SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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F O R M 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________
Commission File No. 19869-99
CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3927257
- ---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 East 59th Street, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 906-8481
(Registrant's telephone number, including area code)
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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
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Registrant's common stock held by
non-affiliates at March 23, 1999, valued in accordance with the Nasdaq
Stock Market's National Market closing sale price for the Registrant's
common stock, was approximately
$283,519,000.
Number of shares of Common Stock outstanding as at March 23, 1999: 13,821,770
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of 10-K in which
Incorporated
Definitive proxy statement for the 1999 Annual Part III
Meeting of the Stockholders of Cellular
Communications of Puerto Rico, Inc.
* * * * *
This Annual Report on Form 10-K for the year ended December 31, 1998, 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 Company, or industry
results, to be materially different from those contemplated, projected,
forecasted, estimated or budgeted, whether expressed or implied, by such
forward-looking statements. Such factors include the following: general
economic and business conditions in Puerto Rico and US. Virgin Islands,
industry trends, the Company's ability to continue to design and build its
network, install facilities, obtain and maintain any required government
licenses or approvals and finance construction and development, all in a
timely manner, at reasonable costs and on satisfactory terms and
conditions, as well as assumptions about customer acceptance, churn rates,
overall market penetration, and competition from providers of alternative
services, the impact of new business opportunities requiring significant
up-front investment, Year 2000 readiness, and availability, terms and
deployment of capital.
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS....................................................1
ITEM 2. PROPERTY...................................................17
ITEM 3. LEGAL PROCEEDINGS..........................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
STOCKHOLDERS...............................................17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS............................18
ITEM 6. SELECTED FINANCIAL DATA....................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION....................................20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK..........................................27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.......................................................27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.................................................28
PART III
ITEMS 10, 11, 12 AND 13.............................................28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K..........................28
EXHIBIT INDEX...............................................................29
SIGNATURES..................................................................31
INDEX TO FINANCIAL STATEMENTS..............................................F-1
PART I
ITEM 1. BUSINESS
GENERAL
Cellular Communications of Puerto Rico, Inc. (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 telecommunications related
operations described below. From time to time the Company reviews
opportunities in other telecommunications related industries in Puerto Rico
and the U.S. Virgin Islands. The Company's executive offices are located at
110 East 59th Street, New York, New York 10022 and its telephone number is
(212) 906-8481.
The Company is a Delaware corporation that was incorporated
on January 13, 1997. From January 31, 1997 to September 2, 1998 (the
"Spin-off Date"), the Company was known as CoreComm Incorporated. On the
Spin-off Date, the Company changed its name from CoreComm Incorporated to
Cellular Communications of Puerto Rico, Inc. and distributed to its
shareholders on a one-for-one basis all of the shares of its wholly-owned
subsidiary, CoreComm Limited. Prior to January 31, 1997 (the "Merger Date")
a predecessor of the Company was known as Cellular Communications of Puerto
Rico, Inc. ("Old CCPR"). From its date of incorporation until the Merger
Date, the Company was a wholly-owned subsidiary of Old CCPR. On the Merger
Date, Old CCPR effected a corporate restructuring (the "Restructuring")
whereby shareholders of Old CCPR became shareholders of the Company on a
one-for-one basis upon the completion of a merger of Old CCPR with and into
a subsidiary of the Company. As a result of the Restructuring, the Company
replaced Old CCPR as the publicly traded entity and Old CCPR became a
wholly-owned subsidiary of the Company.
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.
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, 1999:
<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
---------------- -------------- -----------
Total 3,856,936 3,812,975
================ ===========
</TABLE>
(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.
(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, 1998, an aggregate of
approximately 301,500 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 7.8% 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, 1998, the Company's paging
operations had approximately 56,900 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. 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 approximately 350 employees in sales and
marketing functions. Direct sales, including corporate accounts,
represented approximately 70% of the Company's total sales in 1998. The 160
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 five kiosks
located in major shopping centers, 31 mini-kiosks inside large retail
stores (e.g. WalMart, Sams, Western Auto, Sears, Blockbuster Video) and
three 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
approximately 30% of the Company's new activations in 1998. 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, providing over 300 points of presence for
hardware sales and over 1,400 points of presence for sales of prepaid phone
calls. The Company markets its services under the nationally recognized
CELLULAR ONE(R) brand name and its sales and marketing strategy carefully
promotes CELLULAR ONE(R)'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 90% overall satisfaction rating it received from its
subscribers in an annual independent survey of customer satisfaction
conducted by the Cellular One Group in 1998. 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.
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 in 1997
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 cellular
licensees and, when required, has the appropriate regulatory approval.
COMPETITIVE LOCAL EXCHANGE ("CLEC") SERVICES
In 1998, the Company began to expand its presence in the
local and long distance telecommunications markets in Puerto Rico. In
addition to expanding the resale of its backbone digital microwave network
and long distance services to large businesses (primarily those with
existing wireless accounts), the Company now has full authority to provide
facilities-based competitive local exchange ("CLEC") services in Puerto
Rico and the requisite approvals to build a fiber optic loop in downtown
San Juan (Hato Rey). A CLEC switch is currently being tested and installed
and marketing of CLEC services is expected to commence in the second half
of 1999.
In addition, due to recent favorable regulatory and judicial
developments (including a U.S. Supreme Court decision granting the FCC
jurisdiction over the availability and pricing of incumbent telephone
company facilities and interconnection services) and the sale of the PRTC
to GTE, the Company believes it may be possible to market CLEC services to
the entire Puerto Rico telecommunications market using a combination of
CCPR-owned facilities and "unbundled" network elements purchased from the
PRTC.
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, 1998 included 109 cell sites
and repeaters 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 66 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. In the first quarter of 1998, the majority of minutes
processed used TDMA transceivers. 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 high usage 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.
Cellular systems are capital intensive, requiring
significant levels of investment for equipment, construction and cell site
acquisition. As of December 31, 1998, the Company had operating plant and
equipment and construction-in-progress with an historical cost of
approximately
$152,600,000.
INTERCONNECTION AGREEMENTS
Effective September 2, 1997, after negotiations between PRTC
and the Company and arbitration by the Telecommunications Regulatory Board
of Puerto Rico (the "Board"), 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 reflected 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.
On September 8, 1998, through one of its subsidiaries, the
Company entered into an interconnection and resale agreement with PRTC for
use related to the Company's CLEC services. The agreement allows the
Company to resell any of PRTC's unbundled network elements. The agreement
is for a three year term.
In 1998, the PRTC appealed to the Federal District Court for
the District of Puerto Rico a decision of the Board that required that it
refund to its customers long-distance toll charges it had assessed on them
for placing calls to the Company's subscribers. The District Court
dismissed the PRTC's complaint for lack of federal jurisdiction. The PRTC
subsequently appealed the District Court's decision to the U.S. Court of
Appeals for the First Circuit, which appeal remains pending. In 1997,
before the District Court suit was filed, the Company interconnected with
each of the PRTC's end offices, which, under the interconnection agreement,
precluded the PRTC from assessing toll charges on its own customers for
calls to the Company's subscribers. It also gave the Company the added
advantage of a lower reciprocal compensation rate for calls made to the
PRTC's customers served by those end offices. Nevertheless, the Company
believes that the PRTC's appeal is without merit and will continue to
oppose it.
Effective March 1, 1999, the Company entered into an
interconnection agreement with the Virgin Islands Telephone Corporation.
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 responsible for purchasing
their own pager. The Company also generates some revenue from the resale of
its digital microwave transmission network and resale of long distance
service to certain corporate accounts (see CLEC).
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(R), 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,
1998 were $289,000, 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
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 cellular
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. In 1999, the Commonwealth
announced that it had completed the sale of a controlling interest in the
PRTC to GTE. The Company believes the PRTC currently provides service to
approximately 32% 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 17% of the wireless
market at year end 1998.
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, 1998 had approximately 90,000 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 (or its affiliate Telecorp) has begun
construction and is expected to provide service later this year. In
addition, ClearComm has announced a partnership with Telefonica Larga
Distancia, an affiliate of the Spanish national phone company, to build a
wireless and wireline telephone network.
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 areas. Accordingly, each of these
companies holds 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 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 begun to provide
a cellular-type telephone service via satellite technology that is
available anywhere in the world. 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.
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 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. On
December 3, 1998, the Company also successfully renewed its licenses in the
San Juan and Aguadilla MSAs for additional ten year terms.
The Company's licenses to provide paging and mobile
telecommunications services (other than cellular services) in Puerto Rico
are among the approximately 5,000 licenses held by paging and
telecommunications operators throughout the United States which expire on
April 1, 1999. The Company has filed renewal applications for these
licenses within the filing window for such applications and has no reason
to expect that the FCC will not routinely renew these licenses.
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 (non-wireless)
interstate telecommunications services are offered to the public.
Accordingly, the Company must file tariffs for certain telecommunications
services that it proposes to offer.
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" 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. 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.
On January 25, 1999, the Supreme Court issued its decision,
which overturned the bulk of the Eighth Circuit's ruling. Among other
things, the Court held that the FCC has jurisdiction over the pricing of
interconnection services and unbundled elements, reinstated the "pick and
choose" rule, and concluded that ILECs must provide combinations of network
elements to competitors. This decision should make it less burdensome and
less expensive for the Company to interconnect with the PRTC and should
facilitate the Company's provision of competitive landline telephone
services.
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 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 $142,000,000. Under the
FCC's rules, 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. This rule is currently under review at the FCC.
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, although the Joint Board composed of federal and state regulators
has recommended that no carrier's current high cost support should decrease
under the new regime.
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 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 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, 1998, the Company and its subsidiaries
had an aggregate of approximately 710 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.
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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq Stock
Market's National Market ("Nasdaq") under the symbol "CLRP". From February
3, 1997 through September 2, 1998, the Common Stock traded on Nasdaq under
the symbol "COMM", and from February 28, 1992 through January 31, 1997, the
Company's predecessor's Common Stock traded on Nasdaq under the symbol
"CCPR".
