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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock - 103,294,511 outstanding shares as of October 5, 2004
TABLE OF CONTENTS
Part I - Financial Information 1
Item 1. Financial Statements...................................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 41
Item 4. Controls and Procedures................................................................... 41
Part II - Other Information 43
Item 1. Legal Proceedings......................................................................... 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............................. 43
Item 3. Defaults Upon Senior Securities........................................................... 43
Item 4. Submission of Matters to a Vote of Security Holders....................................... 43
Item 5. Other Information......................................................................... 43
Item 6. Exhibits.................................................................................. 44
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31, 2004 MAY 31,2004
(UNAUDITED)
----------------- --------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 89,627 $ 105,712
Accounts receivable, less allowance for doubtful accounts of
$5,995 and $5,385, respectively 101,999 84,583
Inventory - phones and accessories, net 11,746 15,986
Prepaid expenses and other current assets 34,822 32,280
Assets held for sale 130,033 134,625
-------------- -------------------
Total Current Assets 368,227 373,186
Property, plant and equipment, net 630,236 631,671
Equity investments in wireless systems, net 2,272 2,697
Debt issuance costs, less accumulated amortization of $14,559 and
$12,719, respectively 53,131 54,948
U.S. wireless licenses 371,766 371,766
Caribbean wireless licenses, net 70,242 70,492
Goodwill 26,704 26,704
Customer lists, net - 319
Transmission and connecting rights, net 818 840
Cable facility, net 4,150 4,210
Other assets, net 4,587 2,814
-------------- -------------------
TOTAL ASSETS $ 1,532,133 $ 1,539,647
============== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,856 $ 5,850
Accounts payable 24,062 26,884
Accrued expenses and other current liabilities 168,454 191,559
Payable to affiliates 125 125
Liabilities held for sale 17,659 18,766
-------------- -------------------
Total Current Liabilities 216,156 243,184
Long-term debt 1,761,934 1,762,016
Deferred federal income taxes 81,203 71,321
Other liabilities 10,627 10,224
Minority interest in subsidiaries 1,769 1,543
Commitments and contingencies (see note 6)
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.01 per share, 10,000,000
authorized, no shares issued or outstanding - -
Common $0.01 stock par value per share: 240,000,000 shares
authorized; issued 103,354,653 and 103,223,924 shares,
respectively; and outstanding 103,284,150 and 103,153,421
shares, respectively 1,034 1,032
Additional paid-in capital 475,534 474,918
Accumulated deficit (1,015,047) (1,023,514)
-------------- -------------------
(538,479) (547,564)
Less: cost of 70,503 common shares in treasury (1,077) (1,077)
-------------- -------------------
Total Stockholders' Deficit (539,556) (548,641)
-------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,532,133 $ 1,539,647
============== ===================
See notes to condensed consolidated financial statements.
1
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-------------------------------------
AUGUST 31, 2004 AUGUST 31, 2003
(AS RESTATED)
--------------- ---------------
Revenue:
Service revenue $ 210,356 $ 183,475
Equipment sales 6,426 7,861
--------------- ----------------
216,782 191,336
--------------- ----------------
Costs and Expenses:
Cost of services (exclusive of depreciation and amortization shown below) 41,490 37,516
Cost of equipment sold 21,326 21,674
Sales and marketing 24,624 22,141
General and administrative 37,741 33,347
Depreciation and amortization 29,158 29,911
Loss (gain) on disposition of assets 432 (631)
--------------- ----------------
154,771 143,958
--------------- ----------------
Operating income 62,011 47,378
--------------- ----------------
Income from equity investments 145 24
Interest expense, net (36,479) (49,032)
Other expense (878) (858)
--------------- ----------------
Income (loss) from continuing operations before income taxes expense and
minority interest in income of subsidiaries 24,799 (2,488)
Income tax expense (14,110) (1,306)
--------------- ----------------
Income (loss) from continuing operations before minority interest in income of
subsidiaries 10,689 (3,794)
Minority interest in income of subsidiaries (226) (133)
--------------- ----------------
Income (loss) from continuing operations 10,463 (3,927)
Loss from discontinued operations, net of tax provision of $429 and $2,146,
respectively. (1,996) (389)
--------------- ----------------
Net income (loss) $ 8,467 $ (4,316)
=============== ================
Earnings (loss) per share:
Basic
Earnings per share (loss) per share from continuing operations $ 0.10 $ (0.04)
Loss per share from discontinued operations (0.02) (0.00)
--------------- ----------------
Net income (loss) per share $ 0.08 $ (0.04)
=============== ================
Diluted
Earnings per share (loss) per share from continuing operations $ 0.10 $ (0.04)
Loss per share from discontinued operations (0.02) (0.00)
--------------- ----------------
Net income (loss) per share $ 0.08 $ (0.04)
=============== ================
Weighted-average number of shares outstanding:
Basic 103,213 95,754
=============== ================
Diluted 104,281 95,754
=============== ================
See notes to condensed consolidated financial statements.
2
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
------------------------------
AUGUST 31, AUGUST 31,
2004 2003
(AS RESTATED)
---------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 8,467 $ (4,316)
Less: loss from discontinued operations, net of tax (1,996) (389)
--------- ---------
Income (loss) from continuing operations 10,463 (3,927)
Adjustments to reconcile net income (loss) from continuing operations to net
cash provided by operating activities of continuing operations:
Depreciation and amortization 29,158 29,911
Non cash, paid-in kind interest - 7,029
Minority interest in income of subsidiaries 226 133
Income from equity investments (145) (24)
Loss (gain) on disposition of assets 432 (631)
Changes in assets and liabilities, net of effects of acquisitions and
dispositions and other (29,540) 7,161
--------- ---------
Total adjustments 131 43,579
--------- ---------
Net cash provided by operating activities of continuing operations 10,594 39,652
--------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition of assets, net of cash expenses 20 1,681
Capital expenditures (27,446) (23,801)
Distributions received from equity investments 570 -
--------- ---------
Net cash used in investing activities of continuing operations (26,856) (22,120)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt - 500,861
Repayment of debt (1,634) (519,461)
Debt issuance costs paid - (22,305)
Proceeds from the exercise of stock options 193 127
Proceeds from issuance of common stock under employee stock purchase plan 425 390
--------- ---------
Net cash used in financing activities of continuing operations (1,016) (40,388)
--------- ---------
Net decrease in cash and cash equivalents from continuing operations (17,278) (22,856)
Net increase in cash and cash equivalents from discontinued operations 1,193 1,101
--------- ---------
Net decrease in cash and cash equivalents (16,085) (21,755)
Cash and cash equivalents, beginning of period 105,712 65,493
--------- ---------
Cash and cash equivalents, end of period $ 89,627 $ 43,738
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the period for:
Interest $ 62,495 $ 33,152
========= =========
Income taxes $ 968 $ 603
========= =========
NON-CASH TRANSACTION:
Fixed assets acquired under capital leases $ 1,398 $ 2,985
========= =========
See notes to condensed consolidated financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share amounts)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission ("SEC") for interim financial statements.
These condensed consolidated financial statements do not include all disclosures
required by GAAP. The results for the interim periods are not necessarily
indicative of results for the full year. 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, 2004 Annual
Report on Form 10-K/A, filed on October 1, 2004, which includes a summary of
significant accounting policies and other disclosures. As more fully described
in Note 10, the Company has restated its results as of May 31, 2003, for the
years ended May 31, 2003 and 2002 and for the first three quarters of fiscal
year ended May 31, 2004. In the opinion of management, the accompanying interim
unaudited condensed consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
consolidated financial position of Centennial Communications Corp. and
Subsidiaries (the "Company") as of August 31, 2004 and the results of its
consolidated operations and cash flows for the three-month periods ended August
31, 2004 and 2003. The consolidated balance sheet as of May 31, 2004 included
herein has been derived from the consolidated balance sheet included in the
Company's Annual Report on Form 10-K/A, adjusted to present the classification
of Centennial Puerto Rico Cable TV Corp., the Company's cable television
business in Puerto Rico ("Centennial Cable") as a discontinued operation (see
note 4).
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
provision from continuing operations for the quarter ended August 31, 2004 based
on its projected annual worldwide effective tax rate of 56.9%.
The Company's projected annual worldwide effective tax rate of 56.9% 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 and certain foreign taxes
for which the Company cannot claim a foreign tax credit. See Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Stock-Based Compensation:
Stock-based compensation issued to employees and directors is valued using
the intrinsic value method under APB No. 25 "Accounting for Stock Issued to
Employees" ("APB No. 25"). Under this method, compensation expense is recorded
on the date of grant only if the current price of the underlying stock exceeds
the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") established accounting and disclosure requirements using a fair
value based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply APB No. 25
and follow the disclosure only provisions of SFAS No. 123.
For disclosure purposes, pro forma net income (loss) and earnings (loss)
per share as if the Company had applied SFAS No. 123 are shown below:
4
THREE MONTHS ENDED
AUGUST 31,
-----------------------------
2004 2003
------------- ------------
Net income (loss):
As reported $ 8,467 $ (4,316)
Deduct: total stock based employee compensation determined under
fair-value based method for all awards, net of related tax effects........... 763 331
------------ -----------
Pro forma.................................................................. $ 7,704 $ (4,647)
Earnings (loss) per share:
Basic: As reported....................................................... $ 0.08 $ (0.04)
Pro forma......................................................... $ 0.07 $ (0.05)
Diluted: As reported....................................................... $ 0.08 $ (0.04)
Pro forma......................................................... $ 0.07 $ (0.05)
The fair value of options granted under the Company's stock option plans
was estimated on the dates of grant using the Black-Scholes options-pricing
model with the following weighted-average assumptions used:
THREE MONTHS ENDED
AUGUST 31,
--------------------
2004 2003
---- ----
Expected volatility............... 121.2% 127.8%
Risk-free interest rate........... 3.5% 3.5%
Expected lives of option grants... 4 years 4 years
Expected dividend yield........... 0.00% 0.00%
Reclassification:
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
AUGUST 31, 2004 MAY 31, 2004
--------------- ------------
U.S. wireless licenses $ 371,766 $ 371,766
Caribbean wireless licenses -
Puerto Rico (1) 54,159 54,159
Cable franchise costs (2) 52,139 52,139
---------- -----------
Total $ 478,064 $ 478,064
========== ===========
(1) Included in Caribbean wireless licenses on the consolidated balance sheet
which also includes finite lived wireless assets for the Dominican
Republic (see table below).
