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, 1997
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. 19869-99
CORECOMM INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 13-3927257
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 East 59th Street, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 906-8485
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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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. [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates at March 20, 1998, valued in accordance with the Nasdaq Stock
Market's National Market closing sale price for the Registrant's common stock,
was approximately $183,027,000.
Number of shares of Common Stock outstanding as at March 20, 1998: 13,181,336
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Document Part of 10-K in which
Incorporated
Definitive proxy statement for the PART III
1998 Annual Meeting of the Stockholders
of CoreComm Incorporated
* * * * *
This Annual Report on Form 10-K for the year ended December 31, 1997, at the
time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents filed pursuant to Section 13, 14 and 15(d) of the
Securities Exchange Act of 1934 for purposes of any offers or sales of any
securities after the date of such filing pursuant to any Registration Statement
or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference this Annual Report.
"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 Registrant, or industry results, to be materially different from those
contemplated or projected, forecast, estimated or budgeted in or expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions, industry trends, the
Registrant'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, and availability, terms and deployment
of capital.
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TABLE OF CONTENTS
PART I PAGE
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Item 1 Business...................................................... 1
Item 2 Property...................................................... 18
Item 3 Legal Proceedings............................................. 19
Item 4 Submission of Matters to a Vote of Stockholders............... 19
PART II
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Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters................................... 20
Item 6 Selected Financial Data....................................... 21
Item 7 Management's Discussion and Analysis of Results
of Operations and Financial Condition......................... 22
Item 7A Quantitative and Qualitative Disclosures About Market Risk.... 26
Item 8 Financial Statements and Supplementary Data................... 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 28
PART III
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Items 10, 11, 12 and 13.................................................. 28
PART IV
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Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................... 28
Exhibit Index............................................................ 29
Signatures............................................................... 31
Index to Financial Statements............................................ F-1
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PART I
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ITEM 1. BUSINESS
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GENERAL
The Company, through wholly and majority 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 cellular and paging related operations
described below. From time to time the Company reviews opportunities in other
telecommunications related industries both inside and outside of Puerto Rico and
the U.S. Virgin Islands. A wholly-owned subsidiary of the Company was the high
bidder in auctions held by the Federal Communications Commission ("FCC") for
Local Multipoint Distribution Service ("LMDS") Block A licenses in 15 markets in
Ohio. See "-Local Multipoint Distribution Service." The Company's executive
offices are located at 110 East 59th Street, New York, New York 10022 and its
telephone number is (212) 906-8485.
Prior to January 31, 1997 (the "Merger Date") CoreComm Incorporated
("CoreComm" or the "Company") was known as Cellular Communications of Puerto
Rico, Inc. ("CCPR"). CoreComm is a Delaware corporation that was incorporated on
January 13, 1997. From its date of incorporation until the Merger Date CoreComm
was a wholly-owned subsidiary of CCPR. On the Merger Date CCPR effected a
corporate restructuring (the "Restructuring") whereby shareholders of CCPR
became shareholders of CoreComm on a one-for-one basis upon the completion of a
merger of CCPR with and into a subsidiary of CoreComm. As a result of the
Restructuring CoreComm replaced CCPR as the publicly traded entity and CCPR
became a wholly-owned subsidiary of CoreComm.
COMMONWEALTH OF PUERTO RICO
The Commonwealth of Puerto Rico has been a territory of the United States
since 1898 and a Commonwealth since 1952. Puerto Ricans are U.S. citizens with
non-voting representation in Congress, who cannot vote in national elections
unless they reside in the United States. The system of government is modeled
after the state governments of the United States, with an executive branch
headed by a Governor and a legislature consisting of a 27-member Senate and a
53-member House of Representatives. The judicial system is closely linked to the
United States system. Most United States laws apply in Puerto Rico and Puerto
Rico is under the jurisdiction of the First Circuit, United States Court of
Appeals, which maintains a United States District Court in Puerto Rico. Judicial
decisions may be appealed to the Supreme Court of the United States in the same
manner that decisions are appealed from state courts. The United States and
Puerto Rico also share common monetary, defense and postal systems.
The Commonwealth of Puerto Rico has a land area approximately 70 percent
the size of Connecticut and has a population of approximately 3.8 million
people. The population is concentrated primarily in the coastal regions, in
particular in the San Juan metropolitan area. Puerto Rico maintains a highway
and road network of approximately 8,600 miles, including a partially completed
all island beltway loop.
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THE U.S. VIRGIN ISLANDS
The U.S. Virgin Islands has been a territory of the United States since
1917. Virgin Islanders are U.S. citizens with non-voting representation in
Congress, who cannot vote in national elections unless they reside in the United
States. The system of government is modeled after the state governments of the
United States, with three main branches of government. The executive branch is
headed by a Governor, elected every four years through a direct vote. The
legislative branch consists of one chamber having 14 members. The judicial
system is closely linked to the United States system with a Territorial Court
that has jurisdiction over local matters and a United States District Court,
which falls under the jurisdiction of the Third Circuit, United States Court of
Appeals. Judicial decisions may be appealed to the Supreme Court of the United
States in the same manner that decisions are appealed from state courts. United
States Federal law applies in the U.S. Virgin Islands. The United States and the
U. S. Virgin Islands share common monetary, defense and postal systems.
The U.S. Virgin Islands has a land area of approximately 84 square miles
and has a population of approximately 102,000 people. The population is divided
in three islands: St. Thomas (with a population of approximately 46,000 people),
St. Croix (with a population of approximately 50,000 people) and St. John (with
a population of approximately 6,000 people).
CELLULAR TELEPHONE OWNERSHIP INTERESTS
The following table sets forth the Company's cellular Metropolitan
Statistical Area ("MSA") and Rural Service Area ("RSA") markets and approximate
percentage ownership as of March 20, 1998:
<TABLE>
<CAPTION>
MARKET POPULATION(1)(2) OWNERSHIP POPS (3)
------ ---------------- --------- --------
<S> <C> <C> <C>
San Juan/Caguas MSA............................ 2,124,891 100.00% 2,124,891
Aguadilla MSA.................................. 180,687 99.01 178,898
Mayaguez MSA................................... 227,941 100.00 227,941
Ponce MSA...................................... 261,585 100.00 261,585
Arecibo MSA.................................... 195,843 100.00 195,843
PR-1 Rincon RSA................................ 13,726 100.00 13,726
PR-2 Adjuntas RSA.............................. 276,517 100.00 276,517
PR-3 Ciales RSA................................ 126,052 100.00 126,052
PR-4 Aibonito RSA(4)........................... 295,140 100.00 295,140
PR-5 Ceiba RSA(5).............................. 42,172 0.00 0
PR-6 Vieques RSA............................... 8,975 100.00 8,975
PR-7 Culebra RSA............................... 1,598 100.00 1,598
U.S. Virgin Islands-1 St. Thomas/St. John...... 51,670 100.00 51,670
U.S. Virgin Islands-2 St. Croix................ 50,139 100.00 50,139
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Total..................................... 3,856,936 3,812,975
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</TABLE>
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(1) 1995 U.S. Census Bureau Population Estimates for Puerto Rico.
(2) 1990 U.S. Census Bureau Population Estimates for the U.S. Virgin Islands.
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(3) A cellular system operator's "pops" is currently the most common technique
for measuring the relative size of different companies in the cellular
telephone business. Pops are defined as the estimated population of a
market multiplied by a company's ownership interest in the entity operating
the system in that market. The number of pops owned by a cellular operator
does not represent the number of users of cellular service and is not
necessarily indicative of the number of potential subscribers. Rather, this
term is used only as a basis for comparison of the current size of cellular
system operators.
(4) In January 1998, a subsidiary of the Company acquired all of the assets of
Cellular Uno Limited Partnership, the entity that held the license to own
and operate the non-wireline system for PR-4 Aibonito-RSA.
(5) The Company has received interim operating authority in the PR-5 Ceiba RSA
from the FCC and from Puerto Rico authorities. In 1997, the U.S. Congress
directed the FCC to use the auction mechanism to grant permanent operating
authority with this and other RSA's if and when the FCC decided to grant
such licenses.
The Company had, as of December 31, 1997, an aggregate of approximately
196,400 subscribers which represents a penetration rate (i.e., the number of
subscribers divided by the total estimated population of the Company's markets)
for the Company of approximately 5.1% See "Sales and Marketing".
PAGING
A subsidiary of the Company has received authorization from the FCC to
operate two 900 MHz paging systems to serve Puerto Rico and the U.S. Virgin
Islands. The Company completed the construction of the Puerto Rico paging system
and began operations during March 1995. The Company completed construction of
the U.S. Virgin Islands paging system and began operations in November 1995. As
of December 31, 1997, the Company's paging operations had approximately 49,000
pagers in use.
SALES AND MARKETING
The Company attracts subscribers through direct and indirect distribution
channels and aggressive advertising. The Company relies on its direct sales
force, indirect channels such as dealers, retailers and resellers, sales
literature, sponsorship of local events, and substantial television, print and
radio advertising campaigns to create awareness of its services and to
communicate the benefits and promotional offers associated with them.
Sales are targeted at two primary segments: individual and corporate
accounts. Each segment has its own dedicated direct sales force. The Company
introduced prepaid service (primarily for low usage individual users) in 1997.
This payment option eliminates the necessity of credit checks and billing and
allows users to closely monitor their usage.
The Company has over 300 employees in sales and marketing functions. Direct
sales, including corporate accounts, represented over 60% of the Company's total
sales in 1997. The 180-person direct sales force is distributed among 12 fixed
sales and service centers throughout Puerto Rico and the U.S. Virgin Islands,
with five in San Juan/Caguas, one in Ponce, one in Fajardo, one in Arecibo, one
in Mayaguez and three in the U.S. Virgin Islands, as well as six kiosks located
in major shopping centers, 31 mini-kiosks inside large retail stores (e.g.,
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WalMart, Sams, Western Auto, Sears, Blockbuster Video) and four mobile units.
The sales and service centers are designed for up-market consumers, have
convenient hours of operation, and the ability to sell and service cellular
telephones while the customer waits. The sales and service centers also play a
major role in the Company's ability to provide superior customer service. See
"Customer Service". In addition, the Company utilizes a network of carefully
selected independent dealers and large retailers (such as Let's Talk Cellular)
which accounted for over 30% of the Company's new activations in 1997.
Currently, resellers account for only a small percentage of new activations.
The use of a broad mix of different distribution channels in Puerto Rico
gives the Company a widespread marketing presence and provides easy access to
its subscriber base while maintaining a high quality of service to its
subscribers. In addition, the Company's growing network of direct sales, dealers
and large retailers provide it with a strong presence in the telecommunications
market. The Company markets its services under the nationally recognized
CELLULAR ONE (registered trademark) brand name and its sales and marketing
strategy carefully promotes CELLULAR ONE (registered trademark)'s premium brand
image.
Although the Company employs a segmented pricing approach whereby specific
pricing plans are developed to attract different segments of the market, the
Company has differentiated itself from the Puerto Rico Telephone Company
("PRTC"), the Company's significant competitor and the landline telephone
service provider in Puerto Rico, primarily by offering premium services at
premium prices and directing significant efforts toward customer service,
technical excellence and advanced calling features. In contrast, the Company
believes that the PRTC has tended to compete on the basis of name recognition
and appeal to local sentiment. Centennial de Puerto Rico, Inc., a subsidiary of
Centennial Cellular Corp. ("Centennial") was a new Personal Communications
Systems ("PCS") entrant to the market in late 1996 and has competed successfully
with the Company and the PRTC on the bases of price and its all digital network.
CUSTOMER SERVICE
An important element in the Company's business strategy is to provide the
highest quality, localized customer service in the individual markets it serves.
This is especially significant because, in the Company's view, customer service
has not been emphasized by the PRTC.
The Company's commitment to superior quality service is reflected by the
92% overall satisfaction rating it received from its subscribers in an annual
independent survey of customer satisfaction conducted by the Cellular One Group
in 1997. This rating far exceeded the 85% United States national average.
The Company has introduced a full-service program utilizing customer
service representatives and local customer service centers in all of its major
markets. Customer service centers are located within existing sales and service
distribution outlets, offering a specific, non-sales-oriented point of contact
where existing customers can pay their bills, ask questions about their cellular
service or hardware, etc. In addition, the Company provides a 24-hour customer
service hotline. This full-service policy means that a customer service person
is available at all times to answer inquiries and to respond rapidly to customer
emergencies.
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The Company also employs a proactive, segment-driven approach to customer
retention and loyalty, beginning with a "welcome call" shortly after a
subscriber receives its first bill. Subsequently, each subscriber is classed
according to segment (corporate or individual), usage (high, medium, low),
tenure, payment history, etc., and subsequent contact patterns and methods
depend on a subscriber's class. This allows the Company to service and satisfy
its subscriber base according to their value to the Company in a cost effective
manner.
The Company proactively implements fraud detection and sophisticated
prevention mechanisms to protect its subscribers from fraud. In 1992 the Company
implemented fraud identification software and has recently implemented the
additional state-of-the-art fraud detection and prevention systems known as
fingerprinting and authentication. The Company has also taken a leading role in
the industry to educate the public about the growing problem of cellular
telephone fraud and how to detect and prevent its occurrence. In addition,
through its participation in the North American Cellular Network ("NACN"), the
Company is assured that only bona-fide subscribers enjoy roaming services.
CELLULAR TECHNOLOGY
Cellular mobile radio technology was developed to provide high quality,
high capacity mobile and portable telephone systems. In a cellular telephone
system, the service area is subdivided into smaller geographic areas or "cells."
Each cell has its own relatively low power transmitter and receiver that
communicates by radio signal with cellular telephones located in the cell. Each
cell is connected by microwave or telephone line to a mobile telephone switching
office ("MTSO"), which in turn is connected to the worldwide telephone network.
See "- Regulation - Federal Communications Commission Regulation" for the
interconnection arrangements with the worldwide telephone network.
When a cellular subscriber in a particular cell dials a number, the mobile
telephone sends the call by radio to the cell's transmitter/receiver, where it
is sent to the MTSO. The MTSO then completes the call through its connection
with the landline telephone network. Conversely, incoming calls are received by
the MTSO, which instructs the appropriate cell to complete the communications
link by radio signal between the cell's transmitter/receiver and the cellular
telephone.
The MTSO controls communications within the cellular system, including the
"hand-off" process as a cellular telephone moves from one cell to another. In
this process, the system recognizes that a cell boundary has been crossed, finds
an available channel in the new cell, and transfers the call to that channel -
all within a fraction of a second.
Cellular telephone systems have a high capacity because of the substantial
frequency spectrum generally allocated for the purpose of cellular service by
the FCC and because all frequencies can be reused throughout the system.
Frequency reuse is possible because the transmission power of cell site
equipment and mobile units is relatively low and signals on the same channel
will not interfere with each other if they are transmitted in cells that are
sufficiently far apart. Reuse multiplies the number of channels available to the
system operator and thereby increases the telephone calling capacity. A cellular
licensee may also use its cellular frequencies to provide paging, data
transmission, and other services so long as the provision of these services does
not impair its ability to provide cellular service, cause interference to other
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cellular licensees and, when required, has the appropriate regulatory approval.
NETWORK AND SYSTEM CONSTRUCTION
The Company's network was designed specifically for the Puerto Rico and
U.S. Virgin Islands markets using extensive geographic and engineering studies.
The Company continually updates its network in order to ensure quality service
and maximum geographic coverage. The Company has completed a network that as of
December 31, 1997, included approximately 99 cell sites and two MTSOs covering
over 90% of the population of Puerto Rico and the U.S. Virgin Islands.
Engineering and system construction is carried out by approximately 80
employees.
Cell sites are equipped with both analog and dual mode (i.e. digital or
analog cellular) radio transceivers. Digital Time Division Multiple Access
("TDMA") was originally installed in 1995 and commercially implemented in 1997.
Digital technology offers many advantages over analog technology, including
substantially increased capacity, lower costs and the opportunity to provide
enhanced services such as data transmission. In early 1997 the Company initiated
the use of an enhanced voice coder in its TDMA system. The enhanced voice coder
provides this system with improved voice quality. The Company has introduced and
distributed to selected groups of subscribers, including internal users, dual
mode phones using the TDMA format for digital signaling. Because existing analog
cellular telephones will not be able to receive digital transmissions from the
base station, the Company expects that the transition from analog to digital
will be phased in over a number of years, during which time the system will
maintain both analog and digital transmitting equipment and will thus be able to
serve both analog and digital forms of cellular telephones and transmitting
equipment.
In order to hasten cell site commissioning, increase network reliability
and reduce ongoing operating costs, the Company has built its own digital
microwave transmission network to connect its cell sites and switches. The
backbone of the network is a ring around the mountainous regions of the island,
providing substantial capacity (135 Mb/sec). The ring network provides redundant
communication paths to ensure minimal network disruption in the event of a cell
site outage and spurs provide at least 6 Mb/sec of capacity to each cell site.
The Company resells spare capacity on this network to major telecommunications
users.
In 1997, the Company began to use a Network Management Center ("NMC")
provided by C-Net, Inc. The NMC enables the Company to monitor the entire system
on a 24 hour basis and allows for nearly instant detection of any system
malfunction or failure.
The Company uses a Computer Automated Design system to choose the proper
network configuration that will provide maximum capacity and service reliability
in the island's heavily populated coastal areas. The design is based on the ring
network concept, which provides a good fit with Puerto Rico's topography. In
addition, to test the network design, the Company uses a performance testing
system to predict and measure signal levels. By utilizing sophisticated network
design and system testing techniques, the Company's completed network provides
similar geographic coverage to the PRTC with fewer cell sites and with greater
service reliability.
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Cellular systems are capital intensive, requiring significant levels of
investment for equipment, construction and cell site acquisition. As of December
31, 1997, the Company had operating plant and equipment and
construction-in-progress with an historical cost of approximately $142,000,000.
INTERCONNECTION AGREEMENT
Effective September 2, 1997, after negotiations between PRTC and the
Company and arbitration by the Telecommunications Regulatory Board of Puerto
Rico, the Company and PRTC entered into an interconnection agreement. The
agreement is for a two year term. The agreement establishes the rate at which
the Company will pay PRTC for calls placed by the Company's subscribers to
PRTC's customers. In addition, the agreement provides that PRTC is obligated to
pay the Company the same amount for calls made by its customers to the Company's
subscribers. This agreement reflects a reduction in the Company's
interconnection rate of almost 50% and, unlike the previous contract between the
parties, requires PRTC to pay the Company for calls originated on PRTC's
network. Moreover, the Company is no longer required to pay PRTC for the
telephone numbers the Company supplies to its customers.