Last Sale Price
High Low
----------------------------------
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 10.27 6.39
Second Quarter 16.28 10.27
Third Quarter 20.84 10.44
Fourth Quarter 20.00 8.13
1999
First Quarter (through March 23) 24.84 18.50
On March 23, 1999, the last sales price for the Common Stock
on the Nasdaq Stock Market's National Market was $21.50. As of March 23,
1999, there were approximately 290 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.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994. This
information should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------- ------------------------------------------------------
1998(1) 1997 1996 1995 1994
------------- ------------- -------------------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income statement data:
<S> <C> <C> <C> <C> <C>
Revenues $180,198 $148,494 $133,818 $108,668 $67,141
Operating expenses 182,770 130,969 115,817 97,647 65,187
Operating income (loss) (2,572) 17,525 18,001 11,021 1,954
Income (loss) before
extraordinary (30,851) (2,014) 5,114 (1,451) (4,812)
Net income (loss) (30,851) (5,340) 5,114 (1,451) (4,812)
Income (loss) per common share
before extraordinary item:
Basic (2.34) (.15) .39 (.13) (.49)
Diluted (2.34) (.15) .36 (.13) (.49)
Net income (loss) per common share:
Basic (2.34) (.40) .39 (.13) (.49)
Diluted (2.34) (.40) .36 (.13) (.49)
Weighted average number of common shares:
Basic 13,195 13,075 13,196 11,070 9,867
Diluted 13,195 13,075 14,027 11,070 9,867
DECEMBER 31,
1998(2) 1997 1996 1995(3) 1994
------------- ------------- -------------------------- -------------
BALANCE SHEET DATA:
Working capital $40,833 $72,562 $11,078 $12,444 10,808
Property, plaint and 125,422 128,451 97,945 75,769 55,077
equipment-net
Total assets 392,819 397,276 300,722 256,997 231,371
Long-term debt 355,000 200,000 115,000 90,000 101,212
Shareholders' equity
(deficiency) (18,531) 156,861 162,608 144,152 112,784
</TABLE>
(1) The Company recognized $31,792,000 as a non-cash stock option expense
in 1998.
(2) In 1998, a subsidiary of the Company borrowed $155,000,000 under a new
credit agreement with various banks. In addition, the Company
distributed CoreComm Limited to its shareholders.
(3) In 1995, the $40,000,000 principal amount Convertible Senior
Subordinated Notes were converted into approximately 2,778,000 shares
of common stock.
The Company did not declare or pay any cash dividends during the periods
indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Cellular Communications of Puerto Rico, Inc. (formerly CoreComm
Incorporated) (the "Company") was formed in January 1997 to own and operate
CCPR, Inc. (formerly Cellular Communications of Puerto Rico, Inc.) and to
pursue communications related opportunities outside of Puerto Rico and the
U.S. Virgin Islands. CCPR, Inc., through its wholly-owned subsidiaries,
owns and operates cellular and paging systems in Puerto Rico and the U.S.
Virgin Islands. In April and June 1998, the Company acquired three
communications related businesses in the United States. These businesses
were contributed to the Company's former wholly-owned subsidiary, CoreComm
Limited, prior to the distribution of CoreComm Limited to the Company's
shareholders in September 1998. The Company included the results of
operations of the acquired businesses in its consolidated results of
operations from the dates of acquisition through the date of distribution
in September 1998. The results of the acquired businesses are not included
in the 1997 or 1996 consolidated results.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Service revenue increased to $156,008,000 from $131,882,000. Service
revenue includes $2,876,000 in 1998 from acquired businesses. For CCPR,
Inc.'s cellular and paging business in Puerto Rico and the U.S. Virgin
Islands, lower average revenue and minutes of use of new prepaid
subscribers and the selection by existing subscribers of alternate rate
plans resulted in average monthly revenue per cellular subscriber for the
year ended December 31 decreasing to $51 in 1998 from $62 in 1997. The
Company expects these trends to continue for the foreseeable future. Ending
subscribers were 301,500 and 196,400 as of December 31, 1998 and 1997,
respectively. Ending pagers in use were 56,900 and 49,000 as of December
31, 1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $2,082,000 from a loss of $2,477,000 primarily
because CCPR, Inc. is not selling telephones below their cost to prepaid
subscribers. Reductions in the cost of cellular telephones also contributed
to this change. The Company intends to continue to sell telephones at or
above cost to prepaid subscribers. The Company expects the growth in
prepaid subscribers to continue, therefore the Company expects the trend in
equipment income to continue for the foreseeable future. The income from
equipment in 1998 includes $60,000 from acquired businesses.
Operating expenses increased to $19,276,000 from $14,949,000. Operating
expenses include $2,308,000 in 1998 from acquired businesses. For CCPR,
Inc.'s cellular and paging business in Puerto Rico and the U.S. Virgin
Islands, operating expenses increased to $16,968,000 from $14,949,000 due
to additional costs associated with the expanded network (including paging
operations). CCPR, Inc.'s operating expenses as a percentage of service
revenue was 11% in 1998 and in 1997.
Selling, general and administrative expenses increased to $75,760,000 from
$71,271,000. Selling, general and administrative expenses include
$4,108,000 in 1998 from acquired businesses and general and administrative
expenses of the Company of $3,263,000 in 1998 and $1,111,000 in 1997. For
CCPR, Inc.'s cellular and paging business in Puerto Rico and the U.S.
Virgin Islands, selling, general and administrative expenses decreased to
$68,389,000 from $70,160,000 primarily as a result of a decrease in bad
debt expense and subscriber billing expense. The decreases in bad debt
expense and subscriber billing expense were 121% and 22%, respectively, of
the total $1,771,000 decrease. These decreases were partially offset by an
increase in property taxes due to an increase in taxable property which was
(120)% of the decrease.
Stock option expense of $31,792,000 in 1998 is a non-cash charge recorded
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" due to an equitable adjustment made to certain employee and
non-employee director stock options in connection with the distribution of
CoreComm Limited. The Company has $16,287,000 of deferred stock option
expense as of December 31, 1998 that will be charged as non-cash
compensation expense over the vesting period of the stock options as
follows: $10,481,000 in 1999, $4,550,000 in 2000 and $1,256,000 in 2001.
Depreciation of rental equipment increased to $1,169,000 from $855,000 due
to an increase in the number of rental telephones and pagers.
Depreciation expense increased to $25,784,000 from $18,390,000 primarily
because of an increase in property, plant and equipment.
Amortization expense increased to $6,881,000 from $6,415,000 primarily due
to increases in license acquisition costs and deferred financing costs.
Interest income and other, net, increased to $2,142,000 from $2,020,000
primarily due to a reduction in losses from disposals of cell site
equipment
Interest expense increased to $26,158,000 from $19,400,000 as a result of
the office building capital lease obligation beginning in April 1997, the
issuance of the subsidiary note payable in January 1998 and the new bank
loan commencing in August 1998.
The provision for income taxes increased to $4,263,000 from $2,159,000 as a
result of a tax provision of $2,200,000 in connection with transactions
related to the distribution and an increase in Puerto Rico and U.S. Virgin
Islands taxable income of certain of the Company's consolidated
subsidiaries.
In 1997, a subsidiary of the Company recorded an extraordinary loss of
$4,067,000 ($3,326,000 net of income tax benefit) from the write-off of
unamortized deferred financing costs in connection with the termination of
a bank loan.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Service revenue increased to $131,882,000 from $119,839,000. Lower average
revenue and minutes of use of new prepaid subscribers and the selection by
existing subscribers of alternate rate plans resulted in average monthly
revenue per cellular subscriber for the year ended December 31 decreasing
to $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
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.
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.
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 1997, a subsidiary of the Company recorded an extraordinary loss of
$4,067,000 ($3,326,000 net of income tax benefit) from the write-off of
unamortized deferred financing costs in connection with the termination of
a bank loan.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to expand its Puerto Rico and U.S. Virgin
Islands cellular and paging network and for debt service. The Company is
currently adding cell sites and increasing capacity throughout its Puerto
Rico and U.S. Virgin Islands markets. The Company expects to use
approximately $35,400,000 in 1999 for contemplated additions to the
cellular network, the paging network, and for other non-cell site related
capital expenditures. The Company's commitments at December 31, 1998 of
$7,500,000 for cellular network and other equipment and for construction
services are included in the total anticipated expenditures. The Company
expects to be able to meet these requirements with cash, cash equivalents
and marketable securities on hand and cash from operations.
In August 1998, a wholly-owned indirect subsidiary of the Company, CCPR
Services, Inc. ("Services") entered into a $170,000,000 credit agreement
with various banks and borrowed $155,000,000. The Company made a capital
contribution to its wholly-owned subsidiary, CoreComm Limited, of
$150,000,000 in cash using proceeds from a bank loan and distributed 100%
of the common stock of CoreComm Limited to the Company's shareholders.
Services has $15,000,000 available under the bank loan until September
2001. The terms include the payment of interest at least quarterly at a
floating rate, which is, at Services' option, either (a) the greater of the
bank's prime rate or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus,
based on the ratio of CCPR, Inc. (the parent company of Services) and
subsidiaries' debt to cash flow and the floating rate in effect, either 0%
to 1.25% or 1.25% to 2.5%. The effective rate on Services' borrowings as of
December 31, 1998 was 7.87%. The terms also include an unused commitment
fee of 0.5% per annum which is payable quarterly. Principal payments
commence on September 30, 2001 based on two amortization schedules. One
schedule is for the first $95,000,000 borrowed which includes quarterly
payments until June 2006. The other schedule is for the remainder of the
amount borrowed which includes quarterly payments until June 2005. Services
incurred costs of $3,377,000 in connection with the bank loan which are
included in deferred financing costs.
In connection with the bank loan, CCPR, Inc. has pledged to the banks the
stock of its subsidiaries and CCPR, Inc. and its subsidiaries have given
the banks a security interest in their assets. CCPR, Inc. and its other
subsidiaries have guaranteed the payment in full when due of the principal,
interest and fees owing under the bank loan, which guarantee is full, joint
and several. The bank loan also includes, among other things, restrictions
on CCPR, Inc. and its subsidiaries (i) dividend payments, (ii)
acquisitions, (iii) investments, (iv) sales and dispositions of assets, (v)
additional indebtedness and (vi) liens. The bank loan requires that CCPR,
Inc. and subsidiaries maintain certain ratios of indebtedness to cash flow,
fixed charges to cash flow and debt service to cash flow.
