UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 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 Identification No.)
incorporation or organization)
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the issuer's common stock as of
September 30, 1998 was 1,400.
<PAGE>
CCPR Services, Inc. and Subsidiaries
Index
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997......................... 2
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 1998 and 1997.......... 3
Condensed Consolidated Statement of Shareholder's
Equity (Deficiency)
Nine months ended September 30, 1998............................. 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997.................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition............................... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 18
SIGNATURES................................................................ 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CCPR Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------------------------
(Unaudited) (see note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,681,000 $ 9,181,000
Marketable securities - 235,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,637,000 (1998) and $1,839,000 (1997) 18,913,000 17,847,000
Due from affiliates 3,870,000 12,313,000
Equipment inventory 5,617,000 2,497,000
Prepaid expenses 6,729,000 3,108,000
---------------------------------
Total current assets 50,810,000 45,181,000
Property, plant and equipment, net 116,736,000 119,702,000
Investment in San Juan Cellular Telephone Company - 98,822,000
Unamortized license acquisition costs 241,347,000 8,233,000
Deferred financing costs, net of accumulated
amortization of $1,164,000 (1998) and $584,000 (1997) 8,788,000 6,206,000
Other assets, net of accumulated amortization
of $638,000 (1998) and $1,046,000 (1997) 1,029,000 938,000
---------------------------------
Total assets $ 418,710,000 $ 279,082,000
=================================
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 9,829,000 $ 6,335,000
Accrued expenses 13,912,000 18,343,000
Due to affiliates 16,823,000 44,897,000
Deferred revenue 4,778,000 3,094,000
---------------------------------
Total current liabilities 45,342,000 72,669,000
Long-term debt 355,000,000 200,000,000
Obligation under capital lease 9,234,000 9,456,000
Commitments and contingent liabilities - -
Minority interest 9,100,000 -
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
(Deficit) (19,480,000) (22,557,000)
---------------------------------
34,000 (3,043,000)
---------------------------------
Total liabilities and shareholder's equity (deficiency) $ 418,710,000 $ 279,082,000
=================================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
2
<PAGE>
CCPR Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------- -------------------------------
1998 1997 1998 1997
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Service revenue $ 34,364,000 $ 4,223,000 $ 96,084,000 $ 13,582,000
Equipment revenue 5,021,000 408,000 13,986,000 1,362,000
Administrative and capital usage fees charged
to San Juan Cellular Telephone Company - 9,484,000 - 26,068,000
Equity in net (loss) of San Juan Cellular
Telephone Company - (558,000) - (349,000)
------------------------------- -------------------------------
39,385,000 13,557,000 110,070,000 40,663,000
COST AND EXPENSES:
Cost of equipment sold 4,443,000 611,000 12,296,000 1,731,000
Operating expenses 3,579,000 253,000 10,559,000 1,870,000
Selling, general and administrative expenses 14,988,000 2,957,000 43,915,000 8,264,000
Depreciation of rental equipment 157,000 60,000 342,000 153,000
Depreciation expense 6,148,000 4,485,000 17,890,000 11,834,000
Amortization expense 1,645,000 1,030,000 3,577,000 2,888,000
------------------------------- -------------------------------
30,960,000 9,396,000 88,579,000 26,740,000
------------------------------- -------------------------------
Operating income 8,425,000 4,161,000 21,491,000 13,923,000
OTHER INCOME (EXPENSE):
Intercompany interest income 29,000 145,000 224,000 403,000
Interest income and other, net (373,000) (19,000) (333,000) (54,000)
Interest expense (6,956,000) (5,199,000) (17,714,000) (14,257,000)
------------------------------- -------------------------------
Income (loss) before income taxes, minority
interests and extraordinary item 1,125,000 (912,000) 3,668,000 15,000
Income tax provision (244,000) (223,000) (244,000) (560,000)
------------------------------- -------------------------------
Income (loss) before minority interests and
extraordinary item 881,000 (1,135,000) 3,424,000 (545,000)
Minority interests 578,000 - (347,000) -
------------------------------- -------------------------------
Income (loss) before extraordinary item 1,459,000 (1,135,000) 3,077,000 (545,000)
Loss from early extinguishment of debt,
net of income tax benefit of $1,129,000 - 387,000 - (2,939,000)
------------------------------- -------------------------------
Net income (loss) $ 1,459,000 $ (748,000) $ 3,077,000 $ (3,484,000)
=============================== ===============================
</TABLE>
See accompanying notes.
