SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
F O R M 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________
Commission File No. 0-19869
CCPR, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3517074
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
----------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Guarantee of 10% Senior Subordinated Notes due 2007 issued
by CCPR Services, Inc.
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 19, 1999, there were 1,000 shares of the Registrant's common
stock outstanding. The Registrant is a wholly-owned subsidiary of Cellular
Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated), and
there is no market for the Registrant's common stock.
The Registrant meets the conditions set forth in General Instructions
I(1)(a) and I(1)(b) of Form 10-K and is filing this form with the reduced
disclosure format pursuant to General Instructions.
TABLE OF CONTENTS
PAGE
PART
ITEM 1. BUSINESS.............................................1
ITEM 2. PROPERTY.............................................1
ITEM 3. LEGAL PROCEEDINGS....................................1
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS......1
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS..........................2
ITEM 6. SELECTED FINANCIAL DATA..............................2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION...................3
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK..........................................8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................9
PART III
ITEMS 10, 11, 12 AND 13...........................................9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K..........................................9
EXHIBIT INDEX....................................................10
SIGNATURES.......................................................11
INDEX TO FINANCIAL STATEMENTS....................................F-1
PART I
ITEM 1. BUSINESS
General
CCPR, Inc. (the "Company") is a wholly-owned subsidiary
of Cellular Communications of Puerto Rico, Inc. ("Parent") (formerly
CoreComm Incorporated). The Company is a Delaware corporation that was
originally organized under the name EC Acquisition, Inc. on May 18, 1988.
The Company, through wholly-owned entities, owns, operates and markets
cellular and paging systems in the Commonwealth of Puerto Rico and the U.S.
Virgin Islands and conducts other telecommunications related operations.
The Company's executive offices are located at 110 East 59th Street, New
York, New York 10022 and its telephone number is (212) 906-8481.
Prior to September 1, 1998, the Company was known as
Cellular Communications of Puerto Rico, Inc., and prior to January 31, 1997
(the "Merger Date") the Company was a publicly traded entity. On the Merger
Date the Company effected a corporate restructuring (the "Restructuring")
whereby shareholders of the Company became shareholders of Parent on a
one-for-one basis upon the completion of a merger of the Company with and
into a subsidiary of Parent. As a result of the Restructuring Parent
replaced the Company as the publicly traded entity and the Company became a
wholly-owned subsidiary of Parent.
ITEM 2. PROPERTY
Certain of the Company's subsidiaries lease office space,
sales and service centers and warehouse space in the Commonwealth of Puerto
Rico and in the U.S. Virgin Islands. In addition, certain subsidiaries
either own or lease transmitter sites and lease a cellular switch site. The
loss of any of these leases, either because of a failure to obtain a
renewal of a lease or for any reason not known or anticipated by the
Company, could have an adverse effect on the Company's cellular operations
until a substitute site could be found.
The Company believes that the properties that are
currently under lease or owned by the Company are adequate to serve its
present business operations and its goals of providing continuous coverage
throughout Puerto Rico and the U.S. Virgin Islands, although the Company
may require additional properties for new cell sites and sales and service
centers as demand for cellular service increases. See the Notes to the
Company's Consolidated Financial Statements included elsewhere in this Form
10-K for information concerning lease commitments.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various disputes, arising in
the ordinary course of business, which may result in pending or threatened
litigation. The Company's management expects no material adverse effect on
the Company's financial condition to result from these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
Omitted pursuant to General Instruction I(2)(e) of Form
10-K.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of Cellular
Communications of Puerto Rico, Inc.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994. This
information should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- -------------- --------------
(In thousands)
----------- -------------- --------------
Income statement data:
<S> <C> <C> <C> <C> <C>
Revenues $177,225 $148,494 $133,818 $108,668 $67,141
Operating expenses 140,881 129,858 115,817 97,647 65,187
Operating income 36,344 18,636 18,001 11,021 1,954)
Income (loss) before extraordinary item 6,057 (3,452) 5,114 (1,451) (4,812)
Net income (loss) 6,057 (6,778) 5,114 (1,451) (4,812)
December 31,
-----------------------------------------------------------------------------
1998(1) 1997 1996 1995 (2) 1994
----------- -------------- -------------- -------------- ---------------
Balance sheet data:
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $20,850 $(8,776) $11,078 $12,444 $10,808
Property, plant and
Equipment-net 125,422 128,451 97,945 75,769 55,077
Total assets 373,460 332,124 300,722 256,997 231,371
Long-term debt 355,000 200,000 115,000 90,000 101,212
Shareholders' equity (deficiency) (38,514) 75,429 162,608 144,152 112,784
</TABLE>
- ---------------
(1) In 1998, a subsidiary of the Company borrowed $155,000,000
under a new credit agreement with various banks.
(2) In 1995, the $40,000,000 principal amount Convertible Senior
Subordinated Notes were converted into approximately 2,778,000
shares of common stock.
The Company did not declare or pay any cash dividends during the
periods indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Years ended December 31, 1998 and 1997
Service revenue increased to $153,132,000 from
$131,882,000. 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
year ended December 31 decreasing to $51 in 1998 from $62 in 1997. The
Company expects these trends to continue for the foreseeable future. Ending
subscribers were 301,500 and 196,400 as of December 31, 1998 and 1997,
respectively. Ending pagers in use were 56,900 and 49,000 as of December
31, 1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of
rental equipment, increased to income of $2,022,000 from a loss of
$2,477,000 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 costs 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 increased to $16,968,000 from
$14,949,000 primarily due to 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.
