SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
F O R M 10-K/A-1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3120943
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
100 East 59th Street, New York, New York 10022
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(Address of principal executive officers) (Zip Code)
(212) 906-8481
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(Registrant's telephone number, including area code)
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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)
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 19, 1999, there were 1,400 shares of the Registrant's common
stock outstanding. The Registrant is an indirect wholly-owned subsidiary of
Cellular Communications of Puerto Rico, Inc. (formerly 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).
TABLE OF CONTENTS
Page
PART I
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...........................................8*
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................9*
PART III
ITEMS 10, 11, 12 AND 13..........................................10*
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K......................10*
EXHIBIT INDEX..........................................................11*
SIGNATURES.............................................................12
INDEX TO FINANCIAL STATEMENTS.........................................F-1
* Previously filed.
The Annual Report on Form 10-K of CCPR Services, Inc. for the fiscal year
ended December 31, 1998 is being amended by this Form 10-K/A-1 to reflect a
change in the accounting for the 1997 and 1998 acquisitions of interests in
the San Juan Cellular Telephone Company from the Company's parent.
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.
CCPR SERVICES, INC.
By: /s/ Gregg Gorelick
------------------------
Name: Gregg Gorelick
Title: Vice President-Controller
Date: May 7, 1999
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain financial data for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994. 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,
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1998(1) 1997 1996 1995 1994
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(IN THOUSANDS)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenues $154,551 $55,932 $38,295 $28,105 $14,085
Operating income (loss) 33,527 19,986 9,348 4,504 (3,535)
Income (loss) before extraordinary
item 7,072 (667) 1,491 1,821 (3,643)
Net income (loss) 7,072 (3,993) 1,491 1,821 (3,643)
DECEMBER 31,
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1998(1)(2) 1997(2) 1996 1995 1994
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BALANCE SHEET DATA:
Working capital (deficiency) $7,183 $(27,488) $(8,156) $6,222 $(39,534)
Property, plant and equipment-net 118,280 119,702 90,000 69,594 52,760
Total assets 284,842 221,921 163,408 122,087 80,530
Long-term debt excluding capital
Lease 355,000 200,000 115,000 90,000 225
Shareholder's equity (deficiency) (143,328) (60,204) 2,291 800 24,127
</TABLE>
(1) In 1998, the Company borrowed $155,000,000 under a new credit
agreement with various banks. The Company consolidates the San Juan
Cellular Telephone Company effective January 1, 1998.
(2) The Company made cash payments to its parent of $90,196,000 and
$58,502,000 in 1998 and 1997, respectively, which were accounted
for as reductions to shareholder's equity.
The Company did not declare or pay any cash dividends during the periods
indicated.
ITEM 7. 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"). 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 was accounted for as a transfer of entities
under common control, and, accordingly, the net assets and the results of
operations of SJCTC have been included in the consolidated financial
statements as though the transfer 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). In 1997, these mergers
were accounted for in a manner similar to a pooling of interests since all
of the companies were wholly-owned by CCPR. 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.
Prior to the consolidation of SJCTC (effective January 1, 1998),
SJCTC's revenues and expenses are not included in the Company's statement
of operations and are included in the statement of operations of SJCTC.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 and 1997
Total revenues increased to $154,551,000 from $55,932,000 due to
the consolidation of SJCTC results as of January 1, 1998. Total revenues
increased to $154,551,000 from $127,788,000 (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 $93,231,000 from $16,185,000 due
to the consolidation of SJCTC results as of January 1, 1998. These costs
and expenses increased to $93,231,000 from $88,492,000 (pro forma)
primarily due to increases in costs of equipment sold, costs associated
with the expanded network, bad debt expense and subscriber billing expense.
These costs and expenses as a percentage of total revenues decreased to 60%
in 1998 from 69% (pro forma) in 1997.
Depreciation of rental equipment increased to $505,000 from
$221,000 due to an increase in the number of rental telephones.
Depreciation expense increased to $23,944,000 from $17,010,000
primarily because of an increase in property, plant and equipment.
Amortization expense increased to $3,344,000 from $2,530,000
primarily due to increases in license acquisition costs and deferred
financing costs.
Interest income and other, net, increased to an income of $63,000
from expense of $1,788,000 primarily due to a reduction in losses from
disposals of cell site equipment.
