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. 19869-99
------------------------------------------------------------
CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
(On September 1, 1998, the name of the Registrant was changed from
CoreComm Incorporated to Cellular Communications of Puerto Rico, Inc.)
Delaware 13-3927257
- ------------------------------- ------------------------------------
(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) 906-8485
- --------------------------------------------------------------------------------
(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 13,203,713.
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
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'
Equity (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 .............................. 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 19
SIGNATURES ............................................................... 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
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 $ 22,376,000 $ 11,783,000
Marketable securities 17,214,000 62,666,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,758,000 (1998) and $2,106,000 (1997) 20,020,000 19,043,000
Equipment inventory 5,853,000 2,882,000
Prepaid expenses and other current assets 7,235,000 7,147,000
----------------------------------
Total current assets 72,698,000 103,521,000
Property, plant and equipment, net 124,170,000 128,451,000
Unamortized license acquisition costs 170,806,000 157,467,000
Deferred financing costs, less accumulated amortization
of $1,164,000 (1998) and $584,000 (1997) 8,788,000 6,206,000
Other assets, less accumulated amortization of
$793,000 (1998) and $1,088,000 (1997) 1,376,000 1,631,000
----------------------------------
$ 377,838,000 $ 397,276,000
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 10,855,000 $ 6,873,000
Accrued expenses 12,937,000 11,730,000
Due to NTL Incorporated 487,000 71,000
Interest payable 4,845,000 8,333,000
Deferred revenue 5,723,000 3,952,000
----------------------------------
Total current liabilities 34,847,000 30,959,000
Long-term debt 355,000,000 200,000,000
Obligation under capital lease 9,234,000 9,456,000
Commitments and contingent liabilities
Shareholders' equity (deficiency):
Series preferred stock - $.01 par value; authorized
2,500,000 shares; issued and outstanding none - -
Common stock - $.01 par value; authorized 30,000,000
shares; issued 13,587,000 (1998) and 13,565,000
(1997) shares 136,000 136,000
Additional paid-in capital 97,730,000 226,490,000
Deferred stock option expense (26,321,000) -
(Deficit) (83,726,000) (60,703,000)
----------------------------------
(12,181,000) 165,923,000
Treasury stock - at cost, 383,000 shares (9,062,000) (9,062,000)
----------------------------------
(21,243,000) 156,861,000
----------------------------------
$ 377,838,000 $ 397,276,000
==================================
</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 of Puerto Rico, Inc. (formerly CoreComm Incorporated)
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>
REVENUES:
Service revenue $ 40,900,000 $ 31,541,000 $ 113,667,000 $ 99,587,000
Equipment revenue 5,680,000 4,672,000 16,193,000 12,335,000
----------------------------- ------------------------------
46,580,000 36,213,000 129,860,000 111,922,000
COSTS AND EXPENSES:
Cost of equipment sold 5,094,000 5,258,000 14,563,000 14,331,000
Operating expenses 5,550,000 4,555,000 14,968,000 12,783,000
Selling, general and administrative expenses 20,952,000 18,035,000 56,639,000 54,513,000
Compensation charge 21,758,000 - 21,758,000 -
Depreciation of rental equipment 312,000 233,000 828,000 608,000
Depreciation expense 6,731,000 4,831,000 19,100,000 12,823,000
Amortization expense 1,741,000 1,610,000 5,141,000 4,821,000
----------------------------- ------------------------------
62,138,000 34,522,000 132,997,000 99,879,000
----------------------------- ------------------------------
Operating income (loss) (15,558,000) 1,691,000 (3,137,000) 12,043,000
OTHER INCOME (EXPENSE):
Interest income and other, net 284,000 876,000 1,464,000 2,861,000
Interest expense (6,958,000) (5,200,000) (17,718,000) (14,261,000)
----------------------------- ------------------------------
Income (loss) before income taxes and
extraordinary item (22,232,000) (2,633,000) (19,391,000) 643,000
Income tax provision (benefit) (2,796,000) 104,000 (3,632,000) (1,241,000)
----------------------------- ------------------------------
Loss before extraordinary item (25,028,000) (2,529,000) (23,023,000) (598,000)
Loss from early extinguishment of debt,
net of income tax benefit of $108,000 - (117,000) - (3,959,000)
----------------------------- ------------------------------
Net loss $ (25,028,000) $ (2,646,000) $ (23,023,000) $ (4,557,000)
============================= ==============================
Basic and diluted net loss per common share:
Loss before extraordinary item $ (1.90) $ (.19) $ (1.75) $ (.05)
Extraordinary item - (.01) - (.30)
----------------------------- ------------------------------
Net loss $ (1.90) $ (.20) $ (1.75) $ (.35)
============================= ==============================
</TABLE>
See accompanying notes.
