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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 November 30, 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-103,035,232 outstanding shares as of January 5, 2004
TABLE OF CONTENTS
Part I - Financial Information
Item 1 Financial Statements......................................................................................... 1
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 25
Item 3 Quantitative and Qualitative Disclosures about Market Risk................................................... 52
Item 4 Controls and Procedures...................................................................................... 53
Part II - Other Information
Item 1 Legal Proceedings............................................................................................ 54
Item 2 Changes in Securities and Use of Proceeds.................................................................... 54
Item 3 Defaults Upon Senior Securities.............................................................................. 54
Item 4 Submission of Matters to a Vote of Security Holders.......................................................... 55
Item 5 Other Information............................................................................................ 55
Item 6 Exhibits and Reports on Form 8-K............................................................................. 55
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MAY 31,
NOVEMBER 30, 2003 2003
(UNAUDITED) (AUDITED)
----------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 65,404 $ 69,692
Accounts receivable, less allowance for doubtful accounts of
$8,471 and $9,754, respectively 78,756 71,777
Inventory - phones and accessories 13,717 5,689
Prepaid expenses and other current assets 32,719 34,370
----------------- --------------
Total Current Assets 190,596 181,528
Property, plant and equipment, net 681,684 675,574
Equity investments, net 2,582 2,568
Debt issuance costs, less accumulated amortization of $30,672 and $33,943,
respectively 51,471 39,442
U.S. wireless licenses 371,766 371,766
Caribbean wireless licenses, less accumulated amortization of
$3,167 and $2,667, respectively 70,992 71,492
Cable franchise costs 52,139 52,139
Goodwill 26,704 26,704
Customer lists, net 13,078 18,830
Transmission and connecting rights, net 884 928
Cable facility, net 4,330 4,450
Other assets, net 1,007 1,427
----------------- --------------
TOTAL ASSETS $ 1,467,233 $ 1,446,848
================= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 36,815 $ 89,401
Accounts payable 21,969 18,789
Accrued expenses and other current liabilities 203,519 171,801
Payable to affiliates 125 125
----------------- --------------
Total Current Liabilities 262,428 280,116
Long-term debt 1,675,422 1,669,659
Deferred federal income taxes 64,382 62,788
Other liabilities 11,752 13,011
Minority interest in subsidiaries 441 360
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: 240,000,000 shares authorized; issued
103,103,235 and 95,766,539 shares, respectively; and outstanding 103,032,732
and 95,696,036 shares, respectively 1,031 958
Additional paid-in capital 472,816 437,019
Accumulated deficit (1,017,662) (1,011,388)
Accumulated other comprehensive loss (2,300) (4,594)
----------------- --------------
(546,115) (578,005)
Less: cost of 70,503 common shares in treasury (1,077) (1,077)
Deferred compensation - (4)
----------------- --------------
Total Stockholders' Deficit (547,192) (579,086)
----------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,467,233 $ 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 SIX MONTHS ENDED
----------------------------------- ---------------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2003 2002 2003 2002
-------------- ---------------- -------------- --------------
Revenues:
Service revenue $ 195,658 $ 174,616 $ 391,349 $ 361,238
Equipment sales 7,197 6,103 15,058 11,375
-------------- ---------------- -------------- --------------
202,855 180,719 406,407 372,613
-------------- ---------------- -------------- --------------
Costs and Expenses:
Cost of services 41,110 37,863 81,797 80,131
Cost of equipment sold 22,058 15,535 43,696 30,706
Sales and marketing 23,537 23,625 46,306 47,456
General and administrative 36,443 37,907 71,524 72,726
Depreciation and amortization 34,995 34,646 70,062 71,127
(Gain) loss on disposition of assets (55) 482 (38) (1,893)
-------------- ---------------- -------------- --------------
158,088 150,058 313,347 300,253
-------------- ---------------- -------------- --------------
Operating income 44,767 30,661 93,060 72,360
-------------- ---------------- -------------- --------------
Income from equity investments 4 79 28 133
Interest expense, net (41,562) (36,994) (91,160) (75,267)
Other income (expense) 257 (99) (601) (106)
-------------- ---------------- -------------- --------------
Income (loss) before income tax expense and minority
interest 3,466 (6,353) 1,327 (2,880)
Income tax expense (15,996) (7,241) (7,319) (11,006)
-------------- ---------------- -------------- --------------
Loss before minority interest (12,530) (13,594) (5,992) (13,886)
Minority interest in (income) loss of subsidiaries (148) 120 (282) 171
-------------- ---------------- -------------- --------------
Net loss $ (12,678) $ (13,474) $ (6,274) $ (13,715)
============== ================ ============== ==============
Loss per share:
Basic and diluted $ (0.13) $ (0.14) $ (0.06) $ (0.14)
============== ================ ============== ==============
Weighted-average number of shares outstanding:
Basic and diluted 97,839 95,668 96,791 95,544
============== ================ ============== ==============
See notes to condensed consolidated financial statements.
2
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
------------------------
NOVEMBER 30, NOVEMBER 30,
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (6,274) $ (13,715)
--------- ---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 70,062 71,127
Non cash, paid-in kind interest 13,997 12,514
Minority interest in loss (income) of subsidiaries 282 (171)
Income from equity investments (28) (133)
Gain on disposition of assets (38) (1,893)
Changes in assets and liabilities, net of effects of acquisitions and
dispositions and other 34,109 28,325
--------- ---------
Total adjustments 118,384 109,769
--------- ---------
Net cash provided by operating activities 112,110 96,054
--------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition of assets, net of cash expenses 1,681 7,540
Capital expenditures (61,831) (67,518)
Distribution received from equity investment 14 48
--------- ---------
Net cash used in investing activities (60,136) (59,930)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 500,861 27,173
Repayment of debt (567,825) (47,169)
Debt issuance costs paid (25,170) -
Net proceeds from the issuance of common stock 34,663 -
Proceeds from the exercise of stock options 819 -
Proceeds from issuance of common stock under employee stock purchase plan 390 483
--------- ---------
Net cash used in financing activities (56,262) (19,513)
--------- ---------
Net (decrease) increase in cash and cash equivalents (4,288) 16,611
Cash and cash equivalents, beginning of period 69,692 33,871
--------- ---------
Cash and cash equivalents, end of period $ 65,404 $ 50,482
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest $ 43,223 $ 55,791
========= =========
Income taxes $ 3,487 $ 5,212
========= =========
NON-CASH TRANSACTIONS:
Fixed assets acquired under capital leases $ 5,082 $ 5,209
========= =========
Compensation paid in stock $ - $ 244
========= =========
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 November 30, 2003 and the results of its consolidated
operations and cash flows for the three and six month periods ended November 30,
2003 and 2002.
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
expense for the six months ended November 30, 2003 based on its projected annual
worldwide effective tax rate of 552%.
The Company's projected annual worldwide effective tax rate of 552% 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 unsecured subordinated notes due 2009 (the "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. 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.
4
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 loss and loss per share, as if
the Company had applied SFAS No. 123, are shown below:
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------------------------
2003 2002 2003 2002
------- ------- ------ -------
Net loss:
As reported.............. (12,678) (13,474) (6,274) (13,715)
Pro forma................ (13,610) (15,741) (7,553) (18,469)
Loss per share:
Basic and diluted:
As reported........... (0.13) (0.14) (0.06) (0.14)
Pro forma............. (0.14) (0.16) (0.08) (0.19)
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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------------------------
2003 2002 2003 2002
------- ------- ------- -------
Expected volatility............... 125.5% 128.4% 125.5% 128.4%
Risk-free interest rate........... 3.4% 3.5% 3.4% 3.5%
Expected lives of option grants... 4 Years 4 Years 4 Years 4 Years
Expected dividend yield........... 0.00% 0.00% 0.00% 0.00%
Reclassifications:
Certain prior period information has been reclassified to conform to
the current period presentation.
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the intangible assets not subject to
amortization:
AS OF AS OF
NOVEMBER 30, 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
===============================================================================================
5
The following table presents other intangible assets subject to
amortization:
AS OF NOVEMBER 30, 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 $ 3,167 $ 20,000 $ 2,667
Customer lists............ 4-5 years 48,470 35,392 48,470 29,640
Transmission and
connecting rights....... 25 years 2,192 1,308 2,192 1,264
Cable facility............ 25 years 6,000 1,670 6,000 1,550
-------- ------- -------- --------
Total..................... $ 76,662 $41,537 $ 76,662 $ 35,121
======== ======= ======== ========
Other intangible assets amortization expense was $2,917 and $6,416 for
the three and six months ended November 30, 2003, respectively. Based solely on
the finite lived intangible assets at November 30, 2003, amortization expense is
estimated to be $5,262 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 and broadband segments
was $22,517 and $4,187, respectively, at both November 30 and May 31, 2003.
NOTE 3. DEBT
Long-term debt consists of the following:
NOVEMBER 30, MAY 31,
2003 2003
- ---------------------------------------------------------------------------------------------------------------
Senior Secured 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% Senior Subordinated Notes due 2008 370,000 370,000
Mezzanine Debt 181,103 202,794
Cable TV Credit Facility - 11,688
Capital Lease Obligation 19,961 14,924
Financing Obligation - Tower Sale 13,332 12,571
10 1/8% Senior Notes due 2005 219 219
- ---------------------------------------------------------------------------------------------------------------
Total Long-Term Debt 1,712,237 1,759,060
Current Portion of Long-Term Debt (36,815) (89,401)
- ---------------------------------------------------------------------------------------------------------------
Net Long-Term Debt $ 1,675,422 $ 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 outstanding as of
November 30, 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
6
November 30, 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 November 30, 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"), (1.2% as of November 30, 2003) 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.
