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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2003
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 number 0-19603
CENTENNIAL COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Delaware 06-1242753
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3349 Route 138
Wall, NJ 07719
(Address of principal executive offices, including zip code)
(732) 556-2200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock - 96,022,732 outstanding shares as of October 10, 2003
TABLE OF CONTENTS
Part I - Financial Information .............................................................................. 1
Item 1 Financial Statements ............................................................................... 1
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 23
Item 3 Quantitative and Qualitative Disclosures about Market Risk ......................................... 48
Item 4 Controls and Procedures ............................................................................ 48
Part II - Other Information .................................................................................. 50
Item 1 Legal Proceedings .................................................................................. 50
Item 2 Changes in Securities and Use of Proceeds .......................................................... 50
Item 3 Defaults Upon Senior Securities .................................................................... 50
Item 4 Submission of Matters to a Vote of Security Holders ................................................ 50
Item 5 Other Information .................................................................................. 50
Item 6 Exhibits and Reports on Form 8-K ................................................................... 51
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31, 2003 MAY 31, 2003
(UNAUDITED) (AUDITED)
--------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,894 $ 69,692
Accounts receivable, less allowance for doubtful accounts of
$10,330 and $9,754, respectively 80,027 71,777
Inventory - phones and accessories, less allowance for
obsolescence of $2,527 and $2,496, respectively 5,631 5,689
Prepaid expenses and other current assets 35,731 34,370
------------ ------------
Total Current Assets 173,283 181,528
Property, plant and equipment, net 676,580 675,574
Equity investments in wireless systems, net 2,592 2,568
Debt issuance costs, less accumulated amortization of $28,292 and
$33,943, respectively 50,892 39,442
U.S. wireless licenses 371,766 371,766
Caribbean wireless licenses, less accumulated amortization of
$11,516 and $11,266, respectively 71,242 71,492
Cable franchise costs 52,139 52,139
Goodwill 26,704 26,704
Customer lists 15,663 18,830
Transmission and connecting rights 906 928
Cable facility 4,390 4,450
Other assets, net 1,444 1,427
------------ ------------
TOTAL ASSETS $ 1,447,601 $ 1,446,848
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 23,640 $ 89,401
Accounts payable 20,030 18,789
Accrued expenses and other current liabilities 170,414 171,801
Payable to affiliates 125 125
------------ ------------
Total Current Liabilities 214,209 280,116
Long-term debt 1,726,359 1,669,659
Deferred federal income taxes 63,666 62,788
Other liabilities 13,771 13,011
Minority interest in subsidiaries 494 360
Commitments and contingencies
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.01 per share, 10,000,000
authorized, no shares issued or outstanding - -
Common stock par value $0.01 per share: 140,000,000 shares
authorized; issued 95,951,355 and 95,766,539 shares,
respectively; and outstanding 95,880,852 and 95,696,036
shares, respectively 960 958
Additional paid-in capital 437,534 437,019
Accumulated deficit (1,004,984) (1,011,388)
Accumulated other comprehensive loss (3,331) (4,594)
------------ ------------
(569,821) (578,005)
Less: cost of 70,503 common shares in treasury (1,077) (1,077)
Deferred compensation - (4)
------------ ------------
Total Stockholders' Deficit (570,898) (579,086)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,447,601 $ 1,446,848
============ ============
See notes to condensed consolidated financial statements.
1
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-----------------------------------
AUGUST 31, 2003 AUGUST 31, 2002
--------------- ---------------
Revenue:
Service revenue $ 195,691 $ 186,622
Equipment sales 7,861 5,272
------------ ------------
203,552 191,894
------------ ------------
Costs and Expenses:
Cost of services 40,687 42,268
Cost of equipment sold 21,638 15,171
Sales and marketing 22,769 23,831
General and administrative 35,081 34,819
Depreciation and amortization 35,067 36,481
Loss (gain) on disposition of assets 17 (2,375)
------------ ------------
155,259 150,195
------------ ------------
Operating income 48,293 41,699
------------ ------------
Income from equity investments 24 54
Interest expense, net (49,598) (38,273)
Other expense (858) (7)
------------ ------------
(Loss) income before income taxes and minority interest (2,139) 3,473
Income tax benefit (expense) 8,677 (3,765)
------------ ------------
Income (loss) before minority interest 6,538 (292)
Minority interest in (income) loss (134) 51
------------ ------------
Net income (loss) $ 6,404 $ (241)
============ ============
Earnings (loss) per share:
Basic 0.07 (0.00)
============ ============
Diluted $ 0.07 $ (0.00)
============ ============
Weighted-average number of shares outstanding:
Basic 95,754 95,479
============ ============
Diluted 96,187 95,479
============ ============
See notes to condensed consolidated financial statements.
2
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
---------------------------
AUGUST 31, AUGUST 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 6,404 $ (241)
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided
By operating activities:
Depreciation and amortization 35,067 36,481
Non cash, paid-in kind interest 7,029 6,188
Minority interest income (loss) 134 (51)
Income from equity investments (24) (54)
Loss (gain) on disposition of assets 17 (2,375)
Changes in assets and liabilities, net of effects of acquisitions and
dispositions and other (298) 5,705
------------ ------------
Total adjustments 41,925 45,894
------------ ------------
Net cash provided by operating activities 48,329 45,653
------------ ------------
INVESTING ACTIVITIES:
Proceeds from disposition of assets, net of cash expenses 1,681 1,017
Capital expenditures (26,275) (35,465)
------------ ------------
Net cash used in investing activities (24,594) (34,448)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 500,861 11,848
Repayment of debt (520,700) (33,359)
Debt issuance costs paid (22,211) -
Proceeds from the exercise of stock options 127 -
Proceeds from issuance of common stock under employee stock purchase plan 390 483
------------ ------------
Net cash used in financing activities (41,533) (21,028)
------------ ------------
Net decrease in cash and cash equivalents (17,798) (9,823)
Cash and cash equivalents, beginning of period 69,692 33,871
------------ ------------
Cash and cash equivalents, end of period $ 51,894 $ 24,048
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Interest $ 33,152 $ 37,042
============ ============
Income taxes $ 603 $ 188
============ ============
NON-CASH TRANSACTION:
Fixed assets acquired under capital leases $ 2,958 $ -
============ ============
See notes to condensed consolidated financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share amounts)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission ("SEC") for interim financial statements.
These condensed consolidated financial statements do not include all disclosures
required by GAAP. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's May 31, 2003 Annual Report on Form 10-K, which
includes a summary of significant accounting policies and other disclosures. In
the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the consolidated
financial position of Centennial Communications Corp. and Subsidiaries (the
"Company") as of August 31, 2003 and the results of its consolidated operations
and cash flows for the periods ended August 31, 2003 and 2002. The consolidated
balance sheet at May 31, 2003 is audited.
Income Taxes:
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes, and Accounting Principles Board ("APB")
Opinion No. 28, Interim Financial Reporting, the Company has recorded its tax
benefit for the quarter ended August 31, 2003 based on its projected annual
worldwide effective tax rate of 405.7%.
The Company's projected annual worldwide effective tax rate of 405.7%
is primarily due to book losses generated in the Dominican Republic for which,
in the Company's judgment, it is more likely than not that a tax benefit will
not be realized, state taxes net of federal tax benefit, certain interest
expense related to the Company's Mezzanine Debt that is not deductible for U.S.
income tax purposes and certain foreign taxes for which the company cannot claim
a foreign tax credit. See Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Stock-Based Compensation:
Stock-based compensation issued to employees and directors is valued
using the intrinsic value method under APB No. 25 "Accounting for Stock Issued
to Employees" ("APB No. 25"). Under this method, compensation expense is
recorded on the date of grant only if the current price of the underlying stock
exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") established accounting and disclosure
requirements using a fair value based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply APB No. 25 and follow the disclosure only provisions of
SFAS No. 123.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" ("SFAS No. 148"). SFAS No.
4
148 serves as an amendment to SFAS No. 123, and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and
interim consolidated financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted the annual financial statement reporting
requirements for the fiscal year ended May 31, 2003 and the interim periods
reporting disclosure requirements of SFAS No. 148 during the three month period
ended August 31, 2003.
For disclosure purposes, pro forma net income (loss) and earnings
(loss) per share as if the Company had applied SFAS No. 123 are shown below:
THREE MONTHS ENDED
AUGUST 31,
---------------------------
2003 2002
------------ -----------
Net income (loss):
As reported..................... $ 6,404 $ (241)
Pro forma....................... $ 6,057 $ (2,728)
Earnings (loss) per share:
Basic: As reported.............. $ 0.07 $ (0.00)
Pro forma................ $ 0.06 $ (0.03)
Diluted: As reported............ $ 0.07 $ (0.00)
Pro forma.............. $ 0.06 $ (0.03)
The fair value of options granted under the Company's stock option
plans was estimated on the dates of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used:
THREE MONTHS ENDED
AUGUST 31,
----------------------
2003 2002
------- -------
Expected volatility............... 127.8% 128.4%
Risk-free interest rate........... 3.5% 2.3%
Expected lives of option grants... 4 years 4 years
Expected dividend yield........... 0.00% 0.00%
Reclassifications:
Certain prior period information has been reclassified to conform to
the current period presentation.
5
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the intangible assets not subject to
amortization:
AS OF AS OF
AUGUST 31, 2003 MAY 31, 2003
--------------- ------------
U.S. wireless licenses $ 371,766 $ 371,766
Caribbean wireless licenses -
Puerto Rico 54,159 54,159
Cable franchise costs 52,139 52,139
------------ -----------
Total $ 478,064 $ 478,064
============ ===========
6
The following table presents other intangible assets subject to
amortization:
AS OF AUGUST 31, 2003 AS OF MAY 31, 2003
-------------------------- -----------------------
GROSS GROSS
USEFUL CARRYING ACCUMULATED CARRYING ACCUMULATED
LIFE AMOUNT AMORTIZATION AMOUNT AMORTIZATION
--------- -------- ------------ -------- ------------
Caribbean wireless
licenses --
Dominican Republic...... 20 years $ 20,000 $ 2,917 $ 20,000 $ 2,667
Customer lists............ 4-5 years 48,470 32,807 48,470 29,640
Transmission and
connecting rights....... 25 years 2,192 1,286 2,192 1,264
Cable facility............ 25 years 6,000 1,610 6,000 1,550
-------- --------- -------- --------
Total..................... $ 76,662 $ 38,620 $ 76,662 $ 35,121
======== ========= ======== ========
Other intangible assets amortization expense was $3,499 for the three
months ended August 31, 2003. Based solely on the finite lived intangible assets
at August 31, 2003, amortization expense is estimated to be $8,179 for the
remainder of fiscal 2004, $7,017 in 2005, $4,119 in 2006, $1,328 in 2007 and
$1,328 in 2008.
Goodwill
The goodwill balance in the Caribbean wireless segment was $22,517 at
August 31 and May 31, 2003. The goodwill balance in the Caribbean broadband
segment at August 31 and May 31, 2003 was $4,187.
NOTE 3. DEBT
Long-term debt consists of the following:
AUGUST 31, MAY 31,
2003 2003
---------------------------
Senior Credit Facility - Term Loans $ 627,622 $ 946,864
Senior Credit Facility - Revolving Credit Facility - 200,000
10 1/8% Senior Notes due 2013 500,000 -
10 3/4% Subordinated Notes due 2008 370,000 370,000
Mezzanine Debt 210,354 202,794
Cable TV Credit Facility 10,253 11,688
Capital Lease Obligation 18,172 14,924
Financing Obligation - Tower Sale 13,379 12,571
10 1/8% Senior Notes due 2005 219 219
---------------------------
Total Long-Term Debt 1,749,999 1,759,060
Current Portion of Long-Term Debt (23,640) (89,401)
---------------------------
Net Long-Term Debt $ 1,726,359 $ 1,669,659
---------------------------
The Company's Senior Secured Credit Facility (the "Senior Credit
Facility") includes four term loans. The borrowers under the Senior Credit
Facility are Centennial Cellular Operating Co. LLC ("CCOC") for a term loan with
an original principal amount of $325,000, of which $177,362 is
7
outstanding as of August 31, 2003, and Centennial Puerto Rico Operations Corp.
("CPROC") for three separate term loans aggregating an original principal amount
of $719,375, of which $450,260 is outstanding as of August 31, 2003. The Senior
Credit Facility also includes a revolving credit facility with an aggregate
principal amount of $250,000, of which $0 is outstanding as of August 31, 2003.
The revolving credit facility is available to both of the borrowers. Borrowings
under the term loans and the revolving credit facility bear interest at a rate
per annum of the London Inter-Bank Offering Rate ("LIBOR") plus the applicable
margin. The maximum applicable margin for the term loans and revolving credit
facility ranges between 3.00% and 3.50% above LIBOR. The Company has the ability
to choose between various LIBOR rates at the interest reset dates. The Company's
obligations under the Senior Credit Facility are guaranteed by substantially all
of the Company's subsidiaries and are collateralized by liens on substantially
all of the Company's assets. See later in this Note for a further description of
the Senior Credit Facility.
On June 20, 2003, the Company and CCOC, as co-issuers, issued $500,000
aggregate principal amount of 10 1/8% senior unsecured notes due 2013 (the
"Senior Notes"), in a private placement transaction. On October 10, 2003, the
SEC declared effective the Company's registration statement, which registered
the Senior Notes. CPROC is a guarantor of the Senior Notes. In connection with
the sale of Senior Notes, on June 20, 2003, the Company amended the Senior
Credit Facility. The Company used the net proceeds from the offering to make
repayments under the Senior Credit Facility as follows:
- $170,000 under the revolving credit facility
- $85,000 under Term Loan A
- $32,700 under Term Loan A-PR
- $98,700 under Term Loan B-PR
- $83,600 under Term Loan C-PR
In connection with the repayments under the Senior Credit Facility, the
Company wrote-off approximately $16,413, net of accumulated amortization of
$7,842 in debt issuance costs.
As part of the amendment, the applicable margins with respect to the
interest rates for outstanding loans were increased by 0.25% and certain of the
financial and other covenants in the Senior Credit Facility were modified.
