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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended February 28, 2005
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 - 103,919,858 outstanding shares as of April 4, 2005
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... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 34
Item 4. Controls and Procedures................................................................. 35
Part II - Other Information..................................................................... 35
Item 1. Legal Proceedings....................................................................... 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 36
Item 3. Defaults Upon Senior Securities......................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders..................................... 36
Item 5. Other Information....................................................................... 36
Item 6. Exhibits................................................................................ 37
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FEBRUARY 28,
2005
(UNAUDITED) MAY 31, 2004
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 161,823 $ 105,712
Accounts receivable, less allowance for doubtful accounts of $6,784 and $5,385, respectively 98,022 84,583
Inventory - phones and accessories, net 19,913 15,986
Prepaid expenses and other current assets 39,833 32,280
Assets held for sale - 134,625
------------ ------------
Total Current Assets 319,591 373,186
Property, plant and equipment, net 609,410 631,671
Equity investments in wireless systems, net 2,473 2,697
Debt issuance costs, less accumulated amortization of $14,186 and $12,719, respectively 46,901 54,948
U.S. wireless licenses 382,909 371,766
Caribbean wireless licenses, net 69,742 70,492
Goodwill 26,704 26,704
Customer lists, net - 319
Transmission and connecting rights, net 775 840
Cable facility, net 4,030 4,210
Other assets, net 4,369 2,814
------------ ------------
TOTAL ASSETS $ 1,466,904 $ 1,539,647
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,764 $ 5,850
Accounts payable 27,498 26,884
Accrued expenses and other current liabilities 162,336 191,559
Payable to affiliates 125 125
Liabilities held for sale - 18,766
------------ ------------
Total Current Liabilities 195,723 243,184
Long-term debt 1,651,931 1,762,016
Deferred federal income taxes 92,462 71,321
Other liabilities 12,413 10,224
Minority interest in subsidiaries 2,185 1,543
Commitments and contingencies (See note 7)
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized, no shares issued
or outstanding - -
Common stock, $0.01 par value per share, 240,000,000 shares authorized; issued 103,682,208
and 103,223,924 shares, respectively; and outstanding 103,611,705 and 103,153,421 shares,
respectively 1,036 1,032
Additional paid-in capital 477,047 474,918
Accumulated deficit (964,816) (1,023,514)
------------ ------------
(486,733) (547,564)
Less: cost of 70,503 common shares in treasury (1,077) (1,077)
------------ ------------
Total Stockholders' Deficit (487,810) (548,641)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,466,904 $ 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 NINE MONTHS ENDED
---------------------------- ----------------------------
FEBRUARY 29, FEBRUARY 29,
FEBRUARY 28, 2004 FEBRUARY 28, 2004
2005 (AS RESTATED) 2005 (AS RESTATED)
------------ ------------- ------------ -------------
Revenue:
Service revenue $ 214,067 $ 187,349 $ 631,120 $ 554,374
Equipment sales 7,767 8,489 21,605 23,547
----------- ----------- ----------- -----------
221,834 195,838 652,725 577,921
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of services (exclusive of depreciation and amortization
shown below) 41,722 35,135 123,806 107,745
Cost of equipment sold 25,273 22,051 69,514 65,818
Sales and marketing 23,601 22,287 70,228 67,083
General and administrative 40,324 38,052 116,908 105,963
Depreciation and amortization 71,269 28,708 130,034 87,751
Loss(gain) on disposition of assets 150 (63) (14,782) (748)
----------- ----------- ----------- -----------
202,339 146,170 495,708 433,612
----------- ----------- ----------- -----------
Operating income 19,495 49,668 157,017 144,309
----------- ----------- ----------- -----------
Income from equity investments 137 24 427 52
Interest expense, net (37,163) (41,889) (110,580) (124,898)
Loss on extinguishment of debt (6,749) (28,625) (6,749) (36,160)
Other (expense) income (83) 232 (2,165) (370)
----------- ----------- ----------- -----------
(Loss) income from continuing operations before
income tax expense and minority interest
in income of subsidiaries (24,363) (20,590) 37,950 (17,067)
Income tax benefit (expense) 28,785 6,416 (4,034) (2,789)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
minority interest in income of subsidiaries 4,422 (14,174) 33,916 (19,856)
Minority interest in income of subsidiaries (191) (125) (642) (408)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 4,231 (14,299) 33,274 (20,264)
Discontinued operations:
Income (loss) 1,280 (2,483) 2,767 (7,565)
Gain on disposition 38,353 - 38,353 -
Tax expense (14,977) 1,302 (15,696) 1,871
----------- ----------- ----------- -----------
Net income (loss) from discontinued operations 24,656 (1,181) 25,424 (5,694)
Net income (loss) $ 28,887 $ (15,480) $ 58,698 $ (25,958)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic
Earnings (loss) per share from continuing operations $ 0.04 $ (0.14) $ 0.32 $ (0.21)
Earnings (loss) per share from discontinued operations 0.24 (0.01) 0.25 (0.05)
----------- ----------- ----------- -----------
Net income (loss) per share $ 0.28 $ (0.15) $ 0.57 $ (0.26)
=========== =========== =========== ===========
Diluted
Earnings (loss) per share from continuing operations $ 0.04 $ (0.14) $ 0.32 $ (0.21)
Earnings (loss) per share from discontinued operations 0.23 (0.01) 0.24 (0.05)
----------- ----------- ----------- -----------
Net income (loss) per share $ 0.27 $ (0.15) $ 0.56 $ (0.26)
=========== =========== =========== ===========
Weighted-average number of shares outstanding:
Basic 103,471 103,046 103,332 98,868
=========== =========== =========== ===========
Diluted 105,692 103,046 104,772 98,868
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
2
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
FEBRUARY 29,
FEBRUARY 28, 2004
2005 (AS RESTATED)
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 58,698 $ (25,958)
Less: Income (loss) from discontinued operations 25,424 (5,694)
------------ ------------
Income (loss) from continuing operations 33,274 (20,264)
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities from continuing operations:
Depreciation and amortization 130,034 87,751
Non cash, paid-in kind interest - 13,997
Minority interest in income of subsidiaries 642 408
Income from equity investments (427) (52)
Distributions received from equity investments 651 14
Gain on disposition of assets (14,782) (748)
Changes in assets and liabilities (30,271) 5,206
------------ ------------
Total adjustments 85,847 106,576
------------ ------------
Net cash provided by operating activities from continuing operations 119,121 86,312
------------ ------------
INVESTING ACTIVITIES:
Proceeds from disposition of assets, net of cash expenses 150 2,442
Capital expenditures (100,892) (94,975)
Proceeds from sale of discontinued operations 157,629 -
Proceeds from sale of wireless spectrum 24,000 -
Payments for purchase of wireless spectrum (19,495) -
------------ ------------
Net cash provided by (used in) investing activities from continuing operations 61,392 (92,533)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt - 1,425,000
Repayment of debt (120,410) (1,382,365)
Debt issuance costs paid - (48,158)
Net proceeds from the issuance of common stock - 34,663
Proceeds from the exercise of stock options 1,709 1,005
Proceeds from issuance of common stock under employee stock purchase plan 425 390
------------ ------------
Net cash (used in) provided by financing activities from continuing operations (118,276) 30,535
------------ ------------
Net cash used in discontinued operations (6,126) (2,960)
------------ ------------
Net increase in cash and cash equivalents 56,111 21,354
Cash and cash equivalents, beginning of period 105,712 65,493
------------ ------------
Cash and cash equivalents, end of period $ 161,823 $ 86,847
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the period for:
Interest $ 138,411 $ 103,128
============ ============
Income taxes $ 4,761 $ 6,291
============ ============
NON-CASH TRANSACTION:
Fixed assets acquired under capital leases $ 9,277 $ 6,509
============ ============
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 accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") and pursuant to the rules and regulations of
the United States Securities and Exchange Commission ("SEC") for interim
financial statements. Accordingly, 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 11, 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 items)
necessary to present fairly the consolidated financial position of Centennial
Communications Corp. and Subsidiaries (the "Company") as of February 28, 2005
and the results of its consolidated operations and consolidated cash flows for
the three and nine-month periods ended February 28, 2005 and February 29, 2004.
