-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K+C9ObSBbnGRqJoAzqOOSv8Od7bz5063RWUo2lboPaUhVXcuxmoweFX5cnuWPyrF jxQUOH0P3qtVl2FTG54zxA== 0000881817-98-000008.txt : 19981118 0000881817-98-000008.hdr.sgml : 19981118 ACCESSION NUMBER: 0000881817-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CCPR INC CENTRAL INDEX KEY: 0000881817 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 133517074 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19869 FILM NUMBER: 98750635 BUSINESS ADDRESS: STREET 1: 110 EAST 59TH STREET STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129068485 MAIL ADDRESS: STREET 1: 110 EAST 59TH STREET STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: CELLULAR COMMUNICATIONS OF PUERTO RICO INC DATE OF NAME CHANGE: 19930328 10-Q 1 FORM 10Q - SEPTEMBER 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-19869 ------------------------------------------------------------ CCPR, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) (On August 28, 1998, the name of the Registrant was changed from Cellular Communications of Puerto Rico, Inc. to CCPR, Inc.) Delaware 13-3517074 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 East 59th Street, New York, New York 10022 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 906-8481 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's common stock as of September 30, 1998 was 1,000. CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) Index PART I. FINANCIAL INFORMATION Page - ------ --------------------- ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1998 and December 31, 1997 ...................... 2 Condensed Consolidated Statements of Operations Three and nine months ended September 30, 1998 and 1997 ....... 3 Condensed Consolidated Statement of Shareholder's Equity (Deficiency) Nine months ended September 30, 1998 .......................... 4 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 1998 and 1997 ................. 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................ 10 PART II. OTHER INFORMATION - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K .............................. 17 SIGNATURES.............................................................. 18 - ---------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Condensed Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------------------- (Unaudited) (See Note) ASSETS Current assets: Cash and cash equivalents $ 16,157,000 $ 9,445,000 Marketable securities - 235,000 Accounts receivable - trade, less allowance for doubtful accounts of $1,758,000 (1998) and $2,106,000 (1997) 20,020,000 19,043,000 Due from parent company 2,084,000 935,000 Equipment inventory 5,853,000 2,882,000 Prepaid expenses and other current assets 7,004,000 5,923,000 ------------------------------- Total current assets 51,118,000 38,463,000 Property, plant and equipment, net 124,170,000 128,451,000 Unamortized license acquisition costs 170,806,000 157,467,000 Deferred financing costs, less accumulated amortization of $1,164,000 (1998) and $584,000 (1997) 8,788,000 6,206,000 Other assets, less accumulated amortization of $793,000 (1998) and $1,088,000 (1997) 1,376,000 1,537,000 ------------------------------- $ 356,258,000 $ 332,124,000 =============================== LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 10,364,000 $ 6,815,000 Accrued expenses 12,279,000 11,012,000 Due to NTL Incorporated 5,000 71,000 Due to parent company - 17,056,000 Interest payable 4,845,000 8,333,000 Deferred revenue 5,723,000 3,952,000 ------------------------------- Total current liabilities 33,216,000 47,239,000 Long-term debt 355,000,000 200,000,000 Obligation under capital lease 9,234,000 9,456,000 Commitments and contingent liabilities Shareholder's equity (deficiency): Common stock - $.01 par value; authorized, issued and outstanding 1,000 shares - - Additional paid-in capital 17,570,000 137,570,000 (Deficit) (58,762,000) (62,141,000) ------------------------------- (41,192,000) 75,429,000 ------------------------------- $ 356,258,000 $ 332,124,000 ===============================
