SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
F O R M 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________
Commission File No. 333-26055
CCPR SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3120943
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 East 59th Street, New York, New York 10022
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 906-8481
----------------------------------------------------
(Registrant's telephone number, including area code)
----------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
10% Senior Subordinated Notes due 2007
--------------------------------------
(Title of Class)
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20, 1998, there were 1,400 shares of the Registrant's common stock
outstanding. The Registrant is an indirect wholly-owned subsidiary of CoreComm
Incorporated, and there is no market for the Registrant's common stock.
The Registrant meets the conditions set forth in General Instructions I(1)(a)
and I(1)(b) of Form 10-K and is filing this form with the reduced disclosure
format pursuant to General Instructions I(2)(b) and I(2)(c).
"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 Registrant, or industry results, to be materially different from those
contemplated or projected, forecast, estimated or budgeted in or expressed or
implied by such forward-looking statements. Such factors include, among others,
the risk and other factors set forth under "Risk Factors" as well as the
following: general economic and business conditions, industry trends, the
Registrant's ability to continue to design 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, and availability, terms and deployment of
capital.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
- ------
Item 1 Business ........................................................ 1
Item 2 Property ........................................................ 1
Item 3 Legal Proceedings ............................................... 1
Item 4 Submission of Matters to a Vote of Stockholders.................. 1
PART II
- -------
Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters ..................................... 2
Item 6 Selected Financial Data ......................................... 2
Item 7 Management's Discussion and Analysis of Results
of Operations and Financial Condition ........................... 3
Item 7A Quantitative and Qualitative Disclosures About Market Risk ...... 7
Item 8 Financial Statements and Supplementary Data ..................... 7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................. 7
PART III
- --------
Items 10, 11, 12 and 13.................................................... 8
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................................. 8
Exhibit Index ............................................................. 9
Signatures ................................................................ 10
Index to Financial Statements .............................................F-1
<PAGE>
PART I
------
ITEM 1. BUSINESS.
- ----------------
CCPR Services, Inc. (the "Company") is a wholly-owned subsidiary of
Cellular Communications of Puerto Rico, Inc. ("CCPR"). CCPR is a wholly-owned
subsidiary of CoreComm Incorporated ("CoreComm"). The Company is the principal
operating subsidiary of CoreComm's Puerto Rico cellular system. The Company also
owns or controls the following Federal Communications Commission cellular
licenses with respect to that system: Aguadilla, Arecibo, Mayaguez, Ponce,
Ricon, Adjuntas, Ciales, Vieques and Culebra.
The Company is a Delaware corporation that was incorporated on May 28,
1982. The Company's executive offices are located at 110 East 59th Street, New
York, New York 10022 and its telephone number is (212) 906-8481.
ITEM 2. PROPERTY.
- ----------------
The Company leases office space, sales and service centers and warehouse
space in the Commonwealth of Puerto Rico. In addition, the Company owns or
leases transmitter sites and leases a cellular switch site. The loss of any of
these leases, either because of a failure to obtain a renewal of a lease or for
any reason not known or anticipated by the Company, could have an adverse effect
on the Company's cellular operations until a substitute site could be found.
The Company believes that the properties that are currently under lease or
owned by the Company are adequate to serve its present business operations and
its goals of providing continuous cellular coverage throughout Puerto Rico,
although the Company may require additional properties for new cell sites and
sales and service centers as demand for cellular service increases. See the
Notes to the Company's Financial Statements included elsewhere in this Form 10-K
for information concerning lease commitments.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
The Company is involved in various disputes, arising in the ordinary course
of business, which may result in pending or threatened litigation. The Company's
management expects no material adverse effect on the Company's financial
condition to result from these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
- -------------------------------------------------------
Omitted pursuant to General Instruction I(2)(c)of Form 10-K.
1
<PAGE>
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
- ------------------------------------------------------------------------
The Company is a wholly-owned subsidiary of CCPR.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
The following table sets forth certain financial data for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993. The selected financial data has
been restated to include the combined financial data of Services and the merged
companies. This information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 55,932 $ 38,295 $ 28,105 $ 14,085 $ 5,981
Operating income (loss) 18,645 9,348 4,504 (3,535) (5,612)
Income (loss) before extraordinary item (2,008) 1,491 1,821 (3,643) (5,697)
Net income (loss) (5,334) 1,491 1,821 (3,643) (5,697)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $ (27,488) $ (8,156) $ 6,222 $ (39,534) $ (26,436)
Property, plant and equipment-net 119,702 90,000 69,594 52,760 42,482
Total assets 279,082 163,408 122,087 80,530 74,386
Long-term debt excluding capital lease 200,000 115,000 90,000 225 225
Shareholders' equity (deficiency) (3,043) 2,291 800 24,127 27,770
</TABLE>
The Company did not declare or pay any cash dividends during the periods
indicated.
2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
- -------------------------------------------------------------------------
Effective December 31, 1997, certain subsidiaries of Cellular
Communications of Puerto Rico, Inc. ("CCPR") merged with and into CCPR Services,
Inc. (the "Company"). The Company is a wholly-owned subsidiary of CCPR, and CCPR
is a wholly-owned subsidiary of CoreComm. As a result of these mergers, the
Company owns and operates a portion of CCPR's Puerto Rico cellular system. The
Company manages and operates the remainder in accordance with an Administration
and Management Agreement between the Company and the San Juan Cellular Telephone
Company ("SJCTC") (a general partnership). The Company owns 27.146% of the
partnership interests in SJCTC, and CCPR directly or through subsidiaries owns
the remaining 72.854% of the interests.
These mergers have been accounted for in a manner similar to a pooling of
interests since all of the companies were wholly-owned by CCPR. Accordingly, all
prior periods presented have been restated to include the combined results of
operations of Services and the merged companies. Services charges SJCTC an
administrative fee based on its revenues and a capital usage fee which is the
recovery of a portion of Services' capital costs.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
- --------------------------------------
Administrative and capital usage fees charged to SJCTC increased to
$35,743,000 from $18,417,000 primarily because of increases in capital costs in
the SJCTC license area.
Service revenue increased to $18,452,000 from $17,701,000 as a result of
subscriber growth.
The loss from equipment, before depreciation of rental equipment, decreased
to $282,000 from $580,000 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 decrease.
Equity in net income (loss) of SJCTC decreased to a loss of $199,000 from
income of $304,000. The change is a result of the increase in capital usage fees
charged to SJCTC.
Operating expenses increased to $2,981,000 from $2,736,000 primarily due to
additional costs associated with the expanded network, offset by a reduction in
interconnection charges.
