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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 February 29, 2004
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 - 103,114,357 outstanding shares as of April 9, 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............................ 20
Item 3 Quantitative and Qualitative Disclosures about Market Risk....................................................... 36
Item 4 Controls and Procedures.......................................................................................... 36
Part II - Other Information
Item 1 Legal Proceedings................................................................................................ 37
Item 2 Changes in Securities and Use of Proceeds........................................................................ 38
Item 3 Defaults Upon Senior Securities.................................................................................. 38
Item 4 Submission of Matters to a Vote of Security Holders.............................................................. 38
Item 5 Other Information................................................................................................ 38
Item 6 Exhibits and Reports on Form 8-K................................................................................. 38
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MAY 31,
FEBRUARY 29, 2004 2003
(UNAUDITED) (AUDITED)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 90,942 $ 69,692
Accounts receivable, less allowance for doubtful accounts of
$9,074 and $9,754, respectively 82,668 71,777
Inventory - phones and accessories 16,562 5,689
Prepaid expenses and other current assets 33,092 34,370
----------- -----------
Total Current Assets 223,264 181,528
Property, plant and equipment, net 688,596 675,574
Equity investments, net 2,606 2,568
Debt issuance costs, less accumulated amortization of $12,125 and $33,943,
respectively 57,732 39,442
U.S. wireless licenses 371,766 371,766
Caribbean wireless licenses, less accumulated amortization of
$3,417 and $2,667, respectively 70,742 71,492
Cable franchise costs 52,139 52,139
Goodwill 26,704 26,704
Customer lists, net 10,684 18,830
Transmission and connecting rights, net 862 928
Cable facility, net 4,270 4,450
Other assets, net 2,581 1,427
----------- -----------
TOTAL ASSETS $ 1,511,946 $ 1,446,848
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 42,836 $ 89,401
Accounts payable 24,819 18,789
Accrued expenses and other current liabilities 191,949 171,801
Payable to affiliates 125 125
----------- -----------
Total Current Liabilities 259,729 280,116
Long-term debt 1,753,004 1,669,659
Deferred income taxes 65,980 62,788
Other liabilities 7,755 13,011
Minority interest in subsidiaries 567 360
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
103,139,360 and 95,766,539 shares, respectively; and outstanding 103,068,857
and 95,696,036 shares, respectively 1,031 958
Additional paid-in capital 472,952 437,019
Accumulated deficit (1,047,995) (1,011,388)
Accumulated other comprehensive loss - (4,594)
----------- -----------
(574,012) (578,005)
Less: cost of 70,503 common shares in treasury (1,077) (1,077)
Deferred compensation - (4)
----------- -----------
Total Stockholders' Deficit (575,089) (579,086)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,511,946 $ 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 NINE MONTHS ENDED
------------------------- -------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Service revenue $ 198,903 $ 173,978 $ 590,252 $ 535,216
Equipment sales 8,489 8,052 23,547 19,427
--------- --------- --------- ---------
207,392 182,030 613,799 554,643
--------- --------- --------- ---------
Costs and Expenses:
Cost of services 40,941 36,794 122,738 116,925
Cost of equipment sold 22,016 21,467 65,712 52,173
Sales and marketing 23,169 24,026 69,475 71,482
General and administrative 40,014 31,692 111,538 104,418
Depreciation and amortization 34,640 35,855 104,702 106,982
Loss on impairment of assets - 189,492 - 189,492
Loss (gain) on disposition of assets 249 (464) 211 (2,357)
--------- --------- --------- ---------
161,029 338,862 474,376 639,115
--------- --------- --------- ---------
Operating income (loss) 46,363 (156,832) 139,423 (84,472)
--------- --------- --------- ---------
Income from equity investments 24 33 52 166
Interest expense, net (41,742) (36,331) (125,367) (111,598)
Loss on extinguishment of debt (28,625) - (36,160) -
Other income (expense) 232 (771) (369) (877)
--------- --------- --------- ---------
Loss before income tax expense and minority
interest (23,748) (193,901) (22,421) (196,781)
Income tax (expense) benefit (6,459) 34,324 (13,778) 23,318
--------- --------- --------- ---------
Loss before minority interest (30,207) (159,577) (36,199) (173,463)
Minority interest in (income) loss of subsidiaries (126) - (408) 171
--------- --------- --------- ---------
Net loss $ (30,333) $(159,577) $ (36,607) $(173,292)
========= ========= ========= =========
Loss per share:
Basic and diluted $ (0.29) $ (1.67) $ (0.37) $ (1.81)
========= ========= ========= =========
Weighted-average number of shares outstanding:
Basic and diluted 103,046 95,696 98,868 95,566
========= ========= ========= =========
See notes to condensed consolidated financial statements.
2
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
FEBRUARY 29, FEBRUARY 28,
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (36,607) $ (173,292)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 104,702 106,982
Non cash, paid-in kind interest 13,997 19,084
Minority interest in income (loss) of subsidiaries 408 (171)
Income from equity investments (52) (166)
Loss (gain) on disposition of assets 211 (2,357)
Loss on impairment of assets - 189,492
Changes in assets and liabilities, net of effects of acquisitions and
dispositions and other 17,290 (3,901)
----------- -----------
Total adjustments 136,556 308,963
----------- -----------
Net cash provided by operating activities 99,949 135,671
----------- -----------
INVESTING ACTIVITIES:
Proceeds from disposition of assets, net of cash expenses 2,442 18,300
Capital expenditures (99,420) (92,605)
Distributions received from equity investment 14 1,004
----------- -----------
Net cash used in investing activities (96,964) (73,301)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 1,425,000 27,174
Repayment of debt (1,394,729) (66,656)
Debt issuance costs paid (48,064) -
Net proceeds from the issuance of common stock 34,663 -
Proceeds from the exercise of stock options 1,005 -
Proceeds from issuance of common stock under employee stock purchase plan 390 483
----------- -----------
Net cash provided by (used in) financing activities 18,265 (38,999)
----------- -----------
Net increase in cash and cash equivalents 21,250 23,371
Cash and cash equivalents, beginning of period 69,692 33,871
----------- -----------
Cash and cash equivalents, end of period $ 90,942 $ 57,242
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest $ 103,128 $ 95,712
=========== ===========
Income taxes $ 5,781 $ 10,314
=========== ===========
NON-CASH TRANSACTIONS:
Paid-in-kind interest $ 13,997 $ 19,084
=========== ===========
Fixed assets acquired under capital leases $ 6,509 $ 13,340
=========== ===========
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 United States
("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 February 29, 2004 and the results of its consolidated
operations and cash flows for the three and nine month periods ended February
29, 2004 and February 28, 2003.
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 nine months ended February 29, 2004 based on its projected
annual worldwide effective tax rate of 61%.
The Company has computed its tax provision based on its projected
annual rate of 61% against its pre-tax book loss of $22,421 through the nine
months ended February 29, 2004. The rate 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 was incurred prior to
the repayment of 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.
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.
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.
4
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 NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss:
As reported......... $(30,333) $(159,577) $(36,607) $(173,292)
Pro forma........... (31,267) (160,055) (38,820) (178,524)
Loss per share:
Basic and diluted:
As reported...... $(0.29) $(1.67) $(0.37) $(1.81)
Pro forma........ (0.30) (1.67) (0.39) (1.87)
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 NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Expected volatility.............. 123.3% 128.4% 123.3% 128.4%
Risk-free interest rate.......... 3.0% 2.3% 3.0% 2.3%
Expected lives of option grants.. 4 Years 4 Years 4 Years 4 Years
Expected dividend yield.......... 0.0% 0.0% 0.0% 0.0%
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
FEBRUARY 29, 2004 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
=========== ==========
The Company performed goodwill and intangible asset impairment analyses
during the three months ended February 29, 2004. Based upon the results of these
analyses, no impairments were noted.
The following table presents other intangible assets subject to
amortization:
AS OF FEBRUARY 29, 2004 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 $ 3,417 $ 20,000 $ 2,667
Customer lists............ 4-5 years 48,470 37,786 48,470 29,640
Transmission and
connecting rights....... 25 years 2,192 1,330 2,192 1,264
Cable facility............ 25 years 6,000 1,730 6,000 1,550
-------- -------- -------- --------
Total..................... $ 76,662 $ 44,263 $ 76,662 $ 35,121
======== ======== ======== ========
Other intangible assets amortization expense was $2,726 and $9,142 for
the three and nine months ended February 29, 2004, respectively. Based solely on
the finite lived intangible assets at February 29, 2004, amortization expense is
estimated to be $2,536 for the remainder of fiscal year 2004, $7,017 in fiscal
year 2005, $4,119 in fiscal year 2006, $1,328 in fiscal year 2007 and $1,328 in
fiscal year 2008.
5
Goodwill
The goodwill balance in the Caribbean wireless and broadband segments
was $22,517 and $4,187, respectively, at both February 29, 2004 and May 31,
2003.