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. In November 2003, the Company registered the Senior Notes
under the Securities Act of 1933, as amended. 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 Senior Notes 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
The Company capitalized approximately $27,088 of debt issuance costs
including $25,170 during the six months ended November 30, 2003 in connection
with the issuance of the Senior Notes and, as a result of the repayments under
the Senior Credit Facility, the Company wrote-off approximately $15,377, net of
accumulated amortization of $7,842 in debt issuance costs. The net amount of
$7,535 is included within interest expense, net in the consolidated statement of
operations for the six months ended November 30, 2003.
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.
7
The amounts outstanding under, and maturity dates of, the Senior Credit
Facility are as follows:
ORIGINAL AMOUNT
PRINCIPAL OUTSTANDING AT
SENIOR CREDIT FACILITY AMOUNT NOVEMBER 30, 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
============= ================
In December 1998, the Company and CCOC issued $370,000 of 10 3/4%
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 accrued and unpaid
("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. On November 10, 2003, proceeds of $36,750 from
the Company's equity offering (see Note 4) were used to prepay a portion of the
Mezzanine Debt. Paid-in-kind interest compounded on the Mezzanine Debt was
$6,968 and $13,997 for the three and six months ended November 30, 2003. As of
November 30, 2003, $181,103 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. As of November 30, 2003,
Centennial Cable had repaid all amounts owed under the Cable TV Credit Facility
and terminated the 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
8
agreements at November 30, 2003.
The aggregate annual scheduled principal payments for the next five
years and thereafter related to the Company's long-term debt at November 30,
2003, are summarized as follows:
November 30, 2004 $ 36,815
November 30, 2005 95,214
November 30, 2006 114,032
November 30, 2007 382,268
November 30, 2008 350
November 30, 2009 and thereafter 1,083,558
---------------
$ 1,712,237
===============
Interest expense, as reflected in the condensed consolidated financial
statements, has been partially offset by interest income. The gross interest
expense for the three and six months ended November 30, 2003 was $41,693 and
$91,469, respectively, and $37,388 and $75,865 for the three and six months
ended November 30, 2002, respectively.
During the six months ended November 30, 2003, the Company recorded a
reduction of $2,294, net of tax, in accumulated other comprehensive loss
attributable to fair value adjustments of interest rate swap and collar
agreements. The Company also decreased its liabilities by $3,980 as a result of
adjusting the carrying amounts of its derivatives to reflect their fair values
at November 30, 2003.
NOTE 4. EQUITY
On November 10, 2003, the Company completed a public offering of
10,000,000 shares of its common stock at $5.50 per share for total gross
proceeds of $55,000. The offering included 7,000,000 primary shares sold by the
Company and 3,000,000 shares sold by affiliates of The Blackstone Group, one of
our principal shareholders. The Company and Blackstone granted the underwriter
an option to purchase up to an additional 1,500,000 shares of common stock to
cover over-allotments, if any. The option expired unexercised on December 4,
2003. Proceeds to the Company (after underwriting commissions but before other
expenses) of approximately $36,750 were used to prepay a portion of the
Company's Mezzanine Debt, which is currently accruing paid-in-kind interest at a
rate of 13%. Additionally, the Company paid other expenses of $2,087 in
connection with the offering yielding net proceeds of $34,663. The Company did
not receive any of the proceeds from the sale of the shares owned by affiliates
of The Blackstone Group. In connection with the sale of shares of the Company's
common stock, the Company amended the Senior Credit Facility on November 6, 2003
to permit the Company to use the proceeds of the equity offering (and certain
subsequent equity offerings) to prepay the Mezzanine Debt.
NOTE 5. 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 recorded a pretax gain of $306 on
this transaction that is included in (gain) loss on disposition of assets in the
consolidated statement of operations. The Company acquired its 60% interest in
Infochannel Limited for $8,000 in cash in July 2000.
9
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 a
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 on the sale of the
additional 14 telecommunications towers 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 6. 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 at the end of the lease. 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 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. However, as a result of concerns over
implementation and measurement issues, the FASB unanimously decided to defer the
application of SFAS No. 150 to certain
10
non-controlling interests of limited-life entities that are consolidated in the
financial statements. The Company has accordingly deferred adoption of this
aspect of the standard pending further guidance.
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 were 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.
In the ordinary course of 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 the Company's 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 VIEs expected losses or to receive a majority
of the VIE's expected residual returns. In December 2003, the FASB published a
revision to FIN 46 to clarify some of the provisions of FIN 46 and to exempt
certain entities from its requirements. Under the new guidance, application of
FIN 46 is required in financial statements of public entities that have that
have interests in a VIE or potential VIE's that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003. As such,
FIN 46 will be effective for the Company as of June 1, 2004. The Company has
evaluated the
11
effect of the adoption of FIN 46, and do not believe it will have a material
effect on our Company's consolidated results of operations, consolidated
financial position or consolidated cash flows.
In November 2002, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables" ("EITF No. 00-21"). This consensus requires that revenue
arrangements with multiple deliverables be divided into separate units of
accounting if the deliverables in the arrangement meet specific criteria. In
addition, arrangement consideration must be allocated among the separate units
of accounting based on their relative fair values, with certain limitations. The
Company has determined that the sale of wireless services with an accompanying
handset constitutes a revenue arrangement with multiple deliverables.
Consideration received for the wireless service is recognized as service revenue
when earned, and consideration received for the handset is recognized as
equipment sales when the handset is delivered and the title is transferred to
the customer. Upon adoption of EITF No. 00-21, the Company discontinued
deferring non-refundable, up-front activation fees to the extent that the
aggregate activation fee and handset proceeds received from a subscriber does
not exceed the fair value of the handset sold. Any activation fees not allocated
to the handset would be deferred upon activation and recognized as service
revenue over the expected customer relationship period. Additionally, to the
extent that the aggregate activation fee and handset proceeds received from a
subscriber do not exceed the fair value of the handset sold, activation fees
will be included in equipment sales rather than service revenues in the
consolidated statement of operations. The Company adopted effective September 1,
2003 and is applying it on a prospective basis. Since the Company adopted EITF
No. 00-21 prospectively, all previously deferred activation fees will continue
to be amortized over their remaining customer relationship period. The Company's
adoption of EITF No. 00-21 did not have a material effect on the Company's
consolidated results of operations, consolidated financial position or
consolidated cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition," ("SAB No. 104") which revises or rescinds certain
sections of SAB No. 101, "Revenue Recognition," in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on the Company's consolidated results of
operations, consolidated financial position or consolidated cash flows.
NOTE 7. 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
potentially 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 5 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. As of November 30, 2003,
no amounts have been paid in connection with this agreement.
In fiscal year 2003 the Company 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, 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. As of
November 30, 2003, none of the options have been exercised.
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
13
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 8. 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 the Company's Internet service provider
operations in Jamaica, 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, taxes, depreciation, amortization, (gain) loss on
disposition of assets, minority interest in (income) loss of subsidiaries,
income from equity investments, other non-operating (income) expense and special
non-cash charge.