3
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity (Deficiency)
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TREASURY STOCK
----------------------- PAID-IN STOCK OPTION ------------------------
SHARES AMOUNT CAPITAL EXPENSE (DEFICIT) SHARES AMOUNT
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 13,565,000 $ 136,000 $ 226,490,000 $ (60,703,000) (383,000) $ (9,062,000)
Exercise of stock options 22,000 262,000
Distribution of subsidiary to
shareholders (177,101,000)
Deferred stock option expense 48,079,000 $ (48,079,000)
Compensation charge 21,758,000
Net (loss) for the nine months
ended September 30, 1998 (23,023,000)
---------------------------------------------------------------------------------------------------
Balance, September 30, 1998 13,587,000 $ 136,000 $ 97,730,000 $ (26,321,000) $ (83,726,000) (383,000) $ (9,062,000)
===================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 29,308,000 $ 15,537,000
----------------------------------
INVESTING ACTIVITIES
Payment of the LMDS license fee and related costs (25,365,000) -
Cost of cellular license interest (8,686,000) (146,000)
Distribution of subsidiary to shareholders (150,904,000) -
Acquisition of subsidiaries, net of cash acquired (3,715,000) -
Purchase of property, plant and equipment (18,928,000) (33,621,000)
Purchase of marketable securities (44,914,000) (74,393,000)
Proceeds from maturities of marketable securities 90,798,000 54,920,000
----------------------------------
Net cash (used in) investing activities (161,714,000) (53,240,000)
----------------------------------
FINANCING ACTIVITIES
Repayment of debt (8,900,000) (115,000,000)
Proceeds from bank loan, net of financing costs 151,838,000 -
Proceeds from issuance of Notes, net of financing costs - 193,694,000
Purchase of treasury stock - (688,000)
Principal payments of capital lease obligation (201,000) (131,000)
Proceeds from exercise of stock options 262,000 287,000
----------------------------------
Net cash provided by financing activities 142,999,000 78,162,000
----------------------------------
Increase in cash and cash equivalents 10,593,000 40,459,000
Cash and cash equivalents at beginning of period 11,783,000 2,307,000
----------------------------------
Cash and cash equivalents at end of period $ 22,376,000 $ 42,766,000
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive
of amounts capitalized $ 21,205,000 $ 12,606,000
Income taxes paid 781,000 4,353,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred to acquire property, plant and equipment $ 1,373,000 $ 2,365,000
Long-term debt issued to acquire cellular license interest 8,900,000 -
Capital lease obligation incurred to acquire office building - 9,922,000
</TABLE>
See accompanying notes.
5
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A - BASIS OF PRESENTATION
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 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
its 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 of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE B - DISTRIBUTION OF SUBSIDIARY TO SHAREHOLDERS
In September 1998, the Company completed the distribution of all the common
stock of its wholly-owned subsidiary, CoreComm Limited, on a one-for-one basis
to its shareholders. Prior to the distribution, the Company made a cash
contribution of $150,000,000 to CoreComm Limited using proceeds from the new
bank loan. In April and June 1998, the Company acquired certain businesses in
acquisitions that were accounted for as purchases. Accordingly, the net assets
and results of operations of the acquired businesses have been included in the
consolidated financial statements from the dates of acquisition. In March 1998,
a former subsidiary of the Company, Cortelyou Communications Corp. ("Cortelyou")
was the successful bidder for an aggregate of $25,241,000 for 15 Block A Local
Multipoint Distribution Service ("LMDS") licenses in Ohio. In June 1998, the
Company funded Cortelyou's payment of its bid. The acquired businesses and
Cortelyou were contributed to CoreComm Limited prior to the distribution.
In connection with the distribution, the Company made an equitable adjustment to
certain employee and non-employee director stock options. The deferred stock
option expense included in shareholders' deficiency of $48,079,000 is a non-cash
charge recorded in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company recognized $21,758,000 as a non-cash
compensation charge through September 30, 1998. The remaining $26,321,000 will
be charged to compensation expense over the vesting period of the stock options
as follows: $10,034,000 in the fourth quarter of 1998, $10,481,000 in 1999,
$4,550,000 in 2000 and $1,256,000 in 2001.
