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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-19869
------------------------------------------------------------
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 June 30,
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
June 30, 1998 and December 31, 1997 ............................. 2
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1998 and 1997 ............... 3
Condensed Consolidated Statement of Shareholder's Equity
Six months ended June 30, 1998 .................................. 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 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 ................................ 16
SIGNATURES ............................................................... 17
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cellular Communications of Puerto Rico, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------------------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,701,000 $ 9,445,000
Marketable securities - 235,000
Accounts receivable--trade, less allowance for doubtful
accounts of $1,814,000 (1998) and $2,106,000 (1997) 17,701,000 19,043,000
Due from CoreComm Incorporated 3,797,000 935,000
Equipment inventory 4,266,000 2,882,000
Prepaid expenses and other current assets 9,001,000 5,923,000
---------------------------------
Total current assets 53,466,000 38,463,000
Property, plant and equipment, net 127,359,000 128,451,000
Unamortized license acquisition costs 172,158,000 157,467,000
Deferred financing costs, less accumulated amortization
of $926,000 (1998) and $584,000 (1997) 5,864,000 6,206,000
Other assets, less accumulated amortization of
$639,000 (1998) and $1,088,000 (1997) 1,610,000 1,537,000
---------------------------------
$ 360,457,000 $ 332,124,000
=================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 8,437,000 $ 6,815,000
Accrued expenses 10,167,000 11,012,000
Due to NTL Incorporated 11,000 71,000
Due to CoreComm Incorporated 30,937,000 17,056,000
Interest payable 8,687,000 8,333,000
Deferred revenue 4,907,000 3,952,000
---------------------------------
Total current liabilities 63,146,000 47,239,000
Long-term debt 208,900,000 200,000,000
Obligation under capital lease 9,310,000 9,456,000
Commitments and contingent liabilities
Shareholder's equity:
Common stock--$.01 par value; authorized, issued and
outstanding 1,000 shares - -
Additional paid-in capital 137,570,000 137,570,000
(Deficit) (58,469,000) (62,141,000)
---------------------------------
79,101,000 75,429,000
---------------------------------
$ 360,457,000 $ 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Service revenue $ 37,108,000 $ 34,694,000 $ 71,567,000 $ 68,046,000
Equipment revenue 5,499,000 3,744,000 10,453,000 7,663,000
-------------------------------- --------------------------------
42,607,000 38,438,000 82,020,000 75,709,000
COSTS AND EXPENSES:
Cost of equipment sold 4,879,000 4,294,000 9,454,000 9,073,000
Operating expenses 4,251,000 4,338,000 8,366,000 8,228,000
Selling, general and administrative expenses 16,809,000 18,082,000 32,942,000 35,981,000
Depreciation of rental equipment 275,000 198,000 516,000 375,000
Depreciation expense 6,326,000 4,186,000 12,272,000 7,992,000
Amortization expense 1,650,000 1,654,000 3,340,000 3,211,000
-------------------------------- --------------------------------
34,190,000 32,752,000 66,890,000 64,860,000
-------------------------------- --------------------------------
Operating income 8,417,000 5,686,000 15,130,000 10,849,000
OTHER INCOME (EXPENSE):
Interest income and other, net 31,000 (79,000) 63,000 (14,000)
Interest expense (5,395,000) (5,077,000) (10,760,000) (9,061,000)
-------------------------------- --------------------------------
Income before income taxes and extraordinary item 3,053,000 530,000 4,433,000 1,774,000
Income tax (provision) benefit (370,000) 24,000 (761,000) (1,152,000)
-------------------------------- --------------------------------
Income before extraordinary item 2,683,000 554,000 3,672,000 622,000
Loss from early extinguishment of debt, net of
income tax benefit of $741,000 - 425,000 - (3,326,000)
-------------------------------- --------------------------------
Net income (loss) $ 2,683,000 $ 979,000 $ 3,672,000 $ (2,704,000)
================================ ================================
</TABLE>
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 six months
ended June 30, 1998 3,672,000
----------------------------------------------------------------
Balance, June 30, 1998 1,000 $ - $ 137,570,000 $ (58,469,000)
================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 19,515,000 $ 13,224,000
INVESTING ACTIVITIES
Cost of cellular license interest (8,686,000) (146,000)
Purchase of property, plant and equipment (13,075,000) (16,747,000)
Proceeds from maturities of marketable securities 235,000 5,707,000
----------------------------------
Net cash (used in) investing activities (21,526,000) (11,186,000)
----------------------------------
FINANCING ACTIVITIES
Principal payments of capital lease obligation (133,000) (68,000)
Due to CoreComm Incorporated 11,400,000 -
Repayment of bank loan - (115,000,000)
Proceeds from issuance of Notes, net of financing costs - 193,695,000
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 11,267,000 (1,774,000)
----------------------------------
Increase in cash and cash equivalents 9,256,000 264,000
Cash and cash equivalents at beginning of period 9,445,000 2,307,000
----------------------------------
Cash and cash equivalents at end of period $ 18,701,000 $ 2,571,000
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive
of amounts capitalized $ 10,406,000 $ 2,406,000
Income taxes paid 263,000 2,897,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred to acquire property, plant and equipment $ 1,643,000 $ 6,263,000
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>
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 and six months ended June 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.