Selling, general and administrative expenses increased to $10,986,000 from
$10,092,000 as a result of increased selling and marketing to increase the
customer base and additional personnel to service the expanding customer base.
Depreciation of rental equipment increased to $221,000 from $193,000 due to
an increase in rental telephones.
3
<PAGE>
Depreciation expense increased to $17,010,000 from $11,546,000 primarily
because of an increase in property, plant and equipment.
Amortization expense increased to $3,871,000 from $1,927,000 primarily due
to the increase in investment in SJCTC.
Interest and other income (expense) decreased to an expense of $1,788,000
from income of $600,000 primarily due to an increase in loss on write-downs and
disposals of property, plant, and equipment.
Interest expense increased to $19,394,000 from $8,094,000 as a result of
the increase in long-term debt at a higher effective interest rate during the
first quarter of 1997.
The provision for income taxes decreased to $2,000 from $960,000 due to a
decrease in Puerto Rico taxable income.
In connection with the repayment of the bank loan, Services recorded an
extraordinary loss of $4,067,000 ($3,326,000 net of income tax benefit) from the
write-off of unamortized deferred financing costs.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Administrative and capital usage fees charged to SJCTC increased to
$18,417,000 from $11,914,000 as a result of increases in revenues and capital
costs in the SJCTC license area.
Service revenue increased to $17,701,000 from $14,221,000 as a result of
subscriber growth.
The loss from equipment, before depreciation of rental equipment, decreased
to $580,000 from $932,000 primarily because of reductions in the cost of
cellular telephones. Services sells cellular telephones below cost in response
to competition and to generate subscriber growth.
Equity in net income of SJCTC of $304,000 in 1996 is the result of the
acquisition of an approximately 6% ownership interest in the partnership in
February 1996.
Operating expenses increased to $2,736,000 from $2,178,000 primarily due to
increased usage of the network and additional costs associated with the expanded
network.
Selling, general and administrative expenses increased to $10,092,000 from
$8,191,000 as a result of increased selling and marketing to increase the
customer base and additional personnel to service the expanding customer base.
4
<PAGE>
Depreciation of rental equipment decreased to $193,000 from $225,000 due to
rental telephones becoming fully depreciated
Depreciation expense increased to $11,546,000 from $8,920,000 primarily
because of an increase in property, plant and equipment.
Amortization expense increased to $1,927,000 from $1,185,000 primarily due
to the increase in investment in SJCTC.
Intercompany interest income increased to $597,000 from $407,000 as a
result of the increase in the amounts due from affiliates.
Interest and other income increased to $600,000 from $169,000 as a result
of increases in cash available for short-term investment.
Interest expense increased to $8,094,000 from $2,769,000 as a result of a
higher average balance on long-term debt outstanding during 1996.
The provision for income taxes increased to $960,000 from $149,000 as a
result of an increase in Puerto Rico income tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to expand its Puerto Rico cellular system and
for debt service. The Company is currently adding cell sites and increasing
capacity throughout Puerto Rico. The Company expects to use approximately
$26,300,000 in 1998 for contemplated additions to the Puerto Rico cellular
network and for other non-cell site related capital expenditures. The Company's
commitments at December 31, 1997 of $4,000,000 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 from operations and cash from CCPR.
CCPR has received loans from CoreComm of $17,056,000 through 1997, which
are non-interest bearing and are due on June 30, 1998. CCPR used the funds to
make loans to the Company. As of March 20, 1998, CoreComm had loaned an
additional $11,400,000, of which $3,000,000 was used by the Company for a
portion of its interest payment.
In January 1997, the Company 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. The Notes are
unconditionally guaranteed by CCPR. The Company used approximately $116,000,000
of the proceeds to repay the $115,000,000 principal outstanding plus accrued
interest and fees under an existing bank loan. In addition, the Company made a
cash payment to CCPR of $80,000,000 in exchange for a 21% interest in SJCTC.
5
<PAGE>
The Notes are due on February 1, 2007. Interest on the Notes is payable
semiannually commencing August 1, 1997. The Notes are redeemable, in whole or in
part, at the option of the Company 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 the Company, CCPR and certain
subsidiaries of CCPR that limit their ability to, among other things, (i) incur
additional indebtedness, (ii) pay dividends or make other distributions or
restricted payments (except for dividend payments to CCPR and an aggregate of up
to $100,000,000 to be used for dividends or restricted payments to CoreComm),
(iii) create liens, (iv) sell assets, (v) enter into mergers or consolidations
or (vi) sell or issue stock of subsidiaries.
Cash provided by operating activities was $23,818,000 and $8,959,000 for
the years ended December 31, 1997 and 1996, respectively. The change is
primarily due to increased depreciation and amortization and changes in
operating assets and liabilities. Purchases of property, plant and equipment of
$37,335,000 in 1997 were primarily for additional cell sites and increased
capacity in its Puerto Rico cellular network.
Write-offs of accounts receivable, net of recoveries as a percentage of
service revenues was 7.1% for the year ended December 31, 1997 compared to 6.2%
for the year ended December 31, 1996. This percentage increased because the
Company has attracted and continues to attract new segments of the market. The
Company continues to attempt to reduce this percentage by improving credit
procedures and instituting innovative forms of payment such as prepaid billing.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of the
computer systems of certain significant customers and vendors for handling the
year 2000. The Company expects to implement successfully the systems and
programming changes necessary to address year 2000 issues, and does not believe
that the cost of such actions will have a material adverse effect on the
Company. There can be no assurance, however, that there will not be a delay in,
or increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
the Company. In addition, the failure of certain of the Company's significant
customers and vendors to address the year 2000 issue could have a material
adverse effect on the Company.
6
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------------------------------------------------------------------
The Company is required to provide these disclosures in its Annual Report
on Form 10-K for the year ended December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
The Financial Statements are included herein commencing on page F-1.
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 12,983 $ 14,123 $ 13,556 $ 15,270
Operating income 4,593 5,168 4,159 4,725
Income (loss) before extraordinary item 590 (1) (1,136) (1,461)
Net income (loss) (3,163) 425 (749) (1,847)
</TABLE>
<TABLE>
<CAPTION>
1996
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 8,325 $ 8,995 $ 10,369 $ 10,606
Operating income 1,714 1,946 2,420 3,268
Net income 55 266 64 1,106
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- -----------------------------------------------------------------------
Not applicable.
7
<PAGE>
PART III
--------
ITEMS 10, 11, 12 AND 13.
- -----------------------
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- ------------------------------------------------------------------------
(a)(1) Financial Statements - See list of Financial Statements on page F-1.
(2) Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1.