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," Accounting Principles Board ("APB")
Opinion No. 28, "Interim Financial Reporting," and Financial Accounting
Standards Board ("FASB") Interpretation No. 18, "Accounting for Income Taxes in
Interim Periods - An Interpretation of APB Opinion No. 28," the Company has
recorded its tax expense from continuing operations for the quarter ended
February 28, 2005 based on its projected annual worldwide effective tax rate of
8.1%.
The Company's projected annual worldwide effective tax rate of 8.1% 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, a tax benefit for losses
generated in Puerto Rico and a decrease in tax contingency reserves. See Item 2
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The Company establishes reserves for tax contingencies when, despite the
belief that the Company's tax return positions are fully supported, it is
probable that certain positions may be challenged and may not be fully
sustained. The tax contingency reserves are analyzed on a quarterly basis and
adjusted based upon changes in facts and circumstances, such as the conclusion
of federal and state audits, expiration of the statute of limitations for the
assessment of tax, case law and emerging legislation. The Company's effective
tax rate includes the impact of tax contingency reserves and changes to the
reserves as considered appropriate by management. The tax contingency reserve
was decreased for the three and nine months ended February 28, 2005 by $7,570
reflecting the reduction in exposure due to the expiration of the statute of
limitations for the assessment of tax for the tax years ended May 31, 2001 and
2000.
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
only if the current price of the underlying stock on the date of grant exceeds
the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), established accounting and disclosure requirements using a
fair value based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
APB No. 25.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("SFAS No. 148"). SFAS
No. 148 serves as an amendment to SFAS No. 123, and provides alternative methods
of transition for a
4
voluntary change to the fair value based method of accounting for stock-based
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosure in both annual and interim consolidated
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the annual financial statement reporting requirements for the fiscal
year ended May 31, 2003 and the interim periods reporting disclosure
requirements of SFAS No. 148 during the three-month period ended August 31,
2003.
For disclosure purposes, pro forma net income (loss) and earnings (loss)
per share as if the Company had applied SFAS No. 123 are shown below:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income (loss) as reported ........................................ $ 28,887 $ (15,480) $ 58,698 $ (25,958)
Deduct: total stock-based compensation expense determined
under fair-value based method for all awards, net of related tax
effects ............................................................ (787) (561) (2,360) (1,451)
---------- ---------- ---------- ----------
Pro forma net income (loss) ........................................ $ 28,100 $ (16,041) $ 56,338 $ (27,409)
Earnings (loss) per share:
Basic: As reported ................................................. $ 0.28 $ (0.15) $ 0.57 $ (0.26)
Pro forma ................................................. $ 0.27 $ (0.16) $ 0.55 $ (0.28)
Diluted: As reported ............................................... $ 0.27 $ (0.15) $ 0.56 $ (0.26)
Pro forma .............................................. $ 0.27 $ (0.16) $ 0.54 $ (0.28)
The fair value of options granted under the Company's stock option plans
was estimated on the dates of grant using the Black-Scholes options-pricing
model with the following weighted-average assumptions used:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Expected volatility........................................... 115.2% 123.3% 120.9% 123.3%
Risk-free interest rate....................................... 4.0% 3.0% 3.5% 3.0%
Expected lives of option grants............................... 4 years 4 years 4 years 4 years
Expected dividend yield....................................... 0.00% 0.00% 0.00% 0.00%
Reclassifications:
Certain prior period information has been reclassified to conform to the
current period presentation.
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the intangible assets not subject to
amortization:
AS OF FEBRUARY 28, AS OF MAY 31,
2005 2004
------------------ ---------------
U.S. wireless licenses............................... $ 382,909 $ 371,766
Caribbean wireless licenses - Puerto Rico (1)........ 54,159 54,159
Cable franchise costs (2)............................ - 52,139
--------------- ---------------
Total................................................ $ 437,068 $ 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.
During the quarter ended November 30, 2004, the Company acquired 10 MHz of
personal communications service ("PCS") spectrum covering approximately 4.1
million population equivalents for an aggregate purchase price of $19,495. At
the same time, the Company sold a portion of the acquired PCS spectrum with a
cost of $8,352 for $24,000. The Company recorded a gain of $15,623, net of $25
of direct costs associated with the sale as part of operations, which is
included along with other miscellaneous items in gain on disposition of assets
in the Condensed Consolidated Statements of Operations. The Company recorded a
provision for income taxes
5
of $6,028, which is included in income tax expense, related to this gain. This
transaction resulted in the Company recording an additional $11,143 of U.S.
wireless licenses.
The Company currently tests other intangible assets not subject to
amortization for impairment using a residual value approach on an annual basis
as of January 31 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. A residual value approach consists of measuring the fair value of each
reporting unit's indefinite lived assets by deducting the aggregate fair value
of its net assets, including customer relationships, other than the indefinite
lived assets, from the reporting unit's fair value, which is determined using a
discounted cash flow analysis. The analysis is based on the Company's long-term
cash flow projections with an assumed terminal value, discounted at the
Company's weighted-average cost of capital. If the carrying value of the
indefinite lived intangible assets of a reporting unit exceeds its fair value,
an impairment loss is recognized in an amount equal to the excess.
The Company performed its annual goodwill and intangible asset impairment
analyses during the three months ended February 28, 2005. Based upon the results
of these analyses, there were no impairments.
On September 29, 2004, the SEC issued a Staff Announcement titled "Use of
the Residual Method to Value Acquired Assets other than Goodwill." The Staff
Announcement requires adoption of a direct value method of assigning value to
intangible assets acquired in a business combination under SFAS No. 141,
"Business Combinations," effective for all business combinations completed after
September 29, 2004. Further, all intangible assets valued under the residual
method prior to this adoption are required to be tested for impairment using a
direct value method no later than the beginning of fiscal year 2006. Any
impairment of intangible assets recognized upon application of a direct value
method by entities previously applying the residual method is to be reported as
a cumulative effect of a change in accounting principle. Under this Staff
Announcement, the reclassification of recorded balances between goodwill and
intangible assets prior to the adoption of this Staff Announcement is
prohibited. The Company is currently evaluating the provisions of this Staff
Announcement to determine the effect, if any of adopting a direct value method,
on its consolidated results of operations and consolidated financial position.
The following table presents other intangible assets subject to
amortization:
AS OF FEBRUARY 28, 2005 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 $ 4,417 $ 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 1,417 2,192 1,352
Cable facility............................. 25 years 6,000 1,970 6,000 1,790
----------- ----------- ----------- -----------
Total...................................... $ 49,808 $ 29,420 $ 49,808 $ 28,106
=========== =========== =========== ===========
Customer lists with a gross carrying amount of $26,854 and accumulated
amortization of $18,692, as of May 31, 2004, are included in assets held for
sale in the consolidated balance sheet.
Other intangible assets amortization expense was $332 and $1,315 for the
three and nine months ended February 28, 2005, respectively. Amortization
expense on the finite lived intangible assets is estimated to be $332 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
February 28, 2005 and May 31, 2004. The goodwill balance in the Caribbean
broadband segment was $4,187 at February 28, 2005 and May 31, 2004.