(2) Amounts included in assets held for sale on the consolidated balance
sheet.
5
The following table presents other intangible assets subject to
amortization:
AS OF AUGUST 31, 2004 AS OF MAY 31, 2004
------------------------- -----------------------
GROSS GROSS
USEFUL CARRYING ACCUMULATED CARRYING ACCUMULATED
LIFE AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---- ------ ------------ ------ ------------
Caribbean wireless
licenses --
Dominican Republic...... 20 years $ 20,000 $ 3,917 $ 20,000 $ 3,667
Customer lists............ 4-5 years 21,616 21,616 21,616 21,297
Transmission and
connecting rights....... 25 years 2,192 1,374 2,192 1,352
Cable facility............ 25 years 6,000 1,850 6,000 1,790
-------- ---------- -------- --------
Total..................... $ 49,808 $ 28,757 $ 49,808 $ 28,106
======== ========== ======== ========
Customer lists with a gross carrying amount of $26,854 and accumulated
amortization of $20,034 and $18,692 as of August 31, 2004 and May 31, 2004,
respectively, are included in assets held for sale in the consolidated balance
sheet.
Other intangible assets amortization expense was $651 for the three months
ended August 31, 2004. Amortization expense on the finite lived intangible
assets is estimated to be $996 for the remainder of fiscal 2005, $1,328 in
fiscal 2006, $1,328 in fiscal 2007, $1,328 in fiscal 2008, $1,328 in fiscal 2009
and $1,328 in fiscal 2010.
Goodwill
The goodwill balance in the Caribbean wireless segment was $22,517 at
August 31 and May 31, 2004. The goodwill balance in the Caribbean broadband
segment was $4,187 at August 31 and May 31, 2004.
NOTE 3. DEBT
Long-term debt consists of the following:
AS OF AUGUST AS OF MAY 31,
31, 2004 2004
----------- -------------
New Senior Secured Credit Facility - Term Loans ......................... $ 597,000 $ 598,500
8 1/8% Senior Unsecured Notes due 2014...(The "2014 Senior Notes") ...... 325,000 325,000
10 1/8% Senior Unsecured Notes due 2013 (The "2013 Senior Notes")........ 500,000 500,000
10 3/4% Senior Subordinated Notes due 2008(The "2008 Senior
Subordinated Notes") .................................................... 300,000 300,000
Capital Lease Obligations ............................................... 32,622 31,141
Financing Obligation -- Tower Sale ...................................... 13,168 13,225
----------- -----------
Total Long-Term Debt .................................................. 1,767,790 1,767,866
Current Portion of Long-Term Debt ....................................... (5,856) (5,850)
----------- -----------
Net Long-Term Debt .................................................... $ 1,761,934 $ 1,762,016
=========== ===========
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 and enter into
transactions with affiliates. Under certain circumstances, the Company is
6
prohibited from paying cash dividends on its common stock under certain of the
above debt agreements. The Company was in compliance with all covenants of its
debt agreements at August 31, 2004.
The aggregate annual scheduled principal payments for the next five years
and thereafter related to the Company's long-term debt at August 31, 2004 are
summarized as follows:
August 31, 2005 $ 5,856
August 31, 2006 5,938
August 31, 2007 5,972
August 31, 2008 6,120
August 31, 2009 306,310
August 31, 2010 and thereafter 1,437,594
----------------
$ 1,767,790
================
Interest expense, as reflected in the condensed consolidated financial
statements, has been partially offset by interest income. The gross interest
expense for the three months ended August 31, 2004 and 2003 was $36,701 and
$49,198, respectively.
NOTE 4. DISCONTINUED OPERATIONS
On September 6, 2004, the Company entered into a definitive agreement to
sell its wholly owned subsidiary, Centennial Cable, to an affiliate of Hicks,
Muse, Tate & Furst Incorporated for approximately $155,000 in cash. Completion
of the transaction is subject to customary closing conditions, including
regulatory approval of the transfer of Centennial Cable's cable franchises, and
is expected to occur in the first quarter of calendar year 2005. The expected
disposition has been accounted for by the Company as a discontinued operation in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," ("SFAS 144") for the quarter ended August 31, 2004.
Summarized financial information for the discontinued operations of
Centennial Cable is as follows:
THREE MONTHS ENDED AUGUST 31,
-----------------------------
2004 2003
---- ----
Revenue $ 12,778 $ 12,017
Loss before income tax benefit (2,425) (2,535)
Income tax benefit 429 2,146
Net loss from discontinued operations (1,996) (389)
AS OF AUGUST 31, 2004 AS OF MAY 31, 2004
--------------------- ------------------
Current assets $ 13,084 $ 11,760
Property, plant and equipment, net 58,683 61,947
Cable franchise costs 52,139 52,139
Total assets 130,033 134,625
Current liabilities 11,926 13,033
Total liabilities 17,659 18,766
Net equity of discontinued operations 112,374 115,859
7
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
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," 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 6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
The Company is party to several lawsuits in which plaintiffs have alleged,
depending on the case, breach of contract, misrepresentation or unfair practice
claims relating to its billing practices, including rounding up of partial
minutes of use to full-minute increments, billing send to end, and billing for
unanswered and dropped calls. The plaintiffs in these cases have not alleged any
specific monetary damages and are seeking certification as a class action. A
hearing on class certification in one of these cases was held on September 2,
2003 in a state court in Louisiana. The decision of the court with respect to
certification is still pending. Damages payable by the Company could be
significant, although the Company does not believe that it is probable that 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 Company does not believe that it is probable that any damage
payments would have a material adverse effect on the Company's results of
operations.
The Company is subject to other claims and legal actions that arise in the
ordinary course of business. The Company does not believe that any of these
other pending claims or legal actions will have a material adverse effect on its
business or results of operations.
Guarantees:
The Company currently does not guarantee the debt of any entity outside
its consolidated group. In the ordinary course of its business, the Company
enters into agreements with third parties that provide for indemnification of
counterparties. Examples of these types of agreements are underwriting
agreements entered into in connection with securities offerings and agreements
relating to the sale or purchase of assets. The duration, triggering events,
maximum exposure and other terms under these indemnification provisions vary
from agreement to agreement. In general, the indemnification provisions require
the Company to indemnify the other party to the agreement against losses it may
suffer as a result of the Company's breach of its representations and warranties
contained in the underlying agreement or for misleading information contained in
a securities offering document.
The Company is unable to estimate the maximum potential liability for
these types of indemnifications as the agreements generally do not specify a
maximum amount, and the actual amounts are dependant on future events, the
nature and likelihood of which cannot be determined at this time.
8
Historically, the Company has never incurred any material costs relating to
these indemnification agreements. Accordingly, the Company believes the
estimated fair value of these agreements is minimal.
Lease Commitments:
The Company leases facilities and equipment under noncancelable operating
and capital leases. 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 this agreement.
As of August 31, 2004, the Company has paid $6,181 in connection with this
agreement.
In fiscal 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.
The GSM overlay has required in fiscal 2004 and will require in fiscal 2005
approximately $10,000 to $15,000 of incremental expenditures above the Company's
historical U.S. wireless expenditure levels.
During the fiscal years ended May 31, 2003 and 2002, an affiliate of Welsh
Carson, Anderson and Stowe ("Welsh Carson"), the Company's principal
stockholder, purchased in open market transactions, approximately $189,000
principal amount of the 2008 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. As part of the
February 2004 refinancing transactions, the Company redeemed $70,000 in
aggregate principal amount of the 2008 Senior Subordinated Notes, including
$34,852 principal amount of 2008 Senior Subordinated Notes held by the Welsh
Carson affiliate.
In June 2004, the Company signed an amendment to its billing services
agreement with Convergys Information Management Group, Inc. ("Convergys").
Convergys acquired Alltel Information Services, Inc. in December 2003. The
agreement has a term of seven years and Convergys agreed to provide billing
services, facilitate network fault detection, correction and management
performance and usage monitoring and security for our wireless operations
throughout the Company. Subject to the terms of the agreement including
performance standards, the Company has committed to purchase a total of
approximately $74,642 of services through 2011 under this agreement.
9
NOTE 7. SEGMENT INFORMATION
The Company's consolidated financial statements include three reportable
segments: U.S. wireless, Caribbean wireless, and Caribbean broadband. The
Company determines its reportable segments based on the aggregation criteria of
the SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, (e.g., 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 broadband represents the Company's offering of broadband services
including switched voice, dedicated (private line), video and other services in
Puerto Rico and the Dominican Republic. The Company measures the operating
performance of each segment based on adjusted operating income. Adjusted
operating income is defined as net income (loss) from continuing operations
before minority interest in income of subsidiaries, income tax expense, other
expense, interest expense, net, income from equity investments, (loss) gain on
disposition of assets, and depreciation and amortization.
The results of operations presented below exclude Centennial Cable TV due
to its classification as a discontinued operation. (See Note 4.)
10
Information about the Company's operations in its three business segments
as of, and for the three months ended, August 31, 2004 and 2003 is as follows:
THREE MONTHS ENDED
AUGUST 31,
-----------------------
2004 2003
---- ----
U.S. wireless
Service revenue $ 85,918 $ 72,142
Roaming revenue 13,308 17,047
Equipment sales 3,841 5,265
----------- -----------
Total revenue 103,067 94,454
Adjusted operating income 47,953 36,941
Total assets 1,986,022 1,966,549
Capital expenditures 9,351 7,493
Caribbean wireless
Service revenue $ 79,962 $ 70,177
Roaming revenue 458 1,383
Equipment sales 2,585 2,544
----------- -----------
Total revenue 83,005 74,104
Adjusted operating income 32,238 30,339
Total assets 497,308 437,390
Capital expenditures 12,939 11,211
Caribbean broadband
Switched revenue $ 11,379 $ 8,799
Dedicated revenue 12,534 11,842
Other revenue 9,596 5,642
----------- -----------
Total revenue 33,509 26,283
Adjusted operating income 11,410 9,378
Total assets 801,588 781,942
Capital expenditures 5,156 5,097
Eliminations
Total revenue (1) $ (2,799) $ (3,505)
Total assets (2) (1,752,785) (1,735,784)
Consolidated
Total revenue $ 216,782 $ 191,336
Adjusted operating income 91,601 76,658
Total assets 1,532,133 1,450,097
Capital expenditures 27,446 23,801
(1) Elimination of intercompany revenue, primarily from Caribbean broadband to
Caribbean wireless.