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. See accompanying notes. 2 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------------ -------------------------------- 1998 1997 1998 1997 ------------------------------ -------------------------------- REVENUES: Service revenue $ 39,224,000 $ 31,541,000 $ 110,791,000 $ 99,587,000 Equipment revenue 5,643,000 4,672,000 16,096,000 12,335,000 ------------------------------ -------------------------------- 44,867,000 36,213,000 126,887,000 111,922,000 COSTS AND EXPENSES: Cost of equipment sold 5,072,000 5,258,000 14,526,000 14,331,000 Operating expenses 4,294,000 4,555,000 12,660,000 12,783,000 Selling, general and administrative expenses 17,101,000 17,712,000 50,043,000 53,693,000 Depreciation of rental equipment 312,000 233,000 828,000 608,000 Depreciation expense 6,547,000 4,831,000 18,819,000 12,823,000 Amortization expense 1,700,000 1,610,000 5,040,000 4,821,000 ------------------------------ -------------------------------- 35,026,000 34,199,000 101,916,000 99,059,000 ------------------------------ -------------------------------- Operating income 9,841,000 2,014,000 24,971,000 12,863,000 OTHER INCOME (EXPENSE): Interest income and other, net (381,000) (17,000) (318,000) (31,000) Interest expense (6,957,000) (5,200,000) (17,717,000) (14,261,000) ------------------------------ -------------------------------- Income (loss) before income taxes and extraordinary item 2,503,000 (3,203,000) 6,936,000 (1,429,000) Income tax provision (2,796,000) (114,000) (3,557,000) (1,266,000) ------------------------------ -------------------------------- Income (loss) before extraordinary item (293,000) (3,317,000) 3,379,000 (2,695,000) Loss from early extinguishment of debt, net of income tax benefit of $1,128,000 - 387,000 - (2,939,000) ------------------------------ -------------------------------- Net income (loss) $ (293,000) $ (2,930,000) $ 3,379,000 $ (5,634,000) ============================== ================================
See accompanying notes. 3 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Condensed Consolidated Statement of Shareholder's Equity (Deficiency) (Unaudited)
COMMON STOCK ADDITIONAL --------------------- PAID-IN SHARES AMOUNT CAPITAL (DEFICIT) -------------------------------------------------------------- Balance, December 31, 1997 1,000 $ - $ 137,570,000 $ (62,141,000) Distribution to parent company (120,000,000) Net income for the nine months ended September 30, 1998 3,379,000 -------------------------------------------------------------- Balance, September 30, 1998 1,000 $ - $ 17,570,000 $ (58,762,000) ==============================================================
See accompanying notes. 4 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 -------------------------------------- 1998 1997 -------------------------------------- Net cash provided by operating activities $ 27,295,000 $ 13,544,000 INVESTING ACTIVITIES Cost of cellular license interest (8,686,000) (146,000) Purchase of property, plant and equipment (17,813,000) (33,621,000) Proceeds from maturities of marketable securities 235,000 5,917,000 -------------------------------------- Net cash (used in) investing activities (26,264,000) (27,850,000) -------------------------------------- FINANCING ACTIVITIES Principal payments of capital lease obligation (201,000) (131,000) Due to parent company 12,944,000 13,056,000 Proceeds from bank loan, net of financing costs 151,838,000 - Repayment of long-term debt (8,900,000) - Repayment of amount due to parent company (30,000,000) - Repayment of bank loan - (115,000,000) Proceeds from issuance of Notes, net of financing costs - 193,694,000 Distribution to parent company (120,000,000) (80,000,000) Purchase of treasury stock - (688,000) Proceeds from exercise of stock options - 287,000 -------------------------------------- Net cash provided by financing activities 5,681,000 11,218,000 -------------------------------------- Increase (decrease) in cash and cash equivalents 6,712,000 (3,088,000) Cash and cash equivalents at beginning of period 9,445,000 2,307,000 -------------------------------------- Cash and cash equivalents at end of period $ 16,157,000 $ (781,000) ====================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest exclusive of amounts capitalized $ 21,205,000 $ 12,606,000 Income taxes paid 781,000 4,339,000 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Liabilities incurred to acquire property, plant and equipment $ 1,373,000 $ 2,365,000 Long-term debt issued to acquire cellular license interest 8,900,000 - Capital lease obligation incurred to acquire office building - 9,922,000
See accompanying notes. 5 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company has adopted SFAS No. 130, which had no effect on the consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company is assessing whether changes in reporting will be required upon the adoption of this new standard. The Company will adopt SFAS No. 131 for fiscal year ending December 31, 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in fiscal years beginning after June 15, 1999. Management does not anticipate that the adoption of this new standard will have a significant effect on earnings or the financial position of the Company. 