<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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)
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) 355-3466
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock as of June 30,
1999 was 13,890,109.
<PAGE> 2
Cellular Communications of Puerto Rico, Inc
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1999 and 1998 3
Condensed Consolidated Statement of Shareholders'
(Deficiency) - Six months ended June 30, 1999 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
ASSETS (Unaudited) (See Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 36,122,000 $ 36,528,000
Marketable securities 19,604,000 19,482,000
Accounts receivable -- trade, less allowance for doubtful
accounts of $858,000 (1999) and $1,582,000 (1998) 17,998,000 18,806,000
Equipment inventory 6,688,000 7,635,000
Prepaid expenses and other current assets 6,352,000 5,575,000
------------- -------------
Total current assets 86,764,000 88,026,000
Property, plant and equipment, net 128,932,000 125,422,000
Unamortized license acquisition costs 166,749,000 169,453,000
Deferred financing costs, less accumulated amortization
of $2,017,000 (1999) and $1,446,000 (1998) 8,150,000 8,721,000
Other assets, less accumulated amortization of
$1,114,000 (1999) and $957,000 (1998) 1,021,000 1,197,000
------------- -------------
$ 391,616,000 $ 392,819,000
============= =============
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY)
Current liabilities:
Accounts payable $ 8,218,000 $ 15,003,000
Accrued expenses 15,489,000 16,772,000
Due to affiliates 114,000 716,000
Interest payable 8,364,000 8,367,000
Deferred revenue 6,892,000 6,335,000
------------- -------------
Total current liabilities 39,077,000 47,193,000
Long-term debt 355,000,000 355,000,000
Obligation under capital lease 8,996,000 9,157,000
Commitments and contingent liabilities
Shareholders' (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 13,890,000 (1999) and 13,757,000 (1998) shares 139,000 138,000
Additional paid-in capital 98,612,000 98,234,000
Deferred stock option expense (11,046,000) (16,287,000)
(Deficit) (90,100,000) (91,554,000)
------------- -------------
(2,395,000) (9,469,000)
Treasury stock -- at cost, 383,000 shares (9,062,000) (9,062,000)
------------- -------------
(11,457,000) (18,531,000)
------------- -------------
$ 391,616,000 $ 392,819,000
============= =============
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
See accompanying notes.
2
<PAGE> 4
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Service revenue $ 42,487,000 $ 38,308,000 $ 83,336,000 $ 72,767,000
Equipment revenue 6,243,000 5,559,000 13,689,000 10,513,000
------------ ------------ ------------ ------------
48,730,000 43,867,000 97,025,000 83,280,000
COSTS AND EXPENSES:
Cost of equipment sold 5,939,000 4,894,000 12,727,000 9,469,000
Operating expenses 4,190,000 5,303,000 8,071,000 9,418,000
Selling, general and administrative expenses 17,649,000 19,058,000 34,614,000 35,687,000
Stock option expense 2,621,000 -- 5,241,000 --
Depreciation of rental equipment 380,000 275,000 740,000 516,000
Depreciation expense 7,236,000 6,423,000 14,299,000 12,369,000
Amortization expense 1,696,000 1,710,000 3,392,000 3,400,000
------------ ------------ ------------ ------------
39,711,000 37,663,000 79,084,000 70,859,000
------------ ------------ ------------ ------------
Operating income 9,019,000 6,204,000 17,941,000 12,421,000
OTHER INCOME (EXPENSE):
Interest income and other, net 741,000 494,000 1,098,000 1,180,000
Interest expense (7,931,000) (5,395,000) (16,125,000) (10,760,000)
------------ ------------ ------------ ------------
Income before income tax provision 1,829,000 1,303,000 2,914,000 2,841,000
Income tax provision (618,000) (370,000) (1,460,000) (836,000)
------------ ------------ ------------ ------------
Net income $ 1,211,000 $ 933,000 $ 1,454,000 $ 2,005,000
============ ============ ============ ============
Net income per common share - basic $ .09 $ .07 $ .11 $ .15
============ ============ ============ ============
Net income per common share - assuming dilution $ .07 $ .06 $ .09 $ .14
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Condensed Consolidated Statement of Shareholders' (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, 1998 13,757,000 $ 138,000 $ 98,234,000 $(16,287,000) $(91,554,000) (383,000) $ (9,062,000)
Exercise of stock options 133,000 1,000 378,000
Stock option expense 5,241,000
Net income for the six months
ended June 30, 1999 1,454,000
---------- ------------ ------------ ------------ ------------ -------- ------------
Balance, June 30, 1999 13,890,000 $ 139,000 $ 98,612,000 $(11,046,000) $(90,100,000) (383,000) $ (9,062,000)
========== ============ ============ ============ ============ ======== ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 20,094,000 $ 20,219,000
------------ ------------
INVESTING ACTIVITIES
Payment of the LMDS license fee and related costs -- (25,356,000)
Cost of cellular license interest -- (8,686,000)