(3) Exhibits - See Exhibit Index on page 9.
(b) Reports on Form 8-K. The Company filed no current reports on Form 8-K
during the quarter ended December 31, 1997.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1. See the Index to Financial Statements of the
San Juan Cellular Telephone Company on page S-1.
8
<PAGE>
EXHIBIT INDEX
Exhibit No.
- ----------
3.1 Restated Certificate of Incorporation of the Company. (Incorporated by
reference from Exhibit 3.1, File Number 333-26055)
3.2 By-laws of the Company. (Incorporated by reference from Exhibit 3.2,
File Number 333-26055)
4.1 Indenture dated as of January 31, 1997 by and between the Company,
Cellular Communications of Puerto Rico, Inc. and The Chase Manhattan
Bank, N.A. (Incorporated by reference from Exhibit 4.3 of CoreComm's
1996 Form 10-K, File Number 19869-99)
4.2 Registration Rights Agreement dated as of January 31, 1997 by and
among the Company, Cellular Communications of Puerto Rico, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Brothers
Inc and Wasserstein Perella Securities, Inc. (Incorporated by
reference from Exhibit 4.2 of CoreComm's 1996 Form 10-K, File Number
19869-99)
10.1 Partnership Agreement relating to San Juan Cellular Telephone Company.
(Incorporated by reference to Exhibit 10.4, File Number 33-44420)
10.2 Tax Sharing Agreement dated as of January 31, 1997 by and among
CoreComm, Cellular Communications of Puerto Rico, Inc. and the
Company. (Incorporated by reference to Exhibit 10.2 of CoreComm's 1996
Form 10-K, File Number 19869-99)
10.3 Agreement dated as of January 31, 1997, by and between Cellular
Communications of Puerto Rico, Inc. and the Company. (Incorporated by
reference to Exhibit 10.7 of CoreComm's 1996 Form 10-K, File Number
19869-99)
21 Omitted pursuant to General Instruction I(2)(b) of Form 10-K.
27 Financial Data Schedule, for the year ended December 31, 1997.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 26, 1998
CCPR SERVICES, INC.
By: /s/ Stanton N. Williams
------------------------------------------
Stanton N. Williams
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ George S. Blumenthal Principal Executive March 26, 1998
- ---------------------------- Officer and Director
George S. Blumenthal
/s/ J. Barclay Knapp Chief Operating Officer March 26, 1998
- ---------------------------- and Director
J. Barclay Knapp
/s/ Stanton N. Williams Principal Financial Officer March 26, 1998
- ----------------------------
Stanton N. Williams
/s/ Gregg Gorelick Principal Accounting Officer March 26, 1998
- ----------------------------
Gregg Gorelick
/s/ Richard J. Lubasch Director March 26, 1998
- ----------------------------
Richard J. Lubasch
10
<PAGE>
Form 10-K - Item 14(a)(1) and (2)
CCPR Services, Inc.
Index to Financial Statements
and Financial Statement Schedules
The following financial statements and schedule of CCPR Services, Inc. are
included in Item 8:
Report of Independent Auditors...........................................F-2
Balance Sheets - December 31, 1997 and 1996..............................F-3
Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995......................................F-4
Statement of Shareholder's Equity (Deficiency) - Years Ended
December 31, 1997, 1996 and 1995......................................F-5
Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995......................................F-6
Notes to Financial Statements............................................F-8
The following financial statement schedule of CCPR Services, Inc. is included in
Item 14(d):
Schedule II - Valuation and Qualifying Accounts........................F-19
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholder
CCPR Services, Inc.
We have audited the accompanying balance sheets of CCPR Services, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CCPR Services, Inc. at December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Juan, Puerto Rico
February 27, 1998
F-2
<PAGE>
CCPR Services, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,181,000 $ 1,921,000
Marketable securities 235,000 5,917,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,839,000 (1997) and $3,472,000 (1996) 17,847,000 18,553,000
Due from affiliates 12,313,000 6,855,000
Equipment inventory 2,497,000 2,292,000
Prepaid expenses 3,108,000 2,423,000
----------------------------------
Total current assets 45,181,000 37,961,000
Property, plant and equipment, net 119,702,000 90,000,000
Investment in San Juan Cellular Telephone Company 98,822,000 21,401,000
Unamortized license acquisition costs 8,233,000 8,869,000
Deferred financing costs, net of accumulated
amortization of $584,000 (1997) and $1,065,000 (1996) 6,206,000 4,118,000
Other assets, net of accumulated amortization
of $1,046,000 (1997) and $607,000 (1996) 938,000 1,059,000
----------------------------------
Total assets $ 279,082,000 $ 163,408,000
==================================
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 6,335,000 $ 6,713,000
Accrued expenses 18,343,000 10,307,000
Due to affiliates 44,897,000 26,643,000
Deferred revenue 3,094,000 2,454,000
----------------------------------
Total current liabilities 72,669,000 46,117,000
Long-term debt 200,000,000 115,000,000
Obligation under capital lease 9,456,000 -
Commitments and contingent liabilities
Shareholder's equity (deficiency):
Common stock, $1 par value; authorized 1,500 shares;
issued and outstanding 1,400 shares 1,000 1,000
Additional paid-in capital 19,513,000 19,513,000
Retained earnings (deficit) (22,557,000) (17,223,000)
----------------------------------
Total shareholder's equity (deficiency) (3,043,000) 2,291,000
----------------------------------
Total liabilities and shareholder's equity (deficiency) $ 279,082,000 $ 163,408,000
==================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
CCPR Services, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Revenues:
Administrative and capital usage fees charged
to San Juan Cellular Telephone Company $ 35,743,000 $ 18,417,000 $ 11,914,000
Service revenue 18,452,000 17,701,000 14,221,000
Equipment revenue 1,936,000 1,873,000 1,970,000
Equity in net income (loss) of San Juan
Cellular Telephone Company (199,000) 304,000 -
---------------------------------------------------
55,932,000 38,295,000 28,105,000
Cost and expenses:
Cost of equipment sold 2,218,000 2,453,000 2,902,000
Operating expenses 2,981,000 2,736,000 2,178,000
Selling, general and administrative expenses 10,986,000 10,092,000 8,191,000
Depreciation of rental equipment 221,000 193,000 225,000
Depreciation expense 17,010,000 11,546,000 8,920,000
Amortization expense 3,871,000 1,927,000 1,185,000
---------------------------------------------------
37,287,000 28,947,000 23,601,000
---------------------------------------------------
Operating income 18,645,000 9,348,000 4,504,000
Other income (expense):
Intercompany interest income 531,000 597,000 407,000
Interest and other income (expense) (1,788,000) 600,000 169,000
Interest expense (19,394,000) (8,094,000) (2,769,000)
---------------------------------------------------
Income (loss) before income taxes and extraordinary item (2,006,000) 2,451,000 2,311,000
Provision for income taxes (2,000) (960,000) (490,000)
---------------------------------------------------
Income (loss) before extraordinary item (2,008,000) 1,491,000 1,821,000
Loss from early extinguishment of debt,
net of income tax benefit of $741,000 (3,326,000) - -
---------------------------------------------------
Net income (loss) $ (5,334,000) $ 1,491,000 $ 1,821,000
===================================================
</TABLE>
See accompanying notes
F-4
<PAGE>
CCPR Services, Inc.
