SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
F O R M 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________
Commission File No. 333-26055-01
CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3517074
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 East 59th Street, New York, New York 10022
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 906-8481
----------------------------------------------------
(Registrant's telephone number, including area code)
--------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Guarantee of 10% Senior Subordinated Notes due 2007
issued by CCPR Services, Inc.
---------------------------------------------------
(Title of Class)
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20, 1998, there were 1,000 shares of the Registrant's common stock
outstanding. The Registrant is a wholly-owned subsidiary of CoreComm
Incorporated, and there is no market for the Registrant's common stock.
The Registrant meets the conditions set forth in General Instructions I(1)(a)
and I(1)(b) of Form 10-K and is filing this form with the reduced disclosure
format pursuant to General Instructions.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
Certain statements contained herein constitute "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act of
1995. When used herein, the words, "believe," "anticipate," "should," "intend,"
"plan," "will," "expects," "estimates," "projects," "positioned," "strategy,"
and similar expressions identify such forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Registrant, or industry results, to be materially different from those
contemplated or projected, forecast, estimated or budgeted in or expressed or
implied by such forward-looking statements. Such factors include the following:
general economic and business conditions, industry trends, the Registrant's
ability to continue to design and build its network, install facilities, obtain
and maintain any required government licenses or approvals and finance
construction and development, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions, as well as assumptions about customer
acceptance, churn rates, overall market penetration and competition from
providers of alternative and competing services, and availability, terms and
deployment of capital.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
- ------
Item 1 Business...................................................... 1
Item 2 Property...................................................... 17
Item 3 Legal Proceedings............................................. 18
Item 4 Submission of Matters to a Vote of Stockholders............... 18
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 Disclosures About Market Risk.... 24
Item 8 Financial Statements and Supplementary Data................... 25
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 26
PART III
- --------
Items 10, 11, 12 and 13.................................................. 26
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................... 26
Exhibit Index............................................................ 27
Signatures............................................................... 29
Index to Financial Statements ........................................... F-1
<PAGE>
PART I
------
ITEM 1. BUSINESS
- ----------------
GENERAL
Cellular Communications of Puerto Rico, Inc. (the "Company") is a
wholly-owned subsidiary of CoreComm Incorporated ("CoreComm"). The Company is a
Delaware corporation that was originally organized under the name EC
Acquisition, Inc. on May 18, 1998. The Company, through wholly and majority
owned entities, owns, operates and markets cellular and paging systems in the
Commonwealth of Puerto Rico and the U.S. Virgin Islands and conducts other
cellular and paging related operations described below. The Company's executive
offices are located at 110 East 59th Street, New York, New York 10022 and its
telephone number is (212) 906-8481.
Prior to January 31, 1997 (the "Merger Date") the Company was a publicly
traded entity. On the Merger Date the Company effected a corporate restructuring
(the "Restructuring") whereby shareholders of the Company became shareholders of
CoreComm on a one-for-one basis upon the completion of a merger of the Company
with and into a subsidiary of CoreComm. As a result of the Restructuring
CoreComm replaced the Company as the publicly traded entity and the Company
became a wholly-owned subsidiary of CoreComm.
COMMONWEALTH OF PUERTO RICO
The Commonwealth of Puerto Rico has been a territory of the United States
since 1898 and a Commonwealth since 1952. Puerto Ricans are U.S. citizens with
non-voting representation in Congress, who cannot vote in national elections
unless they reside in the United States. The system of government is modeled
after the state governments of the United States, with an executive branch
headed by a Governor and a legislature consisting of a 27-member Senate and a
53-member House of Representatives. The judicial system is closely linked to the
United States system. Most United States laws apply in Puerto Rico and Puerto
Rico is under the jurisdiction of the First Circuit, United States Court of
Appeals, which maintains a United States District Court in Puerto Rico. Judicial
decisions may be appealed to the Supreme Court of the United States in the same
manner that decisions are appealed from state courts. The United States and
Puerto Rico also share common monetary, defense and postal systems.
The Commonwealth of Puerto Rico has a land area approximately 70 percent
the size of Connecticut and has a population of approximately 3.8 million
people. The population is concentrated primarily in the coastal regions, in
particular in the San Juan metropolitan area. Puerto Rico maintains a highway
and road network of approximately 8,600 miles, including a partially completed
all island beltway loop.
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
1
<PAGE>
elections unless they reside in the United States. The system of government is
modeled after the state governments of the United States, with three main
branches of government. The executive branch is headed by a Governor, elected
every four years through a direct vote. The legislative branch consists of one
chamber having 14 members. The judicial system is closely linked to the United
States system with a Territorial Court that has jurisdiction over local matters
and a United States District Court, which falls under the jurisdiction of the
Third Circuit, United States Court of Appeals. Judicial decisions may be
appealed to the Supreme Court of the United States in the same manner that
decisions are appealed from state courts. United States Federal law applies in
the U.S. Virgin Islands. The United States and the U. S. Virgin Islands share
common monetary, defense and postal systems.
The U.S. Virgin Islands has a land area of approximately 84 square miles
and has a population of approximately 102,000 people. The population is divided
in three islands: St. Thomas (with a population of approximately 46,000 people),
St. Croix (with a population of approximately 50,000 people) and St. John (with
a population of approximately 6,000 people).
CELLULAR TELEPHONE OWNERSHIP INTERESTS
The following table sets forth the Company's cellular Metropolitan
Statistical Area ("MSA") and Rural Service Area ("RSA") markets and approximate
percentage ownership as of March 20, 1998:
<TABLE>
<CAPTION>
MARKET POPULATION(1)(2) OWNERSHIP POPS (3)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
San Juan/Caguas MSA ........................... 2,124,891 100.00% 2,124,891
Aguadilla MSA.................................. 180,687 99.01 178,898
Mayaguez MSA................................... 227,941 100.00 227,941
Ponce MSA...................................... 261,585 100.00 261,585
Arecibo MSA.................................... 195,843 100.00 195,843
PR-1 Rincon RSA................................ 13,726 100.00 13,726
PR-2 Adjuntas RSA.............................. 276,517 100.00 276,517
PR-3 Ciales RSA................................ 126,052 100.00 126,052
PR-4 Aibonito RSA(4)........................... 295,140 100.00 295,140
PR-5 Ceiba RSA(5).............................. 42,172 0.00 0
PR-6 Vieques RSA............................... 8,975 100.00 8,975
PR-7 Culebra RSA............................... 1,598 100.00 1,598
U.S. Virgin Islands-1 St. Thomas/St. John...... 51,670 100.00 51,670
U.S. Virgin Islands-2 St. Croix................ 50,139 100.00 50,139
--------- ---------
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
2
<PAGE>
necessarily indicative of the number of potential subscribers. Rather, this
term is used only as a basis for comparison of the current size of cellular
system operators.
(4) In January 1998, a subsidiary of the Company acquired all of the assets of
Cellular Uno Limited Partnership, the entity that held the license to own
and operate the non-wireline system for PR-4 Aibonito-RSA.
(5) The Company has received interim operating authority in the PR-5 Ceiba RSA
from the FCC and from Puerto Rico authorities. In 1997, the U.S. Congress
directed the FCC to use the auction mechanism to grant permanent operating
authority with this and other RSA's if and when the FCC decided to grant
such licenses.
The Company had, as of December 31, 1997, an aggregate of approximately
196,400 subscribers which represents a penetration rate (i.e., the number of
subscribers divided by the total estimated population of the Company's markets)
for the Company of approximately 5.1% See "Sales and Marketing".
PAGING
A subsidiary of the Company has received authorization from the FCC to
operate two 900 MHz paging systems to serve Puerto Rico and the U.S. Virgin
Islands. The Company completed the construction of the Puerto Rico paging system
and began operations during March 1995. The Company completed construction of
the U.S. Virgin Islands paging system and began operations in November 1995. As
of December 31, 1997, the Company's paging operations had approximately 49,000
pagers in use.
SALES AND MARKETING
The Company attracts subscribers through direct and indirect distribution
channels and aggressive advertising. The Company relies on its direct sales
force, indirect channels such as dealers, retailers and resellers, sales
literature, sponsorship of local events, and substantial television, print and
radio advertising campaigns to create awareness of its services and to
communicate the benefits and promotional offers associated with them.
Sales are targeted at two primary segments: individual and corporate
accounts. Each segment has its own dedicated direct sales force. The Company
introduced prepaid service (primarily for low usage individual users) in 1997.
This payment option eliminates the necessity of credit checks and billing and
allows users to closely monitor their usage.
The Company has over 300 employees in sales and marketing functions. Direct
sales, including corporate accounts, represented over 60% of the Company's total
sales in 1997. The 180-person direct sales force is distributed among 12 fixed
sales and service centers throughout Puerto Rico and the U.S. Virgin Islands,
with five in San Juan/Caguas, one in Ponce, one in Fajardo, one in Arecibo, one
in Mayaguez and three in the U.S. Virgin Islands, as well as six kiosks located
in major shopping centers, 31 mini-kiosks inside large retail stores (e.g.,
WalMart, Sams, Western Auto, Sears, Blockbuster Video) and four mobile units.
The sales and service centers are designed for up-market consumers, have
convenient hours of operation, and the ability to sell and service cellular
telephones while the customer waits. The sales and service centers also play a
major role in the Company's ability to provide superior customer service. See
3
<PAGE>
"Customer Service". In addition, the Company utilizes a network of carefully
selected independent dealers and large retailers (such as Let's Talk Cellular)
which accounted for over 30% of the Company's new activations in 1997.
Currently, resellers account for only a small percentage of new activations.
The use of a broad mix of different distribution channels in Puerto Rico
gives the Company a widespread marketing presence and provides easy access to
its subscriber base while maintaining a high quality of service to its
subscribers. In addition, the Company's growing network of direct sales, dealers
and large retailers provide it with a strong presence in the telecommunications
market. The Company markets its services under the nationally recognized
CELLULAR ONE (registered trademark) brand name and its sales and marketing
strategy carefully promotes CELLULAR ONE (registered trademark)'s premium brand
image.
Although the Company employs a segmented pricing approach whereby specific
pricing plans are developed to attract different segments of the market, the
Company has differentiated itself from the Puerto Rico Telephone Company
("PRTC"), the Company's significant competitor and the landline telephone
service provider in Puerto Rico, primarily by offering premium services at
premium prices and directing significant efforts toward customer service,
technical excellence and advanced calling features. In contrast, the Company
believes that the PRTC has tended to compete on the basis of name recognition
and appeal to local sentiment. Centennial de Puerto Rico, Inc., a subsidiary of
Centennial Cellular Corp. ("Centennial") was a new personal communications
systems ("PCS") entrant to the market in late 1996 and has competed successfully
with the Company and the PRTC on the bases of price and its all digital network.