NOTE 3. DEBT
Long-term debt consists of the following:
FEBRUARY 29, MAY 31,
2004 2003
----------- -----------
New Senior Secured Credit Facility - Term Loans $ 600,000 $ -
Old Senior Secured Credit Facility - Term Loans - 946,864
Old Senior Secured Credit Facility - Revolving Loans - 200,000
8 1/8% Senior Notes due 2014 325,000 -
10 1/8% Senior Notes due 2013 500,000 -
10 3/4% Senior Subordinated Notes due 2008 336,812 370,000
Mezzanine Debt - 202,794
Cable TV Credit Facility - 11,688
Capital Lease Obligation 20,529 14,924
Financing Obligation - Tower Sale 13,280 12,571
10 1/8% Senior Notes due 2005 219 219
----------- -----------
Total Long-Term Debt 1,795,840 1,759,060
Current Portion of Long-Term Debt (42,836) (89,401)
----------- -----------
Net Long-Term Debt $ 1,753,004 $ 1,669,659
=========== ===========
On February 9, 2004, the Company and its wholly-owned subsidiaries,
Centennial Cellular Operating Co. LLC ("CCOC") and Centennial Puerto Rico
Operations Corp. ("CPROC"), as co-issuers, issued $325,000 aggregate principal
amount of 8 1/8% senior unsecured notes due 2014 (the "2014 Senior Notes"), in a
private placement transaction. Concurrent with the issuance of the 2014 Senior
Notes, CCOC and CPROC, as co-borrowers, entered into a new $750,000 senior
secured credit facility (the "New Senior Secured Credit Facility"). The Company
and its direct and indirect domestic subsidiaries, including CCOC and CPROC, are
guarantors under the New Senior Secured Credit Facility. Collectively, these two
issuances are referred to as the Debt Refinancing. The Company received $905,375
(after underwriting commissions, but before other expenses) in net proceeds from
the Debt Refinancing and used, or will use, these funds to make the following
payments:
- $627,622 to repay all principal amounts outstanding under the
Old Senior Secured Credit Facility, which extinguished the Old
Senior Secured Credit Facility;
- $197,304 to repurchase all of the Company's outstanding
Mezzanine Debt which was accruing paid-in-kind interest at a
rate of 13%;
- $73,763 to repurchase and/or redeem $70,000 aggregate
principal amount of the Company's outstanding $370,000 10 3/4%
senior subordinated notes due 2008 (the "Senior Subordinated
Notes"). As of February 29, 2004, the Company had repurchased
$33,188 of such notes and issued a notice of redemption to
redeem the additional $36,812 of such notes. The Company
completed the redemption of the $36,812 of Senior Subordinated
Notes on March 12, 2004;
- $1,892 to pay applicable breakage fees on the termination of
the Company's interest rate swap and collar agreements; and
- $4,794 to pay fees, expenses and accrued interest related to
the Debt Refinancing.
The New Senior Secured Credit Facility consists of a seven-year term
loan, maturing in fiscal year 2011, with an aggregate principal amount of
$600,000 which requires quarterly amortization payments in an aggregate
principal amount of $1,500 in fiscal year 2004, $6,000 in each of the fiscal
years ended 2005, 2006, 2007, 2008 and 2009, $4,500 in fiscal year 2010 and the
balance in two equal installments of $282,000 in August 2010 and February 2011.
The New Senior Secured Credit Facility also includes a six-year revolving credit
facility, maturing in February 2010, with an aggregate principal amount of up to
$150,000, which had no amounts outstanding as of the close of the New Senior
Secured Credit Facility, but may be drawn upon at any time. In the event that
the remaining Senior Subordinated Notes are not refinanced by June 15, 2008, the
aggregate amount outstanding under the New Senior Secured Credit Facility will
then become immediately due and payable on such date.
6
Under the terms of the New Senior Secured Credit Facility, term and revolving
loan borrowings will bear interest at the London Inter-Bank Offering Rate
("LIBOR") (1.12% as of February 29, 2004) plus 2.75% and LIBOR plus 3.25%,
respectively. The Company's obligations under the New Senior Secured Credit
Facility are collateralized by liens on substantially all of the Company's
assets.
As a result of the Debt Refinancing, as of February 29, 2004, the
Company terminated all of its derivative financial instruments. Prior to the
termination of the derivatives, the Company recorded an increase of $2,702, net
of tax, in accumulated other comprehensive loss and also decreased its
liabilities by $6,024 due to changes in fair value of the derivatives. Since the
hedged forecasted transactions related to the derivatives were terminated, the
Company recorded a charge of $1,892 to other comprehensive loss, which is
included in interest expense in the consolidated statements of operations.
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 "2013
Senior Notes"), in a private placement transaction. In October, 2003, the
Company registered the 2013 notes with the SEC. CPROC is a guarantor of the 2013
Senior Notes. The Company used the net proceeds from the 2013 Senior Notes
offering to make repayments of $470,000 under the Old Senior Secured Credit
Facility.
The Company capitalized approximately $49,982 of debt issuance costs,
including, $25,170 and $22,894 in connection with the issuance of the 2013
Senior Notes and the Debt Refinancing, respectively, during the nine months
ended February 29, 2004. As a result of the extinguishment of the Old Senior
Secured Credit Facility and a portion of the Senior Subordinated Notes, the
Company wrote-off approximately $35,383, net of accumulated amortization of
$20,592, in debt issuance costs for the three months ended February 29, 2004 and
$50,760, net of accumulated amortization of $28,434, in debt issuance costs for
the nine months ended February 29, 2004. The Company recorded a loss on
extinguishment of debt of $28,625 and $36,160 for the three and nine months
ended February 29, 2004, respectively. This amount includes $13,834 of other
fees and expenses related to the Debt Refinancing that were expensed when
incurred as well as the net debt issuance costs that were written off.
In December 1998, the Company and CCOC issued $370,000 of 10 3/4%
senior subordinated notes due 2008 (the "Senior Subordinated Notes") in a
private placement transaction. In July 1999, the Company registered the Senior
Subordinated Notes with the SEC. CPROC is a guarantor of the Senior Subordinated
Notes. In connection with the Debt Refinancing, the Company repurchased and or
redeemed $70,000 aggregate principal amount of such notes. As of February 29,
2004 the Company repurchased $33,188 of such notes and issued a notice of
redemption to redeem the remaining $36,812 of such notes. As of February 29,
2004, $336,812 of Senior Subordinated Notes is outstanding. The Company
completed the redemption of the remaining $36,812 of Senior Subordinated Notes
on March 12, 2004.
An affiliate of Welsh, Carson, Anderson and Stowe, our principal
stockholder, owned approximately $189,000 principal amount of the Senior
Subordinated Notes, or approximately 51%. Approximately $34,852, or 49.8%, of
the $70,000 of the Senior Subordinated Notes redeemed and repurchased were owned
by the affiliate of Welsh, Carson, Anderson and Stowe.
In 1999, the Company issued $180,000 of Mezzanine Debt and common
shares of the Company. All of the Mezzanine Debt was held by an affiliate of
Welsh, Carson, Anderson & Stowe. 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. Proceeds of $197,304 from the Debt Refinancing were used to
repurchase all of the Company's outstanding Mezzanine Debt, which was accruing
paid-in-kind interest at a rate of 13.0%. As of February 29, 2004, the Company
had repaid all amounts owed 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 February 29, 2004,
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. Under certain
circumstances, the Company is prohibited from paying cash dividends on its
common stock under certain of the above debt agreements. The Company was in
compliance with all covenants of its debt agreements at February 29, 2004.
7
The aggregate annual scheduled principal payments for the next five
years and thereafter related to the Company's long-term debt at February 29,
2004 are summarized as follows:
February 29, 2005 $ 42,836
February 28, 2006 6,338
February 28, 2007 6,154
February 28, 2008 6,248
February 29, 2009 306,380
February 28, 2010 and thereafter 1,427,884
--------------
$ 1,795,840
==============
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 nine months ended February 29, 2004 was $41,859 and
$125,793, respectively, and $36,487 and $112,351 for the three and nine months
ended February 28, 2003, respectively.
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 $36,750 were used to prepay a portion of the Company's Mezzanine
Debt, which was 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 Old Senior Secured 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 year 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 loss (gain) 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.
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 year 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 approximately
$34,100 in cash. During the year ended May 31, 2003, the Company sold 144
telecommunications towers to AAT for $23,952. During the nine months ended
February 29, 2004, the Company sold an additional 14 telecommunications towers
to AAT for proceeds of approximately $2,553. Under the terms of the agreement,
the Company leased back space on the telecommunications towers from AAT. 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
8
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). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
No. 150 did not have a material impact on the Company's consolidated results of
operations, consolidated financial position or consolidated cash flows.
Additionally, 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. 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 initial recognition and
initial measurement provisions 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 (FIN 46R)to clarify some of the provisions of FIN 46 and to
exempt certain
9
entities from its requirements. Under the new guidance, application of FIN 46R
is required in financial statements of public entities 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 46R will be effective
for the Company as of May 31, 2004. The Company has evaluated the effect of the
adoption of FIN 46R, and does not believe it will have a material effect on its
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 EITF No. 00-21
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 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 non-cancelable
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
space on the same telecommunications towers. As a result of provisions in the
sale and
10
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 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 of equipment and services under the agreement.
As of February 29, 2004, the Company has paid $4,575 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
two 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 December 2004 and February 2005.
As of February 29, 2004, 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 purchased approximately $189,000 principal amount of the
Senior Subordinated Notes. On September 24, 2002, the Company entered into an
indemnification agreement with the Welsh Carson affiliate pursuant to which the
Welsh Carson affiliate agreed to indemnify the Company in respect of taxes which
may become payable by the Company as a result of these purchases. In connection
with these transactions, the Company recorded a $15,925 income tax payable
included in accrued expenses and other current liabilities, and a corresponding
amount due from the Welsh Carson affiliate that is included in prepaid expenses
and other current assets. (See Note 3. - Debt)
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 determined 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 loss
before interest, taxes, depreciation, amortization, loss (gain) on disposition
of assets, minority interest in (income) loss of subsidiaries, income from
equity investments, loss on impairment of assets, other income (expense) and
special non-cash charge.
See Note 5 for a discussion of the sale of the Company's Jamaican
wireless operation and its Jamaican Internet service provider operation.