In January 1997, Services issued $200,000,000 principal amount 10% Senior
Subordinated Notes due 2007 (the "Notes") and received proceeds of
$193,233,000 after discounts, commissions and other related costs. The
Notes are unconditionally guaranteed by CCPR, Inc., which guarantee is
full, joint and several. CCPR, Inc. and Services used approximately
$116,000,000 of the proceeds to repay the $115,000,000 principal
outstanding plus accrued interest and fees under a bank loan. The
Notes are due on February 1, 2007. Interest on the Notes is payable
semiannually on February 1 and August 1. The Notes are redeemable, in whole
or in part, at the option of Services at any time on or after February 1,
2002, at a redemption price of 105% that declines annually to 100% in 2005,
in each case together with accrued and unpaid interest to the redemption
date. The Indenture contains certain covenants with respect to Services,
CCPR, Inc. and certain subsidiaries that limit their ability to, among
other things, (i) incur additional indebtedness, (ii) pay dividends or make
other distributions or restricted payments, (iii) create liens, (iv) sell
assets, (v) enter into mergers or consolidations or (vi) sell or issue
stock of subsidiaries.
The Company is highly leveraged as a result of the new bank loan and the
distribution of CoreComm Limited. Such leverage could limit the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes, increases its
vulnerability to adverse changes in general economic conditions or
increases in interest rates, and requires that a substantial portion of
cash flow from operations be dedicated to debt service requirements. The
leveraged nature of the Company and the Company's continued compliance with
the restrictions in its debt agreements could limit its ability to respond
to market conditions, meet extraordinary capital needs or restrict other
business activities such as acquisitions. In addition, the Company is a
holding company with no significant assets other than its investments in
and advances to its subsidiaries. The Company is therefore dependent upon
receipt of funds from its subsidiaries to meet its own obligations, however
the debt agreements effectively prevent the payment of dividends, loans or
other distributions to the Company. The Company expects to be able to meet
its own obligations at least through the next twelve months with cash, cash
equivalents and marketable securities on hand.
Management does not anticipate that the Company and its subsidiaries will
generate sufficient cash flow from operations to repay at maturity the
entire principal amount of the outstanding indebtedness. Accordingly, the
Company may be required to consider a number of measures, including (i)
refinancing all or a portion of such indebtedness, (ii) seeking
modifications of the terms of such indebtedness, (iii) seeking additional
debt financing, which would be subject to obtaining necessary lender
consents, (iv) seeking additional equity financing or (v) a combination of
the foregoing. The particular measures the Company may undertake and the
ability of the Company to accomplish those measures will depend on the
financial condition of the Company and its subsidiaries at the time, as
well as a number of factors beyond the control of the Company. No assurance
can be given that any of the foregoing measures can be accomplished, or can
be accomplished on terms which are favorable to do Company.
The Board of Directors has authorized the repurchase of up to 1,000,000
shares of the Company's common stock through open market purchases as
market conditions warrant. As of December 31, 1998, 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 $50,687,000 and $28,998,000 for
the years ended December 31, 1998 and 1997, respectively. The increase is
primarily a result of an increase in operating income (before the non-cash
stock option expense in 1998) and changes in operating assets and
liabilities. In September 1998, the Company's cash was reduced by
$150,904,000 as a result of the 100% distribution of the common stock of
CoreComm Limited to the Company's shareholders. Purchases of property,
plant and equipment of $23,675,000 in 1998 were primarily for additional
cell sites and increased capacity in CCPR, Inc.'s cellular and paging
networks, including $1,115,000 for CoreComm Limited property, plant and
equipment purchases. In April and June 1998, three communications related
businesses in the United States were acquired for cash of $3,715,000 (net
of cash acquired). In 1998, fifteen Block A LMDS licenses in Ohio were
acquired for cash of $25,241,000 plus $124,000 in auction and license
application related costs (an aggregate of $25,365,000). In January 1998,
the San Juan Cellular Telephone Company (a wholly owned subsidiary of CCPR,
Inc.) purchased the FCC license to own and operate the non-wireline
cellular system in Puerto Rico RSA-4 (Aibonito) and all of the assets of
the system in exchange for $8,400,000 in cash and a promissory note in the
amount of $8,900,000. Total cash paid was $8,686,000, including costs
incurred in connection with the acquisition of $286,000. The $8,900,000
promissory note was paid in August 1998 as required by the new bank loan.
Write-offs of accounts receivable, net of recoveries as a percentage of
service revenues was 3.6% for the year ended December 31, 1998 compared to
6.7% for the year ended December 31, 1997. This percentage decreased
because CCPR, Inc. and its subsidiaries have increased prepaid subscribers.
YEAR 2000
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products,
operations and infrastructure, suppliers, and customers that are not Year
2000 compliant, and to develop, implement and test remediation and
contingency plans to mitigate these risks. The project comprises four
phases: (1) identification of risks, (2) assessment of risks, (3)
development of remediation and contingency plans and (4) implementation and
testing. The Company has incurred approximately $500,000 related to its
Year 2000 project and estimates that it will incur costs of $1,900,000 to
complete the renovation, validation and implementation phases and achieve
year 2000 readiness.
The Company's assessment is focused on its information technology ("IT")
systems, in particular its cellular and paging network and its billing,
provisioning and customer service system. The Company is also evaluating
the readiness of third-parties such as utility companies that the Company
depends upon for the operation of its network. The Company's leased office
space and other non-IT equipment which may have embedded technology that
may be affected by the year 2000 problem is being separately assessed. The
Company has completed the assessment of its IT systems and expects to
complete the remediation and testing of its IT systems year 2000 readiness
by June 1999. The evaluation of the readiness of the major third-parties is
expected to be completed by June 1999. The Company is also reviewing its
detailed contingency plans for potential modifications to address year 2000
issues. This review is expected to be completed by June 1999.
The Company currently believes that the most reasonably likely worst case
scenario with respect to the Year 2000 is the failure of the electric
company or the local exchange telephone company to be ready for the year
2000. This could cause a temporary interruption in the provision of service
to customers or in the Company's ability to complete telephone calls, or
both. Either or both could have a material adverse effect on operations,
although it is not possible at this time to quantify the amount of revenues
and gross profit that might be lost, or the costs that could be incurred.
The contingency plan to address some of these risks involve utilizing
back-up power supplies and alternative interconnections, which would
require time to implement and may be constrained due to capacity and/or
training limitations. The Company has had experience in implementing its
disaster recovery plan due to Hurricane Georges, which struck Puerto Rico
and the U.S. Virgin Islands in September 1998 and caused the electric
company and local exchange telephone company to experience service
interruptions.
As the Year 2000 project continues, the Company may discover additional
problems, may not be able to develop, implement or test remediation or
contingency plans, or may find that the costs of these activities exceed
current expectations. In many cases, the Company is relying on assurances
from suppliers that new and upgraded information systems and other products
will be Year 2000 ready. The Company plans to test such third-party system
and products, but cannot be sure that its tests will be adequate or that,
if problems are identified, they will be addressed by the supplier in a
timely and satisfactory way.
Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the
Company cannot be sure that all of its systems will work together in a Year
2000-ready fashion. Furthermore, the Company cannot be sure that it will
not suffer business interruptions, either because of its own Year 2000
problems or those of third-parties upon whom the Company is reliant for
services. The Company is continuing to evaluate its Year 2000-related risks
and corrective actions. However, the risks associated with the Year 2000
problem are pervasive and complex; they can be difficult to identify and
address, and can result in material adverse consequences to the Company.
Even if the Company, in a timely manner, completes all of its assessments,
identifies and tests remediation plans believed to be adequate, and
develops contingency plans believed to be adequate, some problems may not
be identified or corrected in time to prevent material adverse
consequences, to the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein constitute "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act
of 1995. When used herein, the words, "believe," "anticipate," "should,"
"intend," "plan,"' "will," "expects," "estimates," "projects,"
"positioned," "strategy," and similar expressions identify such
forward-looking statements. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company, or industry
results, to be materially different from those contemplated, projected,
forecasted, estimated or budgeted, whether expressed or implied, by such
forward-looking statements. Such factors include the following: general
economic and business conditions in Puerto Rico and US. Virgin Islands,
industry trends, the Company's ability to continue to design and build its
network, install facilities, obtain and maintain any required government
licenses or approvals and finance construction and development, all in a
timely manner, at reasonable costs and on satisfactory terms and
conditions, as well as assumptions about customer acceptance, churn rates,
overall market penetration, and competition from providers of alternative
services, the impact of new business opportunities requiring significant
up-front investment, Year 2000 readiness, and availability, terms and
deployment of capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Securities and Exchange Commission's rule related to
market risk disclosure requires that we describe and quantify our potential
losses from market risk sensitive instruments attributable to reasonably
possible market changes. Market risk sensitive instruments include all
financial or commodity instruments and other financial instruments (such as
investments and debt) that are sensitive to future changes in interest
rates, currency exchange rates, commodity prices or other market factors.
We are not exposed to market risks from changes in foreign currency
exchange rates or commodity prices. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes.
We are exposed to changes in interest rates primarily from our investments
in cash equivalents and available-for-sale marketable securities. All of
our marketable securities have maturities of less than one year which
reduces our interest rate exposure. Under our current policies, we do not
use interest rate derivative instruments to manage our exposure to interest
rate changes. A hypothetical 100 basis point decline in short-term interest
rates would reduce the fair value of our interest sensitive investments by
approximately $27,000 at December 31, 1998.
The principal amount by expected maturity, average interest rate and fair
value of the Company's liabilities that are exposed to interest rate risk
are described in the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements are included herein commencing on
page F-1.
The following is a summary of the quarterly results of
operations for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
THREE MONTHS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30(1) DECEMBER 31(1)
------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Revenues $39,413 $43,867 $46,580 $50,338
Operating income 6,217 6,204 (15,558) 565
Net income (loss) 1,072 933 (25,028) (7,828)
Net income (loss) per common share:
Basic .08 .07 (1.90) (.59)
Diluted .08 .06 (1.90) (.59)
1997
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------- --------------- --------------
Revenues $37,271 $38,438 $36,213 $36,572
Operating income 5,013 5,339 1,691 5,482
Income (loss) before extraordinary 404 1,527 (2,529) (1,416)
item
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)
(1) The Company recorded $21,758,000 and $10,034,000 in the third and
fourth quarters of 1998, respectively, as non-cash stock option
expense.
</TABLE>
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. For the quarter ended December 31, 1998, the
Company filed reports on Form 8-K dated the following dates: Form
8-K/A filed on October 13, 1998 and Form 8-K dated
November 17, 1998, filed on November 18, 1998.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1.