6
NOTE 3. DEBT
Long-term debt consists of the following:
AS OF AS OF
FEBRUARY 28, MAY 31,
2005 2004
------------------ -------------------
New Senior Secured Credit Facility - Term Loans........................................ $ 594,000 $ 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")...... 185,000 300,000
Capital Lease Obligations.............................................................. 40,710 31,141
Financing Obligation -- Tower Sale..................................................... 12,985 13,225
------------------ ------------------
Total Long-Term Debt................................................................. 1,657,695 1,767,866
Current Portion of Long-Term Debt...................................................... (5,764) (5,850)
------------------ ------------------
Net Long-Term Debt................................................................... $ 1,651,931 $ 1,762,016
================== ==================
On January 27, 2005, the Company redeemed $115,000 aggregate principal
amount of its 2008 Senior Subordinated Notes. The redemption was completed at a
redemption price of 103.583 percent or $119,120. The redemption premium of
$4,120 and debt issuance costs of $2,629 related to the redeemed debt that were
written off are included in loss on extinguishment of debt for the three and
nine months ended February 28, 2005 on the consolidated statement of operations.
As of February 28, 2005, $185,000 of the 2008 Senior Subordinated Notes remains
outstanding (See note 10).
On February 10, 2005, the Company amended its New Senior Secured Credit
Facility to, among other things, lower the interest rate on term loan borrowings
by 0.50% through a reduction in the London Inter-Bank Offering Rate ("LIBOR")
spread from 2.75% to 2.25%.
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
prohibited from paying cash dividends on its common stock under certain of the
above debt agreements. The Company was in compliance with all covenants of its
debt agreements at February 28, 2005.
The aggregate annual scheduled principal payments for the next five years
and thereafter under the Company's long-term debt at February 28, 2005 are
summarized as follows:
February 28, 2006............................. $ 5,764
February 28, 2007............................. 5,829
February 28, 2008............................. 5,950
February 29, 2009............................. 191,157
February 28, 2010............................. 6,319
February 28, 2011 and thereafter.............. 1,442,676
------------------
$ 1,657,695
==================
Interest expense, as reflected in the condensed consolidated financial
statements, has been partially offset by interest income. The gross interest
expense for the three and nine months ended February 28, 2005 was $38,061 and
$112,098, respectively, and $42,000 and $125,283 for the three and nine months
ended February 29, 2004, respectively.
NOTE 4. DISCONTINUED OPERATIONS
On December 28, 2004, the Company sold its wholly-owned subsidiary,
Centennial Cable, to an affiliate of Hicks, Muse, Tate & Furst Incorporated for
$157,629 in cash, which consisted of a purchase price of $155,000 and a working
capital adjustment of $2,629. The 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 No. 144").
7
Summarized financial information for the discontinued operations of
Centennial Cable is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- -------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2005* 2004 2005* 2004
------------ ------------- ------------ -------------
Revenue $ 3,982 $ 12,319 $ 30,303 $ 36,540
Income (loss) from discontinued operations 1,280 (2,483) 2,767 (7,565)
Gain on disposition 38,353 - 38,353 -
Income tax expense (14,977) 1,302 (15,696) 1,871
Net income (loss) from discontinued operations $ 24,656 $ (1,181) $ 25,424 $ (5,694)
AS OF MAY 31,
2004
-------------
Current assets $ 11,760
Property, plant and equipment, net 61,947
Cable franchise costs 52,139
Total assets 134,625
Current liabilities 13,033
Total liabilities 18,766
Net equity of discontinued operations $ 115,859
* The three and nine month periods ended February 28, 2005 include the
results of operations of Centennial Cable through the date of its sale on
December 28, 2005.
NOTE 5. ACQUISITIONS AND DISPOSITIONS
In August 2004, the Company entered into a definitive agreement with AT&T
Wireless to acquire 10 MHz of PCS spectrum covering approximately 4.1 million
population equivalents in Michigan and Indiana for an aggregate purchase price
of $19,495. At the same time, the Company entered into a definitive agreement to
sell to Verizon Wireless for $24,000 in cash the Indianapolis and Lafayette,
Indiana licenses covering approximately 1.9 million population equivalents that
the Company expected to acquire from AT&T Wireless. The Company consummated the
transactions on October 1, 2004. The Company recorded a gain of $15,623, net of
$25 of direct costs associated with the sale which is included along with other
miscellaneous items in gain on disposition of assets in the Condensed
Consolidated Statements of Operations. The Company recorded a provision for
income taxes of $6,028, which is included in income tax expense in the Condensed
Consolidated Statements of Operations, related to this gain.
On December 28, 2004 the Company sold its wholly owned subsidiary,
Centennial Cable (See note 4 above).
In February 2005, the Federal Communication Commission's auction of broadband
PCS licenses ended and the Company was the highest bidder for the 10 MHz PCS
license in the Lafayette, Indiana market which covers approximately 275,000
Pops. The purchase price for the license is $949 and the Company expects to
close on the purchase during the fourth quarter of the fiscal year ended May 31,
2005.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS No. 123R and certain SEC rules and regulations,
as well as provides the SEC staff's views regarding the valuation of share-based
payment arrangements. The Company is currently assessing the impact of SAB No.
107 on its implementation and adoption of SFAS No. 123R.
In December 2004, the FASB issued SFAS No. 123R (revised 2004),
"Share-Based Payment" ("SFAS No. 123R") which addresses the accounting for
share-based payment transactions in which a company receives employee services
in exchange for either equity instruments of the company or liabilities that are
based on the fair value of the company's equity instruments or that may be
settled by the issuance of such equity instruments. SFAS No. 123R eliminates the
ability to account for share-based compensation transactions using the intrinsic
method that the Company currently uses and requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in the
consolidated statement of operations. The effective date of SFAS No. 123R
8
is for interim or annual reporting periods beginning after June 15, 2005. The
Company has not yet adopted this pronouncement and is currently evaluating the
expected impact that the adoption of SFAS No. 123R will have on its consolidated
results of operations, consolidated financial position and consolidated cash
flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153
amends APB Opinion No. 29, "Accounting for Nonmonetary Transactions". The
amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets, which requires that the
accounting for the exchange be based on the recorded amount of the asset
relinquished, and replaced it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance." The provisions in
SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Early application is permitted and
companies must apply the standard prospectively. The Company does not expect
that the adoption of SFAS No. 153 will have a material effect on its
consolidated results of operations, consolidated financial position or
consolidated cash flows.
In December 2003, the SEC issued 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 7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
The Company is party to several lawsuits in which plaintiffs have alleged,
depending on the case, breach of contract, misrepresentation or unfair practice
claims relating to its billing practices, including rounding up of partial
minutes of use to full-minute increments, billing send to end, and billing for
unanswered and dropped calls. The plaintiffs in these cases have not alleged any
specific monetary damages and are seeking certification as a class action. A
hearing on class certification in one of these cases was held on September 2,
2003 in a state court in Louisiana. 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 any damage payments
would have a material adverse effect on its consolidated results of operations,
consolidated financial position or consolidated cash flows.
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 any damage payments would have a
material adverse effect on the Company's consolidated results of operations,
consolidated financial position or consolidated cash flows.
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 consolidated results of operations.
Guarantees:
The Company currently does not guarantee the debt of any entity outside of
its consolidated group. In the ordinary course of its business, the Company
enters into agreements with third parties that provide for indemnification of
counter parties. 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. 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.
9
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. When determining the term of a lease, the
Company includes renewal options that are reasonably assured. Rent expense is
recorded on a straight-line basis over the initial lease term and those renewal
periods that are reasonably assured. The difference between rent expense and
rent paid is recorded as deferred rent. Leasehold improvements are depreciated
over the shorter of their economic lives, which begins once the assets are ready
for their intended use, or the lease term.
Other Commitments and Contingencies:
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.
In June 2004, the Company signed an amendment to its billing services
agreement with Convergys Information Management Group, Inc. ("Convergys"). 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, which include a
requirement to meet certain performance standards, the Company has committed to
purchase a total of approximately $74,642 of services through 2011 under this
agreement. As of February 28, 2005 the Company has paid $10,150 in connection
with this agreement.
In December 2004, the Company entered into an agreement with Nortel
Networks to upgrade its wireless network equipment in Puerto Rico and the U.S.