3
<PAGE>
CCPR Services, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholder's Equity (Deficiency)
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,400 $ 1,000 $ 19,513,000 $ (22,557,000) $ (3,043,000)
Net income for the nine months
ended September 30, 1998 3,077,000 3,077,000
----------------------------------------------------------------------------
Balance, September 30, 1998 1,400 $ 1,000 $ 19,513,000 $ (19,480,000) $ 34,000
============================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
CCPR Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 26,482,000 $ 10,975,000
INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities 235,000 5,917,000
Purchase of San Juan Cellular Telephone Company interests (128,686,000) (80,000,000)
Purchse of property, plant and equipment (17,212,000) (31,464,000)
----------------------------------
Net cash (used in) investing activities (145,663,000) (105,547,000)
----------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of debt, net of financing costs 151,838,000 193,694,000
Due to CCPR, Inc. 12,944,000 13,056,000
Repayment of amount due to CCPR, Inc. (30,000,000) -
Repayment of debt (8,900,000) (115,000,000)
Principal payments of capital lease obligation (201,000) (131,000)
----------------------------------
Net cash provided by financing activities 125,681,000 91,619,000
----------------------------------
Increase (decrease) in cash and cash equivalents 6,500,000 (2,953,000)
Cash and cash equivalents at beginning of period 9,181,000 1,921,000
----------------------------------
Cash and cash equivalents at end of period $ 15,681,000 $ (1,032,000)
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive of amounts
capitalized $ 21,201,000 $ 12,602,000
Income taxes paid 57,000 226,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Capital lease obligation incurred to acquire office building $ - $ 9,922,000
Liabilities incurred to acquire property, plant and equipment 1,373,000 2,363,000
Long-term debt issued to acquire cellular license interest 8,900,000 -
</TABLE>
See accompanying notes.
5
<PAGE>
CCPR Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
CCPR Services, Inc. (the "Company") is a wholly-owned subsidiary of CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) ("CCPR"). In August
1998, the Company purchased an additional 23.5% interest in the San Juan
Cellular Telephone Company ("SJCTC") from CCPR for $120,000,000 in cash. The
Company's aggregate ownership of the partnership interests in SJCTC is now
50.646%, and CCPR directly or through subsidiaries owns the remaining 49.354% of
the interests. The acquisition has been accounted for as a purchase, and,
accordingly, the net assets and the results of operations of SJCTC have been
included in the consolidated financial statements as though the purchase
occurred on January 1, 1998. The Company has included minority interests in its
results of operations for the 72.854% of the interests in SJCTC that it did not
own prior to August 1998 and for the 49.354% of the interests subsequent to
August 1998. The purchase price exceeded the fair value of the net tangible
assets acquired by $115,440,000, which is classified as license acquisition
costs. In addition, the Company's investment in SJCTC was reclassified to
license acquisition costs. All material intercompany accounts and transactions
have been eliminated in consolidation.
Effective December 31, 1997, certain subsidiaries of CCPR merged with and into
the Company. This transaction was 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, the Company's financial
statements have been restated to include the results of the merged entities. All
material intercompany accounts and transactions have been eliminated.