(2) Elimination of intercompany investments.
11
Reconciliation of adjusted operating income to net income (loss):
THREE MONTHS ENDED
AUGUST 31,
------------------------
2004 2003
--------- ---------
Adjusted operating income ............................ $ 91,601 $ 76,658
Less: depreciation and amortization .................. (29,158) (29,911)
(Loss) gain on disposition of assets ................. (432) 631
-------- --------
Operating income ..................................... 62,011 47,378
Income from equity investments ....................... 145 24
Interest expense, net ................................ (36,479) (49,032)
Other expense ........................................ (878) (858)
Income tax expense ................................... (14,110) (1,306)
Minority interest in income of subsidiaries........... (226) (133)
Loss from discontinued operations .................... (1,996) (389)
-------- --------
Net income (loss) .................................... $ 8,467 $ (4,316)
======== ========
NOTE 8. CONDENSED CONSOLIDATING FINANCIAL DATA
As discussed in Note 6 to the Condensed Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K/A for the year ended May
31, 2004, Centennial Cellular Operating Company, LLC ("CCOC") and Centennial
Puerto Rico Operations Corp. ("CPROC") are wholly-owned subsidiaries of the
Company. CCOC is a joint and several co-issuer on both the 2008 Senior
Subordinated Notes and the 2013 Senior Notes issued by the Company, and CPROC
has unconditionally guaranteed both the 2008 Senior Subordinated Notes and the
2013 Senior Notes. Separate financial statements and other disclosures
concerning CCOC and CPROC are not presented because they are not material to
investors.
12
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF AUGUST 31, 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 $ 44,436 $ - $ 45,191 $ - $ - $ 89,627
Accounts receivable, net 39,223 - 62,776 - - 101,999
Inventory - phones and
accessories, net 2,910 - 8,836 - - 11,746
Prepaid expenses and other
current assets 6,866 - 27,956 - - 34,822
Asset held for sale 130,033 130,033
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 93,435 - 274,792 - - 368,227
Property, plant & equipment, net 285,804 - 344,432 - - 630,236
Equity investments in wireless
systems, net - - 2,272 - - 2,272
Debt issuance costs, net 23,384 - 29,747 - - 53,131
U.S. wireless licenses - - 371,766 - - 371,766
Caribbean wireless licenses, net - - 70,242 - - 70,242
Goodwill 4,186 - 22,518 - - 26,704
Cable franchise costs - - - - - -
Intercompany - 1,311,342 1,201,878 528,173 (3,041,393) -
Investment in subsidiaries - (278,593) 106,228 (786,351) 958,716 -
Other assets, net 5,965 - 3,590 - - 9,555
----------- ----------- ----------- ----------- ----------- -----------
Total $ 412,774 $ 1,032,749 $ 2,427,465 $ (258,178) $(2,082,677) $ 1,532,133
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 16 $ 6,000 $ (160) $ - $ - $ 5,856
Accounts payable 12,232 - 11,830 - - 24,062
Accrued expenses and other
current liabilities 524,475 - 352,123 - (708,144) 168,454
Payable to affiliates - - 125 - - 125
Liabilities held for sale 17,659 17,659
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities 536,723 6,000 381,577 - (708,144) 216,156
Long-term debt 829,140 892,600 40,194 - - 1,761,934
Deferred federal income taxes - - 81,203 - - 81,203
Other liabilities 2,771 - 7,856 - - 10,627
Intercompany 10,112 920,500 1,839,515 281,378 (3,051,505) -
Minority interest in subsidiaries - - 1,769 - - 1,769
Stockholders' equity (deficit):
Common stock - - - 1,034 - 1,034
Additional paid-in capital (818,498) - 818,498 475,534 475,534
Accumulated deficit (147,474) (786,351) (743,147) (1,015,047) 1,676,972 (1,015,047)
----------- ----------- ----------- ----------- ----------- -----------
(965,972) (786,351) 75,351 (538,479) 1,676,972 (538,479)
Less: treasury shares (1,077) (1,077)
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' (deficit) equity (965,972) (786,351) 75,351 (539,556) 1,676,972 (539,556)
----------- ----------- ----------- ----------- ----------- -----------
Total $ 412,774 $ 1,032,749 $ 2,427,465 $ (258,178) $(2,082,677) $ 1,532,133
=========== =========== =========== =========== =========== ===========
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE THREE MONTHS ENDED AUGUST 31, 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 $ 91,564 $ - $ 127,202 $ - $ (1,984) $ 216,782
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of services (exclusive
of depreciation and
amortization shown below) 13,237 - 29,278 - (1,025) 41,490
Cost of equipment sold 6,352 - 14,974 - - 21,326
Sales and marketing 9,686 - 14,938 - - 24,624
General and administrative 19,199 - 19,501 - (959) 37,741
Depreciation and amortization 16,691 - 12,467 - - 29,158
Loss (Gain) on disposition of
assets 531 - (99) - - 432
------------ ------------ ------------ ------------ ------------ ------------
65,696 - 91,059 - (1,984) 154,771
------------ ------------ ------------ ------------ ------------ ------------
Operating income 25,868 - 36,143 - - 62,011
------------ ------------ ------------ ------------ ------------ ------------
Income from equity investments - - 145 - - 145
Income (loss) from investments
in subsidiaries - 8,467 831 8,467 (17,765) -
Interest expense, net (24,475) (9,300) (2,704) - - (36,479)
Other expenses (411) - (467) - - (878)
Intercompany interest allocation - 9,300 (9,300) - - -
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income tax
expense and minority interest 982 8,467 24,648 8,467 (17,765) 24,799
Income tax expense (151) (13,959) - - (14,110)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before minority
interest 831 8,467 10,689 8,467 (17,765) 10,689
Minority interest in
income (loss) - - (226) - - (226)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations 831 8,467 10,463 8,467 (17,765) 10,463
Loss from discontinued
operations (1,996) (1,996)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 831 $ 8,467 $ 8,467 $ 8,467 $ (17,765) $ 8,467
============ ============ ============ ============ ============ ============
14
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE THREE MONTHS ENDED AUGUST 31, 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 $ 831 $ 8,467 $ 8,467 $ 8,467 $(17,765) $ 8,467
Less: loss from discontinued
operations, net of tax - - (1,996) - - (1,996)
-------- -------- -------- -------- -------- ---------
Income (loss) from continuing
operations 831 8,467 10,463 8,467 (17,765) 10,463
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 16,691 - 12,467 - - 29,158
Minority interest in income
of subsidiaries - - 226 - - 226
Income from equity investments - - (145) - - (145)
Equity in undistributed
earnings of subsidiaries - (8,467) (831) (8,467) 17,765 -
Loss (gain) on disposition
of assets 531 - (99) - 432
Changes in assets and
liabilities, net of effects
of acquisitions and
dispositions and other (1,380) (37,214) 672,119 (129,300) (533,765) (29,540)
-------- -------- -------- -------- -------- ---------
Total adjustments 15,842 (45,681) 683,737 (137,767) (516,000) 131
-------- -------- -------- -------- -------- ---------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES 16,673 (37,214) 694,200 (129,300) (533,765) 10,594
-------- -------- -------- -------- -------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition
of assets, net of cash
expenses - - 20 - - 20
Capital expenditures (18,491) - (8,955) - - (27,446)
Distributions received from
equity investments - - 570 - - 570
-------- -------- -------- -------- -------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (18,491) - (8,365) - - (26,856)
-------- -------- -------- -------- -------- ---------
FINANCING ACTIVITIES:
Repayment of debt (21) (1,500) (113) - - (1,634)
Proceeds from the exercise of
employee stock options - - - 193 - 193
Proceeds from issuance of
common stock under employee
stock purchase plan - - - 425 - 425
Cash (paid to) received from
affiliates 3,791 38,714 (704,952) 128,682 533,765 -
-------- -------- -------- -------- -------- ---------
NET CASH (USED IN)
PROVIDED BY
FINANCING ACTIVITIES 3,770 37,214 (705,065) 129,300 533,765 (1,016)
-------- -------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
FROM CONTINUING OPS 1,952 - (19,230) - - (17,278)
NET INCREASE IN CASH AND CASH
EQUIVALENTS FROM
DISCONTINUED OPS - - 1,193 - - 1,193
-------- -------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,952 - (18,037) - - (16,085)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 42,484 - 63,228 - - 105,712
-------- -------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 44,436 $ - $ 45,191 $ - $ - $ 89,627
======== ======== ======== ======== ======== =========
15
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF MAY 31, 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 $ 42,484 $ - $ 63,228 $ - $ - $ 105,712
Accounts receivable, net 37,010 - 47,573 - - 84,583
Inventory - phones and
accessories, net 2,756 - 13,230 - - 15,986
Prepaid expenses and
other current assets 3,452 - 28,828 - - 32,280
Asset held for sale - 134,625 134,625
-------------- -------------- -------------- -------------- -------------- --------------
Total current assets 85,702 - 287,484 - - 373,186
Property, plant &
equipment, net 285,004 - 346,667 - - 631,671
Equity investments in
wireless systems, net - - 2,697 - - 2,697
Debt issuance costs, net 24,082 - 30,866 - - 54,948
U.S. wireless licenses - - 371,766 - - 371,766
Caribbean wireless
licenses, net - - 70,492 - - 70,492
Goodwill 4,186 - 22,518 - - 26,704
Cable franchise costs - - - - - -
Intercompany - 1,361,804 1,228,067 629,423 (3,219,294) -
Investment in
subsidiaries - (322,879) 767,558 (924,118) 479,439 -
Other assets, net 4,889 - 27,716 - (24,422) 8,183
-------------- -------------- -------------- -------------- -------------- --------------
Total $ 403,863 $ 1,038,925 $ 3,155,831 $ (294,695) $ (2,764,277) $ 1,539,647
============== ============== ============== ============== ============== ==============
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 34 $ 6,000 $ (184) $ - $ - $ 5,850
Accounts payable 9,488 - 17,396 - - 26,884
Accrued expenses and
other current
liabilities 525,704 - 358,265 - (692,410) 191,559
Payable to affiliates - - 125 - - 125
Liabilities held
for sale - 18,766 18,766
-------------- -------------- -------------- -------------- -------------- --------------
Total current
liabilities 535,226 6,000 394,368 - (692,410) 243,184
Long-term debt 829,119 894,100 38,797 - - 1,762,016
Deferred federal income
taxes - - 71,321 - - 71,321
Other liabilities - - 10,224 - - 10,224
Intercompany 6,321 933,643 1,673,982 253,946 (2,867,892) -
Minority interest in
subsidiaries - - 1,543 - - 1,543
Stockholders' equity
(deficit):
Preferred stock - - - - - -
Common stock 0 0 1,003 1,032 (1,003) 1,032
Additional paid-in
capital (818,498) - 1,716,207 474,918 (897,709) 474,918
Accumulated deficit (148,305) (794,818) (751,614) (1,023,514) 1,694,737 (1,023,514)
Accumulated other
comprehensive loss - - - - - -
-------------- -------------- -------------- -------------- -------------- --------------