Statement of Shareholder's Equity (Deficiency)
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994
as previously reported 1,000 $ 1,000 $ 30,406,000 $ (10,477,000) $ 19,930,000
Adjustment for pooling of
interests 400 - 14,255,000 (10,058,000) 4,197,000
-------------------------------------------------------------------------------
Balance at December 31, 1994,
restated 1,400 1,000 44,661,000 (20,535,000) 24,127,000
Return of capital (25,148,000) (25,148,000)
Net income 1,821,000 1,821,000
-------------------------------------------------------------------------------
Balance at December 31, 1995 1,400 1,000 19,513,000 (18,714,000) 800,000
Net income 1,491,000 1,491,000
-------------------------------------------------------------------------------
Balance at December 31, 1996 1,400 1,000 19,513,000 (17,223,000) 2,291,000
Net loss (5,334,000) (5,334,000)
-------------------------------------------------------------------------------
Balance at December 31, 1997 1,400 $ 1,000 $ 19,513,000 $ (22,557,000) $ (3,043,000)
===============================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
CCPR Services, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (5,334,000) $ 1,491,000 $ 1,821,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 21,102,000 13,666,000 10,330,000
Equity in net (income) loss of San Juan Cellular
Telephone Company 199,000 (304,000) -
Loss from early extinguishment of debt 4,067,000 - -
Provision for losses on accounts receivable 6,620,000 7,087,000 6,164,000
(Gain) loss on disposal of fixed assets 1,792,000 67,000 (24,000)
Changes in operating assets and liabilities:
Accounts receivable (5,914,000) (9,629,000) (13,078,000)
Due from affiliates (5,458,00) 1,559,000 (4,373,000)
Equipment inventory (205,000) 2,425,000 (2,517,000)
Prepaid expenses (685,000) (1,028,000) (348,000)
Other assets (97,000) (472,000) (85,000)
Accounts payable (913,000) 2,428,000 (2,853,000)
Accrued expenses 6,806,000 2,826,000 1,985,000
Due to affiliates 1,198,000 (11,260,000) 23,992,000
Deferred revenue 640,000 103,000 797,000
-------------------------------------------------------
Net cash provided by operating activities 23,818,000 8,959,000 21,811,000
INVESTING ACTIVITIES
Purchase of marketable securities (235,000) (15,658,000) -
Proceeds from maturities of marketable securities 5,917,000 9,741,000 -
Purchase of San Juan Cellular Telephone Company interest (80,000,000) (56,000) -
Acquisition of property, plant and equipment (37,335,000) (33,014,000) (25,096,000)
-------------------------------------------------------
Net cash (used in) investing activities (111,653,000) (38,987,000) (25,096,000)
FINANCING ACTIVITIES
Due to Cellular Communications of Puerto Rico, Inc. 17,056,000 - -
Principal payments of capital lease obligation (194,000) - -
Additional deferred financing costs - (23,000) -
Proceeds from borrowings 193,233,000 52,000,000 10,000,000
Principal payments (115,000,000) (27,000,000) -
-------------------------------------------------------
Net cash provided by financing activities 95,095,000 24,977,000 10,000,000
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents 7,260,000 (5,051,000) 6,715,000
Cash and cash equivalents at beginning of year 1,921,000 6,972,000 257,000
-------------------------------------------------------
Cash and cash equivalents at end of year $ 9,181,000 $ 1,921,000 $ 6,972,000
=======================================================
</TABLE>
F-6
<PAGE>
CCPR Services, Inc.
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest exclusive
of amounts capitalized $ 13,155,000 $ 7,032,000 $ 2,111,000
Income taxes paid 226,000 757,000 191,000
Supplemental schedule of noncash investing activities:
Liability to parent company incurred in connection with
acquisition of San Juan Cellular Telephone Company interest $ - $ 21,536,000 $ -
Liability incurred to acquire property, plant and equipment 3,038,000 1,568,000 2,369,000
Capital lease obligation incurred to acquire office building 9,922,000 - -
Supplemental disclosure of noncash financing activities:
Assumption of parent company's long-term debt $ - $ - $ 80,000,000
Deferred financing costs transferred in connection with
assumption of parent company's debt - - 4,958,000
Reduction of amount due to parent company in connection
with assumption of parent company's debt - - 49,894,000
Return of capital in connection with assumption of parent
company's debt - - 25,148,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CCPR Services, Inc. ("Services") is a wholly-owned subsidiary of Cellular
Communications of Puerto Rico, Inc. ("CCPR"). Effective December 31, 1997,
certain subsidiaries of CCPR merged with and into Services. As a result of these
mergers, Services owns and operates the licenses granted by the Federal
Communications Commission ("FCC") for the non-wireline cellular systems in the
following markets in Puerto Rico: Aguadilla, Arecibo, Mayaguez, Ponce, Rincon,
Adjuntas, Ciales, Vieques and Culebra. The Company manages and operates the
non-wireline cellular system in San Juan/Caguas in accordance with an
Administration and Management Agreement between Services and the San Juan
Cellular Telephone Company (a general partnership). Services owns 27.146% of the
partnership interests in the San Juan Cellular Telephone Company, and CCPR
directly or through subsidiaries owns the remaining 72.854% of the interests.
Services collects revenues and incurs costs on behalf of the San Juan Cellular
Telephone Company. These revenues and costs are recorded by the San Juan
Cellular Telephone Company. Services charges the San Juan Cellular Telephone
Company an administrative fee based on its revenues and a capital usage fee
which is the recovery of a portion of Services' capital costs.
Services' business is currently dependent on the trends in the use of cellular
telephone services and is subject to economic, social, political and
governmental conditions in Puerto Rico. The sale of cellular services in Puerto
Rico is becoming increasingly competitive. Services previously had one cellular
competitor in each market, but now it has many wireless competitors due to the
introduction of broadband personal communications services ("PCS") on
frequencies auctioned by the FCC and specialized mobile radio ("SMR") services
on existing SMR frequencies. Increased competition has resulted in pricing
pressure, which contributes to lower revenues per customer and higher customer
acquisition costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Service revenue is recognized at the time services are rendered. Charges for
services that are billed in advance are deferred and recognized when earned.