CUSTOMER SERVICE
An important element in the Company's business strategy is to provide the
highest quality, localized customer service in the individual markets it serves.
This is especially significant because, in the Company's view, customer service
has not been emphasized by the PRTC.
The Company's commitment to superior quality service is reflected by the
92% overall satisfaction rating it received from its subscribers in an annual
independent survey of customer satisfaction conducted by the Cellular One Group
in 1997. This rating far exceeded the 85% United States national average.
The Company has introduced a full-service program utilizing customer
service representatives and local customer service centers in all of its major
markets. Customer service centers are located within existing sales and service
distribution outlets, offering a specific, non-sales-oriented point of contact
where existing customers can pay their bills, ask questions about their cellular
service or hardware, etc. In addition, the Company provides a 24-hour customer
service hotline. This full-service policy means that a customer service person
is available at all times to answer inquiries and to respond rapidly to customer
emergencies.
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),
4
<PAGE>
usage (high, medium, low), tenure, payment history, etc., and subsequent contact
patterns and methods depend on a subscriber's class. This allows the Company to
service and satisfy its subscriber base according to their value to the Company
in a cost effective manner.
The Company proactively implements fraud detection and sophisticated
prevention mechanisms to protect its subscribers from fraud. In 1992 the Company
implemented fraud identification software and has recently implemented the
additional state-of-the-art fraud detection and prevention systems known as
fingerprinting and authentication. The Company has also taken a leading role in
the industry to educate the public about the growing problem of cellular
telephone fraud and how to detect and prevent its occurrence. In addition,
through its participation in the North American Cellular Network ("NACN"), the
Company is assured that only bona-fide subscribers enjoy roaming services.
CELLULAR TECHNOLOGY
Cellular mobile radio technology was developed to provide high quality,
high capacity mobile and portable telephone systems. In a cellular telephone
system, the service area is subdivided into smaller geographic areas or "cells."
Each cell has its own relatively low power transmitter and receiver that
communicates by radio signal with cellular telephones located in the cell. Each
cell is connected by microwave or telephone line to a mobile telephone switching
office ("MTSO"), which in turn is connected to the worldwide telephone network.
See " - Regulation - Federal Communications Commission Regulation" for the
interconnection arrangements with the worldwide telephone network.
When a cellular subscriber in a particular cell dials a number, the mobile
telephone sends the call by radio to the cell's transmitter/receiver, where it
is sent to the MTSO. The MTSO then completes the call through its connection
with the landline telephone network. Conversely, incoming calls are received by
the MTSO, which instructs the appropriate cell to complete the communications
link by radio signal between the cell's transmitter/receiver and the cellular
telephone.
The MTSO controls communications within the cellular system, including the
"hand-off" process as a cellular telephone moves from one cell to another. In
this process, the system recognizes that a cell boundary has been crossed, finds
an available channel in the new cell, and transfers the call to that channel -
all within a fraction of a second.
Cellular telephone systems have a high capacity because of the substantial
frequency spectrum generally allocated for the purpose of cellular service by
the FCC and because all frequencies can be reused throughout the system.
Frequency reuse is possible because the transmission power of cell site
equipment and mobile units is relatively low and signals on the same channel
will not interfere with each other if they are transmitted in cells that are
sufficiently far apart. Reuse multiplies the number of channels available to the
system operator and thereby increases the telephone calling capacity. A cellular
licensee may also use its cellular frequencies to provide paging, data
transmission, and other services so long as the provision of these services does
not impair its ability to provide cellular service, cause interference to other
cellular licensees and, when required, has the appropriate regulatory approval.
5
<PAGE>
NETWORK AND SYSTEM CONSTRUCTION
The Company's network was designed specifically for the Puerto Rico and
U.S. Virgin Islands markets using extensive geographic and engineering studies.
The Company continually updates its network in order to ensure quality service
and maximum geographic coverage. The Company has completed a network that as of
December 31, 1997, included approximately 99 cell sites and two MTSOs covering
over 90% of the population of Puerto Rico and the U.S. Virgin Islands.
Engineering and system construction is carried out by approximately 80
employees.
Cell sites are equipped with both analog and dual mode (i.e. digital or
analog cellular) radio transceivers. Digital Time Division Multiple Access
("TDMA") was originally installed in 1995 and commercially implemented in 1997.
Digital technology offers many advantages over analog technology, including
substantially increased capacity, lower costs and the opportunity to provide
enhanced services such as data transmission. In early 1997 the Company initiated
the use of an enhanced voice coder in its TDMA system. The enhanced voice coder
provides this system with improved voice quality. The Company has introduced and
distributed to selected groups of subscribers, including internal users, dual
mode phones using the TDMA format for digital signaling. Because existing analog
cellular telephones will not be able to receive digital transmissions from the
base station, the Company expects that the transition from analog to digital
will be phased in over a number of years, during which time the system will
maintain both analog and digital transmitting equipment and will thus be able to
serve both analog and digital forms of cellular telephones and transmitting
equipment.
In order to hasten cell site commissioning, increase network reliability
and reduce ongoing operating costs, the Company has built its own digital
microwave transmission network to connect its cell sites and switches. The
backbone of the network is a ring around the mountainous regions of the island,
providing substantial capacity (135 Mb/sec). The ring network provides redundant
communication paths to ensure minimal network disruption in the event of a cell
site outage and spurs provide at least 6 Mb/sec of capacity to each cell site.
The Company resells spare capacity on this network to major telecommunications
users.
In 1997, the Company began to use a Network Management Center ("NMC")
provided by C-Net, Inc. The NMC enables the Company to monitor the entire system
on a 24 hour basis and allows for nearly instant detection of any system
malfunction or failure.
The Company uses a Computer Automated Design system to choose the proper
network configuration that will provide maximum capacity and service reliability
in the island's heavily populated coastal areas. The design is based on the ring
network concept, which provides a good fit with Puerto Rico's topography. In
addition, to test the network design, the Company uses a performance testing
system to predict and measure signal levels. By utilizing sophisticated network
design and system testing techniques, the Company's completed network provides
similar geographic coverage to the PRTC with fewer cell sites and with greater
service reliability.
Cellular systems are capital intensive, requiring significant levels of
investment for equipment, construction and cell site acquisition. As of
December 31, 1997, the Company
6
<PAGE>
had operating plant and equipment and construction-in-progress with an
historical cost of approximately $142,000,000.
INTERCONNECTION AGREEMENT
Effective September 2, 1997, after negotiations between PRTC and the
Company and arbitration by the Telecommunications Regulatory Board of Puerto
Rico, the Company and PRTC entered into an interconnection agreement. The
agreement is for a two year term. The agreement establishes the rate at which
the Company will pay PRTC for calls placed by the Company's subscribers to
PRTC's customers. In addition, the agreement provides that PRTC is obligated to
pay the Company the same amount for calls made by its customers to the Company's
subscribers. This agreement reflects a reduction in the Company's
interconnection rate of almost 50% and, unlike the previous contract between the
parties, requires PRTC to pay the Company for calls originated on PRTC's
network. Moreover, the Company is no longer required to pay PRTC for the
telephone numbers the Company supplies to its customers.
The interconnection agreement gives PRTC the right to assess long-distance
toll charges on any of its own customers who call from outside the Metro area to
any of the Company's subscribers. The agreement further provides, however, that
PRTC will not assess such charges on its customers if the Company either agrees
to assume the long distance charges or if the Company interconnects with, and
picks up PRTC's incoming calls, at each of the 17 host end offices outside the
Metro area. The Company chose the option of end office interconnection but, in
November 1997, before PRTC installed such points of interconnection, PRTC began
assessing, retroactively to September 2, 1997 and without warning to its
customers, toll charges to its customers who had placed calls to the Company's
subscribers. By December 17, 1997, PRTC had installed all the point of
interconnection requested by the Company. On December 24, 1997, the Board ruled
that PRTC had violated its good faith duty to its customers by assessing charges
to them retroactively and without any advance notice. Accordingly, the Board
ordered PRTC to refund any payments already collected and to cease and desist
from attempting to collect charges not yet rendered. PRTC subsequently filed a
complaint in Federal District Court for the District of Puerto Rico against the
Board and the Company and asked for a preliminary injunction. Both the complaint
and preliminary injunction request remain pending. The Company believes there is
no merit to PRTC's lawsuit and intends to defend itself vigorously.
SOURCES OF REVENUE
The cellular mobile telephone services available to customers and the
sources of revenue available to a system operator are similar to those available
with standard home and office telephones. Cellular telephone subscribers are
generally charged separately for monthly access, air time, toll calls and custom
calling features such as voice mail, call forwarding, call waiting and third
party conferencing. Cellular telephone subscribers are generally responsible for
purchasing or otherwise obtaining their own cellular mobile telephone. The
Company introduced prepaid service (primarily for low usage individual users) in
1997. This payment option eliminates the necessity of credit checks and billing
and allows users to closely monitor their usage. Paging subscribers are charged
on a monthly basis for service and are generally responsible for purchasing
their own pager. The Company also generates some revenue from the resale of its
digital microwave transmission network.
7
<PAGE>
When service is provided to "roamers" (i.e., registered customers of a
cellular system other than the Company's cellular system who place calls on the
Company's cellular system), the Company charges a daily access fee and the
roamer air time rate, which is typically higher than standard usage rates.
Roaming is an added service offered by the Company which allows a customer to
place or receive a call in a cellular service area away from the customer's home
market area. The Company has entered into "roaming agreements" with operators of
other cellular systems covering most of the United States cellular systems.
These reciprocal agreements allow a subscriber of a participating system to roam
or travel into a Company market and make and receive calls on the Company's
system. The charge for this service is billed by the Company to the subscriber's
home system, which then bills the subscriber. Roamers from systems that do not
participate in this arrangement are routed to an outside service bureau which
completes the call upon the receipt of a valid credit card number. The Company
receives a fee from the service bureau for each completed call. The Company
provides roaming services under the NACN, which allows calls to and from roamers
from systems who participate in NACN to be delivered automatically without the
use of access codes. NACN also provides such roamers the ability to use their
custom calling features in roaming markets.
The cellular telephone industry is typically characterized by high fixed
costs and low variable costs. Therefore, once revenues exceed fixed costs,
incremental revenues should yield a high incremental operating profit. In
addition, once initial system capacity has been reached, additional cellular
system capacity can be added in increments that closely match demand and at less
than the proportionate cost of the initial capacity.
