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. 0-19869
------------------------------------------------------------
CCPR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
(On August 28, 1998, the name of the Registrant was changed from Cellular
Communications of Puerto Rico, Inc. to CCPR, Inc.)
Delaware 13-3517074
- ------------------------------- ------------------------------------
(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 1,000.
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.)
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 ............................ 10
PART II. OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K .............................. 17
SIGNATURES.............................................................. 18
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, 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 $ 16,157,000 $ 9,445,000
Marketable securities - 235,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,758,000 (1998) and $2,106,000 (1997) 20,020,000 19,043,000
Due from parent company 2,084,000 935,000
Equipment inventory 5,853,000 2,882,000
Prepaid expenses and other current assets 7,004,000 5,923,000
-------------------------------
Total current assets 51,118,000 38,463,000
Property, plant and equipment, net 124,170,000 128,451,000
Unamortized license acquisition costs 170,806,000 157,467,000
Deferred financing costs, less accumulated amortization
of $1,164,000 (1998) and $584,000 (1997) 8,788,000 6,206,000
Other assets, less accumulated amortization of
$793,000 (1998) and $1,088,000 (1997) 1,376,000 1,537,000
-------------------------------
$ 356,258,000 $ 332,124,000
===============================
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 10,364,000 $ 6,815,000
Accrued expenses 12,279,000 11,012,000
Due to NTL Incorporated 5,000 71,000
Due to parent company - 17,056,000
Interest payable 4,845,000 8,333,000
Deferred revenue 5,723,000 3,952,000
-------------------------------
Total current liabilities 33,216,000 47,239,000
Long-term debt 355,000,000 200,000,000
Obligation under capital lease 9,234,000 9,456,000
Commitments and contingent liabilities
Shareholder's equity (deficiency):
Common stock - $.01 par value; authorized, issued and
outstanding 1,000 shares - -
Additional paid-in capital 17,570,000 137,570,000
(Deficit) (58,762,000) (62,141,000)
-------------------------------
(41,192,000) 75,429,000
-------------------------------
$ 356,258,000 $ 332,124,000
===============================
</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, Inc.
(formerly Cellular Communications of Puerto Rico, 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 $ 39,224,000 $ 31,541,000 $ 110,791,000 $ 99,587,000
Equipment revenue 5,643,000 4,672,000 16,096,000 12,335,000
------------------------------ --------------------------------
44,867,000 36,213,000 126,887,000 111,922,000
COSTS AND EXPENSES:
Cost of equipment sold 5,072,000 5,258,000 14,526,000 14,331,000
Operating expenses 4,294,000 4,555,000 12,660,000 12,783,000
Selling, general and administrative expenses 17,101,000 17,712,000 50,043,000 53,693,000
Depreciation of rental equipment 312,000 233,000 828,000 608,000
Depreciation expense 6,547,000 4,831,000 18,819,000 12,823,000
Amortization expense 1,700,000 1,610,000 5,040,000 4,821,000
------------------------------ --------------------------------
35,026,000 34,199,000 101,916,000 99,059,000
------------------------------ --------------------------------
Operating income 9,841,000 2,014,000 24,971,000 12,863,000
OTHER INCOME (EXPENSE):
Interest income and other, net (381,000) (17,000) (318,000) (31,000)
Interest expense (6,957,000) (5,200,000) (17,717,000) (14,261,000)
------------------------------ --------------------------------
Income (loss) before income taxes and
extraordinary item 2,503,000 (3,203,000) 6,936,000 (1,429,000)
Income tax provision (2,796,000) (114,000) (3,557,000) (1,266,000)
------------------------------ --------------------------------
Income (loss) before extraordinary item (293,000) (3,317,000) 3,379,000 (2,695,000)
Loss from early extinguishment of debt, net of
income tax benefit of $1,128,000 - 387,000 - (2,939,000)
------------------------------ --------------------------------
Net income (loss) $ (293,000) $ (2,930,000) $ 3,379,000 $ (5,634,000)
============================== ================================
</TABLE>
See accompanying notes.