Equipment sales are recorded when the equipment is shipped to the customer.
Rental revenue is billed and recognized on a monthly basis.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less.
F-8
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are carried at
fair value. Unrealized holding gains and losses on securities, net of tax, are
carried as a separate component of shareholder's equity. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 1997 consisted of corporate debt
securities. Marketable securities at December 31, 1996 consisted of U.S.
Treasury securities and obligations of U.S. government agencies. During the
years ended December 31, 1997, 1996 and 1995, there were no realized gains or
losses on sales of securities. As of December 31, 1997 and 1996, there were no
unrealized gains or losses on securities. All of the marketable securities as of
December 31, 1997 had a contractual maturity of less than one year.
EQUIPMENT INVENTORY
Equipment inventory is stated at the lower of cost (first-in, first-out method)
or market.
INVESTMENT IN SAN JUAN CELLULAR TELEPHONE COMPANY
The investment in San Juan Cellular Telephone Company is accounted for using the
equity method and consists of the cost of acquiring the ownership interest in
the partnership and Services' share of the partnership's net income (loss) from
the date of acquisition. The excess of the cost over the equity acquired is
being amortized through charges to operations by the straight-line method over
40 years. The investment is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable.
LICENSE ACQUISITION COSTS
The FCC grants the license to operate a cellular telephone system in a
Metropolitan Service Area or a Rural Service Area. Costs incurred to obtain FCC
licenses have been deferred and are being amortized by the straight-line method
over ten years. In connection with the purchase of license interests, the excess
of purchase price paid over the fair value of tangible assets acquired has been
classified as license acquisition costs which are amortized through charges to
operations by the straight-line method over 40 years. License acquisition costs
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
F-9
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows: office building - 15 years, operating equipment - 7
to 25 years, office furniture and other equipment - 1 to 5 years, and rental
equipment - 2 years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future discounted cash flow is less than the carrying amount
of the asset, a loss is recognized for the difference between the fair value and
carrying value of the asset.
CAPITALIZED INTEREST
Interest is capitalized as a component of the cost of property, plant and
equipment constructed. In 1997, 1996 and 1995, interest of $415,000, $198,000
and $119,000, respectively, was capitalized.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred relating to the issuance of
debt and are amortized over the term of the related debt.
ADVERTISING
Advertising costs incurred for the years ended December 31, 1997, 1996 and 1995
were $2,731,000, $2,544,000 and $2,378,000, respectively. The costs were either
charged to expense or charged to the San Juan Cellular Telephone Company.
2. BUSINESS COMBINATION
Effective December 31, 1997, each of CCPR's subsidiaries that owned or
controlled an FCC cellular license in a Puerto Rico market (other than the San
Juan Cellular Telephone Company) was merged with and into Services. The specific
subsidiaries merged with and into Services were Aguadilla Cellular Telephone
Company, Inc. ("Aguadilla"), Cellular Communications of Arecibo, Inc.
("Arecibo"), CCI PR RSA Inc. ("RSA"), Cellular Ponce, Inc. ("Ponce"), Mayaguez
Cellular Telephone Co., Inc. ("Mayaguez") and Star Associaties, Inc. ("Star").
Services' acquired all of the common stock of these subsidiaries in exchange for
400 shares of Services common stock with Services being the surviving
corporation in the mergers.
Also as a result of the mergers, the partnership known as Gamma Communications
("Gamma") was terminated effective December 31, 1997, and the net assets of
Gamma were transferred to Services.
The mergers and termination were accounted for at historical cost in a manner
consistent with a transfer of entities under common control which is similar to
that used in a "pooling of interests." Accordingly,
F-10
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
2. BUSINESS COMBINATION (CONTINUED)
Services' financial statements have been restated to include the results of the
merged entities for all periods presented. All material intercompany
transactions have been eliminated.
The results of operations of the previously separate entities that are included
in the current combined net income (loss) is as follows:
<TABLE>
<CAPTION>
Services Aguadilla Arecibo RSA Ponce
(Pre-Merger) (Pre-Merger) (Pre-Merger) (Pre-Merger) (Pre-Merger)
-------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997
Revenues $ 40,232 $ 2,061 $ 1,877 $ 770 $ 3,213
Operating income (loss) 20,000 134 97 (1,514) 174
Income (loss) before
extraordinary item (638) 103 94 (1,628) 160
Net income (loss) (3,966) 103 94 (1,628) 160
YEAR ENDED
DECEMBER 31, 1996
Revenues $ 26,924 $ 1,962 $ 1,864 $ 894 $ 3,061
Operating income (loss) 13,918 (250) (726) (2,284) (127)
Net income (loss) 6,580 (277) (728) (2,335) (134)
YEAR ENDED
DECEMBER 31, 1995
Revenues $ 17,213 $ 1,845 $ 1,706 $ 799 $ 2,104
Operating income (loss) 7,544 (204) (506) (1,873) (186)
Net income (loss) 5,389 (228) (507) (1,943) (189)
</TABLE>
Continued on the next page...
F-11
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
2. BUSINESS COMBINATION (CONTINUED)
<TABLE>
<CAPTION>
Services
(Post-Merger
and
Mayaguez Star Gamma Intercompany Post Termination
(Pre-Merger) (Pre-Merger) (Pre-Termination) Transactions of Partnership)
---------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997
Revenues $ 3,476 $ 7,182 $ 1,808 $ (4,488) $ 56,131
Operating income (loss) 231 (375) 97 18,844
Income (loss) before
extraordinary item 173 (360) 90 (2,006)
Net income (loss) 173 (360) 90 (5,334)
YEAR ENDED
DECEMBER 31, 1996
Revenues $ 3,213 $ 6,885 $ 1,695 $ (8,507) $ 37,991
Operating income (loss) (339) 195 (1,343) 9,044
Net income (loss) (390) 123 (1,348) 1,491
YEAR ENDED
DECEMBER 31, 1995
Revenues $ 2,818 $ 5,543 $ 1,375 $ (5,298) $ 28,105
Operating income (loss) (192) 871 (950) 4,504
Net income (loss) (237) 490 (954) 1,821
</TABLE>
3. RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board 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. Services will adopt SFAS No. 130 in the first interim period
for its fiscal year ending December 31, 1998.