6 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE B - UNAMORTIZED LICENSE ACQUISITION COSTS Unamortized license acquisition costs consist of: SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------------------- (Unaudited) Deferred cellular license costs $ 5,935,000 $ 5,935,000 Excess of purchase price paid over the fair market value of tangible assets acquired 207,052,000 189,466,000 ------------------------------- 212,987,000 195,401,000 Accumulated amortization 42,181,000 37,934,000 ------------------------------- $ 170,806,000 $ 157,467,000 =============================== In January 1998, the San Juan Cellular Telephone Company ("SJCTC"), a wholly-owned subsidiary of the Company, purchased the FCC license to own and operate the non-wireline cellular system in Puerto Rico RSA-4 (Aibonito) and all of the assets of the system in exchange for $8,400,000 in cash and a promissory note in the amount of $8,900,000. Costs of $286,000 were incurred in connection with this acquisition. NOTE C - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of: SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------------------- (Unaudited) Land $ 1,951,000 $ 1,951,000 Office building 9,922,000 9,922,000 Operating equipment 137,326,000 127,534,000 Office furniture and other equipment 31,439,000 24,546,000 Rental equipment 3,044,000 1,745,000 Construction in progress 8,064,000 12,533,000 ------------------------------- 191,746,000 178,231,000 Accumulated depreciation 67,576,000 49,780,000 ------------------------------- $ 124,170,000 $ 128,451,000 =============================== 7 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE D - ACCRUED EXPENSES Accrued expenses consist of: SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------------------ (Unaudited) Accrued compensation $ 1,398,000 $ 765,000 Accrued equipment purchases 243,000 1,427,000 Accrued franchise, property and income taxes 5,345,000 2,836,000 Commissions payable 616,000 1,143,000 Subscriber deposits 1,389,000 1,544,000 Other 3,288,000 3,297,000 ------------------------------ $ 12,279,000 $ 11,012,000 ============================== NOTE E - LONG-TERM DEBT Long-term debt consists of: SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------------------ (Unaudited) Senior Subordinated Notes $ 200,000,000 $ 200,000,000 Bank loan 155,000,000 - ------------------------------ $ 355,000,000 $ 200,000,000 ============================== In August 1998, a wholly-owned subsidiary of the Company, CCPR Services, Inc. ("Services"), entered into a $170,000,000 credit agreement with various banks. Services borrowed $155,000,000 which, along with cash on hand of $7,000,000, was used to repay amounts due to the Company of $30,000,000, to purchase a 23.5% interest in SJCTC from the Company for cash of $120,000,000, to pay fees incurred in connection with the new bank loan of approximately $3,000,000 and to make a term loan to SJCTC of $8,900,000 in order for SJCTC to repay its note payable to a third party, which repayment was a condition of the bank loan. The Company used $30,000,000 to repay its loan payable to its parent company, Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated) ("CCPR"), and the Company made a cash distribution of $120,000,000 to CCPR. CCPR made a capital contribution to its wholly-owned subsidiary, CoreComm Limited, of $150,000,000 in cash and distributed 100% of the common stock of CoreComm Limited to CCPR's shareholders. 8 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) NOTE E - LONG-TERM DEBT (CONTINUED) Services has $15,000,000 available under the bank loan until September 2001. The terms include the payment of interest at least quarterly at a floating rate, which is, at Services' option, either (a) the greater of the bank's prime rate or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio of the Company and its subsidiaries debt to cash flow and the floating rate in effect, either 0% to 1.25% or 1.25% to 2.5%. The effective rate on Services' borrowings as of September 30, 1998 was 8%. The terms also include an unused commitment fee of 0.5% per annum which is payable quarterly. Principal payments commence on September 30, 2001 based on two amortization schedules. One schedule is for the first $95,000,000 borrowed which includes quarterly payments until June 2006. The other schedule is for the remainder of the amount borrowed which includes quarterly payments until June 2005. Services incurred costs of $3,162,000 in connection with the bank loan which are included in deferred financing costs. In connection with the bank loan, the Company has pledged to the banks the stock of its subsidiaries and the Company and its subsidiaries have given the banks a security interest in their assets. The Company and its subsidiaries have guaranteed the payment in full when due of the principal, interest and fees owing under the bank loan. The bank loan also includes, among other things, restrictions on the Company and its subsidiaries (i) dividend payments, (ii) acquisitions, (iii) investments, (iv) sales and dispositions