NOTE C - UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
September 30, December 31,
1998 1997
-----------------------------
(Unaudited)
Deferred cellular license costs $ 5,935,000 $ 5,935,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 207,052,000 189,466,000
-----------------------------
212,987,000 195,401,000
Accumulated amortization 42,181,000 37,934,000
-----------------------------
$ 170,806,000 $ 157,467,000
=============================
7
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE C - UNAMORTIZED LICENSE ACQUISITION COSTS (CONTINUED)
In January 1998, the San Juan Cellular Telephone Company ("SJCTC"), a
wholly-owned indirect subsidiary of the Company, purchased the FCC license to
own and operate the non-wireline cellular system in Puerto Rico RSA-4 (Aibonito)
and all of the assets of the system in exchange for $8,400,000 in cash and a
promissory note in the amount of $8,900,000. Costs of $286,000 were incurred in
connection with this acquisition.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------------------------
(Unaudited)
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 137,326,000 127,534,000
Office furniture and other equipment 31,439,000 24,546,000
Rental equipment 3,044,000 1,745,000
Construction in progress 8,064,000 12,533,000
--------------------------------
191,746,000 178,231,000
Accumulated depreciation 67,576,000 49,780,000
--------------------------------
$ 124,170,000 $ 128,451,000
================================
NOTE E - ACCRUED EXPENSES
Accrued expenses consist of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Accrued compensation $ 1,398,000 $ 765,000
Accrued equipment purchases 243,000 1,427,000
Accrued franchise, property and income taxes 5,363,000 3,489,000
Commissions payable 616,000 1,143,000
Subscriber deposits 1,389,000 1,544,000
Other 3,928,000 3,362,000
------------------------------
$ 12,937,000 $ 11,730,000
==============================
8
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE F - LONG-TERM DEBT
Long-term debt consists of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
-----------------------------------
(Unaudited)
Senior Subordinated Notes $ 200,000,000 $ 200,000,000
Bank loan 155,000,000 -
-----------------------------------
$ 355,000,000 $ 200,000,000
===================================
In August 1998, a wholly-owned indirect subsidiary of the Company, CCPR
Services, Inc. ("Services") entered into a $170,000,000 credit agreement with
various banks and borrowed $155,000,000. The Company made a capital contribution
to its wholly-owned subsidiary, CoreComm Limited, of $150,000,000 in cash using
proceeds from the bank loan and distributed 100% of the common stock of CoreComm
Limited to the Company's shareholders. Services has $15,000,000 available under
the bank loan until September 2001. The terms include the payment of interest at
least quarterly at a floating rate, which is, at Services' option, either (a)
the greater of the bank's prime rate or the Federal Funds Rate plus 0.5% or (b)
LIBOR, plus, based on the ratio of CCPR, Inc. and subsidiaries' debt to cash
flow and the floating rate in effect, either 0% to 1.25% or 1.25% to 2.5%. The
effective rate on Services' borrowings as of September 30, 1998 was 8%. The
terms also include an unused commitment fee of 0.5% per annum which is payable
quarterly. Principal payments commence on September 30, 2001 based on two
amortization schedules. One schedule is for the first $95,000,000 borrowed which
includes quarterly payments until June 2006. The other schedule is for the
remainder of the amount borrowed which includes quarterly payments until June
2005. Services incurred costs of $3,162,000 in connection with the bank loan
which are included in deferred financing costs.
In connection with the bank loan, CCPR, Inc. (a wholly-owned subsidiary of the
Company and the parent company of Services) has pledged to the banks the stock
of its subsidiaries and CCPR, Inc. and its subsidiaries have given the banks a
security interest in their assets. CCPR, Inc. and its other subsidiaries have
guaranteed the payment in full when due of the principal, interest and fees
owing under the bank loan. The bank loan also includes, among other things,
restrictions on CCPR, Inc. and its subsidiaries (i) dividend payments, (ii)
acquisitions, (iii) investments, (iv) sales and dispositions of assets, (v)
additional indebtedness and (vi) liens. The bank loan requires that CCPR, Inc.
and subsidiaries maintain certain ratios of indebtedness to cash flow, fixed
charges to cash flow and debt service to cash flow.
9
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE G - 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 $ (25,028,000) $ (2,529,000) $ (23,023,000) $ (598,000)
Extraordinary item - (117,000) - (3,959,000)
---------------------------------------------------------------------
Net loss $ (25,028,000) $ (2,646,000) $ (23,023,000) $ (4,557,000)
---------------------------------------------------------------------
Denominator for basic net loss per common share 13,196,000 13,074,000 13,187,000 13,073,000
Effect of dilutive securities - - - -
---------------------------------------------------------------------
Denominator for diluted net loss per common share 13,196,000 13,074,000 13,187,000 13,073,000
---------------------------------------------------------------------
Basic and diluted net loss per common share:
Loss before extraordinary item $ (1.90) $ (.19) $ (1.75) $ (.05)
Extraordinary item - (.01) - (.30)
---------------------------------------------------------------------
Net loss $ (1.90) $ (.20) $ (1.75) $ (.35)
=====================================================================
</TABLE>
The shares issuable upon the exercise of stock options are excluded from the
computation as their effect would be antidilutive.