PATENTS, COPYRIGHTS AND LICENSES
The Company does not have any patents or copyrights nor does the Company
believe patents or copyrights play a material role in its business. Other than
the Company's FCC licenses, the Company's only license is for the use of the
service mark and trademark CELLULAR ONE (registered trademark), which is also
licensed to many of the non-wireline systems in the United States. In 1992, the
owners of such mark entered into a new agreement with the Company, with an
effective twenty-year term, under which the Company is required to maintain
certain service quality standards. Under this agreement, the Company is required
to pay licensing and other fees for the use of the service mark. The total fees
paid in the year ended December 31, 1997 were $216,000, which were determined by
the size of the Company's markets.
COMPETITION
FCC rules formerly provided that two licensees will be authorized to
provide wireless communications service in each market. PRTC is one of the
licensees (the "Wireline Licensee") in each Puerto Rico market. VitelCellular,
Inc., an affiliate of Virgin Islands Telephone Company (the provider of landline
telephone service in each market in the U.S. Virgin Islands) is the Wireline
Licensee in each U.S. Virgin Islands market. The second authorization in each of
Puerto Rico and the U.S. Virgin Islands was available for applications by a
non-telephone company carrier (the "Non-Wireline Licensees"). The Company is a
Non-Wireline Licensee. The FCC's regulation of cellular system licensing,
construction and operation 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
8
<PAGE>
competition in each of its Puerto Rico markets from the PRTC and in each of its
U.S. Virgin Islands markets from VitelCellular, Inc. Although the cellular
services offered by the Company, the PRTC and VitelCellular, Inc. are similar in
terms of price, the Company has attempted to differentiate itself from the PRTC
and VitelCellular, Inc. by directing significant efforts toward customer
service, technical services and calling features.
The PRTC and VitelCellular, Inc. are significantly larger and better
capitalized than the Company. The Company believes the PRTC currently provides
service to less than approximately 40% of the subscribers of wireless service in
Puerto Rico. In the U.S. Virgin Islands, the Company believes that
VitelCellular, Inc. currently provides service to approximately 45% of the
subscribers of cellular service in the U.S. Virgin Islands. In Puerto Rico,
Centennial, a competitor using PCS frequencies, had approximately 15% of the
wireless market at year end 1997.
In 1990, the Commonwealth of Puerto Rico attempted to sell the PRTC to an
independent third party, but did not consummate such a transaction. In 1997, the
Commonwealth announced that it intended to restart this process and indicated
that it intended to complete such sale by the end of 1998. Such sale could be to
another experienced cellular operator or to a telecommunications company, such
as an affiliate of a Bell Operating Company. Given that the FCC-defined markets
and the technical standards are the same for both licensees in a market, the
Company believes that its ability to make and implement decisions rapidly and
its customer service oriented strategy should enable it to compete effectively
with the PRTC or any other competitor.
Broadband PCS has become increasingly competitive with cellular services.
Broadband PCS is a digital, wireless communications service consisting of a
variety of new mobile and portable services and technologies, such as small,
lightweight telephone handsets that work at home, in the office, or on the
streets; portable, wireless facsimile machines; wireless electronic mail
services; advanced paging techniques; and other wireless communications
services. Broadband PCS providers are deploying a large number of low power base
stations to take advantage of the radio propagation characteristics of the 2 GHz
spectrum. Accordingly, more PCS base stations than cellular base stations are
needed to cover a particular area, although PCS facilities cost less than
comparable cellular facilities.
The FCC completed the first auction process for broadband PCS in March
1995. In the Puerto Rico-Virgin Islands MTA, the three high bidders were AT&T,
Centennial and PCS 2000, now known as Clear Comm, Inc. Centennial began
marketing its PCS services in December 1996 and as of December 31, 1997 had
approximately 55,000 subscribers. Centennial's network provides a single
seamless system substantially overlapping the Company's system. None of the
other PCS licensees have commenced operations, although AT&T has begun limited
construction.
In the D-F block PCS auction, the PRTC and VitelCom, Inc., an affiliate of
VitelCellular, Inc., each purchased 10 MHz licenses that cover their respective
cellular service areas. Accordingly, after the FCC completes the licensing
process, each of these companies will hold 35 MHz of wireless spectrum in their
regions. The remaining D, E, and F blocks PCS licenses were acquired by entities
which include Sprint Communications Inc. and Omnipoint
9
<PAGE>
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 stated its intent to provide a cellular-type
telephone service via satellite
10
<PAGE>
technology that will be available anywhere in the world beginning in September
1998. Iridium also plans to offer a means of roaming among the world's major
ground-based cellular phone standards. Other mobile satellite service providers
are expected to include Globalstar LP, which has announced its intention to be
in operation by 1999, and ICO Global Communications LP. The FCC has also
authorized Basic Exchange Telecommunications Radio Service to make basic
telephone service more accessible to rural households and businesses.
Further, various other FCC rulemaking proceedings may affect the manner in
which radio frequency spectrum will be allocated among the various potential
competitors of cellular service. For example, the FCC has adopted rules
allocating 25 MHz below 5 GHz for commercial fixed and mobile radio services
which could eventually compete with cellular. The FCC has also adopted rules
allocating a portion of the spectrum above 40 GHz for commercial radio service
some of which could compete with cellular. There can be no assurance that
existing cellular operators will be permitted to receive licenses for such
spectrum, or that the adoption of auctions would not increase the cost to the
Company of obtaining such licenses or their renewal. In addition, 30 MHz of
spectrum in the 2.3 GHz band has been licensed for wireless communication
services ("WCS"), and the FCC has adopted rules permitting licensees to offer
virtually any wireless service on this band, subject to specific technical rules
to prevent interference with services in adjacent bands. Because the FCC has
adopted restrictive out-of-band emission limits for WCS spectrum, which it
believes will render WCS spectrum technologically infeasible for mobile
operations, WCS licensees will probably not present significant competition to
the Company's operations for the foreseeable future. Other technological
advances or regulatory changes in the future may make available other
alternatives to cellular service, thereby creating additional sources of
competition.
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
11
<PAGE>
to the expiration of its license term, each cellular licensee seeking renewal
must file an application. Other parties seeking authorization to serve the
licensee's market may also file competing applications. The FCC has ruled that
an incumbent licensee would receive a "renewal expectancy" if, during its
license term, (i) its performance has been "substantial," defined as "sound,
favorable, and substantially above a level of mediocre service;" and (ii) it had
substantially complied with applicable FCC rules, policies, and the
Communications Act. The FCC may award an incumbent its license renewal and not
require a full comparative hearing if the incumbent qualifies for a renewal
expectancy. If the licensee does not qualify for a renewal expectancy, the FCC
will consider all competing applications in a comparative hearing. The FCC may
grant an uncontested renewal application without conducting a comparative
hearing or finding a renewal expectancy. There can be no assurance that a
license will be renewed.
On January 22, 1998, the Company successfully renewed its licenses for the
Ponce and Mayaguez MSAs for additional ten year terms. During 1998, the Company
will apply for renewal of its licenses in the San Juan and Aguadilla MSAs, to
which it does not expect any significant challenge.
The FCC has adopted regulations regarding auctions for the award of radio
spectrum licenses. Pursuant to such rules, the FCC at any time may require
auctions for new or existing services prior to the award of any license.
Accordingly, the Company can give no assurance with respect to its continued
ability to procure additional frequencies or to expand existing services using
frequencies for which the Company is licensed into new geographic areas.
Under FCC rules, the authorized cellular service area for the Company in
each of its markets is referred to as the "cellular geographic service area" or
"CGSA". The boundaries of the CGSA are determined by a mathematical formula that
is a function of transmitting station effective radiated power and antenna
height. The CGSA may be coincident with, smaller than, or in some cases larger
than the related MSA or RSA boundary. The right to serve areas which fall within
the licensee's MSA or RSA but outside of its CGSA is exclusive to such licensee
for a period of five years from the grant of its initial construction permit. As
licensees serve such areas, their CGSAs will be extended to cover the additional
served areas inside the MSA or RSA and, in some cases, area beyond the MSA/RSA
boundary. Although overlapping service areas are common, under rules adopted by
the FCC in 1993, service area extensions into the CGSA of a neighboring system
on the same frequency block must be withdrawn from such CGSA at the request of
the neighboring licensee. At the conclusion of the initial five-year
construction period any entity, including the licensee, may file with the FCC an
application to serve the "unserved areas," of that MSA or RSA which are outside
of the licensee's CGSA, subject to certain restrictions. The Company has
determined that there are no significant unserved areas within its licensed
markets.
The Communications Act requires telecommunications common carriers to file
and maintain with the FCC tariffs describing rates, terms and conditions under
which their international and certain interstate telecommunications services are
offered to the public. Accordingly, the Company must file tariffs for certain
telecommunications services that it proposes to offer.
12
<PAGE>
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 local exchange carriers ("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"
13
<PAGE>
provision (which enabled a telecommunications carrier to demand any term of an
incumbent LEC's ("ILEC's") interconnection contract with another carrier). The
Eighth Circuit's October 14 decision vacated an FCC rule that obligated ILECs,
under certain circumstances, to provide combinations of network elements, rather
than provide them individually. This decision may make it more difficult or
expensive for competitors to use combinations of ILEC elements. The FCC,
numerous interexchange carriers ("IXCs") and various other parties filed
petitions for certiorari with the U.S. Supreme Court, which accepted the case
for review on January 26, 1998. The Supreme Court is not expected to issue a
decision before the end of 1998. Some of the same parties and certain other
parties also have asked the FCC to reconsider these and other regulations
implementing the Telecommunications Act. On January 22, 1998, the Eighth Circuit
Court of Appeals ruled that the FCC cannot apply its local competition pricing
rules in reviewing applications of the BOCs for authorization to provide long
distance service that originates and certain long distance services that
terminate in one of their in-region states. If upheld, this decision could make
it somewhat easier for the BOCs to enter the market for in-region long distance
services.
On December 31, 1997, a U.S. District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271, which prohibits BOCs from providing long distance service that
originates (or in certain cases terminates) in one of its in-region states until
the BOC has satisfied certain statutory conditions in that state and has
received the approval of the FCC. This decision would permit the three BOCs that
are parties to the case immediately to begin offering widespread in-region
long-distance services. The District Court has granted the request of the FCC
and certain IXCs for a stay, and the FCC and certain IXCs have filed appeals of
the decision with the U.S. Court of Appeals for the Fifth Circuit.