F-12
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
4. INVESTMENT IN SAN JUAN CELLULAR TELEPHONE COMPANY
The investment in the San Juan Cellular Telephone Company consists of the
following:
DECEMBER 31
1997 1996
-----------------------------
Purchase of San Juan Cellular
Telephone Company interests $ 101,592,000 $ 21,592,000
Equity in accumulated net income 105,000 304,000
-----------------------------
101,697,000 21,896,000
Accumulated amortization (2,875,000) (495,000)
-----------------------------
$ 98,822,000 $ 21,401,000
=============================
In February 1996, Services acquired approximately 6% of the San Juan Cellular
Telephone Company in exchange for 820,000 shares of common stock of CCPR. The
stock was valued at $21,536,000, the fair market value on the date of
acquisition. Services recorded a liability to CCPR of $21,536,000 in connection
with the acquisition. Services incurred $56,000 in expenses related to the
acquisition.
In January 1997, Services acquired a 21% interest in the San Juan Cellular
Telephone Company from CCPR, in exchange for cash of $80,000,000.
The following summarizes the assets, liabilities and partners' capital of the
San Juan Cellular Telephone Company:
DECEMBER 31
1997 1996
-----------------------------
ASSETS
Current assets $ 8,715,000 $ 10,180,000
Deferred costs, net 163,000 229,000
-----------------------------
$ 8,878,000 $ 10,409,000
=============================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilties $ - $ 796,000
Partners' capital 8,878,000 9,613,000
-----------------------------
$ 8,878,000 $ 10,409,000
=============================
F-13
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
4. INVESTMENT IN SAN JUAN CELLULAR TELEPHONE COMPANY (CONTINUED)
The following summarizes the results of operations of the San Juan Cellular
Telephone Company:
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
Revenues $ 107,400,000 $ 96,907,000
Cost and expenses 108,136,000 88,188,000
------------------------------
Operating income (loss) (736,000) 8,719,000
Interest income 1,000 2,000
------------------------------
Income (loss) before income taxes (735,000) 8,721,000
Income taxes - (3,319,000)
------------------------------
Net income (loss) $ (735,000) $ 5,402,000
==============================
5. UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
DECEMBER 31
1997 1996
------------------------------
Deferred cellular license costs $ 3,252,000 $ 3,252,000
Excess of purchase price paid over
the fair market value of tangible
assets acquired 10,482,000 10,482,000
------------------------------
13,734,000 13,734,000
Accumulated amortization (5,501,000) (4,865,000)
------------------------------
$ 8,233,000 $ 8,869,000
==============================
F-14
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
DECEMBER 31
1997 1996
-------------------------------
Land $ 1,928,000 $ 1,928,000
Office building 9,922,000 -
Operating equipment 118,048,000 90,487,000
Office furniture and other equipment 23,207,000 15,408,000
Rental equipment 623,000 712,000
Construction in progress 12,070,000 17,663,000
-------------------------------
165,798,000 126,198,000
Accumulated depreciation (46,096,000) (36,198,000)
-------------------------------
$ 119,702,000 $ 90,000,000
===============================
7. ACCRUED EXPENSES
Accrued expenses consists of:
DECEMBER 31
1997 1996
-------------------------------
Accrued franchise, property and
income taxes $ 2,722,000 $ 2,943,000
Interest payable 8,333,000 1,678,000
Other 7,288,000 5,686,000
-------------------------------
$ 18,343,000 $ 10,307,000
===============================
8. RELATED PARTY TRANSACTIONS
Pursuant to the Administration and Management Agreement, Services allocates
revenues to the San Juan Cellular Telephone Company based on the completed calls
within its license area during the year, and allocates costs to the San Juan
Cellular Telephone Company based on the number of cell sites and radio channels
in operation or under construction within its license area during the year.
During 1997, 1996 and 1995, Services allocated cellular service and equipment
revenues of $107,400,000, $96,907,000 and $82,990,000, respectively, and costs
of $71,819,000, $69,198,000 and $60,232,000, respectively, to the San Juan
Cellular Telephone Company.
F-15
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
In 1995, Services assumed $80,000,000 in long-term debt of CCPR, net of deferred
financing costs of $4,958,000. This transaction was recorded by Services as a
reduction of the amount due to CCPR ($49,894,000) with the balance ($25,148,000)
recorded as a return of capital.
9. LONG-TERM DEBT
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. The Notes are
unconditionally guaranteed by CCPR. Services and CCPR used approximately
$116,000,000 of the proceeds to repay the $115,000,000 principal outstanding
plus accrued interest and fees under the bank loan (see below). In connection
with the repayment of the bank loan, Services recorded an extraordinary loss of
$4,067,000 from the write-off of unamortized deferred financing costs.
The Notes are due on February 1, 2007. Interest on the Notes is payable
semiannually as of August 1, 1997. 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 and certain
subsidiaries of CCPR that limit their ability to, among other things, (i) incur
additional indebteness, (ii) pay dividends or make other distributions or
restricted payments (except for dividend payments to CCPR and an aggregate of up
to $100,000,000 to be used for dividends or restricted payments to CoreComm
Incorporated, the parent company of CCPR ("CoreComm")), (iii) create liens, (iv)
sell assets, (v) enter into mergers or consolidations or (vi) sell or issue
stock of subsidiaries. The fair value of the Notes at December 31, 1997 based on
the quoted market price was $194,000,000.
In April 1995, Services and CCPR entered into a $200,000,000 revolving credit
facility with various banks. The line of credit was available until March 31,
1999, on which date it would have converted into a term loan. The terms included
the payment of interest each quarter at a floating rate, which was, at the
borrower's option, either (a) the higher of the bank's base rate or the Federal
Funds Rate plus 1/2%, (b) the London Interbank Offering Rate or (c) the 936
Rate, plus, based on the ratio of CCPR and subsidiaries' debt to cash flow and
the floating rate in effect, either .25% to 1.875% or 1.25% to 2.875%. The
effective rate on Services' borrowings as of December 31, 1996 and 1995 was
7.01% and 7.23%, respectively. The terms also included an unused commitment fee
of 1/2% per annum which was payable quarterly. The carrying amount of the bank
loan at December 31, 1996 approximated fair value based on discounted cash flow
analysis.