6
<PAGE>
CCPR Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE B - UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Deferred cellular license costs $ 3,252,000 $ 3,252,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 245,100,000 10,482,000
------------------------------
248,352,000 13,734,000
Accumulated amortization (7,005,000) (5,501,000)
------------------------------
$ 241,347,000 $ 8,233,000
==============================
In January 1998, SJCTC purchased the FCC license to own and operate the
non-wireline cellular system in Puerto Rico RSA-4 (Aibonito) and all of the
assets of the system in exchange for $8,400,000 in cash and a promissory note in
the amount of $8,900,000. Costs of $286,000 were incurred in connection with the
acquisition.
The pro forma unaudited consolidated results of operations for the nine months
ended September 30, 1998 and 1997 assuming consummation of the SJCTC and RSA-4
acquisitions as of January 1, 1997 are as follows:
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1998 1997
------------------------------
Total revenues $ 110,070,000 $ 96,685,000
Income (loss) before extraordinary item 3,375,000 (1,813,000)
Net income (loss) 3,375,000 (4,752,000)
NOTE C - INVESTMENT IN SAN JUAN CELLULAR TELEPHONE COMPANY
The investment in the San Juan Cellular Telephone Company ("SJCTC") consists of
the following:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Purchase of San Juan Cellular Telephone
Company interests - $ 101,592,000
Equity in accumulated net income - 105,000
------------------------------
- 101,697,000
Accumulated amortization - (2,875,000)
------------------------------
- $ 98,822,000
==============================
7
<PAGE>
CCPR Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE C - INVESTMENT IN SAN JUAN CELLULAR TELEPHONE COMPANY (CONTINUED)
The following summarizes the assets, liabilities and partners' capital of the
San Juan Cellular Telephone Company at December 31, 1997:
ASSETS
Current assets $ 8,715,000
Deferred costs, net 163,000
------------
$ 8,878,000
============
LIABILITIES AND PARTNERS' CAPITAL
Partners' capital $ 8,878,000
------------
$ 8,878,000
============
The following summarizes the unaudited results of operations of the San Juan
Cellular Telephone Company for the nine months ended September 30, 1997:
Revenues $ 81,741,000
Cost and expenses 83,029,000
------------
Operating (loss) (1,288,000)
Interest income 1,000
------------
Net (loss) $ (1,287,000)
============
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Land $ 1,928,000 $ 1,928,000
Office building 9,922,000 9,922,000
Operating equipment 127,977,000 118,048,000
Office furniture and other equipment 30,006,000 23,207,000
Rental equipment 1,399,000 623,000
Construction in progress 7,635,000 12,070,000
------------------------------
178,867,000 165,798,000
Accumulated depreciation (62,131,000) (46,096,000)
------------------------------
$ 116,736,000 $ 119,702,000
==============================
8
<PAGE>
CCPR Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE E - ACCRUED EXPENSES
Accrued expenses consist of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Accrued franchise, property and income taxes $ 2,993,000 $ 2,722,000
Interest payable 4,845,000 8,333,000
Other 6,074,000 7,288,000
------------------------------
$ 13,912,000 $ 18,343,000
==============================
NOTE F - LONG-TERM DEBT
Long-term debt consists of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Senior Subordinated Notes $ 200,000,000 $ 200,000,000
Bank loan 155,000,000 -
------------------------------
$ 355,000,000 $ 200,000,000
==============================
In August 1998, the Company entered into a $170,000,000 credit agreement with
various banks. The Company borrowed $155,000,000 which, along with cash on hand
of $7,000,000, was used to repay amounts due to CCPR of $30,000,000, to purchase
a 23.5% interest in SJCTC from CCPR for cash of $120,000,000, to pay fees
incurred in connection with the new bank loan of approximately $3,000,000 and to
make a term loan to SJCTC of $8,900,000 in order for SJCTC to repay its note
payable to a third party, which repayment was a condition of the bank loan.