NOTE H - COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 1998, the Company was committed to purchase approximately
$2,900,000 for cellular network and other equipment and for construction
services. In addition, as of September 30, 1998, the Company had commitments to
purchase telephones, pagers and accessories of approximately $2,400,000.
In 1992, the Company entered into an agreement which in effect provides for a
twenty year license to use its service mark in Puerto Rico and U.S. Virgin
Islands which is also licensed to many of the non-wireline cellular systems in
the United States. The Company is required to pay licensing and advertising
fees, and to maintain certain service quality standards. The total fees paid for
1998 were $289,000, which were determined by the size of the Company's markets.
NOTE I - EXCHANGE OFFER
In October 1998, the Company commenced an offer to exchange $15.00 principal
amount of a new issue of 15% Subordinated Notes due 2008 (the "Notes") in
exchange for each share of its common stock up to 3,500,000 shares. Interest on
the Notes will be payable semi-annually; the first year in cash and, at the
option of the Company, subsequent payments may be paid in cash or through the
issuance of additional Notes. The exchange offer will expire on December 4,
1998.
10
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
(the "Company") was formed in January 1997 to own and operate CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and to pursue
communications related opportunities outside of Puerto Rico and the U.S. Virgin
Islands. CCPR, Inc., through its wholly-owned subsidiaries, owns and operates
cellular and paging systems in Puerto Rico and the U.S. Virgin Islands. In April
and June 1998, the Company acquired three communications related businesses in
the United States. These businesses were contributed to the Company's former
wholly-owned subsidiary, CoreComm Limited, prior to the distribution of CoreComm
Limited to the Company's shareholders in September 1998. The Company
consolidated the results of operations of the acquired businesses from the dates
of acquisition through the date of distribution in September 1998. The results
of the acquired businesses are not included in the 1997 consolidated results.
In September 1998, Hurricane Georges struck Puerto Rico and the U.S. Virgin
Islands. The Company's insurance is expected to cover nearly all of the expenses
associated with restoring its service and the cost of repairing and replacing
damaged equipment and facilities. In addition, the Company has business
interruption insurance so it is not expected to incur an uninsured material loss
from the Company's cell sites that were out of service. The Company received
$1,000,000 from its insurance company in November 1998 as a partial payment of
its claim, which was included in the results of operations in the third quarter.
The Company has not completed discussions with its insurance carriers and their
adjusters regarding the total amount to be received by the Company.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------
Service revenue increased to $40,900,000 from $31,541,000. Service revenue
includes $1,676,000 in 1998 from acquired businesses. For CCPR, Inc.'s cellular
and paging business in Puerto Rico and the U.S. Virgin Islands, lower average
revenue and minutes of use of new prepaid subscribers and the selection by
existing subscribers of alternate rate plans resulted in average monthly revenue
per cellular subscriber for the third quarter decreasing to $53 in 1998 from $59
in 1997. The Company expects these trends to continue for the foreseeable
future. Ending subscribers were 264,700 and 181,900 as of September 30, 1998 and
1997, respectively. Ending pagers in use were 54,300 and 45,500 as of September
30, 1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $586,000 from a loss of $586,000 primarily because CCPR,
Inc. is not selling telephones below their cost to prepaid subscribers.
Reductions in the cost of cellular telephones also contributed to this change.
The Company intends to continue to sell telephones at or above cost to prepaid
subscribers. The Company expects the growth in prepaid subscribers to continue,
therefore the Company expects the trend in equipment income to continue for the
foreseeable future. The income from equipment in 1998 includes $15,000 from
acquired businesses.
11
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Operating expenses increased to $5,550,000 from $4,555,000. Operating expenses
include $1,256,000 in 1998 from acquired businesses. For CCPR, Inc.'s cellular
and paging business in Puerto Rico and the U.S. Virgin Islands, operating
expenses decreased to $4,294,000 from $4,555,000 primarily due to the
elimination of the expense accrual for the proposed Puerto Rico universal
service charge in the fourth quarter of 1997. Subsidiaries of the Company were
recording an estimate for this proposed charge in operating expenses through
September 30, 1997. The total expense accrual of $1,644,000 was reversed in the
fourth quarter of 1997 after the Puerto Rico Telecommunications Regulatory Board
announced that the proposed retroactive application of the universal service
charge to January 1997 had been eliminated. After adjusting for the reversal of
$520,000 charged to expense in the third quarter of 1997, operating expenses
increased to $4,294,000 from $4,035,000 due to additional costs associated with
the expanded network (including paging operations). CCPR, Inc.'s operating
expenses as a percentage of service revenue decreased to 11% in 1998 from 13%
(after adjustment) in 1997.