EXHIBIT INDEX
Exhibit No.
2.1 Agreement and Plan of Merger, dated as of January 31, 1997 by and
among Old CCPR, the Company and CoreComm Sub, Inc. (Incorporated by
reference from Exhibit 2, 1996 Form 10-K, File Number 19869-99)
2.2 Form of Distribution Agreement, dated as of August 18, 1998,
between CoreComm Limited ("CoreComm") and the Company.
(Incorporated by reference from Exhibit 2.1 from CoreComm's
Registration Statement on Form 10/A File Number 0-24521)
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 Amendment No. 2 to Rights Agreement, dated as of November 17, 1998,
between the Company and Continental Stock Transfer & Trust Company.
4.5 Indenture dated as of January 31, 1997 by and between CCPR
Services, Inc. ("Services"), Old CCPR and The Chase Manhattan Bank,
N.A. (Incorporated by reference from Exhibit 4.3, 1996 Form 10-K,
File Number 19809-99).
4.6 Registration Rights Agreement dated as of January 31, 1997, by and
among Services, Old 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, Old CCPR and CCPR Services. (Incorporated by reference
from Exhibit 10.2, 1996 Form 10-K, File Number 19869-99)
10.3 Form of Administration and Management Agreement between CCPR
Services, Inc., on the one hand and, on the other hand,
individually, each of Aguadilla Cellular Telephone Company, Inc.,
CCI PR RSA, Inc., Cellular Communications of Arecibo, Inc.,
Cellular Ponce, Inc., Gamma Communications, Mayaguez Cellular
Telephone Co., Inc., San Juan Cellular Telephone Company and Star
Associates, Inc. (Incorporated by reference to Exhibit 10.9, File
Number 33- 44420)
10.4 Agreement dated as of January 31, 1997, by and between Old CCPR and
CCPR Services, Inc. (Incorporated by reference to Exhibit 10.7,
1996 Form 10-K, File Number 19869-99).
10.5 Compensation Plan Agreements, as amended and restated effective May
1, 1997 (Incorporated by reference to Exhibit 10.6, 1997 Form 10-K,
File Number 19869-99). [UPDATE?]
10.6 Cellular Communications of Puerto Rico, Inc. 1998 Non-Qualified
Stock Option Plan.
10.7 Form of Tax Disaffiliation Agreement, dated as of August 18, 1998,
between CoreComm Limited and the Company. (Incorporated by
reference from Exhibit 10.1 from CoreComm's Registration
Statement on Form 10/A, File Number 0-24521).
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, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated: March 31, 1999
CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
By: /s/ Stanton N. Williams
Stanton N. Williams
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date
indicated.
Signature Title Date
/s/ George S. Blumenthal Principal Executive Officer March 31, 1999
- --- --------------------
George S. Blumenthal and Director
/s/ J. Barclay Knapp Principal Operating Officer March 31, 1999
- --- --------------------
J. Barclay Knapp and Director
/s/ Stanton N. Williams Principal Financial Officer March 31, 1999
- --- --------------------
Stanton N. Williams
/s/ Gregg Gorelick Principal Accounting Officer March 31, 1999
- --- --------------------
Gregg Gorelick
/s/ Sidney R. Knafel Director March 31, 1999
- --- --------------------
Sidney R. Knafel
/s/ Del Mintz Director March 31, 1999
- --- --------------------
Del Mintz
/s/ Alan J. Paticof Director March 31, 1999
- --- --------------------
Alan J. Paticof
/s/ Warren Potash Director March 31, 1999
- --- --------------------
Warren Potash
<TABLE>
<CAPTION>
Form 10-K-Item 14(a)(1) and (2)
Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated) and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
The following consolidated financial statements and schedule of Cellular
Communications of Puerto Rico, Inc. and Subsidiaries are included in Item 8:
<S> <C>
Report of Independent Auditors.............................................................F-2
Consolidated Balance Sheets - December 31, 1998 and 1997...................................F-3
Consolidated Statements of Operations - Years Ended December 31,
1998, 1997 and 1996......................................................................F-4
Consolidated Statement of Shareholders' Equity (Deficiency) - Years Ended
December 31, 1998, 1997 and 1996........................................................ F-5
Consolidated Statements of Cash Flows - Years Ended December 31,
1998, 1997 and 1996......................................................................F-6
Notes to Consolidated Financial Statements.................................................F-8
The following consolidated financial statement schedule of Cellular
Communications of Puerto Rico, Inc.
and Subsidiaries is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts .........................................F-25
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.
</TABLE>
Report of Independent Auditors
Shareholders and Board of Directors
Cellular Communications of Puerto Rico, Inc.
We have audited the accompanying consolidated balance sheets of Cellular
Communications of Puerto Rico, Inc. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity (deficiency), and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Cellular Communications of Puerto Rico, Inc. and subsidiaries
at December 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
San Juan, Puerto Rico
February 26, 1999
<TABLE>
<CAPTION>
Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated) and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
ASSETS 1998 1997
----------------- ------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $36,528,000 $11,783,000
Marketable securities 19,482,000 62,666,000
Accounts receivable - trade, less allowance for doubtful
accounts of $1,582,000 (1998) and $2,106,000 (1997) 18,806,000 19,043,000
Equipment inventory 7,635,000 2,882,000
Prepaid expenses and other current assets 5,575,000 7,147,000
----------------- ------------------
Total current assets 88,026,000 103,521,000
Property, plant and equipment, net 125,422,000 128,451,000
Unamortized license acquisition costs 169,453,000 157,467,000
Deferred financing costs, less accumulated amortization
of $1,446,000 (1998) and $584,000 (1997) 8,721,000 6,206,000
Other assets, less accumulated amortization of $957,000
(1998) and $1,088,000 (1997) 1,197,000 1,631,000
----------------- ------------------
$392,819,000 $397,276,000
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $15,003,000 $ 6,873,000
Accrued expenses 16,772,000 11,730,000
Due to affiliates 716,000 71,000
Interest payable 8,367,000 8,333,000
Deferred revenue 6,335,000 3,952,000
----------------- ------------------
Total current liabilities 47,193,000 30,959,000
Long-term debt 355,000,000 200,000,000
Obligation under capital lease 9,157,000 9,456,000
Commitments and contingent liabilities
Shareholders' equity (deficiency):
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 13,757,000 (1998) and 13,565,000 (1997) shares 138,000 136,000
Additional paid-in capital 98,234,000 226,490,000
Deferred stock option expense (16,287,000) __
(Deficit) (91,554,000) (60,703,000)
----------------- ------------------
(9,469,000) 165,923,000
Treasury stock-- at cost, 383,000 shares (9,062,000) (9,062,000)
----------------- ------------------
(18,531,000) 156,861,000
----------------- ------------------
$392,819,000 $397,276,000
================= ==================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated) and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
REVENUES:
<S> <C> <C> <C>
Service revenue $156,008,000 $131,882,000 $119,839,000
Equipment revenue 24,190,000 16,612,000 13,979,000
180,198,000 148,494,000 133,818,000
------------------------------------------------------
COSTS AND EXPENSES:
Cost of equipment sold 22,108,000 19,089,000 17,962,000
Operating expenses 19,276,000 14,949,000 15,214,000
Selling, general and administrative expenses 75,760,000 71,271,000 63,223,000
Stock option expense 31,792,000 - -
Depreciation of rental equipment 1,169,000 855,000 521,000
Depreciation expense 25,784,000 18,390,000 12,710,000
Amortization expense 6,881,000 6,415,000 6,187,000
------------------------------------------------------
182,770,000 130,969,000 115,817,000
------------------------------------------------------
Operating income (loss) (2,572,000) 17,525,000 18,001,000
OTHER INCOME (EXPENSE):
Interest income and other, net 2,142,000 2,020,000 646,000
Interest expense (26,158,000) (19,400,000) (8,181,000)
------------------------------------------------------
Income (loss) before income tax provision
and extraordinary item (26,588,000) 145,000 10,466,000
Income tax provision (4,263,000) (2,159,000) (5,352,000)
------------------------------------------------------
Income (loss) before extraordinary item (30,851,000) (2,014,000) 5,114,000
Loss from early extinguishment of debt, net
of income tax benefit of $741,000 - (3,326,000) -
------------------------------------------------------
Net income (loss) $(30,851,000) $ (5,340,000) $ 5,114,000
======================================================
Earnings Per Common Share:
Income (loss) before extraordinary item $(2.34) $(.15) $.39
Extraordinary item - (.25) -
---------------------------------------------------------
Net income (loss) $(2.34) $(.40) $.39
---------------------------------------------------------
Earnings Per Common Share-Assuming Dilution:
Income (loss) before extraordinary item $(2.34) $(.15) $.36
Extraordinary item - (.25) -
---------------------------------------------------------
Net income (loss) $(2.34) $(.40) $.36
=========================================================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated) and Subsidiaries
Consolidated Statement of Shareholders' Equity (Deficiency)
DEFERRED
ADDITIONAL STOCK
COMMON STOCK PAID-IN OPTION TREASURY STOCK
----------------------- ----------------------
SHARES AMOUNT CAPITAL EXPENSE (DEFICIT) SHARES AMOUNT
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 12,803,000 $128,000 $210,646,000 $(60,477,000) (207,000) $(6,145,000)
Shares issued for
interests in
cellular license 820,000 8,000 21,528,000
Exercise of stock options 16,000 129,000
Common stock repurchased,
at cost (343,000) (8,323,000)
Retirement of Treasury
Stock (207,000) (2,000) (6,143,000) 207,000 6,145,000
Net income for the year
ended December 31, 1996 5,114,000
-----------------------------------------------------------------------------------------
Balance, December 31,1996 13,432,000 134,000 226,160,000 (55,363,000) (343,000) (8,323,000)
Exercise of stock options 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)
Exercise of stock options 192,000 2,000 766,000
Distribution of
subsidiary to
shareholders (177,101,000)
Deferred stock option
expense 48,079,000 $(48,079,000)
Compensation charge 31,792,000
Net loss for the year
ended December 31, 1998 30,851,000)
-----------------------------------------------------------------------------------------
Balance, December 31, 1998 13,757,000 $138,000 $98,234,000 $(16,287,000)$(91,554,000) 383,000) $(9,062,000)
-----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated) and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1998 1997 1996
---------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ (30,851,000) $ (5,340,000) $ 5,114,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 33,834,000 25,660,000 19,418,000
Provision for losses on accounts receivable 5,049,000 7,146,000 7,520,000
Loss on disposal of property, plant and equipment 436,000 1,873,000 371,000
Stock option expense 31,792,000 -- --
Loss from early extinguishment of debt -- 4,067,000 --
Changes in operating assets and liabilities
net of effects from business acquisitions:
Accounts receivable (4,570,000) (6,155,000) (9,625,000)
Equipment inventory (4,880,000) 30,000 3,476,000
Prepaid expenses and other current assets 1,433,000 (4,125,000) (422,000)