Interest expense increased to $26,154,000 from $19,394,000 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.
The provision for income taxes increased to $279,000 from $2,000
due to an increase in Puerto Rico taxable income.
In 1997, the Company 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 in connection with the termination of a bank loan.
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 charges 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.
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 $2,530,000 from $1,927,000
primarily due to the increase in investment in SJCTC.
Interest income and other, net, 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, the Company
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.
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 $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 December 31, 1998 of $7,400,000
for cellular network and other equipment and for construction services are
included in the total anticipated expenditures. The Company expects to be
able to meet these requirements with cash and cash equivalents on hand and
cash from operations.
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 December 31, 1998 was
7.87%. 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, which guarantee is full, joint and several.
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, which guarantee is full,
joint and several. Approximately $116,000,000 of the proceeds was 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.
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.
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 $45,743,000 and
$23,818,000 for the years ended December 31, 1998 and 1997, respectively.
The increase is primarily due to an increase in net income and changes in
operating assets and liabilities. Purchases of property, plant and
equipment of $21,695,000 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.
Write-offs of accounts receivable, net of recoveries as a
percentage of service revenues was 3.86% for the year ended December 31,
1998 compared to 6.7% for the year ended December 31, 1997. This percentage
decreased because the Company has increased prepaid subscribers.
YEAR 2000
The Company has a comprehensive Year 2000 project designed to
identify and assess the risks associated with its information systems,
products, operations and infrastructure, suppliers, and customers that are
not Year 2000 compliant, and to develop, implement and test remediation and
contingency plans to mitigate these risks. The project comprises four
phases: (1) identification of risks, (2) assessment of risks, (3)
development of remediation and contingency plans and (4) implementation and
testing. The Company has incurred approximately $500,000 related to its
Year 2000 project and estimates that it will incur costs of $1,900,000 to
complete the renovation, validation and implementation phases and achieve
year 2000 readiness.
The Company's assessment is focused on its information technology
("IT") systems, in particular its cellular network and its billing,
provisioning and customer service systems. The Company is also evaluating
the readiness of third-parties such as utility companies that the Company
depends upon for the operation of its network. The Company's leased office
space and other non-IT equipment which may have embedded technology that
may be affected by the year 2000 problem is being separately assessed. The
Company has completed the assessment of its IT systems and expects to
complete the remediation and testing of its IT systems year 2000 readiness
by June 1999. The evaluation of the readiness of the major third-parties is
expected to be completed by June 1999. The Company is also reviewing its
detailed contingency plans for potential modifications to address year 2000
issues. This review is expected to be completed by June 1999
The Company currently believes that the most reasonably likely
worst case scenario with respect to the Year 2000 is the failure of the
electric company or the local exchange telephone company to be ready for
the year 2000. This could cause a temporary interruption in the provision
of service to customers or in the Company's ability to complete telephone
calls, or both. Either or both could have a material adverse effect on
operations, although it is not possible at this time to quantify the amount
of revenues and gross profit that might be lost, or the costs that could be
incurred. The contingency plan to address some of these risks involve
utilizing back-up power supplies and alternative interconnections, which
would require time to implement and may be constrained due to capacity
and/or training limitations. The Company has had experience in implementing
its disaster recovery plan due to Hurricane Georges, which struck Puerto
Rico and the U.S. Virgin Islands in September 1998 and caused the electric
company and local exchange telephone company to experience service
interruptions.
As the Year 2000 project continues, the Company may discover
additional problems, may not be able to develop, implement or test
remediation or contingency plans, or may find that the costs of these
activities exceed current expectations. In many cases, the Company is
relying on assurances from suppliers that new and upgraded information
systems and other products will be Year 2000 ready. The Company plans to
test such third-party systems and products, but cannot be sure that its
tests will be adequate or that, if problems are identified, they will be
addressed by the supplier in a timely and satisfactory way.
Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the
Company cannot be sure that all of its systems will work together in a Year
2000-ready fashion. Furthermore, the Company cannot be sure that it will
not suffer business interruptions, either because of its own Year 2000
problems or those of third-parties upon whom the Company is reliant for
services. The Company is continuing to evaluate its Year 2000-related risks
and corrective actions. However, the risks associated with the Year 2000
problem are pervasive and complex; they can be difficult to identify and
address, and can result in material adverse consequences to the Company.