Selling, general and administrative expenses increased to $20,952,000 from
$18,035,000. Selling, general and administrative expenses include $2,691,000 in
1998 from acquired businesses and general and administrative expenses of the
Company of $1,160,000 in 1998 and $323,000 in 1997. For CCPR, Inc.'s cellular
and paging business in Puerto Rico and the U.S. Virgin Islands, selling, general
and administrative expenses decreased to $17,101,000 from $17,712,000 as a
result of all of the following: a decrease in selling and marketing costs, bad
debt expense and subscriber billing expense. The decreases in selling and
marketing costs, bad debt expense and subscriber billing expense were 8%, 65%
and 11%, respectively, of the $611,000 decrease. These decreases were partially
offset by an increase in property taxes due to an increase in taxable property
which was (29)% of the decrease.
Compensation charge of $21,758,000 in 1998 is a non-cash charge recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees"
due to an equitable adjustment made to certain employee and non-employee
director stock options in connection with the distribution of CoreComm Limited.
The Company has $26,321,000 of deferred stock option expense as of September 30,
1998 that will be charged as non-cash compensation expense over the vesting
period of the stock options as follows: $10,034,000 in the fourth quarter of
1998, $10,481,000 in 1999, $4,550,000 in 2000 and $1,256,000 in 2001.
Depreciation of rental equipment increased to $312,000 from $233,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $6,731,000 from $4,831,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $1,741,000 from $1,610,000 primarily due to an
increase in deferred financing costs.
Interest income and other, net, decreased to $284,000 from $876,000 primarily
due to losses on the disposal of cell site equipment damaged by Hurricane
Georges of approximately $400,000, net of partial payment of claims. Interest
income decreased to $679,000 from $900,000.
12
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Interest expense increased to $6,958,000 from $5,200,000 as a result of the new
bank loan commencing in August 1998.
The provision for income taxes increased to a provision of $2,796,000 from a
benefit of $104,000 as a result of a tax provision of $2,200,000 in connection
with transactions related to the distribution and an increase in Puerto Rico and
U.S. Virgin Islands taxable income of certain of the Company's consolidated
subsidiaries.
The loss from early extinguishment of debt of $117,000 in 1997 is due to an
adjustment to the estimated Puerto Rico income tax benefit from the loss.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------------
Service revenue increased to $113,667,000 from $99,587,000. Service revenue
includes $2,876,000 in 1998 from acquired businesses. For CCPR, Inc.'s cellular
and paging business in Puerto Rico and the U.S. Virgin Islands, lower average
revenue and minutes of use of new prepaid subscribers and the selection by
existing subscribers of alternate rate plans resulted in average monthly revenue
per cellular subscriber for the nine months ended September 30 decreasing to $53
in 1998 from $65 in 1997. The Company expects these trends to continue for the
foreseeable future. Ending subscribers were 264,700 and 181,900 as of September
30, 1998 and 1997, respectively. Ending pagers in use were 54,300 and 45,500 as
of September 30, 1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $1,630,000 from a loss of $1,996,000 primarily because
CCPR, Inc. is not selling telephones below their cost to prepaid subscribers.
Reductions in the cost of cellular telephones also contributed to this change.
The Company intends to continue to sell telephones at or above cost to prepaid
subscribers. The Company expects the growth in prepaid subscribers to continue,
therefore the Company expects the trend in equipment income to continue for the
foreseeable future. The income from equipment in 1998 includes $60,000 from
acquired businesses.
Operating expenses increased to $14,968,000 from $12,783,000. Operating expenses
include $2,308,000 in 1998 from acquired businesses. For CCPR, Inc.'s cellular
and paging businesses in Puerto Rico and the U.S. Virgin Islands, operating
expenses decreased to $12,660,000 from $12,783,000 primarily due to the
elimination of the expense accrual for the proposed Puerto Rico universal
service charge in the fourth quarter of 1997. Subsidiaries of the Company were
recording an estimate for this proposed charge in operating expenses through
September 30, 1997. The total expense accrual of $1,644,000 was reversed in the
fourth quarter of 1997 after the Puerto Rico Telecommunications Regulatory Board
announced that the proposed retroactive application of the universal service
charge to January 1997 had been eliminated. After adjusting for the expense
reversal, operating expenses increased to $12,660,000 from $11,139,000 due to
increased usage of the network and additional costs associated with the expanded
network (including paging operations). CCPR, Inc.'s operating expenses as a
percentage of service revenue was 11% in 1998 and in 1997 (after adjustment).