of assets, (v) additional indebtedness and (vi) liens. The bank loan requires that the Company and its subsidiaries maintain certain ratios of indebtedness to cash flow, fixed charges to cash flow and debt service to cash flow. NOTE F - COMMITMENTS AND CONTINGENT LIABILITIES As of September 30, 1998, the Company was committed to purchase approximately $2,900,000 for cellular network and other equipment and for construction services. In addition, as of September 30, 1998, the Company had commitments to purchase cellular telephones, pagers and accessories of approximately $2,400,000. In 1992, the Company entered into an agreement which in effect provides for a twenty year license to use its service mark which is also licensed to many of the non-wireline cellular systems in the United States. The Company is required to pay licensing and advertising fees, and to maintain certain service quality standards. The total fees paid for 1998 were $289,000, which were determined by the size of the Company's markets. 9 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. RESULTS OF OPERATIONS In September 1998, Hurricane Georges struck Puerto Rico and the U.S. Virgin Islands. The Company's insurance is expected to cover nearly all of the expenses associated with restoring its service and the cost of repairing and replacing damaged equipment and facilities. In addition, the Company has business interruption insurance so it is not expected to incur an uninsured material loss from the Company's cell sites that were out of service. The Company received $1,000,000 from its insurance company in November 1998 as a partial payment of its claim, which was recorded in the results of operations in the third quarter. The Company has not completed discussions with its insurance carriers and their adjusters regarding the total amount to be paid. THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - ---------------------------------------------- Service revenue increased to $39,224,000 from $31,541,000. Lower average revenue and minutes of use of new prepaid subscribers and the selection by existing subscribers of alternate rate plans resulted in average monthly revenue per cellular subscriber for the third quarter decreasing to $53 in 1998 from $59 in 1997. The Company expects these trends to continue for the foreseeable future. Ending subscribers were 264,700 and 181,900 as of September 30, 1998 and 1997, respectively. Ending pagers in use were 54,300 and 45,500 as of September 30, 1998 and 1997, respectively. The income (loss) from equipment, before depreciation of rental equipment, increased to income of $571,000 from a loss of $586,000 primarily because the Company is not selling telephones below their cost to prepaid subscribers. Reductions in the cost of cellular telephones also contributed to this change. The Company intends to continue to sell telephones at or above cost to prepaid subscribers. The Company expects the growth in prepaid subscribers to continue, therefore the Company expects the trend in equipment income to continue for the foreseeable future. Operating expenses decreased to $4,294,000 from $4,555,000 primarily due to the elimination of the expense accrual for the proposed Puerto Rico universal service charge in the fourth quarter of 1997. Subsidiaries of the Company were recording an estimate for this proposed charge in operating expenses through September 30, 1997. The total expense accrual of $1,644,000 was reversed in the fourth quarter of 1997 after the Puerto Rico Telecommunications Regulatory Board announced that the proposed retroactive application of the universal service charge to January 1997 had been eliminated. After adjusting for the reversal of $520,000 charged to expense in the third quarter of 1997, operating expenses increased to $4,294,000 from $4,035,000 due to additional costs associated with the expanded network (including paging operations). Operating expenses as a percentage of service revenue decreased to 11% in 1998 from 13% (after adjustment) in 1997. 10 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Selling, general and administrative expenses decreased to $17,101,000 from $17,712,000 as a result of all of the following: a decrease in selling and marketing costs, bad debt expense and subscriber billing expense. The decreases in selling and marketing costs, bad debt expense and subscriber billing expense were 8%, 65% and 11%, respectively of the $611,000 decrease. These decreases were partially offset by an increase in property taxes due to an increase in taxable property which was (29)% of the decrease. Depreciation of rental equipment increased to $312,000 from $233,000 due to an increase in the number of rental telephones and pagers. Depreciation expense increased to $6,547,000 from $4,831,000 primarily