The Company 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 the Company's option, either (a) the greater of the bank's prime
rate or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio
of CCPR and subsidiaries' debt to cash flow and the floating rate in effect,
either 0% to 1.25% or 1.25% to 2.5%. The effective rate on the Company's
borrowings as of September 30, 1998 was 8%. The terms also include an unused
commitment fee of 0.5% per annum which is payable quarterly. Principal payments
commence on September 30, 2001 based on two amortization schedules. One schedule
is for the first $95,000,000 borrowed which includes quarterly payments until
June 2006. The other schedule is for the remainder of the amount borrowed which
includes quarterly payments until June 2005. The Company incurred costs of
$3,162,000 in connection with the bank loan which are included in deferred
financing costs.
9
<PAGE>
CCPR Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE F - LONG-TERM DEBT (CONTINUED)
In connection with the bank loan, CCPR has pledged to the banks the stock of its
subsidiaries and CCPR and its subsidiaries have given the banks a security
interest in their assets. CCPR and its other subsidiaries have guaranteed the
payment in full when due of the principal, interest and fees owing under the
bank loan. The bank loan also includes, among other things, restrictions on CCPR
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 and subsidiaries maintain
certain ratios of indebtedness to cash flow, fixed charges to cash flow and debt
service to cash flow.
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 1998, the Company was committed to purchase approximately
$2,900,000 for cellular network and other equipment and for construction
services. In addition, as of September 30, 1998, the Company had commitments to
purchase cellular telephones, pagers and accessories of approximately
$2,400,000.
In 1992, the Company entered into an agreement, which in effect provides for a
twenty year license to use its service mark, which is also licensed to many of
the non-wireline cellular systems in the United States. The Company is required
to pay licensing and advertising fees, and to maintain certain service quality
standards. The total fees paid for 1998 were $289,000, which were determined by
the size of the Company's markets.
10
<PAGE>
CCPR Services, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
In August 1998, the Company purchased an additional 23.5% interest in the San
Juan Cellular Telephone Company ("SJCTC") for $120,000,000 in cash. The
Company's aggregate ownership of the partnership interests in SJCTC is now
50.646%, and CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.)
("CCPR") directly or through subsidiaries owns the remaining 49.354% of the
interests. The acquisition has been accounted for as a purchase, and,
accordingly, the net assets and the results of operations of SJCTC have been
included in the consolidated financial statements as though the purchase
occurred on January 1, 1998. The Company has included minority interests in its
results of operations for the 72.854% of the interests in SJCTC that it did not
own prior to August 1998 and for the 49.354% of the interests subsequent to
August 1998.
Effective December 31, 1997, certain subsidiaries of CCPR merged with and into
the Company. The Company is a wholly-owned subsidiary of CCPR, and CCPR is a
wholly-owned subsidiary of Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated). 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 the Company and the
merged companies. As a result of these mergers and the SJCTC acquisition in
August 1998, the Company owns and operates CCPR's Puerto Rico cellular system.
The Company manages and operates the SJCTC cellular system in accordance with an
Administration and Management Agreement between the Company and SJCTC.
The Company collects revenues and incurs costs on behalf of SJCTC. These
revenues and costs are allocated by the Company to SJCTC based on methods
described in the Administration and Management Agreement. These revenues and
expenses are not included in the Company's statement of operations in 1997 and
are included in the statement of operations of SJCTC. The Company also charges
SJCTC an administrative fee based on its revenues and a capital usage fee which
is the recovery of a portion of the Company's capital costs. Beginning January
1, 1998, the administrative fee and the capital usage fee are eliminated in
consolidation.
RESULTS OF OPERATIONS
In September 1998, Hurricane Georges struck Puerto Rico and the U.S. Virgin
Islands. The Company's insurance is expected to cover nearly all of the expenses
associated with restoring its service and the cost of repairing and replacing
damaged equipment and facilities. In addition, the Company has business
interruption insurance so it is not expected to incur an uninsured material loss
from the Company's cell sites that were out of service. The Company received
$1,000,000 from its insurance company in November 1998 as a partial payment of
its claim, which was included in the results of operations in the third quarter.
The Company has not completed discussions with its insurance carriers and their
adjusters regarding the total amount to be paid.