F-16
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
10. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------
Current:
Federal $ - $ - $ -
Puerto Rico 2,000 163,000 490,000
--------------------------------------------
Total current 2,000 163,000 490,000
--------------------------------------------
Deferred:
Federal - - -
Puerto Rico - 797,000 -
--------------------------------------------
Total deferred - 797,000 -
--------------------------------------------
$ 2,000 $ 960,000 $ 490,000
============================================
Services is included in CCPR's consolidated federal income tax return. In
January 1997, Services, CCPR and CoreComm entered into a tax sharing agreement
which provides that CCPR and Services will pay to CoreComm (or CoreComm will pay
to CCPR or Services, as appropriate) an amount which would equal the amount of
federal income taxes for which a company would be liable if such company were
not part of the CoreComm consolidated group.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Services' deferred tax liability and asset as of December 31, 1997 and 1996, are
as follows:
DECEMBER 31
1997 1996
-------------------------------
Deferred tax liability:
Tax over book depreciation $ 797,000 $ 904,000
Deferred tax asset:
Net operating loss carryforwards 6,796,000 107,000
Valuation allowance for deferred
tax assets (6,796,000) -
-------------------------------
Net deferred tax asset - 107,000
-------------------------------
Net deferred taxes $ 797,000 $ 797,000
===============================
As of December 31, 1997, Services had net operating loss carryforwards of
$17,427,000 to offset future Puerto Rico taxable income that expire as follows:
$1,313,000 in 1998 , $2,029,000 in 1999, $2,164,000 in 2000, $2,568,000 in 2001,
$4,127,000 in 2002 and $5,226,000 in 2003.
F-17
<PAGE>
CCPR Services, Inc.
Notes to Financial Statements (continued)
11. LEASES
Total rent which was either charged to expense or to the San Juan Cellular
Telephone Company during the years ended December 31, 1997, 1996 and 1995 was
$3,367,000, $2,852,000 and $2,109,000, respectively.
Future minimum annual lease payments under noncancelable operating leases at
December 31, 1997 are: $2,950,000 (1998); $2,748,000 (1999); $2,063,000 (2000),
$1,306,000 (2001); $587,000 (2002) and $3,141,000 thereafter.
In 1997, Services entered into a lease for office space through 2012 which is
classified as a capital lease for financial reporting purposes. Accordingly, an
asset of $9,922,000 has been recorded. Future minimum annual payments under this
lease at December 31, 1997 are as follows:
1998 $ 1,196,000
1999 1,196,000
2000 1,196,000
2001 1,196,000
2002 1,257,000
Thereafter 12,169,000
-----------
18,210,000
Interest (8,482,000)
-----------
Present value of net minimum obligations 9,728,000
Current portion (included in accrued expenses) (272,000)
-----------
$ 9,456,000
===========
12. PENSION PLAN
Services has a defined contribution plan covering all employees who have
completed six months of employment. Services' matching contributions are
determined annually. Participants can make salary deferral contributions of 1%
to 10% of annual compensation, not to exceed the maximum allowed by law. Costs
incurred for 1997, 1996 and 1995 were $187,000, $145,000 and $121,000,
respectively.
13. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1997, Services was committed to purchase approximately
$4,000,000 for cellular network and other equipment and for construction
services. In addition, as of December 31, 1997, Services had commitments to
purchase cellular telephones and accessories of approximately $1,500,000.
Services is involved in various disputes, arising in the ordinary course of
business, which may result in pending or threatened litigation. Services'
management expects no material adverse effect on Services' financial condition,
results of operations or cash flows to result from these matters.
F-18
<PAGE>
CCPR Services, Inc.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
(1) (2)
-------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $ 3,472,000 $ 6,620,000 $ - $ (8,253,000)(a) $ 1,839,000
Year ended December 31, 1996:
Allowance for doubtful accounts $ 2,903,000 $ 7,087,000 $ - $ (6,518,000)(a) $ 3,472,000
Year ended December 31, 1995:
Allowance for doubtful accounts $ 1,127,000 $ 6,164,000 $ - $ (4,388,000)(a) $ 2,903,000
</TABLE>
(a) - Uncollectible accounts written off, net of recoveries.
F-19
<PAGE>
Form 10-K - Item 14(d)
San Juan Cellular Telephone Company
Index to Financial Statements
The following financial statements of the San Juan Cellular Telephone Company
are included in Item 14(d):
Report of Independent Auditors..........................................S-2
Balance Sheets - December 31, 1997 and 1996.............................S-3
Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995.....................................S-4
Statement of Changes in Partners' Capital - Years Ended
December 31, 1997, 1996 and 1995.....................................S-5
Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995.....................................S-6
Notes to Financial Statements...........................................S-7
Schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
S-1
<PAGE>
Report of Independent Auditors
The Partners
San Juan Cellular Telephone Company
(A Partnership)
We have audited the accompanying balance sheets of San Juan Cellular Telephone
Company (A Partnership) as of December 31, 1997 and 1996, and the related
statements of operations, changes in partners' capital and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of San Juan Cellular Telephone
Company at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Juan, Puerto Rico
February 27, 1998
S-2
<PAGE>
San Juan Cellular Telephone Company
(A Partnership)
Balance Sheets
DECEMBER 31,
1997 1996
---------------------------
ASSETS
Current assets:
Cash $ 47,000 $ 46,000
Due from CCPR Services, Inc. 6,388,000 9,959,000
Prepaid expenses 2,280,000 175,000
---------------------------
Total current assets 8,715,000 10,180,000
Deferred costs, less accumulated amortization
of $760,000 (1997) and $674,000 (1996) 163,000 229,000
---------------------------
Total assets $ 8,878,000 $ 10,409,000
===========================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ - $ 10,000
Income tax payable - 786,000
---------------------------
Total current liabilities - 796,000
Partners' capital:
Capital contributions 272,000 272,000
Undistributed earnings 8,606,000 9,341,000
---------------------------
Total partners' capital 8,878,000 9,613,000
---------------------------
Total liabilities and partners' capital $ 8,878,000 $ 10,409,000
===========================
See accompanying notes.
S-3
<PAGE>
San Juan Cellular Telephone Company
(A Partnership)
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Revenues:
Puerto Rico System allocated revenues $ 107,400,000 $ 96,907,000 $ 82,990,000
--------------------------------------------------
Costs and expenses:
Puerto Rico System allocated expenses 71,819,000 69,198,000 60,232,000
Administrative and capital usage fees 35,743,000 18,417,000 11,914,000
General and administrative expenses 488,000 448,000 361,000
Depreciation and amortization 86,000 125,000 152,000
--------------------------------------------------
108,136,000 88,188,000 72,659,000
--------------------------------------------------
Operating income (loss) (736,000) 8,719,000 10,331,000
Interest income 1,000 2,000 1,000
--------------------------------------------------
Income (loss) before income taxes (735,000) 8,721,000 10,332,000
Income taxes - 3,319,000 2,979,000
--------------------------------------------------
Net income (loss) $ (735,000) $ 5,402,000 $ 7,353,000
==================================================
</TABLE>
See accompanying notes.