Other assets (722,000) (265,000) (292,000)
Accounts payable 6,941,000 (1,008,000) 2,497,000
Accrued expenses 4,423,000 (380,000) (227,000)
Interest payable 34,000 6,655,000 1,063,000
Deferred revenue 2,390,000 871,000 227,000
Due to affiliates 5,378,000 (31,000) (208,000)
---------------------------------------------
Net cash provided by operating activities 50,687,000 28,998,000 28,912,000
INVESTING ACTIVITIES
Payment of the LMDS license fee and related costs (25,365,000) -- --
Acquisition of subsidiaries, net of cash acquired (3,715,000) -- --
Purchase of marketable securities (58,464,000) (132,016,000) (18,653,000)
Proceeds from maturities of marketable securities 101,648,000 75,267,000 12,736,000
Purchase of property, plant and equipment (23,675,000) (40,259,000) (36,564,000)
Cost of cellular license interests (8,686,000) (146,000) (5,811,000)
---------------------------------------------
Net cash (used in) investing activities (18,257,000) (97,154,000) (48,292,000)
FINANCING ACTIVITIES
Distribution of subsidiary to shareholders (150,904,000) -- --
Proceeds from borrowings, net of financing costs 151,623,000 193,233,000 52,000,000
Principal payments (8,900,000) (115,000,000) (28,975,000)
Principal payments of capital lease obligation (272,000) (194,000) --
Additional deferred financing costs -- -- (22,000)
Proceeds from exercise of stock options 768,000 332,000 129,000
Purchase of treasury stock -- (739,000) (8,323,000)
Distribution to minority interests holders -- -- (1,172,000)
---------------------------------------------
Net cash provided by (used in) financing
activities (7,685,000) 77,632,000 13,637,000
---------------------------------------------
Increase (decrease) in cash and cash equivalents 24,745,000 9,476,000 (5,743,000)
Cash and cash equivalents at beginning of year 11,783,000 2,307,000 8,050,000
---------------------------------------------
Cash and cash equivalents at end of year $36,528,000 $ 11,783,000 $ 2,307,000
=============================================
</TABLE>
<TABLE>
<CAPTION>
Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated) and Subsidiaries
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest
<S> <C> <C> <C>
exclusive of amounts capitalized $26,124,000 $12,745,000 $7,118,000
Income taxes paid 1,131,000 4,423,000 7,239,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES:
Long-term debt issued to acquire cellular
license interest $ 8,900,000 $ -- $ --
Liabilities incurred to acquire property, plant
and equipment 5,191,000 3,038,000 1,595,000
Capital lease obligation incurred to acquire
office building -- 9,922,000 --
Common stock issued to acquire cellular license
interests -- -- 21,536,000
</TABLE>
See accompanying notes.
Cellular Communications of Puerto Rico, Inc.
(formerly CoreComm Incorporated) and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION, BUSINESS AND DISTRIBUTION OF SUBSIDIARY
In January 1997, Cellular Communications of Puerto Rico, Inc. (formerly
CoreComm Incorporated) (the "Company") was formed, and a subsidiary of the
Company was merged with and into CCPR, Inc. (formerly 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.
In September 1998, the Company completed the distribution of all the common
stock of its wholly-owned subsidiary, CoreComm Limited, on a one-for-one
basis to its shareholders. Prior to the distribution, the Company made a
cash contribution of $150,000,000 to CoreComm Limited using proceeds from
the new bank loan. In April and June 1998, the Company acquired certain
businesses in acquisitions that were accounted for as purchases.
Accordingly, the net assets and results of operations of the acquired
businesses have been included in the consolidated financial statements from
the dates of acquisition. In March 1998, a former subsidiary of the
Company, Cortelyou Communications Corp. ("Cortelyou") was the successful
bidder for an aggregate of $25,241,000 for 15 Block A Local Multipoint
Distribution Service ("LMDS") licenses in Ohio. In June 1998, the Company
funded Cortelyou's payment of its bid. The acquired businesses and
Cortelyou were contributed to CoreComm Limited prior to the distribution.
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
The Company reports its net income (loss) per share in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
REVENUE RECOGNITION
Service revenue is recognized at the time services are rendered. Charges
for services that are billed in advance are deferred and recognized when
earned. Equipment sales are recorded when the equipment is shipped to the
customer. Rental revenue is billed and recognized on a monthly basis.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were $18,343,000 and
$2,338,000 at December 31, 1998 and 1997, respectively, and consisted of
corporate commercial paper.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities,
net of tax, are carried as a separate component of other comprehensive
income. The amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization and
accretion is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary will be included in
interest income. The cost of securities sold or matured is based on the
specific identification method. Interest on securities is included in
interest income.
Marketable securities at December 31, 1998 and 1997 consisted of corporate
debt securities. During the years ended December 31, 1998, 1997 and 1996,
there were no realized gains or losses on sales of securities. As of
December 31, 1998 and 1997, there were no unrealized gains or losses on
securities. All of the marketable securities as of December 31, 1998 and
1997 had a contractual maturity of less than one year.
EQUIPMENT INVENTORY
Equipment inventory is stated at the lower of cost (first-in, first-out
method) or market.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an estimate of uncollectible accounts receivable based
on the current aging of its receivables and its prior collection
experience.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
by the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are as follows: office building - 15 years,
operating equipment - 7 to 25 years, office furniture and other equipment -
1 to 5 years, and rental equipment - 2 years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
CAPITALIZED INTEREST
Interest is capitalized as a component of the cost of property, plant and
equipment constructed. In 1998, 1997 and 1996, interest of $148,000,
$415,000 and $198,000, respectively, was capitalized.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred relating to the issuance
of debt and are amortized over the term of the related debt.
ADVERTISING
The Company charges the cost of advertising to expense as incurred.
Advertising expense for the years ended December 31, 1998, 1997 and 1996
was $3,638,000, $3,667,000 and $3,025,000, 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 stock option 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 adopted SFAS
No. 130 in 1998 which had no impact on the Company's financial position or
results of operations.
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 these
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company adopted SFAS No. 131
in 1998 which had no effect on the consolidated financial statements since
the Company operates in one business segment.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in
fiscal years beginning after June 15, 1999. Management does not anticipate
that the adoption of this new standard will have a significant effect on
earnings or the financial position of the Company.
4. UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
DECEMBER 31
1998 1997
---------------------------
Deferred cellular license costs $ 5,935,000 $ 5,935,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 207,052,000 189,466,000
---------------------------
212,987,000 195,401,000
212,987,000 195,401,000
Accumulated amortization 43,534,000 37,934,000
---------------------------
$169,453,000 $157,467,000
===========================
4. UNAMORTIZED LICENSE ACQUISITION COSTS (CONTINUED)
In January 1998, the San Juan Cellular Telephone Company ("SJCTC"), 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. Costs of
$286,000 were incurred in connection with this acquisition.
In November 1996, a subsidiary of CCPR acquired the remaining interests,
aggregating 49%, in Star Associates, Inc., the company which owned the FCC
license for the non-wireline cellular system in Adjuntas, Puerto Rico
(RSA-2) for cash of $5,755,000 including expenses.
In February 1996, CCPR acquired the remaining minority interests
aggregating approximately 6% in SJCTC in exchange for approximately 820,000
shares of the Company's common stock. The stock was valued at $21,536,000,
the fair market value on the date of acquisition. In addition, SJCTC made a
special cash distribution of $1,172,000 to the minority interest holders.
The aggregate purchase price of $21,536,000 plus expenses of $56,000 and
the deficiency in net assets acquired of $850,000 have been classified as
license acquisition costs.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
DECEMBER 31,
1998 1997
--------------------------------
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 142,252,000 127,534,000
Office furniture and other equipment 33,909,000 24,546,000
Rental equipment 3,413,000 1,745,000
Construction in progress 8,387,000 12,533,000
--------------------------------
199,834,000 178,231,000
Accumulated depreciation 74,412,000 49,780,000
--------------------------------
$ 125,422,000 $ 128,451,000
================================
6. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31,
1998 1997
Accrued compensation $ 1,309,000 $ 765,000
Accrued franchise, property and income taxes 6,152,000 3,489,000
Commissions payable 1,237,000 1,143,000
Accrued equipment purchases 2,340,000 1,427,000
Subscriber deposits 1,384,000 1,544,000
Other 4,350,000 3,362,000
---------------------------
$16,772,000 $11,730,000
===========================
7. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
1998 1997
----------------------------
Senior Subordinated Notes $ 200,000,000 $ 200,000,000
Bank loan 155,000,000 --
------------- -------------
$ 355,000,000 $ 200,000,000
============= =============
In August 1998, a wholly-owned indirect subsidiary of the Company, CCPR
Services, Inc. ("Services") entered into a $170,000,000 credit agreement
with various banks and borrowed $155,000,000. The Company made a capital
contribution to its wholly-owned subsidiary, CoreComm Limited, of
$150,000,000 in cash using proceeds from the bank loan and distributed 100%
of the common stock of CoreComm Limited to the Company's shareholders.
Services has $15,000,000 available under the bank loan until September
2001. The terms include the payment of interest at least quarterly at a
floating rate, which is, at Services' option, either (a) the greater of the
bank's prime rate or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus,
based on the ratio of CCPR (the parent company of Services) and
subsidiaries' debt to cash flow and the floating rate in effect, either 0%
to 1.25% or 1.25% to 2.5%. The effective rate on Services' borrowings as of
December 31, 1998 was 7.87%. The terms also include an unused commitment
fee of 0.5% per annum which is payable quarterly. Principal payments
commence on September 30, 2001 based on two amortization schedules. One
schedule is for the first $95,000,000 borrowed which includes quarterly
payments until June 2006. The other schedule is for the remainder of the
amount borrowed which includes quarterly payments until June 2005. Services
incurred costs of $3,377,000 in connection with the bank loan which are
included in deferred financing costs.