3
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Condensed Consolidated Statement of Shareholder's Equity (Deficiency)
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN
SHARES AMOUNT CAPITAL (DEFICIT)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 1,000 $ - $ 137,570,000 $ (62,141,000)
Distribution to parent company (120,000,000)
Net income for the nine months
ended September 30, 1998 3,379,000
--------------------------------------------------------------
Balance, September 30, 1998 1,000 $ - $ 17,570,000 $ (58,762,000)
==============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, 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 $ 27,295,000 $ 13,544,000
INVESTING ACTIVITIES
Cost of cellular license interest (8,686,000) (146,000)
Purchase of property, plant and equipment (17,813,000) (33,621,000)
Proceeds from maturities of marketable securities 235,000 5,917,000
--------------------------------------
Net cash (used in) investing activities (26,264,000) (27,850,000)
--------------------------------------
FINANCING ACTIVITIES
Principal payments of capital lease obligation (201,000) (131,000)
Due to parent company 12,944,000 13,056,000
Proceeds from bank loan, net of financing costs 151,838,000 -
Repayment of long-term debt (8,900,000) -
Repayment of amount due to parent company (30,000,000) -
Repayment of bank loan - (115,000,000)
Proceeds from issuance of Notes, net of financing costs - 193,694,000
Distribution to parent company (120,000,000) (80,000,000)
Purchase of treasury stock - (688,000)
Proceeds from exercise of stock options - 287,000
--------------------------------------
Net cash provided by financing activities 5,681,000 11,218,000
--------------------------------------
Increase (decrease) in cash and cash equivalents 6,712,000 (3,088,000)
Cash and cash equivalents at beginning of period 9,445,000 2,307,000
--------------------------------------
Cash and cash equivalents at end of period $ 16,157,000 $ (781,000)
======================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive
of amounts capitalized $ 21,205,000 $ 12,606,000
Income taxes paid 781,000 4,339,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred to acquire property, plant and equipment $ 1,373,000 $ 2,365,000
Long-term debt issued to acquire cellular license interest 8,900,000 -
Capital lease obligation incurred to acquire office building - 9,922,000
</TABLE>
See accompanying notes.
5
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and 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.
In June 1997, the Financial Accounting Standards Board (the "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 has adopted SFAS No. 130, which
had no effect on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company is assessing whether changes in reporting will be required
upon the adoption of this new standard. The Company will adopt SFAS No. 131 for
fiscal year ending December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in fiscal
years beginning after June 15, 1999. Management does not anticipate that the
adoption of this new standard will have a significant effect on earnings or the
financial position of the Company.
6
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, 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 $ 5,935,000 $ 5,935,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 207,052,000 189,466,000
-------------------------------
212,987,000 195,401,000
Accumulated amortization 42,181,000 37,934,000
-------------------------------
$ 170,806,000 $ 157,467,000
===============================
In January 1998, the San Juan Cellular Telephone Company ("SJCTC"), a
wholly-owned subsidiary of the Company, 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 this acquisition.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------------------
(Unaudited)
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 137,326,000 127,534,000
Office furniture and other equipment 31,439,000 24,546,000
Rental equipment 3,044,000 1,745,000
Construction in progress 8,064,000 12,533,000
-------------------------------
191,746,000 178,231,000
Accumulated depreciation 67,576,000 49,780,000
-------------------------------
$ 124,170,000 $ 128,451,000
===============================
7
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE D - ACCRUED EXPENSES
Accrued expenses consist of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Accrued compensation $ 1,398,000 $ 765,000
Accrued equipment purchases 243,000 1,427,000
Accrued franchise, property and income taxes 5,345,000 2,836,000
Commissions payable 616,000 1,143,000
Subscriber deposits 1,389,000 1,544,000
Other 3,288,000 3,297,000
------------------------------
$ 12,279,000 $ 11,012,000
==============================
NOTE E - 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, a wholly-owned subsidiary of the Company, CCPR Services, Inc.
("Services"), entered into a $170,000,000 credit agreement with various banks.
