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