Acquisition of subsidiaries, net of cash acquired -- (3,715,000)
Purchase of property, plant and equipment (21,078,000) (13,307,000)
Purchase of marketable securities (16,260,000) (38,496,000)
Proceeds from maturities of marketable securities 16,605,000 76,911,000
------------ ------------
Net cash (used in) investing activities (20,733,000) (12,649,000)
------------ ------------
FINANCING ACTIVITIES
Principal payments of capital lease obligation (146,000) (133,000)
Proceeds from exercise of stock options 379,000 30,000
------------ ------------
Net cash provided by (used in) financing activities 233,000 (103,000)
------------ ------------
Increase (decrease) in cash and cash equivalents (406,000) 7,467,000
Cash and cash equivalents at beginning of period 36,528,000 11,783,000
------------ ------------
Cash and cash equivalents at end of period $ 36,122,000 $ 19,250,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive
of amounts capitalized $ 16,128,000 $ 10,406,000
Income taxes paid 1,509,000 355,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred to acquire property, plant and
equipment $ 2,285,000 $ 1,754,000
Long-term debt issued to acquire cellular license interest -- 8,900,000
</TABLE>
See accompanying notes.
6
<PAGE> 7
Cellular Communications of Puerto Rico, Inc.
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 six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in fiscal years
beginning after June 15, 2000. 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.
NOTE B - MERGER AGREEMENT
On May 3, 1999, the Company announced that it had entered into an agreement with
SBC Communications Inc. ("SBC") under which it would be acquired in a
transaction valued at $29.50 per outstanding share. In addition, based on
information provided by SBC, Telefonos de Mexico S.A. de C.V. will purchase an
interest in the SBC subsidiary that will acquire the Company. The Company
expects to complete the merger in the third quarter of 1999 pending regulatory
approvals.
NOTE C - UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Deferred cellular license costs $ 5,935,000 $ 5,935,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 207,052,000 207,052,000
------------ ------------
212,987,000 212,987,000
Accumulated amortization 46,238,000 43,534,000
------------ ------------
$166,749,000 $169,453,000
============ ============
</TABLE>
7
<PAGE> 8
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 153,075,000 142,252,000
Office furniture and other equipment 40,276,000 33,909,000
Rental equipment 4,136,000 3,413,000
Construction in progress 8,728,000 8,387,000
------------ ------------
218,088,000 199,834,000
Accumulated depreciation 89,156,000 74,412,000
------------ ------------
$128,932,000 $125,422,000
============ ============
</TABLE>
NOTE E - ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Accrued compensation $ 2,117,000 $ 1,309,000
Accrued franchise, property and income taxes 6,287,000 6,152,000
Commissions payable 1,366,000 1,237,000
Accrued equipment purchases 1,106,000 2,340,000
Subscriber deposits 1,513,000 1,384,000
Other 3,100,000 4,350,000
------------ ------------
$15,489,000 $16,772,000
=========== ===========
</TABLE>
NOTE F - LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Senior Subordinated Notes $200,000,000 $200,000,000
Bank loan 155,000,000 155,000,000
------------ ------------
$355,000,000 $355,000,000
============ ============
</TABLE>
8
<PAGE> 9
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NOTE G - NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,211,000 $ 933,000 $ 1,454,000 $ 2,005,000
----------- ----------- ----------- -----------
Denominator for basic net income per
common share 13,452,000 13,184,000 13,437,000 13,183,000
Effect of dilutive securities:
Stock options 3,582,000 1,305,000 3,540,000 772,000
----------- ----------- ----------- -----------
Denominator for diluted net income per
common share 17,034,000 14,489,000 16,977,000 13,955,000
----------- ----------- ----------- -----------
Basic net income per common share $ .09 $ .07 $ .11 $ .15
=========== =========== =========== ===========
Diluted net income per common share $ .07 $ .06 $ .09 $ .14
=========== =========== =========== ===========
</TABLE>
NOTE H - DEFERRED STOCK OPTION EXPENSE
In connection with the distribution of all the common stock of CoreComm Limited
to the Company's shareholders in 1998, the Company made an equitable adjustment
to certain employee and non-employee director stock options. The deferred stock
option expense included in shareholders' deficiency was a non-cash charge
recorded in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" as a result of the new measurement date. The Company recognized
$5,241,000 as a non-cash stock option charge in the six months ended June 30,
1999. The remaining $11,046,000 will be charged to stock option expense over the
vesting period of the stock options as follows: $5,240,000 in 1999, $4,550,000
in 2000 and $1,256,000 in 2001.
