========
Net assets 651.192 741.309
========= =========
Omnitel S.R.I. 70% share of OPI's equity 455.834 518.916
========= =========
</TABLE>
5. Other current liabilities
Other current liabilities consist of:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
<S> <C> <C>
Tax on issuance of common stock -- 1.500
Tax on stockholders' equity 832 138
Other 13 43
------- -------
845 1.681
======= =======
</TABLE>
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 to buy from Omnitel S.R.I. 262,500
shares of OPI at a price of Lit. 5,500 per share. The cost of the
option was Lit. 90 million and will be exercisable in July 2000.
S-42
<PAGE> 50
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
7. Income taxes
No provision for current income taxes has been made as the Company
is in a tax loss position.
Significant components of the Company's deferred tax accounts are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
<S> <C> <C>
Deferred tax assets 234.287 268.386
Valuation allowance (234.287) (268.386)
--------- ---------
Net deferred tax assets -- --
========= =========
</TABLE>
The deferred tax assets of Lit. 234,287 million and Lit. 268,386
million relate principally to temporary differences arising from the
adjustment of the investment in OPI to the equity method for
financial reporting purposes, but not for fiscal purposes.
A full valuation allowance has been provided at December 31, 1997
and 1996 as it is not more likely than not that a portion of these
assets will be realized.
8. Related party transactions
The Company does not have its own personnel, thus personnel of OPI
are utilized. For the year ended December 31, 1997, costs charged by
OPI to the Company amounted to Lit. 200 million.
S-43
<PAGE> 51
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
8. Related party transactions, continued
Amounts due from (to) related parties are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
<S> <C> <C>
Amounts due from related parties:
Cellular Communication International Inc. -- 30
Telia International -- 30
Bell Atlantic International Inc. -- 30
-------- --------
-- 90
======== ========
Amounts due to related parties:
OPI (200) --
Ing. C. Olivetti S.p.A -- (203)
Other -- (11)
-------- --------
(200) (214)
======== ========
</TABLE>
9. Commitments and contingencies
As required by the terms of OPI's cellular concession, Banca
Commerciale Italiana has issued a guarantee to the Ministry of
Communications on behalf of OPI for Lit. 219.4 billion. The Company
has provided a counter guarantee to Banca Commerciale Italiana in
the amount of Lit. 153.6 billion.
On October 2, 1997 the Board of Directors approved to make available
to OPI a subordinated credit facility of Lit. 70 billion, when OPI's
indebtedness amounts to Lit. 2,200 billion or in any event of
default of OPI under the facility.
The Company has committed to purchase 70% of OPI's forfeited stock
warrants granted to OPI executives in connection with OPI's stock
option plan.
S-44
<PAGE> 52
Omnitel Sistemi Radiocellulari Italiani S.p.A.
Notes to the financial statements
(in millions of Italian Lira unless otherwise stated)
10. Reconciliation to Generally Accepted Accounting Principles in Italy
("Italian GAAP")
In order to conform with US GAAP, certain adjustments are reflected
in the financial statements, which are not recorded in the Italian
statutory financial statements.
As of December 31, 1997, 1996 and 1995 these adjusments, which
principally related to equity basis accounting for the investment in
OPI, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
NET LOSS
Net loss for the year, as reported (64.116) (311.404) (160.335)
Tax on common stock subscriptions
capitalized as an intangible asset
under Italian GAAP (2.072) (2.072) (1.143)
Loss on investment in OPI 63.132 311.032 160.331
---------- ---------- ----------
Net adjustments 61.060 308.960 159.188
---------- ---------- ----------
Net loss under Italian GAAP (3.056) (2.444) (1.147)
========== ========== ==========
STOCKHOLDERS' EQUITY
Stockholders' equity, as reported 467.159 531.275 382.322
Tax on common stock subscriptions
capitalized as an intangible asset
under Italian GAAP 4.478 6.551 3.980
Loss on investment in OPI 559.328 496.196 185.164
---------- ---------- ----------
Net adjustments 563.806 502.747 189.144
---------- ---------- ----------
Stockholders' equity under
Italian GAAP 1.030.965 1.034.022 571.466
========== ========== ==========
</TABLE>
S-45
<PAGE> 1
[LETTERHEAD OF COOPERS & LYBRAND]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the (i) Registration Statements
(Form S-8 No. 33-41258. No. 33-78846, No. 33-89366 and No. 333-44761)
pertaining to the 1991 Employee Stock Option Plan of Cellular Commuincations
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 Statements (Form S-3 No. 33-90980 and No. 33-97392) pertaining to
the registration of 13 1/4% Senior Discount Notes and Warrants to purchase
Common Stock and the related Prospectus of our report dated March 25, 1998 on
our audit of the financial statements of Omnitel Sistemi Radiocellulari Italiani
S.p.A. as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 and our report dated March 25, 1998 on our audit
of the financial statements of Omnitel Pronto Italia S.p.A. as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997, which reports are included in this Form 10-K/A-1.
COOPERS & LYBRAND S.p.A.
Milan, Italy
April 10, 1998