Virgin Islands. The Company has committed to purchase approximately $20,000 of
equipment and services under the agreement. As of February 28, 2005, the Company
has paid approximately $5,780 in connection with this agreement.
NOTE 8. 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 No. 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), 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) before income (loss) from discontinued operations,
minority interest in income of subsidiaries, income tax benefit (expense), other
(expense) income, loss on extinguishment of debt, interest expense, net, income
from equity investments, (gain) loss on disposition of assets, and depreciation
and amortization.
The results of operations presented below exclude Centennial Cable 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 and nine months ended, February 28, 2005 and February
29, 2004 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -----------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2005 2004 2005 2004
------------- ------------- ------------- -------------
U.S. WIRELESS
Service revenue $ 77,884 $ 73,815 $ 243,737 $ 219,108
Roaming revenue 13,776 11,978 40,128 41,659
Equipment sales 5,567 5,584 14,391 15,503
------------- ------------- ------------- -------------
Total revenue 97,227 91,377 298,256 276,270
Adjusted operating income 36,582 37,873 126,052 110,203
Total assets 1,895,767 1,831,515 1,895,767 1,831,515
Capital expenditures 14,472 14,393 40,005 37,409
CARIBBEAN WIRELESS
Service revenue $ 87,794 $ 74,696 $ 250,554 $ 217,667
Roaming revenue 475 277 1,475 2,480
Equipment sales 2,200 2,853 7,214 7,817
------------- ------------- ------------- -------------
Total revenue 90,469 77,826 259,243 227,964
Adjusted operating income 35,910 28,338 102,091 88,783
Total assets 485,471 643,043 485,471 643,043
Capital expenditures 17,310 18,053 43,115 44,140
CARIBBEAN BROADBAND
Switched revenue $ 12,088 $ 9,524 $ 35,234 $ 27,732
Dedicated revenue 13,664 11,945 39,555 35,857
Wholesale termination revenue 4,041 6,191 17,196 13,585
Other revenue 7,395 1,822 11,834 6,053
------------- ------------- ------------- -------------
Total revenue 37,188 29,482 103,819 83,227
Adjusted operating income 18,422 12,102 44,126 32,326
Total assets 682,346 799,866 682,346 799,866
Capital expenditures 4,826 3,855 17,772 13,426
ELIMINATIONS
Total revenue (1) $ (3,050) $ (2,847) $ (8,593) $ (9,540)
Total assets (2) (1,596,680) (1,757,055) (1,596,680) (1,757,055)
CONSOLIDATED
Total revenue $ 221,834 $ 195,838 $ 652,725 $ 577,921
Adjusted operating income 90,914 78,313 272,269 231,312
Total assets 1,466,904 1,517,369 1,466,904 1,517,369
Capital expenditures 36,608 36,301 100,892 94,975
(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 NINE MONTHS ENDED
----------------------------- -----------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2005 2004 2005 2004
------------ ------------- ------------ -------------
Adjusted operating income...................... $ 90,914 $ 78,313 $ 272,269 $ 231,312
Less: depreciation and amortization............ (71,269) (28,708) (130,034) (87,751)
(Gain) loss on disposition of assets........... (150) 63 14,782 748
------------ ------------- ------------ -------------
Operating income............................... 19,495 49,668 157,017 144,309
Income from equity investments................. 137 24 427 52
Interest expense, net.......................... (37,163) (41,889) (110,580) (124,898)
Loss on extinguishment of debt................. (6,749) (28,625) (6,749) (36,160)
Other (expense) income......................... (83) 232 (2,165) (370)
Income tax benefit (expense)................... 28,785 6,416 (4,034) (2,789)
Minority interest in income of subsidiaries.... (191) (125) (642) (408)
Income (loss) from discontinued operations..... 24,656 (1,181) 25,424 (5,694)
------------ ------------- ------------ -------------
Net income (loss).............................. $ 28,887 $ (15,480) $ 58,698 $ (25,958)
============ ============= ============ =============
NOTE 9. 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. The Company, CCOC and CPROC are joint and several co-issuers
of the 2014 Senior Notes. Separate financial statements and other disclosures
concerning CCOC and CPROC are not presented because they are not material to
investors.
12
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF FEBRUARY 28, 2005
(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 $ 61,837 $ - $ 99,986 $ - $ - $ 161,823
Accounts receivable, net 39,662 - 58,360 - - 98,022
Inventory - phones and
accessories, net 9,301 - 10,612 - - 19,913
Prepaid expenses and
other current assets 10,689 - 29,144 - - 39,833
Assets held for sale - - - - - -
------------- ------------- ------------- ------------- ------------ ------------
Total current assets 121,489 - 198,102 - - 319,591
Property, plant &
equipment, net 253,044 - 356,366 - - 609,410
Equity investments in
wireless systems, net - - 2,473 - - 2,473
Debt issuance costs 21,998 - 24,903 - - 46,901
U.S. wireless licenses - - 382,909 - - 382,909
Caribbean wireless licenses, net - - 69,742 - - 69,742
Goodwill 4,186 - 22,518 - - 26,704
Intercompany - 1,038,569 - 263,970 (1,302,539) -
Investment in subsidiaries - 44,411 1,563,329 (751,780) (855,960) -
Other assets, net 6,143 - 3,031 - - 9,174
------------- ------------- ------------- ------------- ------------ ------------
Total $ 406,860 $ 1,082,980 $ 2,623,373 $ (487,810) $ (2,158,499) $ 1,466,904
============= ============= ============= ============= ============ ============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Current portion of long-term
debt $ (11) $ 6,000 $ (225) $ - $ - $ 5,764
Accounts payable 19,183 - 8,315 - - 27,498
Accrued expenses and other
current liabilities 542,103 - 355,070 - (734,837) 162,336
Payable to affiliates - - 125 - - 125
Liabilities held for sale - - - - - -
------------- ------------- ------------- ------------- ------------ ------------
Total current liabilities 561,275 6,000 363,285 - (734,837) 195,723
Long-term debt 831,541 892,600 (72,210) - - 1,651,931
Deferred federal income taxes - - 92,462 - - 92,462
Other liabilities 3,081 - 9,332 - - 12,413
Intercompany 1,737 920,500 2,102,737 - (3,024,974) -
Minority Interest in subsidiaries - - 2,185 - - 2,185
Stockholders' (deficit) equity:
Common stock - - - 1,036 - 1,036
Additional paid-in capital (818,498) - 818,498 477,047 477,047
Accumulated deficit (172,276) (736,120) (692,916) (964,816) 1,601,312 (964,816)
------------- ------------- ------------- ------------- ------------ ------------
(990,774) (736,120) 125,582 (486,733) 1,601,312 (486,733)
Less: treasury shares - - - (1,077) - (1,077)
------------- ------------- ------------- ------------- ------------ ------------
Total stockholders' (deficit)
equity (990,774) (736,120) 125,582 (487,810) 1,601,312 (487,810)
------------- ------------- ------------- ------------- ------------ ------------
Total $ 406,860 $ 1,082,980 $ 2,623,373 $ (487,810) $ (2,158,499) $ 1,466,904
============= ============= ============= ============= ============ ============
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2005
(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 $ 284,535 $ - $ 372,925 $ - $ (4,735) $ 652,725
------------ ------------- ------------ ------------ ------------ ------------
Costs and expenses:
Cost of services 38,409 - 88,562 - (3,165) 123,806
Cost of equipment sold 19,766 - 49,748 - - 69,514
Sales and marketing 27,544 - 42,684 - - 70,228
General and administrative 57,412 - 61,066 - (1,570) 116,908
Depreciation and amortization 87,449 - 42,585 - - 130,034
Loss (Gain) on disposition of
assets 1,039 - (15,821) - - (14,782)
------------ ------------- ------------ ------------ ------------ ------------
231,619 - 268,824 - (4,735) 495,708
------------ ------------- ------------ ------------ ------------ ------------
Operating income 52,916 - 104,101 - - 157,017
------------ ------------- ------------ ------------ ------------ ------------
Income from equity investments - - 427 - - 427
Income (loss) from investments in
subsidiaries - 58,698 (23,971) 58,698 (93,425) -
Interest expense, net (75,148) (110,580) 75,148 - - (110,580)
Loss on extinguishment of debt - (6,749) - - - (6,749)
Other expenses (1,300) - (865) - - (2,165)
Intercompany interest allocation - 117,329 (117,329) - - -
------------ ------------- ------------ ------------ ------------ ------------
(Loss) income from continuing
operations before income tax
expense and minority interest (23,532) 58,698 37,511 58,698 (93,425) 37,950
Income tax expense (439) - (3,595) - - (4,034)
------------ ------------- ------------ ------------ ------------ ------------
(Loss) income from continuing
operations before minority
interest (23,971) 58,698 33,916 58,698 (93,425) 33,916
Minority interest in income of
subsidiaries - - (642) - - (642)
------------ ------------- ------------ ------------ ------------ ------------
(Loss) income from continuing
operations (23,971) 58,698 33,274 58,698 (93,425) 33,274
Discontinued operations:
Income - - 2,767 - - 2,767
Gain on disposition - - 38,353 - - 38,353
Tax expense - - (15,696) - - (15,696)