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 5 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 and six months ended, November 30, 2003 and
2002 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
U.S. wireless
Service revenue $ 72,878 63,433 $ 144,746 129,198
Roaming revenue 12,529 19,353 29,747 44,132
Equipment sales 4,654 3,429 9,919 6,026
------------------------------------------------------------------
Total revenues 90,061 86,215 184,412 179,356
Adjusted operating income 35,397 39,611 74,934 84,669
Total assets 1,984,660 1,896,779 1,984,660 1,896,779
Capital expenditures 15,523 9,141 24,453 18,186
Caribbean wireless
Service revenue $ 72,966 59,029 $ 143,347 121,375
Roaming revenue 821 415 2,204 766
Equipment sales 2,420 2,585 4,964 5,131
------------------------------------------------------------------
Total revenues 76,207 62,029 150,515 127,272
Adjusted operating income 30,802 22,893 62,593 43,857
Total assets 445,178 381,174 445,178 381,174
Capital expenditures 14,876 12,115 26,087 25,435
Caribbean broadband
Switched revenue $ 9,409 8,429 $ 18,307 16,241
Dedicated revenue 12,070 9,311 23,880 18,370
Video revenue 12,204 12,031 24,221 24,695
Other revenue 6,089 5,019 11,762 11,202
------------------------------------------------------------------
Total revenues 39,772 34,790 78,170 70,508
Adjusted operating income 13,508 8,285 25,557 18,068
Total assets 780,897 622,560 780,897 622,560
Capital expenditures 5,157 10,797 11,291 23,897
Eliminations
Total revenues (1) $ (3,185) (2,315) $ (6,690) (4,523)
Total assets (2) (1,743,502) (1,257,560) (1,743,502) (1,257,560)
Consolidated
Total revenues $ 202,855 180,719 $ 406,407 372,613
Adjusted operating income 79,707 70,789 163,084 146,594
Total assets 1,467,233 1,642,953 1,467,233 1,642,953
Capital expenditures 35,556 32,053 61,831 67,518
(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 loss:
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------ ------------
2003 2002 2003 2002
(Unaudited) (Unaudited)
-------------------------------------------------------
Adjusted operating income............................... $ 79,707 $ 70,789 $ 163,084 $ 146,594
Less: depreciation and amortization..................... (34,995) (34,646) (70,062) (71,127)
Special non-cash charge................................. - (5,000) - (5,000)
Gain (loss) on disposition of assets.................... 55 (482) 38 1,893
-------------------------------------------------------
Operating income........................................ 44,767 30,661 93,060 72,360
Income from equity investments.......................... 4 79 28 133
Interest expense, net................................... (41,562) (36,994) (91,160) (75,267)
Other income (expense).................................. 257 (99) (601) (106)
Income tax expense...................................... (15,996) (7,241) (7,319) (11,006)
Minority interest in (income) loss of subsidiaries...... (148) 120 (282) 171
-------------------------------------------------------
Net loss................................................ $ (12,678) $ (13,474) $ (6,274) $ (13,715)
=======================================================
NOTE 9. 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 NOVEMBER 30, 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 $ 15,000 $ - $ 50,404 $ - $ - $ 65,404
Accounts receivable, net 37,100 - 42,441 - (785) 78,756
Inventory - phones and
accessories, net 2,295 - 11,422 - - 13,717
Prepaid expenses and other
current assets 4,763 - 27,956 - - 32,719
---------- ---------- ----------- ----------- ----------- -----------
Total current assets 59,158 - 132,223 - (785) 190,596
Property, plant & equipment, net 260,142 - 421,542 - - 681,684
Equity investments, net - - 2,582 - - 2,582
Debt issuance costs, net 19,153 - 32,318 - - 51,471
U.S. wireless licenses - - 371,766 - - 371,766
Caribbean wireless licenses, net - - 70,992 - - 70,992
Cable franchise costs - - 52,139 - - 52,139
Goodwill 4,186 - 22,518 - - 26,704
Intercompany - 1,360,015 1,030,762 629,933 (3,020,710) -
Investment in subsidiaries - (473,685) 758,790 (909,988) 624,883 -
Other assets, net 5,030 - 21,642 - (7,373) 19,299
---------- ---------- ----------- ----------- ----------- -----------
Total $ 347,669 $ 886,330 $ 2,917,274 $ (280,055) $(2,403,985) $ 1,467,233
========== ========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 10,288 $ 26,584 $ (57) $ - $ - $ 36,815
Accounts payable 8,228 - 13,741 - - 21,969
Accrued expenses and other
current liabilities 41,306 - 170,503 - (8,165) 203,644
Payable to affiliates - - - - - -
----------- ---------- ----------- ---------- ------------ -----------
Total current liabilities 59,822 26,584 184,187 - (8,165) 262,428
Long-term debt 616,666 847,598 30,055 181,103 - 1,675,422
Deferred federal income taxes - - 64,382 - - 64,382
Other liabilities - 3,936 7,816 - - 11,752
Intercompany 27,547 920,500 1,954,080 84,073 (2,986,200) -
Minority interest in subsidiaries - - 441 - - 441
Stockholders' equity (deficit):
Common stock - - 140 1,031 (140) 1,031
Preferred stock 465,000 - 188,240 - (653,240) -
Additional paid-in capital (818,498) - 1,339,817 472,477 (520,980) 472,816
Accumulated deficit (2,868) (909,988) (851,884) (1,017,662) 1,764,740 (1,017,662)
Accumulated other
comprehensive loss - (2,300) - - - (2,300)
----------- ---------- ----------- ---------- ------------ -----------
(356,366) (912,288) 676,313 (544,154) 590,380 (546,115)
Less: treasury shares - - - (1,077) - (1,077)
----------- ---------- ----------- ---------- ------------ -----------
Total stockholders'
(deficit) equity (356,366) (912,288) 676,313 (545,231) 590,380 (547,192)
----------- ---------- ----------- ---------- ------------ -----------
Total $ 347,669 $ 886,330 $ 2,917,274 $ (280,055) $ (2,403,985) $ 1,467,233
=========== ========== =========== ========== ============ ===========
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 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
---------------- ----------------- -------------- -------------- ------------ --------------
Revenue $ 170,003 $ - $ 242,323 $ - $ (5,919) $ 406,407
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of services 25,776 - 56,021 - - 81,797
Cost of equipment sold 12,241 35,020 (3,565) 43,696
Sales and marketing 17,527 - 28,779 - - 46,306
General and administrative 32,955 - 40,923 - (2,354) 71,524
Depreciation and amortization 28,530 - 41,532 - - 70,062
Loss (Gain) on disposition of
assets 53 - (91) - - (38)
--------- --------- --------- --------- --------- ---------
117,082 - 202,184 - (5,919) 313,347
--------- --------- --------- --------- --------- ---------
Operating income 52,921 - 40,139 - - 93,060
--------- --------- --------- --------- --------- ---------
Income from equity investments - - 28 - - 28
Income (loss) from investments in
subsidiaries - 8,797 25,433 8,797 (43,027) -
Interest expense, net (27,289) (76,088) 27,288 (15,071) - (91,160)
Other expenses - - (601) - - (601)
Intercompany interest allocation - 76,088 (76,088) - - -
--------- --------- --------- --------- --------- ---------
Income (loss) before income tax
expense and minority interest 25,632 8,797 16,199 (6,274) (43,027) 1,327
Income tax expense (199) (7,120) - - (7,319)
--------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest 25,433 8,797 9,079 (6,274) (43,027) (5,992)
Minority interest in income
(loss) - - (282) - - (282)
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 25,433 $ 8,797 $ 8,797 $ (6,274) $ (43,027) $ (6,274)
========= ========= ========= ========= ========= =========
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 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
---------------- ----------------- -------------- -------------- ------------ --------------
OPERATING ACTIVITIES:
Net income (loss) $ 25,433 $ 8,797 $ 8,797 $ (6,274) $ (43,027) $ (6,274)
--------- --------- --------- --------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 28,530 - 41,532 - - 70,062
Noncash paid in kind interest - - - 13,997 - 13,997
Minority interest in loss of
subsidiaries - - 282 - - 282
Income from equity investments - - (28) - - (28)
Equity in undistributed earnings
of subsidiaries - (8,797) (25,433) (8,797) 43,027 -
Gain on disposition of assets 53 - (91) - (38)
Changes in assets and
liabilities, net of effects
of acquisitions and
dispositions and other 21,749 - 11,641 719 - 34,109
--------- --------- --------- --------- --------- ---------
Total adjustments 50,332 (8,797) 27,903 5,919 43,027 118,384
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 75,765 - 36,700 (355) - 112,110
--------- --------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition of
assets, net of cash expenses - - 1,681 - - 1,681
Capital expenditures (24,334) - (37,497) - - (61,831)
Distributions received from
equity investments - - 14 - - 14
--------- --------- --------- --------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (24,334) - (35,802) - - (60,136)
--------- --------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of
long-term debt 173,400 - 327,461 - - 500,861
Repayment of debt (228,523) (290,762) (11,790) (36,750) - (567,825)
Debt issuance costs paid - - (25,170) - - (25,170)
Net proceeds from issuance of
common stock - - - 34,663 - 34,663
Proceeds from the exercise of
employee stock options - - - 819 - 819
Proceeds from issuance of common
stock under employee stock
purchase plan - - - 390 - 390
Cash (paid to) received from
affiliates (2,531) - 6,496 (34,324) 30,359 -
Cash advances from parent
(to subsidiaries) (15,085) 290,762 (280,875) 35,557 (30,359) -
--------- --------- --------- --------- --------- ---------
NET CASH USED IN FINANCING
ACTIVITIES (72,739) - 16,122 355 - (56,262)
--------- --------- --------- --------- --------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (21,308) - 17,020 - - (4,288)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 36,308 - 33,384 - - 69,692
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 15,000 $ - $ 50,404 $ - $ - $ 65,404
========= ========= ========= ========= ========= =========
20
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, net - - 2,568 - - 2,568
Debt issuance costs, net 16,832 - 22,610 - - 39,442
U.S. wireless licenses - - 371,766 - - 371,766
Caribbean wireless licenses, net - - 71,492 - - 71,492
Cable franchise costs - - 52,139 - - 52,139
Goodwill 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 in subsidiaries - - 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
=========== =========== =========== =========== ============ ===========
21
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 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 $ 141,605 $ - $ 234,274 $ - $ (3,266) $ 372,613
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of services 23,442 - 57,823 - (1,134) 80,131
Cost of equipment sold 12,124 - 18,582 - - 30,706
Sales and marketing 17,777 - 29,679 - - 47,456
General and administrative 33,387 - 41,471 - (2,132) 72,726
Depreciation and amortization 31,529 - 39,598 - - 71,127
Loss (gain) on disposition of
assets 476 - (2,369) - - (1,893)
--------- --------- --------- --------- --------- ---------
118,735 - 184,784 - (3,266) 300,253
--------- --------- --------- --------- --------- ---------
Operating income 22,870 - 49,490 - - 72,360
--------- --------- --------- --------- --------- ---------
Income from equity investments - - 133 - - 133
Income from investments in
subsidiaries - 165 3,491 165 (3,821) -
Interest expense, net (19,379) (41,011) (997) (13,880) - (75,267)
Other expenses - - (106) - - (106)
Intercompany interest allocation - 41,011 (41,011) - - -
--------- --------- --------- --------- --------- ---------
Income (loss) before income tax
expense and minority interest 3,491 165 11,000 (13,715) (3,821) (2,880)
Income tax expense - - (11,006) - - (11,006)
--------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest 3,491 165 (6) (13,715) (3,821) (13,886)
Minority interest in loss of
subsidiaries - - 171 - - 171
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 3,491 $ 165 $ 165 $ (13,715) $ (3,821) $ (13,715)
========= ========= ========= ========= ========= =========
23
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2002
(AMOUNTS IN THOUSANDS)
Centennial
Centennial Centennial Centennial Communication
Puerto Rico Cellular Non- Communications Corp. and
Operations Corp. Operating Co. LLC Guarantors Corp. Eliminations Subsidiaries
---------------- ----------------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,491 $ 165 $ 165 $ (13,715) $ (3,821) $ (13,715)
--------- --------- --------- --------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 31,529 - 39,598 - - 71,127
Non cash, paid-in kind interest 12,514 12,514
Minority interest in loss of
subsidiaries - - (171) - - (171)
Income from equity investments - - (133) - - (133)
Equity in undistributed earnings
of subsidiaries - (165) (3,491) (165) 3,821 -
Gain (loss) on disposition of
assets 476 - (2,369) - - (1,893)
Changes in assets and liabilities,
net of effects of acquisitions
and dispositions and other 20,464 - 6,251 1,610 - 28,325
--------- --------- --------- --------- --------- ---------
Total adjustments 52,469 (165) 39,685 13,959 3,821 109,769
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 55,960 - 39,850 244 - 96,054
--------- --------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition of assets,
net of cash expenses - - 7,540 - - 7,540
Capital expenditures (35,786) - (31,732) - - (67,518)
Distribution received from equity
investments - - 48 - - 48
--------- --------- --------- --------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (35,786) - (24,144) - - (59,930)
--------- --------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of
long-term debt 335 20,000 6,838 - - 27,173
Repayment of debt (9,290) (36,301) (1,578) - - (47,169)
Proceeds from issuance of common
stock under employee stock
purchase plan - - - 483 - 483
Cash (paid to) received from
affiliates (11,295) 16,301 8,294 - - 13,300
Cash advances from parent (to
subsidiaries) - - (12,573) (727) - (13,300)
--------- --------- --------- --------- --------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (20,250) - 981 (244) - (19,513)
--------- --------- --------- --------- --------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (76) - 16,687 - 16,611
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 13,539 - 20,332 - 33,871
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 13,463 $ - $ 37,019 $ - $ - $ 50,482
========= ========= ========= ========= ========= =========
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
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 unaudited 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" herein and the "Risk Factors"
section of our 2003 Annual Report on Form 10-K.