Services borrowed $155,000,000 which, along with cash on hand of $7,000,000, was
used to repay amounts due to the Company of $30,000,000, to purchase a 23.5%
interest in SJCTC from the Company 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 used $30,000,000 to repay its loan payable to its parent company,
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
("CCPR"), and the Company made a cash distribution of $120,000,000 to CCPR. CCPR
made a capital contribution to its wholly-owned subsidiary, CoreComm Limited, of
$150,000,000 in cash and distributed 100% of the common stock of CoreComm
Limited to CCPR's shareholders.
8
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE E - LONG-TERM DEBT (CONTINUED)
Services has $15,000,000 available under the bank loan until September 2001. The
terms include the payment of interest at least quarterly at a floating rate,
which is, at Services' option, either (a) the greater of the bank's prime rate
or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio of
the Company and its subsidiaries debt to cash flow and the floating rate in
effect, either 0% to 1.25% or 1.25% to 2.5%. The effective rate on Services'
borrowings as of 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. Services incurred costs of
$3,162,000 in connection with the bank loan which are included in deferred
financing costs.
In connection with the bank loan, the Company has pledged to the banks the stock
of its subsidiaries and the Company and its subsidiaries have given the banks a
security interest in their assets. The Company and its 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 the Company 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 the Company
and its subsidiaries maintain certain ratios of indebtedness to cash flow, fixed
charges to cash flow and debt service to cash flow.
NOTE F - 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.
9
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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 recorded 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.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------
Service revenue increased to $39,224,000 from $31,541,000. Lower average revenue
and minutes of use of new prepaid subscribers and the selection by existing
subscribers of alternate rate plans resulted in average monthly revenue per
cellular subscriber for the third quarter decreasing to $53 in 1998 from $59 in
1997. The Company expects these trends to continue for the foreseeable future.
Ending subscribers were 264,700 and 181,900 as of September 30, 1998 and 1997,
respectively. Ending pagers in use were 54,300 and 45,500 as of September 30,
1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $571,000 from a loss of $586,000 primarily because the
Company is not selling telephones below their cost to prepaid subscribers.
Reductions in the cost of cellular telephones also contributed to this change.
The Company intends to continue to sell telephones at or above cost to prepaid
subscribers. The Company expects the growth in prepaid subscribers to continue,
therefore the Company expects the trend in equipment income to continue for the
foreseeable future.
Operating expenses decreased to $4,294,000 from $4,555,000 primarily due to the
elimination of the expense accrual for the proposed Puerto Rico universal
service charge in the fourth quarter of 1997. Subsidiaries of the Company were
recording an estimate for this proposed charge in operating expenses through
September 30, 1997. The total expense accrual of $1,644,000 was reversed in the
fourth quarter of 1997 after the Puerto Rico Telecommunications Regulatory Board
announced that the proposed retroactive application of the universal service
charge to January 1997 had been eliminated. After adjusting for the reversal of
$520,000 charged to expense in the third quarter of 1997, operating expenses
increased to $4,294,000 from $4,035,000 due to additional costs associated with
the expanded network (including paging operations). Operating expenses as a
percentage of service revenue decreased to 11% in 1998 from 13% (after
adjustment) in 1997.
10
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Selling, general and administrative expenses decreased to $17,101,000 from
$17,712,000 as a result of all of the following: a decrease in selling and
marketing costs, bad debt expense and subscriber billing expense. The decreases
in selling and marketing costs, bad debt expense and subscriber billing expense
were 8%, 65% and 11%, respectively of the $611,000 decrease. These decreases
were partially offset by an increase in property taxes due to an increase in
taxable property which was (29)% of the decrease.
Depreciation of rental equipment increased to $312,000 from $233,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $6,547,000 from $4,831,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $1,700,000 from $1,610,000 primarily due to an
increase in deferred financing costs.
Interest income and other, net, increased to expense of $381,000 from expense of
$17,000 primarily due to losses on the disposal of cell site equipment damaged
by Hurricane Georges of approximately $400,000, net of the partial payment of
claims. Interest income increased to $13,000 from $7,000.
Interest expense increased to $6,957,000 from $5,200,000 as a result of the new
bank loan commencing in August 1998.
The provision for income taxes increased to $2,796,000 from $114,000 as a result
of a tax provision of $2,200,000 in connection with the August 1998 transactions
and an increase in Puerto Rico and U.S. Virgin Islands taxable income of certain
of the Company's consolidated subsidiaries.