NOTE B - UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
JUNE 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 40,829,000 37,934,000
------------------------------
$ 172,158,000 $ 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.
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 consist of:
JUNE 30, DECEMBER 31,
1998 1997
---------------------------------
(Unaudited)
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 136,252,000 127,534,000
Office furniture and other equipment 30,235,000 24,546,000
Rental equipment 2,596,000 1,745,000
Construction in progress 8,765,000 12,533,000
---------------------------------
189,721,000 178,231,000
Accumulated depreciation 62,362,000 49,780,000
---------------------------------
$ 127,359,000 $ 128,451,000
=================================
NOTE D - ACCRUED EXPENSES
Accrued expenses consists of:
JUNE 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Accrued compensation $ 1,286,000 $ 765,000
Accrued equipment purchases 246,000 1,427,000
Accrued franchise, property and income taxes 3,532,000 2,836,000
Commissions payable 1,017,000 1,143,000
Subscriber deposits 1,411,000 1,544,000
Other 2,675,000 3,297,000
------------------------------
$ 10,167,000 $ 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:
JUNE 30, 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, SJCTC issued a
promissory note in January 1998. The promissory note was repaid in August 1998
using proceeds from the new bank loan. Interest on the note was payable at 7.95%
per annum beginning in July 1998.
NOTE F - COMMITMENTS AND CONTINGENT LIABILITIES
As of June 30, 1998, the Company was committed to purchase approximately
$2,600,000 for cellular network and other equipment and for construction
services. In addition, as of June 30, 1998, the Company had commitments to
purchase cellular telephones, pagers and accessories of approximately $700,000.
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.
NOTE G - NEW BANK LOAN AND DISTRIBUTION TO CORECOMM INCORPORATED
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 has 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 most of its loan payable to its parent
company, CoreComm Incorporated ("CoreComm"), and the Company made a cash
distribution of $120,000,000 to CoreComm. CoreComm is planning to make a capital
contribution to its wholly-owned subsidiary, CoreComm Limited, of $150,000,000
in cash or in-kind and spinning out 100% of CoreComm Limited and its
subsidiaries to CoreComm's shareholders.
8
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE G - NEW BANK LOAN AND DISTRIBUTION TO CORECOMM INCORPORATED (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 August 12, 1998 was 8%. The terms also include an unused
commitment fee of 0.5% per annum which is payable quarterly. Principal payments
commence on September 30, 2001 based on two amortization schedules. One schedule
is for the first $95,000,000 borrowed which includes quarterly payments until
June 2006. The other schedule is for the remainder of the amount borrowed which
includes quarterly payments until June 2005.
In connection with the bank loan, 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.
Services incurred costs of approximately $3,000,000 in connection with the bank
loan which will be included in deferred financing costs.
9
<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 June 30, 1998 and 1997
- -----------------------------------------
Service revenue increased to $37,108,000 from $34,694,000. 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 second quarter decreasing to $55 in 1998 from $68 in
1997. Ending subscribers were 234,400 and 175,500 as of June 30, 1998 and 1997,
respectively. Ending pagers in use were 53,400 and 39,400 as of June 30, 1998
and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $620,000 from a loss of $550,000 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 decreased to $4,251,000 from $4,338,000 primarily due to a
reduction in interconnection charges, offset by additional costs associated with
the expanded network (including paging operations). Operating expenses as a
percentage of service revenue decreased to 11.4% in 1998 from 12.5% in 1997.
Selling, general and administrative expenses decreased to $16,809,000 from
$18,082,000 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 70%, 22% and 8%, respectively of the $1,273,000 decrease. These decreases
were partially offset by an increase in property taxes due to an increase in
taxable property which was (28)% of the decrease.
Depreciation of rental equipment increased to $275,000 from $198,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $6,326,000 from $4,186,000 primarily because
of an increase in property, plant and equipment.