Following enactment of the 1996 Act, no CMRS providers, including those
owned or affiliated with BOCs, are required to provide equal access to long
distance service providers. The 1996 Act, however, does permit the FCC to impose
rules requiring CMRS providers to afford subscribers unblocked access to a long
distance provider of their choice through the use of carrier identification
codes or other mechanisms, but only if the FCC determines that cellular and
other CMRS subscribers are being denied access to their chosen long distance
providers and that such denial is contrary to the public interest. It cannot be
predicted whether the FCC will subsequently order cellular carriers and other
CMRS providers to provide such unblocked access.
The overall impact of the 1996 Act on the business of the Company is
unclear and will likely remain so for the foreseeable future. The Company may
benefit from reduced costs in acquiring required communications services, such
as LEC interconnection. However, other provisions of the 1996 Act relating to
interconnection, telephone number portability, equal access and resale could
subject the Company to increased competition.
In addition, pursuant to the 1996 Act the FCC issued new regulations in
1997 regarding the implementation of the universal service program. In 1998, the
FCC established a nationwide universal service fund ("USF") to subsidize
telecommunications carriers operating in high-cost and rural areas and to help
provide telecommunications services to schools and libraries. The company has to
pay into the federal high cost/rural fund based upon its interstate gross
revenues and into the school/libraries fund based upon its interstate and
intra-island gross
14
<PAGE>
revenues. The government will reassess the contribution factors for each fund on
a quarterly basis. The company's first quarter contribution was approximately
$279,000. The company might seek to be certified as eligible to receive money
from the USF by the Puerto Rico Telecommunications Regulatory Board (the
"Board"). To do so, it must provide certain services to customers in specified
areas in Puerto Rico.
Puerto Rico is currently eligible for contributions from the high
cost/rural USF in the amount of approximately $110,000,000. On January 1, 1999,
all non-rural telephone companies will receive support from the federal fund
based on forward-looking, rather than historical, costs. In addition, the
federal government will cover only 25% of the costs and states are expected to
collect remaining 75% by establishing state universal service funds. PRTC has
estimated that, under the FCC's forward looking proxy models, Puerto Rico's
federal universal service funding would decrease to anywhere between $171,000
and $9,000,000. In that case, the Board would likely establish its own USF
program. Given the small number of carriers operating in Puerto Rico, each
carrier's contribution to the Puerto Rico fund would probably be significantly
larger than the current contributions to the federal fund. For this reason, PRTC
has requested that the FCC continue to provide Puerto Rico with the funding at
current levels until 2001, the date on which rural carriers are required to
begin the transition to a forward-looking cost methodology and participate in
the 25%-75% federal/state split. It cannot be predicted how the FCC will rule on
PRTC's request.
Subsidiaries of the Company also hold point-to-point common carrier
microwave licenses to transport the Company's traffic. These licenses have been
issued by the FCC for specified terms, and the licensed facilities, as well as
proposed new microwave facilities, must be authorized by the FCC and operated in
accordance with the FCC regulations. FCC rules had provided for a universal
expiration date every 10 years for all common carrier microwave licenses,
regardless of when they had been issued, with the next expiration occurring in
February 2001. Under new rules that became effective in August 1996, licensees
may select either a full 10-year license term dating from the original issuance,
modification or renewal of license or a term of less than 10 years to allow for
consolidated renewal application filings. Microwave renewal applications are not
subject to comparative proceedings. There can be no assurance that a license
will be renewed.
Alien Ownership. Section 310(b) of the Communications Act places
significant restrictions on alien ownership in and involvement with any
companies that use electromagnetic spectrum frequencies under the FCC's
broadcast or common carrier authority. Section 310(b)(3) of the Communications
Act places an absolute prohibition on aliens owning or voting more than 20
percent of the capital stock of any corporation holding such a license. Section
310(b)(4) prohibits aliens from owning or voting more than 25% of the capital
stock of any holding company of such a corporate licensee. The FCC has statutory
discretion to refrain from applying the holding company proscriptions of Section
310(b)(4) in a particular case if it determines that doing so would not
adversely affect the public interest. Since February 9, 1998, FCC rules have
provided for a rebuttable presumption that greater than 25% indirect ownership
or control of a common carrier licensee by citizens or companies from a country
that is a signatory to the Telecommunications Annex to the World Trade
Organization General Agreement on Trade in Services ("WTO Agreement") serves the
public interest. With regard to investors from countries that are not
signatories to the WTO Agreement, the FCC continues to apply an "effective
15
<PAGE>
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
16
<PAGE>
obtained FAA clearance for the construction of antenna structures where such
approval is necessary. The siting and construction of cellular communications
facilities requires land use and construction approval in Puerto Rico and in the
U.S. Virgin Islands. In the past the Company has experienced delays in receiving
the required approvals in Puerto Rico. The 1996 Act prohibits the FCC from
preempting local and state regulations of the siting and construction of antenna
towers for commercial mobile radio service providers except in certain limited
circumstances.
Media reports have suggested that certain radio frequency emissions from
portable cellular telephones might be linked to cancer. The Cellular
Telecommunications Industry Association, as a result of industry concern, has
asked the Federal Food and Drug Administration and the Environmental Protection
Agency to appoint a panel of experts to review and revalidate the previously
existing research that established the safety of cellular telephones, and which
had resulted in an FCC determination in 1987 that microwave and cellular radio
transmissions did not pose a material health hazard. The FCC enforces standards
governing the emission of electromagnetic frequencies, including those used by
cellular systems and portable cellular telephones. The Company believes that its
facilities and all cellular telephones currently marketed and in use by its
subscribers comply with those standards.
CUSTOMER DEPENDENCE AND SEASONALITY
The Company is not dependent upon any single customer for any significant
portion of its business. The Company's business, as well as the cellular
communications industry, is not generally characterized as having a material
seasonal element and it is not expected to become seasonal in the foreseeable
future.
EMPLOYEES
As of December 31, 1997, the Company through its subsidiaries had an
aggregate of approximately 750 employees. No employees are represented by any
labor organization. The Company believes that its relationship with its
employees is excellent.
ITEM 2. PROPERTY
- ----------------
Certain of the Company's subsidiaries lease office space, sales and service
centers and warehouse space in the Commonwealth of Puerto Rico and in the U.S.
Virgin Islands. In addition, certain subsidiaries either own or lease
transmitter sites and lease a cellular switch site. The loss of any of these
leases, either because of a failure to obtain a renewal of a lease or for any
reason not known or anticipated by the Company, could have an adverse effect on
the Company's cellular operations until a substitute site could be found.
The Company believes that the properties that are currently under lease or
owned by the Company are adequate to serve its present business operations and
its goals of providing continuous coverage throughout Puerto Rico and the U.S.
Virgin Islands, although the Company may require additional properties for new
cell sites and sales and service centers as demand for cellular service
increases. See the Notes to the Company's Consolidated Financial Statements
included elsewhere in this Form 10-K for information concerning lease
commitments.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is involved in various disputes, arising in the ordinary course
of business, which may result in pending or threatened litigation. The Company's
management expects no material adverse effect on the Company's financial
condition to result from these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- -------------------------------------------------------
Omitted pursuant to General Instruction I(2)(e) of Form 10-K.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
- ------------------------------------------------------------------------
The Company is a wholly-owned subsidiary of CoreComm.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following table sets forth certain financial data for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993. This information should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 148,494 $ 133,818 $ 108,668 $ 67,141 $ 29,146
Operating expenses 129,858 115,817 97,647 65,187 42,023
Operating income (loss) 18,636 18,001 11,021 1,954 (12,877)
Income (loss) before extraordinary item (3,452) 5,114 (1,451) (4,812) (18,731)
Net income (loss) (6,778) 5,114 (1,451) (4,812) (18,731)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 (1) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $ (8,776) $ 11,078 $ 12,444 $ 10,808 $ 18,658
Property, plant and equipment-net 128,451 97,945 75,769 55,077 42,653
Total assets 332,124 300,722 256,997 231,371 218,669
Long-term debt 200,000 115,000 90,000 101,212 95,506
Shareholders' equity 75,429 162,608 144,152 112,784 111,621
</TABLE>
(1) In 1995, the $40,000,000 principal amount Convertible Senior Subordinated
Notes were converted into approximately 2,778,000 shares of common stock.
The Company did not declare or pay any cash dividends during the periods
indicated.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
- -------------------------------------------------------------------------
On January 31, 1997, the Company effected a corporate restructuring whereby
shareholders of the Company became shareholders of CoreComm Incorporated
("CoreComm") on a one-for-one basis upon the completion of a merger of the
Company with and into a subsidiary of CoreComm. As a result of this
restructuring, CoreComm replaced the Company as the publicly traded entity and
the Company became a wholly-owned subsidiary of CoreComm.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
- --------------------------------------
Service revenue increased to $131,882,000 from $119,839,000 as a result of
subscriber growth. Lower average revenue of new prepaid subscribers, a migration
of subscribers to less expensive rate plans, and a decrease in minutes of use of
existing subscribers resulted in average monthly revenue per cellular subscriber
for the year ended December 31 decreasing to $62 in 1997 from $73 in 1996.
Ending subscribers were 196,400 and 159,300 as of December 31, 1997 and 1996,
respectively. Ending pagers in use were 49,000 and 31,000 as of December 31,
1997 and 1996, respectively.
The loss from equipment, before depreciation of rental equipment, decreased
to $2,477,000 from $3,983,000 primarily because the Company is not selling
telephones below their cost to prepaid subscribers. Reductions in the cost of
cellular telephones also contributed to this decrease.
Operating expenses decreased to $14,949,000 from $15,214,000 primarily due
to a reduction in interconnection charges offset by additional costs associated
with the expanded network (including paging operations). Operating expenses as a
percentage of service revenue decreased to 11.3% in 1997 from 12.7% in 1996.
Late in the fourth quarter of 1997, the Puerto Rico Telecommunications
Regulatory Board announced that the proposed retroactive application of a
universal service charge to January 1997 had been eliminated. As a result, in
the fourth quarter, subsidiaries of the Company reversed a $1,644,000 expense
accrual for this proposed charge which had been recorded in operating expenses
during the prior quarters of 1997. The Company anticipates that any universal
service charge adopted in Puerto Rico in 1998 will not be retroactive.
Selling, general and administrative expenses increased to $70,160,000 from
$63,223,000 as a result of increased selling and marketing to increase the
customer base and additional personnel to service the expanding customer base.
Increases in property taxes and subscriber billing expense also contributed to
this increase. The increases in selling and marketing costs, personnel costs,
property taxes and subscriber billing expense were 48%, 20%, 9% and 13%,
respectively, of the total $6,937,000 increase.