------------ ------------- ------------ ------------ ------------ ------------
Income from discontinued operations - - 25,424 - - 25,424
------------ ------------- ------------ ------------ ------------ ------------
Net (loss) income $ (23,971) $ 58,698 $ 58,698 $ 58,698 $ (93,425) $ 58,698
============ ============= ============ ============ ============ ============
14
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2005
(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 (loss) income $ (23,971) $ 58,698 $ 58,698 58,698 $ (93,425) $ 58,698
Less: income from discontinued
operations, net of tax - - 25,424 - - 25,424
--------------- ---------- -------------- ---------- ----------- ----------
(Loss) income from
continuing operations (23,971) 58,698 33,274 58,698 (93,425) 33,274
Adjustments to reconcile
net (loss) income to net
cash provided by
(used in) operating
activities:
Depreciation and
amortization 87,449 - 42,585 - - 130,034
Minority interest
in loss of subsidiaries - - 642 - - 642
Income from equity
investments - - (427) - - (427)
Equity in undistributed
earnings of subsidiaries - (58,698) 23,971 (58,698) 93,425 -
Distribution received from
equity investment - - 651 - - 651
Loss (gain) on disposition
of assets 1,039 - (15,821) - - (14,782)
Changes in assets and
liabilities, net of
effects of acquisitions
and dispositions and other 13,934 57,303 17,305 58,698 (177,511) (30,271)
------------ ---------- ------------- ---------- ----------- ---------
Total adjustments 102,422 (1,395) 68,906 - (84,086) 85,847
--------------- ---------- -------------- ---------- ------------ ----------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES 78,451 57,303 102,180 58,698 (177,511) 119,121
------------- ---------- -------------- ---------- ------------ ----------
INVESTING ACTIVITIES:
Proceeds from disposition
of assets, net of cash
expenses - - 150 - - 150
Capital expenditures (54,317) - (46,575) - - (100,892)
Proceeds from sale of
discountinued operations - - 157,629 - - 157,629
Proceeds from sale of
wireless spectrum - - 24,000 - - 24,000
Payments for purchase
of wireless spectrum - - (19,495) - - (19,495)
------------- ---------- -------------- ---------- ----------- ---------
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES (54,317) - 115,709 - - 61,392
--------------- --------- -------------- ---------- ------------ ----------
FINANCING ACTIVITIES:
Repayment of debt (65) (119,500) (845) - - (120,410)
Proceeds from the
exercise of employee
stock options - - - 1,709 - 1,709
Proceeds from issuance
of common stock under
employee stock
purchase plan - - - 425 - 425
Cash (paid to)
received from
affiliates (4,716) 62,197 (174,160) (60,832) 177,511 -
------------ ---------- ------------ ---------- ---------- ----------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES (4,781) (57,303) (175,005) (58,698) 177,511 (118,276)
--------------- ---------- ------------- ---------- ------------ ----------
NET CASH USED IN
DISCONTINUED OPERATIONS - - (6,126) - - (6,126)
NET INCREASE IN CASH
AND CASH EQUIVALENTS 19,353 - 36,758 - - 56,111
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD 42,484 - 63,228 - - 105,712
--------------- ---------- -------------- ---------- ------------ ----------
CASH AND CASH
EQUIVALENTS, END
OF PERIOD $ 61,837 $ - $ 99,986 $ - $ - $ 161,823
=============== ========== ============== ========== ============ ==========
15
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF MAY 31, 2004
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Co. Communications Corp. and
Corp. 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 - - 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 NINE MONTHS ENDED FEBRUARY 29, 2004
(AS RESTATED)
(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 $ 254,175 $ - $ 330,710 $ - $ (6,964) $ 577,921
------------- ------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of services 37,094 - 75,039 - (4,388) 107,745
Cost of equipment sold 19,921 - 45,897 - - 65,818
Sales and marketing 25,975 - 41,108 - - 67,083
General and administrative 51,354 - 57,185 - (2,576) 105,963
Depreciation and
amortization 44,762 - 42,989 - - 87,751
Loss (Gain) on disposition
of assets 53 - (801) - - (748)
------------- ------------- ------------- ------------- ------------- -------------
179,159 - 261,417 - (6,964) 433,612
------------- ------------- ------------- ------------- ------------- -------------
Operating income 75,016 - 69,293 - - 144,309
------------- ------------- ------------- ------------- ------------- -------------
Income from equity investments - - 52 - - 52
Income (loss) from investments
in subsidiaries - 5,316 23,933 5,316 (34,565) -
Interest expense, net (50,784) (75,493) 32,653 (31,274) - (124,898)
Loss on extinguishment of debt - (36,160) - - - (36,160)
Other expenses - - (370) - - (370)
Intercompany interest
allocation - 111,653 (111,653) - - -
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income tax
expense and minority
interest 24,232 5,316 13,908 (25,958) (34,565) (17,067)
Income tax (expense) benefit (299) - (2,490) - - (2,789)
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) from continuing
operations before minority
interest 23,933 5,316 11,418 (25,958) (34,565) (19,856)
Minority interest in income of
subsidiaries - - (408) - - (408)
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) from continuing
operations 23,933 5,316 11,010 (25,958) (34,565) (20,264)
Discontinued operations:
Loss - - (7,565) - - (7,565)
Tax expense - - 1,871 - - 1,871
------------- ------------- ------------- ------------- ------------- -------------
Loss from discontinued
operations - - (5,694) - - (5,694)
Net income (loss) $ 23,933 $ 5,316 $ 5,316 $ (25,958) $ (34,565) $ (25,958)
============= ============= ============= ============= ============= =============
17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2004
(AS RESTATED)
(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 (loss) income $ 23,933 $ 5,316 $ 5,316 $ (25,958) $ (34,565) $ (25,958)
Less: loss from
discontinued
operations, net of tax - - (5,694) - - (5,694)
------------ ---------- ---------- ----------- ---------- -----------
Income (loss) from
continuing operations 23,933 5,316 11,010 (25,958) (34,565) (20,264)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization 44,762 - 42,989 - - 87,751
Noncash paid in
kind interest - - - 13,997 - 13,997
Minority interest in
loss of subsidiaries - - 408 - - 408
Income from equity investments - - (52) - - (52)
Equity in undistributed
earnings of subsidiaries (5,316) (23,933) (5,316) 34,565 -
Distribution received from
equity investment - - 14 - - 14
Loss (gain) on disposition
of assets 53 - (801) - - (748)
Changes in assets and
liabilities, net of effects
of acquisitions and dispositions
and other (13,160) (3,993) 97,676 (8,681) (66,636) 5,206
------------ ---------- ---------- ----------- ---------- -----------
Total adjustments 31,655 (9,309) 116,301 - (32,071) 106,576
------------ ---------- ---------- ----------- ---------- -----------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES 55,588 (3,993) 127,311 (25,958) (66,636) 86,312
------------ ---------- ---------- ----------- ---------- -----------
INVESTING ACTIVITIES:
Proceeds from disposition
of assets, net of
cash expenses - - 2,442 - - 2,442
Capital expenditures (42,073) - (52,902) - - (94,975)
------------ ---------- ---------- ----------- ---------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (42,073) - (50,460) - - (92,533)
------------ ---------- ---------- ----------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from the
issuance of long-term
debt 817,131 154,412 608,731 - (155,274) 1,425,000
Repayment of debt (682,201) (54,125) (598,519) (202,794) 155,274 (1,382,365)
Debt issuance costs paid - - (48,158) - - (48,158)
Proceeds from issuance of
common stock (net of
underwriting fees) - - - 34,663 - 34,663
Proceeds from the exercise
of employee stock options - - - 1,005 - 1,005
Proceeds from issuance of
common stock under employee
stock purchase plan - - - 390 - 390
Cash (paid to) received from
affiliates (164,076) (96,294) 1,040 192,694 66,636 -
------------ ---------- ---------- ----------- ---------- -----------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (29,146) 3,993 (36,906) 25,958 66,636 30,535
------------ ---------- ---------- ----------- ---------- -----------
NET CASH USED IN
DISCONTINUED OPERATIONS - - (2,960) - - (2,960)
------------ ---------- ---------- ----------- ---------- -----------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS (15,631) - 36,985 - - 21,354
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 36,572 - 28,921 - - 65,493
------------ ---------- ---------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 20,941 $ - $ 65,906 $ - $ - $ 86,847
============ ========== ========== ============ ========== ===========
18
NOTE 10. SUBSEQUENT EVENTS
On March 1, 2005, the Company entered into an interest rate swap agreement
(the "swap") to hedge variable interest rate risk on $250,000 of its $594,000 of
variable interest rate term loans. The swap is effective as of March 31, 2005,
for a term of two years and the fixed interest rate on the swap is 6.29%.