Amortization expense decreased to $1,650,000 from $1,654,000 due to certain
deferred costs becoming fully amortized.
Interest income and other, net, increased to income of $31,000 from expense of
$79,000 primarily due to losses on the disposals of various assets in 1997.
Interest expense increased to $5,395,000 from $5,077,000 as a result of the
office building capital lease obligation beginning in April 1997 and the
issuance of the subsidiary note payable in January 1998.
10
<PAGE>
Cellular Communications of Puerto Rico, Inc.
The provision for income taxes increased to $370,000 from a benefit of $24,000
primarily as a result of an increase in Puerto Rico or 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 $425,000 in 1997 due to an adjustment to the
estimated tax benefit from the loss.
Six Months Ended June 30, 1998 and 1997
- ---------------------------------------
Service revenue increased to $71,567,000 from $68,046,000. 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 six months ended June 30 decreasing to $55 in 1998
from $68 in 1997. Ending subscribers were 234,400 and 175,500 as of June 30,
1998 and 1997, respectively. Ending pagers in use were 53,400 and 39,400 as of
June 30, 1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $999,000 from a loss of $1,410,000 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 $8,366,000 from $8,228,000 primarily 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 decreased to 11.7% in 1998 from 12.1% in 1997.
Selling, general and administrative expenses decreased to $32,942,000 from
$35,981,000 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 38%, 38% and 11%, respectively of the $3,039,000 decrease. These decreases
were partially offset by an increase in property taxes due to an increase in
taxable property which was (23)% of the decrease.
Depreciation of rental equipment increased to $516,000 from $375,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $12,272,000 from $7,992,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $3,340,000 from $3,211,000 primarily due to an
increase in license acquisition costs.
Interest income and other, net, increased to income of $63,000 from expense of
$14,000 primarily due to losses on the disposals of various assets in 1997.
11
<PAGE>
Cellular Communications of Puerto Rico, Inc.
Interest expense increased to $10,760,000 from $9,061,000 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.
The provision for income taxes decreased to $761,000 from $1,152,000 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 1997 ($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 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 $16,700,000 in the remainder of 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 June 30, 1998 of
$2,600,000 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 has 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 the San Juan Cellular Telephone Company ("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 most of
its loan payable to its parent company, CoreComm Incorporated ("CoreComm"), and
the Company made a cash distribution of $120,000,000 to CoreComm. CoreComm is
planning to make a capital contribution to its wholly-owned subsidiary, CoreComm
Limited, of $150,000,000 in cash or in-kind and spinning out of 100% of CoreComm
Limited and its subsidiaries to CoreComm'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 August 12, 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.
12
<PAGE>
Cellular Communications of Puerto Rico, Inc.
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 the bank loan. In addition, the Company distributed
$80,000,000 to CoreComm 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 CoreComm. 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.
Cash provided by operating activities was $19,515,000 and $13,224,000 for the
six months ended June 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 $13,075,000 in 1998
were primarily for additional cell sites and increased capacity
13
<PAGE>
Cellular Communications of Puerto Rico, Inc.
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. Including
costs incurred in connection with the acquisition of $286,000, total cash paid
was $8,686,000.
Write-offs of accounts receivable, net of recoveries as a percentage of service
revenue was 4.1% for the six months ended June 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 and improved credit
procedures.
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.
14
<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.
15
<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 June 30, 1998.
16
<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: August 12, 1998 By: /s/ J. Barclay Knapp
------------------------------
J. Barclay Knapp
President
Date: August 12, 1998 By: /s/ Gregg Gorelick
------------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,701,000
<SECURITIES> 0
<RECEIVABLES> 19,515,000
<ALLOWANCES> (1,814,000)
<INVENTORY> 4,266,000
<CURRENT-ASSETS> 12,798,000
<PP&E> 189,721,000
<DEPRECIATION> (62,362,000)
<TOTAL-ASSETS> 360,457,000
<CURRENT-LIABILITIES> 63,146,000
<BONDS> 208,900,000
0
0
<COMMON> 0
<OTHER-SE> 79,101,000
<TOTAL-LIABILITY-AND-EQUITY> 360,457,000
<SALES> 10,453,000
<TOTAL-REVENUES> 82,020,000
<CGS> 9,454,000
<TOTAL-COSTS> 17,820,000
<OTHER-EXPENSES> 32,942,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,760,000
<INCOME-PRETAX> 4,433,000
<INCOME-TAX> (761,000)
<INCOME-CONTINUING> 3,672,000
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<EXTRAORDINARY> 0
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<NET-INCOME> 3,672,000
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