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES
As of June 30, 1999, the Company was committed to purchase approximately
$7,800,000 for cellular network and other equipment and for construction
services. In addition, as of June 30, 1999, the Company had commitments to
purchase cellular telephones, pagers and accessories of approximately
$2,000,000.
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
1999 were $302,000, which were determined by the size of the Company's markets.
9
<PAGE> 10
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
On May 3, 1999, the Company announced that it had entered into an agreement with
SBC Communications Inc. ("SBC") under which it would be acquired in a
transaction valued at $29.50 per outstanding share. In addition, based on
information provided by SBC, Telefonos de Mexico S.A. de C.V. will purchase an
interest in the SBC subsidiary that will acquire the Company. The Company
expects to complete the merger in the third quarter of 1999 pending regulatory
approvals.
In 1998, the Company acquired, through its wholly-owned subsidiary CoreComm
Limited, three communications related businesses in the United States and was
the high bidder for 15 LMDS licenses in Ohio. As a result of acquisitions in
April and June 1998, the Company consolidated the results of operations of the
acquired businesses from the dates of acquisition. In September 1998, the
Company completed the distribution of all of the common stock of CoreComm
Limited to its shareholders.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Service revenue increased to $42,487,000 from $38,308,000. Service revenue
includes $1,200,000 in 1998 from acquired businesses. For the Company'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 second quarter decreasing to $41 in 1999 from
$55 in 1998. The Company expects these trends to continue for the foreseeable
future. Ending subscribers were 361,900 and 234,400 as of June 30, 1999 and
1998, respectively. Ending pagers in use were 59,900 and 53,400 as of June 30,
1999 and 1998, respectively.
The income from equipment, before depreciation of rental equipment, decreased to
$304,000 from $665,000 due to lower selling prices on digital cellular
telephones sold to prepaid subscribers. The Company intends to continue to sell
telephones at or above cost to prepaid subscribers. The income from equipment in
1998 includes $45,000 from acquired businesses.
Operating expenses decreased to $4,190,000 from $5,303,000. Operating expenses
in 1998 include $1,052,000 from acquired businesses. For the Company's cellular
and paging business in Puerto Rico and the U.S. Virgin Islands, operating
expenses decreased to $4,190,000 from $4,251,000 primarily due to a reduction in
interconnection expense, offset by additional costs associated with the expanded
network (including paging operations). Operating expenses as a percentage of
service revenue, excluding CoreComm Limited businesses, decreased to 10% in 1999
from 11% in 1998.
9
<PAGE> 11
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Selling, general and administrative expenses decreased to $17,649,000 from
$19,058,000. Selling, general and administrative expenses include $1,417,000
from acquired businesses and general and administrative expenses of the parent
company of $510,000 in 1999 and $832,000 in 1998. For the Company's cellular and
paging business in Puerto Rico and the U.S. Virgin Islands, selling, general and
administrative expenses increased to $17,139,000 from $16,809,000 primarily as a
result of an increase in selling and marketing costs, which was partially offset
by a decrease in bad debt expense.
Stock option expense of $2,621,000 in 1999 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
to the Company's shareholders in 1998. The Company has $11,046,000 of deferred
stock option expense as of June 30, 1999 that will be charged as non-cash stock
option expense over the vesting period of the stock options as follows:
$5,240,000 in 1999, $4,550,000 in 2000 and $1,256,000 in 2001.