The amounts outstanding under, and maturity dates of, the Senior Credit
Facility are as follows:
ORIGINAL AMOUNT
PRINCIPAL OUTSTANDING AT
SENIOR CREDIT FACILITY AMOUNT AUGUST 31, 2003 FINAL MATURITY DATE
---------------------- ------ --------------- -------------------
(IN THOUSANDS)
Revolving Credit Facility...... $ 250,000 $ - November 30, 2006
Tranche A Term Loan............ 325,000 177,362 November 30, 2006
Tranche A-PR Term Loan......... 125,000 68,216 November 30, 2006
Tranche B-PR Term Loan......... 322,188 206,804 May 30, 2007
Tranche C-PR Term Loan......... 272,187 175,240 November 30, 2007
------------- -----------------
Total........................ $ 1,294,375 $ 627,622
============= =================
8
In December 1998, the Company and CCOC issued $370,000 of senior
subordinated notes due 2008 (the "Senior Subordinated Notes") to qualified
institutional buyers in a private placement transaction. In July 1999, the
Company registered the $370,000 of debt securities with the SEC. CPROC is a
guarantor of the Senior Subordinated Notes.
In 1999, the Company issued $180,000 of unsecured subordinated notes
due 2009 and common shares of the Company ("Mezzanine Debt"). All of the
Mezzanine Debt is currently held by an affiliate of Welsh, Carson, Anderson &
Stowe. The issuance has been allocated $157,500 to debt and $22,500 to equity.
The difference between the face value of the Mezzanine Debt and the amount
allocated to debt is being amortized over the term of the Mezzanine Debt. The
Mezzanine Debt bears cash interest at a rate of 10% or paid-in-kind interest at
a rate of 13% per annum.
The Company was informed by the administrative agent under the Senior
Credit Facility that, as of May 31, 2002, it had used up all remaining baskets
under the Senior Credit Facility to pay cash interest on the Mezzanine Debt and
that any additional payments of cash interest on the Mezzanine Debt would be
considered a default under the Senior Credit Facility. Accordingly, the Company
is effectively prohibited from making any further payments of cash interest on
the Mezzanine Debt, absent additional distributions from the equity investments
in wireless systems that it holds. Any unpaid interest will be repaid upon
maturity of the Mezzanine Debt. Paid-in-kind interest compounded on the
Mezzanine Debt was $7,029 for the three months ended August 31, 2003. As of
August 31, 2003, $210,354 was outstanding under the Mezzanine Debt.
In January 2002, Centennial Puerto Rico Cable TV Corp. ("Centennial
Cable"), a wholly-owned subsidiary of the Company, entered into a $15,000 credit
agreement with Banco Popular de Puerto Rico (the "Cable TV Credit Facility") to
fund the digital conversion of its cable operations. Borrowings under the Cable
TV Credit Facility bear interest at LIBOR plus 3.50%. The Cable TV Credit
Facility matures in May 2005. The maturity date was changed from February 2006
to May 2005 in connection with amendments to the Cable TV Credit Facility
effected in May and July 2003 which also increased the quarterly amortization
payments and modified certain of the covenants. Under the Cable TV Credit
Facility, Centennial Cable is required to maintain certain financial covenants
and is limited in its ability to, among other things, incur additional
indebtedness. CPROC has guaranteed Centennial Cable's obligation under the Cable
TV Credit Facility and the facility is collateralized by a lien on the digital
boxes, the monthly rental payments on the digital boxes and other equipment
purchased with the borrowings under the Cable TV Credit Facility. As of August
31, 2003, $10,253 was outstanding under the Cable TV Credit Facility.
Under certain of the above debt agreements, the Company is required to
maintain certain financial and operating covenants, and is limited in its
ability to, among other things, incur additional indebtedness. The Company is
also effectively prohibited from paying cash dividends on its common stock
under certain of the above debt agreements. The Company was in compliance with
all covenants of its debt agreements at August 31, 2003.
The aggregate annual scheduled principal payments for the next five
years and thereafter related to the Company's long-term debt at August 31, 2003,
are summarized as follows:
August 31, 2004 $ 23,640
August 31, 2005 95,070
August 31, 2006 109,380
August 31, 2007 28,758
August 31, 2008 382,460
August 31, 2009 and thereafter 1,110,691
------------
$ 1,749,999
============
9
Interest expense, as reflected in the condensed consolidated financial
statements, has been partially offset by interest income. The gross interest
expense for the three months ended August 31, 2003 and 2002 was $49,776 and
$38,477, respectively.
During the three months ended August 31, 2003, the Company recorded a
reduction of $1,263, net of tax, in other comprehensive loss attributable to
fair value adjustments of interest rate swap and collar agreements. The Company
also decreased its liabilities by $2,142 as a result of adjusting the carrying
amounts of its derivatives to reflect their fair values at August 31, 2003.
NOTE 4. DISPOSITIONS
In August 2002, the Company entered into an agreement to sell its 60%
interest in Infochannel Limited, a Jamaican Internet service provider, for
$3,000. This transaction, which was initiated in fiscal 2002, closed in the
third quarter of fiscal year 2003. The Company acquired its 60% interest in
Infochannel Limited for $8,000 in cash.
In August 2002, the Company sold its 51% interest in its Jamaica
wireless operations, Centennial Digital Jamaica ("CDJ"), to Oceanic Digital
Communications Inc., the 49% shareholder of Centennial Digital Jamaica. This
transaction was initiated in fiscal 2002. The Company recorded a pretax gain of
$2,626. The Company reduced its net liabilities by $2,626, including
consolidated long-term debt of approximately $45,100 (largely comprised of the
vendor financing facility with Lucent Technologies, which was non-recourse to
the Company) as a result of this transaction.
In May 2002, the Company announced an agreement with AAT Communications
Corp. ("AAT") to sell to AAT 186 telecommunications towers located throughout
the Company's U.S. wireless serving areas for a purchase price of $34,100 in
cash, subject to adjustment. During the year ended May 31, 2003, the Company
sold 144 telecommunications towers to AAT for $23,952. During the three months
ended August 31, 2003, the Company sold an additional 14 telecommunications
towers to AAT for proceeds of approximately $2,553. The gain of $1,836 was
deferred and is being amortized in proportion to the amortization of the leased
telecommunications towers. The Company does not expect to sell any additional
towers to AAT under this agreement.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("SFAS No. 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. The Company
adopted SFAS No. 143 on June 1, 2003. The Company's obligations under SFAS No.
143 arise from certain of its cell site leases and result primarily from the
Company's contractual requirements to remove its equipment from such leased
sites. The adoption of this statement did not have a material effect on the
Company's consolidated results of operations, consolidated financial position or
consolidated cash flows.
In December 2002, the FASB issued SFAS No. 148. SFAS No. 148 serves as
an amendment to SFAS No. 123, and provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company adopted the
annual financial statement reporting
10
requirements for the fiscal year ended May 31, 2003 and the interim reporting
disclosure requirements during the period ended August 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 serves as an amendment to and clarifies financial accounting and reporting
for derivative instruments, including derivative instruments embedded in other
contracts and for hedging activities, under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is to be applied
prospectively to all contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. However, the
provisions of this statement that relate to "SFAS 133 Implementation Issues,"
which have been effective for fiscal quarters beginning prior to June 15, 2003,
continue to be applied in accordance with their respective effective dates. The
adoption of SFAS No. 149 did not have a material effect on the Company's
consolidated results of operations, consolidated financial position or
consolidated cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). The requirements of this statement apply to issuers'
classification and measurement of freestanding financial instruments, including
those that comprise more than one option or forward contract. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted SFAS No. 150 effective
September 1, 2003. The adoption did not have a material effect on the Company's
consolidated results of operations, consolidated financial position or
consolidated cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands the
disclosures made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of the obligation assumed under certain guarantees.
FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in a specified interest rate,
security price, foreign exchange rate or other variable that is related to an
asset, liability or equity security of the guaranteed party, or failure of
another party to perform under an obligating agreement (performance guarantees).
Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees under
capital lease arrangements, commercial letters of credit, loan commitments and
guarantees of a company's own future performance. Other guarantees are subject
to the disclosure requirements of FIN 45 but not to the recognition provisions
and include, among others, a guarantee accounted for as a derivative instrument
under SFAS No. 133, and a guarantee covering product performance, not product
price. The disclosure requirements of FIN 45 are effective for the Company as of
February 28, 2003, and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor could be required
to make under the guarantee and the current amount of the liability, if any, for
the guarantor's obligations under the guarantee. The recognition requirements of
FIN 45 are to be applied prospectively to guarantees issued or modified after
December 31, 2002.
11
In the ordinary course of our business, the Company enters into
agreements with third parties that contain indemnification provisions. Under
these provisions, the Company generally indemnifies the other party for losses
suffered or incurred as a result of our breach of these agreements. At times,
these indemnification provisions survive termination of the underlying
agreement. The maximum potential amount of future payments that the Company
could be required to make under these indemnification provisions is potentially
unlimited. However, the Company has never incurred any material costs to defend
lawsuits or settle claims related to these indemnification agreements. As a
result, the estimated fair value of these agreements is minimal and considered
to be immaterial to the consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 addresses
whether certain types of entities, referred to as variable interest entities, or
VIEs, should be consolidated in a company's financial statements. A VIE is an
entity that either (1) has equity investors that lack certain essential
characteristics of a controlling financial interest (including the ability to
control the entity, the obligation to absorb the entity's expected losses and
the right to receive the entity's expected residual returns), or (2) lacks
sufficient equity to finance its own activities without financial support
provided by other entities, which in turn would be expected to absorb at least
some of the expected losses of the VIE. An entity should consolidate a VIE if it
stands to absorb a majority of the VIE's expected losses or to receive a
majority of the VIE's expected residual returns. In October 2003, the FASB
issued a Final FASB Staff Position deferring the effective date of FIN 46 for
all public entities until the first interim or annual period ending after
December 15, 2003. As such, FIN 46 will be effective for the Company as of
February 28, 2004.
In November 2002, the Emerging Issues Task Force of the FASB reached a
consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF No. 00-21"). EITF No. 00-21 addresses how to account for
arrangements that may involve multiple revenue-generating activities. The
consensus guidance will be applicable to agreements entered into in quarters
beginning after June 15, 2003. The Company adopted EITF No. 00-21 effective
September 1, 2003 and is applying it on a prospective basis. The Company's
initial adoption did not have a material effect on the Company's consolidated
results of operations, consolidated financial position or consolidated cash
flows.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
The Company is party to several lawsuits in which plaintiffs have
alleged, depending on the case, breach of contract, misrepresentation or unfair
practice claims relating to its billing practices, including rounding up of
partial minutes of use to full-minute increments, billing send to end, and
billing for unanswered and dropped calls. The plaintiffs in these cases have not
alleged any specific monetary damages and are seeking certification as a class
action. A hearing on class certification in one of these cases was held on
September 2, 2003 in a state court in Louisiana. A decision of the Court with
respect to certification is still pending. Damages payable by the Company could
be significant, although the Company does not believe any damage payments would
have a material adverse effect on its consolidated results of operations.
In April 2002, WHTV Broadcasting Corp. and Sala Foundation Inc.,
operators of a wireless cable system in Puerto Rico, filed an action against the
Company in the United States District Court for the District of Puerto Rico. The
complaint alleges that the Company breached the terms of a November 2000
12
letter of intent to purchase the wireless cable system for $30,000. The
complaint seeks specific performance of the letter of intent or not less than
$15,000 in damages.
The ultimate outcome of these matters cannot be predicted with
certainty, and accordingly, the aggregate ultimate liability of the Company, if
any, with respect to these matters is not determinable at this time.
To the Company's knowledge, there are no other material pending legal
proceedings to which the Company or its subsidiaries are a party or of which any
of its property is subject that is likely to have a material adverse effect on
the Company's business or consolidated results of operations.
Lease Commitments:
The Company leases facilities and equipment under noncancelable
operating leases. Additionally, as discussed in Note 4 to the condensed
consolidated financial statements, the Company entered into sale-leaseback
transactions where the Company sold telecommunications towers and leased back
the same telecommunications towers. As a result of provisions in the sale and
lease-back agreement that provides for continuing involvement by the Company,
the Company will account for the sale and lease-back of certain towers as a
finance obligation. For the sale and lease-back of towers determined to have no
continuing involvement, sale-leaseback accounting has been followed.
Accordingly, the Company has recognized a deferred gain on the sale of such
telecommunications towers and will account for substantially all of its payments
under the lease-backs as capital leases. As such, the deferred gain is being
amortized in proportion to the amortization of the leased telecommunications
towers. Terms of the leases, including renewal options and escalation clauses,
vary by lease.
Other Commitments and Contingencies:
In May 2003, the Company entered into a multi-year year agreement with
Ericsson, Inc. to purchase equipment and services to overlay the Company's U.S.
wireless networks with global system for mobile communications ("GSM")/general
packet radio service ("GPRS") technology. The Company has committed to purchase
a total of approximately $15,873 under the agreement.
In June 2003, the Company entered into an amendment to its existing
agreement with Nortel Networks pursuant to which Nortel Networks will supply our
U.S. wireless operations with certain hardware and equipment relating to time
division multiple access digital technology ("TDMA") system enhancements through
November 3, 2004 at a price of $3,900.
In fiscal year 2003 the Company entered into multi-year roaming
agreements with Cingular Wireless and AT&T Wireless for analog, TDMA and GSM
traffic. Under these agreements, the Company is required to overlay its existing
U.S. wireless network with a GSM network over the next three years. The Company
expects the GSM overlay will require incremental expenditures, above its
historical U.S. wireless expenditure levels, of approximately $20,000 to $30,000
over the next three years. In connection with the roaming agreement with AT&T
Wireless, AT&T Wireless granted the Company two separate options to purchase
10MHz of spectrum covering an aggregate of approximately 4.2 million Pops in
Michigan and Indiana. The aggregate exercise price of the options is $20,000,
but the options may be exercised on a proportionate basis for less than all of
the 4.2 million Pops. The options have a two-year term and expire in late 2004
and early 2005.
13
During the year ended May 31, 2003, an affiliate of Welsh Carson
purchased in open market transactions approximately $153,000 principal amount of
the 10 3/4% Senior Subordinated Notes. Together with the previous purchases, the
Welsh Carson affiliate holds approximately $189,000 principal amount of the 10
3/4% Senior Subordinated Notes. On September 24, 2002, the Company entered into
an indemnification agreement with the Welsh Carson affiliate pursuant to which
the Welsh Carson affiliate agreed to indemnify the Company in respect of taxes
which may become payable by the Company as a result of these purchases. In
connection with these transactions, the Company recorded a $15,925 income tax
payable included in accrued expenses and other current liabilities, and a
corresponding amount due from the Welsh Carson affiliate that is included in
prepaid expenses and other current assets.
NOTE 7. SEGMENT INFORMATION
The Company's condensed consolidated financial statements include three
distinct business segments: U.S. wireless, Caribbean wireless, and Caribbean
broadband. The Company determines its segments based on the types of services
offered and geographic location. U.S. wireless represents the Company's wireless
systems in the United States that it owns and manages. Caribbean wireless
represents the Company's wireless operations in Puerto Rico, the Dominican
Republic and the U.S. Virgin Islands. Caribbean wireless also included the
Company's wireless operations in Jamaica until the disposition of those
operations in August 2002. Caribbean broadband represents the Company's offering
of broadband services including switched voice, dedicated (private line), cable
television and other services in Puerto Rico and the Dominican Republic.
