UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 333-26055-01
------------------------------------------------------------
CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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 March 31,
1998 was 1,000.
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Index
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 ............................ 2
Condensed Consolidated Statements of Operations -
Three months ended March 31, 1998 and 1997 ...................... 3
Condensed Consolidated Statement of Shareholder's
Equity - Three months ended March 31, 1998 ...................... 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 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 .............................. 9
PART II OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K ................................ 13
SIGNATURES ................................................................ 14
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cellular Communications of Puerto Rico, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------------------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,230,000 $ 9,445,000
Marketable securities - 235,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,701,000 (1998) and $2,106,000 (1997) 19,032,000 19,043,000
Due from CoreComm Incorporated 1,223,000 935,000
Equipment inventory 6,501,000 2,882,000
Prepaid expenses and other current assets 4,592,000 5,923,000
------------------------------
Total current assets 41,578,000 38,463,000
Property, plant and equipment, net 128,856,000 128,451,000
Unamortized license acquisition costs 173,567,000 157,467,000
Deferred financing costs, less accumulated amortization
of $755,000 (1998) and $584,000 (1997) 6,035,000 6,206,000
Other assets, less accumulated amortization of
$1,263,000 (1998) and $1,088,000 (1997) 1,663,000 1,537,000
------------------------------
$ 351,699,000 $ 332,124,000
==============================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 9,185,000 $ 6,815,000
Accrued expenses 9,862,000 11,012,000
Due to NTL Incorporated 116,000 71,000
Due to CoreComm Incorporated 28,456,000 17,056,000
Interest payable 3,510,000 8,333,000
Deferred revenue 5,868,000 3,952,000
------------------------------
Total current liabilities 56,997,000 47,239,000
Long-term debt 208,900,000 200,000,000
Obligation under capital lease 9,384,000 9,456,000
Commitments and contingent liabilities
Shareholder's equity:
Common stock - $.01 par value; authorized 1,000 shares;
issued 1,000 shares - -
Additional paid-in capital 137,570,000 137,570,000
(Deficit) (61,152,000) (62,141,000)
------------------------------
76,418,000 75,429,000
------------------------------
$ 351,699,000 $ 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>
Cellular Communications of Puerto Rico, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MARCH 31
-----------------------------
1998 1997
-----------------------------
REVENUES:
Service revenue $ 34,459,000 $ 33,352,000
Equipment revenue 4,954,000 3,919,000
-----------------------------
39,413,000 37,271,000
COSTS AND EXPENSES:
Cost of equipment sold 4,575,000 4,779,000
Operating expenses 4,115,000 3,890,000
Selling, general and administrative expenses 16,133,000 17,899,000
Depreciation of rental equipment 241,000 177,000
Depreciation expense 5,946,000 3,806,000
Amortization expense 1,690,000 1,557,000
-----------------------------
32,700,000 32,108,000
-----------------------------
Operating income 6,713,000 5,163,000
OTHER INCOME (EXPENSE):
Interest income and other, net 32,000 65,000
Interest expense (5,365,000) (3,984,000)
-----------------------------
Income before income taxes and
extraordinary item 1,380,000 1,244,000
Income tax provision (391,000) (1,176,000)
-----------------------------
Income before extraordinary item 989,000 68,000
Loss from early extinguishment of debt, net
of income tax benefit of $316,000 - (3,751,000)
-----------------------------
Net income (loss) $ 989,000 $ (3,683,000)
=============================
See accompanying notes.
3
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Condensed Consolidated Statement of Shareholder's Equity
(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)
Net income for the three months
ended March 31, 1998 989,000
-----------------------------------------------------
Balance, March 31, 1998 1,000 $ - $ 137,570,000 $ (61,152,000)
=====================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------
1998 1997
--------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 5,562,000 $ 8,130,000
INVESTING ACTIVITIES
Cost of cellular license interest (8,686,000) (146,000)
Purchase of property, plant and equipment (7,661,000) (7,210,000)
Proceeds from maturities of marketable securities 235,000 2,257,000
--------------------------------
Net cash (used in) investing activities (16,112,000) (5,099,000)
--------------------------------
FINANCING ACTIVITIES
Principal payments of capital lease obligation (65,000) -
Due to CoreComm Incorporated 11,400,000 -
Repayment of bank loan - (115,000,000)
Proceeds from issuance of Notes, net of financing costs - 193,968,000
Distribution to CoreComm Incorporated - (80,000,000)
Purchase of treasury stock - (688,000)
Proceeds from exercise of stock options - 287,000
--------------------------------
Net cash provided by (used in) financing activities 11,335,000 (1,433,000)
--------------------------------
Increase in cash and cash equivalents 785,000 1,598,000
Cash and cash equivalents at beginning of period 9,445,000 2,307,000
--------------------------------
Cash and cash equivalents at end of period $ 10,230,000 $ 3,905,000
================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive
of amounts capitalized $ 10,188,000 $ 2,329,000
Income taxes paid 200,000 550,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred to acquire property, plant
and equipment $ 1,938,000 $ 1,012,000
Long-term debt issued to acquire cellular license interest 8,900,000 -
</TABLE>
See accompanying notes.