13
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Selling, general and administrative expenses increased to $56,639,000 from
$54,513,000. Selling, general and administrative expenses include $4,108,000 in
1998 from acquired businesses and general and administrative expenses of the
Company of $2,488,000 in 1998 and $820,000 in 1997. For CCPR, Inc.'s cellular
and paging businesses in Puerto Rico and the U.S. Virgin Islands, selling,
general and administrative expenses decreased to $50,043,000 from $53,693,000 as
a result of all of the following: a decrease in selling and marketing costs, bad
debt expense and subscriber billing expense. The decreases in selling and
marketing costs, bad debt expense and subscriber billing expense were 33%, 42%
and 11%, respectively, of the total $3,650,000 decrease. These decreases were
partially offset by an increase in property taxes due to an increase in taxable
property which was (24)% of the decrease.
Compensation charge of $21,758,000 in 1998 is a non-cash charge recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees"
due to an equitable adjustment made to certain employee and non-employee
director stock options in connection with the distribution of CoreComm Limited.
The Company has $26,321,000 of deferred stock option expense as of September 30,
1998 that will be charged as non-cash compensation expense over the vesting
period of the stock options as follows: $10,034,000 in the fourth quarter of
1998, $10,481,000 in 1999, $4,550,000 in 2000 and $1,256,000 in 2001.
Depreciation of rental equipment increased to $828,000 from $608,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $19,100,000 from $12,823,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $5,141,000 from $4,821,000 due to increases in
license acquisition costs and deferred financing costs.
Interest income and other, net, decreased to $1,464,000 from $2,861,000
primarily due to losses on disposal of cell site equipment damaged by Hurricane
Georges of approximately $400,000, net of partial payment of claims. Interest
income decreased to $1,805,000 from $3,006,000 due to a decrease in amounts
available for short term investment.
Interest expense increased to $17,718,000 from $14,261,000 as a result of the
office building capital lease obligation beginning in April 1997, the issuance
of the subsidiary note payable in January 1998 and the new bank loan commencing
in August 1998.
The provision for income taxes increased to $3,632,000 from $1,241,000 as a
result of a tax provision of $2,200,000 in connection with transactions related
to the distribution and an increase in Puerto Rico and U.S. Virgin Islands
taxable income of certain of the Company's consolidated subsidiaries.
In connection with the termination of a bank loan, CCPR, Inc. recorded an
extraordinary loss of $4,067,000 in 1997 ($3,959,000 net of income tax benefit)
from the write-off of unamortized deferred financing costs.
14
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES
CCPR, Inc. requires capital to expand its cellular and paging network and for
debt service. CCPR, Inc. is currently adding cell sites and increasing capacity
throughout its Puerto Rico and U.S. Virgin Islands markets. CCPR, Inc. expects
to use approximately $9,500,000 in the fourth quarter of 1998 and $30,700,000 in
1999 for contemplated additions to the cellular network, the paging network and
for other non-cell site related capital expenditures. CCPR, Inc.'s commitments
at September 30, 1998 of $2,900,000 for cellular network and other equipment and
for construction services are included in the total anticipated expenditures.
In August 1998, a wholly-owned indirect subsidiary of the Company, CCPR
Services, Inc. ("Services") entered into a $170,000,000 credit agreement with
various banks and borrowed $155,000,000. The Company made a capital contribution
to CoreComm Limited of $150,000,000 in cash using proceeds from the bank loan
and distributed 100% of the common stock of CoreComm Limited to the Company's
shareholders. Services has $15,000,000 available under the bank loan until
September 2001. The terms include the payment of interest at least quarterly at
a floating rate, which is, at Services' option, either (a) the greater of the
bank's prime rate or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based
on the ratio of CCPR and subsidiaries' debt to cash flow and the floating rate
in effect, either 0% to 1.25% or 1.25% to 2.5%. The effective rate on Services'
borrowings as of September 30, 1998 was 8%. The terms also include an unused
commitment fee of 0.5% per annum which is payable quarterly. Principal payments
commence on September 30, 2001 based on two amortization schedules. One schedule
is for the first $95,000,000 borrowed which includes quarterly payments until
June 2006. The other schedule is for the remainder of the amount borrowed which
includes quarterly payments until June 2005. Services incurred costs of
$3,162,000 in connection with the bank loan which are included in deferred
financing costs.
In connection with the bank loan, Services' parent company, CCPR, Inc. has
pledged to the banks the stock of its subsidiaries and CCPR, Inc. and its
subsidiaries have given the banks a security interest in their assets. CCPR,
Inc. and its other subsidiaries have guaranteed the payment in full when due of
the principal, interest and fees owing under the bank loan. The bank loan also
includes, among other things, restrictions on CCPR, Inc. and its subsidiaries
(i) dividend payments, (ii) acquisitions, (iii) investments, (iv) sales and
dispositions of assets, (v) additional indebtedness and (vi) liens. The bank
loan requires that CCPR, Inc. and subsidiaries maintain certain ratios of
indebtedness to cash flow, fixed charges to cash flow and debt service to cash
flow.