Even if the Company, in a timely manner, completes all of its assessments,
identifies and tests 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.
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, 1998 and 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS)
1998
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $33,829 $36,856 $39,385 $44,481
Operating income 6,075 7,722 9,167 10,563
Net income (loss) 448 1,901 2,201 2,522
1997
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------------
Revenues $12,983 $14,123 $13,556 $15,270
Operating income 4,837 5,534 4,525 5,090
Income (loss) before extraordinary
item 834 365 (770) (1,096)
Net income (loss) (2,919) 791 (383) (1,482)
</TABLE>
Form 10-K--Item 14(a)(1) and (2)
CCPR Services, Inc. and Subsidiaries
Index to Consolidated Financial Statements and
Financial Statement Schedule
The following consolidated financial statements and schedule of CCPR
Services, Inc. and subsidiaries are included in Item 8:
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets -- December 31, 1998 and 1997 ................F-3
Consolidated Statements of Operations --
Years Ended December 31, 1998, 1997 and 1996...........................F-4
Consolidated Statement of Shareholder's Equity (Deficiency) --
Years Ended December 31, 1998, 1997 and 1996...........................F-5
Consolidated Statements of Cash Flows --
Years Ended December 31, 1998, 1997 and 1996...........................F-6
Notes to Consolidated Financial Statements................................F-8
The following consolidated financial statement schedule of CCPR Services,
Inc. and subsidiaries is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts.........................F-22
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.
Report of Independent Auditors
Board of Directors and Shareholder
CCPR Services, Inc.
We have audited the accompanying consolidated balance sheets of CCPR
Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholder's equity
(deficiency), and cash flows for each of the three years in the period
ended December 31, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of CCPR Services, Inc. and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, 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.
As more fully described in Note 4, the Company has restated the
consolidated financial statements to correct the accounting for its
purchases of interests in the San Juan Cellular Telephone Company from its
Parent.
ERNST & YOUNG LLP
San Juan, Puerto Rico
February 26, 1999, except for
the last paragraph of Note 4 as
to which the date is April 30, 1999
CCPR Services, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $32,146,000 $ 9,181,000
Marketable securities - 235,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,506,000 (1998) and $1,839,000 (1997) 17,620,000 17,847,000
Due from affiliates 4,283,000 12,313,000
Equipment inventory 7,159,000 2,497,000
Prepaid expenses 5,295,000 3,108,000
--------------------------------
Total current assets 66,503,000 45,181,000
Property, plant and equipment, net 118,280,000 119,702,000
Investment in San Juan Cellular Telephone Company - 41,661,000
Unamortized license acquisition costs 90,394,000 8,233,000
Deferred financing costs, net of accumulated amortization of
$1,446,000 (1998) and $584,000 (1997) 8,721,000 6,206,000
Other assets, net of accumulated amortization of $709,000
(1998) and $1,046,000 (1997) 944,000 938,000
--------------------------------
Total assets $284,842,000 $221,921,000
================================
LIABILITIES AND SHAREHOLDER'S (DEFICIENCY)
Current liabilities:
Accounts payable $14,640,000 $ 6,335,000
Accrued expenses 20,958,000 18,343,000
Due to affiliates 18,385,000 44,897,000
Deferred revenue 5,337,000 3,094,000
--------------------------------
Total current liabilities 59,320,000 72,669,000
Long-term debt 355,000,000 200,000,000
Obligation under capital lease 9,157,000 9,456,000
Commitments and contingent liabilities
Minority interest 4,693,000 -
Shareholder's (deficiency):
Common stock - $1 par value; authorized 1,500 shares; issued
and outstanding 1,400 shares 1,000 1,000
Additional paid-in capital - -
(Deficit) (143,329,000) (60,205,000)
--------------------------------
Total shareholder's equity (deficiency) (143,328,000) (60,204,000)
--------------------------------
Total liabilities and shareholder's (deficiency) $284,842,000 $221,921,000
================================
</TABLE>
See accompanying notes
CCPR Services, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
REVENUES:
Service revenue $133,413,000 $18,452,000 $17,701,000
Equipment revenue 21,138,000 1,936,000 1,873,000
Administrative and capital usage
fees charged to San Juan Cellular
Telephone Company - 35,743,000 18,417,000
Equity in net income (loss) of San Juan
Cellular Telephone Company - (199,000) 304,000
----------------------------------------------
154,551,000 55,932,000 38,295,000
COST AND EXPENSES:
Cost of equipment sold 18,875,000 2,218,000 2,453,000
Operating expenses 14,212,000 2,981,000 2,736,000