The interconnection agreement gives PRTC the right to assess long-distance
toll charges on any of its own customers who call from outside the Metro area to
any of the Company's subscribers. The agreement further provides, however, that
PRTC will not assess such charges on its customers if the Company either agrees
to assume the long distance charges or if the Company interconnects with, and
picks up PRTC's incoming calls, at each of the 17 host end offices outside the
Metro area. The Company chose the option of end office interconnection but, in
November 1997, before PRTC installed such points of interconnection, PRTC began
assessing, retroactively to September 2, 1997 and without warning to its
customers, toll charges to its customers who had placed calls to the Company's
subscribers. By December 17, 1997, PRTC had installed all the point of
interconnection requested by the Company. On December 24, 1997, the Board ruled
that PRTC had violated its good faith duty to its customers by assessing charges
to them retroactively and without any advance notice. Accordingly, the Board
ordered PRTC to refund any payments already collected and to cease and desist
from attempting to collect charges not yet rendered. PRTC subsequently filed a
complaint in Federal District Court for the District of Puerto Rico against the
Board and the Company and asked for a preliminary injunction. Both the complaint
and preliminary injunction request remain pending. The Company believes there is
no merit to PRTC's lawsuit and intends to defend itself vigorously.
SOURCES OF REVENUE
The cellular mobile telephone services available to customers and the
sources of revenue available to a system operator are similar to those available
with standard home and office telephones. Cellular telephone subscribers are
generally charged separately for monthly access, air time, toll calls and custom
calling features such as voice mail, call forwarding, call waiting and third
party conferencing. Cellular telephone subscribers are generally responsible for
purchasing or otherwise obtaining their own cellular mobile telephone. The
Company introduced prepaid service (primarily for low usage individual users) in
1997. This payment option eliminates the necessity of credit checks and billing
and allows users to closely monitor their usage. Paging subscribers are charged
on a monthly basis for service and are generally
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responsible for purchasing their own pager. The Company also generates some
revenue from the resale of its digital microwave transmission network.
When service is provided to "roamers" (i.e., registered customers of a
cellular system other than the Company's cellular system who place calls on the
Company's cellular system), the Company charges a daily access fee and the
roamer air time rate, which is typically higher than standard usage rates.
Roaming is an added service offered by the Company which allows a customer to
place or receive a call in a cellular service area away from the customer's home
market area. The Company has entered into "roaming agreements" with operators of
other cellular systems covering most of the United States cellular systems.
These reciprocal agreements allow a subscriber of a participating system to roam
or travel into a Company market and make and receive calls on the Company's
system. The charge for this service is billed by the Company to the subscriber's
home system, which then bills the subscriber. Roamers from systems that do not
participate in this arrangement are routed to an outside service bureau which
completes the call upon the receipt of a valid credit card number. The Company
receives a fee from the service bureau for each completed call. The Company
provides roaming services under the NACN, which allows calls to and from roamers
from systems who participate in NACN to be delivered automatically without the
use of access codes. NACN also provides such roamers the ability to use their
custom calling features in roaming markets.
The cellular telephone industry is typically characterized by high fixed
costs and low variable costs. Therefore, once revenues exceed fixed costs,
incremental revenues should yield a high incremental operating profit. In
addition, once initial system capacity has been reached, additional cellular
system capacity can be added in increments that closely match demand and at less
than the proportionate cost of the initial capacity.
PATENTS, COPYRIGHTS AND LICENSES
The Company does not have any patents or copyrights nor does the Company
believe patents or copyrights play a material role in its business. Other than
the Company's FCC licenses, the Company's only license is for the use of the
service mark and trademark CELLULAR ONE (registered trademark), which is also
licensed to many of the non-wireline systems in the United States. In 1992, the
owners of such mark entered into a new agreement with the Company, with an
effective twenty-year term, under which the Company is required to maintain
certain service quality standards. Under this agreement, the Company is required
to pay licensing and other fees for the use of the service mark. The total fees
paid in the year ended December 31, 1997 were $216,000, which were determined by
the size of the Company's markets.
COMPETITION
FCC rules formerly provided that two licensees will be authorized to
provide wireless communications service in each market. PRTC is one of the
licensees (the "Wireline Licensee") in each Puerto Rico market. VitelCellular,
Inc., an affiliate of Virgin Islands Telephone Company (the provider of landline
telephone service in each market in the U.S. Virgin Islands) is the Wireline
Licensee in each U.S. Virgin Islands market. The second authorization in each of
Puerto Rico and the U.S. Virgin Islands was available for applications by a
non-telephone company carrier (the "Non-Wireline Licensees"). The Company is a
Non-Wireline Licensee. The FCC's regulation of cellular system licensing,
construction and operation
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is substantially the same for both the Non-Wireline Licensee and the Wireline
Licensee. Each Licensee is assigned 25 megahertz of the radio spectrum, which is
further divided into 416 two-way channels. Given the cellular market duopoly,
the Company faces facilities-based competition in each of its Puerto Rico
markets from the PRTC and in each of its U.S. Virgin Islands markets from
VitelCellular, Inc. Although the cellular services offered by the Company, the
PRTC and VitelCellular, Inc. are similar in terms of price, the Company has
attempted to differentiate itself from the PRTC and VitelCellular, Inc. by
directing significant efforts toward customer service, technical services and
calling features.
The PRTC and VitelCellular, Inc. are significantly larger and better
capitalized than the Company. The Company believes the PRTC currently provides
service to less than approximately 40% of the subscribers of wireless service in
Puerto Rico. In the U.S. Virgin Islands, the Company believes that
VitelCellular, Inc. currently provides service to approximately 45% of the
subscribers of cellular service in the U.S. Virgin Islands. In Puerto Rico,
Centennial, a competitor using PCS frequencies, had approximately 15% of the
wireless market at year end 1997.
In 1990, the Commonwealth of Puerto Rico attempted to sell the PRTC to an
independent third party, but did not consummate such a transaction. In 1997, the
Commonwealth announced that it intended to restart this process and indicated
that it intended to complete such sale by the end of 1998. Such sale could be to
another experienced cellular operator or to a telecommunications company, such
as an affiliate of a Bell Operating Company. Given that the FCC-defined markets
and the technical standards are the same for both licensees in a market, the
Company believes that its ability to make and implement decisions rapidly and
its customer service oriented strategy should enable it to compete effectively
with the PRTC or any other competitor.
Broadband PCS has become increasingly competitive with cellular services.
Broadband PCS is a digital, wireless communications service consisting of a
variety of new mobile and portable services and technologies, such as small,
lightweight telephone handsets that work at home, in the office, or on the
streets; portable, wireless facsimile machines; wireless electronic mail
services; advanced paging techniques; and other wireless communications
services. Broadband PCS providers are deploying a large number of low power base
stations to take advantage of the radio propagation characteristics of the 2 GHz
spectrum. Accordingly, more PCS base stations than cellular base stations are
needed to cover a particular area, although PCS facilities cost less than
comparable cellular facilities.
The FCC completed the first auction process for broadband PCS in March
1995. In the Puerto Rico-Virgin Islands MTA, the three high bidders were AT&T,
Centennial and PCS 2000, now known as Clear Comm, Inc. Centennial began
marketing its PCS services in December 1996 and as of December 31, 1997 had
approximately 55,000 subscribers. Centennial's network provides a single
seamless system substantially overlapping the Company's system. None of the
other PCS licensees have commenced operations, although AT&T has begun limited
construction.
In the D-F block PCS auction, the PRTC and VitelCom, Inc., an affiliate of
VitelCellular, Inc., each purchased 10 MHz licenses that cover their respective
cellular service
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areas. Accordingly, after the FCC completes the licensing process, each of these
companies will hold 35 MHz of wireless spectrum in their regions. The remaining
D, E, and F blocks PCS licenses were acquired by entities which include Sprint
Communications Inc. and Omnipoint Corp. in Puerto Rico and the U.S. Virgin
Islands.
In total, the FCC awarded six broadband PCS licenses by auction in each
market, with each licensee holding either 10 MHz, 20 MHz, 30 MHz, or 40 MHz of
spectrum in service areas larger than most individual cellular markets. Eligible
entities are permitted to aggregate up to 45 MHz of commercial mobile radio
services spectrum in any given area. Thus, the Company, the PRTC, and
VitelCellular, Inc. are eligible to own 20 MHz each of PCS spectrum in their
cellular markets. Like cellular licensees, PCS licensees will also be permitted
to aggregate markets to create regional and national systems. In addition, the
FCC recently modified its rules to permit broadband PCS licensees to
disaggregate their spectrum or geographically partition their service areas.
Therefore, the auction winners in Puerto Rico and the U.S. Virgin Islands may
now sell blocks of their spectrum or portions of their service areas to other
competitors.
The FCC has also issued local and nationwide licenses in the 220-222 MHz
band for the provision of land mobile service. These licenses are expected to
provide various one-way acknowledgment, and certain two-way voice and data
services. Further, the FCC has completed the licensing of "narrowband PCS" in
the 900 MHz band, which includes, among other services, data messaging, advanced
one-way and two-way paging, and facsimile. The messaging and paging services are
expected to include electronic mail and digitized voice messages. These licenses
were issued by auction on a local, regional, and national basis, including in
the Company's markets. Narrowband PCS will likely be competitive with the
Company's paging operations.
Cellular telephone systems also face competition from specialized mobile
radio ("SMR") systems. Although the rules for SMR service permit interconnection
with the landline network, the Company believes that SMR has been most effective
as a two-way radio (i.e., dispatch) service. The FCC promulgation of certain
rules have permitted SMR companies to overcome certain regulatory limitations
and replace analog SMR systems with advanced digital mobile systems known as
enhanced SMR ("ESMR"). In 1995 the FCC adopted rules applicable to SMR services
in both the 800 and 900 MHz bands that facilitate the growth of seamless
regional or national SMR systems. The FCC established 175 economic-areas ("EAs")
as the geographic area for licensing the upper 10 MHz block of the 800 MHz SMR
band and provided for 3 SMR licenses (120, 60, and 20 channel blocks) per EA for
a total of 525 EA licenses. The FCC established a licensing scheme which divided
the 900 MHz band into 20 ten-channel blocks in each of 51 MTAs. Similar to other
commercial wireless services, 800 Mhz and 900 MHz SMR licensees may construct,
operate or modify systems without obtaining prior FCC approval. The FCC has
tentatively scheduled an auction for the lower 80 MHz block of 800 MHz SMR
spectrum and "general category" channels for the third quarter of 1998. In
addition, the FCC has tentatively scheduled an auction of 220 MHz SMR licenses
for May 19, 1998. The auction will consist of 908 licenses (3 nationwide, 30
regional economic-area groupings and 875 EA).
Technological advances in the communications field continue to make it
impossible to predict the extent of future competition for cellular services.
For example, the FCC has licensed four mobile satellite systems in which
transmissions from mobile units to satellites
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would augment or replace transmissions to cell sites. There are a number of
large, well-financed entities involved in the mobile satellite business. One
international investment consortium, Iridium LLC, has stated its intent to
provide a cellular-type telephone service via satellite technology that will be
available anywhere in the world beginning in September 1998. Iridium also plans
to offer a means of roaming among the world's major ground-based cellular phone
standards. Other mobile satellite service providers are expected to include
Globalstar LP, which has announced its intention to be in operation by 1999, and
ICO Global Communications LP. The FCC has also authorized Basic Exchange
Telecommunications Radio Service to make basic telephone service more accessible
to rural households and businesses.
Further, various other FCC rulemaking proceedings may affect the manner in
which radio frequency spectrum will be allocated among the various potential
competitors of cellular service. For example, the FCC has adopted rules
allocating 25 MHz below 5 GHz for commercial fixed and mobile radio services
which could eventually compete with cellular. The FCC has also adopted rules
allocating a portion of the spectrum above 40 GHz for commercial radio service
some of which could compete with cellular. There can be no assurance that
existing cellular operators will be permitted to receive licenses for such
spectrum, or that the adoption of auctions would not increase the cost to the
Company of obtaining such licenses or their renewal. In addition, 30 MHz of
spectrum in the 2.3 GHz band has been licensed for wireless communication
services ("WCS"), and the FCC has adopted rules permitting licensees to offer
virtually any wireless service on this band, subject to specific technical rules
to prevent interference with services in adjacent bands. Because the FCC has
adopted restrictive out-of-band emission limits for WCS spectrum, which it
believes will render WCS spectrum technologically infeasible for mobile
operations, WCS licensees will probably not present significant competition to
the Company's operations for the foreseeable future. Other technological
advances or regulatory changes in the future may make available other
alternatives to cellular service, thereby creating additional sources of
competition.
LOCAL MULTIPOINT DISTRIBUTION SERVICE
The FCC has allocated two blocks of frequencies in the 28 GHz and 30 GHz
bands for Local Multipoint Distribution Service ("LMDS"): Block A, with 1,150
megahertz of spectrum, and Block B, with 150 megahertz. Each block of LMDS
spectrum will be licensed in each of 493 Basic Trading Areas ("ETAs") and
BTA-like areas in the United States and its territories. Licenses will be
awarded to the high bidders in a simultaneous multiple-round auction that began
on February 18, 1998. The FCC has adopted liberal service rules for LMDS,
permitting any type of two-way communications service on a common carrier or
private basis. Because of the propagation characteristics of frequencies in
these bands, LMDS is not expected to be used for mobile communications, but is
expected to be viable for the transmission of voice, data, and video between
multiple fixed points. Plans for LMDS include the use of "cells" that permit
frequency reuse within BTAs. One LMDS operator has been using the Block A
frequencies to provide multichannel video service in portions of New York City
and intends to implement telecommunications services there in the future.
Because LMDS may develop into a competitor to local exchange telephone service
or cable service or both, incumbent local exchange carriers ("LECs") and cable
operators are prohibited from owning Block A LMDS licenses for three years.
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A subsidiary of the Company, Cortelyou Communications Corp. ("Cortelyou"),
participated in the LMDS auction and was high bidder for Block A licenses in 15
markets in Ohio totaling approximately 10.5 million Pops for approximately $25
million. Other bidders included affiliates of wireless telecommunications
carriers, LECs, and Competitive Local Exchange Carriers ("CLECs") as well as
start-up companies, some of which were organized by experienced communications
executives. The auction rules provided bidding credits of up to 45% for
participants that had, along with their controlling principals and affiliates,
revenues below certain levels. Cortelyou did not qualify for any bidding credit.
Auction participants were required to submit upfront payments that determined
bidding eligibility. In February 1998, Cortelyou submitted an upfront payment of
$20 million. FCC rules require high bidders to submit a down payment of 20% of
their total bids, adjusted for bidding credits, shortly after the completion of
the auction. Funds submitted as upfront payments may be credited toward the down
payment. High bidders must also submit "long form" applications demonstrating
their qualifications to hold the licenses they have won at auction. The
remaining amount of the high bids must be paid within ten business days of the
announcement by the FCC that long form applications are acceptable and it is
prepared to grant licenses.
The Company expects that LMDS licensees will use the A Block spectrum for
the provision of various voice, data, video, and Internet services to businesses
and homes. Such services will be provided in competition to LECs and cable
operators who have established networks and customers and who have greater
resources than the Company. Nevertheless, recent changes in telecommunications
regulation initiated by the Telecommunications Act of 1996 (the "1996 Act") are
intended to promote the development of competition in telecommunications and
multichannel video distribution services.
REGULATION
Federal Communications Commission Regulation. The Communications Act of
1934 (the "Communications Act") requires cellular system, paging system and
microwave station operators such as the Company to obtain authorization from the
FCC prior to constructing or operating their systems.
For cellular licensing purposes, the FCC divided the United States,
including Puerto Rico and other areas under the FCC's jurisdiction, into
separate geographic markets, known as MSAs and RSAs. Licenses have been issued
in all 306 MSAs and in all 428 RSAs. There are no pre-designated microwave
markets. Applicants may apply for microwave licenses anywhere they seek to
provide microwave services, provided that operation of the microwave facility at
that location will not cause interference to other parties.
When the initial phase of a cellular system has been constructed in an
authorized manner, the licensee is required to notify the FCC that construction
has been completed before it is authorized to offer commercial service to the
public. The licensee then is said to have "operating authority" and is issued an
operating license. The Company has obtained operating authority for each of its
currently operating cellular systems. Initial licenses are granted for 10-year
periods and are renewable upon application to the FCC for periods of 10 years.
The Company's initial operating licenses for its systems were issued in
1988 through 1993. Licenses may be revoked and license renewal applications
denied for cause. Prior
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to the expiration of its license term, each cellular licensee seeking renewal
must file an application. Other parties seeking authorization to serve the
licensee's market may also file competing applications. The FCC has ruled that
an incumbent licensee would receive a "renewal expectancy" if, during its
license term, (i) its performance has been "substantial," defined as "sound,
favorable, and substantially above a level of mediocre service;" and (ii) it had
substantially complied with applicable FCC rules, policies, and the
Communications Act. The FCC may award an incumbent its license renewal and not
require a full comparative hearing if the incumbent qualifies for a renewal
expectancy. If the licensee does not qualify for a renewal expectancy, the FCC
will consider all competing applications in a comparative hearing. The FCC may
grant an uncontested renewal application without conducting a comparative
hearing or finding a renewal expectancy. There can be no assurance that a
license will be renewed.
On January 22, 1998, the Company successfully renewed its licenses for the
Ponce and Mayaguez MSAs for additional ten year terms. During 1998, the Company
will apply for renewal of its licenses in the San Juan and Aguadilla MSAs, to
which it does not expect any significant challenge.
The FCC has adopted regulations regarding auctions for the award of radio
spectrum licenses. Pursuant to such rules, the FCC at any time may require
auctions for new or existing services prior to the award of any license.
Accordingly, the Company can give no assurance with respect to its continued
ability to procure additional frequencies or to expand existing services using
frequencies for which the Company is licensed into new geographic areas.
Under FCC rules, the authorized cellular service area for the Company in
each of its markets is referred to as the "cellular geographic service area" or
"CGSA". The boundaries of the CGSA are determined by a mathematical formula that
is a function of transmitting station effective radiated power and antenna
height. The CGSA may be coincident with, smaller than, or in some cases larger
than the related MSA or RSA boundary. The right to serve areas which fall within
the licensee's MSA or RSA but outside of its CGSA is exclusive to such licensee
for a period of five years from the grant of its initial construction permit. As
licensees serve such areas, their CGSAs will be extended to cover the additional
served areas inside the MSA or RSA and, in some cases, area beyond the MSA/RSA
boundary. Although overlapping service areas are common, under rules adopted by
the FCC in 1993, service area extensions into the CGSA of a neighboring system
on the same frequency block must be withdrawn from such CGSA at the request of
the neighboring licensee. At the conclusion of the initial five-year
construction period any entity, including the licensee, may file with the FCC an
application to serve the "unserved areas," of that MSA or RSA which are outside
of the licensee's CGSA, subject to certain restrictions. The Company has
determined that there are no significant unserved areas within its licensed
markets.
The Communications Act requires telecommunications common carriers to file
and maintain with the FCC tariffs describing rates, terms and conditions under
which their international and certain interstate telecommunications services are
offered to the public. Accordingly, the Company must file tariffs for certain
telecommunications services that it proposes to offer.
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The FCC's rules also prohibit common carrier licensees from imposing
restrictions on the resale of service by third parties who purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public. The Company currently provides service to third party resellers. The FCC
recently extended this nondiscriminatory resale requirement to broadband PCS and
certain SMR licensees. Further, under this new policy, all resale obligations
for cellular, broadband PCS and SMR operators will terminate five years after
the date that the last group of initial PCS licenses are granted.