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.
25
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. Prior to September 1, 2003, revenue from
activation fees was recognized over the expected customer service period,
ranging from 26 to 48 months. Revenue from other services is recognized when
earned.
In November 2002, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on EITF No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").
This consensus requires that revenue arrangements with multiple deliverables be
divided into separate units of accounting if the deliverables in the arrangement
meet specific criteria. In addition, arrangement consideration must be allocated
among the separate units of accounting based on their relative fair values, with
certain limitations. We have determined that the sale of wireless services with
an accompanying handset constitutes a revenue arrangement with multiple
deliverables. Upon adoption of EITF No. 00-21, we discontinued deferring
non-refundable, up-front activation fees to the extent that the aggregate
activation fee and handset proceeds received from a subscriber does not exceed
the fair value of the handset sold. Additionally, to the extent that the
aggregate activation fee and handset proceeds received from a subscriber do not
exceed the fair value of the handset sold, activation fees will be included in
equipment sales rather than service revenues in the statement of operations. We
adopted EITF No. 00-21 effective September 1, 2003 and are applying it on a
prospective basis. Since we adopted EITF No. 00-21 prospectively, all previously
deferred activation fees will continue to be amortized over their remaining
customer relationship period. Our adoption of EITF No. 00-21 did not have a
material effect on our consolidated results of operations, consolidated
financial position or consolidated cash flows. 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. We have multiple billing cycles, all of which span the
end of our fiscal quarterly periods. As a result of our billing cycle cut-off
times, we are required to make estimates for switched and dedicated revenue
earned, but not yet billed, at the end of each of our fiscal quarters. 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 actual customer usage and monthly recurring charge mix, from
the results estimated at the end of each fiscal quarter. 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
26
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 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.
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
segment, the fair value of aggregated indefinite-lived intangible assets by
subtracting from each segment discounted cash flows the fair value of all of the
other net tangible and intangible assets of that segment.
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 amortized, but rather are tested for impairment
annually or if there are changes in circumstances. We re-evaluate the useful
life determination for U.S. wireless and Puerto Rico PCS licenses and the Puerto
Rico cable television franchise costs each reporting period to determine whether
events and circumstances continue to support an indefinite useful life.
Derivative Financial Instruments
We use derivative financial 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.
Our 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 consolidated statement of operations as a component of
interest expense.
27
In April 2003, the 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 our 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" ("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," 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
28
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 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 that are 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, taxes, depreciation,
amortization, (gain) loss on disposition of assets, minority interest in
(income) loss of subsidiaries, income from equity investments, other (income)
expense and special non-cash charge.
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:
- 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.
- Management does not consider income tax 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.
29
- 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.
- (Gain) loss 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.
- Minority interest in loss (income) 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
direct benefit or detriment to us and, therefore, we believe it
would be helpful to exclude such items to better reflect 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.
- Other (income) expense relates to foreign currency transaction
losses in our operations in the Dominican Republic because some of
our revenue in the Dominican Republic is collected and expenses are
paid in local currency, the DR peso. Although foreign currency
transaction 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 special non-cash charge relates to disputed billings that arose
in prior fiscal years with the Puerto Rico Telephone Company
("PRTC"). We recorded this charge in the second quarter of fiscal
2003 as a result of developments in these disputes at that time and
the protracted negotiations with PRTC concerning the disputed
billings. While these charges reduced cash available to us, due to
newly negotiated interconnection rates with PRTC, we believe
disputed charges will become less material in future periods.
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 loss to adjusted
operating income for our consolidated results.
RECONCILIATION OF CONSOLIDATED NET LOSS TO ADJUSTED OPERATING INCOME
30
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------- -----------------------
2003 2002 2003 2002
(In thousands) (Unaudited) (Unaudited)
---------------------- -----------------------
NET LOSS $ (12,678) $ (13,474) $ (6,274) $ (13,715)
Minority interest in (loss) income of subsidiaries 148 (120) 282 (171)
Income tax expense 15,996 7,241 7,319 11,006
Other (income) expense (257) 99 601 106
Interest expense, net 41,562 36,994 91,160 75,267
Income from equity investments (4) (79) (28) (133)
--------- --------- --------- ---------
Operating income 44,767 30,661 93,060 72,360
(Gain) loss on disposition of assets (55) 482 (38) (1,893)
Special non-cash charge - 5,000 - 5,000
Depreciation and amortization 34,995 34,646 70,062 71,127
--------- --------- --------- ---------
ADJUSTED OPERATING INCOME $ 79,707 $ 70,789 $ 163,084 $ 146,594
========= ========= ========= =========
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 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 to
adjusted operating income for each of our business segments.
31
U.S. WIRELESS
RECONCILIATION OF OPERATING INCOME TO ADJUSTED OPERATING INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- -------------------
2003 2002 2003 2002
(In thousands) (Unaudited) (Unaudited)
-------------------- -------------------
Operating income $ 26,372 $ 30,209 $ 56,690 $ 66,034
(Gain) loss on disposition of assets (35) 1 99 (3)
Depreciation and amortization 9,060 9,401 18,145 18,638
-------- -------- -------- --------
ADJUSTED OPERATING INCOME $ 35,397 $ 39,611 $ 74,934 $ 84,669
======== ======== ======== ========
CARIBBEAN WIRELESS
RECONCILIATION OF OPERATING INCOME TO ADJUSTED OPERATING INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- -------------------
2003 2002 2003 2002
(In thousands) (Unaudited) (Unaudited)
-------------------- -------------------
Operating income $ 17,775 $ 3,797 $ 36,187 $ 11,670
(Gain) loss on disposition of assets (20) 492 53 (1,878)
Special non-cash charge - 4,389 - 4,389
Depreciation and amortization 13,047 14,215 26,353 29,676
-------- -------- -------- --------
ADJUSTED OPERATING INCOME $ 30,802 $ 22,893 $ 62,593 $ 43,857
======== ======== ======== ========
CARIBBEAN BROADBAND
RECONCILIATION OF OPERATING INCOME (LOSS) TO ADJUSTED OPERATING INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------- --------------------
2003 2002 2003 2002
(In thousands) (Unaudited) (Unaudited)
------------------- --------------------
Operating income (loss) $ 620 $ (3,345) $ 183 $ (5,344)
Gain on disposition of assets - (11) (190) (12)
Special non-cash charge - 611 - 611
Depreciation and amortization 12,888 11,030 25,564 22,813
-------- -------- -------- --------
ADJUSTED OPERATING INCOME $ 13,508 $ 8,285 $ 25,557 $ 18,068
======== ======== ======== ========
RESULTS OF OPERATIONS
We had 997,200 wireless subscribers at November 30, 2003, as compared to
896,800 at November 30, 2002, an increase of 11%. The net loss for the three and
six months ended November 30, 2003 was $12.7 million and $6.3 million,
respectively, as compared to a net loss of $13.5 million and $13.7 million for
the three and six months ended November 30, 2002, respectively. Basic and
diluted loss per share for the three and six months ended November 30, 2003 was
$0.13 and $0.06, respectively, as compared to basic and diluted loss per share
of $0.14 for both the three and six months ended November 30, 2002.