because of an increase in property, plant and equipment. Amortization expense increased to $1,700,000 from $1,610,000 primarily due to an increase in deferred financing costs. Interest income and other, net, increased to expense of $381,000 from expense of $17,000 primarily due to losses on the disposal of cell site equipment damaged by Hurricane Georges of approximately $400,000, net of the partial payment of claims. Interest income increased to $13,000 from $7,000. Interest expense increased to $6,957,000 from $5,200,000 as a result of the new bank loan commencing in August 1998. The provision for income taxes increased to $2,796,000 from $114,000 as a result of a tax provision of $2,200,000 in connection with the August 1998 transactions and an increase in Puerto Rico and U.S. Virgin Islands taxable income of certain of the Company's consolidated subsidiaries. The Company recorded an increase in the income tax benefit from the loss from the early extinguishment of debt of $387,000 in 1997 due to an adjustment to the estimated tax benefit from the loss. NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - --------------------------------------------- Service revenue increased to $110,791,000 from $99,587,000. Lower average revenue and minutes of use of new prepaid subscribers and the selection by existing subscribers of alternate rate plans resulted in average monthly revenue per cellular subscriber for the nine months ended September 30 decreasing to $53 in 1998 from $65 in 1997. The Company expects these trends to continue for the foreseeable future. Ending subscribers were 264,700 and 181,900 as of September 30, 1998 and 1997, respectively. Ending pagers in use were 54,300 and 45,500 as of September 30, 1998 and 1997, respectively. 11 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries The income (loss) from equipment, before depreciation of rental equipment, increased to income of $1,570,000 from a loss of $1,996,000 primarily because the Company is not selling telephones below their cost to prepaid subscribers. Reductions in the cost of cellular telephones also contributed to this change. The Company intends to continue to sell telephones at or above cost to prepaid subscribers. The Company expects the growth in prepaid subscribers to continue, therefore the Company expects the trend in equipment income to continue for the foreseeable future. Operating expenses decreased to $12,660,000 from $12,783,000 primarily due to the elimination of the expense accrual for the proposed Puerto Rico universal service charge in the fourth quarter of 1997. Subsidiaries of the Company were recording an estimate for this proposed charge in operating expenses through September 30, 1997. The total expense accrual of $1,644,000 was reversed in the fourth quarter of 1997 after the Puerto Rico Telecommunications Regulatory Board announced that the proposed retroactive application of the universal service charge to January 1997 had been eliminated. After adjusting for the expense reversal, operating expenses increased to $12,660,000 from $11,139,000 due to increased usage of the network and additional costs associated with the expanded network (including paging operations). Operating expenses as a percentage of service revenue was 11% in 1998 and in 1997 (after adjustment). Selling, general and administrative expenses decreased to $50,043,000 from $53,693,000 as a result of all of the following: a decrease in selling and marketing costs, bad debt expense and subscriber billing expense. The decreases in selling and marketing costs, bad debt expense and subscriber billing expense were 33%, 42% and 11%, respectively of the $3,650,000 decrease. These decreases were partially offset by an increase in property taxes due to an increase in taxable property which was (24)% of the decrease. Depreciation of rental equipment increased to $828,000 from $608,000 due to an increase in the number of rental telephones and pagers. Depreciation expense increased to $18,819,000 from $12,823,000 primarily because of an increase in property, plant and equipment. Amortization expense increased to $5,040,000 from $4,821,000 due to increases in license acquisition costs and deferred financing costs. Interest income and other, net, increased to expense of $318,000 from expense of $31,000 primarily due to losses on the disposal of cell site equipment damaged by Hurricane Georges of approximately $400,000, net of the partial payment of claims. Interest income decreased to $20,000 from $114,000 due to a decrease in amounts available for short term investment. Interest expense increased to $17,717,000 from $14,261,000 as a result of the office building capital lease obligation beginning in April 1997, the issuance of the subsidiary note payable in January 1998 and the new bank loan commencing in August 1998. 