In January 1997, Services issued $200,000,000 principal amount 10% Senior
Subordinated Notes due 2007 (the "Notes") and received proceeds of $193,233,000
after discounts, commissions and other related costs. Approximately $116,000,000
of the proceeds were used to repay the $115,000,000 principal outstanding plus
accrued interest and fees under a bank loan. The Notes are due on February 1,
2007. Interest on the Notes is payable semiannually on February 1 and August 1.
The Notes are redeemable, in whole or in part, at the option of Services at any
time on or after February 1, 2002, at a redemption price of 105% that declines
annually to 100% in 2005, in each case together with accrued and unpaid interest
to the redemption date. The Indenture contains certain convenants with respect
to Services, CCPR, Inc. and certain subsidiaries that limit their
15
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
ability to, among other things: (i) incur additional indebtedness, (ii) pay
dividends or make other distributions or restricted payments, (iii) create
liens, (iv) sell assets, (v) enter into mergers or consolidations or (vi) sell
or issue stock of subsidiaries.
In October 1998, the Company commenced an offer to exchange $15.00 principal
amount of a new issue of 15% Subordinated Notes due 2008 (the "15% Notes") in
exchange for each share of its common stock up to 3,500,000 shares. Interest on
the 15% Notes will be payable semi-annually; the first year in cash and, at the
option of the Company, subsequent payments may be paid in cash or through the
issuance of additional 15% Notes. The exchange offer will expire on December 4,
1998.
The Company is highly leveraged as a result of the new bank loan and the
distribution of CoreComm Limited. Such leverage could limit the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes, increases its
vulnerability to adverse changes in general economic conditions or increases in
interest rates, and requires that a substantial portion of cash flow from
operations be dedicated to debt service requirements. The leveraged nature of
the Company and the Company's continued compliance with the restrictions in its
debt agreements could limit its ability to respond to market conditions, meet
extraordinary capital needs or restrict other business activities such as
acquisitions. In addition, the Company is a holding company with no significant
assets other than its investments in and advances to its subsidiaries. The
Company is therefore dependent upon receipt of funds from its subsidiaries to
meet its own obligations, however the debt agreements effectively prevent the
payment of dividends, loans or other distributions to the Company. The Company
expects to be able to meet its consolidated capital requirements at least
through the next twelve months with cash and cash equivalents on hand, cash from
operations and borrowings under the new bank loan.
Management does not anticipate that the Company and its subsidiaries will
generate sufficient cash flow from operations to repay at maturity the entire
principal amount of the outstanding indebtedness. Accordingly, the Company will
be required to consider a number of measures, including (i) refinancing all or a
portion of such indebtedness, (ii) seeking modifications of the terms of such
indebtedness, (iii) seeking additional debt financing, which would be subject to
obtaining necessary lender consents, (iv) seeking additional equity financing or
(v) a combination of the foregoing. The particular measures the Company may
undertake and the ability of the Company to accomplish those measures will
depend on the financial condition of the Company and its subsidiaries at the
time, as well as a number of factors beyond the control of the Company. No
assurance can be given that any of the foregoing measures can be accomplished,
or can be accomplished on terms which are favorable to the Company.
The Board of Directors has authorized the repurchase of up to 1,000,000 shares
of the Company's common stock through open market purchases as market conditions
warrant. As of September 30, 1998, the Company has repurchased 590,000 shares
for an aggregate of $15,207,000, of which 207,000 shares that cost an aggregate
of $6,145,000 were retired.
Cash provided by operating activities was $29,308,000 and $15,537,000 for the
nine months ended September 30, 1998 and 1997, respectively. The increase is
primarily a result of an
16
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
increase in operating income (before the non-cash compensation charge in 1998)
and changes in operating assets and liabilities. In September 1998, the
Company's cash was reduced by $150,904,000 as a result of the distribution of
100% of the common stock of CoreComm Limited to the Company's shareholders.
Purchases of property, plant and equipment of $18,928,000 in 1998 were primarily
for additional cell sites and increased capacity in CCPR, Inc.'s cellular and
paging networks, including $1,115,000 for CoreComm Limited property, plant and
equipment purchases. In April and June 1998, three communications related
businesses in the United States were acquired for cash of $3,715,000 (net of
cash acquired). In 1998, fifteen Block A LMDS licenses in Ohio were acquired for
cash of $25,241,0000 plus $124,000 in auction and license application related
costs (an aggregate of $25,365,000). In January 1998, the San Juan Cellular
Telephone Company (a wholly-owned subsidiary of CCPR, Inc.) purchased the FCC
license to own and operate the non-wireline cellular system in Puerto Rico RSA-4
(Aibonito) and all of the assets of the system in exchange for $8,400,000 in
cash and a promissory note in the amount of $8,900,000. Total cash paid was
$8,686,000 including costs incurred in connection with the acquisition of
$286,000. The $8,900,000 promissory note was paid in August 1998 as required by
the new bank loan.
