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 March 31, 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 March 31,
1999 was 13,438,770.
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Index
PART I. FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 ............................. 2
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 ....................... 3
Condensed Consolidated Statement of Shareholders'
(Deficiency) - Three months ended March 31, 1999 ................. 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 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 ............................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 15
PART II. OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K ................................. 16
SIGNATURES................................................................. 17
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------------------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,437,000 $ 36,528,000
Marketable securities 20,898,000 19,482,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,162,000 (1999) and $1,582,000 (1998) 17,299,000 18,806,000
Equipment inventory 10,929,000 7,635,000
Prepaid expenses and other current assets 4,700,000 5,575,000
-------------------------------
Total current assets 83,263,000 88,026,000
Property, plant and equipment, net 128,961,000 125,422,000
Unamortized license acquisition costs 168,116,000 169,453,000
Deferred financing costs, less accumulated amortization
of $1,732,000 (1999) and $1,446,000 (1998) 8,435,000 8,721,000
Other assets, less accumulated amortization of
$1,061,000 (1999) and $957,000 (1998) 1,082,000 1,197,000
-------------------------------
$ 389,857,000 $ 392,819,000
===============================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY)
Current liabilities:
Accounts payable $ 12,966,000 $ 15,003,000
Accrued expenses 17,738,000 16,772,000
Due to affiliates 192,000 716,000
Interest payable 3,363,000 8,367,000
Deferred revenue 6,994,000 6,335,000
-------------------------------
Total current liabilities 41,253,000 47,193,000
Long-term debt 355,000,000 355,000,000
Obligation under capital lease 9,078,000 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 13,822,000 (1999) and 13,757,000 (1998) shares 138,000 138,000
Additional paid-in capital 98,428,000 98,234,000
Deferred stock option expense (13,667,000) (16,287,000)
(Deficit) (91,311,000) (91,554,000)
-------------------------------
(6,412,000) (9,469,000)
Treasury stock - at cost, 383,000 shares (9,062,000) (9,062,000)
-------------------------------
(15,474,000) (18,531,000)
-------------------------------
$ 389,857,000 $ 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>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
REVENUES:
Service revenue $ 40,849,000 $ 34,459,000
Equipment revenue 7,446,000 4,954,000
---------------------------------
48,295,000 39,413,000
COSTS AND EXPENSES:
Cost of equipment sold 6,788,000 4,575,000
Operating expenses 3,881,000 4,115,000
Selling, general and administrative expenses 16,965,000 16,629,000
Stock option expense 2,620,000 -
Depreciation of rental equipment 360,000 241,000
Depreciation expense 7,063,000 5,946,000
Amortization expense 1,696,000 1,690,000
---------------------------------
39,373,000 33,196,000
---------------------------------
Operating income 8,922,000 6,217,000
OTHER INCOME (EXPENSE):
Interest income and other, net 357,000 686,000
Interest expense (8,194,000) (5,365,000)
---------------------------------
Income before income tax provision 1,085,000 1,538,000
Income tax provision (842,000) (466,000)
---------------------------------
Net income $ 243,000 $ 1,072,000
=================================
Net income per common share $ .02 $ .08
=================================
Net income per common share-assuming dilution $ .01 $ .08
=================================
</TABLE>
See accompanying notes.
3
<PAGE>
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, 13,757,000 $ 138,000 $ 98,234,000 $ (16,287,000) $ (91,554,000) (383,000) $ (9,062,000)
1998
Exercise of stock 65,000 - 194,000
options
Stock option expense 2,620,000
Net income for the
three months ended 243,000
March 31, 1999
---------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 13,822,000 $ 138,000 $ 98,428,000 $ (13,667,000) $ (91,311,000) (383,000) $ (9,062,000)
=========================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Cellular Communication of Puerto Rico, Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 5,088,000 $ 6,427,000
-------------------------------
INVESTING ACTIVITIES
Payment of the LMDS auction deposit - (20,000,000)
Purchase of cellular license interest - (8,686,000)
Payment in connection with an acquisition - (2,000,000)
Purchase of property, plant and equipment (10,885,000) (7,661,000)
Purchase of marketable securities (9,194,000) (35,391,000)
Proceeds from maturities of marketable securities 7,778,000 65,929,000
-------------------------------
Net cash (used in) investing activities (12,301,000) (7,809,000)
-------------------------------
FINANCING ACTIVITIES
Principal payments of capital lease obligation (72,000) (65,000)
Proceeds from exercise of stock options 194,000 -
-------------------------------
Net cash provided by (used in) financing activities 122,000 (65,000)
-------------------------------
(Decrease) in cash and cash equivalents (7,091,000) (1,447,000)
Cash and cash equivalents at beginning of period 36,528,000 11,783,000
-------------------------------
Cash and cash equivalents at end of period $ 29,437,000 $ 10,336,000
===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive
of amounts capitalized $ 13,198,000 $ 10,188,000
Income taxes paid 594,000 292,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred to acquire property, plant and equipment $ 5,262,000 $ 1,938,000
Liability incurred in connection with LMDS auction deposit - 5,241,000
Long-term debt issued to acquired cellular license interest - 8,900,000
</TABLE>
See accompanying notes.