Selling, general and administrative expenses decreased to
$68,389,000 from $70,160,000 primarily as a result of a decrease in bad
debt expense and subscriber billing expense. The decreases in bad debt
expense and subscriber billing expense were 121% and 22%, respectively, of
the total $1,771,000 decrease. These decreases were partially offset by an
increase in property taxes due to an increase in taxable property which was
(120)% of the decrease.
Depreciation of rental equipment increased to $1,169,000
from $855,000 due to an increase in the number of rental telephones and
pagers.
Depreciation expense increased to $25,503,000 from
$18,390,000 primarily because of an increase in property, plant and
equipment.
Amortization expense increased to $6,781,000 from
$6,415,000 primarily due to increases in license acquisition costs and
deferred financing costs.
Interest income and other, net, increased to income of
$79,000 from expense of $1,817,000 primarily due to a reduction in losses
from disposals of cell site equipment.
Interest expense increased to $26,158,000 from
$19,400,000 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.
The provision for income taxes increased to $4,208,000
from $871,000 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 1997, a subsidiary of the Company recorded an
extraordinary loss of $4,067,000 ($3,326,000 net of income tax benefit)
from the write-off of unamortized deferred financing costs in connection
with the termination of a bank loan.
Years Ended December 31, 1997 and 1996
Service revenue increased to $131,882,000 from
$119,839,000. As a result of the lower average revenue and minutes of use
of new prepaid subscribers and the selection by existing subscribers of
alternate rates plans resulted in average monthly revenue per cellular
subscriber for the year ended December 31 decreasing to $62 in 1997 from
$73 in 1996. Ending subscribers were 196,4000 and 159,300 as of December
31, 1997 and 1996, respectively. Ending pagers in use were 49,000 and
31,000 as of December 31, 1997 and 1996, respectively.
The loss from equipment, before depreciation of rental
equipment, decrease to $2,477,000 from $3,983,000 primarily because the
Company is not selling telephones below their costs to prepaid subscribers.
Reductions in the cost of cellular telephones also contributed to this
decrease.
Operating expenses decreased to $14,949,000 from
$15,214,000 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 11.3% in 1997 from 12.7% in 1996.
Late in the fourth quarter of 1997, the Puerto Rico
Telecommunications Regulatory Board announced that the proposed retroactive
application of a universal service charge to January 1997 had been
eliminated. As a result, in the fourth quarter, subsidiaries of the Company
reversed a $1,644,000 expense accrual for the proposed charge which had
been recorded in operating expenses during the prior quarters of 1997.
Selling, general and administrative expenses increased to
$70,160,000 from $63,223,000 as a result of increased selling and marketing
to increase the customer base and additional personnel to service the
expanding customer base. Increases in property taxes and subscriber billing
expense also contributed to this increase. The increases in selling and
marketing costs, personnel costs, property taxes and subscriber billing
expense were 48%, 20%, 9% and 13%, respectively, of the total $6,937,000
increase.
Depreciation of rental equipment increased to $855,000
from $521,000 due to an increase in the number of rental pagers.
Depreciation expense increased to $18,390,000 from
$12,710,000 primarily because of an increase in property, plant and
equipment.
Amortization expense increased to $6,415,000 from
$6,187,000 primarily due to increases in licenses acquisitions costs.
Interest income and other, net, decreased to expense of
$1,817,000 from income of $646,000 primarily due to an increase in loss on
write-downs and disposals of property, plant and equipment to $1,873,000
from $371,000.
Interest expense increased to $19,400,000 from $8,181,000
as a result of the increase in long-term debt at a higher effective
interest rate.
The provision for income taxes decreased to $871,000 from
$5,352,000 as a result of a decrease in Puerto Rico or U.S. Virgin Islands
taxable income of certain of the Company's consolidated subsidiaries and a
federal income tax benefit from the tax sharing agreement with the
Company's parent.
In connection with the termination of the bank loan, a
subsidiary of the Company recorded an extraordinary loss of $4,067,000
($3,326,000 net of income tax benefit) from the write-off of unamortized
deferred financing costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to expand its Puerto Rico
and U.S. Virgin Islands 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 $35,400,000 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 December 31,
1998 of $7,500,000 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, cash
equivalents and marketable securities on hand and cash from operations.
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 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 its
loan payable to Parent, and the Company made a cash distribution of
$120,000,000 to Parent.
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 December 31, 1998
was 7.87%. The terms also include an unused commitment fee of 0.5% per
annum which is payable quarterly. Principal payments commence on September
30, 2001 based on two amortization schedules. One schedule is for the first
$95,000,000 borrowed which includes quarterly payments until June 2006. The
other schedule is for the remainder of the amount borrowed which includes
quarterly payments until June 2005.
In connection with the bank loan, 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, which
guarantee is full, joint and several. 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, which
guarantee is full, joint and several. The Company and Services used
approximately $116,000,000 of the proceeds to repay the $115,000,000
principal outstanding plus accrued interest and fees under a bank
loan. In addition, the Company distributed $80,000,000 to Parent 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 covenants
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.
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 may be required to consider a number of measures,
including (i) refinancing all or a portion of such indebtedness, (ii)
seeking modifications of the terms of such indebtedness, (iii) seeking
additional debt financing, which would be subject to obtaining necessary
lender consents, (iv) seeking additional equity financing or (v) a
combination of the foregoing. The particular measures the Company may
undertake and the ability of the Company to accomplish those measures will
depend on the financial condition of the Company and its subsidiaries at
the time, as well as a number of factors beyond the control of the Company.
No assurance can be given that any of the foregoing measures can be
accomplished, or can be accomplished on terms which are favorable to the
Company.
Cash provided by operating activities was $46,858,000 and
$27,167,000 for the years ended December 31, 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 $22,560,000 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 revenues was 3.6% for the year ended December 31,
1998 compared to 6.7% for the ended December 31, 1997. This percentage
decreased because the Company and its subsidiaries have increased prepaid
subscribers.