12 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries The provision for income taxes increased to $3,557,000 from $1,266,000 as a result of a tax provision of $2,200,000 in connection with the August 1998 transactions and an increase in Puerto Rico and U.S. Virgin Islands taxable income of certain of the Company's consolidated subsidiaries. In connection with the termination of a bank loan, the Company recorded an extraordinary loss of $4,067,000 in 1997 ($2,939,000 net of income tax benefit) from the write-off of unamortized deferred financing costs. LIQUIDITY AND CAPITAL RESOURCES The Company requires capital to expand its cellular and paging network and for debt service. The Company is currently adding cell sites and increasing capacity throughout its Puerto Rico and U.S. Virgin Islands markets. The Company expects to use approximately $9,500,000 in the fourth quarter of 1998 and $30,700,000 in 1999 for contemplated additions to the cellular network, the paging network and for other non-cell site related capital expenditures. The Company's commitments at September 30, 1998 of $2,900,000 for cellular network and other equipment and for construction services are included in the total anticipated expenditures. In August 1998, a wholly-owned subsidiary of the Company, CCPR Services, Inc. ("Services"), entered into a $170,000,000 credit agreement with various banks. Services borrowed $155,000,000 which, along with cash on hand of $7,000,000, was used to repay amounts due to the Company of $30,000,000, to purchase a 23.5% interest in SJCTC from the Company for cash of $120,000,000, to pay fees incurred in connection with the new bank loan of approximately $3,000,000 and to make a term loan to SJCTC of $8,900,000 in order for SJCTC to repay its note payable to a third party, which repayment was a condition of the bank loan. The Company used $30,000,000 to repay its loan payable to its parent company, Cellular Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated) ("CCPR"), and the Company made a cash distribution of $120,000,000 to CCPR. CCPR made a capital contribution to its then wholly-owned subsidiary, CoreComm Limited, of $150,000,000 in cash and distributed 100% of the common stock of CoreComm Limited to CCPR's shareholders. Services has $15,000,000 available under the bank loan until September 2001. The terms include the payment of interest at least quarterly at a floating rate, which is, at Services' option, either (a) the greater of the bank's prime rate or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio of the Company and its subsidiaries debt to cash flow and the floating rate in effect, either 0% to 1.25% or 1.25% to 2.5%. The effective rate on Services' borrowings as of September 30, 1998 was 8%. The terms also include an unused commitment fee of 0.5% per annum which is payable quarterly. Principal payments commence on September 30, 2001 based on two amortization schedules. One schedule is for the first $95,000,000 borrowed which includes quarterly payments until June 2006. The other schedule is for the remainder of the amount borrowed which includes quarterly payments until June 2005. Services incurred costs of $3,162,000 in connection with the bank loan which are included in deferred financing costs. 13 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries In connection with the bank loan, the Company has pledged to the banks the stock of its subsidiaries and the Company and its subsidiaries have given the banks a security interest in their assets. The Company and its subsidiaries have guaranteed the payment in full when due of the principal, interest and fees owing under the bank loan. The bank loan also includes, among other things, restrictions on the Company and its subsidiaries (i) dividend payments, (ii) acquisitions, (iii) investments, (iv) sales and dispositions of assets, (v) additional indebtedness and (vi) liens. The bank loan requires that the Company and its subsidiaries maintain certain ratios of indebtedness to cash flow, fixed charges to cash flow and debt service to cash flow. In January 1997, Services issued $200,000,000 principal amount 10% Senior Subordinated Notes due 2007 (the "Notes") and received proceeds of $193,233,000 after discounts, commissions and other related costs. The Notes are unconditionally guaranteed by the Company. Approximately $116,000,000 of the proceeds were used to repay the $115,000,000 principal outstanding plus accrued interest and fees under a bank loan. In addition, the Company distributed $80,000,000 to CCPR in 1997. The Notes are due on February 1, 2007. Interest on the Notes is payable semiannually on February 1 and August 1. The Notes are redeemable, in whole or in part, at the option of Services at any time on or after February 1, 2002, at a