11
<PAGE>
CCPR Services, Inc. and Subsidiaries
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------
Total revenues increased to $39,385,000 from $13,557,000 due to the acquisition
of SJCTC ownership interests in 1998 and the consolidation of SJCTC results as
of January 1, 1998. Total revenues increased to $39,385,000 from $30,062,000
(pro forma) as a result of subscriber growth. Lower average revenue and minutes
of use of new prepaid subscribers and the selection by existing subscribers of
alternate rate plans resulted in a decrease in average monthly revenue per
cellular subscriber. The Company expects these trends to continue for the
foreseeable future.
Cost of equipment sold, operating expenses and selling, general and
administrative expenses increased to $23,010,000 from $3,821,000 due to the
acquisition of SJCTC ownership interests in 1998 and the consolidation of SJCTC
results as of January 1, 1998. These costs and expenses increased to $23,010,000
from $22,450,000 (pro forma) after adjusting for the reversal of $520,000
charged to expense in the third quarter of 1997 for the proposed Puerto Rico
universal service charge (which proposed retroactive application was eliminated
by the Puerto Rico Telecommunications Regulatory Board). These costs and
expenses as a percentage of total revenues decreased to 58% in 1998 from 75%
(pro forma after adjustment) in 1997.
Depreciation of rental equipment increased to $157,000 from $60,000 due to an
increase in the number of rental telephones.
Depreciation expense increased to $6,148,000 from $4,485,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $1,645,000 from $1,030,000 primarily due to an
increase in deferred financing costs.
Interest income and other, net, increased to expense of $373,000 from expense of
$19,000 primarily due to losses on the disposal of cell site equipment damaged
by Hurricane Georges of approximately $400,000, net of partial payment of
claims.
Interest expense increased to $6,956,000 from $5,199,000 as a result of the new
bank loan commencing in August 1998.
The Company recorded an increase in the income tax benefit from the loss from
the early extinguishment of debt of $387,000 in 1997 due to an adjustment to the
estimated tax benefit from the loss.
12
<PAGE>
CCPR Services, Inc. and Subsidiaries
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------------
Total revenues increased to $110,070,000 from $40,663,000 due to the acquisition
of SJCTC ownership interests in 1998 and the consolidation of SJCTC results as
of January 1, 1998. Total revenues increased to $110,070,000 from $96,685,000
(pro forma) as a result of subscriber growth. Lower average revenue and minutes
of use of new prepaid subscribers and the selection by existing subscribers of
alternate rate plans resulted in a decrease in average monthly revenue per
cellular subscriber. The Company expects these trends to continue for the
foreseeable future.
Cost of equipment sold, operating expenses and selling, general and
administrative expenses increased to $66,770,000 from $11,865,000 due to the
acquisition of SJCTC ownership interests in 1998 and the consolidation of SJCTC
results as of January 1, 1998. These costs and expenses decreased to $66,770,000
from $67,182,000 (pro forma) after adjusting for the reversal of $1,644,000
charged to expense in 1997 for the proposed Puerto Rico universal service charge
(which proposed retroactive application was eliminated by the Puerto Rico
Telecommunications Regulatory Board). These costs and expenses as a percentage
of total revenues decreased to 61% in 1998 from 69% (pro forma after adjustment)
in 1997.
Depreciation of rental equipment increased to $342,000 from $153,000 due to an
increase in the number of rental telephones.
Depreciation expense increased to $17,890,000 from $11,834,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $3,577,000 from $2,888,000 primarily due to
increases in license acquisition costs and deferred financing costs.
Interest income and other, net, increased to expense of $333,000 from expense of
$54,000 primarily due to losses on the disposal of cell site equipment damaged
by Hurricane Georges of approximately $400,000, net of partial payment of
claims.
Interest expense increased to $17,714,000 from $14,257,000 as a result of the
office building capital lease obligation beginning in April 1997, the issuance
of the note payable in January 1998 and the new bank loan commencing in August
1998.