Caribbean broadband also included Infochannel Limited until its disposition in
January 2003.
The Company measures the operating performance of each segment based on
adjusted operating income. Adjusted operating income is defined as net income
(loss) before interest, other non operating (income) expense, taxes,
depreciation, amortization, loss (gain) on disposition of assets, minority
interest in (income) loss of subsidiaries and income from equity investments.
For a detailed discussion of adjusted operating income, see "Item 2 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Non-GAAP Financial Measures."
See Note 4 for a discussion of the sale of the Company's Jamaican
wireless operation and its Jamaican Internet service provider operation.
14
Information about the Company's operations in its three business
segments as of, and for the three months ended, August 31, 2003 and 2002 is as
follows:
THREE MONTHS ENDED
AUGUST 31,
-----------------------------
2003 2002
------------ ------------
(UNAUDITED)
U.S. wireless
Service revenue $ 71,868 $ 65,765
Roaming revenue 17,218 24,779
Equipment sales 5,265 2,597
------------ ------------
Total revenue 94,351 93,141
Adjusted operating income 39,537 45,058
Total assets 1,964,547 1,871,605
Capital expenditures 8,930 9,045
Caribbean wireless
Service revenue $ 70,381 $ 62,346
Roaming revenue 1,383 351
Equipment sales 2,544 2,546
------------ ------------
Total revenue 74,308 65,243
Adjusted operating income 31,791 20,964
Total assets 436,478 380,772
Capital expenditures 11,211 13,320
Caribbean broadband
Switched revenue $ 8,898 $ 7,812
Dedicated revenue 11,810 9,059
Video revenue 12,017 12,664
Other revenue 5,673 6,183
------------ ------------
Total revenue 38,398 35,718
Adjusted operating income 12,049 9,783
Total assets 781,794 627,195
Capital expenditures 6,134 13,100
Eliminations
Total revenue (1) $ (3,505) $ (2,208)
Total assets (2) (1,735,218) (1,252,896)
Consolidated
Total revenue $ 203,552 $ 191,894
Adjusted operating income 83,377 75,805
Total assets 1,447,601 1,626,676
Capital expenditures 26,275 35,465
(1) Elimination of intercompany revenue, primarily from Caribbean broadband to
Caribbean wireless.
(2) Elimination of intercompany investments.
15
Reconciliation of adjusted operating income to Net income (loss):
THREE MONTHS ENDED
AUGUST 31,
---------------------------
2003 2002
------------ ------------
(Unaudited)
Adjusted operating income ......................... $ 83,377 $ 75,805
Less: depreciation and amortization ............... (35,067) (36,481)
(Loss) gain on disposition of assets .............. (17) 2,375
------------ ------------
Operating income .................................. 48,293 41,699
Income from equity investments .................... 24 54
Interest expense, net ............................. (49,598) (38,273)
Other ............................................. (858) (7)
Income tax benefit (expense) ...................... 8,677 (3,765)
Minority interest in (income) loss ................ (134) 51
------------ ------------
Net income (loss) ................................. $ 6,404 $ (241)
============ ============
NOTE 8. CONDENSED CONSOLIDATING FINANCIAL DATA
As discussed in Note 3, CCOC and CPROC are wholly-owned subsidiaries of
the Company. CCOC is a joint and several co-issuer on both the Senior
Subordinated Notes and the Senior Notes issued by the Company, and CPROC has
unconditionally guaranteed both the Senior Subordinated Notes and the Senior
Notes. Separate financial statements and other disclosures concerning CCOC and
CPROC are not presented because they are not material to investors.
16
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF AUGUST 31, 2003
UNAUDITED
(AMOUNTS IN THOUSANDS)
Centennial
Centennial Centennial Centennial Communications
Puerto Rico Cellular Communications Corp. and
Operations Corp. Operating Co. LLC Non-Guarantors Corp. Eliminations Subsidiaries
---------------- ----------------- -------------- -------------- ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,221 $ - $ 45,673 $ - $ - $ 51,894
Accounts receivable, net 33,563 - 47,087 - (623) 80,027
Inventory - phones and
accessories, net 1,840 - 3,791 - - 5,631
Prepaid expenses and other
current assets 6,600 - 29,131 - - 35,731
-------- ---------- ------------ ------------ ------------ ------------
Total current assets 48,224 - 125,682 - (623) 173,283
Property, plant & equipment, net 261,482 - 415,098 - - 676,580
Equity investments in wireless
systems, net - - 2,592 - - 2,592
Debt issuance costs, net 19,410 - 31,482 - - 50,892
U.S. wireless licenses - - 371,766 - - 371,766
Caribbean wireless licenses, net - - 71,242 - - 71,242
Cable franchise costs - - 52,139 - - 52,139
Goodwill 4,186 - 22,518 - - 26,704
Intercompany - 1,326,319 993,999 594,401 (2,914,719) -
Investment in subsidiaries - (434,015) 737,208 (904,821) 601,628 -
Other assets, net 5,065 - 24,718 - (7,380) 22,403
-------- ---------- ------------ ------------ ------------ ------------
Total $338,367 $ 892,304 $ 2,848,444 $ (310,420) $ (2,321,094) $ 1,447,601
======== ========== ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term
debt $ 5,013 $ 12,876 $ 5,751 $ - $ - $ 23,640
Accounts payable 11,243 - 8,787 - - 20,030
Accrued expenses and other
current liabilities 35,591 - 142,828 - (8,005) 170,414
Payable to affiliates - - 125 - - 125
-------- ---------- ------------ ------------ ------------ ------------
Total current liabilities 51,847 12,876 157,491 - (8,005) 214,209
Long-term debt 621,917 861,305 32,783 210,354 - 1,726,359
Deferred federal income taxes - - 63,666 - - 63,666
Other liabilities - 5,775 7,996 - - 13,771
Intercompany 36,633 920,500 1,910,276 47,310 (2,914,719) -
Minority Interest - - 494 - - 494
Stockholders' equity (deficit):
Common stock - - 140 960 (140) 960
Preferred stock 465,000 - 182,320 - (647,320) -
Additional paid-in capital (818,498) - 1,339,994 437,018 (520,980) 437,534
Accumulated deficit (18,532) (904,821) (846,716) (1,004,985) 1,770,070 (1,004,984)
Accumulated other comprehensive
loss - (3,331) - - - (3,331)
-------- ---------- ------------ ------------ ------------ ------------
(372,030) (908,152) 675,738 (567,007) 601,630 (569,821)
Less: treasury shares - - - (1,077) - (1,077)
-------- ---------- ------------ ------------ ------------ ------------
Total stockholders' (deficit)
equity (372,030) (908,152) 675,738 (568,084) 601,630 (570,898)
-------- ---------- ------------ ------------ ------------ ------------
Total $338,367 $ 892,304 $ 2,848,444 $ (310,420) $ (2,321,094) $ 1,447,601
======== ========== ============ ============ ============ ============
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE QUARTER ENDED AUGUST 31, 2003
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Centennial
Centennial Centennial Centennial Communications
Puerto Rico Cellular Communications Corp. and
Operations Corp. Operating Co. LLC Non-Guarantors Corp. Eliminations Subsidiaries
---------------- ------------------ -------------- -------------- ------------ --------------
Revenue $ 83,978 $ - $ 122,440 $ - $ (2,866) $ 203,552
------- --------- ---------- ------- --------- ---------
Costs and expenses:
Cost of services 13,250 - 29,382 - (1,945) 40,687
Cost of equipment sold 5,803 - 15,835 - - 21,638
Sales and marketing 8,917 - 13,852 - - 22,769
General and administrative 15,399 - 20,603 - (921) 35,081
Depreciation and amortization 14,702 - 20,365 - - 35,067
Loss (gain) on disposition of
assets 73 - (56) - - 17
------- --------- ---------- ------- --------- ---------
58,144 - 99,981 - (2,866) 155,259
------- --------- ---------- ------- --------- ---------
Operating income 25,834 - 22,459 - - 48,293
------- --------- ---------- ------- --------- ---------
Income from equity investments - - 24 - - 24
Income (loss) from investments in
subsidiaries - 13,964 9,769 13,964 (37,697) -
Interest expense, net (15,968) (42,040) 15,970 (7,560) - (49,598)
Other - - (858) - - (858)
Intercompany interest allocation - 42,040 (42,040) - - -
------- --------- ---------- ------- --------- ---------
Income (loss) before income tax
expense and minority interest 9,866 (13,964) (5,324) 6,404 (37,697) (2,139)
Income tax expense (benefit) 97 - (8,774) - - (8,677)
------- --------- ---------- ------- --------- ---------
Income (loss) before minority
interest 9,769 13,964 14,098 6,404 (37,697) 6,538
Minority interest in income
(loss) - - (134) - - (134)
------- --------- ---------- ------- --------- ---------
Net income (loss) $ 9,769 $ (13,964) $ 13,964 $ 6,404 $ (37,697) $ 6,404
======= ========= ========== ======= ========= =========
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE QUARTER ENDED AUGUST 31, 2003
(AMOUNTS IN THOUSANDS)
Centennial
Centennial Centennial Centennial Communication
Puerto Rico Cellular Communications Corp. and
Operations Corp. Operating Co. LLC Non-Guarantors Corp. Eliminations Subsidiaries
---------------- ----------------- -------------- -------------- ------------ -------------
OPERATING ACTIVITIES:
Net income (loss) $ 9,769 $ 13,964 $ 13,964 $ 6,404 $ (37,697) $ 6,404
--------- --------- --------- --------- --------- ---------
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization 14,702 - 20,365 - - 35,067
Non cash paid-in king interest - - - 7,029 - 7,029
Minority interest in loss of
subsidiaries - - 134 - - 134
Income from equity investments - - (24) - - (24)
Equity in undistributed earnings
of subsidiaries - (13,964) (9,769) (13,964) 37,697 -
Loss (gain) on disposition of
assets 73 - (56) - - 17
Changes in assets and
liabilities, net of effects
of acquisitions and
dispositions
and other 13,418 - (14,247) 531 - (298)
--------- --------- --------- --------- --------- ---------
Total adjustments 28,193 (13,964) (3,597) (6,404) 37,697 41,925
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 37,962 - 10,367 - - 48,329
--------- --------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition of
assets, net of cash expenses - - 1,681 - - 1,681
Capital expenditures (11,031) - (15,244) - - (26,275)
--------- --------- --------- --------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (11,031) - (13,563) - - (24,594)
--------- --------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of
long-term debt 173,400 - 327,461 - - 500,861
Repayment of debt (228,500) (200) (201,238) (90,762) - (520,700)
Debt issuance costs paid - - (22,211) - - (22,211)
Proceeds from exercise of stock
options - - - 127 - 127
Proceeds from issuance of common
stock under employee stock
purchase plan - - - 390 - 390
Cash (paid to) received from
affiliates (1,931) - (89,044) - 90,975 -
Cash advances from parent (to
subsidiaries) 13 200 517 90,245 (90,975) -
--------- --------- --------- --------- --------- ---------
NET CASH USED IN FINANCING
ACTIVITIES (57,018) - 15,485 - - (41,533)
--------- --------- --------- --------- --------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (30,087) - 12,289 - - (17,798)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 36,308 - 33,384 - 69,692
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 6,221 $ - $ 45,673 $ - $ - $ 51,894
========= ========= ========= ========= ========= =========
19
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF MAY 31, 2003
(AMOUNTS IN THOUSANDS)
Centennial
Centennial Centennial Centennial Communications
Puerto Rico Cellular Communications Corp. and
Operations Corp. Operating Co. LLC Non-Guarantors Corp. Eliminations Subsidiaries
---------------- ----------------- -------------- -------------- ------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,308 $ - $ 33,384 $ - $ - $ 69,692
Accounts receivable - net 31,714 - 40,557 - (494) 71,777
Inventory - phones and
accessories, net 1,704 - 3,985 - - 5,689
Prepaid expenses and other
current assets 4,792 - 29,578 - - 34,370
--------- ---------- ------------ ----------- ----------- -----------
Total current assets 74,518 - 107,504 - (494) 181,528
Property, plant & equipment, net 261,452 - 414,122 - - 675,574
Equity investments in wireless
systems, net - - 2,568 - - 2,568
Debt issuance costs, net 16,832 - 22,610 - - 39,442
U.S. wireless licenses, net - - 371,766 - - 371,766
Caribbean wireless licenses, net - - 71,492 - - 71,492
Cable franchise costs, net - - 52,139 - - 52,139
Goodwill, net 4,186 - 22,518 - - 26,704
Intercompany - 1,311,057 993,929 594,399 (2,899,385) -
Investment in subsidiaries - (467,678) 732,008 (918,785) 654,455 -
Other assets, net 5,119 - 20,516 - - 25,635
--------- ---------- ------------ ----------- ----------- -----------
Total $ 362,107 $ 843,379 $ 2,811,172 $ (324,386) $(2,245,424) $ 1,446,848
========= ========== ============ =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term
debt $ 27,961 $ 56,875 $ 4,565 $ - $ - $ 89,401
Accounts payable 8,256 - 10,533 - - 18,789
Accrued expenses and other
current liabilities 30,620 - 141,675 - (494) 171,801
Payable to affiliates - - 125 - - 125
--------- ---------- ------------ ----------- ----------- -----------
Total current liabilities 66,837 56,875 156,898 - (494) 280,116
Long-term debt 651,039 781,469 34,357 202,794 - 1,669,659
Deferred federal income taxes - - 62,788 - - 62,788
Other liabilities - 7,914 5,097 - - 13,011
Intercompany 26,030 920,500 1,905,456 47,310 (2,899,296) -
Minority Interest - - 360 - - 360
Stockholders' equity (deficit):
Common stock - - 237 958 (237) 958
Preferred stock 465,000 - 177,120 - (642,120) -
Additional paid-in capital (818,498) - 1,329,543 437,018 (511,044) 437,019
Accumulated deficit (28,301) (918,785) (860,680) (1,011,389) 1,807,767 (1,011,388)
Accumulated other comprehensive
loss - (4,594) - - - (4,594)
--------- ---------- ------------ ----------- ----------- -----------
(381,799) (923,379) 646,220 (573,413) 654,366 (578,005)
Less: treasury shares - - - (1,077) - (1,077)
Deferred compensation - - (4) - - (4)
--------- ---------- ------------ ----------- ----------- -----------
Total stockholders' equity
(deficit) (381,799) (923,379) 646,216 (574,490) 654,366 (579,086)
--------- ---------- ------------ ----------- ----------- -----------
Total $ 362,107 $ 843,379 $ 2,811,172 $ (324,386) $(2,245,424) $ 1,446,848
========= ========== ============ =========== =========== ===========
20
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE THREE MONTHS ENDED AUGUST 31, 2002
(AMOUNTS IN THOUSANDS)
Centennial
Centennial Centennial Centennial Communications
Puerto Rico Cellular Communications Corp. and
Operations Corp. Operating Co. LLC Non-Guarantors Corp. Eliminations Subsidiaries
---------------- ----------------- -------------- -------------- ------------ --------------
Revenue $ 71,715 $ - $ 121,427 $ - $ (1,248) $ 191,894
-------- -------- --------- ------- --------- ---------
Costs and expenses:
Cost of equipment sold 6,185 - 8,986 - - 15,171
Cost of services 12,202 - 30,636 - (570) 42,268
Sales and marketing 8,676 - 15,155 - - 23,831
General and administrative 14,549 - 20,948 - (678) 34,819
Depreciation and amortization 15,919 - 20,562 - - 36,481
(Gain) loss on disposition of
assets - - (2,375) - - (2,375)
-------- -------- --------- ------- --------- ---------
57,531 - 93,912 - (1,248) 150,195
-------- -------- --------- ------- --------- ---------
Operating income 14,184 - 27,515 - - 41,699
-------- -------- --------- ------- --------- ---------
Income from equity investments - - 54 - - 54
Income from investments in
subsidiaries - 6,449 4,262 6,449 (17,160) -
Interest expense - net (9,922) (20,768) (893) (6,690) - (38,273)
Other - - (7) - - (7)
Intercompany interest allocation - 20,768 (20,768) - - -
-------- -------- --------- ------- --------- ---------
Income (loss) before income tax
expense and minority interest 4,262 6,449 10,163 (241) (17,160) 3,473
Income tax benefit - - (3,765) - - (3,765)
-------- -------- --------- ------- --------- ---------
Income (loss) before minority
interest 4,262 6,449 6,398 (241) (17,160) (292)
Minority interest in loss of
subsidiaries - - 51 - - 51
-------- -------- --------- ------- --------- ---------
Net income (loss) $ 4,262 $ 6,449 $ 6,449 $ (241) $ (17,160) $ (241)
======== ======== ========= ======= ========= =========
21
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE THREE MONTHS ENDED AUGUST 31, 2002