Selling, general and administrative expenses 60,144,000 10,986,000 10,092,000
Depreciation of rental equipment 505,000 221,000 193,000
Depreciation expense 23,944,000 17,010,000 11,546,000
Amortization expense 3,344,000 2,530,000 1,927,000
----------------------------------------------
121,024,000 35,946,000 28,947,000
----------------------------------------------
Operating income 33,527,000 19,986,000 9,348,000
OTHER INCOME (EXPENSE):
Intercompany interest income 227,000 531,000 597,000
Interest income and other, net 63,000 (1,788,000) 600,000
Interest expense (26,154,000) (19,394,000) (8,094,000)
----------------------------------------------
Income (loss) before income taxes, minority
interests and extraordinary item 7,663,000 (665,000) 2,451,000
Income tax provision (279,000) (2,000) (960,000)
----------------------------------------------
Income (loss) before minority interests
and extraordinary item 7,384,000 (667,000) 1,491,000
Minority interests (312,000) - -
----------------------------------------------
Income (loss) before extraordinary item 7,072,000 (667,000) 1,491,000
Loss from early extinguishment of debt -
net of income tax benefit of $741,000 - (3,326,000)
----------------------------------------------
Net income (loss) $ 7,072,000 $ (3,993,000) $ 1,491,000
==============================================
</TABLE>
See accompanying notes
CCPR Services, Inc. and Subsidiaries
Consolidated Statement of Shareholder's Equity (Deficiency)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Return of capital (19,513,000) (38,989,000) (58,502,000)
Net loss (3,993,000) (3,993,000)
----------------------------------------------------------------
Balance at December 31, 1997 1,400 1,000 - (60,205,000) (60,204,000)
Return of capital (90,196,000) (90,196,000)
Net income 7,072,000 7,072,000
-----------------------------------------------------------------
Balance at December 31, 1998 1,400 $1,000 - $(143,329,000) $(143,328,000)
-----------------------------------------------------------------
</TABLE>
See accompanying notes
CCPR Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 7,072,000 $(3,993,000) $ 1,491,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 27,793,000 19,761,000 13,666,000
Minority interest 312,000 - -
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 4,677,000 6,620,000 7,087,000
Loss on disposal of fixed assets 182,000 1,792,000 67,000
Changes in operating assets and liabilities:
Accounts receivable (3,811,000) (5,914,000) (9,629,000)
Due from affiliates 8,030,000 (5,458,000) 1,559,000
Equipment inventory (4,662,000) (205,000) 2,425,000
Prepaid expenses 93,000 (685,000) (1,028,000)
Other assets (51,000) (97,000) (472,000)
Accounts payable 7,065,000 (913,000) 2,428,000
Accrued expenses 1,794,000 6,806,000 2,826,000
Due to affiliates (4,994,000) 1,198,000 (11,260,000)
Deferred revenue 2,243,000 640,000 103,000
----------------------------------------
Net cash provided by operating activities 45,743,000 23,818,000 8,959,000
INVESTING ACTIVITIES
Purchase of marketable securities - (235,000) (15,658,000)
Proceeds from maturities of marketable securities 235,000 5,917,000 9,741,000
Purchase of cellular license interest (8,686,000) - -
Purchase of San Juan Cellular Telephone Company
interest, net of cash acquired (29,757,000) (21,498,000) (56,000)
Purchase of property, plant and equipment (21,695,000) (37,335,000) (33,014,000)
----------------------------------------
Net cash (used in) investing activities (59,903,000) (53,151,000) (38,987,000)
FINANCING ACTIVITIES
Due to CCPR, Inc. 14,870,000 17,056,000 -
Return of capital to CCPR, Inc. (90,196,000) (58,502,000) -
Principal payments of capital lease obligation (272,000) (194,000) -
Additional deferred financing costs - - (23,000)
Proceeds from borrowings, net of financing costs 151,623,000 193,233,000 52,000,000
Repayment of amount due to CCPR, Inc. (30,000,000) - -
Principal payments (8,900,000) (115,000,000) (27,000,000)
----------------------------------------
Net cash provided by financing activities 37,125,000 36,593,000 24,977,000
----------------------------------------
Increase (decrease) in cash and cash equivalents 22,965,000 7,260,000 (5,051,000)
Cash and cash equivalents at beginning of year 9,181,000 1,921,000 6,972,000
----------------------------------------
Cash and cash equivalents at end of year $ 32,146,000 $ 9,181,000 $ 1,921,000
========================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive of
amounts capitalized $26,120,000 $13,155,000 $ 7,032,000
Income taxes paid 57,000 226,000 757,000
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
Liabilities incurred to acquire property, plant and
equipment 5,191,000 3,038,000 1,568,000
Capital lease obligation incurred to acquire office
building - 9,922,000 -
Long-term debt issued to acquire cellular license 8,900,000 - -
interest
</TABLE>
See accompanying notes
CCPR Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CCPR Services, Inc. ("the Company") is a wholly-owned subsidiary of CCPR,
Inc. (formerly Cellular Communications of Puerto Rico, Inc.) ("CCPR").