Information about the Company's operations in its three business
segments as of February 29, 2004 and May 31, 2003, and for the three and nine
months ended February 29, 2004 and February 28, 2003 is as follows:
11
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
-------------- ------------- -------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
----------- -----------
U.S. WIRELESS
Service revenue $ 73,542 $ 63,010 $ 218,288 $ 192,209
Roaming revenue 11,194 16,632 40,941 60,764
Equipment sales 5,584 5,071 15,503 11,096
-------------- ------------- -------------- -------------
Total revenues 90,320 84,713 274,732 264,069
Adjusted operating income 37,199 34,338 112,133 119,007
Total assets 1,827,475 1,903,270 1,827,475 1,903,270
Capital expenditures 14,393 7,576 38,846 25,762
CARIBBEAN WIRELESS
Service revenue $ 74,870 $ 61,392 $ 218,217 $ 182,767
Roaming revenue 276 835 2,480 1,601
Equipment sales 2,853 2,851 7,817 7,982
-------------- ------------- -------------- -------------
Total revenues 77,999 65,078 228,514 192,350
Adjusted operating income 29,018 24,054 91,611 67,910
Total assets 642,302 399,559 642,302 399,559
Capital expenditures 18,053 11,038 44,140 36,473
CARIBBEAN BROADBAND
Switched revenue $ 9,524 $ 8,304 $ 27,831 $ 24,545
Dedicated revenue 11,945 10,228 35,825 28,598
Cable television revenue 12,319 11,443 36,540 36,138
Other revenue 8,135 4,793 19,897 15,995
-------------- ------------- -------------- -------------
Total revenues 41,923 34,768 120,093 105,276
Adjusted operating income 15,035 9,659 40,592 27,728
Total assets 799,177 754,404 799,177 754,404
Capital expenditures 5,143 6,473 16,434 30,370
Eliminations
Total revenues (1) $ (2,850) $ (2,529) $ (9,540) $ (7,052)
Total assets (2) (1,757,008) (1,614,019) (1,757,008) (1,614,019)
CONSOLIDATED
Total revenues $ 207,392 $ 182,030 $ 613,799 $ 554,643
Adjusted operating income 81,252 68,051 244,336 214,645
Total assets 1,511,946 1,443,214 1,511,946 1,443,214
Capital expenditures 37,589 25,087 99,420 92,605
(1) Elimination of intercompany revenue, primarily from Caribbean broadband to
Caribbean wireless.
(2) Elimination of intercompany investments.
12
Reconciliation of Adjusted operating income to Net loss:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
------------ ------------ ------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
----------- -----------
Adjusted operating income........................... $ 81,252 $ 68,051 $ 244,336 $ 214,645
Less: depreciation and amortization................. (34,640) (35,855) (104,702) (106,982)
Special non-cash charge............................. - - - (5,000)
Loss on impairment.................................. - (189,492) - (189,492)
(Loss) gain on disposition of assets................ (249) 464 (211) 2,357
----------- ------------ ------------ ------------
Operating income (loss)............................. 46,363 (156,832) 139,423 (84,472)
Income from equity investments...................... 24 33 52 166
Interest expense, net............................... (41,742) (36,331) (125,367) (111,598)
Loss on extinguishment of debt...................... (28,625) - (36,160) -
Other income (expense).............................. 232 (771) (369) (877)
Income tax (expense) benefit........................ (6,459) 34,324 (13,778) 23,318
Minority interest in (income) loss of subsidiaries.. (126) - (408) 171
----------- ------------ ------------ ------------
Net loss............................................ $ (30,333) $ (159,577) $ (36,607) $ (173,292)
=========== ============ ============ ============
13
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 of both the Senior
Subordinated Notes and the 2013 Senior Notes issued by the Company, and CPROC
has fully and unconditionally guaranteed both the Senior Subordinated Notes and
the 2013 Senior Notes. The Company, CCOC and CPROC are joint and several
co-issuers of the 2014 Senior Notes. Separate financial statements and other
disclosures concerning CCOC and CPROC are not presented because they are not
material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF FEBRUARY 29, 2004
(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 $ 20,941 $ - $ 70,001 $ - $ - $ 90,942
Accounts receivable, net 39,086 - 44,518 - (936) 82,668
Inventory - phones and
accessories, net 4,718 - 11,844 - - 16,562
Prepaid expenses and other
current assets 4,353 - 28,739 - - 33,092
---------------- ----------------- -------------- -------------- ------------ -------------
Total current assets 69,098 - 155,102 - (936) 223,264
Property, plant & equipment, net 282,891 - 405,705 - - 688,596
Equity investments, net - - 2,606 - - 2,606
Debt issuance costs, net 24,522 - 33,210 - - 57,732
U.S. wireless licenses - - 371,766 - - 371,766
Caribbean wireless licenses, net - - 70,742 - - 70,742
Cable franchise costs - - 52,139 - - 52,139
Goodwill 4,186 - 22,518 - - 26,704
Intercompany 137,383 1,410,864 1,228,067 629,423 (3,405,737) -
Investment in subsidiaries - (327,052) 762,431 (924,118) 488,739 -
Other assets, net 4,967 - 33,103 - (19,673) 18,397
---------------- ----------------- -------------- -------------- ------------ -------------
Total $ 523,047 $ 1,083,812 $ 3,137,389 $ (294,695) $ (2,937,607) $ 1,511,946
================ ================= ============== ============== ============ =============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Current portion of
long-term debt $ 3,316 $ 2,750 $ 36,770 $ - $ - $ 42,836
Accounts payable 15,190 - 9,629 - - 24,819
Accrued expenses and other
current liabilities 44,484 - 168,072 - (20,607) 191,949
Payable to affiliates - - 125 - - 125
---------------- ----------------- -------------- -------------- ------------ -------------
Total current liabilities 62,990 2,750 214,596 - (20,607) 259,729
Long-term debt 817,123 935,881 - - - 1,753,004
Deferred income taxes - - 65,980 - - 65,980
Other liabilities - - 7,755 - - 7,755
Intercompany 620,011 920,500 2,373,904 281,378 (4,195,793) -
Minority interest in subsidiaries - - 567 - - 567
Stockholders' (deficit) equity:
Common stock - - 1,123 48 (140) 1,031
Additional paid-in capital (824,709) - 1,339,478 472,952 (514,769) 472,952
Accumulated deficit (152,368) (775,319) (866,014) (1,047,996) 1,793,702 (1,047,995)
Accumulated other
comprehensive loss - - - - - -
---------------- ----------------- -------------- -------------- ------------ -------------
(977,077) (775,319) 474,587 (574,996) 1,278,793 (574,012)
Less: treasury shares - - - (1,077) - (1,077)
---------------- ----------------- -------------- -------------- ------------ -------------
Total stockholders'
(deficit) equity (977,077) (775,319) 474,587 (576,073) 1,278,793 (575,089)
---------------- ----------------- -------------- -------------- ------------ -------------
Total $ 523,047 $ 1,083,812 $ 3,137,389 $ (294,695) $ (2,937,607) $ 1,511,946
================ ================= ============== ============== ============ =============
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2004
(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 $ 255,492 $ - $ 367,354 $ - $ (9,047) $ 613,799
---------------- ----------------- ------------- -------------- ------------ --------------
Costs and expenses:
Cost of services 37,954 - 89,614 - (4,830) 122,738
Cost of equipment sold 20,048 - 45,664 - - 65,712
Sales and marketing 25,914 - 43,561 - - 69,475
General and administrative 51,403 - 64,352 - (4,217) 111,538
Depreciation and amortization 44,148 - 60,554 - - 104,702
Loss on disposition of
assets 53 - 158 - - 211
---------------- ----------------- ------------- -------------- ------------ --------------
179,520 - 303,903 - (9,047) 474,376
---------------- ----------------- ------------- -------------- ------------ --------------
Operating income 75,972 - 63,451 - - 139,423
---------------- ----------------- ------------- -------------- ------------ --------------
Income from equity investments - - 52 - - 52
(Loss) income from investments
in Subsidiaries - 13,266 6,133 13,266 (32,665) -
Interest (expense) income, net (69,540) (75,494) 69,540 (49,873) - (125,367)
Loss on extinguishment of debt - (36,159) (1) - - (36,160)
Other expenses - - (369) - - (369)
Intercompany interest allocation - 111,653 (111,653) - - -
---------------- ----------------- ------------- -------------- ------------ --------------
Income (loss) before income tax
expense and minority interest 6,432 13,266 27,153 (36,607) (32,665) (22,421)
Income tax expense (299) - (13,479) - - (13,778)
---------------- ----------------- ------------- -------------- ------------ --------------
Income (loss) before minority
Interest 6,133 13,266 13,674 (36,607) (32,665) (36,199)
Minority interest in income - - (408) - - (408)
---------------- ----------------- ------------- -------------- ------------ --------------
Net income (loss) $ 6,133 $ 13,266 $ 13,266 $ (36,607) $ (32,665) $ (36,607)
================ ================= ============= ============== ============ ==============
15
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2004
(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) $ 6,133 $ 13,266 $ 13,266 $ (36,607) $ (32,665) $ (36,607)
---------------- ----------------- -------------- -------------- ------------ --------------
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities:
Depreciation and amortization 44,148 - 60,554 - - 104,702
Noncash paid in kind interest - - - 13,997 - 13,997
Minority interest in loss of
subsidiaries - - 408 - - 408
Income from equity
investments - - (52) - - (52)
Equity in undistributed
earnings of subsidiaries - (13,266) (6,133) (13,266) 32,665 -
Gain on disposition of assets 53 - 158 - 211
Changes in assets and
liabilities, net of effects
of acquisitions and
dispositions and other (93,488) (1,875) 155,904 5,945 (49,196) 17,290
---------------- ----------------- -------------- -------------- ------------ --------------
Total adjustments (49,287) (15,141) 210,839 6,676 (16,531) 136,556
---------------- ----------------- -------------- -------------- ------------ --------------
NET CASH (USED IN)
PROVIDED BY
OPERATING ACTIVITIES (43,154) (1,875) 224,105 (29,931) (49,196) 99,949
---------------- ----------------- -------------- -------------- ------------ --------------
INVESTING ACTIVITIES:
Proceeds from disposition
of assets, net of cash
expenses - - 2,442 - - 2,442
Capital expenditures (53,673) - (45,747) - - (99,420)
Distributions received from
equity investments - - 14 - - 14
---------------- ----------------- -------------- -------------- ------------ --------------
NET CASH USED IN
INVESTING ACTIVITIES (53,673) - (43,291) - - (96,964)