Year 2000
The Company has a comprehensive Year 2000 project
designed to identify and assess the risks associated with its information
systems, products, operations and infrastructure, suppliers, and customers
that are not Year 2000 compliant, and to develop, implement and test
remediation and contingency plans to mitigate these risks. The project
comprises four phases: (1) identification of risks, (2) assessment of
risks, (3) development of remediation and contingency plans and (4)
implementation and testing. The Company has incurred approximately $500,000
related to its Year 2000 project and estimates that it will incur costs of
$1,900,000 to complete the renovation, validation and implementation phases
and achieve year 2000 readiness.
The Company's assessment is focused on its information
technology ("IT") systems, in particular its cellular and paging network
and its billing, provisioning and customer service systems. The Company is
also evaluating the readiness of third-parties such as utility companies
that the Company depends upon for the operation of its network. The
Company's leased office space and other non-IT equipment which may have
embedded technology that may be affected by the year 2000 problem is being
separately assessed. The Company has completed the assessment of its IT
systems and expects to complete the remediation and testing of its IT
systems year 2000 readiness by June 1999. The evaluation of the readiness
of the major third-parties is expected to be completed by June 1999. The
Company is also reviewing its detailed contingency plans for potential
modifications to address year 2000 issues. This review is expected to be
completed by June 1999.
The Company currently believes that the most reasonably
likely worst case scenario with respect to the Year 2000 is the failure of
the electric company or the local exchange telephone company to be ready
for the year 2000. This could cause a temporary interruption in the
provision of service to customers or in the Company's ability to complete
telephone calls, or both. Either or both could have a material adverse
effect on operations, although it is not possible at this time to quantify
the amount of revenues and gross profit that might be lost, or the costs
that could be incurred. The contingency plan to address some of these risks
involve utilizing back-up power supplies and alternative interconnections,
which would require time to implement and may be constrained due to
capacity and/or training limitations. The Company has had experience in
implementing its disaster recovery plan due to Hurricane Georges, which
struck Puerto Rico and the U.S. Virgin Islands in September 1998 and caused
the electric company and local exchange telephone company to experience
service interruptions.
As the Year 2000 project continues, the Company may
discover additional problems, may not be able to develop, implement or test
remediation or contingency plans, or may find that the costs of these
activities exceed current expectations. In many cases, the Company is
relying on assurances from suppliers that new and upgraded information
systems and other products will be Year 2000 ready. The Company plans to
test such third-party systems and products, but cannot be sure that its
tests will be adequate or that, if problems are identified, they will be
addressed by the supplier in a timely and satisfactory way.
Because the Company uses a variety of information systems
and has additional systems embedded in its operations and infrastructure,
the Company cannot be sure that all of its systems will work together in a
Year 2000- ready fashion. Furthermore, the Company cannot be sure that it
will not suffer business interruptions, either because of its own Year 2000
problems or those of third-parties upon whom the Company is reliant for
services. The Company is continuing to evaluate its Year 2000-related risks
and corrective actions. However, the risks associated with the Year 2000
problem are pervasive and complex; they can be difficult to identify and
address, and can result in material adverse consequences to the Company.
Even if the Company, in a timely manner, completes all of its assessments,
identifies and tests remediation plans believed to be adequate, and
develops contingency plans believed to be adequate, some problems may not
be identified or corrected in time to prevent material adverse consequences
to the Company.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995
Certain statements contained herein constitute
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995. When used herein, the words,
"believe," "anticipate," "should," "intend," "plan," "will," "expects,"
"estimates," "projects," "positioned," "strategy," and similar expressions
identify such forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from those contemplated,
projected, forecasted, estimated or budgeted, whether expressed or implied,
by such forward-looking statements. Such factors include the following:
general economic and business conditions in Puerto Rico 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Securities and Exchange Commission's rule related to
market risk disclosure requires that we describe and quantify our potential
losses from market risk sensitive instruments attributable to reasonably
possible market changes. Market risk sensitive instruments include all
financial or commodity instruments and other financial instruments (such as
investments and debt) that are sensitive to future changes in interest
rates, currency exchange rates, commodity prices or other market factors.
We are not exposed to market risks from changes in foreign currency
exchange rates or commodity prices. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes.
We are exposed to changes in interest rates primarily from our investments
in cash equivalents and available-for-sale marketable securities. Under our
current policies, we do not use interest rate derivative instruments to
manage our exposure to interest rate changes. The Company's cash
equivalents at December 31, 1998 were invested for very short periods such
that their exposure to interest rate changes was not significant.
The principal amount by expected maturity, average interest
rate and fair value of the Company's liabilities that are exposed to
interest rate risk are described in the Notes to Consolidated Financial
Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are included herein commencing
on page F-1.
The following is a summary of the quarterly results of
operations for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(In thousands)
1998
Three Months Ended
------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 39,413 $42,607 $44,867 $50,338
Operating income 6,713 8,417 9,841 11,373
Net income (loss) 989 2,683 (293) 2,678
1997
Three Months Ended
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March 31 June 30 September 30 December 31
-------------- ------------- ----------------- ----------------
Revenues $ 37,271 $38,438 $36,213 $36,572
Operating income 5,163 5,686 2,014 5,773
Income (loss) before extraordinary item 68 554 (3,317) (757)
Net income (loss) (3,683) 979 (2,930) (1,144)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10, 11, 12 AND 13.
Omitted pursuant to General Instruction I(2)(e) of Form
10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
a. i. Financial Statements - See list of Financial Statements on page F-1.
ii. Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1.
iii. Exhibits - See Exhibit Index on page 27.
b. Reports on Form 8-K. The Company filed no current reports
on Form 8-K for the quarter ended December 31, 1998.
c. Exhibits - The response to this portion of Item 14 is
submitted as a separate section of this report.
d. Financial Statement Schedules - See list of Financial
Statement Schedules on page F-1.