20
<PAGE>
Depreciation of rental equipment increased to $855,000 from $521,000 due to
an increase in the number of rental pagers.
Depreciation expense increased to $18,390,000 from $12,710,000 primarily
because of an increase in property, plant and equipment.
Amortization expense increased to $6,415,000 from $6,187,000 primarily due
to increases in license acquisition costs.
Interest income and other, net, decreased to expense of $1,817,000 from
income of $646,000 primarily due to an increase in loss on write-downs and
disposals of property, plant and equipment to $1,873,000 from $371,000.
Interest expense increased to $19,400,000 from $8,181,000 as a result of
the increase in long-term debt at a higher effective interest rate.
The provision for income taxes decreased to $871,000 from $5,352,000 as a
result of a decrease in Puerto Rico or U.S. Virgin Islands taxable income of
certain of the Company's consolidated subsidiaries and a federal income tax
benefit from the tax sharing agreement with CoreComm.
In connection with the termination of the bank loan, the Company recorded
an extraordinary loss of $4,067,000 ($3,326,000 net of income tax benefit) from
the write-off of unamortized deferred financing costs.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Service revenue increased to $119,839,000 from $94,409,000 as a result of
subscriber growth that increased the Company's current revenue stream. Average
monthly revenue per subscriber decreased to $73 in 1996 from $86 in 1995. Ending
subscribers were 159,300 and 115,500 as of December 31, 1996 and 1995,
respectively.
The loss from equipment, before depreciation of rental equipment, decreased
to $3,983,000 from $6,376,000 primarily because of reductions in the cost of
cellular telephones offset by an increase in the loss from pager sales. The
Company sells cellular telephones and pagers below cost in response to
competition and to generate subscriber growth.
Operating expenses increased to $15,214,000 from $10,207,000 primarily due
to increased usage of the network and additional costs associated with the
expanded network (including paging operations), which account for 90% and 10% of
the increase, respectively.
Selling, general and administrative expenses increased to $63,223,000 from
$51,148,000 as a result of increased selling and marketing to increase the
customer base and additional personnel to service the expanding customer base.
Increases in bad debt expense,
21
<PAGE>
customer retention expense, property taxes and subscriber billing expense also
contributed to this increase. The increases in selling and marketing costs,
personnel costs, bad debt expense, customer retention expense, property taxes
and subscriber billing expense were 31%, 8%, 12%, 13%, 8% and 11%, respectively,
of the total $12,075,000 increase.
Depreciation of rental equipment increased to $521,000 from $225,000 due to
an increase in the number of rental pagers, offset by a decrease in rental
telephone depreciation due to rental telephones becoming fully depreciated.
Depreciation expense increased to $12,710,000 from $9,638,000 primarily
because of an increase in property, plant and equipment.
Amortization expense increased to $6,187,000 from $5,794,000 primarily due
to increases in license acquisition costs.
Interest income and other, net, increased to $646,000 from $358,000
primarily due to an increase in interest income on short term investments.
Interest expense decreased to $8,181,000 from $8,501,000 as a result of
lower effective interest rates on long-term debt outstanding during 1996.
The provision for income taxes increased to $5,352,000 from $4,007,000 as a
result of an increase in Puerto Rico or U.S. Virgin Islands taxable income of
certain of the Company's consolidated subsidiaries and an increase in deferred
Puerto Rico income tax liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to expand its cellular and paging network, for
debt service and potentially, for the acquisition and development of additional
wireless licenses or communications businesses. The Company is currently adding
cell sites and increasing capacity throughout its Puerto Rico and U.S. Virgin
Islands markets. The Company expects to use approximately $26,300,000 in 1998
for contemplated additions to the cellular network, the paging network and for
other non-cell site related capital expenditures. The Company's commitments at
December 31, 1997 of $4,100,000 for cellular network and other equipment and for
construction services are included in the total anticipated expenditures. The
Company expects to be able to meet these requirements with cash, cash
equivalents and marketable securities on hand and cash from operations.
The Company has received loans from CoreComm of $17,056,000 through 1997,
which are non-interest bearing and are due on June 30, 1998. As of March 20,
1998, CoreComm has loaned an additional $11,400,000 to subsidiaries of the
Company.
In January 1998, a wholly-owned subsidiary of the Company purchased the FCC
license to own and operate the non-wireline cellular system in Puerto Rico RSA 4
(Aibonito) and
22
<PAGE>
all of the assets of the system in exchange for $8,400,000 in cash and a
promissory note in the amount of $8,900,000. The promissory note bears interest
at 7.95% per annum payable semiannually beginning in July 1998 and the principal
is payable in January 2003.
In January 1997, a wholly-owned subsidiary of the Company, CCPR Services,
Inc. ("Services") issued $200,000,000 principal amount 10% Senior Subordinated
Notes due 2007 (the "Notes") and received proceeds of $193,233,000 after
discounts, commissions and other related costs. The Notes are unconditionally
guaranteed by the Company. The Company and Services used approximately
$116,000,000 of the proceeds to repay the $115,000,000 principal outstanding
plus accrued interest and fees under the bank loan. In addition, the Company
distributed $80,000,000 to CoreComm in connection with the corporate
restructuring.
The Notes are due on February 1, 2007. Interest on the Notes is payable
semiannually as of August 1, 1997. The Notes are redeemable, in whole or in
part, at the option of Services at any time on or after February 1, 2002, at a
redemption price of 105% that declines annually to 100% in 2005, in each case
together with accrued and unpaid interest to the redemption date. The Indenture
contains certain convenants with respect to Services, the Company and certain
subsidiaries that limit their ability to, among other things: (i) incur
additional indebtedness, (ii) pay dividends or make other distributions or
restricted payments (except for dividend payments to the Company and an
aggregate of up to $100,000,000 to be used for dividends or restricted payments
to CoreComm), (iii) create liens, (iv) sell assets, (v) enter into mergers or
consolidations or (vi) sell or issue stock of subsidiaries.
In April 1995, the Company and Services entered into a $200,000,000
revolving credit facility with various banks. The line of credit was available
until March 31, 1999, on which date it would have converted into a term loan
with principal payments based on an amortization schedule until September 30,
2003.
Cash provided by operating activities was $27,167,000 and $28,912,000 for
the years ended December 31, 1997 and 1996, respectively. Purchases of property,
plant and equipment of $40,259,000 in 1997 were primarily for additional cell
sites and increased capacity in the Company's cellular and paging systems.
Write-offs of accounts receivable, net of recoveries as a percentage of
service revenue was 6.7% for the year ended December 31, 1997 compared to 5.8%
for the year ended December 31, 1996. This percentage increased because the
Company and its subsidiaries have attracted and continue to attract new segments
of the market. The Company and its subsidiaries continue to attempt to reduce
this percentage by improving credit procedures and instituting innovative forms
of payment such as prepaid billing.
The Company may also require additional capital for acquisitions of
minority interests in its Aguadilla market, or for the acquisition of certain
other RSAs or in other telecommunications related industries, if opportunities
for such acquisitions arise. The Company has from time to time engaged in
discussions with third parties regarding such acquisitions.
23
<PAGE>
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of the
computer systems of certain significant customers and vendors for handling the
year 2000. The Company expects to implement successfully the systems and
programming changes necessary to address year 2000 issues, and does not believe
that the cost of such actions will have a material adverse effect on the
Company. There can be no assurance, however, that there will not be a delay in,
or increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
the Company. In addition, the failure of certain of the Company's significant
customers and vendors to address the year 2000 issue could have a material
adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- ------------------------------------------------------------------
The Company is required to provide these disclosures in its Annual Report
on Form 10-K for the year ending December 31, 1998.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ---------------------------------------------------
The Financial Statements are included herein commencing on page F-1.
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 37,271 $ 38,438 $ 36,213 $ 36,572
Operating income 5,163 5,686 2,014 5,773
Income (loss) before extraordinary item 68 554 (3,317) (757)
Net income (loss) (3,683) 979 (2,930) (1,144)
</TABLE>
<TABLE>
<CAPTION>
1996
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 31,476 $ 31,714 $ 34,914 $ 35,714
Operating income 4,734 2,120 5,233 5,914
Net income (loss) 1,289 (248) 2,273 1,800
</TABLE>
25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- -----------------------------------------------------------------------
Not applicable.
PART III
--------
ITEMS 10, 11, 12 AND 13.
- -----------------------
Omitted pursuant to General Instruction I(2)(e) of Form 10-K.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- ------------------------------------------------------------------------
(a)(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 27.
(b) Reports on Form 8-K. The Company filed no current reports on Form 8-K
for the quarter ended December 31, 1997.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1.
26
<PAGE>
EXHIBIT INDEX
Exhibit No.
- ----------
2 Agreement and Plan of Merger, dated as of January 31, 1997 by and
among the Company, CoreComm and CoreComm Sub, Inc. (Incorporated by
reference from Exhibit 2 to CoreComm's 1996 Form 10-K, File Number
19869-99)
3.1 Restated Certificate of Incorporation of the Company. (Incorporated by
reference to CoreComm's Form 8-B, filed February 12, 1997, File Number
19869-99)
3.2 By-laws of the Company. (Incorporated by reference to CoreComm's Form
8-B, filed February 12, 1997, File Number 19869-99)
4.1 Indenture dated as of January 31, 1997 by and between Services, the
Company and The Chase Manhattan Bank, N.A. (Incorporated by reference
from Exhibit 4.1, to CoreComm's 1996 Form 10-K, File Number 19869-99)
4.2 Registration Rights Agreement dated as of January 31, 1997 by and
among Services, the Company and Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Brothers Inc and Wasserstein Perella
Securities, Inc. (Incorporated by reference from Exhibit 4.3 to
CoreComm's 1996 Form 10-K, File Number 19869-99)