---------------- ----------------- -------------- -------------- ------------ --------------
FINANCING ACTIVITIES:
Proceeds from the issuance
of long-term debt 817,131 154,412 608,731 - (155,274) 1,425,000
Repayment of debt (682,201) (54,125) (610,883) (202,794) 155,274 (1,394,729)
Debt issuance costs paid - - (48,064) - - (48,064)
Net proceeds from issuance
of common stock - - - 34,663 - 34,663
Proceeds from the exercise
of employee stock options - - - 1,005 - 1,005
Proceeds from issuance of
common stock under employee
stock purchase plan - - - 390 - 390
Cash (paid to) received from
affiliates 148,642 (151,578) 183,254 232,673 (412,991) -
Cash advances from parent
(to subsidiaries) (202,112) 53,166 (277,235) (36,006) 462,187 -
---------------- ----------------- -------------- -------------- ------------ --------------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES 81,460 1,875 (144,197) 29,931 49,196 18,265
---------------- ----------------- -------------- -------------- ------------ --------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (15,367) - 36,617 - - 21,250
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 36,308 - 33,384 - - 69,692
---------------- ----------------- -------------- -------------- ------------ --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 20,941 $ - $ 70,001 $ - $ - $ 90,942
================ ================= ============== ============== ============ ==============
16
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 - (346,778) 732,008 (918,785) 533,555 -
Other assets, net 5,119 - 20,516 - - 25,635
---------------- ----------------- -------------- -------------- ------------ --------------
Total $ 362,107 $ 964,279 $ 2,811,172 $ (324,386) $ (2,366,324) $ 1,446,848
================ ================= ============== ============== ============ ==============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
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
---------------- ----------------- -------------- -------------- ------------ --------------
Total Liabilities 743,906 1,766,758 2,164,956 250,104 (2,899,790) 2,025,934
---------------- ----------------- -------------- -------------- ------------ --------------
Mandatorily redeemable preferred
stock 585,900 - 177,120 - (763,020) -
---------------- ----------------- -------------- -------------- ------------ --------------
Stockholders' (deficit) equity:
Common stock - - 237 958 (237) 958
Additional paid-in capital (818,498) - 1,329,543 437,018 (511,044) 437,019
Accumulated deficit (149,201) (797,885) (860,680) (1,011,389) 1,807,767 (1,011,388)
Accumulated other
comprehensive loss - (4,594) - - - (4,594)
---------------- ----------------- -------------- -------------- ------------ --------------
(967,699) (802,479) 469,100 (573,413) 1,296,486 (578,005)
Less: treasury shares - - - (1,077) - (1,077)
Deferred compensation - - (4) - - (4)
---------------- ----------------- -------------- -------------- ------------ --------------
Total stockholders' (deficit)
equity (967,699) (802,479) 469,096 (574,490) 1,296,486 (579,086)
---------------- ----------------- -------------- -------------- ------------ --------------
Total $ 362,107 $ 964,279 $ 2,811,172 $ (324,386) $ (2,366,324) $ 1,446,848
================ ================= ============== ============== ============ ==============
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE NINE MONTHS ENDED FEBRUARY 28, 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 $ 214,773 $ - $ 345,391 $ - $ (5,521) $ 554,643
---------------- ----------------- -------------- -------------- ------------ --------------
Costs and expenses:
Cost of services 35,451 - 83,699 - (2,225) 116,925
Cost of equipment sold 17,400 - 34,773 - - 52,173
Sales and marketing 26,652 - 44,830 - - 71,482
General and administrative 47,621 - 60,093 - (3,296) 104,418
Depreciation and
amortization 46,863 - 60,119 - - 106,982
Loss on impairment
of assets - - 189,492 - - 189,492
Loss (gain) on disposition
of assets 476 - (2,833) - - (2,357)
---------------- ----------------- -------------- -------------- ------------ --------------
174,463 - 470,173 - (5,521) 639,115
---------------- ----------------- -------------- -------------- ------------ --------------
Operating income 40,310 - (124,782) - - (84,472)
---------------- ----------------- -------------- -------------- ------------ --------------
Income from equity investments - - 166 - - 166
(Loss) income from investments
in subsidiaries - (152,296) 11,808 (152,296) 292,784 -
Interest expense, net (28,438) (61,066) (1,098) (20,996) - (111,598)
Other expenses - - (877) - - (877)
Intercompany interest allocation - 61,066 (61,066) - - -
---------------- ----------------- -------------- -------------- ------------ --------------
Income (loss) before income tax
expense and minority interest 11,872 (152,296) (175,849) (173,292) 292,784 (196,781)
Income tax (expense) benefit (64) - 23,382 - - 23,318
---------------- ----------------- -------------- -------------- ------------ --------------
Income (loss) before minority
interest 11,808 (152,296) (152,467) (173,292) 292,784 (173,463)
Minority interest in loss of
subsidiaries - - 171 - - 171
---------------- ----------------- -------------- -------------- ------------ --------------
Net income (loss) $ 11,808 $ (152,296) $ (152,296) $ (173,292) $ 292,784 $ (173,292)
================ ================= ============== ============== ============ ==============
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2003
(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) $ 11,808 $(152,296) $(152,296) $(173,292) $ 292,784 $(173,292)
--------- --------- --------- --------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 46,863 - 60,119 - - 106,982
Non cash, paid-in kind interest - - - - - -
Minority interest in loss of
subsidiaries - - (171) - - (171)
Deferred taxes - - (33,569) - - (33,569)
Income from equity investments - - (166) - - (166)
Equity in undistributed earnings
of subsidiaries - 152,296 (11,808) 152,296 (292,784) -
Loss (gain) on disposition of
assets 476 - (2,833) - - (2,357)
Loss on impairment of assets - - 189,492 - - 189,492
Changes in assets and liabilities,
net of effects of acquisitions
and dispositions and other 22,020 - 5,492 21,240 - 48,752
--------- --------- --------- --------- --------- ---------
Total adjustments 69,359 152,296 206,556 173,536 (292,784) 308,963
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 81,167 - 54,260 244 - 135,671
--------- --------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition of assets,
net of cash expenses - - 18,300 - - 18,300
Capital expenditures (47,807) - (44,798) - - (92,605)
Distribution received from equity
investments - - 1,004 - - 1,004
--------- --------- --------- --------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (47,807) - (25,494) - - (73,301)
--------- --------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of
long-term debt 335 20,000 6,839 - - 27,174
Repayment of debt (15,498) (48,438) (2,720) - - (66,656)
Proceeds from issuance of common
stock under employee stock
Purchase plan - - - 483 - 483
Cash (paid to) received from
Affiliates (10,832) 28,438 (16,879) (727) - -
--------- --------- --------- --------- --------- ---------
NET CASH USED IN
FINANCING ACTIVITIES (25,995) - (12,760) (244) - (38,999)
--------- --------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 7,365 - 16,006 - - 23,371
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 13,539 - 20,332 - 33,871
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 20,904 $ - $ 36,338 $ - $ - $ 57,242
========= ========= ========= ========= ========= =========
19
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 consolidated 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.
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 do 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
20
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 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. We
recognize revenue from cable television installation fees to the extent of
direct selling costs in the period the installation is provided to the customer.
Revenue from prepaid long distance cards is recognized as the customer uses the
minutes on the cards. Revenue from other services is recognized when earned.
Revenue from equipment sales is recognized in the period these products are sold
to the customer.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses,
which result from our customers not making required payments. We base our
allowance on the likelihood of recoverability of our subscriber accounts
receivable based on past experience and by reviewing current collection trends.
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 may 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. At times our portfolio of derivative financial
instruments has consisted of interest rate swap and collar agreements. We use
interest rate swap agreements to modify variable rate obligations to fixed rate
obligations, thereby reducing our exposure to higher interest rates. We use
interest rate collar agreements to lock in a maximum interest rate if interest
rates rise, but allow us to otherwise pay lower market rates, subject to a
floor. Amounts paid or received under interest rate swap agreements are accrued
as interest rates change with the offset recorded in interest expense.
The interest rate swaps and collars that we have used have qualified
for hedge accounting. As such, the fair value of the swaps and collars was
recorded as a liability and as a component of other comprehensive loss (net of
tax). The ineffectiveness of the collar is
21
recorded in the consolidated statement of operations as a component of interest
expense. As a result of the Debt Refinancing described in Liquidity and Capital
Resources, as of February 29, 2004, we have terminated all of our derivative
financial instruments.
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.
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.
RESULTS OF OPERATIONS
We had 1,027,500 wireless subscribers at February 29, 2004, as compared
to 929,700 at February 28, 2003, an increase of 11%. The net loss for the three
and nine months ended February 29, 2004 was $30.3 million and $36.6 million,
respectively, as compared to a net loss of $159.6 million and $173.3 million for
the three and nine months ended February 28, 2003, respectively. Basic and
diluted loss per share for the three and nine months ended February 29, 2004 was
$0.29 and $0.37, respectively, as compared to basic and diluted loss per share
of $1.67 and $1.81 for the three and nine months ended February 28, 2003,
respectively.