On February 8, 1996, Congress enacted the 1996 Act, which effected a
sweeping overhaul of the Communications Act. In particular, the 1996 Act
substantially amended Title II of the Communications Act, which governs common
carriers. The 1996 Act imposes a duty on all telecommunications carriers,
including cellular, to interconnect with the facilities of other
telecommunications carriers. Only incumbent LECs are required to provide
"direct" interconnection with their facilities, however. In addition, the 1996
Act requires that interconnection be the subject of good faith negotiations
leading to voluntary agreements that must be filed with and approved by state
commissions. Moreover, the 1996 Act establishes certain guidelines for the
manner in which LECs may charge for providing interconnection services (e.g.,
tandem switching, transport and termination) and provides that LECs must pay
wireless providers, including cellular and paging operators, for termination of
landline-originated calls. On September 2, 1997, the Company entered into a new
interconnection agreement with the PRTC.
In exchange for opening their local loops to competition, the 1996 Act
permits the Bell Operating Companies ("BOCs"), which previously had been
prohibited from providing interLATA services (i.e., long distance services), to
provide such services, including, but not limited to, the provision of interLATA
services in connection with commercial mobile radio service ("CMRS"). In
addition, the 1996 Act permits registered public utilities to provide cellular
and other telecommunications services through separate affiliates authorized by
the FCC as "exempt telecommunications companies."
As directed by the 1996 Act, in August 1996, the FCC issued comprehensive
rules regarding the introduction of competition into the local telephone market.
These rules address most aspects of the provision of competitive local telephony
services from both facilities-based and non-facilities-based competitors,
including cellular and paging operators. The rules address the process by which
potential competitors negotiate with incumbent telephone companies for
interconnection, the facilities that must be available for interconnection, the
use of components of the incumbents' networks (referred to as "unbundled
access"), the resale of services of others, and the pricing of interconnection
and other services and facilities used for offering competitive local telephone
services. The rules also provide that incumbent LECs, such as the PRTC and the
Virgin Islands Telephone Company, must begin paying the Company and other
wireless providers immediately for terminating landline-originated traffic on
the wireless facilities.
A number of parties appealed the FCC's order adopting its interconnection
rules in Federal court seeking to vacate some or all of the rules. In a July 18,
1997 decision, the United States Court of Appeals for the Eighth Circuit vacated
significant portions of the Interconnection Order, including its provisions
governing the pricing of local telecommunications services and unbundled network
elements, certain of its unbundling requirements and its "pick and choose"
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provision (which enabled a telecommunications carrier to demand any term of an
incumbent LEC's ("ILEC's") interconnection contract with another carrier). The
Eighth Circuit's October 14 decision vacated an FCC rule that obligated ILECs,
under certain circumstances, to provide combinations of network elements, rather
than provide them individually. This decision may make it more difficult or
expensive for competitors to use combinations of ILEC elements. The FCC,
numerous interexchange carriers ("IXCs") and various other parties filed
petitions for certiorari with the U.S. Supreme Court, which accepted the case
for review on January 26, 1998. The Supreme Court is not expected to issue a
decision before the end of 1998. Some of the same parties and certain other
parties also have asked the FCC to reconsider these and other regulations
implementing the Telecommunications Act. On January 22, 1998, the Eighth Circuit
Court of Appeals ruled that the FCC cannot apply its local competition pricing
rules in reviewing applications of the BOCs for authorization to provide long
distance service that originates and certain long distance services that
terminate in one of their in-region states. If upheld, this decision could make
it somewhat easier for the BOCs to enter the market for in-region long distance
services.
On December 31, 1997, a U.S. District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271, which prohibits BOCs from providing long distance service that
originates (or in certain cases terminates) in one of its in-region states until
the BOC has satisfied certain statutory conditions in that state and has
received the approval of the FCC. This decision would permit the three BOCs that
are parties to the case immediately to begin offering widespread in-region
long-distance services. The District Court has granted the request of the FCC
and certain IXCs for a stay, and the FCC and certain IXCs have filed appeals of
the decision with the U.S. Court of Appeals for the Fifth Circuit.
Following enactment of the 1996 Act, no CMRS providers, including those
owned or affiliated with BOCs, are required to provide equal access to long
distance service providers. The 1996 Act, however, does permit the FCC to impose
rules requiring CMRS providers to afford subscribers unblocked access to a long
distance provider of their choice through the use of carrier identification
codes or other mechanisms, but only if the FCC determines that cellular and
other CMRS subscribers are being denied access to their chosen long distance
providers and that such denial is contrary to the public interest. It cannot be
predicted whether the FCC will subsequently order cellular carriers and other
CMRS providers to provide such unblocked access.
The overall impact of the 1996 Act on the business of the Company is
unclear and will likely remain so for the foreseeable future. The Company may
benefit from reduced costs in acquiring required communications services, such
as LEC interconnection. However, other provisions of the 1996 Act relating to
interconnection, telephone number portability, equal access and resale could
subject the Company to increased competition.
In addition, pursuant to the 1996 Act the FCC issued new regulations in
1997 regarding the implementation of the universal service program. In 1998, the
FCC established a nationwide universal service fund ("USF") to subsidize
telecommunications carriers operating in high-cost and rural areas and to help
provide telecommunications services to schools and libraries. The company has to
pay into the federal high cost/rural fund based upon its interstate gross
revenues and into the school/libraries fund based upon its interstate and
intra-island gross
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revenues. The government will reassess the contribution factors for each fund on
a quarterly basis. The company's first quarter contribution was approximately
$279,000. The company might seek to be certified as eligible to receive money
from the USF by the Puerto Rico Telecommunications Regulatory Board (the
"Board"). To do so, it must provide certain services to customers in specified
areas in Puerto Rico.
Puerto Rico is currently eligible for contributions from the high
cost/rural USF in the amount of approximately $110,000,000. On January 1, 1999,
all non-rural telephone companies will receive support from the federal fund
based on forward-looking, rather than historical, costs. In addition, the
federal government will cover only 25% of the costs and states are expected to
collect remaining 75% by establishing state universal service funds. PRTC has
estimated that, under the FCC's forward looking proxy models, Puerto Rico's
federal universal service funding would decrease to anywhere between $171,000
and $9,000,000. In that case, the Board would likely establish its own USF
program. Given the small number of carriers operating in Puerto Rico, each
carrier's contribution to the Puerto Rico fund would probably be significantly
larger than the current contributions to the federal fund. For this reason, PRTC
has requested that the FCC continue to provide Puerto Rico with the funding at
current levels until 2001, the date on which rural carriers are required to
begin the transition to a forward-looking cost methodology and participate in
the 25%-75% federal/state split. It cannot be predicted how the FCC will rule on
PRTC's request.
Subsidiaries of the Company also hold point-to-point common carrier
microwave licenses to transport the Company's traffic. These licenses have been
issued by the FCC for specified terms, and the licensed facilities, as well as
proposed new microwave facilities, must be authorized by the FCC and operated in
accordance with the FCC regulations. FCC rules had provided for a universal
expiration date every 10 years for all common carrier microwave licenses,
regardless of when they had been issued, with the next expiration occurring in
February 2001. Under new rules that became effective in August 1996, licensees
may select either a full 10-year license term dating from the original issuance,
modification or renewal of license or a term of less than 10 years to allow for
consolidated renewal application filings. Microwave renewal applications are not
subject to comparative proceedings. There can be no assurance that a license
will be renewed.
Alien Ownership. Section 310(b) of the Communications Act places
significant restrictions on alien ownership in and involvement with any
companies that use electromagnetic spectrum frequencies under the FCC's
broadcast or common carrier authority. Section 310(b)(3) of the Communications
Act places an absolute prohibition on aliens owning or voting more than 20
percent of the capital stock of any corporation holding such a license. Section
310(b)(4) prohibits aliens from owning or voting more than 25% of the capital
stock of any holding company of such a corporate licensee. The FCC has statutory
discretion to refrain from applying the holding company proscriptions of Section
310(b)(4) in a particular case if it determines that doing so would not
adversely affect the public interest. Since February 9, 1998, FCC rules have
provided for a rebuttable presumption that greater than 25% indirect ownership
or control of a common carrier licensee by citizens or companies from a country
that is a signatory to the Telecommunications Annex to the World Trade
Organization General Agreement on Trade in Services ("WTO Agreement") serves the
public interest. With regard to investors from countries
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that are not signatories to the WTO Agreement, the FCC continues to apply an
"effective competitive opportunities" ("ECO") test. Under this ECO test, if U.S.
investors are permitted to own an interest greater than 25% in a communications
carrier offering similar services in the alien investor's home market and such
market satisfies certain other open competition criteria, the FCC will generally
permit that alien to own an equivalent interest in a U.S.-licensed common
carrier. Other factors, such as the promotion of competition in the U.S. market
and U.S. national security concerns, may affect this determination. Through
examination of a recent list of the record holders of the outstanding stock, the
Company is not aware of alien ownership of its outstanding stock that would
cause it to be in violation of the Communications Act. However, a large
percentage of the Common Stock is held in nominee name and, accordingly, the
Company is not aware of the citizenship of the actual beneficial owners of such
shares.
Puerto Rico and U.S. Virgin Islands Regulation. On September 12, 1996, the
Governor of Puerto Rico signed into law Puerto Rico Bill 1500, the Puerto Rico
Telecommunications Act of 1996 ("P.R. Telecom Act"). The P.R. Telecom Act
created the Board. The Board has primary regulatory jurisdiction in Puerto Rico
over all telecommunications services, all service providers, and all persons
with a direct or indirect interest in said services or providers. On October 17,
1996, the three members of the Board, having been selected by the Governor of
Puerto Rico, were sworn in. Among other things, the P.R. Telecom Act provides
the Board with the power to guarantee the availability of universal service,
ensure the reliability of telecommunications services, guarantee services to
rural areas, and promote competition. In this regard, the law requires all
providers of telecommunications services, except commercial mobile radio
services providers, to obtain certification to do business in Puerto Rico and
directs the Board to adopt regulations specifying the form, contents, and
procedures for such certification. Entities must be certified to obtain access
to government-owned property or notice of proposed Board regulations. In
addition, the P.R. Telecom Act provides interconnection to the PRTC's facilities
at any technically feasible point in PRTC's networks at cost-based rates. The
P.R. Telecom Act requires that telecommunication carriers provide detailed
instructions regarding the procedures for interconnection between the PRTC and
other telecommunications providers. Finally, the P.R. Telecom Act requires
telecommunications providers to submit fee and price lists to the Board and
gives the Board jurisdiction to impose fines if rates to end users are not
cost-based.
On March 2, 1998, the FCC approved the withdrawal by the Company of a
petition which it had filed with the FCC alleging, among other things, that the
P.R. Telecom Act constitutes impermissible regulation of CMRS providers by
enacting numerous statutory provisions that operate as barriers to entry and to
the continued participation of CMRS providers in Puerto Rico.
The foregoing does not purport to be a complete summary of all the
provisions of the Communications Act or the 1996 Act or the regulations and
policies of the FCC promulgated thereunder or of all the provisions of the
applicable Puerto Rico and U.S. Virgin Islands local laws, regulations or
policies that relate to cellular telecommunications services.
Other Regulation; Safety. In addition to FCC and other regulatory approvals
discussed above, the siting and construction of the cellular transmitter towers
and antennas are
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subject to certain Federal Aviation Administration ("FAA") regulations. The
Company has obtained FAA clearance for the construction of antenna structures
where such approval is necessary. The siting and construction of cellular
communications facilities requires land use and construction approval in Puerto
Rico and in the U.S. Virgin Islands. In the past the Company has experienced
delays in receiving the required approvals in Puerto Rico. The 1996 Act
prohibits the FCC from preempting local and state regulations of the siting and
construction of antenna towers for commercial mobile radio service providers
except in certain limited circumstances.
Media reports have suggested that certain radio frequency emissions from
portable cellular telephones might be linked to cancer. The Cellular
Telecommunications Industry Association, as a result of industry concern, has
asked the Federal Food and Drug Administration and the Environmental Protection
Agency to appoint a panel of experts to review and revalidate the previously
existing research that established the safety of cellular telephones, and which
had resulted in an FCC determination in 1987 that microwave and cellular radio
transmissions did not pose a material health hazard. The FCC enforces standards
governing the emission of electromagnetic frequencies, including those used by
cellular systems and portable cellular telephones. The Company believes that its
facilities and all cellular telephones currently marketed and in use by its
subscribers comply with those standards.
CUSTOMER DEPENDENCE AND SEASONALITY
The Company is not dependent upon any single customer for any significant
portion of its business. The Company's business, as well as the cellular
communications industry, is not generally characterized as having a material
seasonal element and it is not expected to become seasonal in the foreseeable
future.
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had an aggregate
of approximately 750 employees. No employees are represented by any labor
organization. The Company believes that its relationship with its employees is
excellent.
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.
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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
- --------------------------------------------------------
No matter was submitted to a vote of security holders of the Company during
the quarter ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
- -------------------------------------------------------------------------
CoreComm's Common Stock began trading on the Nasdaq Stock Market's National
Market on February 3, 1997, under the Nasdaq symbol "COMM". CoreComm is the
successor issuer to Cellular Communications of Puerto Rico, Inc. whose common
stock traded under the Nasdaq symbol "CCPR" from February 28, 1992 until January
31, 1997. The following table sets forth for the periods indicated, the high and
low last sale prices on the Nasdaq Stock Market's National Market.
LAST SALE PRICE
HIGH LOW
----------------------------------
1996
----
First Quarter $28.50 $22.88
Second Quarter 32.50 26.00
Third Quarter 32.65 24.75
Fourth Quarter 26.25 19.25
1997
----
First Quarter 21.50 14.50
Second Quarter 18.50 14.00
Third Quarter 16.75 14.00
Fourth Quarter 16.50 10.00
1998
----
First Quarter (through March 20) 15.38 10.50
On March 20, 1998, the last sales price for the Common Stock on the Nasdaq
Stock Market's National Market was $14.625. As of March 20, 1998, there were
approximately 322 record holders of the Common Stock. This figure does not
reflect beneficial ownership of shares held in nominee names.
The Company has never declared or paid any cash dividends on the Common
Stock. The Company anticipates that it will retain earnings, if any, for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth certain financial data for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993. This information should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 148,494 $ 133,818 $ 108,668 $ 67,141 $ 29,146
Operating expenses 130,969 115,817 97,647 65,187 42,023
Operating income (loss) 17,525 18,001 11,021 1,954 (12,877)
Income (loss) before extraordinary item (2,014) 5,114 (1,451) (4,812) (18,731)
Net income (loss) (5,340) 5,114 (1,451) (4,812) (18,731)
Income (loss) per common share before
extraordinary item:
Basic (.15) .39 (.13) (.49) (1.93)
Diluted (.15) .36 (.13) (.49) (1.93)
Net income (loss) per common share:
Basic (.40) .39 (.13) (.49) (1.93)
Diluted (.40) .36 (.13) (.49) (1.93)
Weighted average number of common shares:
Basic 13,075 13,196 11,070 9,867 9,699
Diluted 13,075 14,027 11,070 9,867 9,699
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1997 1996 1995 (1) 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 72,562 $ 11,078 $ 12,444 $ 10,808 $ 18,658
Property, plant and equipment-net 128,451 97,945 75,769 55,077 42,653
Total assets 397,276 300,722 256,997 231,371 218,669
Long-term debt 200,000 115,000 90,000 101,212 95,506
Shareholders' equity 156,861 162,608 144,152 112,784 111,621
</TABLE>
(1) 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.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
- -------------------------------------------------------------------------
Prior to January 31, 1997, CoreComm Incorporated ("CoreComm" or the
"Company") was known as Cellular Communications of Puerto Rico, Inc. ("CCPR").
On January 31, 1997, CCPR effected a corporate restructuring whereby
shareholders of CCPR became shareholders of CoreComm on a one-for-one basis upon
the completion of a merger of CCPR with and into a subsidiary of CoreComm. As a
result of this restructuring, CoreComm replaced CCPR as the publicly traded
entity and CCPR became a wholly-owned subsidiary of CoreComm.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
- --------------------------------------
Service revenue increased to $131,882,000 from $119,839,000 as a result of
subscriber growth. Lower average revenue of new prepaid subscribers, a migration
of subscribers to less expensive rate plans, and a decrease in minutes of use of
existing subscribers resulted in average monthly revenue per cellular subscriber
for the year ended December 31 decreasing to $62 in 1997 from $73 in 1996.
Ending subscribers were 196,400 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, decreased
to $2,477,000 from $3,983,000 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 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 this proposed charge which had been recorded in operating expenses
during the prior quarters of 1997. The Company anticipates that any universal
service charge adopted in Puerto Rico in 1998 will not be retroactive.
Selling, general and administrative expenses increased to $71,271,000 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 42%, 18%, 8% and 11%,
respectively, of the total $8,048,000 increase.
22
<PAGE>
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 license acquisition costs.
Interest income and other, net, increased to $2,020,000 from $646,000
primarily due to an increase in interest income on short term investments.
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 $2,159,000 from $5,352,000
primarily as a result of a decrease in Puerto Rico or U.S. Virgin Islands
taxable income of certain of the Company's consolidated subsidiaries.
In connection with the termination of the bank loan, the Company recorded
an extraordinary loss of $4,067,000 ($3,326,000 net of income tax benefit) from
the write-off of unamortized deferred financing costs.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Service revenue increased to $119,839,000 from $94,409,000 as a result of
subscriber growth that increased the Company's current revenue stream. Average
monthly revenue per subscriber decreased to $73 in 1996 from $86 in 1995. Ending
subscribers were 159,300 and 115,500 as of December 31, 1996 and 1995,
respectively.
The loss from equipment, before depreciation of rental equipment, decreased
to $3,983,000 from $6,376,000 primarily because of reductions in the cost of
cellular telephones offset by an increase in the loss from pager sales. The
Company sells cellular telephones and pagers below cost in response to
competition and to generate subscriber growth.
Operating expenses increased to $15,214,000 from $10,207,000 primarily due
to increased usage of the network and additional costs associated with the
expanded network (including paging operations), which account for 90% and 10% of
the increase, respectively.
Selling, general and administrative expenses increased to $63,223,000 from
$51,148,000 as a result of increased selling and marketing to increase the
customer base and additional personnel to service the expanding customer base.
Increases in bad debt expense, customer retention expense, property taxes and
subscriber billing expense also contributed to this increase. The increases in
selling and marketing costs, personnel costs, bad debt expense, customer
retention expense, property taxes and subscriber billing expense were 31%, 8%,
12%, 13%, 8%
23
<PAGE>
and 11%, respectively, of the total $12,075,000 increase.
Depreciation of rental equipment increased to $521,000 from $225,000 due to
an increase in the number of rental pagers, offset by a decrease in rental
telephone depreciation due to rental telephones becoming fully depreciated.
Depreciation expense increased to $12,710,000 from $9,638,000 primarily
because of an increase in property, plant and equipment.
Amortization expense increased to $6,187,000 from $5,794,000 primarily due
to increases in license acquisition costs.
Interest income and other, net, increased to $646,000 from $358,000
primarily due to an increase in interest income on short term investments.