(AMOUNTS IN THOUSANDS)
Centennial
Centennial Centennial Centennial Communications
Puerto Rico Cellular Communications Corp. and
Operations Corp. Operating Co. LLC Non-Guarantors Corp. Eliminations Subsidiaries
--------------- ----------------- -------------- -------------- ------------ --------------
OPERATING ACTIVITIES:
Net income (loss) $ 4,262 $ 6,449 $ 6,449 $ (241) $(17,160) $ (241)
-------- -------- -------- -------- -------- --------
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 15,919 - 20,562 - - 36,481
Non cash paid-in kind interest - - - 6,188 - 6,188
Minority interest in loss of
subsidiaries - - (51) - - (51)
Income from equity investments - - (54) - - (54)
Equity in undistributed earnings
of subsidiaries - (6,449) (4,262) (6,449) 17,160 -
Gain on disposition of assets - - (2,375) - - (2,375)
Changes in assets and liabilities,
net of effects of acquisitions
and dispositions and other 11,082 - (5,879) 502 - 5,705
-------- -------- -------- -------- -------- --------
Total adjustments 27,001 (6,449) 7,941 241 17,160 45,894
-------- -------- -------- -------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 31,263 - 14,390 - - 45,653
-------- -------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Proceeds from disposition of
assets, net of cash expenses - - 1,017 - - 1,017
Capital expenditures (21,014) - (14,451) - - (35,465)
-------- -------- -------- -------- -------- --------
NET CASH USED IN INVESTING
ACTIVITIES (21,014) - (13,434) - - (34,448)
-------- -------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from the issuance of
long-term debt - 10,000 1,848 - - 11,848
Repayment of debt (4,311) (28,125) (923) - - (33,359)
Proceeds from issuance of common
stock under employee stock
purchase plan - - - 483 - 483
Cash (paid to) received from
affiliates (11,348) 18,125 (6,777) - - -
Cash advances from parent (to
subsidiaries) - - 483 (483) - -
-------- -------- -------- -------- -------- --------
NET CASH USED IN FINANCING
ACTIVITIES (15,659) - (5,369) - - (21,028)
-------- -------- -------- -------- -------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (5,410) - (4,413) - - (9,823)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 13,539 - 20,332 - - 33,871
-------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,129 $ - $ 15,919 $ - $ - $ 24,048
======== ======== ======== ======== ======== ========
22
NOTE 9. SUBSEQUENT EVENTS
On September 11, 2003, the Company announced that it planned to offer
for sale approximately 30 million newly issued shares of its common stock in a
public offering. In connection with the planned equity offering, on September
10, 2003, the Company and certain of its principal stockholders entered into
amendments to the first amended and restated stockholders agreement and first
amended and restated registration rights agreement. These amendments were to
become effective upon consummation of the equity offering. On September 24,
2003, the Company announced that it had withdrawn this public offering of common
stock and the amendments were terminated.
On September 11, 2003, the Company's amended and restated certificate
of incorporation, which increased the Company's authorized number of shares of
the Company's common stock from 140,000,000 to 240,000,000, became effective.
On October 10, 2003, the SEC declared effective the Company's
registration statement, which registered the Senior Notes.
During fiscal 2003, the Company submitted applications to be designated
as an Eligible Telecommunications Carrier ("ETC") in Indiana, Michigan,
Louisiana and Mississippi. Certification as an ETC would qualify the Company to
receive federal universal service fund payments in such states. The universal
service fund was established to provide support to telecommunications carriers
offering basic telephone service in rural, insular and high cost areas. In
September 2003, the Company was granted ETC status in Michigan and certain areas
of Mississippi. Under current federal rules, in those areas where the Company
has been granted ETC status, it is eligible to receive high-cost support from
the universal service fund. The Company expects to begin receiving universal
service funds in these two states during fiscal 2004. The Company is currently
receiving federal universal service funding support as an ETC in Puerto Rico.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Part I, Item 2 updates, and should be
read in conjunction with, information set forth in Part II, Items 7 and 8, in
the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2003,
in addition to the interim consolidated financial statements and accompanying
notes presented in Part 1, Item 1 of this Form 10-Q.
OVERVIEW
We are a leading regional wireless and broadband (wireline and cable
television) telecommunications service provider serving over one million
customers in markets covering over 17.3 million Net Pops in the United States
and the neighboring Caribbean. In the United States, we are a regional wireless
service provider in small cities and rural areas in two geographic clusters
covering parts of six states (which we refer to as U.S. wireless). In our Puerto
Rico-based Caribbean service area, which also includes operations in the
Dominican Republic and the U.S. Virgin Islands, we are a facilities-based, fully
integrated communications service provider offering both wireless (which we
refer to as Caribbean wireless) and, in Puerto Rico and the Dominican Republic,
broadband services (which we refer to as Caribbean broadband) to business and
residential customers.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the related notes included in this report. Those
statements in the following discussion that are not historical in nature should
be considered to be forward-looking statements that are inherently uncertain.
Please see "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995" and the "Risk Factors"
section of our 2003 Annual Report on Form 10-K.
23
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis is based on our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of our consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect reported
amounts and disclosures of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and revenues and expenses during the periods reported. Actual results
could differ from those estimates.
We believe that the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
Revenue Recognition
Wireless Revenue. We recognize wireless service revenue in the period
the service is provided to our customers. Services billed in advance are
recognized as income when earned. Revenue from sales of handsets and accessories
are recognized in the period these products are sold to the customer. We have
multiple billing cycles, all of which span our quarter-ends. As a result of our
billing cycle cut-off times, we are required to make estimates for service
revenue earned, but not yet billed at the end of each quarter. These estimates
are based primarily on the actual results of the immediately preceding
comparable billing cycle. Actual billing cycle results and related revenue may
vary, depending on subscriber usage and rate plan mix, from the results
estimated at the end of each quarter. Revenue from activation fees is recognized
over the expected customer service period, ranging from 26 to 48 months. Revenue
from other services is recognized when earned.
Broadband Revenue. We recognize revenue from cable television
installation fees to the extent of direct selling costs in the period the
installation is provided to the customer. Revenue from prepaid long distance
cards is recognized as the customer uses the minutes on the cards. Revenue from
other services is recognized when earned. Revenue from equipment sales is
recognized in the period these products are sold to the customer.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses,
which result from our customers not making required payments. We base our
allowance on the likelihood of recoverability of our subscriber accounts
receivable based on past experience and by reviewing current collection trends
that are expected to continue. If economic or industry trends worsen beyond our
estimates, we would increase our allowance for doubtful accounts by recording
additional expense.
Valuation of Long-Lived Assets
Long-lived assets such as property, plant and equipment, certain
license costs and customer lists are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. In our valuation, we consider current market values of properties
similar to our own, competition, prevailing economic conditions, government
policy including taxation and the historical and current growth patterns of both
our business and the industry. We also consider the recoverability of the cost
of our long-lived assets based on a comparison of estimated undiscounted
operating cash flows for the related businesses, with the carrying value of the
long-lived assets.
Considerable management judgment is required to estimate the impairment
and fair value of assets. Estimates related to asset impairment are critical
accounting policies as management must make
24
assumptions about future revenue and related expenses over the life of an asset,
and the effect of recognizing impairment could be material to our consolidated
financial position as well as our consolidated results of operations. Actual
revenue and costs could vary significantly from such estimates.
Our U.S. wireless and Puerto Rico personal communications services
("PCS") licenses and the cable franchise costs are treated as indefinite-lived
intangible assets and are not be amortized, but rather are tested for
impairment. We reevaluate the useful life determination for U.S. wireless and
Puerto Rico PCS licenses and the Puerto Rico cable franchise costs each
reporting period to determine whether events and circumstances continue to
support an indefinite useful life.
Goodwill and other intangible assets with indefinite lives (e.g.,
wireless licenses) are not amortized, but are subject to impairment tests. When
testing the carrying value of these assets for impairment, we determine, within
each operation, the fair value of aggregated indefinite-lived intangible assets
by subtracting from each operations' discounted cash flows the fair value of all
of the other net tangible and intangible assets of each operation.
Derivative Financial Instruments
We use financial derivative instruments as part of our overall risk
management strategy. These instruments are used to manage risk related to
changes in interest rates. Our portfolio of derivative financial instruments
consists of interest rate swap and collar agreements. We use interest rate swap
agreements to modify variable rate obligations to fixed rate obligations,
thereby reducing our exposure to higher interest rates. We use interest rate
collar agreements to lock in a maximum interest rate if interest rates rise, but
allow us to otherwise pay lower market rates, subject to a floor. Amounts paid
or received under interest rate swap agreements are accrued as interest rates
change with the offset recorded in interest expense.
The Company' interest rate swaps and collars qualify for hedge
accounting. As such, the fair value of the swaps and collars is recorded as a
liability and as a component of other comprehensive loss (net of tax). The
ineffectiveness of the collar is recorded in the statement of operations as a
component of interest expense.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendments of
Statement 133 on Derivative Instruments and Hedging Activities," or SFAS No.
149. SFAS No. 149 serves as an amendment to and clarifies financial accounting
and reporting for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is
to be applied prospectively to all contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. However,
the provisions of this statement that relate to "SFAS 133 Implementation
Issues," which have been effective for fiscal quarters beginning prior to June
15, 2003, continue to be applied in accordance with their respective effective
dates. The adoption of SFAS No. 149 did not have a material effect on the
Company's consolidated results of operations, consolidated financial position or
consolidated cash flows.
Stock-Based Compensation
Stock based compensation issued to employees and directors is valued
using the intrinsic value method under Accounting Principles Board ("APB")
Opinion No. 25 "Accounting for Stock Options Issued to Employees.". Under this
method, compensation expense is recorded on the date of grant only if the
25
current price of the underlying stock exceeds the exercise price. SFAS No. 123
"Accounting for Stock-Based Compensation," or SFAS No. 123, established
accounting and disclosure requirements using a fair value based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, we have elected to continue to apply APB No. 25 and adopt only the
disclosure requirements of SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure," or SFAS No. 148. SFAS
No. 148 serves as an amendment to SFAS No. 123 and provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and
interim consolidated financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the transition elements of SFAS No. 148 and the annual
financial statement reporting requirements for the fiscal year ended May 31,
2003 and the interim periods reporting disclosure requirements during the
interim period ended August 31, 2003.
CERTAIN NON-GAAP FINANCIAL MEASURES
Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and
other provisions of the Securities Exchange Act of 1934, as amended, define and
prescribe the conditions for use of certain non-GAAP financial information.
Throughout this Form 10-Q, we present certain financial measures that are not
calculated and presented in accordance with GAAP, including "adjusted operating
income." We previously referred to this non-GAAP financial measure in our
filings with the United States Securities and Exchange Commission ("SEC"), press
releases and other communications with investors as "adjusted EBITDA." The
change to "adjusted operating income" is a change in name only and we have not
changed the way we calculate current or prior results with respect to this
financial measure.
We view adjusted operating income as an operating performance measure,
and as such we believe that the GAAP financial measure most directly comparable
to it is net income or net loss. In calculating adjusted operating income, we
exclude from net income or net loss the financial items that we believe have
less significance to the day-to-day operation of our business. We have outlined
below the type and scope of these exclusions and the limitations on the use of
this non-GAAP financial measure as a result of these exclusions. Adjusted
operating income is not an alternative to net income, operating income or cash
flows from operating activities as calculated and presented in accordance with
GAAP. Investors and potential investors in our securities should not rely on
adjusted operating income as a substitute for any GAAP financial measure. In
addition, our calculation of adjusted operating income may or may not be
consistent with that of other companies. We strongly urge investors and
potential investors in our securities to review the reconciliation of adjusted
operating income to the comparable GAAP financial measures that are included in
this Form 10-Q and our consolidated financial statements, including the notes
thereto, and the other financial information contained in this report and our
other SEC filings and not to rely on any single financial measure to evaluate
our business.
Adjusted operating income is used by our management as a supplemental
financial measure to evaluate the performance of our business that, when viewed
with our GAAP results and the accompanying reconciliations, we believe provides
a more complete understanding of factors and trends affecting our business than
the GAAP results alone. Management also uses this financial measure as one of
several criteria to determine the achievement of performance-based cash bonuses.