10.1 Partnership Agreement relating to San Juan Cellular Telephone Company.
(Incorporated by reference to Exhibit 10.4, File Number 33-44420)
10.2 Tax Sharing Agreement dated as of January 31, 1997 by and among
CoreComm, the Company and CCPR Services. (Incorporated by Reference
from Exhibit 10.2 to CoreComm's 1996 Form 10-K, File Number 19869-99)
10.3 Form of Administration and Management Agreement between CCPR Services,
Inc., on the one hand and, on the other hand, individually, each of
Aguadilla Cellular Telephone Company, Inc., CCI PR RSA, Inc., Cellular
Communications of Arecibo, Inc., Cellular Ponce, Inc., Gamma
Communications, Mayaguez Cellular Telephone Co., Inc., San Juan
Cellular Telephone Company and Star Associates, Inc. (Incorporated by
reference to Exhibit 10.9, File Number 33-44420)
10.4 Agreement dated as of January 31, 1997, by and between the Company and
CCPR Services, Inc. (Incorporated by Reference from Exhibit 10.4 to
CoreComm's 1996 Form 10-K, File Number 19869-99)
21 Omitted pursuant to General Instruction I(2)(b) of Form 10-K
27.1 Financial Data Schedule, for the year ended December 31, 1997
27.2 Restated Financial Data Schedule, for the quarter ended September 30,
1996
27
<PAGE>
27.3 Restated Financial Data Schedule, for the quarter ended June 30, 1996
27.4 Restated Financial Data Schedule, for the quarter ended March 31, 1996
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 26, 1998
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 March 26, 1998
- -------------------------- Officer and Director
George S. Blumenthal
/s/ J. Barclay Knapp Chief Operating Officer March 26, 1998
- -------------------------- and Director
J. Barclay Knapp
/s/ Stanton N. Williams Principal Financial Officer March 26, 1998
- --------------------------
Stanton N. Williams
/s/ Gregg Gorelick Principal Accounting Officer March 26, 1998
- --------------------------
Gregg Gorelick
/s/ Sidney R. Knafel Director March 26, 1998
- --------------------------
Sidney R. Knafel
29
<PAGE>
/s/ Del Mintz Director March 26, 1998
- --------------------------
Del Mintz
/s/ Alan J. Patricof Director March 26, 1998
- --------------------------
Alan J. Patricof
/s Warren Potash Director March 26, 1998
- --------------------------
Warren Potash
30
<PAGE>
Form 10-K - Item 14(a)(1) and (2)
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
The following consolidated financial statements and schedule of Cellular
Communications of Puerto Rico, Inc. and subsidiaries are included in Item 8:
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets - December 31, 1997 and 1996................. F-3
Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995...................................... F-4
Consolidated Statement of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995...................................... F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995...................................... F-6
Notes to Consolidated Financial Statements............................... F-8
The following consolidated financial statement schedule of Cellular
Communications of Puerto Rico, Inc. and subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts........................ F-18
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Shareholder 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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cellular Communications of Puerto Rico, Inc. and subsidiaries at December 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
San Juan, Puerto Rico
February 27, 1998
F-2
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,445,000 $ 2,307,000
Marketable securities 235,000 5,917,000
Accounts receivable - trade, less allowance for doubtful
accounts of $2,106,000 (1997) and $3,767,000 (1996) 19,043,000 20,034,000
Due from CoreComm Incorporated 935,000 -
Equipment inventory 2,882,000 2,912,000
Prepaid expenses and other current assets 5,923,000 3,022,000
---------------------------------
Total current assets 38,463,000 34,192,000
Property, plant and equipment, net 128,451,000 97,945,000
Unamortized license acquisition costs 157,467,000 162,822,000
Deferred financing costs, less accumulated amortization
of $584,000 (1997) and $1,065,000 (1996) 6,206,000 4,118,000
Other assets, less accumulated amortization of
$1,088,000 (1997) and $723,000 (1996) 1,537,000 1,645,000
---------------------------------
$ 332,124,000 $ 300,722,000
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,815,000 $ 7,364,000
Accrued expenses 11,012,000 10,889,000
Due to NTL Incorporated 71,000 102,000
Due to CoreComm Incorporated 17,056,000 -
Interest payable 8,333,000 1,678,000
Deferred revenue 3,952,000 3,081,000
---------------------------------
Total current liabilities 47,239,000 23,114,000
Long-term debt 200,000,000 115,000,000
Obligation under capital lease 9,456,000 -
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock - $.01 par value; authorized
none (1997) and 2,500,000 (1996) shares; issued
and outstanding none - -
Common stock - $.01 par value; authorized 1,000 (1997)
and 30,000,000 (1996) shares; issued 1,000 (1997)
and 13,432,000 (1996) shares - 134,000
Additional paid-in capital 137,570,000 226,160,000
(Deficit) (62,141,000) (55,363,000)
---------------------------------
75,429,000 170,931,000
Treasury stock - at cost, none (1997)
and 343,000 (1996) shares - (8,323,000)
---------------------------------
75,429,000 162,608,000
---------------------------------
$ 332,124,000 $ 300,722,000
=================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Service revenue $ 131,882,000 $ 119,839,000 $ 94,409,000
Equipment revenue 16,612,000 13,979,000 14,259,000
--------------------------------------------------------
148,494,000 133,818,000 108,668,000
--------------------------------------------------------
Costs and expenses:
Cost of equipment sold 19,089,000 17,962,000 20,635,000
Operating expenses 14,949,000 15,214,000 10,207,000
Selling, general and administrative expenses 70,160,000 63,223,000 51,148,000
Depreciation of rental equipment 855,000 521,000 225,000
Depreciation expense 18,390,000 12,710,000 9,638,000
Amortization expense 6,415,000 6,187,000 5,794,000
--------------------------------------------------------
129,858,000 115,817,000 97,647,000
--------------------------------------------------------
Operating income 18,636,000 18,001,000 11,021,000
Other income (expense):
Interest income and other, net (1,817,000) 646,000 358,000
Interest expense (19,400,000) (8,181,000) (8,501,000)
--------------------------------------------------------
Income (loss) before income tax provision,
minority interests and extraordinary item (2,581,000) 10,466,000 2,878,000
Income tax provision (871,000) (5,352,000) (4,007,000)
--------------------------------------------------------
Income (loss) before minority interests and
extraordinary item (3,452,000) 5,114,000 (1,129,000)
Minority interests - - (322,000)
--------------------------------------------------------
Income (loss) before extraordinary item (3,452,000) 5,114,000 (1,451,000)
Loss from early extinguishment of debt,
net of income tax benefit of $741,000 (3,326,000) - -
--------------------------------------------------------
Net income (loss) $ (6,778,000) $ 5,114,000 $ (1,451,000)
========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------------------- PAID-IN ---------------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 10,000,000 $ 100,000 $ 171,710,000 $ (59,026,000)
Exercise of stock options 25,000 385,000
Conversion of Senior
Subordinated Notes 2,778,000 28,000 38,551,000
Common stock repurchased, at cost (207,000) $ (6,145,000)
Net loss for the year ended
December 31, 1995 (1,451,000)
--------------------------------------------------------------------------------------------
Balance, December 31, 1995 12,803,000 128,000 210,646,000 (60,477,000) (207,000) (6,145,000)
Shares issued for interests
in cellular license 820,000 8,000 21,528,000
Exercise of stock options 16,000 129,000
Common stock repurchased, at cost (343,000) (8,323,000)
Retirement of Treasury Stock (207,000) (2,000) (6,143,000) 207,000 6,145,000
Net income for the year ended
December 31, 1996 5,114,000
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 13,432,000 134,000 226,160,000 (55,363,000) (343,000) (8,323,000)
Exercise of stock options 20,000 1,000 286,000
Common stock repurchased, at cost (35,000) (688,000)
Corporate restructuring (13,451,000) (135,000) (8,876,000) 378,000 9,011,000
Distribution to CoreComm Incorporated (80,000,000)
Net loss for the year ended
December 31, 1997 (6,778,000)
--------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,000 $ - $ 137,570,000 $ (62,141,000) - $ -
============================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (6,778,000) $ 5,114,000 $ (1,451,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 25,660,000 19,418,000 15,657,000
Provision for losses on accounts receivable 7,146,000 7,520,000 6,603,000
Loss on disposal of property, plant and equipment 1,873,000 371,000 416,000
Loss from early extinguishment of debt 4,067,000 - -
Minority interests - - 322,000
Interest paid to Cellular Communications of Ohio, Inc. - - (12,978,000)
Changes in operating assets and liabilities net of
effects from business acquisitions:
Accounts receivable (6,155,000) (9,625,000) (15,000,000)
Due from CoreComm Incorporated (935,000) - -
Equipment inventory 30,000 3,476,000 (4,163,000)
Prepaid expenses and other current assets (2,901,000) (422,000) (1,484,000)
Other assets (171,000) (292,000) (461,000)
Accounts payable (1,066,000) 2,497,000 (2,400,000)
Accrued expenses (1,098,000) (227,000) 5,004,000
Interest payable 6,655,000 1,063,000 (760,000)
Deferred revenue 871,000 227,000 1,237,000
Due to Cellular Communications of Ohio, Inc. - - 1,683,000
Due to Cellular Communications, Inc. - (310,000) (4,000)
Due to NTL Incorporated (31,000) 102,000 -
-------------------------------------------------
Net cash provided by (used in) operating activities 27,167,000 28,912,000 (7,779,000)
INVESTING ACTIVITIES
Purchase of marketable securities (235,000) (18,653,000) (2,058,000)
Proceeds from maturities of marketable securities 5,917,000 12,736,000 11,057,000
Purchase of property, plant and equipment (40,259,000) (36,564,000) (30,725,000)
Cost of cellular license interests (146,000) (5,811,000) -
-------------------------------------------------
Net cash (used in) investing activities (34,723,000) (48,292,000) (21,726,000)
FINANCING ACTIVITIES
Proceeds from borrowings, net of financing costs 193,233,000 52,000,000 121,946,000
Principal payments (115,000,000) (28,975,000) (37,000,000)
Principal payments of capital lease obligation (194,000) - -
Due to CoreComm Incorporated 17,056,000 - -
Additional deferred financing costs - (22,000) -
Repayment of amount due to Cellular Communications
of Ohio, Inc. - - (47,942,000)
Proceeds from exercise of stock options 287,000 129,000 385,000
Purchase of treasury stock (688,000) (8,323,000) (6,145,000)
Distribution to CoreComm Incorporated (80,000,000) - -
Distribution to minority interests holders - (1,172,000) -
-------------------------------------------------
Net cash provided by financing activities 14,694,000 13,637,000 31,244,000
-------------------------------------------------
Increase (decrease) in cash and cash equivalents 7,138,000 (5,743,000) 1,739,000
Cash and cash equivalents at beginning of year 2,307,000 8,050,000 6,311,000
-------------------------------------------------
Cash and cash equivalents at end of year $ 9,445,000 $ 2,307,000 $ 8,050,000
=================================================
</TABLE>
F-6
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest exclusive of
amounts capitalized $ 12,745,000 $ 7,118,000 $ 20,556,000
Income taxes paid 4,405,000 7,239,000 620,000
Supplemental schedule of noncash investing activities:
Liabilities incurred to acquire property, plant and equipment $ 3,038,000 $ 1,595,000 $ 2,381,000
Capital lease obligation incurred to acquire office building 9,922,000 - -
Common stock issued to acquire cellular license interests - 21,536,000 -
Supplemental schedule of noncash financing activities:
Conversion of Senior Subordinated Notes, net of
unamortized deferred financing costs of $1,421,000 $ - $ - $ 38,579,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND NATURE OF OPERATIONS
Cellular Communications of Puerto Rico, Inc. (the "Company") was incorporated on
May 18, 1988 as a wholly-owned subsidiary of Cellular Communications, Inc.