(966,803) (794,818) 965,596 (547,564) 796,025 (547,564)
Less: treasury shares - - - (1,077) - (1,077)
Deferred compensation - - - - - -
-------------- -------------- -------------- -------------- -------------- --------------
Total stockholders'
(deficit) equity (966,803) (794,818) 965,596 (548,641) 796,025 (548,641)
-------------- -------------- -------------- -------------- -------------- --------------
Total $ 403,863 $ 1,038,925 $ 3,155,831 $ (294,695) $ (2,764,277) $ 1,539,647
============== ============== ============== ============== ============== ==============
16
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE THREE MONTHS ENDED AUGUST 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
---------------- ----------------- -------------- -------------- ------------ --------------
Revenue $ 83,548 $ - $ 110,527 $ - $ (2,739) $ 191,336
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of services (exclusive
of depreciation and
amortization shown below) 13,047 26,286 (1,817) 37,516
Cost of equipment sold 5,761 - 15,913 - 21,674
Sales and marketing 8,973 - 13,168 - - 22,141
General and administrative 15,569 - 18,700 - (922) 33,347
Depreciation and amortization 15,399 - 14,512 - - 29,911
Loss on impairment of assets - - - - - -
Loss/ (Gain) on disposition
of assets 73 - (704) - - (631)
------------ ------------ ------------ ------------ ------------ ------------
58,822 - 87,875 - (2,739) 143,958
------------ ------------ ------------ ------------ ------------ ------------
Operating income 24,726 - 22,652 - - 47,378
------------ ------------ ------------ ------------ ------------ ------------
Income from equity investments - - 24 - - 24
Income from investments in
subsidiaries - 3,243 8,777 3,243 (15,263) -
Interest expense, net (15,852) (42,040) 16,419 (7,559) - (49,032)
Other expense - - (858) - - (858)
Intercompany interest
allocation - 42,040 (42,040) - - -
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before income
tax expense and minority
interest in income of
subsidiaries. 8,874 3,243 4,974 (4,316) (15,263) (2,488)
Income tax benefit (97) - (1,209) - - (1,306)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before minority
interest in income of
subsidiaries 8,777 3,243 3,765 (4,316) (15,263) (3,794)
Minority interest in income
of subsidiaries - - (133) - - (133)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations 8,777 3,243 3,632 (4,316) (15,263) (3,927)
Loss from discontinued
operations - - (389) - - (389)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 8,777 $ 3,243 $ 3,243 $ (4,316) $ (15,263) $ (4,316)
============ ============ ============ ============ ============ ============
17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE THREE MONTHS ENDED AUGUST 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
---------------- ----------------- -------------- -------------- ------------ --------------
OPERATING ACTIVITIES:
Net income (loss) $ 8,777 $ 3,243 $ 3,243 $ (4,316) $ (15,263) $ (4,316)
Less: loss from
discontinued operations,
net of tax - - (389) - - (389)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) form
continuing operations 8,777 3,243 3,632 (4,316) (15,263) (3,927)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating activities:
Depreciation and amortization 15,399 - 14,512 - - 29,911
Non cash paid-in kind
interest - - - 7,029 - 7,029
Minority interest in loss
of subsidiaries - - 133 - - 133
Income from equity investments - - (24) - - (24)
Equity in undistributed
earnings of subsidiaries - (3,243) (8,777) (3,243) 15,263 -
Loss (gain) on disposition of
assets 73 - (704) - - (631)
Changes in assets and
liabilities, net of effects
of acquisitions and
dispositions and other 13,449 - (6,818) 530 - 7,161
------------ ------------ ------------ ------------ ------------ ------------
Total adjustments 28,921 (3,243) (1,678) 4,316 15,263 43,579
------------ ------------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 37,698 - 1,954 - - 39,652
------------ ------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from disposition of
assets, net of cash expenses - - 1,681 - - 1,681
Capital expenditures (11,031) - (12,770) - - (23,801)
------------ ------------ ------------ ------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (11,031) - (11,089) - - (22,120)
------------ ------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from the issuance
of long-term debt 173,400 - 327,461 - - 500,861
Repayment of debt (228,500) (200) (199,999) (90,762) - (519,461)
Debt issuance costs - - (22,305) - - (22,305)
Proceeds from exercise of
stock options - - - 127 - 127
Proceeds from issuance of
common stock under
employee stock purchase plan - - - 390 - 390
Cash (paid to) received
from affiliates (1,918) 200 (88,527) 90,245 - -
------------ ------------ ------------ ------------ ------------ ------------
NET CASH USED IN FINANCING
ACTIVITIES (57,018) - 16,630 - - (40,388)
------------ ------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (30,351) - 7,495 - - (22,856)
NET INCREASE IN CASH AND CASH
EQUIVALENTS FROM DISCONTINUED
OPERATIONS - - 1,101 - - 1,101
------------ ------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (30,351) - 8,596 - - (21,755)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 36,572 - 28,921 - - 65,493
------------ ------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,221 $ - $ 37,517 $ - $ - $ 43,738
============ ============ ============ ============ ============ ============
18
NOTE 9. SUBSEQUENT EVENTS
In August 2004, the Company entered into a definitive agreement with AT&T
Wireless to acquire 10 MHz of personal communication service ("PCS") spectrum
covering approximately 4.1 million Pops in Michigan and Indiana for an aggregate
purchase price of $19,500. At the same time, the Company entered into a
definitive agreement to sell to Verizon Wireless for $24.0 million in cash the
Indianapolis and Lafayette, Indiana licenses covering approximately 1.9 million
Pops that the Company expected to acquire from AT&T Wireless. The Company
received approval of these transactions from the FCC and consummated the
transactions on October 1, 2004, prior to the Federal Communications Commission
("FCC") approvals becoming final orders. As a result of the transactions, the
Company has acquired licenses covering approximately 2.2 million incremental
Pops and received $4.5 million in cash.
In connection with the issuance of the 2014 Senior Notes on February 9,
2004, the Company entered into a registration rights agreement pursuant to which
it agreed, among other things, (i) to register the 2014 Senior Notes with the
SEC within 180 days after February 9, 2004 and (ii) to consummate the related
exchange offer within 210 days after February 9, 2004. As a result of the
restatement described in Note 10 to the Consolidated Financial Statements, the
registration process has been delayed beyond the required dates. As a result,
pursuant to the terms of the registration rights agreement, effective August 8,
2004, the Company is obligated to pay an additional 0.50% per annum of interest
on the 2014 Senior Notes. The Company is obligated to pay this additional
interest until the Company consummates the exchange offer. The Company expects
to consummate the exchange offer in early November 2004.
NOTE 10. RESTATEMENT
In preparation for complying with the provisions of the Sarbanes-Oxley Act
of 2002 relating to internal control over financial reporting that will be
effective for the Company for the fiscal year ending May 31, 2005, as well as
recent guidance surrounding such legislation, the Company has restated its
condensed consolidated financial statements for the three months ended August
31, 2003. Such restatement relates primarily to adjustments that were identified
in the ordinary course of prior audits of the Company's consolidated financial
statements, but not recorded at the time due to their immateriality from both a
qualitative and quantitative perspective. In an effort not to distort the
results of any period, the Company has recorded all adjustments in the years or
quarter, as applicable, in which they arose.
The nature of the adjustments to restate the Company's consolidated
financial statements primarily relate to the following:
- Overstated Accrual Estimates -- The Company has historically taken a
conservative approach with respect to determining certain accrual estimates.
Year over year fluctuations in these accruals have resulted in an immaterial
impact on the consolidated financial statements.
- Billing Cycle Cut-off -- The Company has historically underestimated the
amount of unbilled revenue related to its businesses. In addition, the Company
has historically recognized less revenue associated with amounts billed in
advance and subsequently earned as services are provided. These differences were
caused by timing issues resulting from the Company's billing process.
Provided below is a comparison of restated summarized quarterly financial data
and summarized quarterly financial data as previously reported.
19
THREE MONTHS ENDED
AUGUST 31, 2003
(AS REPORTED)(1) (AS RESTATED)(1)
---------------- ----------------
Revenue $ 191,664 $ 191,336
Operating income 50,790 47,378
Income tax benefit (expense) 8,677 (1,306)(2)
Net income (loss) 6,404 (4,316)
Income (loss) per common share:
Basic 0.07 (0.04)
Diluted 0.07 (0.04)
(1) Excludes amounts related to Centennial Cable, which have been presented as
discontinued operations.
(2) Income tax benefit (expense) has been adjusted to reflect the effect that
the restatement had on the Company's forecasted income for the year ended
May 31, 2004 and certain quarters in the year ended May 31, 2003, as well
as changes resulting from the Company's application of Financial
Interpretation No. 18, "Accounting for Income Taxes in Interim Periods, an
Interpretation of APB Opinion No. 28," to exclude from the projected
annual effective tax rate losses related to certain foreign jurisdictions.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT
In preparation for complying with the provisions of the Sarbanes-Oxley Act
of 2002 relating to internal control over financial reporting that will be
effective for us for the fiscal year ending May 31, 2005, as well as recent
guidance surrounding such legislation, we have restated our consolidated
financial statements as of May 31, 2003 and for the years ended May 31, 2003 and
2002 (not presented herein), as well as the first three quarters of fiscal year
ended May 31, 2004 for the items discussed in Note 10 to the Condensed
Consolidated Financial Statements. Such restatement relates primarily to
adjustments that were identified in the ordinary course of prior audits of our
consolidated financial statements, but not recorded at the time due to their
immateriality. The effects of the restatement have been reflected in the
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations.
As discussed in Note 4 to the Condensed Consolidated Financial Statements,
the results of operations presented below exclude Centennial Puerto Rico Cable
TV Corp. ("Centennial Cable") due to its classification as a discontinued
operation.