redemption price of 105% that declines annually to 100% in 2005, in each case together with accrued and unpaid interest to the redemption date. The Indenture contains certain convenants with respect to Services, the Company and certain subsidiaries that limit their ability to, among other things: (i) incur additional indebtedness, (ii) pay dividends or make other distributions or restricted payments, (iii) create liens, (iv) sell assets, (v) enter into mergers or consolidations or (vi) sell or issue stock of subsidiaries. The Company is highly leveraged as a result of the new bank loan and the use of the proceeds to distribute cash to CCPR. Such leverage could limit the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes, increases its vulnerability to adverse changes in general economic conditions or increases in interest rates, and requires that a substantial portion of cash flow from operations be dedicated to debt service requirements. The leveraged nature of the Company and the Company's continued compliance with the restrictions in its debt agreements could limit its ability to respond to market conditions, meet extraordinary capital needs or restrict other business activities such as acquisitions. In addition, the Company is a holding company with no significant assets other than its investments in and advances to its subsidiaries. The Company is therefore dependent upon receipt of funds from its subsidiaries to meet its own obligations, however the debt agreements effectively prevent the payment of dividends, loans or other distributions to the Company. The Company expects to be able to meet its consolidated capital requirements at least through the next twelve months with cash and cash equivalents on hand, cash from operations and borrowings under the new bank loan. Management does not anticipate that the Company and its subsidiaries will generate sufficient cash flow from operations to repay at maturity the entire principal amount of the outstanding indebtedness. Accordingly, the Company will be required to consider a number of measures, 14 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries including (i) refinancing all or a portion of such indebtedness, (ii) seeking modifications of the terms of such indebtedness, (iii) seeking additional debt financing, which would be subject to obtaining necessary lender consents, (iv) seeking additional equity financing or (v) a combination of the foregoing. The particular measures the Company may undertake and the ability of the Company to accomplish those measures will depend on the financial condition of the Company and its subsidiaries at the time, as well as a number of factors beyond the control of the Company. No assurance can be given that any of the foregoing measures can be accomplished, or can be accomplished on terms which are favorable to the Company. Cash provided by operating activities was $27,295,000 and $13,544,000 for the nine months ended September 30, 1998 and 1997, respectively. The increase is primarily a result of an increase in operating income and changes in operating assets and liabilities. Purchases of property, plant and equipment of $17,813,000 in 1998 were primarily for additional cell sites and increased capacity in the Company's cellular and paging networks. In January 1998, SJCTC purchased the FCC license to own and operate the non-wireline cellular system in Puerto Rico RSA-4 (Aibonito) and all of the assets of the system in exchange for $8,400,000 in cash and a promissory note in the amount of $8,900,000. Total cash paid was $8,686,000 including costs incurred in connection with the acquisition of $286,000. Write-offs of accounts receivable, net of recoveries as a percentage of service revenue was 3.8% for the nine months ended September 30, 1998 compared to 6.7% for the year ended December 31, 1997. This percentage decreased because the Company and its subsidiaries have increased prepaid subscribers. CCPR has retained an investment banking firm to act as financial adviser in reviewing strategic alternatives to enhance shareholder value, including the exploration of partnering opportunities in the region through a business combination, an appropriate acquisition, the sale of CCPR, or similar transactions. As of the date of this Form 10-Q, CCPR is not engaged in any substantive discussions with other parties regarding such a potential transaction. YEAR 2000 The Company has a comprehensive Year 2000 project designed to identify and assess the risks associated with its information systems, operations and infrastructure, suppliers, and customers that are not Year 2000 compliant, and to develop, implement and test remediation and contingency plans to mitigate these risks. The project comprises four phases: (1) identification of risks, (2) assessment of