-----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, NWWPq43/pd4KdyenoeFy3sJI1ux54ib9RS0jDzSWQxthYtRj/jd8kmkRUO4UYtY2 Crj4l5UC6/5zJ1b7heexMQ== 0000950172-99-000352.txt : 19990402 0000950172-99-000352.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950172-99-000352 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 000-19869 FILM NUMBER: 99581403 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-K 1 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.
Year Ended December 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ----------- ----------- -------------- -------------- (In thousands) ----------- -------------- -------------- Income statement data: 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: 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
- --------------- (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.
(In thousands) 1998 Three Months Ended ------------------------------------------------------------------ March 31 June 30 September 30 December 31 -------------- ------------- ----------------- ---------------- 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 ------------------------------------------------------------------ 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)
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
December 31 1998 1997 --------------------------------- Assets Current assets: 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 =================================
See accompanying notes.
CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and Subsidiaries Consolidated Statements of Operations Year ended December 31 1998 1997 1996 ----------------------------------------------------- Revenues: 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 =====================================================
See accompanying notes.
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 ------------------------------------------------------------------------------------------ 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) - $ - ------------------------------------------------------------------------------------------
See accompanying notes.
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 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
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:
December 31 1998 1997 ----------------------------------------- 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 =========================================
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:
December 31 1998 1997 --------------------------------------------- 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 =============================================
6. Accrued Expenses Accrued expenses consist of:
December 31 1998 1997 ---------------------- -- -------------------- 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 ====================== == ====================
7. Long-Term Debt Long-term debt consists of:
December 31 1998 1997 ---------------------- -- -------------------- 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 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:
Year ended December 31 1998 1997 1996 ----------------------------------------------------------- Current: 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 ===========================================================
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:
December 31 1998 1997 ------------------- -------------------- Deferred tax liabilities: 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 =================== ====================
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
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: 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.
EX-27 2 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 DEC-31-1998 JAN-01-1998 32,613,000 0 20,388,000 (1,582,000) 7,635,000 9,613,000 199,834,000 (74,412,000) 373,460,000 47,817,000 355,000,000 0 0 0 (38,514,000) 373,460,000 24,093,000 177,225,000 22,071,000 39,039,000 68,389,000 0 26,158,000 10,265,000 (4,208,000) 6,057,000 0 0 0 6,057,000 0 0
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