We also regularly communicate our adjusted operating income to the public
through our earnings releases because it is the
26
financial measure commonly used by analysts that cover our industry and our
investor base to evaluate our performance. We understand that analysts and
investors regularly rely on non-GAAP financial measures, such as adjusted
operating income, to provide a financial measure by which to compare a company's
assessment of its operating performance against that of other companies in the
same industry. This non-GAAP financial measure is helpful in more clearly
reflecting the sales of our products and services, as well as highlighting
trends in our core businesses that may not otherwise be apparent when relying
solely on GAAP financial measures, because this non-GAAP financial measure
eliminates from earnings financial items that have less bearing on our
performance. In addition, as our calculation of adjusted operating income is
similar, but not identical, to certain financial ratios used in the financial
covenants of our Senior Credit Facility and the indentures governing our Senior
Subordinated Notes due 2008 and Senior Notes due 2013, and since we do not
publicly disclose the calculations of these financial ratios, adjusted operating
income is the most comparable financial measure that is readily available to
investors to evaluate our compliance with our financial covenants.
The term "adjusted operating income" as used in this Form 10-Q refers
to, for any period, net income (loss) before interest, other non operating
(income) expense,taxes, depreciation, amortization, loss (gain) on disposition
of assets, minority interest in (income) loss of subsidiaries and income from
equity investments.
Set forth below are descriptions of the financial items that have been
excluded from our net income (loss) to calculate adjusted operating income and
the material limitations associated with using this non-GAAP financial measure
as compared to the use of the most directly comparable GAAP financial measure:
- Minority interest in (income) loss of subsidiaries
relates to our minority investors' proportionate
share of income or losses in our non-wholly owned
subsidiaries, which generated non-cash charges to our
operating results. Operating results attributable to
these minority investors' investments do not
necessarily result in any actual benefit or detriment
to us and, therefore, we believe it would be more
helpful for an investor to exclude such items as
being more reflective of our core operating
performance.
- Management does not consider income tax benefit
(expense) when considering the profitability of our
core operations. Nevertheless, the amount of taxes we
are required to pay reduces the amount of funds
otherwise available for use in our business and thus
may be useful for an investor to consider.
- Other non-operating (income) expense relates to
foreign currency translation losses in our operations
in the Dominican Republic because some of our revenue
in the Dominican Republic is collected in local
currency, the DR peso. Although foreign currency
translation gains or losses have a cash effect on our
results, because some of our costs incurred in the
Dominican Republic are paid in U.S. dollars, by
excluding them we are better able to evaluate the
real effects of changes in our core operating
performance.
- The amount of interest expense we incur is
significant and reduces the amount of funds otherwise
available to use in our business and, therefore, is
important for investors to consider. However,
management does not consider the amount of interest
expense when evaluating our core operating
performance.
- Income from equity investments relates to our
proportionate share of income or loss from the
entities in which we hold minority interests. We do
not control these entities and, as such, do not
believe the income we receive from such entities is
indicative of our core operating performance.
- (Loss) gain on the disposition of assets may increase
or decrease the cash available to us and thus may be
important for an investor to consider. We are not in
the business of acquiring or disposing of assets and,
therefore, the effect of the disposition of assets
may not be comparable from year-to-year. We believe
such gains or losses recorded on the disposition of
an asset do not reflect the core operating
performance of our business.
- Depreciation and amortization are important for
investors to consider, even though they are non-cash
charges, because they represent generally the wear
and tear on our property, plant and equipment, which
produce our revenue. We do not believe these charges
are indicative of our core operating performance.
27
Management compensates for the above-described limitations of using a
non-GAAP financial measure by using this non-GAAP financial measure only to
supplement our GAAP results to provide a more complete understanding of the
factors and trends affecting our business.
The following table sets forth a reconciliation of net income (loss) to
adjusted operating income for our consolidated results.
RECONCILIATION OF CONSOLIDATED NET INCOME (LOSS) TO ADJUSTED OPERATING INCOME
THREE MONTHS ENDED
AUGUST 31,
-----------
(Unaudited)
(dollar amounts in thousands)
-----------------------------
2003 2002
----------- ------------
Net income (loss) $ 6,404 $ (241)
Minority interest in income (loss) 134 (51)
Income tax (benefit) expense (8,677) 3,765
Other non-operating expense 858 7
Interest expense - net 49,598 38,273
Income from equity investments (24) (54)
-------- --------
Operating income 48,293 41,699
Loss (gain) on disposition of assets 17 (2,375)
Depreciation and amortization 35,067 36,481
-------- --------
Adjusted operating income $ 83,377 $ 75,805
======== ========
Our business segments were determined in accordance with GAAP. Our
management measures the operating performance of each of our business segments
based on adjusted operating income. Adjusted operating income is the measure of
profit or loss reviewed by the chief operating decision maker when assessing the
performance of each segment and making decisions about the resources to allocate
to each segment. Under current United States Securities and Exchange Commission
("SEC") rules for non-GAAP financial measures, adjusted operating income as used
with respect to our business segments is not required to be reconciled to a GAAP
financial measure. We have, however, also provided in the following tables a
reconciliation of operating income (loss) to adjusted operating income for each
of our business segments.
28
U.S. WIRELESS
RECONCILIATION OF OPERATING INCOME TO ADJUSTED OPERATING INCOME
THREE MONTHS ENDED
-------------------------------------
AUGUST 31, 2003 AUGUST 31, 2002
--------------- ----------------
(Unaudited)
(dollar amounts in thousands)
Operating income $ 30,318 $ 35,825
Loss (gain) on disposition of assets 134 (4)
Depreciation and amortization 9,085 9,237
----------- -----------
Adjusted operating income $ 39,537 $ 45,058
=========== ===========
CARIBBEAN WIRELESS
RECONCILIATION OF OPERATING INCOME TO ADJUSTED OPERATING INCOME
THREE MONTHS ENDED
------------------------------------
AUGUST 31, 2003 AUGUST 31, 2002
--------------- ---------------
(Unaudited)
(dollar amounts in thousands)
Operating income $ 18,412 $ 7,873
Loss (gain) on disposition of assets 73 (2,370)
Depreciation and amortization 13,306 15,461
----------- -----------
Adjusted operating income $ 31,791 $ 20,964
=========== ===========
CARIBBEAN BROADBAND
RECONCILIATION OF OPERATING LOSS TO ADJUSTED OPERATING INCOME
THREE MONTHS ENDED
------------------------------------
AUGUST 31, 2003 AUGUST 31, 2002
--------------- ---------------
(Unaudited)
(dollar amounts in thousands)
Operating loss $ (437) $ (1,999)
Gain on disposition of assets (190) (1)
Depreciation and amortization 12,676 11,783
----------- -----------
Adjusted operating income $ 12,049 $ 9,783
=========== ===========
RESULTS OF OPERATIONS
We had 971,500 wireless subscribers at August 31, 2003, as compared to
883,800 at August 31, 2002, an increase of 10%. The net income for the three
months ended August 31, 2003 was $6.4 million, as compared to a net loss of $0.2
million for the three months ended August 31, 2002. Basic and diluted earnings
per share for the three months ended August 31, 2003 was $0.07 as compared to
basic and diluted loss per share of $0.00 for the three months ended August 31,
2002.
29
In accordance with SFAS No. 109, Accounting for Income Taxes, and APB
Opinion No. 28, Interim Financial Reporting, we have recorded our tax benefit
for the quarter ended August 31, 2003 based on our projected annual worldwide
effective tax rate of 405.7%. Previously, we announced our earnings for the
three months ended August 31, 2003 using a projected annual worldwide effective
tax rate of 98.5%, which was based on our belief at the time that we would be
issuing thirty million shares of stock through a public offering as announced on
September 11, 2003 and repaying a portion of our unsecured subordinated notes
due 2009 ("Mezzanine Debt") with the proceeds of the public offering. On
September 24, 2003, we announced that we would not proceed with the public
offering of our common stock, and as a result, our projected annual worldwide
effective tax rate increased. This increase is primarily because of lower
projected pre-tax book income due to the increased interest expense as a result
of our not paying down a portion of the Mezzanine Debt, and the
non-deductibility for U.S. income tax purposes of a portion of such interest
expense.
Our projected annual worldwide effective tax rate of 405.7% is
primarily due to book losses generated in the Dominican Republic for which, in
our judgment, it is more likely than not that a tax benefit will not be
realized, state taxes net of federal tax benefit, certain interest expense
related to the Company's Mezzanine Debt that is not deductible for U.S. income
tax purposes and certain foreign taxes for which we cannot claim a foreign tax
credit.
As a result of our decision not to pursue an equity offering with
proceeds used to pay down a portion of the Mezzanine Debt, the following numbers
previously included in our first quarter press release on September 12, 2003
have changed as follows:
ACTUAL AS
REPORTED IN
FIRST QUARTER THIS QUARTERLY
PRESS RELEASE REPORT ON FORM 10-Q
------------- --------------------
(Unaudited)
(dollar amounts in thousands)
Income tax benefit $ 2,107 $ 8,677
Net (loss) income $ (166) $ 6,404
(Loss) earnings per share:
Basic and diluted $ (0.00) $ 0.07
30
The table below summarizes the consolidated results of operations for
each period:
THREE MONTH ENDED
AUGUST 31,
---------------------- %
2003 2002 CHANGE
-------- -------- ------
(Unaudited)
(in thousands, except
per share data)
Operating income.................... $ 48,293 $ 41,699 16%
Net income (loss)................... 6,404 (241) *
Earnings (loss) per share:
Basic............................. 0.07 (0.00) *
Diluted........................... 0.07 (0.00) *
Adjusted operating income(1)........ 83,377 75,805 10%
- ----------
(1) See "Certain Non-GAAP Financial Measures" beginning on page 26.
* Percentage change not meaningful.
U.S. Wireless Operations
THREE MONTHS ENDED
(UNAUDITED)
------------------- %
(In thousands) 8/31/03 8/31/02 CHANGE
- -------------------------------------------------------------------------
Revenue:
Service revenue $ 71,868 $ 65,765 9%
Roaming revenue 17,218 24,779 (31)
Equipment sales 5,265 2,597 103
- -----------------------------------------------------------------------
Total revenue 94,351 93,141 1
- -----------------------------------------------------------------------
Costs and expenses:
Cost of services 16,385 17,440 (6)
Cost of equipment sold 13,083 6,110 114
Sales and marketing 11,421 11,661 (2)
General and administrative 13,925 12,872 8
- -----------------------------------------------------------------------
Total costs and expenses 54,814 48,083 14
- -----------------------------------------------------------------------
Adjusted operating income (1) 39,537 45,058 (12)
Loss (gain) on disposition of assets 134 (4) *
Depreciation and amortization 9,085 9,237 (2)
- -----------------------------------------------------------------------
Operating income $ 30,318 $ 35,825 (15)%
=======================================================================
* Percentage change not meaningful.
(1) See "Certain Non-GAAP Financial Measures" beginning on page 26.
Revenue. U.S. wireless service revenue increased $6.1 million, or 9%,
to $71.9 million in the three months ended August 31, 2003, as compared to the
three months ended August 31, 2002. The increase
31
was due to growth in service revenue per subscriber of $5.1 million and to
revenue from new subscribers of $1.0 million.
U.S. wireless roaming revenue decreased $7.6 million, or 31%, from
roaming revenues of $24.8 million for the three months ended August 31, 2002.
The decrease was primarily the result of lower average roaming rates per minute
of $15.0 million for the three months ended August 31, 2003, partially offset by
an increase in roaming usage of $7.4 million for the same period.
We anticipate that roaming revenue will be approximately $20.0 million
lower in fiscal 2004 than in fiscal 2003 primarily due to declines in
contractual roaming rates. We expect the trend of a decreasing roaming rate per
minute, partially offset by an increase in roaming usage, to continue.
Equipment sales increased $2.7 million, or 103%, during the three
months ended August 31, 2003, as compared to the three months ended August 31,
2002 due to a change in the mix of phones sold, increased exchanges and upgrades
and to increased activations in the current period compared to the same period
in the prior year.
Our U.S. wireless operations had approximately 548,900 and 534,000
subscribers at August 31, 2003 and 2002, respectively. During the twelve months
ended August 31, 2003, increases from new activations of 163,100 were offset by
subscriber cancellations of 148,200. The monthly postpaid churn rate was 1.8%
for the three months ended August 31, 2003, as compared to 2.0% for the same
period last year. The cancellations experienced by the U.S. wireless operations
were primarily due to competitive factors, non-payment and the lack of usage by
our prepaid customers.
U.S. wireless revenue per subscriber per month ("ARPU") was $58 for the
three months ended August 31, 2003, as compared to $58 for the same period a
year ago. ARPU remained flat despite the decline in roaming revenue due to an
increase in retail revenue due primarily to the introduction of national rate
plans. Average minutes of use per subscriber were 292 per month for the three
months ended August 31, 2003 as compared to 241 for the same period last year.
Costs and expenses. Cost of services decreased $1.1 million, or 6%,
during the three months ended August 31, 2003, as compared to the three months
ended August 31, 2002, primarily due to reduced roamer service cost due to lower
rates on roaming agreements. This was partially offset by an increase in cost of
services due to increase in variable costs associated with a larger subscription
base, most notably mobile long distance expenses.
Cost of equipment sold increased $7.0 million, or 114%, for the three
months ended August 31, 2003, as compared to the same period last year, due
primarily to an increase in phones used for customer retention and a change in
the mix of phones.
Sales and marketing expenses decreased $0.2 million, or 2%, for the
three months ended August 31, 2003 as compared to the same period in the prior
year, primarily due to decreased advertising costs and compensation costs
partially offset by increased commissions.
General and administrative expenses increased $1.1 million, or 8%,
during the three months ended August 31, 2003, as compared to the three months
ended August 31, 2002, primarily due to additional professional services expense
relating to the Company's further documentation and testing of its internal
controls in the preparation for compliance with the Sarbanes-Oxley Act of 2002
and related regulations.
32
Adjusted operating income for the U.S. wireless operations was $39.5
million for the three months ended August 31, 2003, a decrease of $5.5 million,
or 12%, as compared to the same period in fiscal 2003.
Depreciation and amortization for the three months ended August 31,
2003 was $9.1 million, a decrease of $0.2 million, or 2%, from the same period
in fiscal 2003. The decrease was primarily due to a decrease in depreciation
expense that resulted from our changing the useful lives of our
telecommunications towers from 10 years to 30 years, which change was made in
the fourth quarter of fiscal 2003. This decrease was partially offset by
increased depreciation related to capital expenditures made during fiscal 2003
and 2004.
Operating income for the three months ended August 31, 2003 was $30.3
million, a decrease of $5.5 million, from operating income of $35.8 million for
the same period in fiscal 2003.