In accordance with SFAS No. 109, "Accounting for Income Taxes", and APB
Opinion No. 28, "Interim Financial Reporting", we have recorded our tax expense
for the three and six months ended
32
November 30, 2003 based on our projected annual worldwide effective tax rate of
552%. Our projected annual worldwide effective tax rate of 552% 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 our 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.
Consolidated Operations
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ----------------------
(In thousands, except per 2003 2002 2003 2002
share amounts) (Unaudited) % Change (Unaudited) % Change
- ------------------------------------------------------------------------------------------------------------------
Operating income $ 44,767 $ 30,661 46% $ 93,060 $ 72,360 29%
Net loss $ (12,678) $ (13,474) (6) $ (6,274) $ (13,715) (54)
Loss per share:
Basic $ (0.13) $ (0.14) (7) $ (0.06) $ (0.14) (57)
Diluted $ (0.13) $ (0.14) (7) $ (0.06) $ (0.14) (57)
Adjusted operating income (1) $ 79,707 $ 70,789 13% $ 163,084 $ 146,594 11%
(1) See "Certain Non-GAAP Financial Measures" beginning on page 28.
33
U.S. Wireless Operations
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ---------------------
2003 2002 2003 2002
(In thousands) (Unaudited) % Change (Unaudited) % Change
- -----------------------------------------------------------------------------------------------------------------
Revenues:
Service revenue $ 72,878 $ 63,433 15% $ 144,746 $ 129,198 12%
Roaming revenue 12,529 19,353 (35) 29,747 44,132 (33)
Equipment sales 4,654 3,429 36 9,919 6,026 65
- -----------------------------------------------------------------------------------------------------------------
Total revenues 90,061 86,215 4 184,412 179,356 3
- -----------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of services 17,195 15,009 15 33,580 32,449 3
Cost of equipment sold 12,041 7,311 65 25,124 13,421 87
Sales and marketing 12,054 11,228 7 23,475 22,889 3
General and administrative 13,374 13,056 2 27,299 25,928 5
- -----------------------------------------------------------------------------------------------------------------
Total costs and expenses 54,664 46,604 17 109,478 94,687 16
- -----------------------------------------------------------------------------------------------------------------
Adjusted operating
income(1) 35,397 39,611 (11) 74,934 84,669 (11)
(Gain) loss on disposition of
assets (35) 1 * 99 (3) *
Depreciation and amortization 9,060 9,401 (4) 18,145 18,638 (3)
- -----------------------------------------------------------------------------------------------------------------
Operating income $ 26,372 $ 30,209 (13)% $ 56,690 $ 66,034 (14)%
=================================================================================================================
* Percentage change not meaningful.
(1) See "Certain Non-GAAP Financial Measures" beginning on page 28.
Revenues. U.S. wireless service revenue increased $9.4 million, or 15%, and
$15.5 million, or 12%, to $72.9 million and $144.7 million for the three and six
months ended November 30, 2003, respectively, as compared to the same periods
last year. The increase was due to growth in service revenue per subscriber of
$7.2 million and $12.3 million for the three and six months ended November 30,
2003, respectively, and to revenue from new subscribers of $2.2 million and $3.2
million during the same periods.
U.S. wireless roaming revenue decreased $6.8 million, or 35%, and $14.4
million, or 33%, from roaming revenues of $19.4 million and $44.1 million for
the three and six months ended November 30, 2002, respectively. The decrease was
primarily the result of lower average roaming rates per minute resulting in a
decrease of $8.2 million and $23.2 million for the three and six months ended
November 30, 2003, respectively, partially offset by an increase in roaming
usage resulting in an increase of $1.4 million and $8.8 million during the same
periods.
Equipment sales increased $1.2 million, or 36%, and $3.9 million, or 65%,
during the three and six months ended November 30, 2003, respectively, as
compared to the three and six months ended November 30, 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 551,300 and 530,100
subscribers at November 30, 2003 and 2002, respectively. During the twelve
months ended November 30, 2003, increases from new
34
activations of 172,300 were offset by subscriber cancellations of 151,100. The
monthly postpaid churn rate was 2.0% and 1.9% for the three and six months ended
November 30, 2003, respectively, as compared to 1.9% for both of the same
periods 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. Our postpaid subscribers represented approximately 97% of
our total U.S. wireless subscribers at November 30, 2003, up from approximately
96% at November 30, 2002.
U.S. wireless revenue per subscriber per month ("ARPU") was $55 and $56 for
the three and six months ended November 30, 2003, respectively, as compared to
$54 and $56 for the same periods a year ago. ARPU increased slightly during the
three months ended November 30, 2003 as compared to the same period a year ago
due to an increase in retail revenue resulting primarily from the introduction
of national rate plans. Average minutes of use per subscriber were 296 and 294
per month for the three and six months ended November 30, 2003, respectively, as
compared to 254 and 248 for the same period last year.
Costs and expenses. Cost of services increased $2.2 million, or 15%, and
$1.1 million, or 3%, during the three and six months ended November 30, 2003,
respectively, as compared to the three and six months ended November 30, 2002,
primarily due to an increase in variable costs associated with a larger
subscription base, most notably mobile long distance expenses. This was
partially offset by reduced roamer service cost due to lower roaming rates,
under our roaming agreements.
Cost of equipment sold increased $4.7 million, or 65%, and $11.7 million, or
87%, for the three and six months ended November 30, 2003, respectively, as
compared to the same periods last year, due primarily to higher customer
activations, an increase in phones used for customer retention and a change in
the mix of phones. The increase in phones used for customer retention was
partially due to our efforts to retain customers in light of wireless local
number portability ("WLNP") regulations that took effect on November 24, 2003,
in 100 designated markets, including our Fort Wayne, Indiana and Puerto Rico
markets and that will take effect in all markets on May 26, 2004, which require
wireless carriers to permit the phone numbers that they allocate to their
customers to be portable when the customer switches to another wireless carrier.
Sales and marketing expenses increased $0.8 million, or 7%, and $0.6
million, or 3%, for the three and six months ended November 30, 2003,
respectively, as compared to the same periods in the prior year, primarily due
to increased commissions and advertising.
General and administrative expenses increased $0.3 million, or 2%, and $1.4
million, or 5%, during the three and six months ended November 30, 2003,
respectively, as compared to the three and six months ended November 30, 2002,
primarily due to increased costs to support the expanding subscriber base.
Adjusted operating income for the U.S. wireless operations was $35.4 million
and $74.9 million for the three and six months ended November 30, 2003,
respectively, a decrease of $4.2 million, or 11%, and $9.7 million, or 11%, as
compared to the same periods in fiscal 2003.
Depreciation and amortization was $9.1 million and $18.1 million for the
three and six months ended November 30, 2003, respectively, a decrease of $0.3
million, or 4%, and $0.5 million, or 3%, from the same periods 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
35
in the fourth quarter of fiscal 2003. This decrease was partially offset by
increased depreciation related to capital expenditures made during fiscal 2003
and fiscal 2004.
Operating income was $26.4 million and $56.7 million for the three and six
months ended November 30, 2003, respectively, a decrease of $3.8 million and
$9.3 million, respectively, from operating income of $30.2 million and $66.0
million for the same periods in fiscal 2003.
Caribbean Wireless Operations
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ---------------------
2003 2002 2003 2002
(In thousands) (Unaudited) % Change (Unaudited) % Change
- ------------------------------------------------------------------------------------------------------------
Revenues:
Service revenue $ 72,966 $ 59,029 24% $ 143,347 $ 121,375 18%
Roaming revenue 821 415 98 2,204 766 188
Equipment sales 2,420 2,585 (6) 4,964 5,131 (3)
- ------------------------------------------------------------------------------------------------------------
Total revenues 76,207 62,029 23 150,515 127,272 18
- ------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of services 10,961 9,434 16 22,558 21,164 7
Cost of equipment sold 9,915 8,036 23 18,349 16,942 8
Sales and marketing 9,078 9,898 (8) 18,403 19,809 (7)
General and administrative 15,451 11,768 31 28,612 25,500 12
- ------------------------------------------------------------------------------------------------------------
Total costs and expenses 45,405 39,136 16 87,922 83,415 5
- ------------------------------------------------------------------------------------------------------------
Adjusted operating income(1) 30,802 22,893 35 62,593 43,857 43
(Gain) loss on disposition of
assets (20) 492 (104) 53 (1,878) (103)
Special non-cash charge - 4,389 NA - 4,389 NA
Depreciation and amortization 13,047 14,215 (8) 26,353 29,676 (11)
- ------------------------------------------------------------------------------------------------------------
Operating income $ 17,775 $ 3,797 368% $ 36,187 $ 11,670 210%
============================================================================================================
(1) See "Certain Non-GAAP Financial Measures" beginning on page 28.
Revenues. Caribbean wireless service revenue increased $13.9 million, or
24%, and $22.0 million or, 18%, to $73.0 million and $143.3 million for the
three and six months ended November 30, 2003, respectively, as compared to the
three and six months ended November 30, 2002. The increase in Caribbean wireless
service revenue was primarily due to growth in revenue from new subscribers of
$11.9 million and $19.9 million, for the three and six months ended November 30,
2003, respectively, as well as an increase of $2.0 million and $2.1million in
service revenue per subscriber for the same periods.