5
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 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.
NOTE B - UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
MARCH 31, 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 39,420,000 37,934,000
------------------------------
$ 173,567,000 $ 157,467,000
==============================
In January 1998, 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.
6
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
MARCH 31, DECEMBER 31,
1998 1997
-------------------------------
(Unaudited)
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 132,933,000 127,534,000
Office furniture and other equipment 26,676,000 24,546,000
Rental equipment 2,070,000 1,745,000
Construction in progress 11,149,000 12,533,000
-------------------------------
184,701,000 178,231,000
Accumulated depreciation 55,845,000 49,780,000
-------------------------------
$ 128,856,000 $ 128,451,000
===============================
NOTE D - ACCRUED EXPENSES
Accrued expenses consists of:
MARCH 31, DECEMBER 31,
1998 1997
-------------------------------
(Unaudited)
Accrued compensation $ 952,000 $ 765,000
Accrued equipment purchases 325,000 1,427,000
Accrued franchise, property
and income taxes 3,217,000 2,836,000
Commissions payable 1,038,000 1,143,000
Subscriber deposits 1,520,000 1,544,000
Other 2,810,000 3,297,000
-------------------------------
$ 9,862,000 $ 11,012,000
===============================
7
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NOTE E - LONG-TERM DEBT
Long-term debt consists of:
MARCH 31, DECEMBER 31,
1998 1997
-------------------------------
(Unaudited)
Senior Subordinated Notes $ 200,000,000 $ 200,000,000
Subsidiary Note Payable 8,900,000 -
-------------------------------
$ 208,900,000 $ 200,000,000
===============================
In connection with the acquisition of Puerto Rico RSA-4, a wholly-owned
subsidiary of the Company issued a promissory note in January 1998. The
promissory note bears interest at 7.95% per annum payable semiannually beginning
in July 1998 and the principal is payable in January 2003.
NOTE F - COMMITMENTS AND CONTINGENT LIABILITIES
As of March 31, 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 March 31, 1998, the Company had commitments to
purchase telephones, pagers and accessories of approximately $420,000.
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.
8
<PAGE>
Cellular Communications of Puerto Rico, Inc.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
- ------------------------------------------
Service revenue increased to $34,459,000 from $33,352,000. Lower average revenue
of new prepaid subscribers, a migration of subscribers to less expensive rate
plans, and a decrease in minutes of use of existing subscribers resulted in
average monthly revenue per cellular subscriber for the first quarter decreasing
to $56 in 1998 from $68 in 1997. Ending subscribers were 211,900 and 166,600 as
of March 31, 1998 and 1997, respectively. Prepaid subscribers included in ending
subscribers were 59,000 and 300 as of March 31, 1998 and 1997, respectively.
Ending pagers in use were 51,600 and 35,100 as of March 31, 1998 and 1997,
respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $379,000 from a loss of $860,000 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.
Operating expenses increased to $4,115,000 from $3,890,000 primarily due to
increased usage of the network and additional costs associated with the expanded
network (including paging operations).
Selling, general and administrative expenses decreased to $16,133,000 from
$17,899,000 as a result of 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 14%, 49% and 13%,
respectively of the $1,766,000 decrease.
Depreciation of rental equipment increased to $241,000 from $177,000 due to an
increase in rental telephone depreciation and an increase in the number of
rental pagers.
Depreciation expense increased to $5,946,000 from $3,806,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $1,690,000 from $1,557,000 primarily due to an
increase in license acquisition costs.
Interest income and other, net, decreased to $32,000 from $65,000 primarily due
to a decrease in interest income on short term investments.
Interest expense increased to $5,365,000 from $3,984,000 as a result of the
issuance of the Senior Subordinated Notes on January 28, 1997, the office
building capital lease obligation beginning in April 1997 and the issuance of
the subsidiary note payable in January 1998.
9
<PAGE>
Cellular Communications of Puerto Rico, Inc.