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 nine months ended February 29, 2004 based on our projected
annual worldwide effective tax rate of 61%. Our projected annual worldwide
effective tax rate of 61% is impacted by the following variables:
1. 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;
2. state taxes net of federal tax benefit;
3. interest expense related to our Mezzanine Debt that is not
deductible for U.S. income tax purposes; and
4. foreign taxes for which we cannot claim a foreign tax credit.
Consolidated Operations
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2004 2003 2004 2003
(IN THOUSANDS, EXCEPT PER ------------ ------------ ------------ ------------
SHARE AMOUNTS) (UNAUDITED) % CHANGE (UNAUDITED) % CHANGE
- --------------------------- -------------------------- -------- -------------------------- --------
Operating income (loss) $ 46,363 $(156,832) 130% $ 139,423 $ (84,472) 265%
Net loss $ (30,333) $(159,577) 81 $ (36,607) $(173,292) 79
Loss per share:
Basic and diluted $ (0.29) $ (1.67) 83 $ (0.37) $ (1.81) 80
22
U.S. Wireless Operations
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(IN THOUSANDS) (UNAUDITED) % CHANGE (UNAUDITED) % CHANGE
- --------------------------- -------------------------- -------- -------------------------- --------
Revenues:
Service revenue $ 73,542 $ 63,010 17% $ 218,288 $ 192,209 14%
Roaming revenue 11,194 16,632 (33) 40,941 60,764 (33)
Equipment sales 5,584 5,071 10 15,503 11,096 40
--------- --------- --- --------- --------- ---
Total revenues 90,320 84,713 7 274,732 264,069 4
--------- --------- --- --------- --------- ---
Costs and expenses:
Cost of services 15,768 13,829 14 49,348 46,278 7
Cost of equipment sold 10,150 12,463 (19) 35,274 25,884 36
Sales and marketing 11,608 11,823 (2) 35,083 34,712 1
General and administrative 15,595 12,260 27 42,894 38,188 12
--------- --------- --- --------- --------- ---
Total costs and expenses 53,121 50,375 5 162,599 145,062 12
--------- --------- --- --------- --------- ---
Adjusted operating
income(1) 37,199 34,338 8 112,133 119,007 (6)
(Gain) loss on disposition of
assets (62) 105 * 37 102 *
Depreciation and amortization 9,138 9,246 (1) 27,283 27,884 (2)
--------- --------- --- --------- --------- ---
Operating income $ 28,123 $ 24,987 13% $ 84,813 $ 91,021 (7)%
========= ========= === ========= ========= ===
* Percentage change not meaningful.
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 8 to the condensed consolidated financial statements.
Revenues. U.S. wireless service revenue increased $10.5 million, or
17%, and $26.1 million, or 14%, to $73.5 million and $218.3 million for the
three and nine months ended February 29, 2004, respectively, as compared to the
same periods last year. The increase was due to growth in service revenue per
subscriber of $8.7 million and $21.1 million for the three and nine months ended
February 29, 2004, respectively, and to revenue from new subscribers of $1.8
million and $5.0 million during the same periods.
U.S. wireless roaming revenue decreased $5.4 million, or 33%, and $19.8
million, or 33%, from roaming revenues of $16.6 million and $60.8 million for
the three and nine months ended February 28, 2003, respectively. The decrease
was primarily the result of lower average roaming rates per minute resulting in
a decrease of $5.1 million and $28.3 million for the three and nine months ended
February 29, 2004. The decrease due to lower average roaming rates per minute in
the nine months ended February 29, 2004, was partially offset by an increase in
roaming usage resulting in an increase of $8.5 million as compared to the nine
months ended February 28, 2003. We expect roaming revenue to continue to
decline.
Equipment sales increased $0.5 million, or 10%, and $4.4 million, or
40%, during the three and nine months ended February 29, 2004, respectively, as
compared to the three and nine months ended February 28, 2003. The increase in
the three months ended February 29, 2004 was due to the reclassification of
service activation fees as equipment revenue, as a result of its application of
EITF 00-21, partially offset by decreased activations. The increase in the nine
months ended February 29, 2004 was due to a change in the mix of phones sold,
increased exchanges and upgrades and to increased activations.
Our U.S. wireless operations had approximately 552,900 and 538,900
subscribers at February 29, 2004 and February 28, 2003, respectively. During the
twelve months ended February 29, 2004, increases from new activations of 166,100
were offset by subscriber cancellations of 152,100. The monthly postpaid churn
rate was 2.1% and 2.0% for the three and nine months ended February 29, 2004,
respectively, as compared to 2.2% and 2.0% for 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.
Wireless local number portability ("WLNP") regulations which require wireless
carriers to permit the phone numbers that they assign to their customers to be
portable when the customer switches to another wireless carrier took effect on
November 24, 2003, in 100 designated markets, including our Fort Wayne, Indiana
market and will take effect in all our other markets on May 24, 2004. As of
February 29, 2004, WLNP applied to approximately 8% of our U.S. wireless Net
Pops and on May 24, 2004, WLNP will apply to 100% of our U.S. wireless Net Pops.
As of February 29, 2004 WLNP has not had a material effect on our U.S. Wireless
operations, however after May 24, 2004, it could have a material effect on our
ability to manage subscriber retention and cancellations. Our postpaid
subscribers represented approximately 96% of our total U.S. wireless subscribers
at both February 29, 2004 and February 28, 2003.
U.S. wireless revenue per subscriber per month ("ARPU") was $54 and $56
for the three and nine months ended February 29, 2004, respectively, as compared
to $53 and $55 for the same periods a year ago. ARPU increased slightly during
the three and nine
23
months ended February 29, 2004 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 which have higher access fees than the non-nationwide plans.
Average minutes of use per subscriber were 291 and 293 per month for the three
and nine months ended February 29, 2004, respectively, as compared to 251 and
248 for the same period last year.
Costs and expenses. Cost of services increased $2.0 million, or 14%,
and $3.0 million, or 7%, during the three and nine months ended February 29,
2004, respectively, as compared to the three and nine months ended February 28,
2003, primarily due to an increase in variable costs associated with a larger
subscription base, most notably telephone service costs and mobile long distance
expenses. This was partially offset by reduced roamer service cost due to lower
roaming rates under our roaming agreements in the nine months ended February 29,
2004.
Cost of equipment sold decreased $2.3 million, or 19%, and increased
$9.4 million, or 36%, for the three and nine months ended February 29, 2004,
respectively, as compared to the same periods last year. The decrease in the
three months ended February 29, 2004 was due to a decline in both activations
and average cost per phone. The use of refurbished phones contributed to the
lower average cost per phone. The increase in the nine months ended February 29,
2004 was 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 WLNP.
Sales and marketing expenses decreased $0.2 million, or 2%, and
increased $0.4 million, or 1%, for the three and nine months ended February 29,
2004, respectively, as compared to the same periods in the prior year. The
decrease in the three months ended February 29, 2004 was due to decreased
commission expenses. The increase in the nine months ended February 29, 2004 was
due to increased commission expenses resulting from increased activations.
General and administrative expenses increased $3.3 million, or 27%, and
$4.7 million, or 12%, during the three and nine months ended February 29, 2004,
respectively, as compared to the three and nine months ended February 28, 2003,
primarily due to increased costs to support the expanding subscriber base, as
well as costs associated with our preparation for compliance with certain
sections of the Sarbanes-Oxley Act which is applicable to us beginning with our
fiscal year ending May 31, 2005.
Adjusted operating income for the U.S. wireless operations was $37.2
million and $112.1 million for the three and nine months ended February 29,
2004, respectively, an increase of $2.9 million, or 8%, and a decrease of $6.9
million, or 6%, as compared to the same periods in fiscal year 2003.
Depreciation and amortization was $9.1 million and $27.3 million for
the three and nine months ended February 29, 2004, respectively, a decrease of
$0.1 million, or 1%, and $0.6 million, or 2%, from the same periods in fiscal
year 2003. The decrease was primarily due to a decline in depreciation expense
that resulted from our change in estimate regarding the useful lives of our
telecommunications towers from 10 years to 30 years in the fourth quarter of
fiscal year 2003. This decrease was partially offset by increased depreciation
related to capital expenditures made during fiscal year 2003 and fiscal year
2004.
Operating income was $28.1 million and $84.8 million for the three and
nine months ended February 29, 2004, respectively, an increase of $3.1 million
and a decrease of $6.2 million, respectively, from operating income of $25.0
million and $91.0 million for the same periods in fiscal year 2003.
24
Caribbean Wireless Operations
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2004 2003 2004 2003
-------- -------- ---------- ----------
(IN THOUSANDS) (UNAUDITED) % CHANGE (UNAUDITED) % CHANGE
- ----------------------------- ------------------------ -------- ------------------------- --------
Revenues:
Service revenue $ 74,870 $ 61,392 22% $ 218,217 $ 182,767 19%
Roaming revenue 276 835 (67) 2,480 1,601 55
Equipment sales 2,853 2,851 * 7,817 7,982 (2)
-------- -------- -------- --------- --------- --------
Total revenues 77,999 65,078 20 228,514 192,350 19
-------- -------- -------- --------- --------- --------
Costs and expenses:
Cost of services 11,190 10,579 6 33,748 31,743 6
Cost of equipment sold 11,752 8,751 34 30,101 25,694 17
Sales and marketing 9,229 9,814 (6) 27,632 29,623 (7)
General and administrative 16,810 11,880 42 45,422 37,380 22
-------- -------- -------- --------- --------- --------
Total costs and expenses 48,981 41,024 19 136,903 124,440 10
-------- -------- -------- --------- --------- --------
Adjusted operating income(1) 29,018 24,054 21 91,611 67,910 35
(Gain) loss on disposition of
assets - (179) N/A 53 (2,057) 103
Special non-cash charge - - N/A - 4,389 N/A
Depreciation and
amortization 13,027 13,769 (5) 39,380 43,444 (9)
-------- -------- -------- --------- --------- --------
Operating income $ 15,991 $ 10,464 53% $ 52,178 $ 22,134 136%
======== ======== ======== ========= ========= ========
* Percentage change not meaningful
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 8 to the condensed consolidated financial
statements.