In connection with the termination of the bank loan, the Company recorded an
extraordinary loss of $4,068,000 in 1997 ($2,939,000 net of income tax benefit)
from the write-off of unamortized deferred financing costs.
13
<PAGE>
CCPR Services, Inc. and Subsidiaries
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 $9,500,000 in
the fourth quarter of 1998 and $30,700,000 in 1999 for contemplated additions to
the Puerto Rico cellular network and for other non-cell site related capital
expenditures. The Company's commitments at September 30, 1998 of $2,900,000 for
cellular network and other equipment and for construction services are included
in the total anticipated expenditures.
In August 1998, the Company entered into a $170,000,000 credit agreement with
various banks. The Company borrowed $155,000,000 which, along with cash on hand
of $7,000,000, was used to repay amounts due to CCPR of $30,000,000, to purchase
a 23.5% interest in SJCTC from CCPR for cash of $120,000,000, to pay fees
incurred in connection with the new bank loan of approximately $3,000,000 and to
make a term loan to SJCTC of $8,900,000 in order for SJCTC to repay its note
payable to a third party, which repayment was a condition of the bank loan.
The Company 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 the Company's option, either (a) the greater of the bank's prime
rate or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio
of CCPR and subsidiaries' debt to cash flow and the floating rate in effect,
either 0% to 1.25% or 1.25% to 2.5%. The effective rate on the Company's
borrowings as of September 30, 1998 was 8%. The terms also include an unused
commitment fee of 0.5% per annum which is payable quarterly. Principal payments
commence on September 30, 2001 based on two amortization schedules. One schedule
is for the first $95,000,000 borrowed which includes quarterly payments until
June 2006. The other schedule is for the remainder of the amount borrowed which
includes quarterly payments until June 2005.
In connection with the bank loan, CCPR has pledged to the banks the stock of its
subsidiaries and CCPR and its subsidiaries have given the banks a security
interest in their assets. CCPR and its other subsidiaries have guaranteed the
payment in full when due of the principal, interest and fees owing under the
bank loan. The bank loan also includes, among other things, restrictions on CCPR
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 and subsidiaries maintain
certain ratios of indebtedness to cash flow, fixed charges to cash flow and debt
service to cash flow.
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. Approximately $116,000,000 of the proceeds
were used to repay the $115,000,000 principal outstanding plus accrued interest
and fees under a bank loan. In addition, the Company made a cash payment to CCPR
of $80,000,000 in 1997 in exchange for a 21% interest in SJCTC.
14
<PAGE>
CCPR Services, Inc. and Subsidiaries
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 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, (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 as a result of the new bank loan and the use of
the proceeds to repay CCPR and to acquire the additional SJCTC interest. 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. The Company expects to be able to meet its
capital requirements at least through the next twelve months with cash and cash
equivalents on hand, cash from operations and borrowings under the new bank
loan.
Management does not anticipate that the Company and its subsidiaries will
generate sufficient cash flow from operations to repay at maturity the entire
principal amount of the outstanding indebtedness. Accordingly, the Company will
be required to consider a number of measures, including (i) refinancing all or a
portion of such indebtedness, (ii) seeking modifications of the terms of such
indebtedness, (iii) seeking additional debt financing, which would be subject to
obtaining necessary lender consents, (iv) seeking additional equity financing or
(v) a combination of the foregoing. The particular measures the Company may
undertake and the ability of the Company to accomplish those measures will
depend on the financial condition of the Company and its subsidiaries at the
time, as well as a number of factors beyond the control of the Company. No
assurance can be given that any of the foregoing measures can be accomplished,
or can be accomplished on terms which are favorable to the Company.
Cash provided by operating activities was $26,482,000 and $10,975,000 for the
nine months ended September 30, 1998 and 1997, respectively. The increase is
primarily due to an increase in operating income and changes in operating assets
and liabilities. Purchases of property, plant and equipment of $17,212,000 in
1998 were primarily for additional cell sites and increased capacity in the
Puerto Rico cellular network. In January 1998, SJCTC purchased the FCC license
to own and operate the non-wireline cellular system in Puerto Rico RSA-4
(Aibonito) and all of the assets of the system in exchange for $8,400,000 in
cash and a promissory note in the amount of $8,900,000. Total cash paid was
$8,686,000, including costs incurred in connection with the acquisition of
$286,000.