Interest expense decreased to $8,181,000 from $8,501,000 as a result of
lower effective interest rates on long-term debt outstanding during 1996.
The provision for income taxes increased to $5,352,000 from $4,007,000 as a
result of an increase in Puerto Rico or U.S. Virgin Islands taxable income of
certain of the Company's consolidated subsidiaries and an increase in deferred
Puerto Rico income tax liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to expand its cellular and paging network, for
debt service and potentially, for the acquisition and development of additional
wireless licenses or communications businesses. The Company is currently adding
cell sites and increasing capacity throughout its Puerto Rico and U.S. Virgin
Islands markets. The Company expects to use approximately $26,300,000 in 1998
for contemplated additions to the cellular network, the paging network and for
other non-cell site related capital expenditures. The Company's commitments at
December 31, 1997 of $4,100,000 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.
A subsidiary of the Company, Cortelyou Communications Corp., was the
successful bidder, for an aggregate of approximately $25,200,000, for 15 Block A
LMDS licenses in Ohio. Auction participants were required to submit upfront
payments that determined their bidding eligibility. In February 1998, Cortelyou
submitted an upfront payment of $20,000,000. FCC rules require the high bidders
to submit a down payment of 20% of their total bids, adjusted for bidding
credits, shortly after the completion of the auction. Upfront payments may be
credited toward the down payment. High bidders must also submit an application
demonstrating their qualifications to hold the licenses they won at auction. The
remaining amount of the high bids must be paid within ten business days of the
announcement by the FCC that an application was accepted.
24
<PAGE>
In March 1998, the Company entered into an agreement to acquire a reseller
of centrex services in Cleveland, Ohio for an aggregate purchase price of
$2,000,000. This acquisition is subject to regulatory approval.
In January 1998, a wholly-owned indirect subsidiary of the Company
purchased the FCC license to own and operate the non-wireline cellular system in
Puerto Rico RSA 4 (Aibonito) and all of the assets of the system in exchange for
$8,400,000 in cash and a promissory note in the amount of $8,900,000. The
promissory note bears interest at 7.95% per annum payable semiannually beginning
in July 1998 and the principal is payable in January 2003.
In January 1997, a wholly-owned subsidiary of CCPR, CCPR Services, Inc.
("Services") issued $200,000,000 principal amount 10% Senior Subordinated Notes
due 2007 (the "Notes") and received proceeds of $193,233,000 after discounts,
commissions and other related costs. The Notes are unconditionally guaranteed by
CCPR. CCPR and Services used approximately $116,000,000 of the proceeds to repay
the $115,000,000 principal outstanding plus accrued interest and fees under the
bank loan. The Notes are due on February 1, 2007. Interest on the Notes is
payable semiannually as of August 1, 1997. The Notes are redeemable, in whole or
in part, at the option of Services at any time on or after February 1, 2002, at
a redemption price of 105% that declines annually to 100% in 2005, in each case
together with accrued and unpaid interest to the redemption date. The Indenture
contains certain convenants with respect to Services, CCPR 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 CCPR and an aggregate of up
to $100,000,000 to be used for dividends or restricted payments to the Company),
(iii) create liens, (iv) sell assets, (v) enter into mergers or consolidations
or (vi) sell or issue stock of subsidiaries.
In April 1995, CCPR and Services entered into a $200,000,000 revolving
credit facility with various banks. The line of credit was available until March
31, 1999, on which date it would have converted into a term loan with principal
payments based on an amortization schedule until September 30, 2003.
In April 1996, the Board of Directors authorized the repurchase of up to an
additional 750,000 shares of the Company's common stock through open market
purchases as market conditions warrant. This repurchase plan is in addition to a
previously announced repurchase plan for up to 250,000 shares. As of December
31, 1997, the Company has repurchased 590,000 shares for an aggregate of
$15,207,000, of which 207,000 shares that cost an aggregate of $6,145,000 were
retired.
Cash provided by operating activities was $28,998,000 and $28,912,000 for
the years ended December 31, 1997 and 1996, respectively. Purchases of property,
plant and equipment of $40,259,000 in 1997 were primarily for additional cell
sites and increased capacity in the Company's cellular and paging systems.
Write-offs of accounts receivable, net of recoveries as a percentage of
service revenue was 6.7% for the year ended December 31, 1997 compared to 5.8%
for the year ended December 31, 1996. This percentage increased because the
Company and its subsidiaries have attracted and
25
<PAGE>
continue to attract new segments of the market. The Company and its subsidiaries
continue to attempt to reduce this percentage by improving credit procedures and
instituting innovative forms of payment such as prepaid billing.
The Company may also require additional capital for acquisitions of
minority interests in its Aguadilla market, or for the acquisition of certain
other RSAs or in other telecommunications related industries, if opportunities
for such acquisitions arise. The Company has from time to time engaged in
discussions with third parties regarding such acquisitions both inside and
outside of Puerto Rico and the U.S. Virgin Islands.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of the
computer systems of certain significant customers and vendors for handling the
year 2000. The Company expects to implement successfully the systems and
programming changes necessary to address year 2000 issues, and does not believe
that the cost of such actions will have a material adverse effect on the
Company. There can be no assurance, however, that there will not be a delay in,
or increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
the Company. In addition, the failure of certain of the Company's significant
customers and vendors to address the year 2000 issue could have a material
adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- ------------------------------------------------------------------
The Company is required to provide these disclosures in its Annual Report
on Form 10-K for the year ending December 31, 1998.
26
<PAGE>
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, 1997 and 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 37,271 $ 38,438 $ 36,213 $ 36,572
Operating income 5,013 5,339 1,691 5,482
Income (loss) before extraordinary item 404 1,527 (2,529) (1,416)
Net income (loss) (3,426) 1,515 (2,646) (783)
Income (loss) per common share before
extraordinary item:
Basic .03 .12 (.19) (.11)
Diluted .03 .12 (.19) (.11)
Net income (loss) per common share:
Basic (.26) .12 (.20) (.06)
Diluted (.26) .11 (.20) (.06)
</TABLE>
<TABLE>
<CAPTION>
1996
THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 31,476 $ 31,714 $ 34,914 $ 35,714
Operating income 4,734 2,120 5,233 5,914
Net income (loss) 1,289 (248) 2,273 1,800
Income (loss) per common share:
Basic .10 (.02) .17 .14
Diluted .09 (.02) .16 .13
</TABLE>
27
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- -----------------------------------------------------------------------
Not applicable.
PART III
--------
ITEMS 10, 11, 12 AND 13.
- -----------------------
The information required by Part III is incorporated by reference from the
Company's definitive proxy statement involving the election of directors which
the Company expects to file, pursuant to Regulation 14A, within 120 days
following the end of its fiscal year.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- ------------------------------------------------------------------------
(a)(1) Financial Statements - See list of Financial Statements on page F-1.
(2) Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1.
(3) Exhibits - See Exhibit Index on page 29.
(b) Reports on Form 8-K. The Company filed no current reports on Form 8-K
for the quarter ended December 31, 1997.
(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.
28
<PAGE>
EXHIBIT INDEX
Exhibit No.
- ----------
2 Agreement and Plan of Merger, dated as of January 31, 1997 by and
among CCPR, the Company and CoreComm Sub, Inc. (Incorporated by
reference from Exhibit 2, 1996 Form 10-K, File Number 19869-99)
3.1 Restated Certificate of Incorporation of the Company. (Incorporated by
reference from Exhibit 3.1, 1996 Form 10-K, File Number 19869-99)
3.2 By-laws of the Company. (Incorporated by reference from Exhibit 3.2,
1996 Form 10-K, File Number 19869-99)
4.1 Specimen of Common Stock Certificate. (Incorporated by reference from
Exhibit 4.1, 1996 Form 10-K, File Number 19869-99)
4.2 Certificate of Designation with respect to the Series A Junior
Participating Preferred Stock of the Registrant (Incorporated by
reference to Exhibit 4.1, File Number 33-44420)
4.3 Rights Agreement, dated as of January 24, 1992, between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent, as
amended by Amendment No. 1 dated January 31, 1997. (Incorporated by
reference from Exhibit 4.2, 1996 Form 10-K, File Number 19869-99)
4.4 Indenture dated as of January 31, 1997 by and between Services, CCPR
and The Chase Manhattan Bank, N.A. (Incorporated by reference from
Exhibit 4.3, 1996 Form 10-K, File Number 19809-99).
4.5 Registration Rights Agreement dated as of January 31, 1997, by and
among Services, CCPR and Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Brothers Inc and Wasserstein Perella Securities,
Inc. (Incorporated by reference from Exhibit 4.8, 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 the
Company, CCPR and CCPR Services. (Incorporated by reference from
Exhibit 10.2, 1996 Form 10-K, File Number 19869-99)
10.3 Tax Sharing Agreement, dated as of January 24, 1992 between the
Company and Cellular Communications, Inc. (Incorporated by reference
to Exhibit 10.8, File Number 33-44420)
10.4 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
29
<PAGE>
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)
10.5 Agreement dated as of January 31, 1997, by and between CCPR and CCPR
Services, Inc. (Incorporated by reference to Exhibit 10.7, 1996 Form
10-K, File Number 19869-99).
10.6 Compensation Plan Agreements, as amended and restated effective May 1,
1997.
11 Statement re computation of per share earnings
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule, for the year ended December 31, 1997
27.2 Restated Financial Data Schedule, for the quarter ended September 30,
1997
27.3 Restated Financial Data Schedule, for the quarter ended June 30, 1997
27.4 Restated Financial Data Schedule, for the quarter ended March 31, 1997
27.5 Restated Financial Data Schedule, for the year ended December 31, 1996
30
<PAGE>
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 26, 1998
CORECOMM INCORPORATED
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 Officer March 26, 1998
- ---------------------------- and Director
George S. Blumenthal
/s/ J. Barclay Knapp Principal Operating Officer March 26, 1998
- ---------------------------- and Director
J. Barclay Knapp
/s/ Stanton N. Williams Principal Financial Officer March 26, 1998
- ----------------------------
Stanton N. Williams
/s/ Gregg Gorelick Principal Accounting Officer March 26, 1998
- ----------------------------
Gregg Gorelick
/s/ Sidney R. Knafel Director March 26, 1998
- ----------------------------
Sidney R. Knafel
31
<PAGE>
/s/ Del Mintz Director March 26, 1998
- ----------------------------
Del Mintz
/s/ Alan J. Patricof Director March 26, 1998
- ----------------------------
Alan J. Patricof
/s/ Warren Potash Director March 26, 1998
- ----------------------------
Warren Potash
32
<PAGE>
Form 10-K - Item 14(a)(1) and (2)
CoreComm Incorporated and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
The following consolidated financial statements and schedule of CoreComm
Incorporated and subsidiaries are included in Item 8:
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets - December 31, 1997 and 1996.................. F-3
Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995....................................... F-4
Consolidated Statement of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995....................................... F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995....................................... F-6
Notes to Consolidated Financial Statements................................ F-8
The following consolidated financial statement schedule of CoreComm Incorporated
and subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts......................... F-22
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.
F-1
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
CoreComm Incorporated
We have audited the accompanying consolidated balance sheets of CoreComm
Incorporated and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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
CoreComm Incorporated and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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 27, 1998, except for the
last two paragraphs of Note 1, as
to which the date is March 25, 1998
F-2
<PAGE>
CoreComm Incorporated and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,783,000 $ 2,307,000
Marketable securities 62,666,000 5,917,000
Accounts receivable - trade, less allowance for doubtful
accounts of $2,106,000 (1997) and $3,767,000 (1996) 19,043,000 20,034,000
Equipment inventory 2,882,000 2,912,000
Prepaid expenses and other current assets 7,147,000 3,022,000
---------------------------------
Total current assets 103,521,000 34,192,000
Property, plant and equipment, net 128,451,000 97,945,000
Unamortized license acquisition costs 157,467,000 162,822,000
Deferred financing costs, less accumulated amortization
of $584,000 (1997) and $1,065,000 (1996) 6,206,000 4,118,000
Other assets, less accumulated amortization of
$1,088,000 (1997) and $723,000 (1996) 1,631,000 1,645,000
---------------------------------
$ 397,276,000 $ 300,722,000
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,873,000 $ 7,364,000
Accrued expenses 11,730,000 10,889,000
Due to NTL Incorporated 71,000 102,000
Interest payable 8,333,000 1,678,000
Deferred revenue 3,952,000 3,081,000
---------------------------------
Total current liabilities 30,959,000 23,114,000
Long-term debt 200,000,000 115,000,000
Obligation under capital lease 9,456,000 -
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock - $.01 par value; authorized 2,500,000
shares; issued and outstanding none - -
Common stock - $.01 par value; authorized 30,000,000 shares;
issued 13,565,000 (1997) and 13,432,000 (1996) shares 136,000 134,000
Additional paid-in capital 226,490,000 226,160,000
(Deficit) (60,703,000) (55,363,000)
---------------------------------
165,923,000 170,931,000
Treasury stock - at cost, 383,000 (1997)
and 343,000 (1996) shares (9,062,000) (8,323,000)
---------------------------------
156,861,000 162,608,000
---------------------------------
$ 397,276,000 $ 300,722,000
=================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
CoreComm Incorporated and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Service revenue $ 131,882,000 $ 119,839,000 $ 94,409,000
Equipment revenue 16,612,000 13,979,000 14,259,000
----------------------------------------------------
148,494,000 133,818,000 108,668,000
----------------------------------------------------
Costs and expenses:
Cost of equipment sold 19,089,000 17,962,000 20,635,000
Operating expenses 14,949,000 15,214,000 10,207,000
Selling, general and administrative expenses 71,271,000 63,223,000 51,148,000
Depreciation of rental equipment 855,000 521,000 225,000
Depreciation expense 18,390,000 12,710,000 9,638,000
Amortization expense 6,415,000 6,187,000 5,794,000
----------------------------------------------------
130,969,000 115,817,000 97,647,000
----------------------------------------------------
Operating income 17,525,000 18,001,000 11,021,000
Other income (expense):
Interest income and other, net 2,020,000 646,000 358,000
Interest expense (19,400,000) (8,181,000) (8,501,000)
----------------------------------------------------
Income before income tax provision,
minority interests and extraordinary item 145,000 10,466,000 2,878,000
Income tax provision (2,159,000) (5,352,000) (4,007,000)
----------------------------------------------------
Income (loss) before minority interests and
extraordinary item (2,014,000) 5,114,000 (1,129,000)
Minority interests - - (322,000)
----------------------------------------------------
Income (loss) before extraordinary item (2,014,000) 5,114,000 (1,451,000)
Loss from early extinguishment of debt, net of
income tax benefit of $741,000 (3,326,000) - -
----------------------------------------------------
Net income (loss) $ (5,340,000) $ 5,114,000 $ (1,451,000)
====================================================
Earnings per common share:
Income (loss) before extraordinary item $(.15) $.39 $(.13)
Extraordinary item (.25) - -
----------------------------------------------------
Net income (loss) $(.40) $.39 $(.13)
====================================================
Earnings per common share-assuming dilution:
Income (loss) before extraordinary item $(.15) $.36 $(.13)
Extraordinary item (.25) - -
----------------------------------------------------
Net income (loss) $(.40) $.36 $(.13)
====================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
CoreComm Incorporated and Subsidiaries
Consolidated Statement of Shareholder's Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------------------- PAID-IN ---------------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 10,000,000 $ 100,000 $ 171,710,000 $ (59,026,000)
Exercise of stock options 25,000 385,000
Conversion of Senior
Subordinated Notes 2,778,000 28,000 38,551,000
Common stock repurchased, at cost (207,000) $(6,145,000)
Net loss for the year ended
December 31, 1995 (1,451,000)
-------------------------------------------------------------------------------------------
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 133,000 2,000 330,000
Common stock repurchased, at cost (40,000) (739,000)
Net loss for the year ended
December 31, 1997 (5,340,000)
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 13,565,000 $ 136,000 $ 226,490,000 $ (60,703,000) (383,000) $(9,062,000)
===========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
CoreComm Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (5,340,000) $ 5,114,000 $ (1,451,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 25,660,000 19,418,000 15,657,000
Provision for losses on accounts receivable 7,146,000 7,520,000 6,603,000
Loss on disposal of property, plant and equipment 1,873,000 371,000 416,000
Loss from early extinguishment of debt 4,067,000 - -
Minority interests - - 322,000
Interest paid to Cellular Communications of Ohio, Inc. - - (12,978,000)
Changes in operating assets and liabilities net of
effects from business acquisitions:
Accounts receivable (6,155,000) (9,625,000) (15,000,000)
Equipment inventory 30,000 3,476,000 (4,163,000)
Prepaid expenses and other current assets (4,125,000) (422,000) (1,484,000)
Other assets (265,000) (292,000) (461,000)
Accounts payable (1,008,000) 2,497,000 (2,400,000)
Accrued expenses (380,000) (227,000) 5,004,000
Interest payable 6,655,000 1,063,000 (760,000)
Deferred revenue 871,000 227,000 1,237,000
Due to Cellular Communications of Ohio, Inc. - - 1,683,000
Due to Cellular Communications, Inc. - (310,000) (4,000)
Due to NTL Incorporated (31,000) 102,000 -
--------------------------------------------------------
Net cash provided by (used in) operating activities 28,998,000 28,912,000 (7,779,000)
INVESTING ACTIVITIES
Purchase of marketable securities (132,016,000) (18,653,000) (2,058,000)
Proceeds from maturities of marketable securities 75,267,000 12,736,000 11,057,000
Purchase of property, plant and equipment (40,259,000) (36,564,000) (30,725,000)
Cost of cellular license interests (146,000) (5,811,000) -
--------------------------------------------------------
Net cash (used in) investing activities (97,154,000) (48,292,000) (21,726,000)
FINANCING ACTIVITIES
Proceeds from borrowings, net of financing costs 193,233,000 52,000,000 121,946,000
Principal payments (115,000,000) (28,975,000) (37,000,000)
Principal payments of capital lease obligation (194,000) - -
Additional deferred financing costs - (22,000) -
Repayment of amount due to Cellular Communications of Ohio, Inc. - - (47,942,000)
Proceeds from exercise of stock options 332,000 129,000 385,000
Purchase of treasury stock (739,000) (8,323,000) (6,145,000)
Distribution to minority interests holders - (1,172,000) -
--------------------------------------------------------
Net cash provided by financing activities 77,632,000 13,637,000 31,244,000
--------------------------------------------------------
Increase (decrease) in cash and cash equivalents 9,476,000 (5,743,000) 1,739,000
Cash and cash equivalents at beginning of year 2,307,000 8,050,000 6,311,000
--------------------------------------------------------
Cash and cash equivalents at end of year $ 11,783,000 $ 2,307,000 $ 8,050,000
========================================================
</TABLE>
F-6
<PAGE>
CoreComm Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest exclusive
of amounts capitalized $ 12,745,000 $ 7,118,000 $ 20,556,000
Income taxes paid 4,423,000 7,239,000 620,000
Supplemental schedule of noncash investing activities:
Liabilities incurred to acquire property, plant and
equipment $ 3,038,000 $ 1,595,000 $ 2,381,000
Capital lease obligation incurred to acquire
office building 9,922,000 - -
Common stock issued to acquire cellular license interests - 21,536,000 -
Supplemental schedule of noncash financing activities:
Conversion of Senior Subordinated Notes, net of
unamortized deferred financing costs of $1,421,000 $ - $ - $ 38,579,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND NATURE OF OPERATIONS
In January 1997, CoreComm Incorporated (the "Company") was formed, and a
subsidiary of the Company was merged with and into Cellular Communications of
Puerto Rico, Inc. ("CCPR"). Upon the merger, CCPR became a wholly-owned
subsidiary of the Company and shareholders of CCPR became shareholders of the
Company 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.