Revenue from Caribbean wireless roaming increased $0.4 million, or 98%, and
$1.4 million, or 188%, for the three and six months ended November 30, 2003,
respectively, from roaming revenue of $0.4 million and $0.8 million for the
three and six months ended November 30, 2002. The increase was primarily due to
an increase in roaming usage of $0.4 million and $2.0 million, as compared to
the same periods last year. The increase for the six months ended November 30,
2003 was partially offset by a
36
decrease in revenue of $0.6 million resulting from a lower roaming rate per
minute.
Our Caribbean wireless operations had approximately 445,900 subscribers at
November 30, 2003, an increase of 22% from the 366,700 subscribers at November
30, 2002. During the twelve months ended November 30, 2003, increases from new
activations of 236,000 were offset by subscriber cancellations of 156,800. 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 2.4% and 2.3% for three and six
months ended November 30, 2003, respectively, from 2.8% and 3.0% for the same
periods a year ago. Our postpaid subscribers represented approximately 75% of
our total Caribbean wireless subscribers at November 30, 2003, up from
approximately 72% at November 30, 2002.
Caribbean wireless ARPU was $59 for both the three and six months ended
November 30, 2003, as compared to $57 and $58 for the three and six months ended
November 30, 2003, respectively. Our customers used an average of 923 minutes of
airtime per month for the three months ended November 30, 2003, as compared to
727 minutes of use per month during the three months ended November 30, 2002. An
average of 1,181 minutes of airtime were used by our postpaid customers per
month for the three months ended November 30, 2003, as compared to 971 minutes
of use per month during the three months ended November 30, 2002.
There was a typographical error in our Quarterly Report on Form 10-Q for the
first quarter of fiscal 2004 filed on October 15, 2003. An average of 894
minutes, rather than 984 minutes of airtime were used by our Caribbean wireless
customers per month for the three months ended August 31, 2003.
Costs and expenses. Cost of services increased $1.5 million, or 16%, and
$1.4 million, or 7%, during the three and six months ended November 30, 2003,
respectively, as compared to the three and six months ended November 30, 2002.
The increase was primarily due to increases in variable costs associated with a
larger subscription base, most notably mobile long distance expense and
interconnect charges. This was partially offset by reduced cost of services due
to the sale of Centennial Digital Jamaica ("CDJ") in August 2002.
Cost of equipment sold increased $1.9 million, or 23%, and $1.4 million, or
8%, during the three and six months ended November 30, 2003, respectively, 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 sold versus those
that were rented.
Sales and marketing expenses decreased $0.8 million, or 8%, and $1.4 million
or 7%, during the three and six months ended November 30, 2003, respectively, as
compared to the same period last year. The decrease was primarily due to a
decrease in the amount of store rent expense allocated to sales and marketing
expenses. This decrease in the amount allocated was made to reflect the fact
that portions of the stores are increasingly being used more for customer
service and customer retention activities rather than sales and marketing. In
addition, we had reduced sales and marketing expense due to the sale of our
interest in CDJ in August 2002.
General and administrative expenses increased $3.7 million, or 31%, and $3.1
million, or 12%, during the three and six months ended November 30, 2003,
respectively, as compared to the same period in fiscal 2003. The increase was
due to increased expenses associated with the outsourcing of our phone
activation process in Puerto Rico, as well as the increase in the amount of
store rent expense allocated to general and administrative expenses, to better
reflect that stores are increasingly being used more for customer service and
customer retention activities.
37
Additionally, subscriber billing costs increased as a result of the 27% growth
of postpaid subscribers and we incurred increased expenses as a result of
implementing WLNP.
Adjusted operating income for the Caribbean wireless operations for the
three and six months ended November 30, 2003 was $30.8 million and $62.6
million, respectively, an increase of $7.9 million, or 35%, and $18.7 million,
or 43%, respectively, as compared to the three and six months ended November 30,
2002.
The gain on disposition of assets during the six months ended November 30,
2002 was due to the sale of our interest in CDJ in August 2002.
Depreciation and amortization for the three and six months ended November
30, 2003 was $13.0 million and $26.4 million, respectively, a decrease of $1.2
million, or 8%, and $3.3 million, or 11%, respectively, as compared to the three
and six months ended November 30, 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 PCS phones loaned to subscribers in the
three and six months ended November 30, 2003 than in the same period in the
prior year. In addition, the decrease in depreciation and amortization reflects
the sale of our interest in CDJ in August 2002.
Operating income for the three and six months ended November 30, 2003 was
$17.8 million and $36.2 million, respectively, an increase of $14.0 million and
$24.5 million from the operating income of $3.8 million and $11.7 million,
respectively, from the same period last year.
38
Caribbean Broadband Operations
Three Months Ended Six Months Ended
November 30, November 30,
------------------- --------------------
2003 2002 2003 2002
(In thousands) (Unaudited) % Change (Unaudited) % Change
- ------------------------------------------------------------------------------------------------------
Revenues:
Switched revenue $ 9,409 $ 8,429 12% $ 18,307 $ 16,241 13%
Dedicated revenue 12,070 9,311 30 23,880 18,370 30
Cable television revenue 12,204 12,031 1 24,221 24,695 (2)
Other revenue 6,089 5,019 21 11,762 11,202 5
- ------------------------------------------------------------------------------------------------------
Total revenues 39,772 34,790 14 78,170 70,508 11
- ------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of services 15,997 15,592 3 32,067 30,757 4
Cost of equipment sold 102 187 (46) 223 342 (35)
Sales and marketing 2,404 2,498 (4) 4,427 4,757 (7)
General and administrative 7,761 8,228 (6) 15,896 16,584 (4)
- ------------------------------------------------------------------------------------------------------
Total costs and expenses 26,264 26,505 (1) 52,613 52,440 0
- ------------------------------------------------------------------------------------------------------
Adjusted operating income(1) 13,508 8,285 63 25,557 18,068 41
Gain on disposition of assets - (11) NA (190) (12) *
Special non-cash charge - 611 NA - 611 NA
Depreciation and amortization 12,888 11,030 17 25,564 22,813 12
- ------------------------------------------------------------------------------------------------------
Operating income (loss) $ 620 $ (3,345) 119% $ 183 $ (5,344) 103%
======================================================================================================
* Percentage change not meaningful
(1) See "Certain Non-GAAP Financial Measures" beginning on page 28.
Revenues. Caribbean broadband revenue increased $5.0 million, or 14%, and
$7.7 million, or 11%, to $39.8 million and $78.2 million for the three and six
months ended November 30, 2003, respectively, as compared to the three and six
months ended November 30, 2002.
Switched revenue increased $1.0 million, or 12%, and $2.1 million, or 13%,
to $9.4 million and $18.3 million for the three and six months ended November
30, 2003, respectively, as compared to the same periods last year. The increase
was primarily due to a 22% increase in switched access lines to 45,100 as of the
end of the second quarter of fiscal 2004 and a corresponding growth in aggregate
minutes of use.
Dedicated revenue increased $2.8 million, or 30%, and $5.5 million, or 30%,
to $12.1 million and $23.9 million for the three and six months ended November
30, 2003, respectively, as compared to the same periods last year. The increase
was primarily the result of a 35% growth in voice grade equivalent (the amount
of capacity required to carry one telephone call) dedicated lines to 230,000 and
an increase in revenue per circuit.
Cable television revenue remained flat during the three and six months ended
November 30, 2003 as compared to the same periods last year despite a decline in
subscribers of 8.1%
39
Other revenue increased $1.1 million, or 21%, and $0.6 million, or 5%, to
$6.1 million and $11.8 million for the three and six months ended November 30,
2003, respectively, from the same periods last year. The increase was primarily
due to an increase in the number of international long distance minutes to the
Dominican Republic and long distance minutes to Puerto Rico that we terminate.
This was partially offset by the loss of revenue as a result of the sale of
Infochannel in January 2003.
Costs and expenses. Cost of services increased $0.4 million, or 3%, and $1.3
million, or 4%, during the three and six months ended November 30, 2003,
respectively, as compared to the same periods last year. The increase was
primarily due to an increase in access charges in the Dominican Republic and
termination expense in Puerto Rico, resulting from the increase in the number of
international long distance minutes to the Dominican Republic and long distance
minutes to Puerto Rico that we terminate. This was partially offset by reduced
costs of services due to the sale of Infochannel in January 2003.
Sales and marketing expenses decreased $0.1 million, or 4%, and $0.3
million, or 7%, during the three and six months ended November 30, 2003,
respectively, as compared to the three and six months ended November 30, 2002.
The decrease was primarily due to an overall reduction in advertising spending
and reduced cable television commissions due to a decrease in cable activations.
General and administrative expenses decreased $0.5 million, or 6%, and $0.7
million, or 4%, during the three and six months ended November 30, 2003, as
compared to the three and six months ended November 30, 2002. The decrease was
primarily due to reduced general and administrative expenses due to the sale of
Infochannel.
Adjusted operating income for the Caribbean broadband operations for the
three and six months ended November 30, 2003 was $13.5 million and $25.6
million, respectively, an increase of $5.2 million, or 63%, and $7.5 million, or
41%, respectively, as compared to the same periods last year.