In connection with the bank loan, CCPR has pledged to the banks the stock
of its subsidiaries and CCPR and its subsidiaries have given the banks a
security interest in their assets. CCPR and its other subsidiaries have
guaranteed the payment in full when due of the principal, interest and fees
owing under the bank loan, which guarantee is full, joint and several. The
bank loan also includes, among other things, restrictions on CCPR and its
subsidiaries: (i) dividend payments, (ii) acquisitions, (iii) investments,
(iv) sales and dispositions of assets, (v) additional indebtedness and (vi)
liens. The bank loan requires that CCPR and subsidiaries maintain certain
ratios of indebtedness to cash flow, fixed charges to cash flow and debt
service to cash flow.
In January 1997, Services issued $200,000,000 principal amount 10% Senior
Subordinated Notes due 2007 (the "Notes") and received proceeds of
$193,233,000 after discounts, commissions and other related costs. The
Notes are unconditionally guaranteed by CCPR, which guarantee is full,
joint and several. 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 a bank loan. In connection with the
repayment of the loan, Services recorded an extraordinary loss of
$4,067,000 from the write-off of unamortized deferred financing costs.
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.
Long-term debt repayments are due as follows:
Year ending December 31,
2001 $ 5,000,000
2002 11,500,000
2003 14,500,000
Thereafter 324,000,000
------------
$355,000,000
============
The fair value of the Notes as of December 31, 1998 and 1997 was
$193,500,000 and $194,000,000, respectively, based on the quoted market
price. The fair value of the bank loan as of December 31, 1998 was
$155,000,000 based on discounted cash flow analysis.
8. RELATED PARTY TRANSACTIONS
CCPR had been a wholly-owned subsidiary of Cellular Communications, Inc.
("CCI") until February 28, 1992, when CCI distributed to its stockholders
all of the outstanding common stock of CCPR. 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. The amount charged to CCPR included in general
and administrative expenses during the year ended December 31, 1996 was
$429,000. In August 1996, upon the merger of CCI with AirTouch
Communications, Inc., NTL Incorporated ("NTL") commenced providing
management, financial and legal services to 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 amounts charged to the Company included in general
and administrative expenses in 1998 and 1997 were $1,148,000 and
$1,780,000, respectively.
It is not practicable to determine the amount of expenses that would have
been incurred had the Company operated as an unaffiliated entity. However,
in the opinion of management of the Company, the allocation method is
reasonable.
Due to affiliates includes $588,000 and $71,000 at December 31, 1998 and
1997, respectively, due to NTL and $128,000 at December 31, 1998 due to
CoreComm Limited.
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
1998 1997 1996
---------------------------------------------
Numerator:
<S> <C> <C> <C>
Income (loss) before extraordinary item $(30,851,000) $(2,014,000) $5,114,000
Extraordinary item -- (3,326,000) --
---------------------------------------------
Net income (loss) $(30,851,000) $(5,340,000) $5,114,000
---------------------------------------------
Denominator for basic net income (loss) per
common share 13,195,000 13,075,000 13,196,000
Effect of dilutive securities:
Stock options -- -- 831,000
---------------------------------------------
Denominator for diluted net income (loss)
per common share 13,195,000 13,075,000 14,027,000
=============================================
Basic net income (loss) per common share:
Income (loss) before extraordinary item $(2.34) $(0.15) $0.39
Extraordinary item -- (.25) --
---------------------------------------------
Net income (loss) $(2.34) $(0.40) $0.39
=============================================
Diluted net income (loss) per common share:
Income (loss) before extraordinary
item $(2.34) $(0.15) $0.36
Extraordinary item -- (.25) --
---------------------------------------------
Net income (loss) $(2.34) $(0.40) $0.36
=============================================
</TABLE>
The shares issuable upon the exercise of stock options are excluded from
the computation of net loss per common share as their effect would be
antidilutive.
10. SHAREHOLDERS' EQUITY
DEFERRED STOCK OPTION EXPENSE
In connection with the distribution of all the common stock of CoreComm
Limited to the Company's shareholders, the Company made an equitable
adjustment to certain employee and non-employee director stock options. The
deferred stock option expense included in shareholders' deficiency of
$48,079,000 is a non-cash charge recorded in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" as a result of the new
measurement date. The Company recognized $31,792,000 as non-cash
stock option expense through December 31, 1998. The remaining $16,287,000
will be charged to stock option expense over the vesting period of the
stock options as follows: $10,481,000 in 1999, $4,550,000 in 2000 and
$1,256,000 in 2001.
TREASURY STOCK
The Board of Directors has authorized the repurchase of up to 1,000,000
shares of the Company's common stock through open market purchases as
market conditions warrant. As of December 31, 1998, 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.
SHAREHOLDER RIGHTS PLAN
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 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 2,020,000 shares of Common Stock reserved for issuance under the
1992 Stock Option 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 322,000 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.
There are 4,000,000 shares of Common Stock reserved for issuance under the
1998 Non-Qualified Stock Option Plan. The exercise price of a non-qualified
stock option granted pursuant to this plan is determined by the
Compensation and Option Committee. 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 1998, 1997 and 1996: risk-free
interest rates of 5.02%, 5.89% and 6.56%, respectively, dividend yield of
0%, volatility factor of the expected market price of the Company's common
stock of .507, .319 and .258, respectively, and a weighted-average expected
life of the option of 10 years.
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
1998 1997 1996
-------------- -- ------------ -- -------------
<S> <C> <C> <C>
Pro forma net income (loss) $(32,140,000) $(7,581,000) $3,467,000
Pro forma net income (loss) per share:
Basic $ (2.44) $ (.58) ($.26)
Diluted $ (2.44) (.58) .25
</TABLE>
A summary of the Company's stock option activity and related information
for the years ended December 31, follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------------------------------------------------------
Outstanding-beginning
<S> <C> <C> <C> <C> <C> <C>
of year 2,346,000 $2.68(1) 2,453,000 $17.81 2,180,000 $16.41
Granted 1,950,000 3.00 1,895,000 16.41 289,000 27.87
Exercised (175,000) 2.98 (133,000) 2.49 (16,000) 7.64
Forfeited -- -- (1,869,000) 23.93 -- --
---------- ---------- ---------
Outstanding-end of year 4,121,000 $2.80 2,346,000 $12.68(1) 2,453,000 $17.81
========== ========== =========
Exercisable at end of year 1,713,000 $2.43 1,114,000 $9.69 1,690,000 $14.06
========== ========== =========
(1) In 1998, the Company repriced its options due to the distribution of
CoreComm Limited to the Company's shareholders in 1998.
</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 1998, 1997 and
1996 is $2.03, $8.64 and $15.07, respectively.
The following table summarizes the status of the stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED-
REMAINING WEIGHTED- NUMBER AVERAGE
RANGE OF NUMBER OF CONTRACTUAL AVERAGE OF EXERCISE
EXERCISE PRICES OPTIONS LIFE EXERCISE PRICE OPTIONS PRICE
- --------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$0.04 to $0.46 411,000 3.2 $0.267 411,000 $0.267
$3.00 to $4.37 3,563,000 8.4 $3.000 1,228,000 $3.000
$4.70 to $5.07 147,000 7.1 $4.979 74,000 $4.889
- --------------------------------------------------------------------------------------------------
Total 4,121,000 1,713,000
- --------------------------------------------------------------------------------------------------
</TABLE>
11. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------
Current:
Federal $ -- $ 741,000 $ --
State 2,255,000 947,000 --
Puerto Rico and U.S.
Virgin Islands 2,008,000 471,000 4,555,000
-----------------------------------------
Total current 4,263,000 2,159,000 4,555,000
-----------------------------------------
Deferred:
Federal -- -- --
Puerto Rico -- -- 797,000
-----------------------------------------
Total deferred -- -- 797,000
-----------------------------------------
$4,263,000 $ 2,159,000 $ 5,352,000
=========================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows:
DECEMBER 31
1998 1997
-------------------------------
Deferred tax liabilities:
Tax over book depreciation and
amortization $ 44,777,000 $ 29,094,000
Deferred tax assets:
Net operating loss carryforwards 61,338,000 36,352,000
Valuation allowance for deferred tax
assets (17,358,000) (8,055,000)
-------------------------------
Net deferred tax assets 43,980,000 28,297,000
-------------------------------
Net deferred tax liabilities $ 797,000 $ 797,000
===============================
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $130,800,000 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, $28,900,000 in 2012 and $18,200,000 in 2018. A significant portion of
the US tax loss carryforwards are dual consolidated losses which generally
can only be utilized on a separate company basis rather than on a
consolidated basis.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $33,400,000 to offset future Puerto Rico taxable income that
expire as follows: $2,000,000 in 1999, $2,200,000 in 2000, $2,600,000 in
2001, $4,100,000 in 2002, $5,200,000 in 2003, $16,200,000 in 2004 and
$1,100,000 in 2005.
The provision for income taxes differs from the statutory rates principally
due to state and local taxes and the losses for which no benefit has been
provided.
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 1998, 1997 and
1996 was $257,000, $204,000 and $168,000, respectively.
13. LEASES
Total rent expense during the years ended December 31, 1998, 1997, and 1996
was $3,545,000, $3,680,000 and
$3,085,000, respectively.
Future minimum annual lease payments under noncancellable operating leases at
December 31, 1998 are:
$3,138,000 (1999); $2,432,000 (2000); $1,672,000 (2001); $1,134,000 (2002);
$416,000 (2003) and $3,238,000
thereafter.
In 1997, the Company entered into a lease for office space through 2012
which is classified as a capital lease for financial reporting purposes.
Accordingly, an asset of $9,922,000 has been recorded. Accumulated
depreciation on the office building at December 31, 1998 and 1997 was
$1,049,000 and $388,000, respectively. Future minimum annual payments under
this lease at December 31, 1998 are as follows:
Year ending December 31,
1999 $ 1,196,000
2000 1,196,000
2001 1,196,000
2002 1,265,000
2003 1,288,000
Thereafter 10,872,000
---------------
17,013,000
Interest (7,557,000)
---------------
Present value of net minimum 9,456,000
obligations
Current portion (299,000)
---------------
$ 9,157,000
---------------
14. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1998, the Company was committed to purchase
approximately $7,500,000 for cellular network and other equipment and for
construction services. In addition, as of December 31, 1998, the Company
had commitments to purchase cellular telephones, pagers and accessories of
approximately $2,200,000.