In March 2005, the Company announced that it will redeem $40,000 of its
2008 Senior Subordinated Notes. The redemption will occur on or about April 25,
2005 at a redemption price of 103.583 percent. Following the redemption,
$145,000 of the Company's 2008 Senior Subordinated Notes will remain
outstanding.
NOTE 11. 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 restated its
consolidated financial statements as of May 31, 2003, for the years ended May
31, 2003 and 2002 and the first three quarters of the fiscal year ended May 31,
2004. Such restatement related 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 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 related to the following:
- Overstated Accrual Estimates -- The Company had historically taken a
conservative approach with respect to determining certain accrual estimates.
Year over year fluctuations in these accruals resulted in an immaterial impact
on the consolidated financial statements.
- Billing Cycle Cut-off -- The Company had historically underestimated the
amount of unbilled revenue related to its businesses. In addition, the Company
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.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ ------------------------------------
FEBRUARY 29, 2004 FEBRUARY 29, 2004 FEBRUARY 29, 2004 FEBRUARY 29, 2004
----------------- ----------------- ----------------- -----------------
(AS REPORTED)(1) (AS RESTATED)(1) (AS REPORTED)(1) (AS RESTATED)(1)
----------------- ----------------- ----------------- -----------------
Revenue $ 195,224 $ 195,838 $ 577,701 $ 577,921
Operating income 48,852 49,668 146,769 144,309
Income tax (benefit) expense (6,459) 6,416(2) (13,778) (2,789)(2)
Loss from continuing operations (27,854) (14,299) (28,948) (20,264)
Loss per share from continuing operations:
Basic $ (0.27) $ (0.14) $ (0.29) $ (0.21)
Diluted $ (0.27) $ (0.14) $ (0.29) $ (0.21)
(1) Excludes amounts related to Centennial Cable, which have been presented as
discontinued operations.
(2) Income tax 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, 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 the Dominican
Republic.
NOTE 12. OTHER
Puerto Rico Wireless Network Replacement and Upgrade
19
On December 31, 2004, the Company entered into an agreement with Nortel
Networks to replace and upgrade its wireless network in Puerto Rico and the U.S.
Virgin Islands. Under the terms of the agreement, the Company has committed to
purchase approximately $20,000 of new wireless products and services. As a
result of this upgrade, the Company accelerated the depreciation on its existing
wireless network equipment to be replaced that resulted in approximately $36,400
of incremental depreciation during the three and nine months ended February 28,
2005. The Company expects that additional incremental depreciation expense will
be approximately $35,000 to $40,000 during the three months ended May 31, 2005.
The upgrade is expected to be completed in the first quarter of fiscal 2006.
Wireless Network Equipment Useful Lives
The Company continually evaluates the reasonableness of its estimated useful
lives, which are used to depreciate its long-lived assets. During the quarter
ended February 28, 2005 as a result of the rate of migration of the Company's
subscriber base from its TDMA (Time Division Multiple Access) network to its GSM
(Global System for Mobile Communications) network in the United States
consistently exceeding expectations, regulatory changes and other industry and
technological developments, as well as the Puerto Rico wireless network
replacement and upgrade described above, all of which took place during the
third quarter, the Company undertook a detailed reassessment of the useful lives
of certain of its U.S. and Caribbean wireless network assets. As a result of the
outcome of this detailed assessment, which was implemented effective December
31, 2004, service lives were shortened from 10 years to 4 years in order to
fully depreciate all TDMA equipment by the end of December 2008. Additionally,
service lives were shortened from 10 years to 7 years for all GSM and CDMA (Code
Division Multiple Access) equipment. The impact of these changes was an increase
in depreciation expense of approximately $2,400 during the three and nine months
ended February 28, 2005. As a result of these changes, the Company expects an
increase in depreciation expense of approximately $4,500 to $5,500 during the
fiscal year ended May 31, 2005.
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 our fiscal year ending May 31, 2005, as well as recent
guidance surrounding such legislation, we restated our consolidated financial
statements as of May 31, 2003, for the years ended May 31, 2003 and 2002 (not
presented herein), and for the first three quarters of the fiscal year ended May
31, 2004 for the items discussed in Note 11 to the Condensed Consolidated
Financial Statements. Such restatement related 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 Quarterly Report on Form 10-Q. 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.
EXECUTIVE OVERVIEW
Company Overview
We are a leading regional wireless and broadband (wireline)
telecommunications service provider serving over one million customers in
markets covering over 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
20
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.
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 and wireline services in Puerto
Rico and the Dominican Republic and wireless services in the U.S. Virgin
Islands. For both the three and nine months ended February 28, 2005, we derived
approximately 85% of our Caribbean operations' revenue 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 tailor the ultimate customer experience
entails focusing on attractive and growing markets and customizing our sales,
marketing and customer support functions to customer needs in these markets. For
the three and nine months ended February 28, 2005, approximately 55% and 63%,
respectively, of our wireless sales in the United States and Caribbean and
substantially all of our broadband 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 that is, unique and valued by the
customers in our various markets. Further, through our tailored approach, we
target high quality (high average revenue per user or "ARPU") postpaid wireless
customers in our U.S. and Puerto Rico operations.
Our business strategy also entails ensuring that our networks are of the
highest quality in all our locations. For the three and nine-month periods ended
February 28, 2005, we spent $14.5 million and $40.0 million, respectively, on
capital expenditures in our U.S. wireless operations. Much of this investment
was to upgrade our network to GSM (global system for mobile communications)
technology in our Southeast cluster. We spent $17.3 million and $4.8 million on
capital expenditures in our Caribbean wireless and broadband operations,
respectively, for the three month period ended February 28, 2005 and $43.1
million and $17.8 million on capital expenditures in our Caribbean wireless and
broadband operations, respectively, for the nine month period ended February 28,
2005.