Depreciation and amortization for the three and six months ended November
30, 2003 was $12.9 million and $25.6 million, respectively, an increase of $1.9
million, or 17%, and $2.8 million, or 12%, respectively, from the same periods
last year. The increase was primarily due to increased depreciation expense
associated with the continued expansion of the Puerto Rico broadband operation.
Operating income for the three and six months ended November 30, 2003 was
$0.6 million and $0.2 million, respectively, an improvement of $3.9 million and
$5.5 million as compared to the operating loss of $3.3 million and $5.3 million
for the same periods in fiscal 2003, respectively.
CONSOLIDATED
Other non-operating income and expenses. Net interest expense was $41.6
million and $91.2 million for the three and six months ended November 30, 2003,
respectively, an increase of $4.6 million, or 12%, and $15.9 million, or 21%,
from the three and six months ended November 30, 2002, respectively. Gross
interest expense was $41.7 million and $91.5 million for the three and six
months ended November 30, 2003, respectively, as compared to $37.4 million and
$75.9 million for the same periods 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.
This increase was 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 outstanding debt balances. Total debt decreased $50.2
million from November 30, 2002 to November 30, 2003.
40
The weighted-average debt outstanding during the three months ended November
30, 2003 was $1,738.5 million, a decrease of $24.3 million as compared to the
weighted-average debt outstanding of $1,762.8 million during the three months
ended November 30, 2002. The weighted-average debt outstanding during the six
months ended November 30, 2003 was $1,749.3 million, a decrease of $34.7 million
as compared to the weighted-average debt outstanding of $1,784.0 million during
the six months ended November 30, 2002. Including the amortization and write off
of debt issuance, our weighted-average interest rates were 9.6% and 10.5% for
the three and six months ended November 30, 2003, respectively, as compared to
8.5% for the same periods a year ago. Excluding the amortization and write-off
of debt issuance costs, the weighted-average interest rates were 9.1% and 9.0%
for the three and six months ended November 30, 2003, respectively, as compared
to 8.0% and 8.1% for the same periods a year ago.
Income (loss) before income tax expense and minority interest for the three
and six months ended November 30, 2003 was $3.5 million and $1.3 million,
respectively, as compared to ($6.4) million and ($2.9) million for the three and
six months ended November 30, 2002, respectively. Income tax expense was $16.0
million and $7.3 million for the three and six months ended November 30, 2003,
respectively, as compared to $7.2 million and $11.0 million for the same periods
last year. As previously explained our worldwide effective income tax rate
fluctuates based on certain permanent differences. Additionally, income tax
expense varies based on our worldwide effective income tax rate and Income
(loss) before income tax expense and minority interest.
These factors resulted in a net loss of $12.7 million and $6.3 million for
the three and six months ended November 30, 2003, respectively, as compared to a
net loss of $13.5 million and $13.7 million for the same periods a year ago.
LIQUIDITY AND CAPITAL RESOURCES
On November 10, 2003, we completed a public offering of 10,000,000 shares
of our common stock at $5.50 per share for total gross proceeds of $55.0
million. The offering included 7,000,000 primary shares sold by us and 3,000,000
shares sold by affiliates of The Blackstone Group, one of our principal
shareholders. Blackstone and we granted the underwriter an option to purchase up
to an additional 1,500,000 shares of common stock to cover over-allotments, if
any. The option expired unexercised on December 4, 2003. Proceeds to the Company
(after underwriting commissions but before other expenses) of approximately
$36.8 million were used to prepay a portion of the Company's Mezzanine Debt,
which is currently accruing paid-in-kind interest at a rate of 13%.
Additionally, we paid other expenses of $2.1 million in connection with the
offering yielding net proceeds of $34.7 million. We did not receive any of the
proceeds from the sale of the shares owned by affiliates of The Blackstone
Group. In connection with the sale of shares of our common stock, on November 6,
2003, we amended our Senior Credit Facility to permit us to use the proceeds of
the equity offering (and certain subsequent equity offerings) to prepay the
Mezzanine Debt.
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 November 30, 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 November 30, 2003.
The revolving credit facility has an aggregate principal amount of $250.0
million, of which there was $0.0 million outstanding as of November 30, 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.
41
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
We capitalized approximately $27.1 million of debt issuance costs including
$25.2 million during the six months ended November 30, 2003 in connection with
the issuance of the Senior Notes and, as a result of the repayments under the
Senior Credit Facility, we wrote-off approximately $15.4 million, net of
accumulated amortization of $7.8 million in debt issuance costs. The net amount
of $7.6 million is included within interest expense, net in the consolidated
statement of operations for the three and six months ended November 30, 2003.
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 NOVEMBER 30, 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, CCOC and we issued $370.0 million of 10-3/4% senior
subordinated notes due 2008 (the "Senior Subordinated Notes") to qualified
institutional buyers in a private placement transaction. In July 1999, we
registered the $370.0 million 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.
42
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 hold. Any unpaid interest will be repaid upon maturity
of the Mezzanine Debt. On November 10, 2003, proceeds of $36.8 million from the
aforementioned equity offering were used to prepay a portion of the Mezzanine
Debt. Paid-in-kind interest on the Mezzanine Debt was $7.0 million and $14.0
million for the three and six months ended November 30, 2003, respectively. As
of November 30, 2003, $181.1 million was outstanding under the Mezzanine Debt.
As of November 30, 2003, the total outstanding principal amount, including
unaccreted value of the equity portion of the Mezzanine Debt was approximately
$193.5 million.
In January 2002, Centennial Puerto Rico Cable TV Corp. ("Centennial Cable")
our wholly owned subsidiary, entered into a $15 million credit agreement with
Banco Popular de Puerto Rico (the "Cable TV Credit Facility") to fund the
digital conversion of its cable operations. As of November 30, 2003, the Company
had repaid all amounts owed under the Cable TV Credit Facility and terminated
the Cable TV Credit Facility.
In November 2003, the Company registered the Senior Notes under the
Securities Act of 1933, as amended ("the Securities Act.")
For the six months ended November 30, 2003, the ratio of earnings to fixed
charges was 1.01:1. 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 greater than fixed charges reflects non-cash charges of $70.1 million
relating to depreciation and amortization.
As of November 30, 2003, we had $681.7 million of property, plant and
equipment (net) placed in service. Capital expenditures for the U.S. wireless
operations were $24.4 million, representing 39.5% of total capital
expenditures. These expenditures were to expand the coverage areas and upgrade
our cell sites, as well as our call switching equipment of existing wireless
properties. Capital expenditures for the Caribbean wireless operations were
$26.1 million, representing 42.2% of total capital expenditures. These
expenditures were to add capacity and services and to continue the development
and expansion of our Caribbean wireless systems. Capital expenditures for the
Caribbean Broadband operations were $11.3 million, representing 18.3% of total
capital expenditures. These expenditures were to continue the expansion of our
Caribbean Broadband network infrastructure. During fiscal 2004, we anticipate
capital expenditures of approximately $125.0 million.
43
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.
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:
SIX MONTHS ENDED NOVEMBER 30,
-----------------------------
2003 2002
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------
% of net cash % of net cash
(In thousands) Amount provided Amount provided
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 112,110 72% $ 96,054 63%
Interest paid 43,223 28 55,791 37
- -------------------------------------------------------------------------------------------------
Net cash provided $ 155,333 100% $151,845 100%
=================================================================================================
Principal uses of cash:
Interest paid $ 43,223 28% $ 55,791 37%
Property, plant & equipment 61,831 40 67,518 44
- -------------------------------------------------------------------------------------------------
Total $ 105,054 68% $123,309 81%
=================================================================================================
Cash available for other
financing and investing activities $ 50,279 32% $ 28,536 19%
=================================================================================================
Net cash provided by operating activities for the six months ended November
30, 2003 was sufficient to fund our expenditures for property, plant and
equipment of $61.8 million.
44
The following table sets forth the primary cash flows provided by other
financing and investing activities for the periods indicated:
SIX MONTHS ENDED NOVEMBER 30,
-----------------------------
2003 2002
(In thousands) (Unaudited)
- -------------------------------------------------------------------------------------------------------------
Proceeds from disposition of assets, net of cash expenses $ 1,681 $ 7,540
Proceeds from issuance of long-term debt 500,861 27,173
Net proceeds from the issuance of common stock 34,663 -
Proceeds from the exercise of stock options 819 -
Distributions received from equity investment 14 48
Proceeds from issuance of common stock under employee stock purchase plan 390 483
- -------------------------------------------------------------------------------------------------------------
Cash provided by other financing and investing activities 538,428 35,244
- -------------------------------------------------------------------------------------------------------------
Repayment of debt (567,825) (47,169)
Debt issuance costs paid (25,170) -
- -------------------------------------------------------------------------------------------------------------
Capital deficiency for operations and
capital expenditures $ (54,567) $ (11,925)
=============================================================================================================
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 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' 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.
45
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
(gain) loss on disposition of assets in the consolidated statement of operations
for the six months ended November 30, 2003. 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 a vendor financing credit
facility with Lucent Technologies which was non-recourse to us) 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 six months ended November 30, 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
two quarters of fiscal 2004, we applied $1.6 million against the $1.7 million
credit mentioned above. The remaining $0.1 million credit received by us from
Global Crossing is included in prepaid expenses and 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 result primarily from contractual requirements to remove our
equipment from such leased sites at the end of the lease. 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 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
46
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. However, as a result of concerns over implementation and measurement
issues, the FASB unanimously decided to defer the application of SFAS No. 150 to
certain non-controlling interests of limited-life entities that are consolidated
in the financial statements. We have accordingly deferred adoption of this
aspect of the standard pending further guidance.