risks, (3) development of remediation and contingency plans and (4) implementation and testing. The Company's assessment is focused on its information technology ("IT") systems, in particular its cellular and paging network and its billing, provisioning and customer service systems. The Company will also evaluate the readiness of third-parties such as utility companies that the Company depends upon for the operation of its network. The Company's leased office space and other non-IT equipment which may have embedded technology that may be affected by the year 2000 problem is being separately assessed. The Company expects to complete the assessment of its IT systems in 1998 and expects to complete the validation and implementation 15 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries of its IT systems year 2000 readiness by June 1999. The evaluation of the readiness of the major third-parties is still in the assessment phase and is expected to be completed in early 1999. The Company is also reviewing its detailed contingency plans for potential modifications to address year 2000 issues. This review is expected to be completed by June 1999. The Company estimates that it will incur costs of $2,000,000 to complete the renovation, validation and implementation phases and achieve year 2000 readiness. As the Year 2000 project continues, the Company may discover additional problems, may not be able to develop, implement or test remediation or contingency plans, or may find that the costs of these activities exceed current expectations. In many cases, the Company is relying on assurances from suppliers that new and upgraded information systems and other products will be Year 2000 ready. The Company plans to test such third-party systems and products, but cannot be sure that its tests will be adequate or that, if problems are identified, they will be addressed by the supplier in a timely and satisfactory way. Because the Company uses a variety of information systems and has additional systems embedded in its operations and infrastructure, the Company cannot be sure that all of its systems will work together in a Year 2000-ready fashion. Furthermore, the Company cannot be sure that it will not suffer business interruptions, either because of its own Year 2000 problems or those of third-parties upon whom the Company is reliant for services. The Company is continuing to evaluate its Year 2000-related risks and corrective actions. However, the risks associated with the Year 2000 problem are pervasive and complex; they can be difficult to identify and address, and can result in material adverse consequences to the Company. Even if the Company, in a timely manner, completes all of its assessments, identifies and test remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the Company. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained herein constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. When used herein, the words, "believe", "anticipate", "should", "intend", "plan", "will", "expects", "estimates", "projects", "positioned", "strategy", and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those contemplated, projected, forecasted, estimated or budgeted, whether expressed or implied, by such forward-looking statements. Such factors include the following: general economic and business conditions in Puerto Rico and the U.S. Virgin Islands, industry trends, the Company's ability to continue to design and build its network, install facilities, obtain and maintain any required government licenses or approvals and finance construction and development, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, as well as assumptions about customer acceptance, churn rates, overall market penetration and competition from providers of alternative services, the impact of new business opportunities requiring significant up-front investment, Year 2000 readiness and availability, terms and deployment of capital. 16 CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27. Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the quarter ended September 30, 1998. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CCPR, INC. Date: November 11, 1998 By: /s/ J. Barclay Knapp ------------------------------ J. Barclay Knapp President Date: November 11, 1998 By: /s/ Gregg Gorelick ------------------------------ Gregg Gorelick Vice President-Controller (Principal Accounting Officer) 18 EX-27 2 QUARTERLY FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 16,157,000 0 21,778,000 (1,758,000) 5,853,000 9,088,000 191,746,000 (67,576,000) 356,258,000 33,216,000 355,000,000 0 0 0 (41,192,000) 356,258,000 1,570,000 126,887,000 14,526,000 27,186,000 50,043,000 0 17,717,000 6,936,000 (3,557,000) 3,379,000 0 0 0 3,379,000 0 0
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