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/A for the fiscal year ended May 31,
2004, filed on October 1, 2004, in addition to the unaudited interim Condensed
Consolidated Financial Statements and accompanying notes presented in Part 1,
Item 1 of this Form 10-Q. Additionally, please refer to the Company's
Registration Statement on Form S-4/A filed on October 1, 2004, for its Pro Forma
Condensed Consolidated Financial Statements which give effect to the disposal of
Centennial Cable by Centennial as if it has occurred on June 1, 2001 and as of
May 31, 2004.
EXECUTIVE OVERVIEW
Company Overview
We are a leading regional wireless and broadband (wireline and cable
television) telecommunications service provider serving over one million
customers in markets covering approximately 19.5 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. 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 and, in Puerto Rico and the Dominican
Republic, broadband services to business and residential customers.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the related notes included in this report. Those
statements in the following discussion that are not historical in nature should
be considered to be forward-looking statements that are inherently uncertain.
Please see "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995" and the "Risk Factors"
section of our 2004 Annual Report on Form 10-K/A.
21
Management's Summary
Our vision is to be the premier regional provider of telecommunications
services by tailoring the ultimate customer experience in the markets we serve.
In the United States, we provide digital wireless service in two
geographic clusters, covering approximately 8.3 million Net Pops. Our Midwest
cluster includes parts of Indiana, Michigan and Ohio, and our Southeast cluster
includes parts of Louisiana, Mississippi and Texas. Our clusters are comprised
of small cities and rural areas that generally have lower penetration levels
than major metropolitan areas.
In the Caribbean region, we offer wireless, wireline and cable television
services in Puerto Rico, wireless and wireline services in the Dominican
Republic and wireless services in the U.S. Virgin Islands. Once we complete the
sale of Centennial Cable we no longer expect to offer cable television services.
For the three months ended August 31, 2004, approximately 86% of our revenue of
our Caribbean operations was derived from our Puerto Rico operations. Puerto
Rico is a U.S. dollar-denominated and Federal Communications Commission ("FCC")
regulated commonwealth of the United States.
The business strategy we use to deliver the ultimate customer experience
entails focusing on discreet geographies and customizing our sales, marketing
and customer support functions to the unique requirements of these markets. Over
75% of our wireless sales in the United States and Caribbean and substantially
all of our broadband and cable television sales are made through our own
employees, which allows us to have a high degree of control over the customer
experience. We use this control to deliver an experience which our research
tells us is unique and valued by the customers in our various markets. Further,
by way of the tailored customer experience and rate plans that are similarly
customized, we target high quality (high usage/high ARPU) postpaid wireless
customers.
Our business strategy also entails ensuring that our networks are of the
highest quality in all our locations. For the three-month period ending August
31, 2004, we spent $9.3 million on capital expenditures in our U.S. wireless
operations. Much of this investment was to build the foundation for an upgrade
of our network to GSM (global system for mobile communications) in our Southeast
cluster. We spent $12.9 million and $5.2 million on capital expenditures in our
Caribbean wireless and broadband operations, respectively, for the three month
period ending August 31, 2004.
We believe that the success of our business is a function of our
performance relative to a number of key drivers. The drivers can be summarized
in our ability to attract and retain customers by profitably providing superior
service at competitive rates. We continually monitor our performance against
these key drivers by evaluating several metrics. In addition to adjusted
operating income (adjusted operating income represents the profitability measure
of our segments -- see Note 7 to the Condensed Consolidated Financial
Statements for reconciliation to the appropriate GAAP measure), the following
key metrics, among other factors, are monitored by management in assessing the
performance of our business:
- Gross postpaid and prepaid wireless additions
- Net gain (loss) -- wireless subscribers
- Revenue per average wireless customer (including roaming
revenue), or ARPU
- Roaming revenue
- Penetration -- total wireless
22
- Postpaid churn -- wireless
- Prepaid churn -- Caribbean wireless
- Average monthly minutes of use per wireless customer
- Fiber route miles -- Caribbean broadband
- Switched access lines -- Caribbean broadband
- Dedicated access line equivalents -- Caribbean broadband
- On-net buildings -- Caribbean broadband
- Capital expenditures
Gross postpaid and prepaid wireless additions represent the number of new
subscribers we are able to add during the period. Growing our subscriber base by
adding new subscribers is a fundamental element of our long-term growth
strategy. We must maintain a competitive offering of products and services to
sustain our subscriber growth. We focus on postpaid customers.
Net gain (loss) -- wireless subscribers represents the number of
subscribers we were able to add to our service during the period after deducting
the number of disconnected or terminated subscribers. By monitoring our growth
against our forecast, we believe we are better able to anticipate our future
operating performance.
Revenue per average wireless customer (including roaming revenue), or
ARPU, represents the average monthly subscriber revenue generated by a typical
subscriber (determined as subscriber revenues divided by average number of
subscribers). We monitor trends in ARPU to ensure that our rate plans and
promotional offerings are attractive to customers and cost-effective. The
majority of our revenues are derived from subscriber revenues. Subscriber
revenues include, among other things: monthly access charges; charges for
airtime used in excess of plan minutes; Universal Service Fund support payment
revenues; long distance revenues derived from calls placed by our customers;
international interconnect revenues; roaming revenue; and other charges such as
activation, voice mail, call waiting and call forwarding.
Roaming revenues represent the amount of revenue we receive from other
wireless carriers for providing service to their subscribers who "roam" into our
markets and use our systems to carry their calls. The per minute rate paid by a
roamer is established by an agreement between the roamer's wireless provider and
us. The amount of roaming revenue we generate is often dependent upon usage
patterns of our roaming partners' subscribers and the rate plan mix and
technology mix of our roaming partners. We closely monitor trends in roaming
revenues because usage patterns by our roaming partners' subscribers can be
difficult to predict.
Penetration -- total wireless represents a percentage, which is calculated
by dividing the number of our subscribers by the total population of potential
subscribers available in the markets that we serve.
Postpaid and prepaid churn represent the number of subscribers that
disconnect or are terminated from our service or where there is a lack of usage
by prepaid customers for a prescribed period of time. Churn is calculated by
dividing the aggregate number of wireless subscribers who cancel service during
each month in a period by the total number of wireless subscribers as of the
beginning of the month. Churn is stated as the average monthly churn rate for
the applicable period. We monitor and seek to control churn so that we can grow
our business without incurring significant sales and marketing cost needed to
replace disconnected subscribers. We must continue to ensure that we offer
excellent network quality and customer service so that our churn rates remain
low.
23
Average monthly minutes of use per wireless customer represents the
average number of minutes ("MOU's") used by our customers during a period. We
monitor growth in MOU's to ensure that the access and overage charges we are
collecting are consistent with that growth. In addition, growth in subscriber
usage may indicate a need to invest in additional network capacity.
Fiber route miles are the number of miles of fiber cable that we have
laid. Fiber is installed to connect our equipment to our customer premises
equipment. As a facilities based carrier, the number of fiber route miles is an
indicator of the strength of our network, our coverage and our potential market.
Switched access lines represent the amount of lines connected to our
switching center and serving customers for incoming and outgoing calls. Growing
our switched access lines is a fundamental element of our strategy. We monitor
the trends in our switched access line growth against forecast to be able to
anticipate future operating performance. In addition, this measurement allows us
to compute our current market penetration in the market we serve.
Dedicated access line equivalents represents the amount of Voice Grade
Equivalent ("VGE") lines used to connect two ends points. We monitor the trends
in our dedicated service using VGE against forecast to anticipate future
operating performance, network capacity requirements and overall growth of our
business.
On-net buildings is a location where we have established a point of
presence to serve one or more customers. Tracking the number of on-net buildings
allows us to size our addressable market and determine the appropriate level of
capital expenditures. As a facilities based competitive local exchange carrier,
or CLEC, it is a critical performance measurement of our growth and a clear
indication of our increased footprint.
Capital expenditures represent the amount spent on upgrades, additions and
improvements to our telecommunications network and back office infrastructure.
We monitor our capital expenditures as part of our overall financing plan for
the company and to ensure that we receive an appropriate rate of return on our
capital investments. This statistic is also used to ensure that capital
investments are in line with network usage trends and consistent with our
objective of offering a high quality network to our customers.
CRITICAL ACCOUNTING POLICIES
The preparation of our Condensed Consolidated Financial Statements and
related disclosures in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities as of the date of the financial
statements and revenues and expenses during the periods reported. We base our
estimates on historical experience, where applicable, and other assumptions that
we believe are reasonable under the circumstances. Actual results may differ
from our estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant
judgment in the preparation of our Condensed Consolidated Financial Statements.
We consider an accounting estimate to be critical if:
- it requires us to make assumptions because information was not
available at the time or it included matters that were highly
uncertain at the time we were making the estimate, and
24
- changes in the estimate or different estimates that we could have
selected may have had a material effect on our financial condition
or results of operations.
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. A worsening of
economic or industry trends beyond our estimates could result in an increase of
our allowance for doubtful accounts by recording additional expense.
Property, Plant and Equipment -- Depreciation
The wireless communications industry is capital intensive. Depreciation of
property, plant and equipment constitutes a substantial operating cost for us.
The cost of our property, plant and equipment, principally wireless
communications equipment, is charged to depreciation expense using the
straight-line method over estimated useful lives. We periodically review changes
in our technology and industry conditions, asset retirement activity and salvage
values to determine if an adjustment to the estimated remaining useful lives and
depreciation rates is necessary. Actual economic lives may differ from our lives
as a result of changes in technology, market conditions and other factors. Such
changes could result in a change in our estimated useful lives and therefore our
depreciation expense in future periods.
Valuation of Long-Lived Assets
Long-lived assets such as property, plant and equipment, and customer
lists are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. In our estimation of
fair value, 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 fair value
of and impairment, if any, of our assets. These estimates are very subjective in
nature; we believe that our estimates are consistent with assumptions that
marketplace participants would use in their estimates of fair value. Estimates
related to recoverability of assets 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 Wireless Licenses -- Valuation of Goodwill and
Indefinite-Lived Intangible Assets
We review goodwill, wireless licenses and cable franchise costs for
impairment based on the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
In accordance with SFAS 142, goodwill is tested for impairment at the reporting
unit level on an annual basis as of January 31st or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value. These events or circumstances would
include a significant change in the business climate, legal factors, operating
performance indicators, competition, sale or disposition of a significant
portion of the business or other factors. We have determined that our reporting
units for SFAS 142 are our operating segments
25
determined under SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). In analyzing goodwill, U.S. wireless licenses
and Caribbean wireless licenses for potential impairment, we use projections of
future cash flows from each reporting unit to determine whether its estimated
value exceeds its carrying value. These projections of cash flows are based on
our views of growth rates, time horizons of cash flow forecasts, assumed
terminal value, estimates of our future cost structures and anticipated future
economic conditions and the appropriate discount rates relative to risk and
estimates of residual values. These projections are very subjective in nature.