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 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
47
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 December 2003, the FASB published a revision to FIN 46 ("46R") to
clarify some of the provisions of FIN 46 and to exempt certain entities from its
requirements. Under the new guidance, application of FIN 46 is required in
financial statements of public entities that have that have interests in a VIE
or potential VIEs that are commonly referred to as special-purpose entities for
periods ending after December 15, 2003. As such, FIN 46 will be effective for us
as of June 1, 2004. We have evaluated the effect of the adoption of FIN 46, and
do not believe it will have a material effect on our consolidated results of
operations, consolidated financial position or consolidated cash flows.
In November 2002, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables" ("EITF No. 00-21"). This consensus requires that revenue
arrangements with multiple deliverables be divided into separate units of
accounting if the deliverables in the arrangement meet specific criteria. In
addition, arrangement consideration must be allocated among the separate units
of accounting based on their relative fair values, with certain limitations. We
have determined that the sale of wireless services with an accompanying handset
constitutes a revenue arrangement with multiple deliverables. Consideration
received for the wireless service is recognized as service revenue when earned,
and consideration received for the handset is recognized as equipment sales when
the handset is delivered and the title is transferred to the customer. Upon
adoption of EITF No. 00-21, we discontinued deferring non-refundable, up-front
activation fees to the extent that the aggregate activation fee and handset
proceeds received from a subscriber does not exceed the fair value of the
handset sold. Any activation fees not allocated to the handset would be deferred
upon activation and recognized as service revenue over the expected customer
relationship period. Additionally, to the extent that the aggregate activation
fee and handset proceeds received from a subscriber do not exceed the fair value
of the handset sold, activation fees will be included in equipment sales rather
than service revenues in the consolidated statement of operations. We adopted
EITF No. 00-21 effective September 1, 2003 and are applying it on a prospective
basis. Since we adopted EITF No. 00-21 prospectively, all previously deferred
activation fees will continue to be amortized over their remaining customer
relationship period. Our initial adoption did not have a material effect on our
consolidated results of operations, consolidated financial position or
consolidated cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition," ("SAB No. 104") which revises or rescinds certain
sections of SAB No. 101, "Revenue Recognition," in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
48
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 January 9, 2004, 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 January 9, 2004,
$38.5 million of securities have been issued and 3,000,000 shares resold under
the shelf registration and $711.5 million of securities and the resale of
17,000,000 shares of securities remain available for future issuance.
We have entered into multi-year roaming agreements with Cingular Wireless
and AT&T Wireless for analog, 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. As of November 30, 2003, none of the options have been
exercised.
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.
We have committed to purchase approximately $15.9 million of equipment and
services under the agreement. As of November 30, 2003, no amounts have been paid
in connection with this agreement.
The following table summarizes our scheduled contractual cash obligations
and commercial commitments at November 30, 2003 (unless otherwise noted), and
the effect that such obligations are expected to have on liquidity and cash flow
in future periods.
1 YEAR AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL AND LESS 2-3 YEARS 4-5 YEARS YEARS
----------------------- ----------- ----------- ----------- ----------- -----------
Long-term debt obligations $ 1,712,237 $ 36,815 $ 209,246 $ 382,618 $ 1,083,558
Operating leases obligations (1) 186,276 23,418 39,018 23,832 100,008
Purchase obligations 33,683 13,480 20,203 - -
----------- ----------- ----------- ----------- -----------
Total contractual cash
Obligations 1,932,196 73,713 268,467 406,450 1,183,566
Sublessor agreements (1) (1,955) (660) (1,041) (254) -
----------- ----------- ----------- ----------- -----------
Net $ 1,930,241 $ 73,053 $ 267,426 $ 406,196 $ 1,183,566
=========== =========== =========== =========== ===========
(1) Represents our commitments associated with operating leases as of May 31,
2003.
49
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, 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, our management or we 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 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;
50
- - 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;
- - 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 that took effect on November 24, 2003, in 100
designated markets, including certain of our markets and that will take
effect in all markets in May, 2004, which require 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;
51
- - the relative liquidity 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.
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 November 30, 2003:
52
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------
THERE-
(IN THOUSANDS) 2004 2005 2006 2007 2008 AFTER TOTAL FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt:
Fixed rate $ 8 $ 318 $ 157 $ 224 $ 350 $ 1,083,558 $ 1,084,615 $ 1,115,165
Average interest rate 0% 9.5% 9.3% 10% 10% 10.3% 10.3% -
Variable rate $ 36,807 $ 94,896 $ 113,875 $ 382,044 $ - $ - $ 627,622 $ 627,622
Average interest rate (1) 1.6% 3.2% 4.3% 4.8% % % 4.3% -
Interest rate swaps (pay
fixed, receive variable):
Notional amount $ 50,000 - - - - - - $3,170
Average pay rate 5.7% 4.9% - - - - - -
Average receive rate 1.7% 3.2% - - - - - -
Interest rate collar:
Notional amount $ 50,000 - - - - - - $766
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 November 30, 2003 and 2002 had
outstanding balances of $627.6 million and $1,197.2 million, respectively. The
fair value of such debt approximates the carrying value at November 30, 2003. Of
the variable rate debt, $200 million was hedged at November 30, 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 November
30, 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 November 30, 2003.
There was no change in our internal control over financial reporting during
the second quarter of fiscal 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
53
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 our subsidiaries or we 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
On November 10, 2003, we completed a public offering of 10,000,000
shares of our common stock at $5.50 per share for total gross proceeds of $55.0
million. The offering included 7,000,000 primary shares sold by us and 3,000,000
shares sold by affiliates of The Blackstone Group, one of our principal
shareholders. Blackstone and we granted the underwriter an option to purchase up
to an additional 1,500,000 shares of common stock to cover over-allotments, if
any. The option expired unexercised on December 4, 2003. Proceeds to the Company
(after underwriting commissions but before other expenses) of approximately
$36.8 million were used to prepay a portion of the Company's Mezzanine Debt,
which is currently accruing paid-in-kind interest at a rate of 13%.
Additionally, the Company paid other expenses of $2.1 million in connection with
the offering yielding net proceeds of $34.7 million. We did not receive any of
the proceeds from the sale of the shares owned by affiliates of The Blackstone
Group. In connection with the sale of shares of our common stock, on November 6,
2003, the Company amended it's Senior Credit Facility to permit the Company to
use the proceeds of the equity offering (and certain subsequent equity
offerings) to prepay the Mezzanine Debt.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
54
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company's annual meeting of stockholders was held on
October 2, 2003.
b) The following persons were elected as directors at the
Company's annual meeting pursuant to the following votes:
Number of Votes
------------------------------
Directors For Withhold
- ---------------------- ---------- --------
Anthony J. de Nicola 91,414,523 327,647
Lawrence H. Guffey 91,238,682 503,448
James R. Matthews 91,545,000 197,170
Thomas E. McInerney 91,414,523 327,647
James P. Pellow 91,724,820 17,350
Michael J. Small 91,080,062 662,108
David M. Tolley 91,724,820 17,350
J. Stephen Vanderwoude 91,724,820 17,350
Ellen C. Wolf 91,724,820 17,350
c) The stockholders approved the Centennial Communications
Corp. and its Subsidiaries 2003 Employee Stock Purchase
Plan. The following sets forth the number of votes on this
proposal:
For Against Abstain
- ---------- ---------- ---------
87,083,005 402,924 6,095
d) The stockholders approved a proposal at the annual meeting
to ratify the selection by the Audit Committee of Deloitte
& Touche LLP as independent auditors for the Company for
the fiscal year ending May 31, 2004. The following sets
forth the number of votes on this proposal:
For Against Abstain
- ---------- ---------- ---------
91,724,445 12,631 5,094
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Each exhibit identified below is filed as a part of this
report.
a) Exhibits
55
Exhibit No. Description
- ----------- --------------------------------------------------------------------
10.1 Amendment No. 5 dated as of November 6, 2003 to the Credit Agreement
dated as of January 7, 1999, as amended and restated as of February
29, 2000, as amended by Amendment No. 1 dated as of July 28, 2000,
Amendment No. 2 dated as of August 3, 2001, Amendment No. 3 dated as
of September 5, 2001 and Amendment No. 4 dated as of June 19, 2003
among Centennial Cellular Operating Co. LLC, as Borrower; Centennial
Puerto Rico Operations Corp., as PR Borrower; Centennial
Communications Corp., as a Guarantor; the other Guarantors party
thereto; each of the lenders from time to time party thereto; JP
Morgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Co-Lead Arranger and Co-Syndication Agent; Merrill Lynch & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Co-Lead
Arranger and Co-Syndication Agents; Bank of America, N.A., as
Arranger and Administrative Agent; and The Bank of Nova Scotia, as
Documentation Agent.
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 September 12, 2003, Centennial Communications Corp.
filed a Current Report on Form 8-K announcing that it
amended its bylaws, Restated Registration Rights Agreement
and Restated Stockholders Agreement.
On September 12, 2003, Centennial Communications Corp.
filed a Current Report on Form 8-K reporting its financial
results for the three months ended August 31, 2003.
On November 7, 2003, Centennial Communications Corp. filed
a Current Report on Form 8-K announcing the pricing of an
equity offering to issue and sell an aggregate of 10
million shares of its common stock.
56
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.
January 9, 2004
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)
57