EXHIBIT INDEX
Exhibit No.
2 Agreement and Plan of Merger, dated as of January 31, 1997 by and
among the Company, Parent and CoreComm Sub, Inc. (Incorporated by
reference from Exhibit 2 to Parent's 1996 Form 10-K, File Number
19869-99)
3.1 Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Parent's Form 8-B, filed
February 12, 1997, File Number 19869-99)
3.2 By-laws of the Company. (Incorporated by reference to Parent's
Form 8-B, filed February 12, 1997, File Number 19869-99)
4.1 Indenture dated as of January 31, 1997 by and between Services,
the Company and The Chase Manhattan Bank, N.A. (Incorporated by
reference from Exhibit 4.1, to Parent's 1996 Form 10-K, File
Number 19869-99)
4.2 Registration Rights Agreement dated as of January 31, 1997 by and
among Services, the Company and Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Brothers Inc and Wasserstein
Perella Securities, Inc. (Incorporated by reference from Exhibit
4.3 to Parent's 1996 Form 10-K, File Number 19869-99)
10.1 Partnership Agreement relating to San Juan Cellular Telephone
Company. (Incorporated by reference to Exhibit 10.4, File Number
33-44420)
10.2 Tax Sharing Agreement dated as of January 31, 1997 by and among
Parent, the Company and CCPR Services. (Incorporated by Reference
from Exhibit 10.2 to Parent's 1996 Form 10-K, File Number
19869-99)
10.3 Form of Administration and Management Agreement between CCPR
Services, Inc., on the one hand and, on the other hand,
individually, each of Aguadilla Cellular Telephone Company, Inc.,
CCI PR RSA, Inc., Cellular Communications of Arecibo, Inc.,
Cellular Ponce, Inc., Gamma Communications, Mayaguez Cellular
Telephone Co., Inc., San Juan Cellular Telephone Company and Star
Associates, Inc. (Incorporated by reference to Exhibit 10.9, File
Number 33-44420)
10.4 Agreement dated as of January 31, 1997, by and between the Company
and CCPR Services, Inc. (Incorporated by Reference from Exhibit
10.4 to Parent's 1996 Form 10-K, File Number 19869-99)
10.5 Credit Agreement dated as of August 11, 1998 between CCPR
Services, Inc., CCPR, Inc. (formerly Cellular Communications of
Puerto Rico, Inc.), the Lenders Party thereto and The Chase
Manhattan Bank, as amended (incorporated by reference from CCPR
Services, Inc.'s 1997 Form 10-K, File Number 333-26055).
21 Omitted pursuant to General Instruction I(2)(b) of Form 10-K
27.1 Financial Data Schedule, for the year ended December 31, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: March 31, 1999
CCPR, INC.
By: /s/ Stanton N. Williams
-------------------------------
Stanton N. Williams
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the date indicated.
Signature Title Date
/s/ George S. Blumenthal Principal Executive March 31, 1999
- ------------------------------- Officer and Director
George S. Blumenthal
/s/ J. Barclay Knapp Chief Operating Officer March 31, 1999
- ------------------------------- and Director
J. Barclay Knapp
/s/ Stanton N. Williams Principal Financial March 31, 1999
- ------------------------------ Officer
Stanton N. Williams
/s/ Gregg Gorelick Principal Accounting March 31, 1999
- ------------------------------ Officer
Gregg Gorelick
/s/ Sidney R. Knafel Director March 31, 1999
- -----------------------------
Sidney R. Knafel
/s/ Del Mintz Director March 31, 1999
- -----------------------------
Del Mintz
/s/ Alan J. Patricof Director March 31, 1999
- ----------------------------
Alan J. Patricof
/s Warren Potash Director March 31, 1999
- ----------------------------
Warren Potash
Form 10-K--Item 14(a)(1) and (2)
CCPR, Inc. (formerly Cellular Communications of Puerto Rico,
Inc.) and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
The following consolidated financial statements and schedule of CCPR, Inc.
and subsidiaries are included in Item 8:
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets - December 31, 1998 and 1997..................F-3
Consolidated Statements of Operations - Years Ended
December 31, 1998, 1997 and 1996.......................................F-4
Consolidated Statement of Shareholder's Equity (Deficiency) -
Years Ended December 31, 1998, 1997 and 1996...........................F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996.......................................F-6
Notes to Consolidated Financial Statements................................F-8
The following consolidated financial statement schedule of
CCPR, Inc. and subsidiaries is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts..........................F-19
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
Report of Independent Auditors
Shareholder and Board of Directors
CCPR, Inc.