In 1992, the Company entered into an agreement which in effect provides for
a twenty year license to use a service mark in Puerto Rico and the U.S.
Virgin Islands which is also licensed to many of the non-wireline cellular
systems in the United States. The Company is required to pay licensing and
advertising fees, and to maintain certain service quality standards. The
total fees paid for 1998 were $289,000, which were determined by the size
of the Company's markets.
The Company is involved in various disputes, arising in the ordinary course
of business, which may result in pending or threatened litigation. The
Company's management expects no material adverse effect on the Company's
financial condition, results of operations or cash flows to result from
these matters.
<TABLE>
<CAPTION>
Schedule II -- Valuation and Qualifying Accounts
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
(1) (2)
------------------------
BALANCE AT CHARGED
EGINNING OF CHARGED TO TO OTHER BALANCE AT
PERIOD COSTS AND ACCOUNTS- DEDUCTIONS - END OF
DESCRIPTION B EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------- -------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful
accounts $ 2,106,000 $ 5,049,000 $ - $ (5,573,000) (a) $1,582,000
Year ended December 31, 1997:
Allowance for doubtful
accounts $ 3,767,000 $ 7,146,000 $ - $ (8,807,000) (b) $2,106,000
Year ended December 31, 1996:
Allowance for doubtful
accounts $ 3,233,000 $ 7,520,000 $ - $ (6,986,000) (b) $3,767,000
</TABLE>
(a) Uncollectible accounts written-off, net of recoveries, of $5,584,000,
and allowance of $287,000 of CoreComm Limited distributed, offset by
$298,000 allowance as of acquisition date from business combinations.
(b) Uncollectible accounts written-off, net of recoveries.
Exhibit 4.4
AMENDMENT NO. 2 TO THE RIGHTS AGREEMENT
Amendment No. 2 dated as of November 17, 1998 (the "Amendment"),
between CELLULAR COMMUNICATIONS OF PUERTO RICO, INC., a Delaware
corporation (the "Company"), and CONTINENTAL STOCK TRANSFER & TRUST
COMPANY, a New York corporation (the "Rights Agent").
WHEREAS, the Company and the Rights Agent entered into a Rights
Agreement, dated as of January 24, 1992 (the "Rights Agreement"); and
WHEREAS, the Distribution Date (as defined in the Rights
Agreement) has not occurred, and that accordingly, the Company and Rights
Agent hereby amend the Rights Agreement in accordance with Section 27
thereof.
NOW, THEREFORE, in consideration of the premises and mutual
agreements set forth in the Rights Agreement and this Amendment, the
parties hereby agree as follows:
Section 1. Amendment to Definition of "Acquiring Person".
The text of Section 1(a) of the Rights Agreement is deleted in its entirety
and replaced with the following language:
""Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person,
shall, after the date of Stock Distribution, be the Beneficial
Owner of 18% or more of the shares of PRCO Common Stock then
outstanding, but shall not include the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the
terms of any such plan."
Section 2. Amendment to Issue of Rights Certificates. In
Section 3(a), the clause reading:
"if upon consummation thereof, such Person would be the
Beneficial Owner of 15% or more of the shares of PRCO Common
Stock then outstanding"
is amended to read as follows:
"if upon consummation thereof, such Person would be the
Beneficial Owner of 18% or more of the shares of PRCO Common
Stock then outstanding".
Section 3. Amendment to Adjustment of Purchase Price, Number
and Kind of Shares or Number of Rights. In Section 11 (a) (ii), the clause
reading:
"become the Beneficial Owner of 15% or more of the shares of
Common Stock then outstanding, unless the event causing the 15%
threshold to be crossed is a transaction set forth in Section 13
(a) hereof"
is amended to read as follows:
"become the Beneficial Owner of 18% or more of the shares of
Common Stock then outstanding, unless the event causing the 18%
threshold to be crossed is a transaction set forth in Section 13
(a) hereof".
Section 4. Rights Agreement as Amended. The term "Agreement"
as used in the Rights Agreement shall be deemed to refer to the Rights
Agreement as amended hereby. The foregoing amendments shall be effective
as of the date hereof and, except as set forth herein, the Rights Agreement
shall remain in full force and effect and shall be otherwise unaffected
hereby.
Section 5. Counterparts. This Amendment may be executed in
any number of counterparts, and each of such counterparts shall for all
purposes be deemed an original, but all such counterparts shall together
constitute but one and the same instrument.
Section 6. Governing Law. This Amendment shall be deemed to
be a contract made under the laws of the State of Delaware and for all
purposes shall be governed by and construed in accordance with the laws of
such State applicable to contracts made and to be performed entirely within
such State.
Section 7. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and
shall not control or affect the meaning or construction of any provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
Attest: CELLULAR COMMUNICATIONS OF
PUERTO RICO, INC.
______________________ By _________________________________
Name: Name: Richard J. Lubasch
Title: Title: Senior Vice President - General
Counsel
Attest: CONTINENTAL STOCK
TRANSFER & TRUST COMPANY
As Rights Agent
______________________ By _________________________________
Name: Name:
Title: Title:
Exhibit 10.6
CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
1998 NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSE; CONSTRUCTION.
This Cellular Communications of Puerto Rico, Inc. 1998 Stock Option
Plan (the "Plan"), is intended to encourage stock ownership by employees
and directors of Cellular Communications of Puerto Rico, Inc. (formerly
CoreComm Incorporated, the "Corporation") and its divisions and subsidiary
and parent corporations and other affiliates, so that they may acquire or
increase their proprietary interest in the Corporation, and to encourage
such employees and directors to remain in the employ of the Corporation or
its affiliates and to put forth maximum efforts for the success of the
business. Services of directors will be considered employment for purposes
of this Plan.
2. DEFINITIONS.
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "AFFILIATE" shall have the meaning set forth in Rule 12b-2
under Section 12 of the Exchange Act.
(b) "BENEFICIAL OWNER" shall have the meaning set forth in Rule
13d-3 under the Exchange Act, except that a Person shall not be deemed
to be the Beneficial Owner of any securities which are properly filed
on a Form 13-G.
(c) "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.
(d) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(e) "FAIR MARKET VALUE" per share as of a particular date shall
mean (i) if the shares of common stock, par value $.01 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 market on such
date or on the last preceding date on which there was a sale of Common
Stock in such market, (ii) if the shares of Common Stock are then
admitted to quotation on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or other comparable
quotation system and have been designated as a National Market System
("NMS") security, or if the shares of Common Stock are 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 on such exchange, or (iii) if the shares of Common
Stock are 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.
(f) "OPTION" shall mean an option to purchase shares of common
stock of the corporation.
(g) "OPTIONEE" shall mean a person who has been granted an
Option under the Plan.
(h) "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.
(i) "PERSON" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Corporation
or any of its Affiliates, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation or any of
its subsidiaries, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the stockholders of the Corporation
in substantially the same proportions as their ownership of stock of
the Corporation.
(j) "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).
(k) "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.
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.
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.
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 the purchase price of the shares of Common
Stock covered by each Option (the "Option Price"); to determine the person
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 Notices
(which need not be identical) entered into in 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 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) and directors (who
are not employees) of the Corporation, its present or future divisions and
Subsidiary Corporations and Parent Corporations and (ii) 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.
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 4,000,000. 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 canceled, surrendered, exchanged 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. AUTOMATIC OPTION GRANTS.
Each employee of CCPR Services, Inc. or one of its Subsidiary
Corporations (the "Employer") who is not a member of the Management
Committee of the Employer and who commenced employment on or prior to March
13, 1998 and remains in the continual employ of Employer shall be granted
an Option to purchase 100 shares of Common Stock (the "Automatic Grants")
on March 13, 1998 at the Fair Market Value on such date. The Automatic
Grants shall not be exercisable until June 15, 1999 at which time they
shall become fully exercisable. Such grants will be subject to the terms
set forth in the Option Notice and in the Plan.
7. DISCRETIONARY OPTION GRANTS.
The Committee may make discretionary option grants under this Plan.
Such grants will be subject to the terms set forth in the Option Notice and
in the Plan. The Committee shall determine eligibility for option grants
pursuant to this Section 7 in its sole discretion.
8. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted pursuant to the Plan shall be evidenced by a
written notice (an "Option Notice") from the Corporation to the Optionee,
which Notice shall comply with and be subject to the following terms and
conditions:
(a) NUMBER OF SHARES. Each Option Notice shall state the number
of shares of Common Stock to which the Option relates.
(b) TYPE OF OPTION. Each Option Notice shall specifically
identify the Option as a nonqualified stock option.
(c) OPTION PRICE. Each Option Notice shall state the Option
Price, which shall be determined by the Committee. The Option Price
shall be subject to adjustment as provided in Section 8(i) hereof. An
Option shall be considered to be granted on the date the Committee
adopts a resolution expressly granting such Option.
(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 Notice, 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 Notice;
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 Sections 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.
(f) Intentionally Left Blank
(g) TERMINATION. Except as provided in this Section 8(g) and in
Section 8(h) 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 8(i)) 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 corporate transaction) 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 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 by the
Optionee or by a transferee 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 thereof 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 corporate transaction) 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 retirement (as
determined by the Committee in its sole discretion), 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 exercise such Option by bequest or inheritance or otherwise
by reason of the 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.
The Corporation may require that it be provided with adequate evidence
of death or a Disability.
(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 Notice 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 parents, 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 number of such shares covered by outstanding
Options, 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 rounded to the nearest whole
share. 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 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 i n 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.
(3) If there is an "Acceleration Event" while unexercised
Options remain outstanding under the Plan then from and after the date of
the Acceleration Event (the "Acceleration Date"), all Options that have not
expired or terminated in accordance with the Plan or the Option Notice
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.