Revenues. Caribbean wireless service revenue increased $13.5 million,
or 22%, and $35.4 million or, 19%, to $74.9 million and $218.2 million for the
three and nine months ended February 29, 2004, respectively, as compared to the
three and nine months ended February 28, 2003. The increase in Caribbean
wireless service revenue was primarily due to growth in revenue from new
subscribers of $11.4 million and $31.3 million for the three and nine months
ended February 29, 2004, respectively, as well as an increase of $2.1 million
and $4.1 million in service revenue per subscriber for the same periods.
Revenue from Caribbean wireless roaming decreased $0.5 million, or 67%,
and increased $0.9 million, or 55%, for the three and nine months ended February
29, 2004, respectively, from roaming revenue of $0.8 million and $1.6 million
for the three and nine months ended February 28, 2003. The increase for the nine
months ended February 29, 2004 was a result of increased roaming from a
competitor's subscribers on our CDMA network. The decrease for the three months
ended February 29, 2004 resulted from a decrease in roaming on our CDMA network
due to the further build out of the competitors' CDMA network.
Our Caribbean wireless operations had approximately 474,600 subscribers
at February 29, 2004, an increase of 21% from the 390,800 subscribers at
February 28, 2003. During the twelve months ended February 29, 2004, increases
from new activations of 251,400 were offset by subscriber cancellations of
167,600. 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 increased to 2.8% and decreased to 2.4%
for three and nine months ended February 29, 2004, respectively, from 2.4% and
2.8% for the same periods a year ago. The increase in the three months ended
February 29, 2004 is due to the effect of WLNP in our Puerto Rico operations and
to competitive pressures. The decrease for the nine months ended February 29,
2004 was due to a reduction in non-paid churn. Non-paid churn results when
customers are involuntarily terminated due to non-payment of services. Our
postpaid subscribers represented approximately 74% of our total Caribbean
wireless subscribers at February 29, 2004, up from approximately 72% at February
28, 2003. We continue to focus on attracting postpaid customers.
Caribbean wireless ARPU was $56 and $58 for the three and nine months
ended February 29, 2004, respectively, as compared to $57 and $58 for the three
and nine months ended February 28, 2003, respectively. Our wireless customers
used an average of 897 minutes of airtime per month for the three months ended
February 29, 2004, as compared to 741 minutes of use per month during the three
months ended February 28, 2003. Our postpaid customers used an average of 1,163
minutes of airtime per month for the three months ended February 29, 2004, as
compared to 981 minutes of use per month during the three months ended February
28, 2003.
25
Costs and expenses. Cost of services increased $0.6 million, or 6%, and
$2.0 million, or 6%, during the three and nine months ended February 29, 2004,
respectively, as compared to the three and nine months ended February 28, 2003.
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 $3.0 million, or 34%, and $4.4
million, or 17%, during the three and nine months ended February 29, 2004,
respectively, as compared to the same period last year, due primarily to an
increase in phones used for customer retention and to an increase in the
percentage of phones sold to customers (which is reflected in cost of equipment
sold) versus phones loaned to customers (which is not reflected in cost of
equipment sold.)
Sales and marketing expenses decreased $0.6 million, or 6%, and $2.0
million, or 7%, during the three and nine months ended February 29, 2004,
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 in addition to
traditional sales and marketing. We also had reduced sales and marketing expense
due to the sale of our interest in CDJ in August 2002.
General and administrative expenses increased $4.9 million, or 42%, and
$8.0 million, or 22%, during the three and nine months ended February 29, 2004,
respectively, as compared to the same period in fiscal year 2003. The increase
was primarily due to increased costs to support the expanding subscriber base,
including an increase in subscriber billing costs as a result of the 24% growth
of postpaid subscribers, as well as the increase in the amount of store rent
expense allocated to general and administrative expenses, to better reflect the
fact that stores are being used increasingly more for customer service and
customer retention activities. Additionally, we incurred increased expenses as a
result of implementing WLNP.
Adjusted operating income for the Caribbean wireless operations for the
three and nine months ended February 29, 2004 was $29.0 million and $91.6
million, respectively, an increase of $4.9 million, or 21%, and $23.7 million,
or 35%, respectively, as compared to the three and nine months ended February
28, 2003.
The gain on disposition of assets during the nine months ended February
28, 2003 was due to the sale of our interest in CDJ in August 2002.
Depreciation and amortization for the three and nine months ended
February 29, 2004 was $13.0 million and $39.4 million, respectively, a decrease
of $0.8 million, or 5%, and $4.0 million, or 9%, respectively, as compared to
the three and nine months ended February 28, 2003. 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 nine months ended February 29, 2004 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 nine months ended February 29, 2004
was $16.0 million and $52.2 million, respectively, an increase of $5.5 million
and $30.0 million from the operating income of $10.5 million and $22.1 million,
respectively, from the same period last year.
26
Caribbean Broadband Operations
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2004 2003 2004 2003
--------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED) % CHANGE (UNAUDITED) % CHANGE
- ----------------------------- ------------------------- ----------- ------------------------ ---------
Revenues:
Switched revenue $ 9,524 $ 8,304 15% $ 27,831 $ 24,545 13%
Dedicated revenue 11,945 10,228 17 35,825 28,598 25
Cable television revenue 12,319 11,443 8 36,540 36,138 1
Other revenue 8,135 4,793 70 19,897 15,995 24
--------- --------- ----------- --------- --------- ---------
Total revenues 41,923 34,768 21 120,093 105,276 14
--------- --------- ----------- --------- --------- ---------
Costs and expenses:
Cost of services 16,682 14,767 13 48,749 45,524 7
Cost of equipment sold 115 252 (54) 338 595 (43)
Sales and marketing 2,333 2,390 (2) 6,760 7,148 (5)
General and administrative 7,758 7,698 1 23,654 24,281 (3)
--------- --------- ----------- --------- --------- ---------
Total costs and expenses 26,888 25,107 7 79,501 77,548 3
--------- --------- ----------- --------- --------- ---------
Adjusted operating income(1) 15,035 9,659 56 40,592 27,728 46
Loss on impairment of assets - 189,492 N/A - 189,492 N/A
Loss (gain) on disposition of
assets 311 (391) * 121 (401) *
Special non-cash charge - - N/A - 611 N/A
Depreciation and amortization 12,475 12,841 (3) 38,039 35,654 7
--------- --------- ----------- --------- --------- ---------
Operating income (loss) $ 2,249 $(192,283) 101% $ 2,432 $(197,628) 101%
========= ========= =========== ========= ========= =========
* Percentage change not meaningful
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 8 to the condensed consolidated financial
statements.
Revenues. Caribbean broadband revenue increased $7.1 million, or 21%,
and $14.8 million, or 14%, to $41.9 million and $120.1 million for the three and
nine months ended February 29, 2004, respectively, as compared to the three and
nine months ended February 28, 2003.
Switched revenue increased $1.2 million, or 15%, and $3.3 million, or
13%, to $9.5 million and $27.8 million for the three and nine months ended
February 29, 2004, respectively, as compared to the same periods last year. The
increase was primarily due to a 21% increase in switched access lines to 48,114
as of the end of the third quarter of fiscal year 2004 and a corresponding
growth in aggregate minutes of use.
Dedicated revenue increased $1.7 million, or 17%, and $7.2 million, or
25%, to $11.9 million and $35.8 million for the three and nine months ended
February 29, 2004, respectively, as compared to the same periods last year. The
increase was primarily the result of a 15% growth in voice grade equivalent (the
amount of capacity required to carry one telephone call) dedicated lines to
205,297 and an increase in revenue per circuit. This increase in number of
dedicated access line equivalents reflects a reduction of 32,000 dedicated
access line equivalents for the three months ended February 29, 2004 due to the
sale of an OC-48 in November 2003 that had been previously counted as a fully
active circuit. The correct number of dedicated access line equivalents as of
November 30, 2003 would have been 198,000.
Cable television revenue increased $0.9 million, or 8%, and $0.4
million, or 1%, for the three and nine months ended February 29, 2004,
respectively, as compared to the same periods last year despite a decline in
subscribers of 6.2%. This increase was due to an increase in subscriber ARPU
year over year. The increase in ARPU was the result of rate increases and the
sale of new services.
Other revenue increased $3.3 million, or 70%, and $3.9 million, or 24%,
to $8.1 million and $19.9 million for the three and nine months ended February
29, 2004, 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 $1.9 million, or 13%,
and $3.2 million, or 7%, during the three and nine months ended February 29,
2004, 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.
27
Sales and marketing expenses decreased $0.1 million, or 2%, and $0.3
million, or 5%, during the three and nine months ended February 29, 2004,
respectively, as compared to the three and nine months ended February 28, 2003.
The decrease was primarily due to an overall reduction in advertising spending
and reduced cable television commissions due to a decrease in advertising sales.
Adjusted operating income for the Caribbean broadband operations for
the three and nine months ended February 29, 2004 was $15.0 million and $40.6
million, respectively, an increase of $5.3 million, or 56%, and $12.9 million,
or 46%, respectively, as compared to the same periods last year.
Depreciation and amortization for the three and nine months ended
February 29, 2004 was $12.5 million and $38.0 million, respectively, a decrease
of $0.4 million, or 3%, and an increase of $2.4 million, or 7%, respectively,
from the same periods last year. The increase for the nine months ended February
29, 2004 was primarily due to increased depreciation expense associated with the
continued expansion of the Puerto Rico broadband operation.