We have audited the accompanying consolidated balance sheets of CCPR, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity (deficiency)
and cash flows for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of CCPR, Inc. and subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Juan, Puerto Rico
February 26, 1999
CCPR, Inc. (formerly Cellular Communications of Puerto Rico,
Inc.) and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 32,613,000 $ 9,445,000
Marketable securities - 235,000
Accounts receivable--trade, less allowance for doubtful accounts
of $1,582,000 (1998) and $2,106,000 (1997) 18,806,000 19,043,000
Due from parent company 4,180,000 935,000
Equipment inventory 7,635,000 2,882,000
Prepaid expenses and other current assets 5,433,000 5,923,000
---------------------------------
Total current assets 68,667,000 38,463,000
Property, plant and equipment, net 125,422,000 128,451,000
Unamortized license acquisition costs 169,453,000 157,467,000
Deferred financing costs, less accumulated amortization of
$1,446,000 (1998) and $584,000 (1997) 8,721,000 6,206,000
Other assets, less accumulated amortization of $957,000 (1998) and
$1,088,000 (1997) 1,197,000 1,537,000
---------------------------------
$373,460,000 $332,124,000
=================================
Liabilities and shareholder's equity (deficiency) Current liabilities:
Accounts payable $ 15,003,000 $ 6,815,000
Accrued expenses 16,128,000 11,012,000
Due to NTL Incorporated 58,000 71,000
Due to parent company 1,926,000 17,056,000
Interest payable 8,367,000 8,333,000
Deferred revenue 6,335,000 3,952,000
---------------------------------
Total current liabilities 47,817,000 47,239,000
Long-term debt 355,000,000 200,000,000
Obligation under capital lease 9,157,000 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) (56,084,000) (62,141,000)
---------------------------------
(38,514,000) 75,429,000
---------------------------------
$373,460,000 $332,124,000
=================================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1998 1997 1996
-----------------------------------------------------
Revenues:
<S> <C> <C> <C>
Service revenue $ 153,132,000 $ 131,882,000 $ 119,839,000
Equipment revenue 24,093,000 16,612,000 13,979,000
-----------------------------------------------------
177,225,000 148,494,000 133,818,000
Costs and expenses:
Cost of equipment sold 22,071,000 19,089,000 17,962,000
Operating expenses 16,968,000 14,949,000 15,214,000
Selling, general and administrative expenses 68,389,000 70,160,000 63,223,000
Depreciation of rental equipment 1,169,000 855,000 521,000
Depreciation expense 25,503,000 18,390,000 12,710,000
Amortization expense 6,781,000 6,415,000 6,187,000
-----------------------------------------------------
140,881,000 129,858,000 115,817,000
-----------------------------------------------------
Operating income 36,344,000 18,636,000 18,001,000
Other income (expense):
Interest income and other, net 79,000 (1,817,000) 646,000
Interest expense (26,158,000) (19,400,000) (8,181,000)
-----------------------------------------------------
Income (loss) before income tax provision and
extraordinary item 10,265,000 (2,581,000) 10,466,000
Income tax provision (4,208,000) (871,000) (5,352,000)
-----------------------------------------------------
Income (loss) before extraordinary item 6,057,000 (3,452,000) 5,114,000
Loss from early extinguishment of debt, net of
income tax benefit of $741,000 - (3,326,000) -
-----------------------------------------------------
Net income (loss) $ 6,057,000 $ (6,778,000) $ 5,114,000
=====================================================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Consolidated Statement of Shareholder's Equity (Deficiency)
Additional
Common Stock Paid-in Treasury Stock
Shares Amount Capital (Deficit) Shares Amount
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 12,803,000 $ 128,000 $ 210,646,000 $ (60,477,000) (207,000) $ (6,145,000)
Shares issued for interests
in cellular license 820,000 8,000 21,528,000
Exercise of stock options 16,000 129,000
Common stock repurchased,
at cost (343,000) (8,323,000)
Retirement of Treasury Stock (207,000) (2,000) (6,143,000) 207,000 6,145,000
Net income for the year ended
December 31, 1996 5,114,000
------------------------------------------------------------------------------------------
Balance, December 31, 1996 13,432,000 134,000 226,160,000 (55,363,000) (343,000) (8,323,000)
Exercise of stock options 20,000 1,000 286,000
Common stock
repurchased, at cost (35,000) (688,000)
Corporate restructuring (13,451,000) (135,000) (8,876,000) 378,000 9,011,000
Distribution to parent
company (80,000,000)
Net loss for the year ended
December 31, 1997 (6,778,000)
------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,000 - 137,570,000 (62,141,000) - -
Distribution to parent
company (120,000,000)
Net income for the year ended
December 31, 1998 6,057,000
------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,000 $ - $ 17,570,000 $ (56,084,000) - $ -
------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1998 1997 1996
-----------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income (loss) $ 6,057,000 $ (6,778,000) $ 5,114,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 33,453,000 25,660,000 19,418,000
Provision for losses on accounts receivable 5,004,000 7,146,000 7,520,000
Loss on disposal of property, plant and equipment 431,000 1,873,000 371,000
Loss from early extinguishment of debt - 4,067,000 -
Changes in operating assets and liabilities net of
effects from business acquisitions:
Accounts receivable (4,128,000) (6,155,000) (9,625,000)
Due from parent company (3,245,000) (935,000) -
Equipment inventory (4,753,000) 30,000 3,476,000
Prepaid expenses and other current assets 490,000 (2,901,000) (422,000)
Other assets 21,000 (171,000) (292,000)
Accounts payable 6,948,000 (1,066,000) 2,497,000
Accrued expenses 4,176,000 (1,098,000) (227,000)
Interest payable 34,000 6,655,000 1,063,000
Deferred revenue 2,383,000 871,000 227,000
Due to Cellular Communications, Inc. - - (310,000)
Due to NTL Incorporated (13,000) (31,000) 102,000
-----------------------------------------------
Net cash provided by operating activities 46,858,000 27,167,000 28,912,000
Investing activities
Purchase of marketable securities - (235,000) (18,653,000)
Proceeds from maturities of marketable securities 235,000 5,917,000 12,736,000
Purchase of property, plant and equipment (22,560,000) (40,259,000) (36,564,000)
Purchase of cellular license interests (8,686,000) (146,000) (5,811,000)
Net cash (used in) investing activities (31,011,000) (34,723,000) (48,292,000)
Financing activities
Proceeds from borrowings, net of financing costs 151,623,000 193,233,000 52,000,000
Principal payments (8,900,000) (115,000,000) (28,975,000)
Principal payments of capital lease obligation (272,000) (194,000) -
Due to parent company 14,870,000 17,056,000 -
Additional deferred financing costs - - (22,000)
Repayment of amount due to parent company (30,000,000) - -
Proceeds from exercise of stock options - 287,000 129,000
Purchase of treasury stock - (688,000) (8,323,000)
Distribution to parent company (120,000,000) (80,000,000) -
Distribution to minority interests holders - - (1,172,000)
Net cash provided by financing activities 7,321,000 14,694,000 13,637,000
-----------------------------------------------
Increase (decrease) in cash and cash equivalents 23,168,000 7,138,000 (5,743,000)
Cash and cash equivalents at beginning of year 9,445,000 2,307,000 8,050,000
-----------------------------------------------
Cash and cash equivalents at end of year $ 32,613,000 $ 9,445,000 $ 2,307,000
===============================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest exclusive of
amounts capitalized $ 26,124,000 $ 12,745,000 $ 7,118,000
Income taxes paid 967,000 4,405,000 7,239,000
Supplemental schedule of noncash investing activities:
Long-term debt issued to acquire cellular license interest $ 8,900,000 $ - $ -
Liabilities incurred to acquire property, plant and
equipment 5,191,000 3,038,000 1,595,000
Capital lease obligation incurred to acquire
office building - 9,922,000 -
Common stock issued to acquire cellular license interests - - 21,536,000
</TABLE>
See accompanying notes.
CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
CCPR Inc. (formerly Cellular Communications of Puerto Rico, Inc.) (the
"Company") was incorporated on May 18, 1988 as a wholly-owned subsidiary of
Cellular Communications, Inc. ("CCI") to own and operate cellular telephone
systems. On July 25, 1990, CCI and AirTouch Communications, Inc. entered
into a Merger and Joint Venture Agreement, as amended, pursuant to which,
on February 28, 1992, CCI distributed to its stockholders all of the
outstanding common stock of the Company.
In January 1997, the Company completed a corporate restructuring. A new
entity named Cellular Communications of Puerto Rico, Inc. (formerly
CoreComm Incorporated) ("CCPR") was formed, and a subsidiary of CCPR was
merged with and into the Company. Upon the merger, the Company became a
wholly-owned subsidiary of CCPR and shareholders of the Company became
shareholders of CCPR on a one for one basis.
The Company, through its subsidiaries, owns licenses to operate cellular
telephone and paging systems in Puerto Rico and in the U.S. Virgin Islands.
Based on service revenues, the predominant line of business is cellular
telephone services. The Company's business is currently dependent on the
trends in the use of cellular telephone and paging services and is subject
to economic, social, political and governmental conditions in Puerto Rico
and the U.S. Virgin Islands. The sale of cellular and paging services in
each of the Company's markets is becoming increasingly competitive. The
Company previously had one cellular competitor in each market, but it now
has many wireless competitors due to the introduction of broadband personal
communications services ("PCS") on frequencies auctioned by the Federal
Communications Commission ("FCC") and specialized mobile radio ("SMR")
services on existing SMR frequencies. Increased competition has resulted in
pricing pressure, which contributes to lower revenues per customer and
higher customer acquisition costs.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and those entities where the Company's
interest is greater than 50%. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
License Acquisition Costs
The FCC grants the license to operate a cellular telephone system in a
Metropolitan Service Area or a Rural Service Area. Costs incurred to obtain
FCC licenses have been deferred and are being amortized by the
straight-line method over ten years. In connection with the purchase of
license interests, the excess of purchase price paid over the fair value of
tangible assets acquired has been classified as license acquisition costs
which are amortized through charges to operations by the straight-line
method over 40 years. License acquisition costs are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.
Revenue Recognition
Service revenue is recognized at the time services are rendered. Charges
for services that are billed in advance are deferred and recognized when
earned. Equipment sales are recorded when the equipment is shipped to the
customer. Rental revenue is billed and recognized on a monthly basis.
Cash Equivalents
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were $14,918,000 at
December 31, 1998 and consisted of corporate commercial paper.
Marketable Securities
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities,
net of tax, are carried as a separate component of other comprehensive
income. The amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization and
accretion is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary will be included in
interest income. The cost of securities sold or matured is based on the
specific identification method. Interest on securities is included in
interest income.
The Company had no marketable securities at December 31, 1998. Marketable
securities at December 31, 1997 consisted of corporate debt securities.
During the years ended December 31, 1998, 1997 and 1996, there were no
realized gains or losses on sales of securities. As of December 31, 1997,
there were no unrealized gains or losses on securities. All of the
marketable securities as of December 31, 1997 had a contractual maturity of
less than one year.
Equipment Inventory
Equipment inventory is stated at the lower of cost (first-in, first-out
method) or market.
Allowance for Doubtful Accounts
The Company records an estimate of uncollectible accounts receivable based
on the current aging of its receivables and its prior collections
experience.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is computed
by the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are as follows: office building - 15 years,
operating equipment - 7 to 25 years, office furniture and other equipment -
1 to 5 years, and rental equipment - 2 years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
Capitalized Interest
Interest is capitalized as a component of the cost of property, plant and
equipment constructed. In 1998, 1997 and 1996, interest of $148,000,
$415,000 and $198,000, respectively, was capitalized.
Deferred Financing Costs
Deferred financing costs represent costs incurred relating to the issuance
of debt and are amortized over the term of the related debt.
Advertising
The Company charges the cost of advertising to expense as incurred.
Advertising expense for the years ended December 31, 1998, 1997 and 1996
was $3,473,000, $3,667,000 and $3,025,000, respectively.
3. Recent Accounting Pronouncements
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 130 in 1998 which had no impact on the Company's financial
position or results of operations.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted
effective January 1, 2000. Management does not anticipate that the
adoption of this new standard will have a significant effect on earnings or
the financial position of the Company.