An "Acceleration Event" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have
occurred:
(i) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Corporation (not including in
the securities beneficially owned by such Person any securities acquired
directly from the Corporation or its Affiliates) representing 20% or more
of the combined voting power of the Corporation's then outstanding
securities, excluding any Person who becomes such a Beneficial owner in
connection with a transaction described in clause (a) of Paragraph (iii)
below; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of of directors then serving:
individuals who, on the date hereof, constitute the Board and any new
director (other than a director whose initial assumption of office is in
connection with an actual or threatened election contest, including but not
limited to a consent solicitation, relating to the election of directors of
the Corporation) whose appointment or election by the Board or nomination
for election by the Corporation's stockholders was approved or recommended
by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors on the date hereof or whose appointment,
election or nomination for election was previously so approved or
recommended; or
(iii) there is consummated a merger or
consolidation of the Corporation or any direct or indirect subsidiary of
the Corporation with any other corporation, other than (a) a merger or
consolidation which would result in the voting securities of the
Corporation outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof) at least 60% of the combined voting power of the securities of the
Corporation or such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (b) a merger or
consolidation effected to implement a recapitalization of the Corporation
(or similar transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Corporation (not
including in the securities beneficially owned by such Person any
securities acquired directly from the Corporation or its Affiliates)
representing 20% or more of the combined voting power of the Corporation's
then outstanding securities; or
(iv) the stockholders of the Corporation approve a plan
of complete liquidation or dissolution of the Corporation or there is
consummated an agreement for the sale or disposition by the Corporation of
all or substantially all of the Corporation's assets, other than a sale or
disposition by the Corporation of all or substantially all of the
Corporation's assets to an entity, at least 60% of the combined voting
power of the voting securities of which are owned by the stockholders of
the Corporation in substantially the same proportions as their ownership of
the Corporation immediately prior to such date.
Notwithstanding the foregoing, an "Acceleration Event" shall not
be deemed to have occurred by virtue of the consummation of any transaction
or series of integrated transactions immediately following which the record
holders of the common stock of the Corporation immediately prior to such
transaction or series of transactions continue to have substantially the
same proportionate ownership in an entity which owns all or substantially
all of the assets of the Corporation immediately following such transaction
or series of transactions.
(4) 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.
(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.
(l) 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 Notices authorized under the
Plan shall contain such other provisions, including, without
limitation, the imposition of restrictions upon the exercise of an
Option and the inclusion of any condition as the Committee shall deem
advisable.
9. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES.
As a condition of exercise, each Optionee agrees 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 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 and
employment 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. 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.
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. 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 all
provisions hereof shall be construed in a manner to so comply.
13. EFFECT OF HEADINGS.
The section and subsection headings contained herein are for
convenience only and shall not affect the construction hereof.
14. GOVERNING LAW.
The Plan shall be governed by the laws of the State of Delaware.
15. EFFECTIVE DATE OF PLAN.
The effective date of the Plan is the date the Plan is adopted by the
Board.
<TABLE>
<CAPTION>
EXHIBIT 11
CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
CALCULATION OF NET INCOME (LOSS) PER SHARE
WEIGHTED AVERAGE NUMBER OF SHARES
--------------------------------------------------------
DATE DESCRIPTION OF TOTAL YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
ISSUED ISSUANCE OUTSTANDING 31-DEC-98 31-DEC-97 31-DEC-96 31-DEC-95
- ----------- -----------------------------------------------------------------------------
- ----------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/94 Common Stock 10,000,615 10,000,615 10,000,615 10,000,615 10,000,615
01/12/95 Common Stock 6,813 6,813 6,813 6,813 6,589
02/02/95 Common Stock 1,945 1,945 1,945 1,945 1,769
02/23/95 Common Stock 521 521 521 521 444
04/05/95 Treasury Stock (25,000) (25,000) (25,000) (25,000) (18,493)
04/06/95 Treasury Stock (25,000) (25,000) (25,000) (25,000) (18,425)
04/06/95 Common Stock 1,200 1,200 1,200 1,200 884
04/07/95 Treasury Stock (22,000) (22,000) (22,000) (22,000) (16,153)
04/10/95 Treasury Stock (10,000) (10,000) (10,000) (10,000) (7,260)
04/11/95 Treasury Stock (10,000) (10,000) (10,000) (10,000) (7,233)
04/12/95 Treasury Stock (8,000) (8,000) (8,000) (8,000) (5,764)
05/18/95 Common Stock 3,500 3,500 3,500 3,500 2,177
06/01/95 Common Stock 3,125 3,125 3,125 3,125 1,824
06/17/95 Common Stock 1,388 1,388 1,388 1,388 757
07/12/95 Common Stock 3,125 3,125 3,125 3,125 1,473
07/24/95 Common Stock 83,333 83,333 83,333 83,333 36,530
07/28/95 Common Stock 1,388 1,388 1,388 1,388 593
08/04/95 Common Stock 2,685,398 2,685,398 2,685,398 2,685,398 1,118,231
08/04/95 Common Stock 168 168 168 168 77
08/07/95 Common Stock 9,522 9,522 9,522 9,622 3,809
08/18/95 Treasury Stock (50,000) (50,000) (50,000) (50,000) (18,493)
08/21/95 Common Stock 521 521 521 521 188
09/26/95 Treasury Stock (20,000) (20,000) (20,000) (20,000) (5,260)
09/28/95 Treasury Stock (25,000) (25,000) (25,000) (25,000) (6,438)
09/29/95 Treasury Stock (5,000) (5,000) (5,000) (5,000) (1,274)
10/12/95 Treasury Stock (7,000) (7,000) (7,000) (7,000) (1,534)
02/07/96 Common Stock 821,124 821,124 821,124 735,225
02/13/96 Common Stock 2,084 2,084 2,084 1,833
02/27/96 Common Stock 3,500 3,500 3,500 2,945
03/06/96 Common Stock 513 513 513 257
03/12/96 Common Stock 5,555 5,555 5,555 4,462
04/23/96 Treasury Stock (15,000) (15,000) (15,000) (10,328)
04/24/96 Treasury Stock (53,000) (53,000) (53,000) (36,417)
04/25/96 Treasury Stock (25,000) (25,000) (25,000) (17,077)
04/26/96 Treasury Stock (35,000) (35,000) (35,000) (23,811)
04/29/96 Treasury Stock (25,000) (25,000) (25,000) (16,803)
04/30/96 Treasury Stock (12,500) (12,500) (12,500) (8,367)
05/01/96 Treasury Stock (5,000) (5,000) (5,000) (3,333)
05/02/96 Treasury Stock (22,500) (22,500) (22,500) (14,939)
06/10/96 Common Stock 642 642 642 302
06/11/96 Common Stock 3,000 3,000 3,000 1,664
09/20/96 Common Stock 1,042 1,042 1,042 280
11/06/96 Common Stock 42 42 42 6
11/01/96 Treasury Stock (15,000) (15,000) (15,000) (2,459)
11/04/96 Treasury Stock (35,000) (35,000) (35,000) (5,451)
11/05/96 Treasury Stock (6,000) (6,000) (6,000) (765)
11/12/96 Treasury Stock (25,000) (25,000) (25,000) (3,347)
11/27/96 Treasury Stock (25,000) (25,000) (25,000) (2,322)
12/06/96 Treasury Stock (15,000) (15,000) (15,000) (1,025)
12/23/96 Treasury Stock (20,000) (20,000) (20,000) (437)
12/24/96 Treasury Stock (2,500) (2,500) (2,500) (48)
12/26/96 Treasury Stock (7,500) (7,500) (7,500) (102)
01/03/97 Treasury Stock (20,000) (20,000) (19,836)
01/06/97 Treasury Stock (10,000) (10,000) (9,836)
01/08/97 Treasury Stock (5,000) (5,000) (4,890)
01/17/97 Common Stock 834 834 795
01/21/97 Common Stock 18,750 18,750 17,671
03/06/97 Common Stock 208 208 171
10/08/97 Common Stock 7,725 7,725 1,778
11/25/97 Common Stock 521 521 51
12/23/97 Common Stock 1,875 1,875 41
12/30/97 Treasury Stock (5,000) (5,000) (14)
12/31/97 Common Stock 103,276 103,276 0
02/11/98 Common Stock 83 73
04/13/98 Common Stock 2,000 1,436
07/16/98 Common Stock 4,000 1,841
07/23/98 Common Stock 1,000 441
07/24/98 Common Stock 7,000 3,068
08/13/98 Common Stock 2,000 767
09/11/98 Common Stock 5,377 1,635
10/16/98 Common Stock 3,594 748
11/25/98 Common Stock 24,000 2,368
11/30/98 Common Stock 2,000 170
12/15/98 Common Stock 3,000 132
12/16/98 Common Stock 10,000 411
12/17/98 Common Stock 226 9
12/24/98 Common Stock 1,395 27
12/31/98 Common Stock 41,487 0
Weighted average
number
--------------------------------------------------------
of common shares 13,289,415 13,195,379 13,074,995 13,195,605 11,069,633
--------------------------------------------------------
Net effect of
dilutive
stock options 831,437
Total 13,289,415 13,195,379 13,074,995 14,027,042 11,069,633
========================================================
Income (loss) before
extraordinary item ($30,851,000 ($2,014,000) $5,114,000 ($1,451,000)
Loss from early extinguishment
of debt 0 (3,326,000) 0 0
-------------------------------------------------
Net income (loss) ($30,851,000 ($5,340,000) $5,114,000 ($1,451,000)
=================================================
Net income (loss) per common share
Income (loss) before
extraordinary item ($2.34) ($0.15) $0.39 ($0.13)
Extraordinary item 0.00 (0.25) 0.00 0.00
---------------------------------------------
Net income (loss) ($2.34) ($0.40) $0.39 ($0.13)
=============================================
Net income (loss) per common
share-assuming dilutions:
Income (loss) before ($2.34) ($0.15) $0.36 ($0.13)
extraordinary item
Extraordinary item 0.00 (0.25) 0.00 0.00
---------------------------------------------
Net income (loss) ($2.34) ($0.40) $0.36 ($0.13)
=============================================
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
All of the corporations listed below were incorporated in Delaware
except where otherwise noted:
CCPR, Inc.
CCPR Services, Inc.
CCPR of the Virgin Islands, Inc.
CCPR Paging, Inc.
CCPR Telecommunications, Inc.
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, No.
33-95276, No. 333-13009, No. 33-78842, No. 33-78838, and No. 333-13011) of
Cellular Communications of Puerto Rico Inc. (formerly CoreComm
Incorporated) (the "Company") of our report dated February 26, 1999, with
respect to the consolidated financial statements of the Company included in
its Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Juan, Puerto Rico
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-30-1998
<PERIOD-START> JAN-01-1998
<CASH> 36,528,000
<SECURITIES> 19,482,000
<RECEIVABLES> 20,388,000
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0
0
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</TABLE>