Caribbean Wireless Operations
THREE MONTHS ENDED
(UNAUDITED)
------------------- %
(In thousands) 8/31/03 8/31/02 CHANGE
- --------------------------------------------------------------------------------
Revenue:
Service revenue $ 70,381 $ 62,346 13%
Roaming revenue 1,383 351 294
Equipment sales 2,544 2,546 0
- --------------------------------------------------------------------------------
Total revenue 74,308 65,243 14
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of services 11,597 11,730 (1)
Cost of equipment sold 8,434 8,906 (5)
Sales and marketing 9,325 9,911 (6)
General and administrative 13,161 13,732 (4)
- --------------------------------------------------------------------------------
Total costs and expenses 42,517 44,279 (4)
- --------------------------------------------------------------------------------
Adjusted operating income (1) 31,791 20,964 52
Loss (gain) on disposition of assets 73 (2,370) (103)
Depreciation and amortization 13,306 15,461 (14)
- --------------------------------------------------------------------------------
Operating income $ 18,412 $ 7,873 134%
================================================================================
(1) See "Certain Non-GAAP Financial Measures" beginning on page 26.
Revenue. Caribbean wireless service revenue increased $8.0 million, or
13%, to $70.4 million for the three months ended August 31, 2003, as compared to
the three months ended August 31, 2002. The increase in Caribbean wireless
service revenue was primarily due to growth in revenue from new subscribers of
$7.9 million, as well as an increase of $0.1 million in service revenue per
subscriber.
Revenue from Caribbean wireless roaming increased $1.0 million, or
294%, for the three months ended August 31, 2003 from roaming revenue of $0.4
million for the three months ended August 31, 2002. The increase was primarily
due to an increase in roaming minute usage of $1.6 million, as compared to the
same period last year, partially offset by a decrease in revenue of $0.6 million
resulting
33
from a decrease in the roaming rate per minute for the three months ended August
31, 2003.
Equipment sales of wireless telephones and accessories to subscribers
remained flat.
Our Caribbean wireless operations had approximately 422,600 subscribers
at August 31, 2003, an increase of 21% from the 349,800 subscribers at August
31, 2002. During the twelve months ended August 31, 2003, increases from new
activations of 225,900 were offset by subscriber cancellations of 153,100. The
cancellations experienced by our Caribbean wireless operations were primarily
the result of competitive factors, non-payment and the lack of usage by our
prepaid customers.
The monthly postpaid churn rate decreased to 2.1% for three months
ended August 31, 2003 from 3.3% for the same period a year ago. Our postpaid
subscribers represented approximately 76% of our total Caribbean wireless
subscribers at August 31, 2003, up from approximately 71% at August 31, 2002.
Caribbean wireless ARPU was $60 for the three months ended August 31,
2003, as compared to $59 for the same period last year. An average of 984
minutes of airtime were used by our customers per month for the three months
ended August 31, 2003, as compared to 619 minutes of use per month during the
three month ended August 31, 2002. An average of 1,143 minutes of airtime were
used by our postpaid customers per month for the three months ended August 31,
2003, as compared to 887 minutes of use per month during the three month ended
August 31, 2002.
Costs and expenses. Cost of services decreased $0.1 million, or 1%,
during the three months ended August 31, 2003 as compared to the three months
ended August 31, 2002. The decrease was primarily due to reduced cost of
services due to the sale of Centennial Digital Jamaica ("CDJ") in August 2002 as
well as reduced cost of roamer service due to lower rates on roaming agreements.
This was partially offset by an increase in costs of services due to increases
in variable costs associated with a larger subscription base, most notably
mobile long distance expenses.
Cost of equipment sold decreased $0.5 million, or 5%, during the three
months ended August 31, 2003 as compared to the same period last year. The
decrease was primarily due to reduced cost of equipment sold due to the sale of
our interest in CDJ in August 2002, as well as reduced expenses associated with
the repair of our loaner PCS phones in Puerto Rico.
Sales and marketing expenses decreased $0.6 million, or 6%, during the
three months ended August 31, 2003 as compared to the same period last year. The
decrease was primarily due to reduced sales and marketing expense due to the
sale of our interest in CDJ in August 2002, as well as to a reclassification of
a portion of store rent expense from sales and marketing expense to general and
administrative expense. This reclassification was made to reflect the fact that
a portion of the stores are used for customer service and customer retention
activities. These decreases were partially offset by increased direct
commission expense due to an increase in the number of postpaid activations.
General and administrative expenses decreased $0.6 million, or 4%,
during the three months ended August 31, 2003 as compared to the same period in
fiscal 2003. The decrease was primarily due to reduced general and
administrative expenses due to reduced bad debt expense in both Puerto Rico and
the Dominican Republic, as well as reduced general and administrative expenses
due to the sale of our interest in CDJ in August 2002. These decreases were
partially offset by increased expenses associated with the outsourcing of our
call-in activations in Puerto Rico, as well as the aforementioned portion of
store rent now being included in general and administrative expenses.
34
Adjusted operating income for the Caribbean wireless operations for the
three months ended August 31, 2003 was $31.8 million, an increase of $10.8
million, or 52%, as compared to the three months ended August 31, 2002.
The gain on disposition of assets during the three months ended August
31, 2002 was due to the sale of our interest in CDJ in August 2002.
Depreciation and amortization for the three months ended August 31,
2003 was $13.3 million, a decrease of $2.2 million, or 14%, as compared to the
three months ended August 31, 2002. The decrease was primarily due to a decrease
in depreciation on capitalized PCS phones in Puerto Rico. This decrease is due
to lower capital expenditures on loaner PCS phones in the three months ended
August 31, 2003 than in the three months ended August 31, 2002. In addition, the
decrease in depreciation and amortization reflects the sale of our interest in
CDJ in August 2002.
Operating income for the three months ended August 31, 2003 was $18.4
million, an increase of $10.5 million from the operating income of $7.9 million
from the same period last year.
Caribbean Broadband Operations
THREE MONTHS ENDED
(UNAUDITED)
------------------------ %
(In thousands) 8/31/03 8/31/02 CHANGE
- -----------------------------------------------------------------------------
Revenue:
Switched revenue $ 8,898 $ 7,812 14%
Dedicated revenue 11,810 9,059 30
Cable television revenue 12,017 12,664 (5)
Other revenue 5,673 6,183 (8)
- ---------------------------------------------------------------------------
Total revenue 38,398 35,718 8
- ---------------------------------------------------------------------------
Costs and expenses:
Cost of services 16,070 15,165 6
Cost of equipment sold 121 155 (22)
Sales and marketing 2,023 2,259 (10)
General and administrative 8,135 8,356 (3)
- ---------------------------------------------------------------------------
Total costs and expenses 26,349 25,935 2
- ---------------------------------------------------------------------------
Adjusted operating income (1) 12,049 9,783 23
Gain on disposition of assets (190) (1) *
Depreciation and amortization 12,676 11,783 8
- ---------------------------------------------------------------------------
Operating loss $ (437) $ (1,999) (78)%
===========================================================================
* Percentage change not meaningful
(1) See "Certain Non-GAAP Financial Measures" beginning on page 26.
Revenue. Caribbean broadband revenue increased $2.7 million, or 8%, to
$38.4 million for the three months ended August 31, 2003, as compared to the
three months ended August 31, 2002.
Switched revenue increased $1.1 million, or 14%, to $8.9 million for
the three months ended August
35
31, 2003, as compared to the same period last year. The increase was primarily
due to a 22% increase in switched access lines to 43,800 as of the end of the
first quarter and a corresponding growth in aggregate minutes of use.
Dedicated revenue increased $2.8 million, or 30%, to $11.8 million for
the three months ended August 31, 2003, as compared to the same period last
year. The increase was primarily the result of a 14% growth in voice grade
equivalent dedicated lines to 188,100 and an increase in revenue per circuit.
Cable television revenue of $12.0 million for the three months ended
August 31, 2003 decreased 5% from the same period last year, reflecting a 9%
loss in subscribers partially offset by additional revenue from a rate increase
we implemented after our digital upgrade.
Other revenue decreased $0.5 million, or 8%, to $5.7 million for the
three months ended August 31, 2003 from the same period last year. The decrease
was primarily due to a reduction in interconnection rates in Puerto Rico and the
sale in the third quarter of fiscal 2003 of our 60% interest in Infochannel.
This was partially offset by an increase in revenue due to an increase in the
number of international long distance minutes to the Dominican Republic that we
terminate.
Costs and expenses. Cost of services increased $0.9 million, or 6%,
during the three months ended August 31, 2003, as compared to the same period
last year. The increase was primarily due to an increase in access charges in
the Dominican Republic, resulting from the increase in the number of
international long distance minutes to the Dominican Republic that we terminate.
This was partially offset by the sale of Infochannel.
Sales and marketing expenses decreased $0.2 million or 10%, during the
three months ended August 31, 2003, as compared to the three months ended August
31, 2002. The decrease was primarily due to an overall reduction in advertising
spending.
General and administrative expenses decreased $0.2 million, or 3%,
during the three months ended August 31, 2003, as compared to the three months
ended August 31, 2002. The decrease was primarily due to reduced general and
administrative expenses due to the aforementioned sale of Infochannel.
Adjusted operating income for the Caribbean broadband operations for
the three months ended August 31, 2003 was $12.0 million, an increase of $2.3
million, or 23%, as compared to the same period last year.
Depreciation and amortization for the three months ended August 31,
2003 was $12.7 million, an increase of $0.9 million, or 8%, from the same period
last year. The increase was primarily due to increased depreciation expense
associated with the continued expansion of the Puerto Rico broadband operation.
Operating loss for the three months ended August 31, 2003 was $0.4
million, a decrease of $1.6 million as compared to the operating loss of $2.0
million for the same period in fiscal 2003.
CONSOLIDATED
Other non-operating income and expenses. Net interest expense was $49.6
million for the three months ended August 31, 2003, an increase of $11.3
million, or 30%, from the three months ended August 31, 2002. Gross interest
expense was $49.8 million for the three months ended August 31, 2003,
36
as compared to $38.5 million for the same period a year ago. This increase
resulted primarily from the write-off of approximately $8.6 million in debt
issuance costs due to the repayment of a portion of our term loans as well as
interest on the Senior Notes, which were issued on June 20, 2003 in a private
placement transaction. These increases were partially offset by lower interest
on our terms loans and our revolving credit facility due to a lower average
interest rate on our variable rate debt and lower balances. Total debt decreased
$1.4 million from August 31, 2002 to August 31, 2003.
The weighted-average debt outstanding during the three months ended
August 31, 2003 was $1,759.9 million, a decrease of $45.0 million as compared to
the weighted-average debt level of $1,804.9 million during the three months
ended August 31, 2002. Including the write-off of debt issuance costs made
during the three months ended August 31, 2003 as well as amortization of debt
issuance costs in both the three months ended August 31, 2003 and 2002, our
weighted average interest rate was 11.3% for the three months ended August 31,
2003, as compared to 8.5% for the same period a year ago. Excluding the
write-off of debt issuance costs made during the three months ended August 31,
2003 as well as amortization of debt issuance costs in both the three months
ended August 31, 2003 and 2002, the weighted average interest rate was 8.9% as
compared to 8.1% for the same period a year ago.
(Loss) income before income tax benefit (expense) and minority interest
for the three months ended August 31, 2003 was ($2.1) million as compared to
$3.5 million for the three months ended August 31, 2002. Income tax benefit
(expense) was $8.7 million for the three months ended August 31, 2003, as
compared to ($3.8) million for the same period last year.
These factors resulted in a net income of $6.4 million for the three
months ended August 31, 2003, as compared to a net loss of $0.2 million for the
same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
On June 20, 2003, we sold $500.0 million aggregate principal amount of
our Senior Notes in a private placement transaction. In connection with the sale
of Senior Notes, on June 20, 2003, we amended our senior credit facility. The
senior credit facility consists of four term loans and a revolving credit
facility. The borrowers under the senior credit facility are Centennial Cellular
Operating Co. LLC ("CCOC") for a term loan with an original principal amount of
$325.0 million, which we refer to as Term Loan A, of which $177.4 million was
outstanding as of August 31, 2003, and Centennial Puerto Rico Operations Corp.
("CPROC") for three separate term loans (which we refer to as Term Loan A-PR,
Term Loan B-PR and Term Loan C-PR) aggregating an original principal amount of
$719.4 million, of which $450.3 million was outstanding as of August 31, 2003.
The revolving credit facility has an aggregate principal amount of $250.0
million, of which there was $0.0 million outstanding as of August 31, 2003. The
revolving credit facility is available to both of the borrowers. Under the
provisions of the senior credit facility we are effectively prohibited from
paying cash dividends on our common stock. Our obligations under the senior
credit facility are guaranteed by substantially all of our subsidiaries and are
collateralized by liens on substantially all of our assets.
We used the net proceeds from the offering of Senior Notes to make a
total of $470.0 million in repayments under the senior credit facility in the
following manner:
- $170.0 million under the revolving credit facility
- $85.0 million under Term Loan A
- $32.7 million under Term Loan A-PR
- $98.7 million under Term Loan B-PR
- $83.6 million under Term Loan C-PR
In connection with the repayments under the Senior Credit Facility, we
wrote-off approximately $16.4 million, net of accumulated amortization of $7.8
million in debt issuance costs.
37
As part of the amendment, the applicable margins with respect to the
interest rates for outstanding loans were increased by 0.25%, and we modified
certain of the financial and other covenants in the Senior Credit Facility.
The amounts outstanding under the Senior Credit Facility, and the
maturity dates of the revolving credit facility, and each term loan are as
follows:
ORIGINAL AMOUNT
PRINCIPAL OUTSTANDING AT
SENIOR CREDIT FACILITY AMOUNT AUGUST 31, 2003 MATURITY DATE
- ---------------------- --------- --------------- -------------
(Unaudited)
(In thousands)
Revolving credit facility........ $ 250,000 $ - November 30, 2006
Term Loan A 325,000 177,362 November 30, 2006
Term Loan A-PR................... 125,000 68,216 November 30, 2006
Term Loan B-PR................... 322,188 206,804 May 30, 2007
Term Loan C-PR................... 272,187 175,240 November 30, 2007
------------- -----------
Total.......................... $ 1,294,375 $ 627,622
============= ===========
In December 1998, the Company and CCOC issued $370,000 of senior
subordinated notes due 2008 (the "Senior Subordinated Notes") to qualified
institutional buyers in a private placement transaction. In July 1999, the
Company registered the $370,000 of debt securities with the SEC. CPROC is a
guarantor of the Senior Subordinated Notes.