4. Unamortized License Acquisition Costs
Unamortized license acquisition costs consist of:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------------------
<S> <C> <C>
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 43,534,000 37,934,000
-----------------------------------------
$169,453,000 $157,467,000
=========================================
</TABLE>
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.
In November 1996, the Company acquired the remaining interests, aggregating
49%, in Star Associates, Inc., the company which owned the FCC license for
the non-wireline cellular system in Adjuntas, Puerto Rico (RSA-2) for cash
of $5,755,000 including expenses.
In February 1996, the Company acquired the remaining minority interests
aggregating approximately 6% in SJCTC in exchange for approximately 820,000
shares of the Company's common stock. The stock was valued at $21,536,000,
the fair market value on the date of acquisition. In addition, SJCTC made a
special cash distribution of $1,172,000 to the minority interest holders.
The aggregate purchase price of $21,536,000 plus expenses of $56,000 and
the deficiency in net assets acquired of $850,000 have been classified as
license acquisition costs.
5. Property, Plant and Equipment
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------------------------
<S> <C> <C>
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 142,252,000 127,534,000
Office furniture and other equipment 33,909,000 24,546,000
Rental equipment 3,413,000 1,745,000
Construction in progress 8,387,000 12,533,000
---------------------------------------------
199,834,000 178,231,000
Accumulated depreciation 74,412,000 49,780,000
---------------------------------------------
$125,422,000 $128,451,000
=============================================
</TABLE>
6. Accrued Expenses
Accrued expenses consist of:
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------- -- --------------------
<S> <C> <C>
Accrued compensation $ 1,309,000 $ 765,000
Accrued franchise, property and income taxes 6,105,000 2,836,000
Commissions payable 1,237,000 1,143,000
Accrued equipment purchases 2,340,000 1,427,000
Subscriber deposits 1,384,000 1,544,000
Other 3,753,000 3,297,000
---------------------- -- --------------------
$16,128,000 $11,012,000
====================== == ====================
</TABLE>
7. Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------- -- --------------------
<S> <C> <C>
Senior Subordinated Notes $200,000,000 $200,000,000
Bank loan 155,000,000 -
---------------------- -- --------------------
$355,000,000 $200,000,000
====================== == ====================
</TABLE>
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 and the
Company made a cash distribution of $120,000,000 to its parent.
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 December 31, 1998 was 7.87%.
The terms also include an unused commitment fee of 0.5% per annum which is
payable quarterly. Principal payments commence on September 30, 2001 based
on two amortization schedules. One schedule is for the first $95,000,000
borrowed which includes quarterly payments until June 2006. The other
schedule is for the remainder of the amount borrowed which includes
quarterly payments until June 2005.
In connection with the bank loan, 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, which guarantee is full, joint
and several. 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, which guarantee is
full, joint and several. The Company and Services used approximately
$116,000,000 of the proceeds to repay the $115,000,000 principal
outstanding plus accrued interest and fees under a bank loan. In connection
with the repayment of the loan, Services recorded an extraordinary loss of
$4,067,000 from the write-off of unamortized deferred financing costs. In
addition, Services made a cash payment to the Company of $80,000,000 in
exchange for a 21% interest in SJCTC, and the Company distributed the
$80,000,000 to CCPR.
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 covenants 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 CCPR), (iii) create liens, (iv) sell assets, (v)
enter into mergers or consolidations or (vi) sell or issue stock of
subsidiaries.
Long-term debt repayments are due as follows:
Year ending December 31,
2001 $ 5,000,000
2002 11,500,000
2003 14,500,000
Thereafter 324,000,000
-------------------
$355,000,000
===================
The fair value of the Notes as of December 31, 1998 and 1997 was
$193,500,000 and $194,000,000, respectively, based on the quoted market
price. The fair value of the bank loan as of December 31, 1998 was
$155,000,000 based on discounted cash flow analysis.
8. Related Party Transactions
CCI provided management, financial and legal services to the Company.
Amounts charged to the Company included direct costs where identifiable and
allocated corporate overhead based upon the amount of time incurred on
Company business by the common officers and employees of CCI and the
Company. Amounts charged to the Company included in general and
administrative expenses during the year ended December 31, 1996 was
$429,000. In August 1996, upon the merger of CCI with AirTouch
Communications, Inc., NTL Incorporated ("NTL") commenced providing
management, financial and legal services to the Company. NTL charged the
Company for direct costs where identifiable and allocated corporate
overhead based upon the amount of time incurred on Company business by the
common officers and employees of NTL and the Company. The amount charged to
the Company included in general and administrative expenses in 1996 was
$207,000.
In January 1997, CCPR commenced charging the Company for management,
financial and legal services. CCPR charges the Company for direct costs
where identifiable and a portion of its corporate overhead. The amounts
charged to the Company included in general and administrative expenses in
1998 and 1997 were $447,000 and $1,780,000, respectively.
It is not practicable to determine the amount of expenses that would have
been incurred had the Company operated as an unaffiliated entity. However,
in the opinion of management of the Company, the allocation method is
reasonable.
9. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ - $ - $ -
State 2,200,000 400,000 -
Puerto Rico and U.S.