We believe that our estimates are consistent with assumptions that marketplace
participants would use in their estimates of fair value. The use of different
estimates or assumptions within our discounted cash flow model (e.g., growth
rates, future economic conditions or discount rates and estimates of terminal
values) when determining the fair value of the reporting unit are subjective and
could result in different values and may affect any related goodwill, wireless
licenses or cable franchise costs impairment charge.
RESULTS OF OPERATIONS
We had 1,068,100 wireless subscribers at August 31, 2004, as compared to
968,700 at August 31, 2003, an increase of 10%. Net income for the three months
ended August 31, 2004 was $8.5 million, as compared to a net loss of $4.3
million for the three months ended August 31, 2003. Basic earnings per share for
the three months ended August 31, 2004 was $0.08 as compared to basic loss per
share of $(0.04) for the three months ended August 31, 2003. Diluted earnings
per share for the three months ended August 31, 2004 was $0.08 as compared to
diluted loss per share of $(0.04) for the three months ended August 31, 2003.
In accordance with SFAS No. 109, "Accounting for Income Taxes", and APB
opinion No. 28, "Interim Financial Reporting", we have recorded our tax expense
from continuing operations for the three months ended August 31, 2004 based on
our projected annual worldwide effective tax rate of 56.9%. Our projected annual
worldwide effective tax rate of 56.9% is impacted by the following variables:
1. book losses generated in the Dominican Republic for which it is more
likely than not that a tax benefit will not be realized;
2. state taxes net of federal tax benefit;
3. foreign taxes for which we cannot claim a foreign tax credit.
26
Consolidated Operations
THREE MONTH ENDED
AUGUST 31,
---------------------- $ %
2004 2003 CHANGE CHANGE
---- ---- ------ ------
(Unaudited)
(in thousands,except
per share data)
Operating income.......................... $ 62,011 $ 47,378 $ 14,633 31%
Net income (loss)......................... 8,467 (4,316) 12,783 *
Earnings (loss) per share:
Basic................................... 0.08 (0.04) 0.12 *
Diluted................................. 0.08 (0.04) 0.12 *
* Percentage change not meaningful.
U.S. Wireless Operations
THREE MONTHS ENDED
(UNAUDITED)
----------------------------- %
(In thousands) 8/31/04 8/31/03 $ CHANGE CHANGE
- -------------- ------- ------- -------- ------
Revenue:
Service revenue $ 85,918 $72,142 $ 13,776 19%
Roaming revenue 13,308 17,047 (3,739) (22)
Equipment sales 3,841 5,265 (1,424) (27)
------- ------ ------ --
Total revenue 103,067 94,454 8,613 9
------- ------ ------ --
Costs and expenses:
Cost of services 16,792 18,589 (1,797) 10
Cost of equipment sold 11,423 13,161 (1,738) (13)
Sales and marketing 12,607 11,421 1,186 10
General and administrative 14,292 14,342 (50) -
------- ------ ------ --
Total costs and expenses 55,114 57,513 (2,399) (4)
-------- ------- -------- --
Adjusted operating income (1) $ 47,953 $36,941 $ 11,012 30%
======== ======= ======== ==
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 7 to the condensed consolidated financial statements for a
reconciliation to the appropriate GAAP measure.
Revenue. U.S. wireless service revenue increased in the three months ended
August 31, 2004, as compared to the three months ended August 31, 2003. The
increase was primarily due to an increase in service revenue from existing
subscribers of $12.7 million and growth in revenue from new subscribers of $1.1
million as compared to the same period last year. In addition, as a result of an
order received from the Federal Communications Commission ("FCC") during the
three months ended August 31, 2004, U.S. wireless became entitled to collect and
therefore recognized $8.5 million of revenue related to payments from the
universal service fund ("USF") on account of its designation as an eligible
telecommunications carrier in Louisiana, Michigan and Mississippi. $5.0 million
of the $8.5 million
27
relates to USF support in Louisiana for prior periods for which the amount did
not become known and realizability was not probable until the current quarter
with receipt of the FCC order.
U.S. wireless roaming revenue decreased for the three months ended August
31, 2004. As we previously anticipated, the decrease was primarily the result of
lower average roaming rates per minute as well as a decrease in minutes of use.
Our U.S. wireless operations had approximately 551,400 and 546,100
subscribers at August 31, 2004 and 2003, respectively. Postpaid subscribers
account for 96% of total U.S. wireless subscribers as of August 31, 2004. During
the twelve months ended August 31, 2004, increases from new activations of
163,200 were offset by subscriber cancellations of 157,900. The monthly postpaid
churn rate was 2.1% for the three months ended August 31, 2004, as compared to
1.8% for the same period last year. The cancellations experienced by the U.S.
wireless operations were primarily due to competitive factors and non-payment.
Equipment sales decreased during the three months ended August 31, 2004,
as compared to the three months ended August 31, 2003 due primarily to lower
activations, as well as an increase in phones that were provided free to
customers in connection with new promotions.
U.S. wireless revenue per subscriber per month ("ARPU") was $62 for the
three months ended August 31, 2004, as compared to $58 for the same period a
year ago. Revenue per average wireless customer includes $5.0 million of
USF revenue related to prior quarters. Revenue per average wireless customer
excluding this $5.0 million of USF revenue was $59. Average minutes of use per
subscriber were 518 per month for the three months ended August 31, 2004 as
compared to 412 for the same period last year. Wireless ARPU increased due to
the aforementioned USF revenue.
Costs and expenses. Cost of services decreased during the three months
ended August 31, 2004, as compared to the same period last year, primarily due
to a decrease in incollect roaming cost which was driven primarily by lower
incollect roaming rates and also due to amounts received as reimbursements for
our E911 costs.
Cost of equipment sold decreased for the three months ended August 31,
2004, as compared to the same period last year, primarily due to lower
activations and also due to a decrease in average cost per phone.
Sales and marketing expenses increased for the three months ended August
31, 2004 as compared to the same period in the prior year, due primarily to
increased advertising associated with new promotions, partially offset by lower
commissions as a result of lower activations.
Adjusted operating income for the U.S. wireless operations increased for
the three months ended August 31, 2004 as compared to the same period in fiscal
2004 primarily due to the aforementioned USF revenue.
28
Caribbean Wireless Operations
THREE MONTHS ENDED
(UNAUDITED)
---------------------------
%
(In thousands) 8/31/04 8/31/03 $ CHANGE CHANGE
- --------------- ------- ------- -------- ------
Revenue:
Service revenue $79,962 $70,177 $ 9,785 14%
Roaming revenue 458 1,383 (925) (67)
Equipment sales 2,585 2,544 41 2
------- ------- ------- ---
Total revenue 83,005 74,104 8,901 12
------- ------- ------- ---
Costs and expenses:
Cost of services 12,686 12,144 542 4
Cost of equipment sold 9,685 8,392 1,293 15
Sales and marketing 10,245 9,372 873 9
General and administrative 18,151 13,857 4,294 31
------- ------- ------- ---
Total costs and expenses 50,767 43,765 7,002 16
------- ------- ------- ---
Adjusted operating income (1) $32,238 $30,339 $ 1,899 6%
======= ======= ======= ===
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 7 to the condensed consolidated financial statements
for a reconciliation to the appropriate GAAP measure.
Revenue. Caribbean wireless service revenue increased for the three months
ended August 31, 2004, as compared to the three months ended August 31, 2003.
The increase in Caribbean wireless service revenue was primarily due to growth
in revenue from new subscribers of $17.6 million for the three months ended
August 31, 2004, partially offset by a decrease in service revenue from existing
subscribers of $7.8 million. The growth in service revenue was less than the
growth in subscribers due to a larger proportionate increase in prepaid
subscribers in the Dominican Republic which generally have a lower ARPU, as well
as to increased sales of lower ARPU companion plans in Puerto Rico.
Our Caribbean wireless operations had approximately 516,700 subscribers at
August 31, 2004, an increase of 22% from 422,600 subscribers at August 31, 2003.
During the twelve months ended August 31, 2004, increases from new activations
of 287,800 were offset by subscriber cancellations of 193,700. The cancellations
experienced by our Caribbean wireless operations were primarily the result of a
lack of usage by our prepaid customers, competitive factors and non-payment.
The monthly postpaid churn rate increased to 2.4% for three months ended
August 31, 2004 from 2.1% for the same period last year. Our postpaid
subscribers represented approximately 73% of our total Caribbean wireless
subscribers at August 31, 2004, down from approximately 76% at August 31, 2003.
The decrease in the percentage of postpaid customers is due to growth in our
Dominican Republic operations, which have a higher percentage of prepaid
customers.
Caribbean wireless ARPU was $55 for the three months ended August 31,
2004, as compared to $60
29
for the same period last year. The decrease in ARPU was primarily due to a
change in the subscriber mix as the percentage of total Caribbean subscribers
from the Dominican Republic has continued to increase. The majority of the
subscribers in the Dominican Republic are prepaid subscribers which generally
have a lower ARPU than postpaid subscribers. In addition, the decrease in ARPU
was caused by an increase in sales of companion rate plans in Puerto Rico.
Our subscribers used an average of 947 minutes of airtime per month during
the three months ended August 31, 2004, compared to 894 minutes per month during
the three months ended August 31, 2003. Our postpaid subscribers used an average
of 1,261 minutes of airtime per month during the three months ended August 31,
2004, as compared to 1,143 minutes of use per month during the three months
ended August 31, 2003.
Revenue from Caribbean wireless roaming decreased for the three months
ended August 31, 2004 compared to the three months ended August 31, 2003. The
decrease was primarily due to the loss of Verizon Wireless roaming traffic in
Puerto Rico.
Costs and expenses. Cost of services increased during the three months
ended August 31, 2004 as compared to the three months ended August 31, 2003. The
increase was primarily due to increased tower site and utilities expenses.