The provision for income taxes decreased to $391,000 from $1,176,000 primarily
as a result of a decrease in Puerto Rico or U.S. Virgin Islands taxable income
of certain of the Company's consolidated subsidiaries.
In connection with the termination of the bank loan, the Company recorded an
extraordinary loss of $4,067,000 in the first quarter of 1997 ($3,751,000 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, for debt
service and potentially, for the acquisition and development of additional
wireless licenses or communications businesses. 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 $18,800,000 in 1998
for contemplated additions to the cellular network, the paging network and for
other non-cell site related capital expenditures. The Company's commitments at
March 31, 1998 of $2,900,000 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.
The Company has received loans from its parent company, CoreComm Incorporated
("CoreComm") of $28,456,000 as of March 31, 1998, which are non-interest bearing
and are due on June 30, 1998.
In January 1998, 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. The promissory note
bears interest at 7.95% per annum payable semiannually beginning in July 1998
and the principal is payable in January 2003. Costs of $286,000 were incurred in
connection with this acquisition.
In January 1997, a wholly-owned subsidiary of the Company, CCPR Services, Inc.
("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 the bank
loan. In addition, the Company distributed $80,000,000 to CoreComm in connection
with the corporate restructuring.
10
<PAGE>
Cellular Communications of Puerto Rico, Inc.
The Notes are due on February 1, 2007. Interest on the Notes is payable
semiannually as of August 1, 1997. The Notes are redeemable, in whole or in
part, at the option of Services at any time on or after February 1, 2002, at a
redemption price of 105% that declines annually to 100% in 2005, in each case
together with accrued and unpaid interest to the redemption date. The Indenture
contains certain 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 (except for dividend payments to the Company and an
aggregate of up to $100,000,000 to be used for dividends or restricted payments
to CoreComm), (iii) create liens, (iv) sell assets, (v) enter into mergers or
consolidations or (vi) sell or issue stock of subsidiaries.
Cash provided by operating activities was $5,562,000 and $8,130,000 for the
three months ended March 31, 1998 and 1997, respectively. The decrease is
primarily due to the $7,859,000 increase in cash paid for interest, exclusive of
amounts capitalized. Purchases of property, plant and equipment of $7,661,000 in
1998 were primarily for additional cell sites and increased capacity in the
Company's cellular and paging networks.
Write-offs of accounts receivable, net of recoveries as a percentage of service
revenue was 4.7% for the three months ended March 31, 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 and improved credit
procedures.
The Company may also require additional capital for acquisitions of minority
interests in its Aguadilla market, or for the acquisition of certain other RSAs
or in other telecommunications related industries, if opportunities for such
acquisitions arise. The Company has from time to time engaged in discussions
with third parties regarding such acquisitions.
YEAR 2000
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is assessing both the
internal readiness of its computer systems and the compliance of the computer
systems of certain significant customers and vendors for handling the year 2000.
The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material adverse effect on the Company. There
can be no assurance, however, that there will not be a delay in, or increased
costs associated with, the implementation of such changes, and the Company's
inability to implement such changes could have an adverse effect on the Company.
In addition, the failure of certain of the Company's significant customers and
vendors to address the year 2000 issue could have a material adverse effect on
the Company.
11
<PAGE>
Cellular Communications of Puerto Rico, Inc.
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, and
availability, terms and deployment of capital.
12
<PAGE>
Cellular Communications of Puerto Rico, Inc.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLULAR COMMUNICATIONS OF
PUERTO RICO, INC.
Date: May 11, 1998 By: /s/ J. Barclay Knapp
--------------------
J. Barclay Knapp
President
Date: May 11, 1998 By: /s/ Gregg Gorelick
------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,230,000
<SECURITIES> 0
<RECEIVABLES> 20,733,000
<ALLOWANCES> (1,701,000)
<INVENTORY> 6,501,000
<CURRENT-ASSETS> 5,815,000
<PP&E> 184,701,000
<DEPRECIATION> (55,845,000)
<TOTAL-ASSETS> 351,699,000
<CURRENT-LIABILITIES> 56,997,000
<BONDS> 200,000,000
0
0
<COMMON> 0
<OTHER-SE> 76,418,000
<TOTAL-LIABILITY-AND-EQUITY> 351,699,000
<SALES> 4,954,000
<TOTAL-REVENUES> 39,413,000
<CGS> 4,575,000
<TOTAL-COSTS> 8,690,000
<OTHER-EXPENSES> 16,133,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,365,000
<INCOME-PRETAX> 1,380,000
<INCOME-TAX> 391,000
<INCOME-CONTINUING> 989,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 989,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