Operating income for the three and nine months ended February 29, 2004
was $2.2 million and $2.4 million, respectively, an improvement of $194.5
million and $200.0 million, respectively, as compared to the operating loss of
$192.3 million and $197.6 million, respectively, for the same periods in fiscal
year 2003.
CONSOLIDATED
Other non-operating income and expenses. Net interest expense was $41.7
million and $125.4 million for the three and nine months ended February 29,
2004, respectively, an increase of $5.4 million, or 15%, and $13.8 million, or
12%, from the three and nine months ended February 28, 2003, respectively. Gross
interest expense was $41.9 million and $125.8 million for the three and nine
months ended February 29, 2004, respectively, as compared to $36.5 million and
$112.4 million for the same periods a year ago. The increase in interest expense
is primarily a result of an increase in debt issuance cost amortization expense,
somewhat offset by a lower weighted average interest rate. Total debt increased
$38.9 million from February 28, 2003 to February 29, 2004.
The weighted-average debt outstanding during the three months ended
February 29, 2004 was $1,731.6 million, a decrease of $34.4 million as compared
to the weighted-average debt outstanding of $1,766.0 million during the three
months ended February 28, 2003. The weighted-average debt outstanding during the
nine months ended February 29, 2004 was $1,743.4 million, a decrease of $34.6
million as compared to the weighted-average debt outstanding of $1,778.0 million
during the nine months ended February 28, 2003. Including the amortization of
debt issuance costs, our weighted-average interest rates were 9.7% and 9.6% for
the three and nine months ended February 29, 2004, respectively, as compared to
8.3% and 8.4% for the respective periods a year ago. Excluding the amortization
of debt issuance costs, the weighted-average interest rates were 9.2% and 9.1%
for the three and nine months ended February 29, 2004, respectively, as compared
to 7.8% and 8.0% for the same periods a year ago.
Loss before income tax expense and minority interest for the three and
nine months ended February 29, 2004 was $23.7 million and $22.4 million,
respectively, as compared to $193.9 million and $196.8 million for the three and
nine months ended February 28, 2003, respectively. Income tax (expense) benefit
was $(6.5) million and $(13.8) million for the three and nine months ended
February 29, 2004, respectively, as compared to $34.3 million and $23.3 million
for the same periods last year. Our worldwide effective income tax rate
fluctuates primarily as a result of foreign losses for which we do not realize a
tax benefit, permanent differences and foreign income taxes.
These factors resulted in a net loss of $30.3 million and $36.6 million
for the three and nine months ended February 29, 2004, respectively, as compared
to a net loss of $159.6 million and $173.3 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. Our proceeds (after
underwriting commissions, but before other expenses) of $36.8 million were used
to prepay a portion of our
28
Mezzanine Debt, which was then 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 Old Senior Secured Credit Facility to permit us to use the
proceeds of the equity offering (and certain subsequent equity offerings) to
prepay the Mezzanine Debt.
On February 9, 2004, we issued $325.0 million aggregate principal amount of
2014 Senior Notes in a private placement transaction. Concurrent with the
issuance of the 2014 Senior Notes, we entered into a $750.0 million New Senior
Secured Credit Facility. Centennial Communications Corp. and each of its direct
and indirect domestic subsidiaries are guarantors under the New Senior Secured
Credit Facility. Collectively, these two issuances are referred to as the Debt
Refinancing. We received $905.4 million (after underwriting commissions, but
before other expenses) in net proceeds from the Debt Refinancing and used, or
will use these funds, to make the following payments:
- $627.6 million to repay all principal amounts outstanding under the
Old Senior Secured Credit Facility, which extinguished the Old Senior
Secured Credit Facility;
- $197.3 million to repurchase all of our outstanding Mezzanine Debt,
which was accruing paid-in-kind interest at a rate of 13.0%;
- $73.8 million to repurchase and/or redeem $70.0 million aggregate
principal amount of our outstanding $370.0 million Senior Subordinated
Notes. As of February 29, 2004, we had repurchased $33.2 million of
such notes and issued a notice of redemption to redeem the additional
$36.8 million of such notes. We completed the redemption of the $36.8
million of Senior Subordinated Notes on March 12, 2004;
- $1.9 million to pay applicable breakage fees on the termination of our
interest rate swap and collar agreements; and
- $4.8 million to pay fees, expenses and accrued interest related to the
Debt Refinancing.
The New Senior Secured Credit Facility consists of a seven-year term loan
with an aggregate principal amount of $600.0 million which requires quarterly
amortization payments in an aggregate principal amount of $1.5 million in fiscal
year 2004, $6.0 million in each of the fiscal years ended 2005, 2006, 2007, 2008
and 2009, $4.5 million in fiscal year 2010 and the balance in two equal
installments of $282.0 million in August 2010 and February 2011. The New Senior
Secured Credit Facility also includes a six-year revolving credit facility,
maturing in February 2010, with an aggregate principal amount of up to $150.0
million, which had no amounts outstanding as of the close of the New Senior
Secured Credit Facility, but may be drawn upon at any time. In the event that
the remaining Senior Subordinated Notes are not refinanced by June 15, 2008, the
aggregate amount outstanding under the New Senior Secured Credit Facility will
then become immediately due and payable.
Under the terms of the New Senior Secured Credit Facility, term and
revolving loan borrowings will bear interest at the London Inter-Bank Offering
Rate ("LIBOR") (1.12% as of February 29, 2004) plus 2.75% and LIBOR plus 3.25%,
respectively. Our obligations under the New Senior Secured Credit Facility are
collateralized by liens on substantially all of our assets.
As a result of the Debt Refinancing, as of February 29, 2004, we terminated
all of our derivative financial instruments. Prior to the termination of the
derivatives, we recorded an increase of $2.7 million, net of tax, in accumulated
other comprehensive loss and also decreased our liabilities by $6.0 million due
to changes in fair value of the derivatives. Since the hedged forecasted
transactions related to the derivatives were terminated, we recorded a charge of
$1.9 million to other comprehensive loss, which is included in interest expense
in the consolidated statements of operations.
On June 20, 2003, we sold $500.0 million aggregate principal amount of our
2013 Senior Notes in a private placement transaction. On October 10, 2003, the
SEC declared our registration statement effective, which registered the 2013
Senior Notes under the Securities Act of 1933, as amended. CPROC is a guarantor
of the 2013 Senior Notes. We used the net proceeds from the 2013 Senior Notes
offering to make repayments of $470.0 million under the Senior Secured Credit
Facility.
We capitalized approximately $50.0 million of debt issuance costs,
including, $25.2 million and $22.9 million in connection with the issuance of
the 2013 Senior Notes and the Debt Refinancing, respectively, during the nine
months ended February 29, 2004. As a result of the extinguishment of the Old
Senior Secured Credit Facility and a portion of the Senior Subordinated Notes,
we wrote-off approximately $35.4 million, net of accumulated amortization of
$20.6 million in debt issuance costs, for the three months ended February 29,
2004 and $50.8 million, net of accumulated amortization of $28.4 million in debt
issuance costs, for the nine months ended February 29, 2004. We recorded a loss
on extinguishment of debt of $28.6 million and $36.2 million for the three and
nine months ended February 29, 2004,
29
respectively. This amount includes $13.8 million of other fees and expenses
related to the Debt Refinancing that were expensed when incurred as well as the
net debt issuance costs written off.
In December 1998, we issued $370.0 million of 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 connection with the Debt
Refinancing, we repurchased and or redeemed $70.0 million aggregate principal
amount of such notes. As of February 29, 2004, we have repurchased $33.2 million
of such notes and issued a notice of redemption to redeem the remaining $36.8
million of such notes. As of February 29, 2004, $336.8 million of Senior
Subordinated Notes were outstanding. We completed the redemption of the
remaining $36.8 million of Senior Subordinated Notes on March 12, 2004.
An affiliate of Welsh, Carson, Anderson and Stowe, our principal
stockholder, owned approximately $189.0 million principal amount of the Senior
Subordinated Notes. Approximately $34.9 million, or 49.8%, of the $70.0 million
of the Senior Subordinated Notes redeemed and repurchased were owned by the
affiliate of Welsh, Carson, Anderson and Stowe.
In 1999, we issued the Mezzanine Debt, which was held by an affiliate of
Welsh, Carson, Anderson and 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 was being amortized or accreted
over the term of the Mezzanine Debt. On November 10, 2003, proceeds of $36.8
million from our equity offering were used to prepay a portion of the Mezzanine
Debt. Proceeds of $197.3 million from the Debt Refinancing were used to
repurchase all of our remaining outstanding Mezzanine Debt, which was accruing
paid-in-kind interest at a rate of 13.0%. As of February 29, 2004, we had repaid
the Mezzanine Debt.
In January 2002, Centennial Puerto Rico Cable TV Corp. ("Centennial
Cable"), our wholly-owned subsidiary, entered into a $15.0 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 February 29, 2004,
Centennial Cable had repaid all amounts owed under the Cable TV Credit Facility
and terminated the facility.
For the nine months ended February 29, 2004, earnings were less than fixed
charges by $22.4 million. Fixed charges consist of interest expense, including
amortization of debt issuance costs, loss on extinguishment of debt, and the
portion of rents deemed representative of the interest portion of leases. The
amount by which earnings were less than fixed charges reflects non-cash charges
of $104.7 million relating to depreciation and amortization.