Cost of equipment sold increased during the three months ended August 31,
2004 as compared to the same period last year. The increase was primarily due to
a higher percentage of phones sold instead of leased in Puerto Rico as compared
to the prior year, as well as to an increase in the number of phones used for
upgrades and retention. An increase in the percentage of phones sold increases
our costs and expenses because the cost of the phone sold is charged to cost of
equipment sold whereas the cost of a phone which is leased by a customer is
charged to depreciation expense over the life of the phone.
Sales and marketing expenses increased during the three months ended
August 31, 2004 as compared to the same period last year. The increase is due to
increased commission expense in Puerto Rico as a result of higher activations
and increased costs in the Dominican Republic associated with growing the
subscriber base.
General and administrative expenses increased during the three months
ended August 31, 2004 as compared to the same period in fiscal 2003. The
increase was primarily due to increases in compensation costs associated with
the expanding subscriber base, costs related to preparation for the audit of
internal control required by the Sarbanes-Oxley Act and increases in subscriber
billing expenses due to increased subscribers.
30
Caribbean Broadband Operations
THREE MONTHS ENDED
(UNAUDITED)
-------------------------- %
(In thousands) 8/31/04 8/31/03 $ CHANGE CHANGE
- -------------- ------- ------- -------- -------
Revenue:
Switched revenue $11,379 $ 8,799 $2,580 29%
Dedicated revenue 12,534 11,842 692 6
Other revenue 9,596 5,642 3,954 70
------- ------- ------ --
Total revenue 33,509 26,283 7,226 27
------- ------- ------ --
Costs and expenses:
Cost of services 14,667 10,148 4,519 45
Cost of equipment sold 218 121 97 80
Sales and marketing 1,772 1,348 424 31
General and administrative 5,442 5,288 154 3
------- ------- ------ --
Total costs and expenses 22,099 16,905 5,194 31
------- ------- ------ --
Adjusted operating income (1) $11,410 $ 9,378 $2,032 22%
======= ======= ====== ==
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 7 to the condensed consolidated financial statements
for a reconciliation to the appropriate GAAP measure.
Revenue. Caribbean broadband revenue increased for the three months ended
August 31, 2004, as compared to the three months ended August 31, 2003. This
change was due to a 20% increase in total access lines and equivalents to
278,800 and to an increase in other revenue resulting from an increase in
southbound terminating minutes to the Dominican Republic.
Switched revenue increased for the three months ended August 31, 2004, as
compared to the same period last year. The increase was primarily due to a 23%
increase in switched access lines to 54,000 as of the end of August 31, 2004 and
a corresponding growth in minutes of use.
Dedicated revenue increased for the three months ended August 31, 2004, as
compared to the same period last year. The increase was primarily the result of
a 20% growth in voice grade equivalent dedicated lines to 224,800.
Other revenue increased for the three months ended August 31, 2004 from
the same period last year. The increase was primarily due to an increase in
southbound terminating minutes to the Dominican Republic. The Dominican Republic
termination revenue generally has lower margins than the switched and dedicated
revenue.
Costs and expenses. Cost of services increased during the three months
ended August 31, 2004, as compared to the same period last year. The increase
was primarily due to an increase in access charges in the Dominican Republic,
resulting from the increase in the number of international long distance minutes
to the Dominican Republic that we terminate.
31
Sales and marketing expenses increased during the three months ended
August 31, 2004, as compared to the three months ended August 31, 2003. The
increase was primarily due to increased compensation and advertising costs
associated with growing the customer base.
CONSOLIDATED
Other non-operating income and expenses. Net interest expense was $36.5
million for the three months ended August 31, 2004, a decrease of $12.5 million,
or 26%, as compared to $49.0 million for the same period a year ago. Gross
interest expense was $36.7 million for the three months ended August 31, 2004,
as compared to $49.2 million for the same period a year ago.
The $12.6 million decrease in net interest expense resulted primarily from
the write off, during the first quarter of fiscal 2004, of approximately $8.6
million of unamortized issuance costs related to the Term Loans under our old
senior secured credit facility, (the "Old Senior Secured Credit Facility") that
were prepaid from the proceeds of the issuance of the $500 million 10 1/8%
senior unsecured notes due 2013 (the "2013 Senior Notes".)
The weighted-average debt outstanding during the three months ended August
31, 2004 was $1,768.6 million, an increase of $19.8 million as compared to the
weighted-average debt level of $1,748.8 million during the three months ended
August 31, 2003. Including the amortization of debt issuance costs in both the
three months ended August 31, 2004 and 2003, our weighted-average interest rate
was 8.3% for the three months ended August 31, 2004, as compared to 11.3% for
the same period a year ago. Excluding the amortization of debt issuance costs in
both the three months ended August 31, 2004 and 2003, the weighted-average
interest rate was 7.9% for the three months ended August 31, 2004, as compared
to 8.8% for the same period a year ago.
Income (loss) from continuing operations before income tax expense and
minority interest in income of subsidiaries for the three months ended August
31, 2004 was $24.8 million as compared to ($2.5) million for the three months
ended August 31, 2003. Income tax expense on continuing operations was $14.1
million for the three months ended August 31, 2004, as compared to $1.3 million
for the same period last year.
These factors resulted in net income of $8.5 million for the three months
ended August 31, 2004, as compared to a net loss of $4.3 million for the same
period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2004, we had total liquidity of $239.2 million, consisting
of cash and cash equivalents totaling $89.6 million and approximately $149.6
million available under our revolving credit facility.
On February 9, 2004, we issued the 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, we entered into a new $750 million senior
secured credit facility (the "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 these funds to make the following
payments:
32
- $627.6 million to repay all principal amounts outstanding under our
Old Senior Secured Credit Facility, which extinguished the o Old
Senior Secured Credit Facility;
- $197.3 million to repurchase all of our outstanding unsecured
subordinated notes due 2009 ("Mezzanine Debt"), which was o accruing
paid-in-kind interest at a rate of 13.0%;
- $73.8 million to repurchase or redeem $70.0 million aggregate
principal amount of our outstanding $370.0 million 2008 Senior o
Subordinated Notes;
- $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 of which $597.0 million
remained outstanding at August 31, 2004 and 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 of $564.0 million 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 that had no amounts outstanding as of the close of the New Senior
Secured Credit Facility, but may be drawn upon at any time. At August 31, 2004,
$149.6 million was available under the revolving credit facility. If the
remaining 2008 Senior Subordinated Notes are not refinanced by June 15, 2008,
the aggregate amount outstanding under the New Senior Secured Credit Facility
will 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") (weighted average rate of 1.20% as of August 31, 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.
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
stockholders. Our proceeds (after underwriting commissions, but before other
expenses) of $36.8 million were used to prepay a portion of our Mezzanine Debt,
which was then accruing paid-in-kind interest at a rate of 13%. All of the $36.8
million payment was recorded as interest expense. 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 June 20, 2003, we sold $500.0 million aggregate principal amount of our
2013 Senior Notes. Centennial Puerto Rico Operations Corp. ("CPROC") is a
guarantor of the 2013 Senior Notes. We used
33
the net proceeds from the 2013 Senior Notes offering to make repayments of
$470.0 million under the Old 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 fiscal year
ended May 31, 2004. As a result of the extinguishment of the Old Senior Secured
Credit Facility and a portion of the 2008 Senior Subordinated Notes, we
wrote-off approximately $52.9 million, net of accumulated amortization of $29.5
million, in debt issuance costs for the fiscal year ended May 31, 2004. We
recorded a loss on extinguishment of debt of $39.2 million for the fiscal year
ended May 31, 2004.
In December 1998, we issued $370.0 million of 2008 Senior Subordinated
Notes. CPROC is a guarantor of the 2008 Senior Subordinated Notes. In connection
with the Debt Refinancing, we repurchased or redeemed $70.0 million aggregate
principal amount of such notes.
An affiliate of Welsh, Carson, Anderson and Stowe, our principal
stockholder, owned approximately $189.0 million principal amount of the 2008
Senior Subordinated Notes. Approximately $34.9 million, or 49.9%, of the $70.0
million of the 2008 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 August 31, 2004, we had repaid
the Mezzanine Debt in full.
Under certain of the above debt agreements, we are required to maintain
certain financial and operating covenants, and are limited in our ability to,
among other things, incur additional indebtedness and enter into transactions
with affiliates. Under certain circumstances, we are prohibited from paying cash
dividends on our common stock under certain of the above debt agreements. We
were in compliance with all covenants of our debt agreements at August 31, 2004.
For the three months ended August 31, 2004, the ratio of earnings to fixed
charges was 1.65 to 1. 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 $29.2 million relating to depreciation and amortization.
As of August 31, 2004, we had $630.2 million of property, plant and
equipment, net, placed in service. Capital expenditures for the U.S. wireless
operations were $9.3 million, representing 33.9% of total capital expenditures,
for the three month period ended August 31, 2004. 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
GSM/GPRS network in each of our cell sites in our Southeast cluster. Capital
expenditures for the Caribbean wireless operations were $12.9 million,
representing 47.1% 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
34
were $5.2 million, representing 19.0% of total capital expenditures including.
These expenditures were to continue the expansion of our Caribbean Broadband
network infrastructure. During fiscal 2005, we anticipate capital expenditures
of approximately $160.0 million, which includes $25.0 million to build out the
Grand Rapids and Lansing, Michigan licenses we acquired from AT&T Wireless on
October 1, 2004.
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 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.
35
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 and Stowe ("Welsh Carson") 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.
On September 6, 2004, we entered into a definitive agreement to sell our
wholly owned subsidiary, Centennial Cable, to an affiliate of Hicks, Muse, Tate
& Furst Incorporated for approximately $155.0 million in cash. Completion of the
transaction is subject to customary closing conditions, including regulatory
approval of the transfer of Centennial Cable's cable franchises, and is expected
to occur in the first quarter of calendar year 2005. The expected disposition
has been accounted for by Centennial as a discontinued operation in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144").
36
In August 2004, we entered into a definitive agreement with AT&T Wireless
to acquire 10 MHz of PCS spectrum covering approximately 4.1 million Pops in
Michigan and Indiana for an aggregate purchase price of $19.5 million. At the
same time, we entered into a definitive agreement to sell to Verizon Wireless
for $24.0 million in cash the Indianapolis and Lafayette, Indiana licenses
covering approximately 1.9 million Pops that we expected to acquire from AT&T
Wireless. We received approval of these transactions from the FCC and
consummated the transactions on October 1, 2004, prior to the FCC approvals
becoming final orders. As a result of the transactions, we have acquired
licenses covering approximately 2.2 million incremental Pops and received $4.5
million in cash.