S-4
<PAGE>
San Juan Cellular Telephone Company
(A Partnership)
Statement of Changes in Partners' Capital
Balance at December 31, 1994 $ (1,970,000)
Net income for the year ended December 31, 1995 7,353,000
------------
Balance at December 31, 1995 5,383,000
Distribution (1,172,000)
Net income for the year ended December 31, 1996 5,402,000
------------
Balance at December 31, 1996 9,613,000
Net loss for the year ended December 31, 1997 (735,000)
------------
Balance at December 31, 1997 $ 8,878,000
============
See accompanying notes.
S-5
<PAGE>
San Juan Cellular Telephone Company
(A Partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (735,000) $ 5,402,000 $ 7,353,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 86,000 125,000 152,000
Changes in operating assets and liabilities:
Prepaid expenses (2,105,000) 991,000 (1,116,000)
Due from CCPR Services, Inc. 3,571,000 (3,414,000) (6,545,000)
Deferred costs (20,000) - -
Accounts payable (10,000) 6,000 4,000
Income tax payable (786,000) (2,008,000) 2,550,000
Due to CCPR Services, Inc. - - (2,325,000)
------------------------------------------------
Net cash provided by operating activities 1,000 1,102,000 73,000
FINANCING ACTIVITIES
Distribution - (1,172,000) -
------------------------------------------------
Net increase (decrease) in cash 1,000 (70,000) 73,000
Cash at beginning of year 46,000 116,000 43,000
------------------------------------------------
Cash at end of year $ 47,000 $ 46,000 $ 116,000
================================================
Supplemental disclosure of cash flow information:
Income taxes paid $ 2,571,000 $ 5,327,000 $ 429,000
</TABLE>
See accompanying notes.
S-6
<PAGE>
San Juan Cellular Telephone Company
(A Partnership)
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
San Juan Cellular Telephone Company (the "Partnership") was formed on February
21, 1986 for the purpose of constructing and operating a cellular telephone
system in the San Juan/Caguas, Puerto Rico Metropolitan Statistical Area.
In March 1988, the Partnership was issued a permit to construct a cellular
system in San Juan/Caguas by the Federal Communications Commission ("FCC").
Profits and losses of the Partnership are allocated in accordance with the
provisions of the Partnership agreement. The allocation is generally based on
each partner's ownership interest in the Partnership.
As of February 1993, Cellular Communications of Puerto Rico, Inc. ("CCPR"),
either directly or through its wholly-owned subsidiaries, owned 93.854% of the
Partnership interests. In February 1996, a wholly-owned subsidiary of CCPR, CCPR
Services, Inc. ("Services"), acquired the remaining Partnership interests. In
addition, the Partnership made a special cash distribution of $1,172,000. In
January 1997, Services made a cash payment to CCPR of $80,000,000 in exchange
for a 21% interest in the Partnership. As of January 1997, Services owns 27.146%
of the Partnership interests and CCPR (directly and through subsidiaries other
than Services) owns the remaining interests.
The business of the Partnership is currently dependent on the trends in the use
of cellular telephone services and is subject to economic, social, political and
governmental conditions in Puerto Rico. The sale of cellular services is
becoming increasingly competitive. The Partnership previously had one cellular
competitor, but now it has many wireless competitors due to the introduction of
broadband personal communications services ("PCS") on frequencies recently
auctioned by the FCC and specialized mobile radio ("SMR") services on existing
SMR frequencies. Increased competition has resulted in pricing pressure, which
contributes to lower revenues per customer and higher customer acquisition
costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
S-7
<PAGE>
San Juan Cellular Telephone Company
(A Partnership)
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COSTS
Deferred costs include license acquisition costs incurred to obtain the FCC
permit. These costs are being amortized by the straight-line method over ten
years (the life of the FCC license). Deferred costs are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
2. INCOME TAXES
The Partnership is subject to Puerto Rico income taxes on its income. Income
taxes for the years ended December 31, 1996 and 1995 of $3,319,000 and
$2,979,000, respectively, represent current provisions for Puerto Rico income
taxes.
No provision has been made in the accompanying financial statements for federal
income tax since, pursuant to provisions of the Internal Revenue Code, each item
of income, gain, loss, deduction or credit is reportable by the partners.
3. RELATED PARTY TRANSACTIONS
On April 2, 1991, the partners of the Partnership approved the terms and
conditions whereby Services will manage and operate the Partnership's cellular
system. Pursuant to these terms and conditions, Services collects revenues and
incurs expenditures on behalf of the Partnership. These revenues are allocated
based on the completed calls within the Partnership's license area during the
year, and expenses are allocated based on the cell sites and radio channels in
operation or under construction within the Partnership's license area during the
year. In addition, a portion of Services' administrative and capital use costs
are charged to the Partnership.
During the years ended December 31, 1997, 1996 and 1995, the Partnership's
revenues consisted of allocated revenues. During the years ended December 31,
1997, 1996 and 1995, allocated expenses were $71,819,000, $69,198,000 and
$60,232,000, respectively, and administrative and capital usage fees charged by
Services were $35,743,000, $18,417,000 and $11,914,000, respectively.
4. SUBSEQUENT EVENT
In January 1998, the Partnership 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. The promissory note bears interest at 7.95% per annum
payable semiannually beginning in July 1998 and the principal is payable in
January 2003. Costs of $305,000 were incurred in connection with this
acquisition.
S-8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1997 ANNUAL FINANCIAL STATEMENTS OF CCPR SERVICES, INC. THE SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,181,000
<SECURITIES> 235,000
<RECEIVABLES> 19,686,000
<ALLOWANCES> (1,839,000)
<INVENTORY> 2,497,000
<CURRENT-ASSETS> 3,108,000
<PP&E> 165,798,000
<DEPRECIATION> (46,096,000)
<TOTAL-ASSETS> 279,082,000
<CURRENT-LIABILITIES> 72,669,000
<BONDS> 200,000,000
0
0
<COMMON> 1,000
<OTHER-SE> (3,044,000)
<TOTAL-LIABILITY-AND-EQUITY> 279,082,000
<SALES> 0
<TOTAL-REVENUES> 55,932,000
<CGS> 2,218,000
<TOTAL-COSTS> 5,199,000
<OTHER-EXPENSES> 10,986,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,394,000
<INCOME-PRETAX> (2,006,000)
<INCOME-TAX> (2,000)
<INCOME-CONTINUING> (2,008,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,326,000)
<CHANGES> 0
<NET-INCOME> (5,334,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