A subsidiary of the Company, Cortelyou Communications Corp. ("Cortelyou"), was
the successful bidder, for an aggregate of approximately $25,200,000, for 15
Block A Local Multipoint Distribution Service ("LMDS") licenses in Ohio. The FCC
has allocated two blocks of frequencies (Block A and Block B) to be licensed in
each of the 493 Basis Trading Areas in the United States and its territories
based on an auction that commenced in February 1998 and ended in March 1998.
LMDS frequencies are expected to be used for the provision of voice, data, video
and Internet services to businesses and homes in competition with incumbent
local exchange telephone companies and/or cable television operators. High
bidders must submit an application demonstrating their qualifications to hold
the licenses they won at auction. The high bids must be paid within ten business
days of the announcement by the FCC that an application was accepted.
In March 1998, the Company entered into an agreement to acquire a reseller of
centrex services in Cleveland, Ohio for an aggregate purchase price of
$2,000,000. This acquisition is subject to regulatory approval.
F-8
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
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.
NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements.
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.
F-9
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less.
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 shareholders' equity. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization 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.
Marketable securities at December 31, 1997 consisted of corporate debt
securities. Marketable securities at December 31, 1996 consisted of U.S.
Treasury securities and obligations of U.S. government agencies. During the
years ended December 31, 1997, 1996 and 1995, there were no realized gains or
losses on sales of securities. As of December 31, 1997 and 1996, 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.
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.
F-10
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED INTEREST
Interest is capitalized as a component of the cost of property, plant and
equipment constructed. In 1997, 1996 and 1995, interest of $415,000, $198,000
and $119,000, 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, 1997, 1996 and 1995 was $3,667,000,
$3,025,000, and $2,808,000 respectively.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans.
3. RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
In June 1997, the FASB issued 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 will adopt SFAS No. 130 in the first interim
period for its fiscal year ending December 31, 1998.
SEGMENT DISCLOSURES
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 business 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
F-11
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
services, geographic areas, and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The Company
will adopt SFAS No. 131 for its fiscal year ending December 31, 1998.
4. UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
DECEMBER 31
1997 1996
----------------------------------
Deferred cellular license costs $ 5,935,000 $ 5,935,000
Excess of purchase price paid over
the fair market value of tangible
assets acquired 189,466,000 189,320,000
----------------------------------
195,401,000 195,255,000
Accumulated amortization 37,934,000 32,433,000
----------------------------------
$ 157,467,000 $ 162,822,000
==================================
In February 1996, CCPR acquired the remaining minority interests aggregating
approximately 6% in the San Juan Cellular Telephone Company 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,
the San Juan Cellular Telephone Company 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.
In November 1996, a subsidiary of CCPR acquired the remaining interests,
aggregating 49%, in Star Associates, Inc., the company which owns the FCC
license for the non-wireline cellular system in Adjuntas, Puerto Rico (RSA-2)
for cash of $5,755,000 including expenses.
In January 1998, a wholly-owned indirect subsidiary of the Company purchased the
FCC license to own and operate the non-wireline cellular system in Puerto Rico
RSA-4 (Aibonito) and all of the assets of the system in exchange for $8,400,000
in cash and a promissory note in the amount of $8,900,000. The promissory note
bears interest at 7.95% per annum payable semiannually beginning in July 1998
and the principal is payable in January 2003. Costs of $305,000 were incurred in
connection with this acquisition.
F-12
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
DECEMBER 31
1997 1996
----------------------------------
Land $ 1,951,000 $ 2,027,000
Office building 9,922,000 -
Operating equipment 127,534,000 97,513,000
Office furniture and other equipment 24,546,000 16,521,000
Rental equipment 1,745,000 1,174,000
Construction in progress 12,533,000 18,674,000
----------------------------------
178,231,000 135,909,000
Accumulated depreciation 49,780,000 37,964,000
----------------------------------
$ 128,451,000 $ 97,945,000
==================================
6. ACCRUED EXPENSES
Accrued expenses consists of:
DECEMBER 31
1997 1996
----------------------------------
Accrued compensation $ 765,000 $ 1,005,000
Accrued franchise, property and
income taxes 3,489,000 4,246,000
Commissions payable 1,143,000 1,272,000
Accrued equipment purchases 1,427,000 502,000
Subscriber deposits 1,544,000 1,572,000
Other 3,362,000 2,292,000
----------------------------------
$ 11,730,000 $ 10,889,000
==================================
7. LONG-TERM DEBT
In January 1997, a wholly-owned subsidiary of CCPR, CCPR Services, Inc.
("Services") issued $200,000,000 principal amount 10% Senior Subordinated Notes
due 2007 (the "Notes") and received proceeds of $193,233,000 after discounts,
commissions and other related costs. The Notes are unconditionally guaranteed by
CCPR. CCPR and Services used approximately $116,000,000 of the proceeds to repay
the $115,000,000 principal outstanding plus accrued interest and fees under the
bank loan (see below). In connection with the repayment of the bank 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 CCPR of $80,000,000 in exchange for a 21% interest in the San Juan Cellular
Telephone Company, and CCPR distributed the $80,000,000 to the Company.
F-13
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. LONG-TERM DEBT (CONTINUED)
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, CCPR 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 CCPR and an aggregate of up
to $100,000,000 to be used for dividends or restricted payments to the Company),
(iii) create liens, (iv) sell assets, (v) enter into mergers or consolidations
or (vi) sell or issue stock of subsidiaries. The fair value of the Notes at
December 31, 1997 based on the quoted market price was $194,000,000.
In April 1995, CCPR and Services entered into a $200,000,000 revolving credit
facility with various banks. A portion of the amount borrowed was used to repay
Cellular Communications of Ohio, Inc. ("CCI Ohio"). The line of credit was
available until March 31, 1999, on which date it would have converted into a
term loan. The terms included the payment of interest each quarter at a floating
rate, which was, at the borrower's option, either (a) the higher of the bank's
base rate or the Federal Funds Rate plus 1/2%, (b) the London Interbank Offering
Rate or (c) the 936 Rate, plus, based on the ratio of CCPR's debt to cash flow
and the floating rate in effect, either .25% to 1.875% or 1.25% to 2.875%. The
effective rate on the amounts borrowed as of December 31, 1996 and 1995 was
7.01% and 7.23%, respectively. The terms also included an unused commitment fee
of 1/2% per annum which was payable quarterly. The carrying amount of the bank
loan at December 31, 1996 approximated fair value based on discounted cash flow
analysis.
CCPR had a $47,942,000 principal amount note payable to a subsidiary of Cellular
Communications, Inc. ("CCI"), CCI Ohio, which was due and payable in full on
July 31, 1996. CCPR had been a wholly-owned subsidiary of CCI until February 28,
1992, when CCI distributed to its stockholders all of the outstanding common
stock of CCPR. The note payable to CCI Ohio permitted the deferral of interest
payments, at CCPR's option, throughout the term of the note. Interest was at a
floating rate based on the interest rate in effect under CCI Ohio's bank line of
credit and term loan agreement. Interest expense accrued for the year ended
December 31, 1995 was $1,683,000. In April 1995, CCPR repaid the principal and
deferred interest due to CCI Ohio of $60,920,000.
In connection with license acquisitions, subsidiaries of CCPR issued promissory
notes which were paid in full, together with accrued interest, on their maturity
dates in 1996.
F-14
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. RELATED PARTY TRANSACTIONS
CCI provided management, financial and legal services to CCPR. Amounts charged
to CCPR included direct costs where identifiable and allocated corporate
overhead based upon the amount of time incurred on CCPR business by the common
officers and employees of CCI and CCPR. Amounts charged to CCPR included in
general and administrative expenses during the years ended December 31, 1996 and
1995 were $429,000 and $458,000, respectively. In August 1996, upon the merger
of CCI with AirTouch Communications, Inc., NTL Incorporated ("NTL") commenced
providing management, financial and legal services to CCPR. NTL charged CCPR for
direct costs where identifiable and allocated corporate overhead based upon the
amount of time incurred on CCPR business by the common officers and employees of
NTL and CCPR. The amount charged to CCPR included in general and administrative
expenses in 1996 was $207,000.
In January 1997, the Company and NTL agreed to a change in NTL's fee for the
provision of management, financial and legal services. NTL charges the Company
for direct costs where identifiable and a fixed percentage of its corporate
overhead. The amount charged to the Company included in general and
administrative expenses in 1997 was $1,780,000. It is not practicable to
determine the amount of expenses that would have been incurred had the Company
or CCPR operated as an unaffiliated entity. However, in the opinion of
management of the Company, the allocation methods are reasonable.
9. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $ (2,014,000) $ 5,114,000 $ (1,451,000)
Extraordinary item (3,326,000) - -
----------------------------------------------------
Net income (loss) $ (5,340,000) $ 5,114,000 $ (1,451,000)
----------------------------------------------------
Denominator for basic net income (loss)
per common share 13,075,000 13,196,000 11,070,000
Effect of dilutive securities:
Stock options - 831,000 -
----------------------------------------------------
Denominator for diluted net income (loss)
per common share 13,075,000 14,027,000 11,070,000
----------------------------------------------------
Basic net income (loss) per common share:
Income (loss) before extraordinary item $(.15) $.39 $(.13)
Extraordinary item (.25) - -
----------------------------------------------------
Net income (loss) $(.40) $.39 $(.13)
====================================================
Diluted net income (loss) per common share:
Income (loss) before extraordinary item $(.15) $.36 $(.13)
Extraordinary item (.25) - -
----------------------------------------------------
Net income (loss) $(.40) $.36 $(.13)
====================================================
</TABLE>
F-15
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
Stock options and the shares issuable upon the conversion of the Convertible
Senior Subordinated Notes prior to conversion are excluded from the calculation
of net loss per common share as their effect will be antidilutive.
10. SHAREHOLDERS' EQUITY
TREASURY STOCK
In April 1996, the Board of Directors authorized the repurchase of up to an
additional 750,000 shares of the Company's Common Stock through open market
purchases as market conditions warrant. This repurchase plan is in addition to a
previously announced repurchase plan for up to 250,000 shares. As of December
31, 1997, the Company had repurchased 590,000 shares for an aggregate of
$15,207,000, of which 207,000 shares that cost an aggregate of $6,145,000 were
retired.
CONVERSION OF SENIOR SUBORDINATED NOTES
In August 1992, CCPR issued $40,000,000 principal amount 8-1/4% Convertible
Senior Subordinated Notes due August 1, 2000 (the "Convertible Notes"). In 1995,
primarily as a result of CCPR's issuance of a notice of redemption, the
Convertible Notes were converted into approximately 2,778,000 shares of Common
Stock. Unamortized deferred financing costs of $1,421,000 were charged to equity
upon the conversion. The diluted net income per common share for 1995 assuming
the conversion of the Convertible Notes at the beginning of 1995 would have been
$.03.
SHAREHOLDER RIGHTS PLAN
On January 23, 1992, the Board of Directors approved the Rights Agreement, which
has become the CoreComm Rights Agreement. The Rights Agreement provides that
eight-tenths of a Right will be issued with each share of Common Stock issued
(whether originally issued or from treasury) on or after February 28, 1992 and
prior to the occurrence of certain potential takeover events ("Rights
Distribution Date"). The Rights are not exercisable until the Rights
Distribution Date and will expire at the close of business on February 28, 2002
unless previously redeemed by the Company. When exercisable, each Right entitles
the owner to purchase from the Company 1/100 of a share of Series A Junior
Participating Preferred Stock ("Series A Preferred Stock") at a purchase price
of $100.
The Series A Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of $.01 per share and will be entitled to an
aggregate dividend of 100 times the dividend, if any, declared per share of
Common Stock. In the event of liquidation, the holders of Series A Preferred
Stock will be entitled to a minimum preferential liquidation payment of $1 per
F-16
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
share and will be entitled to an aggregate payment of 100 times the payment made
per share of Common Stock. Each share of Series A Preferred Stock will have 100
votes and will vote together with the Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common Stock are changed
or exchanged, each share of Series A Preferred Stock will be entitled to receive
100 times the amount received per share of Common Stock. The rights are
protected by customary antidilution provisions.
There are 80,000 shares of Series A Preferred Stock designated from the
2,500,000 authorized shares of Series Preferred Stock. No shares of Series A
Preferred Stock are issued or outstanding.
STOCK OPTIONS
There are 1,848,000 shares of Common Stock reserved for issuance under the 1992
Stock Option Plan (the "Plan"). The Plan provides that incentive stock options
be granted at the fair market value of the Common Stock on the date of grant,
and nonqualified stock options be granted at not less than 85% of the fair
market value of the Common Stock on the date of grant. Options are exercisable
as to 20% of the shares subject thereto on the date of grant and become
exercisable as to an additional 20% of the shares subject thereto on each
January 1 thereafter, while the optionee remains an employee. Options will
expire ten years after the date of the grant.
There are 295,000 shares of Common Stock reserved for issuance under the
Non-Employee Directors Stock Option Plan (the "Directors Plan"). The Directors
Plan provides that all options be granted at the fair market value of the Common
Stock on the date of grant. Options are exercisable as to 20% of the shares
subject thereto on the first anniversary of the date of grant and become
exercisable as to an additional 20% of the shares subject thereto on each
subsequent anniversary of the grant date, while the optionee remains a director
of the Company. Options will expire ten years after the date of the grant.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995: risk-free interest rates of 5.89%, 6.56%
and 6.61%, respectively, dividend yield of 0%, volatility factor of the expected
market price of the Company's common stock of .319, .258 and .258, respectively,
and a weighted-average expected life of the option of 10 years.
F-17
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Following is the
Company's pro forma information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $ (7,581,000) $ 3,467,000 $ (2,309,000)
Pro forma net income (loss) per share:
Basic $(.58) $.26 $(.21)
Diluted (.58) .25 (.21)
</TABLE>
A summary of the Company's stock option activity and related information for the
years ended December 31, follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 2,453,000 $ 17.81 2,180,000 $ 16.41 1,918,000 $ 14.13
Granted 1,895,000 16.41 289,000 27.87 287,000 31.60
Exercised (133,000) 2.49 (16,000) 7.64 (25,000) 15.94
Forfeited (1,869,000) 23.93 0 0.00 0 0.00
---------- --------- ---------
Outstanding-end of year 2,346,000 $ 12.68 2,453,000 $ 17.81 2,180,000 $ 16.41
========== ========= =========
Exercisable at end of year 1,114,000 $ 9.69 1,690,000 $ 14.06 1,317,000 $ 11.65
========== ========= =========
</TABLE>
In 1997, the Company cancelled and reissued options to purchase 1,757,000 shares
of Common Stock. Weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1997, 1996 and 1995 is $8.64,
$15.07 and $17.14, respectively.
F-18
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes the status of the stock options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
| STOCK OPTIONS OUTSTANDING | STOCK OPTIONS EXERCISABLE |
|-------------------------------------------------------------------------------------------------------------------
| WEIGHTED- WEIGHTED- | WEIGHTED- |
| REMAINING AVERAGE | AVERAGE |
| RANGE OF EXERCISE NUMBER OF CONTRACTUAL EXERCISE | NUMBER OF EXERCISE |
| PRICES OPTIONS LIFE PRICE | OPTIONS PRICE |
|-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
| $0.08 to $0.64 204,000 4.2 Years $ 0.365 | 204,000 $ 0.365 |
| $0.88 to $1.12 210,000 4.2 Years $ 0.939 | 210,000 $ 0.939 |
| $11.40 to $15.20 1,812,000 8.3 Years $15.065 | 682,000 $14.965 |
| $18.25 120,000 9.4 Years $ 18.25 | 18,000 $ 18.25 |
|-------------------------------------------------------------------------------------------------------------------
| Total 2,346,000 | 1,114,000 |
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
11. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------
Current:
Federal $ 741,000 $ - $ -
State 947,000 - -
Puerto Rico and U.S.
Virgin Islands 471,000 4,555,000 4,007,000
--------------------------------------------------
Total current 2,159,000 4,555,000 4,007,000
--------------------------------------------------
Deferred:
Federal - - -
Puerto Rico - 797,000 -
--------------------------------------------------
Total deferred - 797,000 -
--------------------------------------------------
$ 2,159,000 $ 5,352,000 $ 4,007,000
==================================================
The provision for income taxes differs from the statutory rate principally due
to state and local income taxes from each subsidiary and income taxes on
CoreComm Incorporated's income.
F-19
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. INCOME TAXES (CONTINUED)
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, 1997 and
1996 are as follows:
DECEMBER 31
1997 1996
----------------------------
Deferred tax liabilities:
Tax over book depreciation and amortization $29,094,000 $21,759,000
Deferred tax assets:
Net operating loss carryforwards 36,352,000 27,125,000
Valuation allowance for deferred tax assets (8,055,000) (6,163,000)
----------------------------
Net deferred tax assets 28,297,000 20,962,000
----------------------------
Net deferred tax liabilities $ 797,000 $ 797,000
============================
At December 31, 1997, the Company had net operating loss carryforwards of
$106,900,000 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 and $23,200,000 in
2012.
12. 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 1997, 1996 and 1995 was $204,000,
$168,000 and $134,000, respectively.
13. LEASES
Total rent expense during the years ended December 31, 1997, 1996, and 1995 was
$3,680,000, $3,085,000 and $2,293,000, respectively.
Future minimum annual lease payments under noncancellable operating leases at
December 31, 1997 are: $3,099,000 (1998); $2,887,000 (1999); $2,197,000 (2000);
$1,392,000 (2001); $860,000 (2002) and $3,525,000 thereafter.
F-20
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. LEASES (CONTINUED)
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. Future minimum annual payments under this
lease at December 31, 1997 are as follows:
1998 $ 1,196,000
1999 1,196,000
2000 1,196,000
2001 1,196,000
2002 1,257,000
Thereafter 12,169,000
------------
18,210,000
Interest (8,482,000)
------------
Present value of net minimum obligations 9,728,000
Current portion (272,000)
------------
$ 9,456,000
============
14. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1997, the Company was committed to purchase approximately
$4,100,000 for cellular network and other equipment and for construction
services. In addition, as of December 31, 1997, the Company had commitments to
purchase telephones, pagers and accessories of approximately $1,500,000.
In 1992, the Company entered into an agreement which in effect provides for a
twenty year license to use a 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 1997 were $216,000, 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.
F-21
<PAGE>
CoreComm Incorporated and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
(1) (2)
-------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Year ended December 31, 1995:
Allowance for doubtful accounts $1,174,000 $6,603,000 $ - $(4,544,000)(a) $3,233,000
</TABLE>
(a) - Uncollectible accounts written off, net of recoveries.