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 August 31, 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 August
31, 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 for future issuance and the resale of 17,000,000 shares of
common stock owned by our controlling stockholders remain available.
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.
The GSM overlay required in fiscal 2004 and will require in fiscal 2005
incremental expenditures, above our historical U.S. wireless expenditure levels,
of approximately $10.0 million to $15.0 million.
During the fiscal years ended May 31, 2003 and May 31, 2002, an affiliate
of Welsh Carson purchased in open market transactions approximately $189.0
million principal amount of the 2008 Senior Subordinated Notes. On September 24,
2002, we entered into an indemnification agreement with the Welsh Carson
affiliate pursuant to which the Welsh Carson affiliate agreed to indemnify us in
respect of taxes which may become payable by us as a result of these purchases.
In connection with these transactions, we recorded a $15.9 million 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. As part of the February 2004
refinancing transactions, we redeemed $70.0 million in aggregate principal
amount of the 2008 Senior Subordinated Notes, reflecting approximately $34.9
million principal amount of 2008 Senior Subordinated Notes held by the Welsh
Carson affiliate.
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 GSM/GPRS technology. We have committed to purchase approximately $15.9
million of equipment and services under the agreement. As of August 31, 2004, we
have paid approximately $6.2 million in connection with this agreement.
37
In June 2004, we signed an amendment to our billing services agreement
with Convergys Information Management Group, Inc. ("Convergys"). Convergys
acquired Alltel Information Services, Inc. in December 2003. The agreement has a
term of seven years and Convergys agreed to provide billing services, facilitate
network fault detection, correction and management performance and usage
monitoring and security for our wireless operations throughout the Company.
Subject to the terms of the agreement including performance standards, we have
committed to purchase a total of approximately $74.6 million of services through
2011 under this agreement. These commitments are classified as purchase
obligations in the Contractual Obligations table below.
The following table summarizes our scheduled contractual cash obligations
and commercial commitments at August 31, 2004 (unless otherwise noted), and the
effect that such obligations are expected to have on liquidity and cash flow in
future periods.
LESS
THAN 1
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------------------- ----- ------- --------- --------- -------------
Long-term debt obligations......... $1,767,790 $ 5,856 $11,910 $312,430 $1,437,594
Operating leases obligations (1)... 103,745 11,813 17,807 11,831 62,294
Purchase obligations 80,282 18,364 20,806 21,558 19,554
---------- ------- ------- -------- ----------
Total contractual cash
obligations 1,951,817 36,033 50,523 345,819 1,519,442
--------- ------- ------- -------- ----------
Sublessor agreements (1) 1,893 681 855 357 -
---------- ------- ------- -------- ----------
Net $1,949,924 $35,352 $49,668 $345,462 $1,519,442
========== ======= ======= ======== ==========
(1) Represents our commitments associated with operating leases as of May 31,
2004.
SUBSEQUENT EVENTS
In August 2004, we entered into a definitive agreement with AT&T
Wireless to acquire 10 MHz of PCS spectrum covering approximately 4.1 million
Pops in Michigan and Indiana for an aggregate purchase price of $19.5 million.
At the same time, we entered into a definitive agreement to sell to Verizon
Wireless for $24.0 million in cash the Indianapolis and Lafayette, Indiana
licenses covering approximately 1.9 million Pops that we expected to acquire
from AT&T Wireless. We received approval of these transactions from the FCC and
consummated the transactions on October 1, 2004, prior to the FCC approvals
becoming final orders. As a result of the transactions, we have acquired
licenses covering approximately 2.2 million incremental Pops and received $4.5
million in cash.
In connection with the issuance of the 2014 Senior Notes on February
9, 2004, we entered into a registration rights agreement pursuant to which it
agreed, among other things, (i) to register the 2014 Senior Notes with the SEC
within 180 days after February 9, 2004 and (ii) to consummate the related
exchange offer within 210 days after February 9, 2004. As a result of the
restatement described in Note 10 to the Consolidated Financial Statements, the
registration process has been delayed beyond the required dates. As a result,
pursuant to the terms of the registration rights agreement, effective August 8,
2004, we are obligated to pay an additional 0.50% per annum of interest on the
2014 Senior Notes. We are obligated to pay this additional interest until the
Company consummates the exchange offer. We expect to consummate the exchange
offer in early November 2004.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
38
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Statements in this report that are not historical facts are hereby
identified as "forward-looking statements." Where, in any forward-looking
statement, we or our management expresses an expectation or belief as to future
results or actions, there can be no assurance that the statement of expectation
or belief will result or be achieved or accomplished. Our actual results may
differ materially from our expectations, plans or projections. Forward-looking
statements can be identified by the use of the words "believe," "expect,"
"estimate," "anticipate," "project," "intend," "may," "will" and similar
expressions, or by discussion of competitive strengths or 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.
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:
- the effects of vigorous competition in the telecommunications
industry, which may increase churn, increase our costs to compete
and decrease prices charged;
- the fact that many of our competitors are larger, better capitalized
and less leveraged than we are, have greater resources than we do,
may offer less expensive products than we do and may offer more
technologically advanced products than we do;
- our substantial debt obligations, including restrictive covenants
and consequences of default contained in our financing arrangements,
which place limitations on how we conduct business;
- 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, terrorism, wind storms and weather
conditions on tourism in the Caribbean;
- uncertainty concerning the effect on our business of wireless local
number portability, which permits the wireless phone numbers that we
allocate to our customers to be portable when our customer switches
to another carrier;
- 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 increased subscriber
cancellations, a continued reduction of prices charged, a reduction
in roaming revenue and lower average revenue per subscriber;
- the availability and cost of additional capital to fund our
operations, including the need to refinance or amend existing
indebtedness;
- our dependence on roaming agreements for a significant portion of
our U.S. wireless revenue and the continued price declines in
roaming rates and potential reduction of roaming minutes of use;
39
- our dependence on roaming agreements for our ability to offer our
wireless customers nationwide rate plans at competitive prices;
- 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 telecommunications industry;
- the effects of governmental regulation of the telecommunications
industry, including changes in the level of support provided to us
by the Universal Service Fund;
- 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;
- 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;
- fluctuations in currency values related to our Dominican Republic
operations;
- our ability to acquire, and the cost of acquiring, additional
spectrum in our markets to support growth and advanced technologies;
- local operating hazards and risks in the areas in which we operate,
including without limitation, terrorist attacks, hurricanes,
tornadoes, earthquakes, windstorms and other natural disasters;
- our ability to manage, implement and monitor billing and operational
support systems;
- the results of litigation filed or which may be filed against us,
including litigation relating to wireless billing, using wireless
telephones while operating an automobile or 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; and
- the control of us retained by some of our stockholders and
anti-takeover provisions.
We undertake no obligation, other than as may be required under the
federal securities laws, to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
We do not assume responsibility for the accuracy and completeness of the
forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are reasonable, any or all of the
forward-looking statements contained in this report and in any other public
statements that are made may prove to be incorrect. This may occur as a result
of inaccurate assumptions as a consequence of known or unknown risks and
uncertainties. All of the forward-looking statements are qualified in their
entirety by reference to the factors discussed under the caption "Risk Factors"
of our 2004 Annual Report on Form 10 K/A filed on October 1, 2004. We caution
that these risk factors may not be exhaustive. We operate in a continually
changing business environment, and new risk
40
factors emerge from time to time. We cannot predict these new risk factors, nor
can we assess the impact, if any, of the new risk factors on our business or the
extent to which any factor or combination of factors may cause actual results to
differ materially from those expressed or implied by any forward-looking
statement. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not occur. You should
carefully read this report in its entirety. It contains information that you
should consider in making any investment decision in any of our securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks due to fluctuations in interest
rates. Approximately $597.0 million of our long-term debt has variable interest
rates. However, with the issuance of the 2013 Senior Notes in June 2003, we have
substantially reduced our reliance on variable rate debt. We have utilized
interest rate swap and collar agreements to hedge variable interest rate risk on
a portion of our variable interest rate debt as part of our interest rate risk
management program. There are no interest rate swap or collar agreements
outstanding as of August 31, 2004.
The table below presents principal amounts and related average interest
rate by year of maturity for our long-term debt. Weighted average variable rates
are based on implied forward rates in the yield curve as of August 31, 2004:
FISCAL YEAR ENDED MAY 31,
---------------------------
2005 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE
(IN THOUSANDS)
-------------------------------------------------------------------------------------------
Long-term debt:
Fixed rate $ (144) $ (62) $ (28) $ 120 $ 300,310 $ 870,594 $1,170,790 $1,208,665
Average fixed Interest
rate 11.3% 12.7% 10.0% 10.0% 10.7% 9.4% 9.7% --
Variable rate $ 6,000 $6,000 $6,000 $6,000 $ 6,000 567,000 $ 597,000 $ 598,500
Average variable
Interest rate(1) 2.3% 3.2% 4.0% 4.5% 5.0% 5.3% 5.2% --
(1) Represents the average interest rate before applicable margin on the New
Senior Secured Credit Facility debt.
We have variable rate debt that at August 31, 2004 and 2003 had
outstanding balances of $597.0 million and $637.9 million, respectively. The
fair value of such debt approximates the carrying value at August 31, 2004.
Based on our unhedged variable rate obligations outstanding at August 31, 2004 a
hypothetical increase or decrease of 10% in the weighted average variable
interest rate would have increased or decreased our annual interest expense by
approximately $0.7 million.
ITEM 4. CONTROLS AND PROCEDURES
As discussed in Note 10 to the Condensed Consolidated Financial
Statements, we restated our consolidated financial statements presented in this
Form 10-Q.
We carried out an evaluation, under the supervision and with the
participation of our management including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13-15(b) of the Exchange
Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective as
of August 31, 2004.
41
There was no change in our internal control over financial reporting
during the first quarter of fiscal 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
42
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 that it is probable that 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 $30.0 million. The complaint seeks
specific performance of the letter of intent or not less than $15.0 million in
damages. We do not believe that it is probable that any damage payments would
have a material adverse effect on our results of operations.
We are subject to other claims and legal actions that arise in the
ordinary course of business. We do not believe that any of these other pending
claims or legal actions will have a material adverse effect on our business or
results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY 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
43
ITEM 6. EXHIBITS
Each exhibit identified below is filed as a part of this report.
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 Act of
2002
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
October 12, 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)
45