In 1999, we issued the Mezzanine Debt, which is currently held by an
affiliate of Welsh, Carson, Anderson & Stowe. The issuance was allocated $157.5
million to debt and $22.5 million to equity. The difference between the face
value of the Mezzanine Debt and the amount allocated to debt is being amortized
or accreted over the term of the Mezzanine Debt. The Mezzanine Debt bears cash
interest at a rate of 10% or paid-in-kind interest at a rate of 13% per annum.
We were informed by the administrative agent under the Senior Credit
Facility that, as of May 31, 2002, we had used up all remaining baskets under
the Senior Credit Facility to pay cash interest on the Mezzanine Debt and that
any additional payments of cash interest on the Mezzanine Debt would be
considered a default under the Senior Credit Facility. Accordingly, we are
effectively prohibited from making any further payments of cash interest on the
Mezzanine Debt, absent additional distributions from the equity investments in
wireless systems that we holds. Any unpaid interest will be repaid upon maturity
of the Mezzanine Debt. Paid-in-kind interest on the Mezzanine Debt was $7.0
million for the three months ended August 31, 2003. As of August 31, 2003,
$210.4 million was outstanding under the Mezzanine Debt. As of August 31, 2003,
the total outstanding principle amount, including unaccreted value of the equity
portion of the Mezzanine Debt was approximately $223.3 million.
In January 2002, Centennial Puerto Rico Cable TV Corp., or Centennial
Cable, our wholly owned subsidiary, entered into a $15 million credit agreement
with Banco Popular de Puerto Rico, or the Cable TV Credit Facility, to fund the
digital conversion of its cable operations. Borrowings under the Cable TV Credit
Facility bear interest at the London Inter-Bank Offering Rate, or LIBOR, plus
3.50%. The Cable TV Credit Facility matures in May 2005. The maturity date was
changed from February 2006 to May 2005 in connection with amendments to the
Cable TV Credit Facility effected in May and July 2003 which also increased the
quarterly amortization payments and modified certain of the covenants. Under the
Cable TV Credit Facility, Centennial Cable is required to maintain certain
financial covenants and is limited in its ability to, among other things, incur
additional indebtedness. Centennial Puerto Rico has guaranteed Centennial
Cable's obligation under the Cable TV Credit Facility and the facility is
collateralized by a lien on the digital boxes, the monthly rental payments on
the digital boxes and other equipment purchased with the borrowings under the
Cable TV Credit Facility. As of August 31, 2003, $10.3 million was outstanding
under the Cable TV Credit Facility.
For the three months ended August 31, 2003, earnings were less than
fixed charges by $2.3 million. Fixed charges consist of interest expense,
including amortization of debt issuance costs, and the portion of rents deemed
representative of the interest portion of leases. The amount by which earnings
were less than fixed charges reflects non-cash charges of $35.1 million relating
to depreciation and amortization.
As of August 31, 2003, we had $676.6 million of property, plant and
equipment (net) placed in service. During the three months ended August 31,
2003, we made capital expenditures of $26.3 million to expand the coverage areas
and upgrade our cell sites as well as our call switching equipment of existing
U.S. and Caribbean wireless properties and to extend and enhance our broadband
fiber network in the Caribbean. Capital expenditures for the Caribbean
operations were $17.3 million for the three months ended August 31, 2003,
representing 66% of total capital expenditures. The Caribbean
38
operations' capital expenditures included $11.2 million to add capacity and
services and to continue the development and expansion of our Caribbean wireless
systems and $6.1 million to continue the expansion of our Caribbean Broadband
network infrastructure. During fiscal 2004, we anticipate capital expenditures
of approximately $125.0 million.
We expect to finance our capital expenditures primarily from cash flow
generated from operations, borrowings under our existing credit facilities and
proceeds from the sale of assets. We may also seek various other sources of
external financing including, but not limited to, additional bank financing,
joint ventures, partnerships and issuance of debt or equity securities.
To meet our obligations with respect to our operating needs, capital
expenditures and debt service obligations, it is important that we continue to
improve operating cash flow. Increases in revenue will be dependent upon, among
other things, continued growth in the number of customers and maximizing revenue
per subscriber. We have continued the construction and upgrade of wireless and
broadband systems in our markets to achieve these objectives. There is no
assurance that growth in customers or revenue will occur.
39
The following table sets forth, for the periods indicated, our net cash
provided by operating activities before interest payments (net cash provided),
our principal uses of such cash and the cash required from other financing and
investing activities:
THREE MONTHS ENDED AUGUST 31,
------------------------------------------------------
2003 2002
---- ----
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------
% of net % of net cash
(In thousands) Amount cash provided Amount provided
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 48,329 59% $ 45,653 55%
Interest paid 33,152 41 37,042 45
- --------------------------------------------------------------------------------------------------
Net cash provided $ 81,481 100% $ 82,695 100%
==================================================================================================
Principal uses of cash:
Interest paid $ 33,152 41% $ 37,042 45%
Property, plant & equipment 26,275 32 35,465 43
- --------------------------------------------------------------------------------------------------
Total $ 59,427 73% $ 72,507 88%
==================================================================================================
Cash available for other
financing and investing activities $ 22,054 27% $ 10,188 12%
==================================================================================================
Net cash provided by operating activities for the three months ended
August 31, 2003 was sufficient to fund our expenditures for property, plant and
equipment of $26.3 million.
The following table sets forth the primary cash flows provided by other
financing and investing activities for the periods indicated:
THREE MONTHS ENDED AUGUST 31,
------------------------------
2003 2002
---- ----
(In thousands) (Unaudited)
- --------------------------------------------------------------------------------------------------------
Proceeds from disposition of assets, net of cash expenses $ 1,681 $ 1,017
Proceeds from issuance of long-term debt 500,861 11,848
Proceeds from the exercise of stock options 127 -
Proceeds from issuance of common stock under employee stock purchase plan 390 483
- --------------------------------------------------------------------------------------------------------
Cash provided by other financing and investing activities 503,059 13,348
- --------------------------------------------------------------------------------------------------------
Repayment of debt (520,700) (33,359)
Debt issuance costs paid (22,211) -
- --------------------------------------------------------------------------------------------------------
Capital deficiency for operations and
capital expenditures $ (39,852) $ (20,011)
========================================================================================================
Based upon existing market conditions and our present capital
structure, we believe that cash flows from operations and funds from currently
available credit facilities will be sufficient to enable us to meet required
cash commitments through the next twelve-month period.
Centennial, its subsidiaries, affiliates and controlling stockholders
(including Welsh, Carson, Anderson & Stowe ("WCAS") and The Blackstone Group and
their respective affiliates) may from time to time, depending upon market
conditions, seek to purchase certain of Centennial's or its subsidiaries'
40
securities in the open market or by other means, in each case to the extent
permitted by existing covenant restrictions.
ACQUISITIONS AND DISPOSITIONS
Our primary acquisition strategy is to obtain controlling ownership
interests in communications systems serving markets that are proximate to or
share a community of interest with our current markets. We may pursue
acquisitions of communications businesses that we believe will enhance our scope
and scale. Our strategy of clustering our operations in proximate geographic
areas enables us to achieve operating and cost efficiencies, as well as joint
marketing benefits, and also allows us to offer our subscribers more areas of
uninterrupted service as they travel. In addition to expanding our existing
clusters, we also may seek to acquire interests in communications businesses in
other geographic areas. The consideration for such acquisitions may consist of
shares of stock, cash, assumption of liabilities, a combination thereof or other
forms of consideration.
In January 2003, we sold our 60% interest in Infochannel Limited, an
Internet service provider in Jamaica, for $3.0 million and we recorded a pretax
gain of $0.3 million.
In August 2002, we sold our 51% interest in CDJ to Oceanic Digital
Communications Inc., the 49% shareholder of CDJ. This transaction was initiated
in fiscal 2002. We recorded a pretax gain of $2.6 million, which is included in
loss (gain) on disposition of assets in the consolidated statement of
operations. In addition, we reduced our net liabilities by approximately $2.6
million, including consolidated long-term debt by approximately $45.1 million
(largely comprised of the vendor financing credit facility with Lucent
Technologies which was non-recourse to the Company) as a result of this
transaction.
In May 2002, we announced that we had entered into an agreement with
AAT to sell to AAT 186 telecommunications towers located throughout our U.S.
wireless serving areas for a purchase price of approximately $34.1 million in
cash, subject to adjustment. The agreement was subject to customary closing
conditions and the tower sales closed on a rolling basis during fiscal year 2003
and during the three months ended August 31, 2003. During the year ended May 31,
2003, we sold 144 telecommunications towers to AAT for approximately $24.0
million. During the three months ended August 31, 2003, we sold an additional 14
telecommunications towers to AAT for proceeds of approximately $2.5 million. We
do not expect to sell any additional towers to AAT under this agreement.
In June 2001 we entered into definitive, multi-year agreements with
Global Crossing Ltd., or Global Crossing, for the purchase and sale of
fiber-optic undersea capacity connecting the Caribbean and the United States and
other products and services in the Caribbean. In December 2001, March 2002 and
April 2003, Global Crossing and we restructured these agreements and
significantly reduced the commitments to each other. As of May 31, 2003, we paid
$45.0 million (of which $15.0 million was paid in fiscal 2002 and $30.0 million
was paid in fiscal 2001) to Global Crossing and received $10.4 million (of which
$5.9 million was received in fiscal 2002 and $4.5 million was received in fiscal
year 2001) from Global Crossing. Under the restructured agreements, we have paid
Global Crossing a net amount of $34.6 million ($45.0 million less forfeitures by
Global Crossing of $10.4 million) in exchange for fiber-optic undersea capacity
connecting Puerto Rico and the United States and other routes on the Global
Crossing network and received a $1.7 million credit that will be applied towards
the purchase of products and services on the Global Crossing network, including,
without limitation, prepaid maintenance costs on the undersea capacity and a
$1.2 million credit that was previously applied for voice services. In the first
quarter of fiscal 2004, we applied $0.9 million against the $1.7 million credit
mentioned above. The remaining $0.8 million credit received by us from Global
Crossing is included in prepaid expenses and
41
other current assets, net in the consolidated balance sheet. The fiber-optic
undersea capacity received by us from Global Crossing is included in property,
plant and equipment, net in the consolidated balance sheet and is being
amortized over its useful and contractual life of 15 years. We have not
recognized any revenue from Global Crossing under this transaction.
RECENT ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. We adopted SFAS
No. 143 on June 1, 2003. Our obligations under SFAS No. 143 arise from certain
of our cell site leases and relate primarily from contractual requirements to
remove our equipment from such leased sites. The adoption of this statement did
not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
In December 2002, the FASB issued SFAS No. 148 ("SFAS No. 148"). SFAS
No. 148 serves as an amendment to SFAS No. 123, and provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
adopted the annual financial statement reporting requirements for the fiscal
year ended May 31, 2003 and the interim reporting disclosure requirements during
the period ended August 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 serves as an amendment to and clarifies financial accounting and reporting
for derivative instruments, including derivative instruments embedded in other
contracts and for hedging activities, under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is to be applied
prospectively to all contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. However, the
provisions of this statement that relate to "SFAS 133 Implementation Issues,"
which have been effective for fiscal quarters beginning prior to June 15, 2003,
continue to be applied in accordance with their respective effective dates. The
adoption of SFAS No. 149 did not have a material effect on our consolidated
results of operations, consolidated financial position or consolidated cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). The requirements of this statement apply to issuers'
classification and measurement of freestanding financial instruments, including
those that comprise more than one option or forward contract. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. We adopted SFAS No. 150 effective September 1,
2003. The adoption did not have a material effect on our consolidated results of
operations, consolidated financial position or consolidated cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others"
42
("FIN 45"). FIN 45 expands the disclosures made by a guarantor in its financial
statements about its obligations under certain guarantees and requires the
guarantor to recognize a liability for the fair value of the obligation assumed
under certain guarantees. FIN 45 clarifies the requirements of SFAS No. 5,
"Accounting for Contingencies," relating to guarantees. In general, FIN 45
applies to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in a
specified interest rate, security price, foreign exchange rate or other variable
that is related to an asset, liability or equity security of the guaranteed
party, or failure of another party to perform under an obligating agreement
(performance guarantees). Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan commitments
and guarantees of a company's own future performance. Other guarantees are
subject to the disclosure requirements of FIN 45 but not to the recognition
provisions and include, among others, a guarantee accounted for as a derivative
instrument under SFAS No. 133, and a guarantee covering product performance, not
product price. The disclosure requirements of FIN 45 are effective for us as of
February 28, 2003, and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor could be required
to make under the guarantee and the current amount of the liability, if any, for
the guarantor's obligations under the guarantee. The recognition requirements of
FIN 45 are to be applied prospectively to guarantees issued or modified after
December 31, 2002.
In the ordinary course of our business, we enter into agreements with
third parties that contain indemnification provisions. Under these provisions,
we generally indemnify the other party for losses suffered or incurred as a
result of our breach of these agreements. At times, these indemnification
provisions survive termination of the underlying agreement. The maximum
potential amount of future payments we could be required to make under these
indemnification provisions is potentially unlimited. However, we have never
incurred any material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the estimated fair value of these
agreements is believed to be minimal and considered to be immaterial to the
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46.") FIN 46 addresses
whether certain types of entities, referred to as variable interest entities, or
VIEs, should be consolidated in a company's financial statements. A VIE is an
entity that either (1) has equity investors that lack certain essential
characteristics of a controlling financial interest (including the ability to
control the entity, the obligation to absorb the entity's expected losses and
the right to receive the entity's expected residual returns), or (2) lacks
sufficient equity to finance its own activities without financial support
provided by other entities, which in turn would be expected to absorb at least
some of the expected losses of the VIE. An entity should consolidate a VIE if it
stands to absorb a majority of the VIE's expected losses or to receive a
majority of the VIE's expected residual returns. In October 2003, the FASB
issued a Final FASB Staff Position deferring the effective date of FIN 46 for
all public entities until the first interim or annual period ending after
December 15, 2003. As such, FIN 46 will be effective for us as of February 28,
2004.
In November 2002, the Emerging Issues Task Force of the FASB reached a
consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF No. 00-21"). EITF No. 00-21 addresses how to account for
arrangements that may involve multiple revenue-generating activities. The
consensus guidance will be applicable to agreements entered into in quarters
beginning after June 15, 2003. We adopted this new accounting effective
September 1, 2003, and are applying it on a prospective basis. The initial
adoption of EITF No. 00-21 did not have a material effect on our Company's
consolidated results of operations, consolidated financial position or
consolidated cash flows.