Depreciation of rental equipment increased to $380,000 from $275,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $7,236,000 from $6,423,000 primarily because
of an increase in property, plant and equipment.
Amortization expense decreased to $1,696,000 from $1,710,000 primarily due to a
decrease in goodwill from the 1998 acquisitions.
Interest income and other, net, increased to $741,000 from $494,000 primarily
due to gains on disposals of property, plant and equipment of $327,000.
Interest expense increased to $7,931,000 from $5,395,000 as a result of the new
bank loan commencing in August 1998.
The provision for income taxes increased to $618,000 from $370,000 as a result
of an increase in Puerto Rico and U.S. Virgin Islands taxable income of certain
of the Company's consolidated subsidiaries.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Service revenue increased to $83,336,000 from $72,767,000. Service revenue
includes $1,200,000 in 1998 from acquired businesses. For the Company'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 six months ended June 30 decreasing to $42 in
1999 from $55 in 1998. The Company expects these trends to continue for the
foreseeable future. Ending subscribers were 361,900 and 234,400 as of June 30,
1999 and 1998, respectively. Ending pagers in use were 59,900 and 53,400 as of
June 30, 1999 and 1998, respectively.
10
<PAGE> 12
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
The income from equipment, before depreciation of rental equipment, decreased to
$962,000 from $1,044,000 due to lower selling prices on digital cellular
telephones sold to prepaid subscribers. The Company intends to continue to sell
telephones at or above cost to prepaid subscribers. The income from equipment in
1998 includes $45,000 from acquired businesses.
Operating expenses decreased to $8,071,000 from $9,418,000. Operating expenses
in 1998 include $1,052,000 from acquired businesses. For the Company's cellular
and paging business in Puerto Rico and the U.S. Virgin Islands, operating
expenses decreased to $8,071,000 from $8,366,000 primarily due to a reduction in
interconnection expense, offset by additional costs associated with the expanded
network (including paging operations). Operating expenses as a percentage of
service revenue, excluding CoreComm Limited businesses, decreased to 10% in 1999
from 12% in 1998.
Selling, general and administrative expenses decreased to $34,614,000 from
$35,687,000. Selling, general and administrative expenses in 1998 include
$1,417,000 from acquired businesses and general and administrative expenses of
the parent company of $977,000 in 1999 and $1,328,000 in 1998. For the Company's
cellular and paging business in Puerto Rico and the U.S. Virgin Islands,
selling, general and administrative expenses increased to $33,637,000 from
$32,942,000 primarily as a result of an increase in selling and marketing costs,
which was partially offset by a decrease in bad debt expense.
Stock option expense of $5,241,000 in 1999 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 to the Company's shareholders in 1998. The Company has
$11,046,000 of deferred stock option expense as of June 30, 1999 that will be
charged as non-cash stock option expense over the vesting period of the stock
options as follows: $5,240,000 in 1999, $4,550,000 in 2000 and $1,256,000 in
2001.
Depreciation of rental equipment increased to $740,000 from $516,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $14,299,000 from $12,369,000 primarily because
of an increase in property, plant and equipment.
Amortization expense decreased to $3,392,000 from $3,400,000 due to a decrease
in goodwill from the 1998 acquisitions.
Interest income and other, net, decreased to $1,098,000 from $1,180,000 due to a
decrease in interest income on short term investments offset by an increase in
gains on disposals of property, plant and equipment.
Interest expense increased to $16,125,000 from $10,760,00 as a result of the new
bank loan commencing in August 1998.
11
<PAGE> 13
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
The provision for income taxes increased to $1,460,000 from $836,000 as a result
of an increase in Puerto Rico and U.S. Virgin Islands taxable income of certain
of the Company's consolidated subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to expand its Puerto Rico and U.S. Virgin Islands
cellular and paging network and for debt service. The Company is currently
adding cell sites and increasing capacity throughout its Puerto Rico and U.S.
Virgin Islands markets. The Company expects to use approximately $17,800,000 in
the second half of 1999 for contemplated additions to the cellular network, the
paging network and for other non-cell site related capital expenditures. The
Company's commitments at June 30, 1999 of $7,800,000 for cellular network and
other equipment and for construction services are included in the total
anticipated expenditures. The Company expects to be able to meet these
requirements with cash and securities on hand and cash from operations.