("CCI") to own and operate cellular telephone systems. On July 25, 1990, CCI and
AirTouch Communications, Inc. entered into a Merger and Joint Venture Agreement,
as amended, pursuant to which, on February 28, 1992, CCI distributed to its
stockholders all of the outstanding common stock of the Company.
In January 1997, the Company completed a corporate restructuring. A new entity
named CoreComm Incorporated ("CoreComm") was formed, and a subsidiary of
CoreComm was merged with and into the Company. Upon the merger, the Company
became a wholly-owned subsidiary of CoreComm and shareholders of the Company
became shareholders of CoreComm on a one for one basis.
The Company, through its subsidiaries, owns licenses to operate cellular
telephone and paging systems in Puerto Rico and in the U.S. Virgin Islands.
Based on service revenues, the predominant line of business is cellular
telephone services. The Company's business is currently dependent on the trends
in the use of cellular telephone and paging services and is subject to economic,
social, political and governmental conditions in Puerto Rico and the U.S. Virgin
Islands. The sale of cellular and paging services in each of the Company's
markets is becoming increasingly competitive. The Company previously had one
cellular competitor in each market, but it now has many wireless competitors due
to the introduction of broadband personal communications services ("PCS") on
frequencies auctioned by the Federal Communications Commission ("FCC") and
specialized mobile radio ("SMR") services on existing SMR frequencies. Increased
competition has resulted in pricing pressure, which contributes to lower
revenues per customer and higher customer acquisition costs.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and those entities where the Company's interest is
greater than 50%. Significant intercompany accounts and transactions have been
eliminated in consolidation.
F-8
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LICENSE ACQUISITION COSTS
The FCC grants the license to operate a cellular telephone system in a
Metropolitan Service Area or a Rural Service Area. Costs incurred to obtain FCC
licenses have been deferred and are being amortized by the straight-line method
over ten years. In connection with the purchase of license interests, the excess
of purchase price paid over the fair value of tangible assets acquired has been
classified as license acquisition costs which are amortized through charges to
operations by the straight-line method over 40 years. License acquisition costs
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
REVENUE RECOGNITION
Service revenue is recognized at the time services are rendered. Charges for
services that are billed in advance are deferred and recognized when earned.
Equipment sales are recorded when the equipment is shipped to the customer.
Rental revenue is billed and recognized on a monthly basis.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are carried at
fair value. Unrealized holding gains and losses on securities, net of tax, are
carried as a separate component of shareholders' equity. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 1997 consisted of corporate debt
securities. Marketable securities at December 31, 1996 consisted of U.S.
Treasury securities and obligations of U.S. government agencies. During the
years ended December 31, 1997, 1996 and 1995, there were no realized gains or
losses on sales of securities. As of December 31, 1997 and 1996, there were no
unrealized gains or losses on securities. All of the marketable securities as of
December 31, 1997 had a contractual maturity of less than one year.
F-9
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT INVENTORY
Equipment inventory is stated at the lower of cost (first-in, first-out method)
or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows: office building - 15 years, operating equipment - 7
to 25 years, office furniture and other equipment - 1 to 5 years, and rental
equipment - 2 years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
CAPITALIZED INTEREST
Interest is capitalized as a component of the cost of property, plant and
equipment constructed. In 1997, 1996 and 1995, interest of $415,000, $198,000
and $119,000, respectively, was capitalized.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred relating to the issuance of
debt and are amortized over the term of the related debt.
ADVERTISING
The Company charges the cost of advertising to expense as incurred. Advertising
expense for the years ended December 31, 1997, 1996 and 1995 was $3,667,000,
$3,025,000 and $2,808,000, respectively.
3. RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 in the first interim
period for its fiscal year ending December 31, 1998.
F-10
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 will adopt SFAS No. 131 for its fiscal year ending December
31, 1998.
4. UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
DECEMBER 31
1997 1996
-----------------------------
Deferred cellular license costs $ 5,935,000 $ 5,935,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 189,466,000 189,320,000
-----------------------------
195,401,000 195,255,000
Accumulated amortization 37,934,000 32,433,000
-----------------------------
$ 157,467,000 $ 162,822,000
=============================
In February 1996, the Company acquired the remaining minority interests
aggregating approximately 6% in the San Juan Cellular Telephone Company in
exchange for approximately 820,000 shares of the Company's common stock. The
stock was valued at $21,536,000, the fair market value on the date of
acquisition. In addition, the San Juan Cellular Telephone Company made a special
cash distribution of $1,172,000 to the minority interest holders. The aggregate
purchase price of $21,536,000 plus expenses of $56,000 and the deficiency in net
assets acquired of $850,000 have been classified as license acquisition costs.
In November 1996, the Company acquired the remaining interests, aggregating 49%,
in Star Associates, Inc., the company which owns the FCC license for the
non-wireline cellular system in Adjuntas, Puerto Rico (RSA-2) for cash of
$5,755,000 including expenses.
F-11
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. UNAMORTIZED LICENSE ACQUISITION COSTS (CONTINUED)
In January 1998, a wholly-owned subsidiary of the Company purchased the FCC
license to own and operate the non-wireline cellular system in Puerto Rico RSA-4
(Aibonito) and all of the assets of the system in exchange for $8,400,000 in
cash and a promissory note in the amount of $8,900,000. The promissory note
bears interest at 7.95% per annum payable semiannually beginning in July 1998
and the principal is payable in January 2003. Costs of $305,000 were incurred in
connection with this acquisition.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
DECEMBER 31
1997 1996
-----------------------------
Land $ 1,951,000 $ 2,027,000
Office building 9,922,000 -
Operating equipment 127,534,000 97,513,000
Office furniture and other equipment 24,546,000 16,521,000
Rental equipment 1,745,000 1,174,000
Construction in progress 12,533,000 18,674,000
-----------------------------
178,231,000 135,909,000
Accumulated depreciation 49,780,000 37,964,000
-----------------------------
$ 128,451,000 $ 97,945,000
=============================
6. ACCRUED EXPENSES
Accrued expenses consists of:
DECEMBER 31
1997 1996
----------------------------
Accrued compensation $ 765,000 $ 1,005,000
Accrued franchise, property and income taxes 2,836,000 4,246,000
Commissions payable 1,143,000 1,272,000
Accrued equipment purchases 1,427,000 502,000
Subscriber deposits 1,544,000 1,572,000
Other 3,297,000 2,292,000
----------------------------
$ 11,012,000 $ 10,889,000
============================
F-12
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT
In January 1997, a wholly-owned subsidiary of the Company, CCPR Services, Inc.
("Services"), issued $200,000,000 principal amount 10% Senior Subordinated Notes
due 2007 (the "Notes") and received proceeds of $193,233,000 after discounts,
commissions and other related costs. The Notes are unconditionally guaranteed by
the Company. The Company and Services used approximately $116,000,000 of the
proceeds to repay the $115,000,000 principal outstanding plus accrued interest
and fees under the bank loan (see below). In connection with the repayment of
the bank loan, Services recorded an extraordinary loss of $4,067,000 from the
write-off of unamortized deferred financing costs. In addition, Services made a
cash payment to the Company of $80,000,000 in exchange for a 21% interest in the
San Juan Cellular Telephone Company, and the Company distributed the $80,000,000
to CoreComm.
The Notes are due on February 1, 2007. Interest on the Notes is payable
semiannually as of August 1, 1997. The Notes are redeemable, in whole or in
part, at the option of Services at any time on or after February 1, 2002, at a
redemption price of 105% that declines annually to 100% in 2005, in each case
together with accrued and unpaid interest to the redemption date. The Indenture
contains certain covenants with respect to Services, the Company and certain
subsidiaries that limit their ability to, among other things, (i) incur
additional indebtedness, (ii) pay dividends or make other distributions or
restricted payments (except for dividend payments to the Company and an
aggregate of up to $100,000,000 to be used for dividends or restricted payments
to CoreComm), (iii) create liens, (iv) sell assets, (v) enter into mergers or
consolidations or (vi) sell or issue stock of subsidiaries. The fair value of
the Notes at December 31, 1997 based on the quoted market price was
$194,000,000.
In April 1995, the Company and Services entered into a $200,000,000 revolving
credit facility with various banks. A portion of the amount borrowed was used to
repay a subsidiary of CCI, Cellular Communications of Ohio, Inc. ("CCI Ohio").
The line of credit was available until March 31, 1999, on which date it would
have converted into a term loan. The terms included the payment of interest each
quarter at a floating rate, which was, at the borrower's option, either (a) the
higher of the bank's base rate or the Federal Funds Rate plus 1/2%, (b) the
London Interbank Offering Rate or (c) the 936 Rate, plus, based on the ratio of
the Company's debt to cash flow and the floating rate in effect, either .25% to
1.875% or 1.25% to 2.875%. The effective rate on the Company's borrowings as of
December 31, 1996 and 1995 was 7.01% and 7.23%, respectively. The terms also
included an unused commitment fee of 1/2% per annum which was payable quarterly.
The carrying amount of the bank loan at December 31, 1996 approximated fair
value based on discounted cash flow analysis.
F-13
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
The Company had a $47,942,000 principal amount note payable to CCI Ohio, which
was due and payable in full on July 31, 1996. The note permitted the deferral of
interest payments, at the Company's option, throughout the term of the note.
Interest was at a floating rate based on the interest rate in effect under CCI
Ohio's bank line of credit and term loan agreement. Interest expense accrued for
the year ended December 31, 1995 was $1,683,000. In April 1995, the Company
repaid the principal and deferred interest due to CCI Ohio of $60,920,000.
In connection with license acquisitions, subsidiaries of the Company issued
promissory notes which were paid in full, together with accrued interest, on
their maturity dates in 1996.
8. RELATED PARTY TRANSACTIONS
Due to CoreComm Incorporated represents cash that was loaned to Services in
1997. The amount due to CoreComm is non-interest bearing and is due on June 30,
1998. As of February 27, 1998, CoreComm has loaned an additional $11,400,000 to
subsidiaries of the Company.