F-22
EXHIBIT 10.6
CORECOMM INCORPORATED
1992 STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE MAY 1, 1997)
1. PURPOSE; CONSTRUCTION.
This CoreComm Incorporated 1992 Stock Option Plan, as amended and restated
effective May 1, 1997 (the "Plan"), is intended to encourage stock ownership by
employees of CoreComm Incorporated (the "Corporation") and its divisions and
subsidiary corporations and other affiliates, so that they may acquire or
increase their proprietary interest in the Corporation, and to encourage such
employees and directors who are employees to remain in the employ of the
Corporation or its affiliates and to put forth maximum efforts for the success
of the business. It is further intended that options ("Options") granted by the
Committee pursuant to Section 6 of this Plan shall constitute "incentive stock
options" ("Incentive Stock Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and the regulations issued thereunder
(the "Code") , and options granted by the Committee pursuant to Section 7 of
this Plan shall constitute "nonqualified stock options" ("Nonqualified Stock
Options")
2. DEFINITIONS.
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "DISABILITY" shall mean an Optionee's inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment that can be expected to result in death or that has lasted or
can be expected to last for a continuous period of not less than twelve (12)
months.
(b) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(c) "FAIR MARKET VALUE" per share as of a particular date shall mean (I) if
the shares of common stock, par value $.0l per share, of the Corporation
("Common Stock") are then traded on an over-the-counter market, the average of
the closing bid and asked prices for the shares of Common Stock in such
over-the-counter marker for the last preceding date on which there was a sale of
such Common Stock in such market, (ii) if the shares of Common Stock are then
listed on the Nasdaq Stock Market's National Market or other national securities
exchange, the closing sales price per share on the date of grant or on the last
preceding date on which there was a sale of such Common Stock on such exchange,
or (iii) if the shares of Common Stock are not then
<PAGE>
traded in an over-the-counter market or listed on Nasdaq or a national
securities exchange, such value as the Committee in its discretion may
determine.
(d) "OPTIONEE" shall mean a person who has been granted an Option under the
Plan.
(e) "PARENT CORPORATION" shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the employer
corporation if, at the time of granting an Option, each of the corporations
other than the employer corporation owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(f) "RULE 16b-3" shall mean Rule 16b-3 promulgated under Section 16 of the
Exchange Act (or any other comparable provisions in effect at the time or times
in question)
(g) "SUBSIDIARY CORPORATION" shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the employer
corporation if, at the time of granting an Option, each of the corporations
other than the last corporation in the unbroken chain owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
(h) "TEN PERCENT STOCKHOLDER" shall mean an Optionee who, at the time an
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Corporation or of its Parent or Subsidiary Corporations.
3. ADMINISTRATION.
The Plan shall be administered by the Compensation and Option Committee of
the Corporation's Board of Directors or such other committee appointed either by
the Board of Directors of the Corporation (the "Board") or by such Compensation
and Option Committee (the "Committee"); provided, however, to the extent
determined necessary to satisfy the requirements for exemption from Section
16(b) of the Exchange Act, with respect to the acquisition or disposition of
securities hereunder, action by the Committee may be by a subcommittee of a
committee of the Board composed solely of two or more " non-employee directors,"
within the meaning of Rule 16b-3, appointed by the Board or by the Compensation
and Option Committee of the Board, or by a committee composed solely of two or
more "non-employee directors," within the meaning of Rule 16b-3, as a result of
the recusal of those members who do not qualify as non-employee directors; and,
2
<PAGE>
provided further, to the extent determined necessary to satisfy the requirements
for the exception for qualified performance-based compensation under Section
162(m) of the Code and the treasury regulations thereunder, action by the
Committee may be by a committee comprised solely of two or more "outside
directors, " within the meaning of Section 162(m) of the Code and the treasury
regulations thereunder, appointed by the Board or by the Compensation and Option
Committee. Notwithstanding anything in the Plan to the contrary, and to the
extent determined to be necessary to satisfy an exemption under Rule 16b-3 with
respect to a grant hereunder (and, as applicable, with respect to the
disposition to the Corporation of a security hereunder), or as otherwise
determined advisable by the Committee, the terms of such grant and disposition
under the Plan shall be subject to the prior approval of the Board. Any prior
approval of the Board, as provided in the preceding sentence, shall not
otherwise limit or restrict the authority of the Committee to make grants under
the Plan, including, but not limited to, the authority of the Committee to make
grants qualifying for the performance-based compensation exception under Section
162(m) of the Code and the treasury regulations thereunder.
The Committee shall have the authority in its discretion, subject to and
not inconsistent with the express provisions of the Plan, to administer the Plan
and to exercise all the powers and authorities either specifically granted to it
under the Plan or necessary or advisable in the administration of the Plan,
including, without limitation, the authority to grant Options; to determine
which Options shall constitute Incentive Stock Options and which Options shall
constitute Nonqualified Stock Options; to determine the purchase price of the
shares of Common Stock covered by each Option (the "Option Price") ; to
determine the persons to whom, and the time or times at which, Options shall be
granted; to determine the number of shares to be covered by each Option; to
interpret the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of the Option
Agreements (which need not be identical) entered into a connection with Options
granted under the Plan; and to make all other determinations deemed necessary or
advisable for the administration of the Plan. The Committee may delegate to one
or more of its members or to one or more agents such administrative duties as it
may deem advisable, and the Committee or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with respect
to any responsibility the Committee or such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the Committee. The
Board may from time to time appoint additional members to the Committee, and may
at any time remove one or more Committee members and substitute others. One
member of the
3
<PAGE>
Committee may be selected by the Board as chairman. The Committee shall hold its
meetings at such times and places as it shall deem advisable. All determinations
of the Committee shall be made by a majority of its members either present in
person or participating by conference telephone at any meeting or by written
consent. The Committee may appoint a secretary and make such rules and
regulations for the conduct of its business as it shall deem advisable, and
shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any action taken or
determination made in good faith with respect to the Plan or any Option granted
hereunder.
4. ELIGIBILITY.
Options may be granted (i) to employees (including, without limitation,
officers and directors who are employees) of the Corporation, its present or
future divisions and Subsidiary Corporation and Parent Corporation and (ii) in
the case of Nonqualified Stock Options, also to employees of an affiliated
entity of the Corporation (an "Affiliated Entity") which is designated by the
Board to participate in the Plan. In determining the persons to whom Options
shall be granted and the number of shares to be covered by each Option, the
Committee shall take into account the duties of the respective persons, their
present and potential contributions to the success of the Corporation and such
other factors as the Committee shall deem relevant in connection with
accomplishing the purpose of the Plan. A person to whom an option has been
granted hereunder is sometimes referred to herein as an "Optionee."
An Optionee shall be eligible to receive more than one grant of an Option
during the term of the Plan, but only on the terms and subject to the
restrictions hereinafter set forth.
5. STOCK.
The stock subject to Options hereunder shall be shares of the Corporation's
Common Stock. Such shares may, in whole or in part, be authorized but unissued
shares or shares that shall have been or that may be reacquired by the
Corporation. The aggregate number of shares of Common Stock as to which Options
may be granted from time to time under the Plan shall not exceed 1,848,000. The
limitation established by the preceding sentence shall be subject to adjustment
as provided in Section 8(j) hereof.
In the event that any outstanding Option under the Plan for any reason
expires or is cancelled, surrendered or otherwise terminated without having been
exercised in full, the shares of Common Stock allocable to the unexercised
portion of such Option
4
<PAGE>
shall (unless the Plan shall have been terminated) become available for
subsequent grants of Options under the Plan. Notwithstanding the foregoing, the
expiration, cancellation, surrender or termination of an Option, to the extent
consistent with Section 162(m) of the Code and the treasury regulations
thereunder, shall not be disregarded for purposes of applying the individual
limit on the maximum number of shares, as provided in Section 8(f), that may be
purchased in connection with Options granted under the Plan with respect to any
individual.
6. INCENTIVE STOCK OPTIONS.
Options granted pursuant to this Section 6 are intended to constitute
Incentive Stock Options and shall be subject to the following special terms and
conditions, in addition to the general terms and conditions specified in Section
8 hereof.
(a) VALUE OF SHARES. In no event may Incentive Stock Options be granted to
an Optionee to the extent that the aggregate Fair Market Value (determined as of
the date the Incentive Stock Option is granted) of the shares of Common Stock
with respect to which such Options granted under this Plan and all other option
plans of the Corporation and any Parent or Subsidiary Corporation which would
become exercisable for the first time by an Optionee during any calendar year
exceeds $100,000.
(b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock Option
granted to a Ten Percent Stockholder, (i) the Option Price shall not be less
than one hundred ten percent (110%) of the Fair Market Value of the shares of
Common Stock of the Corporation on the date of grant of such Incentive Stock
Option, and (ii) the exercise period shall not exceed five (5) years from the
date of grant of such Incentive Stock Option.
7. NONQUALIFIED STOCK OPTIONS.
Options granted pursuant to this Section 7 are intended to constitute
Nonqualified Stock Options and shall be subject only to the general terms and
conditions specified in Section 8 hereof.
8. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted pursuant to the Plan shall be evidenced by a written
Option agreement (an "Option Agreement") between the Corporation and the
Optionee, which agreement shall comply with and be subject to the following
terms and conditions:
(a) NUMBER OF SHARES. Each Option Agreement shall state the number of
shares of Common Stock to which the Option relates.
5
<PAGE>
(b) TYPE OF OPTION. Each Option Agreement shall specifically identify the
portion, if any, of the Option which constitutes an Incentive Stock Option and
the portion, if any, which constitutes a Nonqualified Stock Option.
(c) OPTION PRICE. Each Option Agreement shall state the Option Price,
which, in the case of Incentive Stock Options, shall be not less than one
hundred percent (100%) of the Fair Market Value of the shares of Common Stock of
the Corporation on the date of grant of the Option, and which, in the case of
Nonqualified Stock Options, shall in no event be less than eighty-five percent
(85%) of the Fair Market Value of the shares of Common Stock of the Corporation
on the date of grant of the Option. The Option Price shall be subject to
adjustment as provided in Section 8(j) hereof. An Option shall be considered to
be granted on the later of the date the Committee adopts a resolution expressly
granting such Option or the date the Plan is approved by the stockholders of the
Company.
(d) MEDIUM AND TIME OF PAYMENT. Options may be exercised in whole or in
part at any time during the option period by giving written notice of exercise
to the Corporation specifying the number of shares to be purchased, accompanied
by payment of the purchase price. Payment of the purchase price shall be made in
such manner as the Committee may provide in the Option Agreement, which may
include cash (including cash equivalents, such as by certified or bank check
payable to the Corporation) delivery of unrestricted shares of Common Stock that
have been owned by the Optionee or, as applicable, a permissible transferee (as
provided In Section 8(i)) for at least six months, any other manner permitted by
law as determined by the Committee, or any combination of the foregoing.
(e) TERM AND EXERCISE OF OPTIONS. Options shall be exercisable over the
exercise period as and at the times and upon the conditions that the Committee
may determine, as reflected in the Option Agreement; provided, however, that the
Committee shall have the authority to accelerate the exercisability of any
outstanding Option at such time and under such circumstances as it, in its sole
discretion, deems appropriate; and further provided, however, that such exercise
period shall not exceed ten (10) years from the date of grant of such Option.
The exercise period shall be subject to earlier termination as provided in
Section 8(g) and 8(h) hereof. An Option may be exercised, as to any or all full
shares of Common Stock as to which the Option has become exercisable, by giving
written notice of such exercise to the Committee or to such individual(s) as the
Committee may from time to time designate.
6
<PAGE>
(f) LIMITATION ON AWARDS. Commencing with the 1996 calendar year, grants of
options under the Plan to any individual in any calendar year shall be limited
to Options to purchase no greater than 300,000 shares of Common Stock.
(g) TERMINATION. Except as provided in this Section 8(g) and in Section
8(h) hereof, an Option may not be exercised unless the Optionee is then in the
employ of the Corporation or a division or any corporation which was, at the
time of grant of such Option, a Subsidiary Corporation or Parent Corporation
thereof (or a corporation or a Parent or Subsidiary Corporation of such
corporation issuing or assuming the Option in a transaction to which Section
424(a) of the Code applies) or an Affiliated Entity, and unless the Optionee has
remained continuously so employed since the date of grant of the Option. In the
event that the employment of an Optionee shall terminate (other than by reason
of death, Disability or, in the case of Nonqualified Stock Options, retirement),
all Options granted to such Optionee or transferred by such Optionee (as
provided in Section 8(i)) that are exercisable at the time of such termination
may, unless earlier terminated in accordance with their terms, be exercised
within three (3) months after such termination; provided, however, that if the
employment of an Optionee shall terminate for cause, all Options theretofore
granted to such Optionee or transferred by such Optionee (as provided in Section
8(i)) shall, to the extent not theretofore exercised, terminate forthwith.
Nothing in the Plan or in any Option granted pursuant hereto shall confer upon
an individual any right to continue in the employ of the Corporation or any of
its divisions, Parent or Subsidiary Corporations or Affiliated Entities or
interfere in any way with the right of the Corporation or any such division,
Parent or Subsidiary Corporation or Affiliated Entity to terminate such
employment.
(h) DEATH, DISABILITY OR RETIREMENT OF OPTIONEE. If an Optionee shall die
while employed by the Corporation or a division or any corporation which was, at
the time of grant of such Option, a Subsidiary Corporation or Parent Corporation
thereof (or a corporation or a Parent or Subsidiary Corporation of such
corporation issuing or assuming the Option in a transaction to which Section
424(a) of the Code applies) or an Affiliated Entity, or within three (3) months
after the termination of such Optionee' s employment, other than for cause, or
if the Optionee's employment shall terminate by reason of Disability or, in the
case of Nonqualified Stock Options, retirement, all Options theretofore granted
to such Optionee or transferred by such Optionee (as provided in Section 8(i)) ,
to the extent otherwise exercisable at the time of death or termination of
employment, may, unless earlier terminated in accordance with their terms, be
exercised by the Optionee or by the Optionee's estate or by a person who
acquired the right to
7
<PAGE>
exercise such Option by bequest or inheritance or otherwise by reason of death
or Disability of the Optionee or by a transferee (as provided in Section 8(i)),
at any time within one year after the date of death, Disability or retirement of
the Optionee.
(i) NONTRANSFERABILITY OF OPTIONS. Except as provided in this Section 8(i),
no Option granted hereunder shall be transferable by the Optionee to whom
granted, other than by will or the laws of descent and distribution, and the
Option may be exercised during the lifetime of such Optionee only by the
Optionee or such Optionee's guardian or legal representative. To the extent the
Option Agreement so provides, and subject to such conditions as the Committee
may prescribe, an Optionee may, upon providing written notice to the General
Counsel of the Corporation, elect to transfer the Nonqualified Stock Options
granted to such Optionee pursuant to such agreement, without consideration
therefor, to members of his or her "immediate family" (as defined below) , to a
trust or trusts maintained solely for the benefit of the Optionee and/or the
members of his or her immediate family, or to a partnership or partnerships
whose only partners are the Optionee and/or the members of his or her immediate
family. Any purported assignment, alienation, pledge, attachment, sale,
transfer, or encumbrance that does not qualify as a permissible transfer under
this Section 8(i) shall be void and unenforceable against the Plan and the
Corporation. For purposes of this Section 8(i), the term "immediate family"
shall mean, with respect to a particular Optionee, the Optionee's spouse,
children or grandchildren, and such other persons as may be determined by the
Committee. The terms of any such Option and the Plan shall be binding upon a
permissible transferee, and the beneficiaries, executors, administrators, heirs
and successors of the Optionee and, as applicable, a permissible transferee.
(j) EFFECT OF CERTAIN CHANGES.
(1) If there is any change in the number of shares of Common Stock
through the declaration of stock or cash dividends, or recapitalization
resulting in stock splits, or combinations or exchanges of such shares or
other corporate transactions affecting the capitalization of the
Corporation, the aggregate number of shares of Common Stock available for
Options, the aggregate number of shares of Common Stock available for
distribution under the Plan to any single individual with respect to
Options granted hereunder, the number of such shares covered by outstanding
Options, the number of shares set forth in Section 8(f) hereof and the
price per share of such Options shall be proportionately adjusted by the
Committee to reflect any increase or decrease in the number of issued
shares of Common Stock; provided, however, that any fractional shares
resulting from such adjustment shall be eliminated. In the
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event of any other extraordinary corporate transaction, including, but not
limited to distributions of cash or other property to the Corporation's
shareholders, the Committee may equitably adjust outstanding Options as it
deems appropriate.
(2) In the event of the proposed dissolution or liquidation of the
Corporation, in the event of any corporate separation or division,
including, but not limited to, split-up, split-off or spin-off, or in the
event of a merger or consolidation of the Corporation with another
corporation, the Committee may provide that the holder of each Option then
exercisable shall have the right to exercise such Option (at its then
Option Price) solely for the kind and amount of shares of stock and other
securities, property, cash or any combination thereof receivable upon such
dissolution, liquidation, or corporate separation or division, or merger or
consolidation by a holder of the number of shares of Common Stock for which
such Option might have been exercised immediately prior to such
dissolution, liquidation, or corporate separation or division, or merger or
consolidation; or the Committee may provide, in the alternative, that each
Option granted under the Plan shall terminate as of a date to be fixed by
the Committee; provided, however, that not less than thirty (30) days'
written notice of the date so fixed shall be given to each Optionee, who
shall have the right, during the period of thirty (30) days preceding such
termination, to exercise the Options (unless earlier terminated in
accordance with their terms) as to all or any part of the shares of Common
Stock covered thereby, including shares as to which such Options would not
otherwise be exercisable; provided, further, that failure to provide such
notice shall not invalidate or affect the action with respect to which such
notice was required.
(3) If while unexercised Options remain outstanding under the Plan -
(i) any corporation, person or other entity (other than the
Corporation) makes a tender or exchange offer for shares of the Common
Stock pursuant to which purchases are made ("Offer"), or
(ii) the stockholders of the Corporation approve a definitive
agreement to merge or consolidate the Corporation with or into another
corporation or to sell or otherwise dispose of all or substantially
all of its assets, or adopt a plan of liquidation, or
(iii) the "beneficial ownership" (as defined
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in Rule 13d-3 under the Exchange Act) of securities representing more
than 15% of the combined voting power of the Corporation is acquired
by any "person" as defined in Sections 13(d) and 14(d) of the Exchange
Act, or
(iv) during any period of two consecutive years, individuals who
at the beginning of such period were members of the Board cease for
any reason to constitute at least a majority thereof (unless the
election, or the nomination for election by the Corporation's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of such period)
then from and after the date of the first purchase of Common Stock pursuant
to such Offer, or the date of any such stockholder approval or adoption, or
the date on which public announcement of the acquisition of such percentage
shall have been made, or the date on which the change in the composition of
the Board set forth above shall have occurred, whichever is applicable (the
applicable date being referred to hereinafter as the "Acceleration Date") ,
all Options shall be exercisable in full, whether or not otherwise
exercisable. Following the Acceleration Date, the Committee shall, in the
case of a merger, consolidation or sale or disposition of assets, promptly
make an appropriate adjustment to the number and class of shares of Common
Stock available for Options, and to the amount and kind of shares or other
securities or property receivable upon exercise of any outstanding Options
after the effective date of such transaction, and the price thereof.