Effective December 31, 1997, certain subsidiaries of CCPR merged with and
into the Company (see Note 2). As a result of these mergers, the Company
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.
Effective January 1, 1998, the Company consolidates the San Juan Cellular
Telephone Company (a general partnership) ("SJCTC").
The Company's 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. The Company 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and those entities where the Company's
interest is greater than 50%. Significant intercompany accounts and
transactions have been eliminated in consolidation.
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. Cash equivalents were $14,918,000 at
December 31, 1998 and consisted of corporate commercial paper.
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 other comprehensive
income. The amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization and
accretion 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.
The Company had no marketable securities at December 31, 1998. Marketable
securities at December 31, 1997 consisted of corporate debt securities.
During the years ended December 31, 1998, 1997 and 1996, there were no
realized gains or losses on sales of securities. As of December 31, 1997,
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an estimate of uncollectible accounts receivable based
on the current aging of its receivables and its prior collections
experience.
INVESTMENT IN SAN JUAN CELLULAR TELEPHONE COMPANY
Prior to its consolidation effective January 1, 1998, the investment in
SJCTC was accounted for using the equity method and consisted of the cost
of acquiring the ownership interest in the partnership and the Company's
share of the partnership's net income (loss) from the date of acquisition.
The excess of the cost over the equity acquired was being amortized through
charges to operations by the straight-line method over 40 years. (See Note
4).
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.
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 undiscounted cash flows 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 1998, 1997 and 1996, interest of $148,000,
$415,000 and $198,000, 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, 1998, 1997 and
1996 were $2,866,000, $2,731,000 and $2,544,000, respectively. The costs
were either charged to expense or charged to SJCTC.
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
SJCTC) was merged with and into the Company. The specific subsidiaries
merged with and into the Company 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 Associates, Inc. ("Star"). The
Company acquired all of the common stock of these subsidiaries in exchange
for 400 shares of the Company's common stock with the Company 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 the Company.
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, in 1997 the
Company's financial statements were restated to include the results of the
merged entities for all periods presented. All material intercompany
transactions have been eliminated.
3. RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 130 in 1998 which had no impact on the Company's financial
position or results of operations.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted
effective January 1, 2000. Management does not anticipate that the adoption
of this new standard will have a significant effect on results of
operations or the financial condition of the Company.
4. UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
DECEMBER 31
1998 1997
------------------------------
Deferred cellular license costs $ 3,252,000 $ 3,252,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 97,311,000 10,482,000
------------------------------
100,563,000 13,734,000
Accumulated amortization (10,169,000) (5,501,000)
------------------------------
$ 90,394,000 $ 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.