CCI provided management, financial and legal services to the Company. Amounts
charged to the Company included direct costs where identifiable and allocated
corporate overhead based upon the amount of time incurred on Company business by
the common officers and employees of CCI and the Company. Amounts charged to the
Company included in general and administrative expenses during the years ended
December 31, 1996 and 1995 were $429,000 and $458,000, respectively. In August
1996, upon the merger of CCI with AirTouch Communications, Inc., NTL
Incorporated ("NTL") commenced providing management, financial and legal
services to the Company. NTL charged the Company for direct costs where
identifiable and allocated corporate overhead based upon the amount of time
incurred on Company business by the common officers and employees of NTL and the
Company. The amount charged to the Company included in general and
administrative expenses in 1996 was $207,000.
In January 1997, CoreComm commenced charging the Company for management,
financial and legal services. CoreComm charges the Company primarily the same
amount that NTL charges to it, which is based on NTL's direct costs where
identifiable and a fixed percentage of its corporate overhead. The amount
charged to the Company included in general and administrative expenses in 1997
was $1,780,000. It is not practicable to determine the amount of expenses that
would have been incurred had the Company operated as an unaffiliated entity.
However, in the opinion of management of the Company, the allocation method is
reasonable.
F-14
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------
Current:
Federal $ - $ - $ -
State 400,000 - -
Puerto Rico and U.S.
Virgin Islands 471,000 4,555,000 4,007,000
--------------------------------------------
Total current 871,000 4,555,000 4,007,000
--------------------------------------------
Deferred:
Federal - - -
Puerto Rico - 797,000 -
--------------------------------------------
Total deferred - 797,000 -
--------------------------------------------
$ 871,000 $ 5,352,000 $ 4,007,000
============================================
The provision for income taxes differs from the statutory rate principally due
to state and local income taxes. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1997 and 1996 are as follows:
DECEMBER 31
1997 1996
--------------------------
Deferred tax liabilities:
Tax over book depreciation and amortization $29,094,000 $21,759,000
Deferred tax assets:
Net operating loss carryforwards 36,352,000 27,125,000
Valuation allowance for deferred tax assets (8,055,000) (6,163,000)
--------------------------
Net deferred tax assets 28,297,000 20,962,000
--------------------------
Net deferred tax liabilities $ 797,000 $ 797,000
==========================
As of January 1997, the Company and its subsidiaries are included in CoreComm's
consolidated federal income tax group. At December 31, 1997, the Company had net
operating loss carryforwards of $106,900,000 for federal income tax purposes
that expire as follows: $3,800,000 in 2004, $3,900,000 in 2006, $20,400,000 in
2007, $26,400,000 in 2008, $14,100,000 in 2009, $9,600,000 in 2010, $5,500,000
in 2011 and $23,200,000 in 2012.
F-15
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
In January 1997, CoreComm, the Company and Services entered into a tax sharing
agreement which provides that CCPR and Services will pay to CoreComm (or
CoreComm will pay to CCPR or Services, as appropriate) an amount which would
equal the amount of taxes for which a company would be liable if such company
were not part of the CoreComm consolidated group.
10. PENSION PLANS
Two subsidiaries of the Company have defined contribution plans covering all
employees who have completed six months of employment. The Company's matching
contributions are determined annually. Participants can make salary deferral
contributions of 1% to 20% of annual compensation not to exceed the maximum
allowed by law. The Company's expense for 1997, 1996 and 1995 was $204,000,
$168,000 and $134,000, respectively.
11. LEASES
Total rent expense during the years ended December 31, 1997, 1996 and 1995 was
$3,680,000, $3,085,000 and $2,293,000, respectively.
Future minimum annual lease payments under noncancellable operating leases at
December 31, 1997 are: $3,099,000 (1998); $2,887,000 (1999); $2,197,000 (2000);
$1,392,000 (2001); $860,000 (2002) and $3,525,000 thereafter.
In 1997, the Company entered into a lease for office space through 2012 which is
classified as a capital lease for financial reporting purposes. Accordingly, an
asset of $9,922,000 has been recorded. Future minimum annual payments under this
lease at December 31, 1997 are as follows:
1998 $ 1,196,000
1999 1,196,000
2000 1,196,000
2001 1,196,000
2002 1,257,000
Thereafter 12,169,000
-----------
18,210,000
Interest (8,482,000)
-----------
Present value of net minimum obligations 9,728,000
Current portion (272,000)
-----------
$ 9,456,000
===========
F-16
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1997, the Company was committed to purchase approximately
$4,100,000 for cellular network and other equipment and for construction
services. In addition, as of December 31, 1997, the Company had commitments to
purchase telephones, pagers and accessories of approximately $1,500,000.
In 1992, the Company entered into an agreement which in effect provides for a
twenty year license to use a service mark which is also licensed to many of the
non-wireline cellular systems in the United States. The Company is required to
pay licensing and advertising fees, and to maintain certain service quality
standards. The total fees paid for 1997 were $216,000, which were determined by
the size of the Company's markets.
The Company is involved in various disputes, arising in the ordinary course of
business, which may result in pending or threatened litigation. The Company's
management expects no material adverse effect on the Company's financial
condition to result from these matters.
F-17
<PAGE>
Cellular Communications of Puerto Rico, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
(1) (2)
-------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $ 3,767,000 $ 7,146,000 $ - $ (8,807,000)(a) $ 2,106,000
Year ended December 31, 1996:
Allowance for doubtful accounts $ 3,233,000 $ 7,520,000 $ - $ (6,986,000)(a) $ 3,767,000
Year ended December 31, 1995:
Allowance for doubtful accounts $ 1,174,000 $ 6,603,000 $ - $ (4,544,000)(a) $ 3,233,000
(a) - Uncollectible accounts written off, net of recoveries.
F-18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1997 ANNUAL FINANCIAL STATEMENTS OF CELLULAR COMMUNICATIONS OF PUERTO RICO, INC.
THE SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,445,000
<SECURITIES> 235,000
<RECEIVABLES> 21,149,000
<ALLOWANCES> (2,106,000)
<INVENTORY> 2,882,000
<CURRENT-ASSETS> 5,923,000
<PP&E> 178,231,000
<DEPRECIATION> (49,780,000)
<TOTAL-ASSETS> 332,124,000
<CURRENT-LIABILITIES> 47,239,000
<BONDS> 200,000,000
0
0
<COMMON> 0
<OTHER-SE> 75,429,000
<TOTAL-LIABILITY-AND-EQUITY> 332,124,000
<SALES> 16,612,000
<TOTAL-REVENUES> 148,494,000
<CGS> 19,089,000
<TOTAL-COSTS> 34,038,000
<OTHER-EXPENSES> 70,160,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,400,000
<INCOME-PRETAX> (2,581,000)
<INCOME-TAX> (871,000)
<INCOME-CONTINUING> (3,452,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,326,000)
<CHANGES> 0
<NET-INCOME> (6,778,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1996 INTERIM FINANCIAL STATEMENTS OF CELLULAR COMMUNICATIONS OF PUERTO RICO,
INC. THE SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,317,000
<SECURITIES> 1,744,000
<RECEIVABLES> 23,468,000
<ALLOWANCES> (3,753,000)
<INVENTORY> 37,000,000
<CURRENT-ASSETS> 3,788,000
<PP&E> 123,379,000
<DEPRECIATION> (35,045,000)
<TOTAL-ASSETS> 324,551,000
<CURRENT-LIABILITIES> 23,610,000
<BONDS> 137,000,000
0
0
<COMMON> 134,000
<OTHER-SE> 163,807,000
<TOTAL-LIABILITY-AND-EQUITY> 324,551,000
<SALES> 9,983,000
<TOTAL-REVENUES> 98,104,000
<CGS> 13,388,000
<TOTAL-COSTS> 25,333,000
<OTHER-EXPENSES> 46,474,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,646,000
<INCOME-PRETAX> 6,746,000
<INCOME-TAX> (3,432,000)
<INCOME-CONTINUING> 3,314,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,314,000
<EPS-PRIMARY> 0.25<F1>
<EPS-DILUTED> 0.23<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE"
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1996 INTERIM FINANCIAL STATEMENTS OF CELLULAR COMMUNICATIONS OF PUERTO RICO,
INC. THE SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,142,000
<SECURITIES> 0
<RECEIVABLES> 21,677,000
<ALLOWANCES> (3,710,000)
<INVENTORY> 4,776,000
<CURRENT-ASSETS> 4,569,000
<PP&E> 115,472,000
<DEPRECIATION> (31,693,000)
<TOTAL-ASSETS> 279,790,000
<CURRENT-LIABILITIES> 23,123,000
<BONDS> 95,000,000
0
0
<COMMON> 134,000
<OTHER-SE> 161,533,000
<TOTAL-LIABILITY-AND-EQUITY> 279,790,000
<SALES> 6,125,000
<TOTAL-REVENUES> 63,190,000
<CGS> 8,838,000
<TOTAL-COSTS> 16,862,000
<OTHER-EXPENSES> 30,201,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,495,000
<INCOME-PRETAX> 3,528,000
<INCOME-TAX> (2,487,000)
<INCOME-CONTINUING> 1,041,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,041,000
<EPS-PRIMARY> 0.08<F1>
<EPS-DILUTED> 0.07<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE"
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
1996 INTERIM FINANCIAL STATEMENTS OF CELLULAR COMMUNICATIONS OF PUERTO RICO,
INC. THE SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 10,373,000
<SECURITIES> 0
<RECEIVABLES> 21,442,000
<ALLOWANCES> (3,227,000)
<INVENTORY> 3,825,000
<CURRENT-ASSETS> 1,498,000
<PP&E> 106,663,000
<DEPRECIATION> (28,567,000)
<TOTAL-ASSETS> 278,932,000
<CURRENT-LIABILITIES> 21,887,000
<BONDS> 90,000,000
0
0
<COMMON> 136,000
<OTHER-SE> 166,909,000
<TOTAL-LIABILITY-AND-EQUITY> 278,932,000
<SALES> 2,963,000
<TOTAL-REVENUES> 31,476,000
<CGS> 4,680,000
<TOTAL-COSTS> 8,565,000
<OTHER-EXPENSES> 13,647,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,779,000
<INCOME-PRETAX> 3,015,000
<INCOME-TAX> (1,726,000)
<INCOME-CONTINUING> 1,289,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,289,000
<EPS-PRIMARY> 0.10<F1>
<EPS-DILUTED> 0.09<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO.128, "EARNINGS PER SHARE"
</FN>
</TABLE>