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(4) Paragraphs (2) and (3) of this Section 8(j) shall not apply to a
merger or consolidation in which the Company is the surviving corporation
and shares of Common Stock are not converted into or exchanged for stock,
securities of any other corporation, cash or any other thing of value.
Notwithstanding the preceding sentence, in case of any consolidation or
merger of another corporation into the Corporation in which the Corporation
is the surviving corporation and in which there is a reclassification or
change (including a change to the right to receive cash or other property)
of the shares of Common Stock (other than a change in par value, or from
par value to no par value, or as a result of a subdivision or combination,
but including any change in such shares into two or more classes or series
of shares), the Committee may provide that the holder of each Option then
exercisable shall have the right to exercise such Option solely for the
kind and amount of shares of stock and other securities (including those of
any new direct or indirect parent of the Corporation) , property, cash or
any combination thereof receivable upon such reclassification, change,
consolidation or merger by the holder of the number of shares of Common
Stock for which such Option might have been exercised.
(5) In the event of a change in the Common Stock of the Corporation as
presently constituted, which is limited to a change of all of its
authorized shares with par value into the same number of shares with a
different par value or without par value, the shares resulting from any
such change shall be deemed to be the Common Stock within the meaning of
the Plan.
(6) To the extent that the foregoing adjustments relate to stock or
securities of the Corporation, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive, provided that each Incentive Stock Option granted pursuant to
this Plan shall not be adjusted in a manner that causes such Option to fail
to continue to qualify as an Incentive Stock Option within the meaning of
Section 422 of the Code.
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(7) Except as hereinbefore expressly provided in this Section 8(j),
the Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock
of any class or by reason of any dissolution, liquidation, merger, or
consolidation or spin-off of assets or stock of another corporation; and
any issue by the Corporation of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to the Option. The grant of an
Option pursuant to the Plan shall not affect in any way the right or power
of the Corporation to make adjustments, reclassifications, reorganizations
or changes of its capital or business structures or to merge or to
consolidate or to dissolve, liquidate or sell, or transfer all or part of
its business or assets.
(k) RIGHTS AS A STOCKHOLDER. An Optionee or a transferee of an Option shall
have no rights as a stockholder with respect to any shares covered by the Option
until the date of the issuance of a stock certificate to him for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution of other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 8(j) hereof.
(1) RIGHTS AS AN EMPLOYEE. Nothing in the Plan or in any instrument
executed pursuant to the Plan will confer upon any Optionee any right to
continue in the employ of the Corporation or affect the right of the Corporation
to terminate the employment of any Optionee at any time with or without cause.
(m) OTHER PROVISIONS. The Option Agreements authorized under the Plan
shall contain such other provisions, including, without limitation, (i) the
imposition of restrictions upon the exercise of an Option, and (ii) in the case
of an Incentive Stock Option, the inclusion of any condition not inconsistent
with such Option qualifying as an Incentive Stock Option, as the Committee shall
deem advisable.
9. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES.
If the Committee shall so require, as a condition of exercise, each
Optionee shall agree that
(a) no later than the date of exercise of any Option granted hereunder, the
Optionee will pay to the Corporation or make arrangements satisfactory to the
Committee regarding payment
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of any federal, state or local taxes of any kind required by law to be withheld
upon the exercise of such Option, and
(b) the Corporation shall, to the extent permitted or required by law, have
the right to deduct federal, state and local taxes of any kind required by law
to be withheld upon the exercise of such Option from any payment of any kind
otherwise due to the Optionee.
10. TERMS OF PLAN.
Options may be granted pursuant to the Plan from time to time within a
period of ten (10) years from the date the Plan is adopted by the Board, or the
date the Plan is approved by the stockholders of the Corporation, whichever is
earlier.
11. AMENDMENT AND TERMINATION OF THE PLAN.
The Board at any time and from time to time may suspend, terminate, modify
or amend the Plan; provided, however, that no amendment that requires
stockholder approval under applicable Delaware law, under the rules or
regulations of any securities exchange or regulatory agency, or in order for the
Plan to continue to comply with Rule 16b-3 or, if applicable, to comply with the
exception for qualified performance-based compensation under Code Section 162
(in), or in order for Options intended to constitute Incentive Stock Options to
satisfy the requirements of Section 422 of the Code shall be effective unless
the same shall be approved by the requisite vote of the stockholders of the
Corporation. Except as provided in Section 8 hereof, no suspension, termination,
modification or amendment of the Plan may adversely affect any Option previously
granted, unless the written consent of the Optionee or, as applicable, a
permissible transferee (as provided in Section 8(i)) is obtained.
12. INTERPRETATION.
The Plan is designed and intended to comply with Rule 16b-3 and, to the
extent applicable, Sections 162(m) and 422 of the Code, and all provisions
hereof shall be construed in a manner to so comply.
13. APPROVAL AND RATIFICATION BY STOCKHOLDERS.
The Plan shall take effect as set forth in Section 16 upon its adoption by
the Board of Directors, but shall be subject to its approval and ratification by
the holders of a majority of the issued and outstanding shares of Common Stock
of the Corporation, which approval and ratification must occur within twelve
months after the date that the Plan is adopted by the Board.
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14. EFFECT OF HEADINGS.
The section and subsection headings contained herein are for convenience
only and shall not affect the construction hereof.
15. GOVERNING LAW.
The Plan shall be governed by the laws of the State of Delaware.
16. EFFECTIVE DATE OF PLAN.
The effective date of the Plan is the date the Plan is adopted by the
Board.
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CORECOMM INCORPORATED
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE MAY 1, 1997)
1. PURPOSE; CONSTRUCTION.
The purpose of this CoreComm Incorporated Non-Employee Director Stock
Option Plan, as amended and restated effective May 1. 1997 (the "Plan"). is to
encourage stock ownership by non-employee directors of CoreComm Incorporated
(the "Corporation") in order to increase their identification with the interests
of the Corporation's shareholders, and to encourage such directors to remain in
the service of the Corporation and to put forth maximum efforts for the success
of the business.
2. DEFINITIONS.
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "BOARD" shall mean the Board of Directors of the Corporation.
(b) "CODE" shall mean the Internal Revenue Code of 1986. as amended.
(c) "COMMON STOCK" shall mean the common stock, par value 5.01 per share.
of the Corporation.
(d) "DISABILITY" shall mean an Optionee's inability to engage in any
substantial gainful activity by reason of any medic ally determinable
physical or mental impairment that can be expected to result in death
or that has lasted or can be expected to last for a continuous period
of not less than twelve (12) months.
(e) "FAIR MARKET VALUE" per share as of a particular date shall mean (i)
if the Common Stock is then traded on an over-the-counter market. the
average of the closing bid and asked prices for the Common Stock in
such over-the-counter market on such date or on the last preceding
date on which there was a sale of such Common Stock in such market.
(ii) if the Common Stock is then admitted to quotation on the National
Association of Securities Dealers Automated Quotation System
("NASDAQ") or another comparable quotation system and has been
designated as a National Market System ("NMS") security, or if the
Common Stock is then listed on a national securities exchange, the
closing sales price per share on such date or on the last preceding
date on which there was a sale of such Common Stock, or (iii) if the
Common Stock is not then traded in an over-the-counter market,
admitted to quotation on NASDAQ or other comparable quotation system,
or listed on a national securities exchange, such value as the
Committee in its discretion may determine.
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(f) "OPTION" shall mean a stock option granted pursuant to the Plan.
(g) "OPTIONEE" shall mean a person to whom an Option has been granted
under the Plan.
3. ADMINISTRATION.
The Plan shall be administered by the Compensation and Option Committee
(the "Committee") established by the Board.
The Committee shall have the powers vested in it by the terms of the Plan,
such powers to include the authority to prescribe the form of the agreements
embodying awards of Options made under the Plan. The Committee shall, subject to
and not inconsistent with the express provisions of the Plan, have the authority
to administer the Plan and to exercise all the powers and authorities either
specifically granted to it under the Plan or necessary or advisable in the
administration of the Plan, including without limitation, the authority to
prescribe, amend and rescind rules and regulations relating to the Plan; and to
make all other determinations deemed necessary or advisable for the
administration of the Plan.
The Committee may delegate to one or more of its members or to one or more
agents such administrative duties as it may deem advisable, and the Committee or
any person to whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the Committee or
such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the Committee. The
Board may from time to time appoint additional members to the Committee, and may
at any time remove one or more Committee members and substitute others. One
member of the Committee may be selected by the Board as chairman. The Committee
shall hold its meetings at such times and places as it shall deem advisable. All
determinations of the Committee shall be made by a majority of its members
either present in person or participating by conference telephone at any meeting
or by written consent. The Committee may appoint a secretary and make such
rules. and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any action taken or
determination made in good faith with respect to the Plan or any Option granted
hereunder.
4. ELIGIBILITY.
Each member of the Board who is not an employee of the Corporation or any
of its affiliates (a "Non-Employee Director") shall be granted Options in
accordance with Section 6 here of. The adoption of this Plan shall not be deemed
to give any director any right to be granted an Option to purchase shares of
Common Stock, other than in accordance with the terms of this Plan.
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5. STOCK.
The stock subject to Options granted hereunder shall be shares of the
Corporation's Common Stock. Such shares may. in whole or in part. be authorized
but unissued shares or shares that shall have been or that may be reacquired by
the Corporation. The aggregate number of shares of Common Stock as to which
Options may be granted from time to time under the Plan shall not exceed
295,000. The limitation established by the preceding sentence shall be subject
to adjustment as provided in Section 6(k) hereof.
In the event that any outstanding Option under the Plan for any reason
expires or is canceled, surrendered or otherwise terminated without having been
exercised in full. the shares of Common Stock allocable to the unexercised
portion of such Option shall (unless the Plan shall have been terminated) become
available for subsequent grants of Options under the Plan.
6. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted pursuant to the Plan shall be evidenced by a written
agreement between the Corporation and the Optionee in such form as the Committee
shall prescribe from time to time. which agreement shall comply with and be
subject to the following terms and conditions:
(a) INITIAL GRANTS. On the date of the Distribution, each Non-Employee
Director as of such date (a "Current Director") shall be granted automatically.
without action by the Committee, an Option to purchase 9.3 75 shares of Common
Stock.
(b) GRANTS TO NEW NON-EMPLOYEE DIRECTORS. Each Non-Employee Director (a
"New Director") who, after the Distribution, is elected to the Board for the
first time by the stockholders of the Corporation at any special or annual
meeting of stockholders. will. at the time such director is elected and duly
qualified, be granted automatically. without action by the Committee. an Option
to purchase 9,375 shares of Common Stock.
(c) GRANTS TO CONTINUING DIRECTORS. On the date of the first annual meeting
of stockholders subsequent to the Distribution, each continuing Current Director
(i.e.. a Non-Employee Director not being elected by stockholders for the first
time) will be granted automatically, without action by the Committee, an Option
to purchase 1.250 shares of Common Stock. On the dates of the annual meetings of
stockholders for 1993. 1994, 1995. 1996. 1997 and 1998. each continuing Current
Director will be granted automatically, without action by the Committee, an
Option to purchase 1.000, 7,500. 7.500. 7.500, 7.500 and 7.500 shares of Common
Stock, respectively. In addition, on the dates of the first, second. third,
fourth. fifth, sixth and seventh annual meetings of stockholders subsequent to
the election of any New Director, such New Director will, if he or she is a
continuing director on such date, be granted automatically, without action by
the Committee, an Option to purchase 1.250. 1.000, 7.500. 7.500, 7.500. 7.500
and 7,500 shares of Common Stock, respectively.
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(d) TYPE OF OPTION. Each Option granted under the Plan shall be a stock
option which is not intended to qualify as an "incentive stock option" under
Section 422 of the Code.
(e) OPTION PRICE. The Option Price of each Option granted under the Plan
shall be equal to one hundred percent (100%) of the Fair Market Value of the
shares of Common Stock subject to such Option on the date of grant thereof. The
Option Price shall be subject to adjustment as provided in Section 6(k) hereof.
(f) MEDIUM AND TIME OF PAYMENT. Options may be exercised in whole or in
part at any time during the option period by giving written notice of exercise
specifying the number of shares to be purchased. accompanied by payment of the
purchase price. Payment of the purchase price may be made in cash (including
cash equivalents, such as by certified or bank check payable to the
Corporation). by delivery of unrestricted shares of Common Stock that have been
owned by the Optionee or. as applicable, a permissible transferee (as provided
in Section 6(j)) for at least six months. or in any combination of the
foregoing.
(g) TERM AND EXERCISE OF OPTIONS. Options granted under the Plan shall
become exercisable as to twenty percent (2000) of the shares subject thereto on
the first anniversary of the date of grant thereof and as to an additional
twenty percent (20%) of the shares subject thereto on each of the second. third,
fourth and fifth anniversaries of the date of grant thereof. An Option shall be
exercisable for a period often (10) years from the date of grant of such Option:
provided. however, that, except as provided in this Section 6(g). the exercise
period shall be subject to earlier termination as provided in Sections 6(h) and
6(i) hereof. An Option may be exercised. as to any or all full shares of Common
Stock as to which the Option has become exercisable. by giving written notice of
such exercise to the Committee or to such individual(s) as the Committee may
from time to time designate. Notwithstanding anything in the Plan to the
contrary. in the case of the termination of service of an Optionee as a
director. the Committee or. to the extent determined necessary to satisfy the
requirements for an exemption from Section 16(b) of the Securities Exchange Act
of 1934. as amended (the "Exchange Act"). the Board. in its sole discretion. may
determine that all or a portion of the Options that are then held by the
Optionee (or. as applicable, by a permissible transferee of such Options (as
provided in Section 6(j)) shall. to the extent not then exercisable, become
exercisable in accordance with the first sentence of this Section 6(g) or as
provided in Section 6(k) and that all or a portion of the Options held by the
Optionee or by a transferee at the time of the Optionee's termination of service
may be exercised by' the Optionee or. as applicable. by a transferee (or. as
applicable. by their beneficiaries, executors. administrators, heirs and
successors) during such period as determined by' the Committee (or. as
applicable, the Board). provided that such period shall terminate no earlier
than the end of the exercise period that otherwise would apply under Section
6(h) or Section 6(i) following such termination of service under the Plan and no
later than the end of the applicable Option term.
(h) TERMINATION. Except as provided in this Section 6(h) and in Section
6(i) hereof. an Option may' not be exercised by the Optionee to whom it was
granted or by a transferee to whom such Option was transferred (as provided in
Section 6(j)) unless the Optionee is then in service as a director of the
Corporation and unless the Optionee has remained continuously in the
Corporation's service as a director since the date of grant of the Option. In
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the event that the service of an Optionee as a director shall terminate (other
than by reason of death. Disability or retirement), all Options granted to such
Optionee or transferred by such Optionee (as provided in Section 6(j)) that are
exercisable at the time of such termination may. unless earlier terminated in
accordance with their terms, be exercised by the Optionee or by a transferee
within three (3) months after such termination: provided, however, that if the
service of an Optionee as a director of the Corporation shall terminate for
cause, all Options theretofore granted to such Optionee or transferred by such
Optionee (as provided in Section 6(j)), shall, to the extent not theretofore
exercised, terminate forthwith. Nothing in the Plan or in any Option granted
pursuant hereto shall confer upon an individual any right to continue in service
as a director of the Corporation or interfere in any way with the right of the
Corporation to terminate such service.
(i) DEATH. DISABILITY OR RETIREMENT OF OPTIONEE. If an Optionee shall die
while in service as a director of the Corporation or within three (3) months
after the termination of such Optionee's service, other than for cause, or if
the Optionee's service as a director shall terminate by reason of Disability, or
retirement, all Options theretofore granted to such Optionee or transferred by
such Optionee (as provided in Section 6(j)). to the extent otherwise exercisable
at the time of death or termination of service may. unless earlier terminated in
accordance with their terms, be exercised by the Optionee or by the Optionee's
estate or by a person who acquired the right to exercise such option by bequest
or inheritance or otherwise by reason of the death or Disability of the
Optionee. or by a transferee at any time within one year after the date of
death. Disability or retirement of the Optionee.
(j) NONTRANSFERABILITY OF OPTIONS. Except as provided in this Section 6(j).
no Option granted hereunder shall be transferable by the Optionee to whom
granted. other than by will or the laws of descent and distribution, and the
Option may be exercised during the lifetime of such Optionee only by the
Optionee or such Optionee's guardian or legal representative. To the extent the
Option Agreement so provides, and subject to such conditions as the Committee
may prescribe (provided such prescription of conditions does not cause the
acquisition or disposition of securities hereunder to fail to qualify for an
exemption under Section 16(b) of the Exchange Act), an Optionee may, upon
providing written notice to the General Counsel of the Corporation. elect to
transfer the stock options granted to such Optionee pursuant to such agreement.
without consideration therefor, to members of his or her "immediate family"' (as
defined below), to a trust or trusts maintained solely for the benefit of the
Optionee and/or the members of his or her immediate family, or to a partnership
or partnerships whose only partners are the Optionee and/or the members of his
or her immediate family. Any purported assignment. alienation. pledge.
attachment, sale, transfer, or encumbrance that does not qualify as a
permissible transfer under this Section 6(j), shall be void and unenforceable
against the Plan and the Corporation. For purposes of this Section 6(j), the
term "immediate family" shall mean, with respect to a particular Optionee. the
Optionee's spouse, children or grandchildren, and such other persons as may be
determined by the Committee. The terms of any such Option and the Plan shall be
binding upon a permissible transferee, and the beneficiaries, executors,
administrators, heirs and successors of the Optionee and, as applicable, a
permissible transferee.
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(k) EFFECT OF CERTAIN CHANGES.
(1) If there is any change in the number of shares of Common Stock through
the declaration of stock or cash dividends, or recapitalization resulting in
stock splits, or combinations or exchanges of such shares, the aggregate number
of shares of Common Stock available for Options. the number of such shares
covered by outstanding Options. and the exercise price per share of such Options
shall be proportionately adjusted by the Committee to reflect any increase or
decrease in the number of issued shares of Common Stock: provided, however, that
any fractional shares resulting from such adjustment shall be eliminated. In the
event of any other extraordinary corporate transaction, including, but not
limited to. distributions of cash or other property to the Corporation's
shareholders, the Committee shall equitably adjust outstanding Options to
preserve, but not increase, the benefits of such Options.
(2) In the event of the proposed dissolution or liquidation of the
Corporation. in the event of any corporate separation or division. including,
but not limited to. split-up. split-off or spin-off, or in the event of a merger
or consolidation of the Corporation with another corporation. the Committee
shall provide that the holder of each Option then exercisable shall have the
right to exercise such Option (at its then Option Price) solely for the kind and
amount of shares of stock and other securities. property. cash or any
combination thereof receivable upon such dissolution. liquidation, or corporate
separation or division, or merger or consolidation by a holder of the number of
shares of Common Stock for which such Option might have been exercised
immediately' prior to such dissolution, liquidation, or corporate separation or
division. or merger or consolidation.