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. 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. (a wholly-owned subsidiary of the Company and the
parent company of Services) 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 June 30, 1999 was 6.8%. 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.
In connection with the bank loan, 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, which guarantee is full, joint and several. 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.
12
<PAGE> 14
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
In January 1997, Services issued $200,000,000 principal amount 10% Senior
Subordinated Notes due 2007 (the "Notes"). The Notes are unconditionally
guaranteed by CCPR, Inc., which guarantee is full, joint and several. 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 covenants with respect to Services, CCPR, Inc. and certain subsidiaries
that limit their 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.
The Company is highly leveraged. 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 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 own obligations at least through the next twelve months with
cash, cash equivalents and marketable securities on hand.
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 may
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 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.
Cash provided by operating activities was $20,094,000 and $20,219,000 for the
six months ended June 30, 1999 and 1998, respectively. The increase is primarily
a result of an increase in operating income and changes in operating assets and
liabilities. Purchases of property, plant and equipment of $21,078,000 in 1999
were primarily for additional cell sites and increased capacity in the Company's
cellular and paging networks.
13
<PAGE> 15
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Write-offs of accounts receivable, net of recoveries as a percentage of service
revenues was 1.79% for the six months ended June 30, 1999 compared to 3.6% for
the year ended December 31, 1998. This percentage decreased because the Company
and its subsidiaries have increased prepaid subscribers.
YEAR 2000
The Company had 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 included 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 was focused on its
information technology ("IT") systems, in particular it's cellular and paging
network and its billing, provisioning and customer service system. The Company
also evaluated 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 completed the assessment, remediation, and testing of its critical
IT systems. In addition, the evaluation of the readiness of major third-parties
is complete. The Company completed contingency plans for all critical business
processes. Throughout the remainder of the year the Company will review and
update its plans to ensure their applicability. In addition, the Company will
ensure that all personnel involved in the contingency plans are properly trained
and prepared. The Company incurred approximately $2,300,000 related to its Year
2000 project and estimates that it will incur nominal additional costs.
The Company currently believes that the most reasonably likely worst case
scenario with respect to the Year 2000 is the failure of the electric company or
the local exchange telephone company to be ready for the year 2000. This could
cause a temporary interruption in the provision of service to customers or in
the Company's ability to complete telephone calls, or both. Either or both could
have a material adverse effect on operations, although it is not possible at
this time to quantify the amount of revenues and gross profit that might be
lost, or the costs that could be incurred. The contingency plan to address some
of these risks involve utilizing back-up power supplies and alternative
interconnections, which would require time to implement and may be constrained
due to capacity and/or training limitations. The Company has had experience in
implementing its disaster recovery plan due to Hurricane Georges, which struck
Puerto Rico and the U.S. Virgin Islands in September 1998 and caused the
electric company and local exchange telephone company to experience service
interruptions.
14
<PAGE> 16
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
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 though the Company completed
all of its assessments, identified and tested remediation plans believed to be
adequate, and developed 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes in the reported market risks since the end
of the most recent fiscal year.
16
<PAGE> 17
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 3, 1999, the Company held its annual meeting of stockholders.
The following management proposals were adopted: (i) the reelection of
Sidney R. Knafel and Del Mintz to the Board of Directors and (ii) the
ratification of the selection of Ernst & Young LLP as the Company's
independent auditors for 1999.
The stockholders approved the election of Sidney R. Knafel by a vote of
11,160,074 shares in favor and 8,624 shares withheld from voting. The
stockholders approved the election of Del Mintz by a vote of 11,158,074
share in favor and 10,624 shares withheld from voting. The stockholders
approved the second proposal by a vote of 11,164,729 shares in favor,
3,347 shares against and 622 shares abstaining from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999, the Company filed a Current
Report on Form 8-K dated April 30, 1999 reporting under Item 5, Other
Events, that it had entered into a merger agreement with SBC
Communications Inc. No financial statements were filed with this
report.
17
<PAGE> 18
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
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: August 11, 1999 By: /s/ J. Barclay Knapp
-------------------------
J. Barclay Knapp
President and Chief Executive Officer
Date: August 11, 1999 By: /s/ Gregg Gorelick
--------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
18
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