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 8 to the Condensed Consolidated Financial Statements
for reconciliation to the appropriate generally accepted accounting principles
("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
- Postpaid churn -- wireless
- Prepaid churn -- Caribbean wireless
- Average monthly minutes of use per wireless customer
21
- 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 in our U.S. and
Puerto Rico operations.
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 profitable. 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, call forwarding and regulatory charges.
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.
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
opportunity.
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 our forecast to be able to
anticipate future operating performance. In addition, this measurement allows us
to compute our current market penetration in the markets we serve.
22
Dedicated access line equivalents represents the amount of Voice Grade
Equivalent ("VGE") lines used to connect two end points. We monitor the trends
in our dedicated service using VGE against our 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 ESTIMATES
The preparation of our Condensed Consolidated Financial Statements and
related disclosures in conformity with accounting principles generally accepted
in the United States of America ("GAAP") 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
- 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
23
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 estimates 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 No.
142"). In accordance with SFAS No. 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 No. 142 are our operating segments determined under
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 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 1,162,700 wireless subscribers at February 28, 2005 as compared to
1,023,500 at February 29, 2004, an increase of 14%. We had income from
continuing operations for the three and nine months ended February 28, 2005 of
$4.2 and $33.3 million, respectively, as compared to a loss from continuing
operations of $14.3 and $20.3 million for the three and nine months ended
February 29, 2004. Included in the results from continuing operations for the
three and nine months ended February 28, 2005 was approximately $38.8 million of
incremental depreciation and amortization expense resulting from the replacement
and upgrade of our wireless network in Puerto Rico and the shortening of service
lives of certain of our wireless network assets in the U.S. and Caribbean.
Additionally, a tax benefit of $28.8 million is included in the results from
continuing operations for the three months ended February 28, 2005. Basic and
diluted earnings per share from continuing operations for the three and nine
months ended February 28, 2005 were $0.04 and $0.32, respectively as compared to
basic loss per share from continuing operations of $0.14 and $0.21 for the three
and nine months ended February 29, 2004, respectively.
In accordance with SFAS No. 109, "Accounting for Income Taxes," Accounting
Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting," and
Financial Accounting Standards Board ("FASB") Interpretation No. 18, "Accounting
for Income Taxes in Interim Periods - An Interpretation of APB Opinion No. 28,"
we recorded our tax expense from continuing operations for the quarter ended
February 28, 2005 based on our projected annual worldwide effective tax rate of
8.1%. Our projected annual worldwide effective tax rate of 8.1% is affected 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. tax benefit for losses generated in Puerto Rico; and
4. a decrease in tax contingency reserves.
We establish reserves for tax contingencies when, despite the belief that
our tax return positions are fully supported, it is probable that certain
positions may be challenged and may not be fully sustained. The tax contingency
reserves are analyzed on a quarterly basis and adjusted based upon changes in
facts and circumstances, such as the conclusion of federal and state audits,
expiration of the
24
statute of limitations for the assessment of tax, case law and emerging
legislation. Our effective tax rate includes the impact of tax contingency
reserves and changes to the reserves as considered appropriate by management.
The tax contingency reserve was decreased for the three and nine months ended
February 28, 2005 by $ 7,570, reflecting the reduction in exposure due to the
expiration of the statute of limitations for the assessment of tax for the tax
years ended May 31, 2001 and 2000.
CONSOLIDATED OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
(in thousands, except per share data) 2005 2004 $ CHANGE % CHANGE 2005 2004 $ CHANGE % CHANGE
------------ ------------- ---------- -------- ------------ ------------- -------- --------
Operating income................... $ 19,495 $ 49,668 $ (30,173) (61)% $ 157,017 $ 144,309 $ 12,708 9%
Income (loss) from continuing
operations....................... 4,231 (14,299) 18,530 * 33,274 (20,264) 53,538 *
Earnings (loss) per share from
continuing operations:
Basic.......................... 0.04 (0.14) 0.18 * 0.32 (0.21) 0.53 *
Diluted........................ 0.04 (0.14) 0.18 * 0.32 (0.21) 0.53 *
* Percentage change not meaningful.
U.S. WIRELESS OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
(in thousands) 2005 2004 $ CHANGE % CHANGE 2005 2004 $ CHANGE % CHANGE
------------ ------------- ---------- -------- ------------ ------------- -------- --------
Revenue:
Service revenue................... $ 77,884 $ 73,815 $ 4,069 6% $ 243,737 $ 219,108 $24,629 11%
Roaming revenue................... 13,776 11,978 1,798 15 40,128 41,659 (1,531) (4)
Equipment sales................... 5,567 5,584 (17) - 14,391 15,503 (1,112) (7)
------------ ------------- --------- -- ------------ ------------- ------- --
Total revenue.............. 97,227 91,377 5,850 6 298,256 276,270 21,986 8
------------ ------------- --------- -- ------------ ------------- ------- --
Costs and expenses:
Cost of services.................. 19,368 15,658 3,710 24 54,427 51,332 3,095 6
Cost of equipment sold............ 14,420 10,226 4,194 41 37,618 35,506 2,112 6
Sales and marketing............... 10,651 11,607 (956) (8) 33,973 35,082 (1,109) (3)
General and administrative........ 16,206 16,013 193 1 46,186 44,147 2,039 5
------------ ------------- --------- -- ------------ ------------- ------- --
Total costs and expenses... 60,645 53,504 7,141 13 172,204 166,067 6,137 4
------------ ------------- --------- -- ------------ ------------- ------- --
Adjusted operating income (1)..... $ 36,582 $ 37,873 $ (1,291) (3)% $ 126,052 $ 110,203 $15,849 14%
------------ ------------- --------- -- ------------ ------------- ------- --
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 8 to the condensed consolidated financial statements
for a reconciliation of consolidated adjusted operating income to the
appropriate GAAP measure.
Revenue. U.S. wireless service revenue increased in the three and nine months
ended February 28, 2005, as compared to the three and nine months ended February
29, 2004. The increase in U.S. wireless service revenue was primarily due to
increased ARPU. Contributing to the increase in ARPU during the three and nine
months ended February 28, 2005, was $4.7 and $17.9 million of revenue,
respectively, related to payments from the universal service fund ("USF").
Included in the $17.9 million is $5.5 million for prior periods for which the
amount did not become known and realizability was not probable until the first
quarter of fiscal 2005 with receipt of an FCC order.
U.S. wireless roaming revenue increased for the three months ended
February 28, 2005. This increase was primarily due to an increase in GSM roaming
minutes as a result of our launch of GSM service in the Midwest cluster in
November 2003 and the Southeast cluster in October 2004. U.S. wireless roaming
revenue decreased for the nine months ended February 28, 2005. The decrease was
primarily the result of lower average roaming rates per minute, partially offset
by an increase in minutes of use. The Company does not expect long-term growth
in roaming revenues, and anticipates that roaming revenues will remain a small
percentage of consolidated revenues in future periods.
Our U.S. wireless operations had approximately 544,400 and 548,900
subscribers at February 28, 2005 and February 29, 2004, respectively. Postpaid
subscribers account for 97% of total U.S. wireless subscribers as of February
28, 2005. During the twelve months ended February 28, 2005, increases from new
activations of 156,900 were offset by subscriber cancellations of 161,400. The
25
monthly postpaid churn rate was 2.3% for the three and nine months ended
February 28, 2005, as compared to 2.1% and 2.0% for the same periods last year,
respectively. The cancellations experienced by the U.S. wireless operations were
primarily due to competitive factors and non-payment.
Equipment sales decreased during the three and nine months ended February
28, 2005, as compared to the three and nine months ended February 29, 2004, due
primarily to lower activations and to an increase in phones being provided free
to customers in connection with new activations.