(3) If while unexercised Options remain outstanding under the Plan --
(i) any corporation. person or other entity (other than the Corporation)
makes a tender or exchange offer for shares of Common Stock pursuant
to which purchases are made ("Offer"). or
(ii) the stockholders of the Corporation approve a definitive agreement to
merge or consolidate the Corporation with or into another corporation
or to sell or otherwise dispose of all or substantially all of its
assets, or adopt a plan of liquidation, or
(iii) the "beneficial ownership" (as defined in Rule 1 3d-3 under the
Exchange Act) of securities representing more than 150o of the
combined voting power of the Corporation is acquired by any "person"
as defined in sections 13(d) and 14(d) of the Exchange Act, or
(iv) during any period of two consecutive years. individuals who at the
beginning of such period were members of the Board cease for any
reason to constitute at least a majority thereof (unless the election.
or the nomination for election by the Corporation's stockholders, of
each new director was approved by a vote of at least
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two-thirds of the directors then still in office who were directors at
the beginning of such period),
then from and after the date of the first purchase of Common Stock pursuant to
such Offer, or the date of any' such stockholder approval of adoption. or the
date on which public announcement of the acquisition of such percentage shall
have been made, or the date on which the change in the composition of the Board
set forth above shall have occurred, whichever is applicable (the applicable
date being referred to hereinafter as the "Acceleration Date"), all Options
shall be exercisable in full, whether or not otherwise exercisable. Following
the Acceleration Date. the Committee shall, in the case of a merger,
consolidation or sale or disposition of assets. promptly make an appropriate
adjustment to the number and class of shares of Common Stock available for
Options, and to the amount and kind of shares or other securities or property'
receivable upon exercise of any outstanding Options after the effective date of
such transaction. and the price thereof.
(4) Paragraphs (2) and (3) of this Section 6(k) shall not apply to a merger
or consolidation in which the Company is the surviving corporation and shares of
Common Stock are not converted into or exchanged for stock, securities of any
other corporation. cash or any other thing of value. Notwithstanding the
preceding sentence. in case of any consolidation or merger of another
corporation into the Corporation in which the Corporation is the surviving
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property') of the shares of Common
Stock (other than a change in par value. or from par value to no par value, or
as a result of a subdivision or combination, but including any change in such
shares into two or more classes or series of shares). the Committee shall
provide that the holder of each Option then exercisable shall have the right to
exercise such Option solely for the kind and amount of shares of stock and other
securities (including those of any new direct or indirect parent of the
Corporation). property'. cash or any combination thereof receivable upon such
reclassification, change, consolidation or merger by the holder of the number of
shares of Common Stock for which such Option might have been exercised.
(5) In the event of a change in the Common Stock of the Corporation as
presently' constituted, which is limited to a change of all of its authorized
shares with par value into the same number of shares with a different par value
or without par value, the shares resulting from any such change shall be deemed
to be the Common Stock within the meaning of the Plan.
(6) To the extent that the foregoing adjustments relate to stock or
securities of the Corporation. such adjustments shall be made by the Committee,
whose determination in that respect shall be final, binding and conclusive.
(7) Except as hereinbefore expressly provided in this Section 6(k), the
Optionee shall have no rights by reason of any subdivision or consolidation of
shares of stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class or by reason
of any dissolution, liquidation, merger, or consolidation or spin-off of assets
or stock of another corporation, and any issue by the Corporation of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall not affect,
7
<PAGE>
and no adjustment by' reason thereof shall be made with respect to, the number
or price of shares of Common Stock subject to the Option. The grant of an Option
pursuant to the Plan shall not affect in any way the right or power of the
Corporation to make adjustments. reclassifications. reorganizations or changes
of its capital or business structures or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or part of its business or assets.
(1) RIGHTS AS A STOCKHOLDER. An Optionee or a transferee of an Option shall
have no rights as a stockholder with respect to any shares covered by the Option
until the date of the issuance of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends (ordinary, or extraordinary,
whether in cash. securities or other property) or distribution of other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 6(k) hereof.
(m) OTHER PROVISIONS. The Option Agreements authorized under the Plan shall
contain such other provisions, including, without limitation, the imposition of
restrictions upon the exercise of an Option. unless the inclusion of such
provisions would cause the acquisition or disposition of shares of Common Stock
in connection with such Option Agreements to fail to qualify for an exemption
from Section 16(b) of the Exchange Act.
7. TERM OF PLAN.
Options may' be granted pursuant to the Plan from time to time within a
period of ten (10) years from the date the Plan is adopted by the Board, or the
date the Plan is approved by the stockholders of the Corporation. whichever is
earlier.
8. AMENDMENT AND TERMINATION OF THE PLAN.
The Board at any time and from time to time may suspend. terminate, modify
or amend the Plan; provided, however. that no amendment that requires
stockholder approval under applicable Delaware law, under the rules or
regulations of any securities exchange or regulatory agency. or in order for the
Plan to continue to comply with Rule 16b-3 (as promulgated under Section 16(b)
of the Exchange Act) shall be effective unless the same shall be approved by the
requisite vote to the stockholders of the Corporation. Except as provided in
Section 6 hereof, no suspension, termination, modification or amendment of the
Plan may adversely affect any' Option previously granted. unless the written
consent of the Optionee or, as applicable, a permissible transferee (as provided
in Section 6(j)) is obtained.
9. APPROVAL AND RATIFICATION BY STOCKHOLDERS.
The Plan shall take effect as set forth in Section 12 upon its adoption by'
the Board. but shall be subject to its approval and ratification by the holders
of a majority' of the issued and outstanding shares of Common Stock of the
Corporation. which approval and ratification must occur within twelve months
after the date that the Plan is adopted by the Board.
8
<PAGE>
10. EFFECT OF HEADINGS.
The section and subsection headings contained herein are for convenience
only and shall not affect the construction hereof.
11. GOVERNING LAW.
The Plan shall be governed by the laws of the State of Delaware.
12. EFFECTIVE DATE OF PLAN.
The effective date of the Plan is the date the Plan is adopted by the
Board.
9
EXHIBIT 11
CORECOMM INCORPORATED
CALCULATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Weighted Average Number of Shares
----------------------------------------------------------------
Date Total Year Ended Year Ended Year Ended
Issued Description of Issuance Outstanding 31-Dec-97 31-Dec-96 31-Dec-95
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/94 Common Stock 10,000,615 10,000,615 10,000,615 10,000,615
01/12/95 Common Stock 6,813 6,813 6,813 6,589
02/02/95 Common Stock 1,945 1,945 1,945 1,769
02/23/95 Common Stock 521 521 521 444
04/05/95 Treasury Stock (25,000) (25,000) (25,000) (18,493)
04/06/95 Treasury Stock (25,000) (25,000) (25,000) (18,425)
04/06/95 Common Stock 1,200 1,200 1,200 884
04/07/95 Treasury Stock (22,000) (22,000) (22,000) (16,153)
04/10/95 Treasury Stock (10,000) (10,000) (10,000) (7,260)
04/11/95 Treasury Stock (10,000) (10,000) (10,000) (7,233)
04/12/95 Treasury Stock (8,000) (8,000) (8,000) (5,764)
05/18/95 Common Stock 3,500 3,500 3,500 2,177
06/01/95 Common Stock 3,125 3,125 3,125 1,824
06/17/95 Common Stock 1,388 1,388 1,388 757
07/12/95 Common Stock 3,125 3,125 3,125 1,473
07/24/95 Common Stock 83,333 83,333 83,333 36,530
07/28/95 Common Stock 1,388 1,388 1,388 593
08/04/95 Common Stock 2,685,398 2,685,398 2,685,398 1,118,231
08/04/95 Common Stock 168 168 168 77
08/07/95 Common Stock 9,522 9,522 9,622 3,809
08/18/95 Treasury Stock (50,000) (50,000) (50,000) (18,493)
08/21/95 Common Stock 521 521 521 188
09/26/95 Treasury Stock (20,000) (20,000) (20,000) (5,260)
09/28/95 Treasury Stock (25,000) (25,000) (25,000) (6,438)
09/29/95 Treasury Stock (5,000) (5,000) (5,000) (1,274)
10/12/95 Treasury Stock (7,000) (7,000) (7,000) (1,534)
02/07/96 Common Stock 821,124 821,124 735,225
02/13/96 Common Stock 2,084 2,084 1,833
02/27/96 Common Stock 3,500 3,500 2,945
03/06/96 Common Stock 513 513 257
03/12/96 Common Stock 5,555 5,555 4,462
04/23/96 Treasury Stock (15,000) (15,000) (10,328)
04/24/96 Treasury Stock (53,000) (53,000) (36,417)
04/25/96 Treasury Stock (25,000) (25,000) (17,077)
04/26/96 Treasury Stock (35,000) (35,000) (23,811)
04/29/96 Treasury Stock (25,000) (25,000) (16,803)
04/30/96 Treasury Stock (12,500) (12,500) (8,367)
05/01/96 Treasury Stock (5,000) (5,000) (3,333)
05/02/96 Treasury Stock (22,500) (22,500) (14,939)
06/10/96 Common Stock 642 642 302
06/11/96 Common Stock 3,000 3,000 1,664
09/20/96 Common Stock 1,042 1,042 280
11/06/96 Common Stock 42 42 6
11/01/96 Treasury Stock (15,000) (15,000) (2,459)
11/04/96 Treasury Stock (35,000) (35,000) (5,451)
11/05/96 Treasury Stock (6,000) (6,000) (765)
</TABLE>
<PAGE>
CORECOMM INCORPORATED
CALCULATION OF NET INCOME (LOSS) PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Weighted Average Number of Shares
----------------------------------------------------------------
Date Total Year Ended Year Ended Year Ended
Issued Description of Issuance Outstanding 31-Dec-97 31-Dec-96 31-Dec-95
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/12/96 Treasury Stock (25,000) (25,000) (3,347)
11/27/96 Treasury Stock (25,000) (25,000) (2,322)
12/06/96 Treasury Stock (15,000) (15,000) (1,025)
12/23/96 Treasury Stock (20,000) (20,000) (437)
12/24/96 Treasury Stock (2,500) (2,500) (48)
12/26/96 Treasury Stock (7,500) (7,500) (102)
01/03/97 Treasury Stock (20,000) (19,836)
01/06/97 Treasury Stock (10,000) (9,836)
01/08/97 Treasury Stock (5,000) (4,890)
01/17/97 Common Stock 834 795
01/21/97 Common Stock 18,750 17,671
03/06/97 Common Stock 208 171
10/08/97 Common Stock 7,725 1,778
11/25/97 Common Stock 521 51
12/23/97 Common Stock 1,875 41
12/30/97 Treasury Stock (5,000) (14)
12/31/97 Common Stock 103,276 0
----------------------------------------------------------------
Weighted average number
of common shares 13,182,253 13,074,995 13,195,605 11,069,633
----------------------------------------------------------------
Net effect of dilutive
stock options 831,437
----------------------------------------------------------------
Total 13,182,253 13,074,995 14,027,042 11,069,633
================================================================
Income (loss) before extraordinary item ($2,014,000) $ 5,114,000 ($1,451,000)
Loss from early extinguishment of debt (3,326,000) 0 0
-----------------------------------------------
Net income (loss) ($5,340,000) $ 5,114,000 ($1,451,000)
===============================================
Net income (loss) per common share:
Income (loss) before extraordinary item ($0.15) $0.39 ($0.13)
Extraordinary item (0.25) 0.00 0.00
-----------------------------------------------
Net income (loss) ($0.40) $0.39 ($0.13)
===============================================
Net income (loss) per common
share-assuming dilution:
Income (loss) before extraordinary item ($0.15) $0.36 ($0.13)
Extraordinary item (0.25) 0.00 0.00
-----------------------------------------------
Net income (loss) ($0.40) $0.36 ($0.13)
===============================================
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF CORECOMM INCORPORATED
All of the corporations listed below were incorporated in Delaware except where
otherwise noted:
Cellular Communications of Puerto Rico, Inc.
CCPR Services, Inc.
CCPR of the Virgin Islands, Inc.
CCPR Paging, Inc.
CoreComm Delaware, Inc.
CoreComm Maryland, Inc.
CoreComm Massachusetts, Inc.
CoreComm New Jersey, Inc.
CoreComm New York, Inc.
CoreComm Pennsylvania, Inc.
CoreComm Puerto Rico, Inc.
CoreComm Telco, Inc.
CoreComm Virginia, Inc.
Cortelyou Communications Corp.
Merrimack Telecommunications Corp. (Florida corporation)
San Juan Cellular Telephone Company (District of Columbia partnership)
SJCT, Inc.
USVI Cellular Telephone Corporation
USVI Paging, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-54794, No. 33-54796, No. 33-54798, No. 33-95274, and
No.33-95276, No. 333-13009, No. 33-78842, No. 33-78838, No. 333-13011) of
CoreComm Incorporated (the "Company") of our report dated February 27, 1998
except for note 1 as to which the date is March 25, 1998, with respect to the
consolidated financial statements of the Company included in its Annual Report
(Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
San Juan, Puerto Rico
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1997 ANNUAL FINANCIAL STATEMENTS OF CORECOMM INCORPORATED. THE SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,783,000
<SECURITIES> 62,666,000
<RECEIVABLES> 21,149,000
<ALLOWANCES> (2,106,000)
<INVENTORY> 2,882,000
<CURRENT-ASSETS> 7,147,000
<PP&E> 178,231,000
<DEPRECIATION> (49,780,000)
<TOTAL-ASSETS> 397,276,000
<CURRENT-LIABILITIES> 30,959,000
<BONDS> 200,000,000
0
0
<COMMON> 136,000
<OTHER-SE> 156,725,000
<TOTAL-LIABILITY-AND-EQUITY> 397,276,000
<SALES> 16,612,000
<TOTAL-REVENUES> 148,494,000
<CGS> 19,089,000
<TOTAL-COSTS> 34,038,000
<OTHER-EXPENSES> 71,271,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,400,000
<INCOME-PRETAX> 145,000
<INCOME-TAX> 2,159,000
<INCOME-CONTINUING> (2,014,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,326,000)
<CHANGES> 0
<NET-INCOME> (5,340,000)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1997 INTERIM FINANCIAL STATEMENTS OF CORECOMM INCORPORATED. THE SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 42,766,000
<SECURITIES> 25,390,000
<RECEIVABLES> 23,235,000
<ALLOWANCES> (2,758,000)
<INVENTORY> 5,103,000
<CURRENT-ASSETS> 7,885,000
<PP&E> 178,553,000
<DEPRECIATION> (50,091,000)
<TOTAL-ASSETS> 397,039,000
<CURRENT-LIABILITIES> 29,863,000
<BONDS> 200,000,000
0
0
<COMMON> 135,000
<OTHER-SE> 157,515,000
<TOTAL-LIABILITY-AND-EQUITY> 397,039,000
<SALES> 12,335,000
<TOTAL-REVENUES> 111,922,000
<CGS> 14,331,000
<TOTAL-COSTS> 27,114,000
<OTHER-EXPENSES> 54,513,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,261,000
<INCOME-PRETAX> 643,000
<INCOME-TAX> (1,241,000)
<INCOME-CONTINUING> (598,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,959,000)
<CHANGES> 0
<NET-INCOME> (4,557,000)
<EPS-PRIMARY> (0.35)<F1>
<EPS-DILUTED> (0.35)<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE"
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1997 INTERIM FINANCIAL STATEMENTS OF CORECOMM INCORPORATED. THE SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 73,730,000
<SECURITIES> 10,255,000
<RECEIVABLES> 25,377,000
<ALLOWANCES> (3,421,000)
<INVENTORY> 7,502,000
<CURRENT-ASSETS> 9,340,000
<PP&E> 165,330,000
<DEPRECIATION> (45,181,000)
<TOTAL-ASSETS> 411,001,000
<CURRENT-LIABILITIES> 41,110,000
<BONDS> 200,000,000
0
0
<COMMON> 135,000
<OTHER-SE> 160,161,000
<TOTAL-LIABILITY-AND-EQUITY> 411,001,000
<SALES> 7,663,000
<TOTAL-REVENUES> 75,709,000
<CGS> 9,073,000
<TOTAL-COSTS> 17,301,000
<OTHER-EXPENSES> 36,478,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,061,000
<INCOME-PRETAX> 3,276,000
<INCOME-TAX> (1,345,000)
<INCOME-CONTINUING> 1,931,000
<DISCONTINUED> 0
<EXTRAORDINARY> (3,842,000)
<CHANGES> 0
<NET-INCOME> (1,911,000)
<EPS-PRIMARY> (0.15)<F1>
<EPS-DILUTED> (0.15)<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE"
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1997 INTERIM FINANCIAL STATEMENTS OF CORECOMM INCORPORATED. THE SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 53,521,000
<SECURITIES> 34,516,000
<RECEIVABLES> 24,692,000
<ALLOWANCES> (3,889,000)
<INVENTORY> 4,185,000
<CURRENT-ASSETS> 2,411,000
<PP&E> 142,108,000
<DEPRECIATION> (41,575,000)
<TOTAL-ASSETS> 385,508,000
<CURRENT-LIABILITIES> 26,727,000
<BONDS> 200,000,000
0
0
<COMMON> 135,000
<OTHER-SE> 158,646,000
<TOTAL-LIABILITY-AND-EQUITY> 385,508,000
<SALES> 3,919,000
<TOTAL-REVENUES> 37,271,000
<CGS> 4,779,000
<TOTAL-COSTS> 8,669,000
<OTHER-EXPENSES> 18,049,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,984,000
<INCOME-PRETAX> 1,732,000
<INCOME-TAX> (1,328,000)
<INCOME-CONTINUING> 404,000
<DISCONTINUED> 0
<EXTRAORDINARY> (3,830,000)
<CHANGES> 0
<NET-INCOME> (3,426,000)
<EPS-PRIMARY> (0.26)<F1>
<EPS-DILUTED> (0.26)<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE"
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1996 ANNUAL FINANCIAL STATEMENTS OF CORECOMM INCORPORATED. THE SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,307,000
<SECURITIES> 5,917,000
<RECEIVABLES> 23,801,000
<ALLOWANCES> (3,767,000)
<INVENTORY> 2,912,000
<CURRENT-ASSETS> 3,022,000
<PP&E> 135,909,000
<DEPRECIATION> (37,964,000)
<TOTAL-ASSETS> 300,722,000
<CURRENT-LIABILITIES> 23,114,000
<BONDS> 115,000,000
0
0
<COMMON> 134,000
<OTHER-SE> 162,474,000
<TOTAL-LIABILITY-AND-EQUITY> 300,722,000
<SALES> 13,979,000
<TOTAL-REVENUES> 133,818,000
<CGS> 17,962,000
<TOTAL-COSTS> 33,176,000
<OTHER-EXPENSES> 63,223,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,181,000
<INCOME-PRETAX> 10,466,000
<INCOME-TAX> 5,352,000
<INCOME-CONTINUING> 5,114,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,114,000
<EPS-PRIMARY> .39<F1>
<EPS-DILUTED> .36<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE"
</FN>
</TABLE>