CCPR, Inc.'s write-offs of accounts receivable, net of recoveries as a
percentage of service revenue was 3.8% for the nine months ended September 30,
1998 compared to 6.7% for the year ended December 31, 1997. This percentage
decreased because CCPR, Inc. and its subsidiaries have increased prepaid
subscribers.
The Company has retained an investment banking firm to act as financial adviser
in reviewing strategic alternatives to enhance shareholder value, including the
exploration of partnering opportunities in the region through a business
combination, an appropriate acquisition, the sale of the Company, or similar
transactions. As of the date of this Form 10-Q, the Company is not engaged in
any substantive discussions with other parties regarding such a potential
transaction.
YEAR 2000
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, suppliers, and customers that are not Year 2000 compliant,
and to develop, implement and test remediation and contingency plans to mitigate
these risks. The project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans and
(4) implementation and testing.
The Company's assessment is focused on its information technology ("IT")
systems, in particular its cellular and paging network and its billing,
provisioning and customer service systems. The Company will also evaluate the
readiness of third-parties such as utility companies that the Company depends
upon for the operation of its network. The Company's leased office space and
other non-IT equipment which may have embedded technology that may be affected
by the year 2000 problem is being separately assessed. The Company expects to
complete the assessment of its IT systems in 1998 and expects to complete the
validation and implementation of its IT systems year 2000 readiness by June
1999. The evaluation of the readiness of the major third-parties is still in the
assessment phase and is expected to be completed in early 1999. The
17
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
and Subsidiaries
Company is also reviewing its detailed contingency plans for potential
modifications to address year 2000 issues. This review is expected to be
completed by June 1999. The Company estimates that it will incur costs of
$2,000,000 to complete the renovation, validation and implementation phases and
achieve year 2000 readiness. As the Year 2000 project continues, the Company may
discover additional problems, may not be able to develop, implement or test
remediation or contingency plans, or may find that the costs of these activities
exceed current expectations. In many cases, the Company is relying on assurances
from suppliers that new and upgraded information systems and other products will
be Year 2000 ready. The Company plans to test such third-party systems and
products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed by the supplier in a timely and
satisfactory way.
Because the Company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the Company cannot be
sure that all of its systems will work together in a Year 2000-ready fashion.
Furthermore, the Company cannot be sure that it will not suffer business
interruptions, either because of its own Year 2000 problems or those of
third-parties upon whom the Company is reliant for services. The Company is
continuing to evaluate its Year 2000-related risks and corrective actions.
However, the risks associated with the Year 2000 problem are pervasive and
complex; they can be difficult to identify and address, and can result in
material adverse consequences to the Company. Even if the Company, in a timely
manner, completes all of its assessments, identifies and test remediation plans
believed to be adequate, and develops contingency plans believed to be adequate,
some problems may not be identified or corrected in time to prevent material
adverse consequences to the Company.
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 Puerto Rico and the U.S. Virgin
Islands, industry trends, the Company'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, Year 2000
readiness and availability, terms and deployment of capital.
18
<PAGE>
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
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.
During the quarter ended September 30, 1998, the Company filed a
current report on Form 8-K dated September 2, 1998 reporting under
Item 5, Other Events, that the Company conducted a distribution to its
shareholders of all the common stock of its wholly-owned subsidiary
CoreComm Limited.
No financial statements were filed with this report.
19
<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 OF
PUERTO RICO, INC.
Date: November 13, 1998 By: /s/ J. Barclay Knapp
--------------------------------------
J. Barclay Knapp
President and Chief Executive Officer
Date: November 13, 1998 By: /s/ Gregg Gorelick
--------------------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
20
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,376,000
<SECURITIES> 17,214,000
<RECEIVABLES> 21,779,000
<ALLOWANCES> (1,758,000)
<INVENTORY> 5,853,000
<CURRENT-ASSETS> 14,649,000
<PP&E> 191,746,000
<DEPRECIATION> (67,576,000)
<TOTAL-ASSETS> 404,160,000
<CURRENT-LIABILITIES> 34,848,000
<BONDS> 355,000,000
0
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<COMMON> 136,000
<OTHER-SE> 4,942,000
<TOTAL-LIABILITY-AND-EQUITY> 404,160,000
<SALES> 1,630,000
<TOTAL-REVENUES> 129,860,000
<CGS> 14,563,000
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<INCOME-PRETAX> (23,023,000)
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