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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------------
Service revenue increased to $110,791,000 from $99,587,000. Lower average
revenue and minutes of use of new prepaid subscribers and the selection by
existing subscribers of alternate rate plans resulted in average monthly revenue
per cellular subscriber for the nine months ended September 30 decreasing to $53
in 1998 from $65 in 1997. The Company expects these trends to continue for the
foreseeable future. Ending subscribers were 264,700 and 181,900 as of September
30, 1998 and 1997, respectively. Ending pagers in use were 54,300 and 45,500 as
of September 30, 1998 and 1997, respectively.
11
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $1,570,000 from a loss of $1,996,000 primarily because
the Company is not selling telephones below their cost to prepaid subscribers.
Reductions in the cost of cellular telephones also contributed to this change.
The Company intends to continue to sell telephones at or above cost to prepaid
subscribers. The Company expects the growth in prepaid subscribers to continue,
therefore the Company expects the trend in equipment income to continue for the
foreseeable future.
Operating expenses decreased to $12,660,000 from $12,783,000 primarily due to
the elimination of the expense accrual for the proposed Puerto Rico universal
service charge in the fourth quarter of 1997. Subsidiaries of the Company were
recording an estimate for this proposed charge in operating expenses through
September 30, 1997. The total expense accrual of $1,644,000 was reversed in the
fourth quarter of 1997 after the Puerto Rico Telecommunications Regulatory Board
announced that the proposed retroactive application of the universal service
charge to January 1997 had been eliminated. After adjusting for the expense
reversal, operating expenses increased to $12,660,000 from $11,139,000 due to
increased usage of the network and additional costs associated with the expanded
network (including paging operations). Operating expenses as a percentage of
service revenue was 11% in 1998 and in 1997 (after adjustment).
Selling, general and administrative expenses decreased to $50,043,000 from
$53,693,000 as a result of all of the following: a decrease in selling and
marketing costs, bad debt expense and subscriber billing expense. The decreases
in selling and marketing costs, bad debt expense and subscriber billing expense
were 33%, 42% and 11%, respectively of the $3,650,000 decrease. These decreases
were partially offset by an increase in property taxes due to an increase in
taxable property which was (24)% of the decrease.
Depreciation of rental equipment increased to $828,000 from $608,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $18,819,000 from $12,823,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $5,040,000 from $4,821,000 due to increases in
license acquisition costs and deferred financing costs.
Interest income and other, net, increased to expense of $318,000 from expense of
$31,000 primarily due to losses on the disposal of cell site equipment damaged
by Hurricane Georges of approximately $400,000, net of the partial payment of
claims. Interest income decreased to $20,000 from $114,000 due to a decrease in
amounts available for short term investment.
Interest expense increased to $17,717,000 from $14,261,000 as a result of the
office building capital lease obligation beginning in April 1997, the issuance
of the subsidiary note payable in January 1998 and the new bank loan commencing
in August 1998.
12
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
The provision for income taxes increased to $3,557,000 from $1,266,000 as a
result of a tax provision of $2,200,000 in connection with the August 1998
transactions and an increase in Puerto Rico and U.S. Virgin Islands taxable
income of certain of the Company's consolidated subsidiaries.
In connection with the termination of a bank loan, the Company recorded an
extraordinary loss of $4,067,000 in 1997 ($2,939,000 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 cellular and paging network and for
debt service. The Company is currently adding cell sites and increasing capacity
throughout its Puerto Rico and U.S. Virgin Islands markets. The Company expects
to use approximately $9,500,000 in the fourth quarter of 1998 and $30,700,000 in
1999 for contemplated additions to the cellular network, the paging network and
for other non-cell site related capital expenditures. The Company's commitments
at 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, a wholly-owned subsidiary of the Company, CCPR Services, Inc.
("Services"), entered into a $170,000,000 credit agreement with various banks.