Virgin Islands 2,008,000 471,000 4,555,000
-----------------------------------------------------------
Total current 4,208,000 871,000 4,555,000
-----------------------------------------------------------
Deferred:
Federal - - -
Puerto Rico - - 797,000
-----------------------------------------------------------
Total deferred - - 797,000
-----------------------------------------------------------
$4,208,000 $871,000 $5,352,000
===========================================================
</TABLE>
The provision for income taxes differs from the statutory rate principally
due to state and local income taxes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------- --------------------
Deferred tax liabilities:
<S> <C> <C>
Tax over book depreciation and amortization $44,777,000 $29,094,000
Deferred tax assets:
Net operating loss carryforwards 60,620,000 36,352,000
Valuation allowance for deferred tax assets (16,640,000) (8,055,000)
------------------- --------------------
Net deferred tax assets 43,980,000 28,297,000
------------------- --------------------
Net deferred tax liabilities $ 797,000 $ 797,000
=================== ====================
</TABLE>
As of January 1997, the Company and its subsidiaries are included in CCPR's
consolidated federal income tax group. At December 31, 1998, the Company
had net operating loss carryforwards of approximately $139,900,000 for
federal income tax purposes that expire as follows: $3,800,000 in 2004,
$3,900,000 in 2006, $20,400,000 in 2007, $26,400,000 in 2008, $14,100,000
in 2009, $9,600,000 in 2010, $5,500,000 in 2011, $35,800,000 in 2012 and
$20,400,000 in 2013.
9. Income Taxes (continued)
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $33,400,000 to offset future Puerto Rico taxable income that
expire as follows: $2,000,000 in 1999, $2,200,000 in 2000, $2,600,000 in
2001, $4,100,000 in 2002, $5,200,000 in 2003, $16,200,000 in 2004 and
$1,100,000 in 2005.
In January 1997, CCPR, the Company and Services entered into a tax sharing
agreement which provides that the Company and Services will pay to CCPR (or
CCPR will pay to the Company or Services, as appropriate) an amount which
would equal the amount of taxes for which a company would be liable if such
company were not part of the CCPR consolidated group.
The provision for income taxes differs from the statuatory rates
principally due to state and local taxes and the losses for which no
benefit has been provided.
10. Pension Plans
Two subsidiaries of the Company have defined contribution plans covering
all employees who have completed six months of employment. The Company's
matching contributions are determined annually. Participants can make
salary deferral contributions of 1% to 20% of annual compensation not to
exceed the maximum allowed by law. The Company's expense for 1998, 1997 and
1996 was $227,000, $204,000 and
$168,000, respectively.
11. Leases
Total rent expense during the years ended December 31, 1998, 1997 and 1996
was $3,506,000, $3,680,000 and $3,085,000, respectively.
Future minimum annual lease payments under noncancellable operating leases
at December 31, 1998 are: $3,138,000 (1999); $2,432,000 (2000); $1,672,000
(2001); $1,134,000 (2002); $416,000 (2003) and $3,238,000 thereafter.
In 1997, the Company entered into a lease for office space through 2012
which is classified as a capital lease for financial reporting purposes.
Accordingly, an asset of $9,922,000 has been recorded. Accumulated
depreciation on the office building at December 31, 1998 and 1997 was
$1,049,000 and $388,000, respectively. Future minimum annual payments under
this lease at December 31, 1998 are as follows:
Year ending December 31,
1999 $1,196,000
2000 1,196,000
2001 1,196,000
2002 1,265,000
2003 1,288,000
Thereafter 10,872,000
-------------
17,013,000
Interest (7,557,000)
-------------
Present value of net minimum obligations 9,456,000
Current portion (299,000)
-------------
$9,157,000
=============
12. Commitments and Contingent Liabilities
As of December 31, 1998, the Company was committed to purchase
approximately $7,500,000 for cellular network and other equipment and for
construction services. In addition, as of December 31, 1998, the Company
had commitments to purchase cellular telephones, pagers and accessories of
approximately $2,200,000.
In 1992, the Company entered into an agreement which in effect provides for
a twenty year license to use a service mark in Puerto Rico and the U.S.
Virgin Islands which is also licensed to many of the non-wireline cellular
systems in the United States. The Company is required to pay licensing and
advertising fees, and to maintain certain service quality standards. The
total fees paid for 1998 were $289,000, which were determined by the size
of the Company's markets.
The Company is involved in various disputes, arising in the ordinary course
of business, which may result in pending or threatened litigation. The
Company's management expects no material adverse effect on the Company's
financial condition, results of operations or cash flows to result from
these matters.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------------------------
Additions
-------------------------
(1) (2)
-------------------------
Charged
Balance at Charged to to Other
Beginning Costs and Accounts- Deductions - Balance at
Description of Period Expenses Describe Describe End of Period
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $2,106,000 $5,004,000 $ - $(5,528,000) (a) $1,582,000
Year ended December 31, 1997:
Allowance for doubtful accounts $3,767,000 $7,146,000 $ - $(8,807,000) (a) $2,106,000
Year ended December 31, 1996:
Allowance for doubtful accounts $3,233,000 $7,520,000 $ - $(6,986,000) (a) $3,767,000
(a) - Uncollectible accounts written off, net of recoveries.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<CASH> 32,613,000
<SECURITIES> 0
<RECEIVABLES> 20,388,000
<ALLOWANCES> (1,582,000)
<INVENTORY> 7,635,000
<CURRENT-ASSETS> 9,613,000
<PP&E> 199,834,000
<DEPRECIATION> (74,412,000)
<TOTAL-ASSETS> 373,460,000
<CURRENT-LIABILITIES> 47,817,000
<BONDS> 355,000,000
0
0
<COMMON> 0
<OTHER-SE> (38,514,000)
<TOTAL-LIABILITY-AND-EQUITY> 373,460,000
<SALES> 24,093,000
<TOTAL-REVENUES> 177,225,000
<CGS> 22,071,000
<TOTAL-COSTS> 39,039,000
<OTHER-EXPENSES> 68,389,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,158,000
<INCOME-PRETAX> 10,265,000
<INCOME-TAX> (4,208,000)
<INCOME-CONTINUING> 6,057,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,057,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