43
COMMITMENTS AND CONTINGENCIES
We have filed a shelf registration statement with the SEC for the sale
of up to 72,000,000 shares of our common stock that may be offered from time to
time in connection with acquisitions. The SEC declared the registration
statement effective on July 14, 1994. As of October 10, 2003, 37,613,079 shares
remain available for issuance in future acquisitions.
On July 7, 2000, the SEC declared effective our universal shelf
registration statement, which registered our sale of up to an aggregate of
$750.0 million of securities (debt, common stock, preferred stock and warrants),
as well as the resale of up to 20,000,000 shares of our common stock out of
approximately 87,000,000 shares owned by certain of our controlling stockholders
(including Welsh Carson and an affiliate of The Blackstone Group). As of October
10, 2003, there have been no takedowns and the full amount registered under the
shelf registration statement remains available for future issuance.
In 1999, we issued the Mezzanine Debt to an affiliate of Welsh Carson.
We have been informed by the administrative agent under the senior credit
facility that, as of May 31, 2002, we had used up all remaining baskets under
the senior credit facility to pay cash interest on the Mezzanine Debt and that
any additional payments of cash interest on the Mezzanine Debt would be
considered a default under the senior credit facility. Accordingly, we are
effectively prohibited from making any further payments of cash interest on the
Mezzanine Debt, absent additional distributions from the equity investments in
wireless systems that we hold. As such, we are recording paid-in-kind interest
at a rate of 13% per annum, which increases the principal amount of the
Mezzanine Debt. Interest amounts for future periods are calculated on these
higher principal amounts. Any unpaid interest will be repaid upon maturity of
the Mezzanine Debt.
We have entered into multi-year roaming agreements with Cingular
Wireless and AT&T Wireless for analog, time division multiple access digital
technology ("TDMA") and GSM traffic. Under these agreements, we are required to
overlay our existing U.S. wireless network with a GSM network over the next
three years. We expect the GSM overlay will require incremental expenditures,
above our historical U.S. wireless expenditure levels, of approximately $20.0
million to $30.0 million over the next three years. In connection with the
roaming agreement with AT&T Wireless, AT&T Wireless granted us two separate
options to purchase 10 MHz of spectrum covering an aggregate of approximately
4.2 million Pops in Michigan and Indiana. The aggregate exercise price of the
options is $20.0 million, but the options may be exercised on a proportionate
basis for less than all of the 4.2 million Pops. The options have a two-year
term.
In May 2003, we entered into a multi-year year agreement with Ericsson,
Inc. to purchase equipment and services to overlay our U.S. wireless networks
with global system for mobile communications/general packet radio service
technology. The Company has committed to purchase approximately $15.9 million of
equipment and services under the agreement.
In June 2003, we entered into an amendment to our existing agreement
with Nortel Networks pursuant to which Nortel Networks will supply our U.S.
wireless operations with certain hardware and equipment through November 3, 2004
relating to TDMA system enhancements at a price of $3.9 million.
The following table summarizes our scheduled contractual cash
obligations and commercial commitments at August 31, 2003 (unless otherwise
noted), and the effect that such obligations are expected to have on liquidity
and cash flow in future periods.
44
1 YEAR AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL AND LESS 2-3 YEARS 4-5 YEARS YEARS
- ----------------------- ----- -------- --------- --------- -------
Long-term debt obligations (1)...... $ 1,749,999 $ 23,640 $ 204,450 $ 411,218 $ 1,110,691
Operating leases obligations (2).... 186,276 23,418 39,018 23,832 100,008
Purchase obligations................ 37,583 17,380 20,203 - -
----------- ----------- ----------- ----------- -----------
Total contractual cash
Obligations....................... 1,973,858 64,438 263,671 435,050 1,210,699
----------- ----------- ----------- -----------
Sublessor agreements (2)............ (1,955) (660) (1,041) (254) -
----------- ----------- ----------- ----------- -----------
Net............................... $ 1,971,903 $ 63,778 $ 262,630 $ 434,796 $ 1,210,699
=========== =========== =========== =========== ===========
(1) Reflects the issuance of our $500.0 million Senior Notes and repayment of
$300.0 million of term loans and $200.0 million of revolving credit under
our Senior Credit Facility.
(2) Represents our commitments associated with operating leases as of May 31,
2003.
SUBSEQUENT EVENTS
On September 11, 2003 we announced that we planned to offer for sale
approximately 30 million newly issued shares of our common stock in a public
offering. In connection with the planned equity offering, on September 10, 2003,
the Company and certain of its principal stockholders entered into amendments to
the first amended and restated stockholders agreement and first amended and
restated registration rights agreement. These amendments were to become
effective upon consummation of the equity offering. On September 24, 2003, we
announced that we had withdrawn this public offering of common stock and the
amendments were terminated.
On September 11, 2003, our amended and restated certificate of
incorporation, which increased our authorized number of shares of the Company's
common stock from 140,000,000 to 240,000,000, became effective.
On October 10, 2003, the SEC declared effective our registration
statement, which registered the Senior Notes.
During fiscal 2003, we submitted applications to be designated as an
Eligible Telecommunications Carriers ("ETC") in Indiana, Michigan, Louisiana and
Mississippi. Certification as an ETC would qualify us to receive federal
universal service fund payments in such states. The universal service fund was
established to provide support to telecommunications carriers offering basic
telephone service in rural, insular and high cost areas. In September 2003, we
were granted ETC status in Michigan and certain areas of Mississippi. Under
current federal rules, in those areas where we have been granted ETC status, we
are eligible to receive high-cost support from the universal service fund. We
expect to begin receiving universal service funds in these two states during
fiscal 2004. We are currently receiving federal universal service funding
support as an ETC in Puerto Rico.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Statements in this report that are not historical facts are hereby
identified as "forward-looking statements." Where, in any forward-looking
statement, we or our management expresses an expectation or belief as to future
results or actions, there can be no assurance that the statement of expectation
or belief will result or be achieved or accomplished. Our actual results may
differ materially from our expectations, plans or projections. Forward-looking
statements can be identified by the use of the words "believe," "expect,"
"estimate," "anticipate," "project," "intend," "may," "will" and similar
expressions, or by discussion of competitive strengths or
45
strategies that involve risks and uncertainties. We warn the reader that these
forward-looking statements are only predictions and estimates, which are
inherently subject to risks and uncertainties.
Important factors that could cause actual results to differ materially
from those expressed in any forward-looking statement made by, or on behalf of,
us include, but are not limited to:
- - our substantial debt obligations;
- - the availability and cost of additional capital to fund our operations,
including the need to refinance and/or amend existing indebtedness;
- - restrictive covenants and consequences of default contained in our
financing arrangements, which place limitations on how we conduct
business;
- - the competitive nature of the telecommunications industry in the areas
in which we operate, including, without limitation, the effect of
existing and new competitors, including competitors that may have a
lower cost basis or greater resources than we do, competitors that may
offer less expensive products than we do and competitors that may offer
more technologically advanced products than we do;
- - market prices for the products and services we offer may continue to
decline in the future;
- - general economic, business, political and social conditions in the
areas in which we operate, including the Caribbean region, including
the effects of world events and weather conditions on tourism in the
Caribbean;
- - continued overbuilding by personal communications service providers in
our U.S. wireless markets and the effects of increased competition in
our markets, which may cause a reduction in roaming revenue, increased
subscriber cancellations, a continued reduction of prices charged and
lower average revenue per subscriber;
- - fluctuations in currency values;
- - our dependence on roaming agreements for a material portion of our U.S.
wireless revenue and the continued price declines in roaming rates and
potential reduction of roaming minutes of use;
- - our ability to attract and retain qualified personnel;
- - the fact that our coverage areas are not as extensive as those of other
wireless operators which may limit our ability to attract and retain
customers;
- - the effects of consolidation in the wireless communications industry;
- - the effects of governmental regulation of the telecommunications
industry;
- - the capital intensity of the telecommunications industry, including our
plans to make significant capital expenditures during the coming years
to continue to build out and upgrade our networks and the availability
of additional capital to fund these capital expenditures;
46
- - declining rates for international long distance traffic;
- - opportunities for growth through acquisitions and investments and our
ability to manage this growth;
- - changes and developments in technology, including our ability to
upgrade our networks to remain competitive and our ability to
anticipate and react to frequent and significant technological changes;
- - our ability to effectively manage subscriber cancellations,
particularly in light of regulations scheduled to take effect November
2003 requiring wireless companies to permit the phone numbers that they
allocate to their customers to be portable when the customer switches
to another carrier, which may increase customer churn and present
technological difficulties;
- - local operating hazards and risks in the areas in which we operate,
including without limitation, hurricanes, tornadoes, windstorms and
other natural disasters;
- - our ability to manage, implement and monitor billing and operational
support systems;
- - potential litigation relating to using wireless telephones while
operating an automobile and the potential reduction of wireless usage
due to legislation restricting usage while driving;
- - potential litigation relating to possible health effects of radio
frequency transmission;
- - the relative illiquidity and corresponding volatility of our common
stock and our ability to raise future equity capital;
- - the control of us retained by some of our stockholders and
anti-takeover provisions; and
- - other factors described in this report.
We undertake no obligation, other than as may be required under the
federal securities laws, to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
We do not assume responsibility for the accuracy and completeness of the
forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are reasonable, any or all of the
forward-looking statements contained in this report and in any other public
statements that are made may prove to be incorrect. This may occur as a result
of inaccurate assumptions as a consequence of known or unknown risks and
uncertainties. All of the forward-looking statements are qualified in their
entirety by reference to the factors discussed under the caption "Risk Factors"
of our 2003 Annual Report on Form 10-K. We caution that these risk factors may
not be exhaustive. We operate in a continually changing business environment,
and new risk factors emerge from time to time. We cannot predict these new risk
factors, nor can we assess the impact, if any, of the new risk factors on our
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those expressed or implied by any
forward-looking statement. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this report might not
occur. Any investor or potential investor in our securities should carefully
read this report and our other filings with the SEC.
47
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks due to fluctuations in interest rates. A
portion of our long-term debt has variable interest rates. We utilize interest
rate swap and collar agreements to hedge variable interest rate risk on a
portion of our variable interest rate debt as part of our interest rate risk
management program.
The table below presents principal (or notional) amounts and related
average interest rate by year of maturity for our long-term debt and interest
rate swap and collar agreements. Weighted average variable rates are based on
implied forward rates in the yield curve as of August 31, 2003:
YEAR ENDED AUGUST 31,
---------------------------------------------------------
(IN THOUSANDS) 2004 2005 2006 2007 2008 THERE-AFTER TOTAL FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt:
Fixed rate $ 76 $ 402 $ 249 $ 290 $ 416 $1,110,691 $1,112,124 $1,098,249
Average interest rate 7.6% 9.6% 9.4% 10.0% 10.0% 10.3% 10.3% -
Variable rate $23,564 $94,668 $109,131 $28,469 $382,043 $ - $ 637,875 $ 637,875
Average interest rate(1) 1.5% 3.0% 4.5% 5.3% 5.8% -% 5.0% -
Interest rate swaps (pay
fixed, receive variable):
Notional amount $50,000 - - - - - - $ 4,135
Average pay rate 5.7% 4.9% - - - - - -
Average receive rate 1.7% 3.2% - - - - - -
Interest rate collar:
Notional amount $50,000 - - - - - - $ 1,639
Cap 7.0% - - - - - - -
Floor 4.6% - - - - - - -
(1) Represents the average interest rate before applicable margin on the Senior
Credit Facility debt.
We have variable rate debt that at August 31, 2003 and 2002 had
outstanding balances of $637.9 million and $1,196.6 million, respectively. The
fair value of such debt approximates the carrying value at August 31, 2003. Of
the variable rate debt, $200 million was hedged at August 31, 2003, using
interest rate swaps and collars. The fixed interest rates on swaps were between
4.9% and 5.7%. The interest rate range on the collar was 4.6% to 7.0%. These
swaps and collars expire at various dates between February 18, 2004 and February
8, 2005. Based on our unhedged variable rate obligations outstanding at August
31, 2003, a hypothetical increase or decrease of 10% in the weighted average
variable interest rate would have increased or decreased our annual interest
expense by approximately $0.5 million.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13-15(b) of the Exchange
Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective as
of August 31, 2003.
48
There was no change in our internal control over financial reporting
during the first quarter of fiscal 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
49
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to several lawsuits in which plaintiffs have alleged,
depending on the case, breach of contract, misrepresentation or unfair practice
claims relating to our billing practices, including rounding up of partial
minutes of use to full-minute increments, billing send to end, and billing for
unanswered and dropped calls. The plaintiffs in these cases have not alleged any
specific monetary damages and are seeking certification as a class action. A
hearing on class certification in one of these cases was held on September 2,
2003 in state court in Louisiana. The decision of the court with respect to
certification is still pending. Damages payable by us could be significant,
although we do not believe any damage payments would have a material adverse
effect on our results of operations.
In April 2002, WHTV Broadcasting Corp. and Sala Foundation Inc.,
operators of a wireless cable system in Puerto Rico, filed an action against us
in the United States District Court for the District of Puerto Rico. The
complaint alleges that we breached the terms of a November 2000 letter of intent
to purchase the wireless cable system for $30 million. The complaint seeks
specific performance of the letter of intent or not less than $15 million in
damages.
The ultimate outcome of these matters cannot be predicted with
certainty, and accordingly, the aggregate ultimate liability of Centennial, if
any, with respect to these matters is not determinable at this time.
To our knowledge, there are no other material pending legal proceedings
to which we or our subsidiaries are a party, or of which any of our property is
subject, that is likely to have a material adverse effect on our business or
results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
50
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Each exhibit identified below is filed as a part of this report.
a) Exhibits
Exhibit No. Description
- ---------- -----------
31.1 Certification of Michael J. Small, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Thomas J. Fitzpatrick, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael J. Small, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Thomas J. Fitzpatrick, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Acts of 2002
b) Reports on Form 8-K
On June 9, 2003, Centennial Communications Corp. filed a
Current Report on Form 8-K announcing that it intended to
pursue an offering of privately-placed senior notes.
On June 17, 2003, Centennial Communications Corp. filed a
Current Report on Form 8-K announcing that it had priced $500
million of 10 1/8% senior unsecured notes due 2013 to be
issued in a private placement.
On July 23, 2003, Centennial Communications Corp. filed a
Current Report on Form 8-K reporting its fiscal year 2003
financial results.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
October 14, 2003
CENTENNIAL COMMUNICATIONS CORP.
/s/ Thomas J. Fitzpatrick
-------------------------------------
Thomas J. Fitzpatrick
Executive Vice President,
Chief Financial Officer
(Chief Financial Officer)
/s/ Thomas E. Bucks
-------------------------------------
Thomas E. Bucks
Sr. Vice President-Controller
(Chief Accounting Officer)
52