Services borrowed $155,000,000 which, along with cash on hand of $7,000,000, was
used to repay amounts due to the Company of $30,000,000, to purchase a 23.5%
interest in SJCTC from the Company 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 used $30,000,000 to repay its loan payable to its parent company,
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated)
("CCPR"), and the Company made a cash distribution of $120,000,000 to CCPR. CCPR
made a capital contribution to its then wholly-owned subsidiary, CoreComm
Limited, of $150,000,000 in cash and distributed 100% of the common stock of
CoreComm Limited to CCPR's shareholders.
Services has $15,000,000 available under the bank loan until September 2001. The
terms include the payment of interest at least quarterly at a floating rate,
which is, at Services' option, either (a) the greater of the bank's prime rate
or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio of
the Company and its subsidiaries debt to cash flow and the floating rate in
effect, either 0% to 1.25% or 1.25% to 2.5%. The effective rate on Services'
borrowings as of 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. Services incurred costs of
$3,162,000 in connection with the bank loan which are included in deferred
financing costs.
13
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
In connection with the bank loan, the Company has pledged to the banks the stock
of its subsidiaries and the Company and its subsidiaries have given the banks a
security interest in their assets. The Company and its 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 the Company 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 the Company
and its subsidiaries maintain certain ratios of indebtedness to cash flow, fixed
charges to cash flow and debt service to cash flow.
In January 1997, Services issued $200,000,000 principal amount 10% Senior
Subordinated Notes due 2007 (the "Notes") and received proceeds of $193,233,000
after discounts, commissions and other related costs. The Notes are
unconditionally guaranteed by the Company. 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 distributed
$80,000,000 to CCPR in 1997.
The Notes are due on February 1, 2007. Interest on the Notes is payable
semiannually on February 1 and August 1. The Notes are redeemable, in whole or
in part, at the option of Services at any time on or after February 1, 2002, at
a redemption price of 105% that declines annually to 100% in 2005, in each case
together with accrued and unpaid interest to the redemption date. The Indenture
contains certain convenants with respect to Services, the Company and certain
subsidiaries that limit their ability to, among other things: (i) incur
additional indebtedness, (ii) pay dividends or make other distributions or
restricted payments, (iii) create liens, (iv) sell assets, (v) enter into
mergers or consolidations or (vi) sell or issue stock of subsidiaries.
The Company is highly leveraged as a result of the new bank loan and the use of
the proceeds to distribute cash to CCPR. Such leverage could limit the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes, increases its
vulnerability to adverse changes in general economic conditions or increases in
interest rates, and requires that a substantial portion of cash flow from
operations be dedicated to debt service requirements. The leveraged nature of
the Company and the Company's continued compliance with the restrictions in its
debt agreements could limit its ability to respond to market conditions, meet
extraordinary capital needs or restrict other business activities such as
acquisitions. In addition, the Company is a holding company with no significant
assets other than its investments in and advances to its subsidiaries. The
Company is therefore dependent upon receipt of funds from its subsidiaries to
meet its own obligations, however the debt agreements effectively prevent the
payment of dividends, loans or other distributions to the Company. The Company
expects to be able to meet its consolidated 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,
14
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
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 $27,295,000 and $13,544,000 for the
nine months ended September 30, 1998 and 1997, respectively. The increase is
primarily a result of an increase in operating income and changes in operating
assets and liabilities. Purchases of property, plant and equipment of
$17,813,000 in 1998 were primarily for additional cell sites and increased
capacity in the Company's cellular and paging networks. 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
revenue was 3.8% 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 and its subsidiaries have 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 and paging 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
15
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
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.
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 and the U.S. Virgin
Islands, industry trends, the Company's ability to continue to design and build
its network, install facilities, obtain and maintain any required government
licenses or approvals and finance construction and development, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions, as well as
assumptions about customer acceptance, churn rates, overall market penetration
and competition from providers of alternative services, the impact of new
business opportunities requiring significant up-front investment, Year 2000
readiness and availability, terms and deployment of capital.
16
<PAGE>
CCPR, Inc.
(formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.
17
<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, INC.
Date: November 11, 1998 By: /s/ J. Barclay Knapp
------------------------------
J. Barclay Knapp
President
Date: November 11, 1998 By: /s/ Gregg Gorelick
------------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
18
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<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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