5
<PAGE>
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 months ended March 31, 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, 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.
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. The announcement also noted
that SBC had formed a joint venture with Telefonos de Mexico S.A. de C.V.
("Telmex") to effect the acquisition.
SBC and Telmex through the joint venture will pay shareholders $29.50 per share
and assume the outstanding debt of the Company. The companies aim to complete
the merger by late third quarter, pending a vote by the Company's shareholders
and regulatory approvals.
NOTE C - UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
MARCH 31, DECEMBER 31,
1999 1998
-------------------------------
(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 207,052,000 207,052,000
-------------------------------
212,987,000 212,987,000
Accumulated amortization 44,871,000 43,534,000
-------------------------------
$ 168,116,000 $ 169,453,000
===============================
6
<PAGE>
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:
MARCH 31, DECEMBER 31,
1999 1998
------------------------------
(Unaudited)
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 149,700,000 142,252,000
Office furniture and other equipment 37,589,000 33,909,000
Rental equipment 3,786,000 3,413,000
Construction in progress 8,764,000 8,387,000
------------------------------
211,712,000 199,834,000
Accumulated depreciation 82,751,000 74,412,000
------------------------------
$ 128,961,000 $ 125,422,000
==============================
NOTE E - ACCRUED EXPENSES
Accrued expenses consist of:
MARCH 31, DECEMBER 31,
1999 1998
------------------------------
(Unaudited)
Accrued compensation $ 1,070,000 $ 1,309,000
Accrued franchise, property and income taxes 6,900,000 6,152,000
Commissions payable 852,000 1,237,000
Accrued equipment purchases 4,362,000 2,340,000
Subscriber deposits 1,441,000 1,384,000
Other 3,113,000 4,350,000
------------------------------
$ 17,738,000 $ 16,772,000
==============================
NOTE F - LONG-TERM DEBT
Long-term debt consists of:
MARCH 31, DECEMBER 31,
1999 1998
------------------------------
(Unaudited)
Senior Subordinated Notes $ 200,000,000 $ 200,000,000
Bank loan 155,000,000 155,000,000
------------------------------
$ 355,000,000 $ 355,000,000
==============================
7
<PAGE>
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
MARCH 31
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Numerator:
Net income $ 243,000 $ 1,072,000
--------------------------------
Denominator for basic net income per common share 13,422,000 13,182,000
Effect of dilutive securities:
Stock options 3,548,000 105,000
--------------------------------
Denominator for diluted net income per common share 16,970,000 13,287,000
--------------------------------
Basic net income per common share $ .02 $ .08
================================
Diluted net income per common share $ .01 $ .08
================================
</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
$2,620,000 as a non-cash stock option charge in the three months ended March 31,
1999. The remaining $13,667,000 will be charged to stock option expense over the
vesting period of the stock options as follows: $7,861,000 in 1999, $4,550,000
in 2000 and $1,256,000 in 2001.
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES
As of March 31, 1999, the Company was committed to purchase approximately
$2,500,000 for cellular network and other equipment and for construction
services. In addition, as of March 31, 1999, the Company had commitments to
purchase cellular telephones, pagers and accessories of approximately
$3,700,000.
8
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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 the 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>
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. The announcement also noted
that SBC had formed a joint venture with Telefonos de Mexico S.A. de C.V.