15
<PAGE>
CCPR Services, Inc. and Subsidiaries
Write-offs of accounts receivable, net of recoveries as a percentage of service
revenues was 4.0% for the nine months ended September 30, 1998 compared to 6.7%
for the year ended December 31, 1997. This percentage decreased because the
Company has increased prepaid subscribers.
CCPR has retained an investment banking firm to act as financial adviser in
reviewing strategic alternatives to enhance shareholder value, including the
exploration of partnering opportunities in the region through a business
combination, an appropriate acquisition, the sale of CCPR, or similar
transactions. As of the date of this Form 10-Q, CCPR is not engaged in any
substantive discussions with other parties regarding such a potential
transaction.
YEAR 2000
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, operations and
infrastructure, suppliers, and customers that are not Year 2000 compliant, and
to develop, implement and test remediation and contingency plans to mitigate
these risks. The project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans and
(4) implementation and testing.
The Company's assessment is focused on its information technology ("IT")
systems, in particular its cellular network and its billing, provisioning and
customer service systems. The Company will also evaluate the readiness of
third-parties such as utility companies that the Company depends upon for the
operation of its network. The Company's leased office space and other non-IT
equipment which may have embedded technology that may be affected by the year
2000 problem is being separately assessed. The Company expects to complete the
assessment of its IT systems in 1998 and expects to complete the validation and
implementation of its IT systems year 2000 readiness by June 1999. The
evaluation of the readiness of the major third-parties is still in the
assessment phase and is expected to be completed in early 1999. The Company is
also reviewing its detailed contingency plans for potential modifications to
address year 2000 issues. This review is expected to be completed by June 1999.
The Company estimates that it will incur costs of $2,000,000 to complete the
renovation, validation and implementation phases and achieve year 2000
readiness.
As the Year 2000 project continues, the Company may discover additional
problems, may not be able to develop, implement or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations. In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products will be Year 2000
ready. The Company plans to test such third-party systems and products, but
cannot be sure that its tests will be adequate or that, if problems are
identified, they will be addressed by the supplier in a timely and satisfactory
way.
16
<PAGE>
CCPR Services, Inc. and Subsidiaries
Because the Company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the Company cannot be
sure that all of its systems will work together in a Year 2000-ready fashion.
Furthermore, the Company cannot be sure that it will not suffer business
interruptions, either because of its own Year 2000 problems or those of
third-parties upon whom the Company is reliant for services. The Company is
continuing to evaluate its Year 2000-related risks and corrective actions.
However, the risks associated with the Year 2000 problem are pervasive and
complex; they can be difficult to identify and address, and can result in
material adverse consequences to the Company. Even if the Company, in a timely
manner, completes all of its assessments, identifies and test remediation plans
believed to be adequate, and develops contingency plans believed to be adequate,
some problems may not be identified or corrected in time to prevent material
adverse consequences to the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein constitute "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995.
When used herein, the words, "believe," "anticipate," "should," "intend,"
"plan," "will," "expects," "estimates," "projects," "positioned," "strategy,"
and similar expressions identify such forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from those
contemplated, projected, forecasted, estimated or budgeted, whether expressed or
implied, by such forward-looking statements. Such factors include the following:
general economic and business conditions in Puerto Rico, 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.
17
<PAGE>
CCPR Services, Inc. and Subsidiaries
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CCPR SERVICES, INC.
Date: November 13, 1998 By: /s/ Stanton N. Williams
---------------------------------
Stanton N. Williams
Vice President and Chief
Financial Officer
Date: November 13, 1998 By: /s/ Gregg Gorelick
---------------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
19
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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