In August 1998, the Company purchased an additional 23.5% interest in SJCTC
from CCPR for $120,000,000 in cash. The Company recorded its investment in
SJCTC at CCPR's net book value of $29,804,000 and the additional cash paid
of $90,196,000 was recorded as a reduction in shareholder's equity. 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
transfer among entities under common control, 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 pro forma unaudited consolidated results of operations for the years
ended December 31, 1998 and 1997 assuming consummation of the SJCTC and
RSA-4 acquisitions as of January 1, 1997 are as follows:
YEAR ENDED DECEMBER 31
1998 1997
--------------------------------
Total revenues $ 154,551,000 $ 127,788,000
Income (loss) before extraordinary item 7,371,000 (1,643,000)
Net income (loss) 7,371,000 (4,969,000)
The Company previously recorded the excess of the purchase price over the
fair value of the net tangible assets of SJCTC that it purchased from CCPR
as license acquisition costs. The Company has restated the financial
statements to correct the accounting for the interests in SJCTC and now
accounts for the interest in SJCTC at CCPR's historical cost with the
balance of the purchase price being recorded as a reduction of
shareholder's equity. The effect of this restatement was to change the net
income from $4,670,000 to $7,072,000 in 1998 and net loss from $(5,334,000)
to $(3,993,000) in 1997.
5. INVESTMENT IN SAN JUAN CELLULAR TELEPHONE COMPANY
The investment in SJCTC at December 31, 1997 consisted of the following:
Purchase of San Juan Cellular Telephone Company
interests $ 21,592,000
Carryover basis of SJCTC interest purchased
from CCPR 21,498,000
Equity in accumulated net income 105,000
----------------
43,195,000
Accumulated amortization (1,534,000)
----------------
$ 41,661,000
----------------
In February 1996, the Company acquired approximately 6% of SJCTC from a
third party 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. The Company recorded a liability to CCPR of $21,536,000 in
connection with the acquisition. The Company incurred $56,000 in expenses
related to the acquisition.
In January 1997, the Company acquired an additional 21% interest in SJCTC
from CCPR, in exchange for cash of $80,000,000. The Company recorded its
investment in SJCTC at CCPR's net book value of $21,498,000 and the
additional cash paid of $58,502,000 was recorded as a reduction in
shareholder's equity.
The following summarizes the assets, liabilities and partners' capital of
SJCTC 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
--------------------
The following summarizes the results of operations of SJCTC:
YEAR ENDED DECEMBER 31
1997 1996
--------------------------------
Revenues $107,400,000 $96,907,000
Cost and expenses 108,136,000 88,188,000
--------------------------------
Operating (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
================================
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
DECEMBER 31
1998 1997
--------------------------------
Land $ 1,928,000$ 1,928,000
Office building 9,922,000 9,922,000
Operating equipment 132,961,000 118,048,000
Office furniture and other equipment 32,430,000 23,207,000
Rental equipment 1,551,000 623,000
Construction in progress 8,060,000 12,070,000
--------------------------------
186,852,000 165,798,000
Accumulated depreciation (68,572,000) (46,096,000)
--------------------------------
$ 118,280,000 $ 119,702,000
================================
7. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31
1998 1997
--------------------------------
Accrued franchise, property and income taxes $ 3,353,000 $ 2,722,000
Interest payable 8,367,000 8,333,000
Other 9,238,000 7,288,000
--------------------------------
$20,958,000 $18,343,000
================================
8. RELATED PARTY TRANSACTIONS
Prior to SJCTC's consolidation in 1998, the Company allocated revenues to
SJCTC based on the completed calls within its license area during the year,
and allocated costs to SJCTC based on the number of cell sites and radio
channels in operation or under construction within its license area during
the year pursuant to the Administration and Management Agreement. During
1997 and 1996, the Company collected cellular service and equipment
revenues of $107,400,000 and $96,907,000, respectively, and incurred costs
of $71,819,000 and $69,198,000, respectively, on behalf of SJCTC. These
revenues and expenses are not included in the Company's statement of
operations in 1997 and 1996 and are included in the statement of operations
of SJCTC.
9. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31
1998 1997
--------------------------------
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 December 31, 1998 was
7.87%. 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, which guarantee is full, joint and several. 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, which guarantee is full,
joint and several. The Company and CCPR used approximately $116,000,000 of
the proceeds to repay the $115,000,000 principal outstanding plus accrued
interest and fees under a bank loan. In connection with the repayment of
the loan, the Company 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 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 Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated), the parent company of CCPR ("Parent")),
(iii) create liens, (iv) sell assets, (v) enter into mergers or
consolidations or (vi) sell or issue stock of subsidiaries.