("Telmex") to effect the acquisition.
SBC and Telmex through the joint venture will pay shareholders $29.50 per share
and assume the outstanding debt of the Company. The companies aim to complete
the merger by late third quarter, pending a vote by the Company's shareholders
and regulatory approvals.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- ------------------------------------------
Service revenue increased to $40,849,000 from $34,459,000. 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 first quarter decreasing to $43 in 1999 from $56 in
1998. The Company expects these trends to continue for the foreseeable future.
Ending subscribers were 332,600 and 211,900 as of March 31, 1999 and 1998,
respectively. Ending pagers in use were 58,800 and 51,600 as of March 31, 1999
and 1998, respectively.
The income from equipment, before depreciation of rental equipment, increased to
$658,000 from $379,000 primarily because the Company 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.
Operating expenses decreased to $3,881,000 from $4,115,000 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 decreased to 10% in 1999 from 12% in 1998.
Selling, general and administrative expenses increased to $16,965,000 from
$16,629,000. Selling, general and administrative expenses include general and
administrative expenses of the parent company of $467,000 in 1999 and $496,000
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
$16,498,000 from $16,133,000 as a result of all of the following: an increase in
selling and marketing costs, property taxes and subscriber billing expense. The
increases in selling and marketing costs, property taxes and subscriber billing
expense were 173%, 54% and 45%, respectively, of the $365,000 increase. These
increases were partially offset by a decrease in bad debt expense which was
(176%) of the increase.
10
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
Stock option expense of $2,620,000 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 $13,667,000 of deferred
stock option expense as of March 31, 1999 that will be charged as non-cash stock
option expense over the vesting period of the stock options as follows:
$7,861,000 in 1999, $4,550,000 in 2000 and $1,256,000 in 2001.
Depreciation of rental equipment increased to $360,000 from $241,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $7,063,000 from $5,946,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $1,696,000 from $1,690,000 primarily due to an
increase in deferred financing costs.
Interest income and other, net, decreased to $357,000 from $686,000 primarily
due to a decrease in interest income on short-term investments.
Interest expense increased to $8,194,000 from $5,365,000 as a result of the new
bank loan commencing in August 1998.
The provision for income taxes increased to $842,000 from $466,000 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 $28,000,000 in
the remainder 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 March 31, 1999 of $2,500,000 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, cash equivalents and marketable 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
11
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
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 March 31, 1999 was 7.62%. 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. (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, 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.
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 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 own obligations at least through the next twelve months with
cash, cash equivalents and marketable securities on hand.
12
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
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 $5,088,000 and $6,427,000 for the
three months ended March 31, 1999 and 1998, respectively. The decrease is
primarily due to changes in operating assets and liabilties. Purchases of
property, plant and equipment of $10,885,000 in 1999 were primarily for
additional cell sites and increased capacity in the Company's cellular and
paging networks.
Write-offs of accounts receivable, net of recoveries as a percentage of service
revenues was 2.6% for the three months ended March 31, 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 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 has incurred approximately
$1,500,000 related to its Year 2000 project and estimates that it will incur
costs of $1,100,000 to complete the renovation, validation and implementation
phases and achieve year 2000 readiness.
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 system. The Company is also evaluating 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 has completed
the assessment of its IT systems and expects to complete the remediation and
testing of its IT systems year 2000 readiness by June 1999. The evaluation of
the readiness of the major third-parties is expected to be completed by June
1999. The 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.
13
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
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.
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.
14
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein constitute "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995.
When used herein, the words, "believe," "anticipate," "should," "intend,"
"plan," "will," "expects," "estimates," "projects," "positioned," "strategy,"
and similar expressions identify such forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from those
contemplated, projected, forecasted, estimated or budgeted, whether expressed or
implied, by such forward-looking statements. Such factors include the following:
general economic and business conditions in 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 RISK
There have been no material changes in the reported market risks since the end
of the most recent fiscal year.
15
<PAGE>
Cellular Communications of Puerto Rico, Inc.
and Subsidiaries
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
16
<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: May 12, 1999 By: /s/ J. Barclay Knapp
--------------------------------
J. Barclay Knapp
President
Date: May 12, 1999 By: /s/ Gregg Gorelick
--------------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
17
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