As of February 29, 2004, we had $688.6 million of property, plant and
equipment (net) placed in service. Capital expenditures for the U.S. wireless
operations were $38.9 million, representing 39.1% 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 and the
deployment of our global system for mobile communications ("GSM") / general
packet radio service ("GPRS") network in each of our cell sites in our Midwest
cluster. Capital expenditures for the Caribbean wireless operations were $44.1
million, representing 44.4% 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 $16.4 million, representing 16.5% of total capital
expenditures. These expenditures were to continue the expansion of our Caribbean
Broadband network infrastructure. During fiscal year 2004, we anticipate capital
expenditures of approximately $135.0 million.
We expect to finance our capital expenditures primarily from cash flow
generated from operations, borrowings under our existing credit facilities and
proceeds from the sale of assets. We may also seek various other sources of
external financing including, but not limited to, additional bank financing,
joint ventures, partnerships and issuance of debt or equity securities.
To meet our obligations with respect to our operating needs, capital
expenditures and debt service obligations, it is important that we continue to
improve operating cash flow. Increases in revenue will be dependent upon, among
other things, continued growth in the number of customers and maximizing revenue
per subscriber. We have continued the construction and upgrade of wireless and
broadband systems in our markets to achieve these objectives. There is no
assurance that growth in customers or revenue will occur.
30
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:
NINE MONTHS ENDED
FEBRUARY 29, 2004 FEBRUARY 28, 2003
-------------------------- --------------------------
(UNAUDITED) (UNAUDITED)
-------------------------- --------------------------
% OF NET CASH % OF NET CASH
(IN THOUSANDS) AMOUNT PROVIDED AMOUNT PROVIDED
- ----------------------------------------- ----------- ------------- ----------- -------------
Net cash provided by operating activities $ 99,949 49% $ 135,671 59%
Interest paid 103,128 51 95,712 41
----------- --- ----------- ---
Net cash provided $ 203,077 100% $ 231,383 100%
=========== === =========== ===
Principal uses of cash:
Interest paid $ 103,128 51% $ 95,712 41%
Property, plant & equipment 99,420 49 92,605 40
----------- --- ----------- ---
Total $ 202,548 99% $ 188,317 81%
=========== === =========== ===
Cash available for other
financing and investing activities $ 529 1% $ 43,066 19%
=========== === =========== ===
Net cash provided by operating activities for the nine months ended
February 29, 2004 was sufficient to fund our expenditures for property, plant
and equipment of $99.4 million.
The following table sets forth the primary cash flows provided by other
financing and investing activities for the periods indicated:
NINE MONTHS ENDED
FEBRUARY 29, 2004 FEBRUARY 28, 2003
----------------- -----------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------- ----------------- -----------------
Proceeds from disposition of assets, net of cash expenses $ 2,442 $ 18,300
Proceeds from issuance of long-term debt 1,425,000 27,174
Net proceeds from the issuance of common stock 34,663 -
Proceeds from the exercise of stock options 1,005 -
Distributions received from equity investment 14 1,004
Proceeds from issuance of common stock under employee stock purchase plan 390 483
------------ -----------
Cash provided by other financing and investing activities 1,463,514 46,961
------------ -----------
Repayment of debt (1,394,729) (66,656)
Debt issuance costs paid (48,064) -
------------ -----------
Capital available for (required from) operations and capital expenditures $ 20,721 $ (19,695)
============ ===========
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.
31
In January 2003, we sold our 60% interest in Infochannel Limited, an
Internet service provider in Jamaica, for $3.0 million and we recorded a pretax
gain of $0.3 million.
In August 2002, we sold our 51% interest in CDJ to Oceanic Digital
Communications Inc., the 49% shareholder of CDJ. This transaction was initiated
in fiscal year 2002. We recorded a pretax gain of $2.6 million, which is
included in loss (gain) on disposition of assets in the consolidated statement
of operations for the nine months ended February 29, 2004. 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. 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
nine months ended February 29, 2004, 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 our commitments to one another. As of May 31, 2003, we paid $45.0
million (of which $15.0 million was paid in fiscal year 2002 and $30.0 million
was paid in fiscal year 2001) to Global Crossing and received $10.4 million (of
which $5.9 million was received in fiscal year 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 was 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 three quarters of fiscal year 2004, we have applied
the entire $1.7 million credit mentioned above. 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 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 adoption of SFAS No. 150 did not have a material impact
on our consolidated results of operations, consolidated financial position or
consolidated cash flows. 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.
Additionally, 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
32
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
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 46R is required in
financial statements of public entities 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 46R will be effective for
us as of May 31, 2004. We have evaluated the effect of the adoption of FIN 46R,
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.
33
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 material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
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 February 29, 2004, 37,613,079 shares
remain available for issuance under the shelf.
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
February 29, 2004, we have sold $38.5 million of securities under the shelf and
our controlling stockholders have sold 3,000,000 shares. As a result $711.5
million of our securities and the resale of 17,000,000 shares of common stock
owned by our controlling stockholders 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 $10.0 million to $15.0 million through the end of fiscal year
2005. 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 February 29, 2004, 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 February 29, 2004, we have
paid $4.6 million in connection with this agreement.
The following table summarizes our scheduled contractual cash
obligations and commercial commitments at February 29, 2004 (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 $1,795,840 $ 42,836 $ 12,492 $ 312,628 $1,427,884
Operating leases obligations (1) 186,276 23,418 39,018 23,832 100,008
Purchase obligations 29,018 8,905 20,203 - -
---------- -------- --------- --------- ----------
Total contractual cash
Obligations 2,011,224 75,159 71,713 336,460 1,527,892
Sublessor agreements (1) (1,955) (660) (1,041) (254) -
---------- -------- --------- --------- ----------
Net $2,009,269 $ 74,499 $ 70,672 $ 336,206 $1,527,892
========== ======== ========= ========= ==========
(1) Represents our commitments associated with operating leases as of May 31,
2003.
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 strategy that involve risks and uncertainties. We warn you that these
forward-looking statements are only predictions and estimates, which are
inherently subject to risks and uncertainties.
34
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;
- 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;
- our ability to effectively manage subscriber retention and
cancellations, particularly in light of local number
portability regulations that took effect in 100 designated
markets, including certain of our markets, on November 24,
2003 and that will take effect in all U.S. markets on May 24,
2004, which require wireless companies to permit the wireless
phone numbers that they assign to their customers to be
portable when the customer switches to another carrier, which
may increase churn and will increase retention costs and
present technological difficulties;
- market prices for the products and services we offer may
continue to decline in the future;
- general economic, business, political and social conditions in
the areas in which we operate, including the Caribbean region,
including the effects of world events and weather conditions
on tourism in the Caribbean;
- continued overbuilding by personal communications service
providers in our U.S. wireless markets and the effects of
increased competition in our markets, which may cause a
reduction in roaming revenue, increased subscriber
cancellations, a continued reduction of prices charged and
lower average revenue per subscriber;
- the availability and cost of additional capital to fund our
operations, including the need to refinance and/or amend
existing indebtedness;
- fluctuations in currency values related to our Dominican
Republic operations;
- 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;
35
- local operating hazards and risks in the areas in which we
operate, including without limitation, hurricanes, tornadoes,
windstorms and other natural disasters;
- our ability to manage, implement and monitor billing and
operational support systems;
- potential litigation relating to using wireless telephones
while operating an automobile and the potential reduction of
wireless usage due to legislation restricting usage while
driving;
- potential litigation relating to possible health effects of
radio frequency transmission;
- the relative 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 above under the caption "Risk
Factors" in our Annual Report on Form 10-K. We caution you 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 future events discussed in this report might not occur. You
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.
The table below presents principal amounts and related average interest
rate by year of maturity for our long-term debt. As a result of the Debt
Refinancing, as of February 29, 2004, we have terminated all of our derivative
financial instruments. Weighted average variable rates are based on implied
forward rates in the yield curve as of February 29, 2004:
YEAR ENDED
---------------------------------------------------------------------------------------------------------------
FEBRUARY, 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, THERE-
(IN THOUSANDS) 2005 2006 2007 2008 2009 AFTER TOTAL FAIR VALUE
- ------------------ ------------- ------------ ------------ ------------ ------------ ------ ----- ----------
Long-term debt:
Fixed rate $ 36,836 $ 338 $ 154 $ 248 $ 300,380 $ 857,884 $ 1,195,840 $ 1,216,991
Average interest
rate 10.7% 9.5% 9.7% 10.0% 10.8% 9.4% 9.8% -
Variable rate $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 570,000 $ 600,000 $ 600,000
Average interest
rate (1) 1.4% 2.6% 3.7% 4.5% 5.0% 5.2% 5.2% -
(1) Represents the average interest rate before applicable margin on the Senior
Credit Facility debt.
We have variable rate debt that at February 29, 2004 and February 28,
2003 had outstanding balances of $600.0 million and $1,177.9 million,
respectively. The fair value of such debt approximates the carrying value at
February 29, 2004.
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
36
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 February 29, 2004.
There was no change in our internal control over financial reporting
during the third quarter of fiscal year 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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.
37
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Each exhibit identified below is filed as a part of this report.
a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of Michael J. Small, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Thomas J. Fitzpatrick, Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Michael J. Small, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Thomas J. Fitzpatrick, Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Acts of
2002
b) Reports on Form 8-K
On December 17, 2003, Centennial Communications Corp. filed a Current
Report on Form 8-K reporting its financial results for the three and six months
ended November 30, 2003.
On January 15, 2004, Centennial Communications Corp. filed a Current
Report on Form 8-K announcing that it has received a commitment for a new $750
million senior secured credit facility, and also is pursuing, subject to market
conditions, an offering of approximately $250 million in aggregate principal
amount of privately-placed senior notes.
On January 20, 2004, Centennial Communications Corp. filed a Current
Report on Form 8-K announcing that it priced $325 million of 8.125% senior
unsecured notes due 2014.
38
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.
April 14, 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)
39