The consolidated financial statements of CCPR and subsidiaries are included
in CCPR's Annual Report on Form 10-K for the year ended December 31, 1998
(Commission file no. 0-19869).
Long-term debt repayments are due as follows:
Year ending December 31,
2001 $ 5,000,000
2002 11,500,000
2003 14,500,000
Thereafter 324,000,000
----------------
$355,000,000
================
The fair value of the Notes as of December 31, 1998 and 1997 was
$193,500,000 and $194,000,000, respectively, based on the quoted market
price. The fair value of the bank loan as of December 31, 1998 was
$155,000,000 based on discounted cash flow analysis.
10. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------
Current:
Federal $ - $ - $ -
Puerto Rico 279,000 2,000 163,000
---------------------------------------------
Total current 279,000 2,000 163,000
Deferred:
Federal - - -
Puerto Rico - - 797,000
---------------------------------------------
Total deferred - - 797,000
--------------------------------------------
$279,000 $2,000 $960,000
============================================
The Company is included in Parent's consolidated federal income tax return.
In January 1997, the Company, CCPR and Parent entered into a tax sharing
agreement which provides that CCPR and the Company will pay to Parent (or
Parent will pay to CCPR or the Company, 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 Parent's consolidated group.
The provision for income taxes differs from the statutory rates principally
due to state and local taxes and losses for which no benefit is taken.
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 the Company's deferred tax liability and asset as
of December 31, 1998 and 1997, are as follows:
DECEMBER 31
1998 1997
--------------------------------
Deferred tax liability:
Tax over book depreciation $ 6,102,000 $ 797,000
Deferred tax asset:
Net operating loss carryforwards 13,044,000 6,796,000
Valuation allowance for deferred
tax assets (7,739,000) (6,796,000)
--------------------------------
Net deferred tax asset 5,305,000 -
================================
Net deferred taxes $ 797,000 $ 797,000
================================
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $33,400,000 to offset future Puerto Rico taxable income
that expire as follows: $2,000,000 in 1999, $2,200,000 in 2000, $2,600,000
in 2001, $4,100,000 in 2002, $5,200,000 in 2003, $16,200,000 in 2004 and
$1,100,000 in 2005.
11. PENSION PLAN
The Company has a defined contribution plan covering all employees who have
completed six months of employment. The Company's 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 1998, 1997 and 1996 were
$212,000 , $187,000 and $145,000, respectively.
12. LEASES
Total rent which was either charged to expense or to SJCTC during the years
ended December 31, 1998, 1997 and 1996 was $3,191,000, $3,367,000 and
$2,852,000, respectively.
Future minimum annual lease payments under noncancelable operating leases
at December 31, 1998 are: $2,993,000 (1999); $2,286,000 (2000), $1,579,000
(2001); $861,000 (2002); $362,000 (2003) and $2,908,000 thereafter.
In 1997, the Company 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. Accumulated
depreciation on the office building at December 31, 1998 and 1997 was
$1,049,000 and $388,000, respectively. Future minimum annual payments under
this lease at December 31, 1998 are as follows:
Year ending December 31,
1999 $1,196,000
2000 1,196,000
2001 1,196,000
2002 1,265,000
2003 1,288,000
Thereafter 10,872,000
----------------
17,013,000
Interest (7,557,000)
----------------
Present value of net minimum obligations 9,456,000
Current portion (included in accrued expenses) (299,000)
----------------
$9,157,000
================
13. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1998, the Company was committed to purchase
approximately $7,400,000 for cellular network and other equipment and for
construction services. In addition, as of December 31, 1998, the Company
had commitments to purchase cellular telephones, pagers and accessories of
approximately $2,200,000.
In 1992, the Company entered into an agreement, which in effect provides
for a twenty year license to use a service mark in Puerto Rico, 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.
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, results of operations or cash flows to result from
these matters.
CCPR Services, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
(1) (2)
-------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO OTHER BALANCE AT
OF COSTS AND ACCOUNTS- DEDUCTIONS- END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful
accounts $1,839,000 $4,677,000 $ - $(5,010,000(a) $1,506,000
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: $2,903,000 $7,087,000 $ - $(6,518,000(a) $3,472,000
Allowance for doubtful
accounts
</TABLE>
(a) - Uncollectible accounts written-off, net of recoveries.