U.S. wireless ARPU per month was $59 and $60 for the three and nine months
ended February 28, 2005, respectively, as compared to $55 and $56 for the same
periods a year ago, respectively. ARPU for the nine months ended February 28,
2005 includes $5.5 million of USF revenue related to prior quarters. ARPU
excluding the $5.5 million of USF revenue was $59 and $59 for the three and nine
months ended February 28, 2005, respectively. Average minutes of use per
subscriber were 584 and 551 minutes per month for the three and nine months
ended February 28, 2005, respectively, as compared to 449 and 432 minutes for
the same periods last year, respectively. Wireless ARPU increased due to the
Company's increased USF revenue during the three and nine months ended February
28, 2005.
Costs and expenses. Cost of services increased during the three and nine
months ended February 28, 2005, as compared to the same period last year. The
increase for both the three and nine months was primarily due to an (i) increase
in external and internal maintenance costs related to the Company's wireless GSM
network, (ii) increase in incollect roaming cost which was driven by higher
incollect minutes of use partially offset by lower incollect roaming rates and
(iii) increase in telephone service costs due to increased minutes used by our
customers. Average incollect roaming costs per subscriber were $3 per month for
the three and nine months ended February 28, 2005 as compared to $2 per month
for the same periods a year ago.
Cost of equipment sold increased for the three and nine months ended
February 28, 2005, as compared to the same periods last year. The increase from
the three month and nine month comparable periods was primarily due to an
increase in phones used for customer retention, partially offset by a slight
decrease in average cost per phone. The increase for the nine-month comparable
period was also partially offset by lower activations.
Sales and marketing expenses decreased for the three and nine months ended
February 28, 2005 as compared to the same periods in the prior year, primarily
due to decreased advertising and lower commissions as a result of lower
activations.
General and administrative expenses increased slightly for the three and
nine months ended February 28, 2005, as compared to the same periods last year,
primarily due to costs related to the Company's compliance with the provisions
of the Sarbanes-Oxley Act, partially offset by a reduction in bad debt expense
in the three month period.
Adjusted operating income for the U.S. wireless operations decreased for
the three months ended February 28, 2005, as compared to the same period in
fiscal 2004. The decrease is primarily due to the aforementioned increases in
cost of services and cost of equipment sold. Adjusted operating income for the
U.S. wireless operations increased for the nine months ended February 28, 2005,
as compared to the same period in fiscal 2004, primarily due to the receipt of
an additional $17.9 million in USF support for the nine months ended February
28, 2005, as compared to the nine months ended February 29, 2004.
CARIBBEAN WIRELESS OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
(in thousands) 2005 2004 $ CHANGE % CHANGE 2005 2004 $ CHANGE % CHANGE
------------ ------------- ---------- -------- ------------ ------------- -------- --------
Revenue:
Service revenue $ 87,794 $ 74,696 $ 13,098 18% $ 250,554 $ 217,667 $32,887 15%
Roaming revenue 475 277 198 71 1,475 2,480 (1,005) (41)
Equipment sales 2,200 2,853 (653) (23) 7,214 7,817 (603) (8)
------------ ------------- --------- --- ------------ ------------- ------- ---
Total revenue 90,469 77,826 12,643 16 259,243 227,964 31,279 14
------------ ------------- --------- --- ------------ ------------- ------- ---
Costs and expenses:
Cost of services 14,330 11,233 3,097 28 40,525 34,381 6,144 18
Cost of equipment sold 10,552 11,710 (1,158) (10) 31,047 29,974 1,073 4
Sales and marketing 11,130 9,231 1,899 21 30,903 27,684 3,219 12
General and administrative 18,547 17,314 1,233 7 54,677 47,142 7,535 16
------------ ------------- --------- --- ------------ ------------- ------- ---
Total costs and expenses 54,559 49,488 5,071 10 157,152 139,181 17,971 13
------------ ------------- --------- --- ------------ ------------- ------- ---
Adjusted operating income (1) $ 35,910 $ 28,338 $ 7,572 27% $ 102,091 $ 88,783 $13,308 15%
============ ============= ========= === ============ ============= ======= ===
26
(1) Adjusted operating income represents the profitability measure of the
segment - see Note 8 to the condensed consolidated financial statements
for a reconciliation of consolidated adjusted operating income to the
appropriate GAAP measure.
Revenue. Caribbean wireless service revenue increased for the three and
nine months ended February 28, 2005, as compared to the three and nine months
ended February 29, 2004. The increase in Caribbean wireless service revenue was
primarily due to a greater average number of subscribers offset by a lower ARPU
in the three and nine months ended February 28, 2005, as compared to the three
and nine months ended February 29, 2004. The growth rate 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 618,300 subscribers at
February 28, 2005, an increase of 30% from approximately 474,600 subscribers at
February 29, 2004. During the twelve months ended February 28, 2005, increases
from new activations of 372,000 were offset by subscriber cancellations of
228,300. 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 decreased to 2.5% for the three months
ended February 28, 2005, from 2.8% for the same period last year. The monthly
postpaid churn rate was 2.4% for the nine-month periods ended February 28, 2005
and February 29, 2004. Our postpaid subscribers represented approximately 66% of
our total Caribbean wireless subscribers for the three and nine months ended
February 28, 2005, down from approximately 74% for the three and nine months
ended February 29, 2004. The decrease in the percentage of postpaid customers is
due to growth in our Dominican Republic operations, which has a higher
percentage of prepaid customers.
Caribbean wireless ARPU was $52 and $53 for the three and nine months
ended February 28, 2005, as compared to $56 and $58 for the same periods last
year, respectively. 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 resulted from
an increase in sales of companion rate plans, which generally have a lower ARPU,
in Puerto Rico.
Our subscribers used an average of 929 and 962 minutes of airtime per
month during the three and nine months ended February 28, 2005, respectively,
compared to 897 and 905 minutes per month during the three and nine months ended
February 29, 2004, respectively. Our postpaid subscribers used an average of
1,293 and 1,274 minutes of airtime per month during the three and nine months
ended February 28, 2005, respectively, as compared to 1,163 and 1,162 minutes of
use per month during the three and nine months ended February 29, 2004,
respectively.
Costs and expenses. Cost of services increased during the three and nine
months ended February 28, 2005, as compared to the three and nine months ended
February 29, 2004. The increase was primarily due to costs associated with a
larger subscriber base, including interconnection, tower site, utilities and
salary expenses.
Cost of equipment sold decreased during the three months ended February
28, 2005 while increasing for the nine months ended February 28, 2005 as
compared to the same periods last year. The decrease for the three months ended
February 28, 2005 was primarily due to a decrease in our average cost per phone.
The increase for the nine months ended February 28, 2005 was primarily due to an
increase in the number of phones used for upgrades and retention, partially
offset by a decrease in our average cost per phone.
Sales and marketing expenses increased during the three and nine months
ended February 2005 as compared to the same periods last year. The increase was
due to increases in compensation costs, advertising costs and agent commission
expense as a result of growth in the subscriber base.
General and administrative expenses increased during the three and nine
months ended February 28, 2005 as compared to the same period in fiscal 2004.
The increase was primarily due to increases in costs associated with the
expanding subscriber base and costs related to the Company's compliance with the
provisions of the Sarbanes-Oxley Act.
27
CARIBBEAN BROADBAND OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
(in thousands) 2005 2004 $ CHANGE % CHANGE 2005 2004 $ CHANGE % CHANGE
------------ ------------- ---------- -------- ------------ ------------- -------- --------
Revenue:
Switched revenue $ 12,088 $ 9,524 $ 2,564 27% $ 35,234 $ 27,732 $ 7,502 27%
Dedicated revenue 13,664 11,945 1,719 14 39,555 35,857 3,698 10
Wholesale termination revenue 4,041 6,191 (2,150) (35) 17,196 13,585 3,611 27
Other revenue 7,395 1,822 5,573 306 11,834 6,053 5,781 96
------------ ------------- --------- --- ------------ ------------- -------- ---
Total revenue 37,188 29,482 7,706 26 103,819 83,227 20,592 25
------------ ------------- --------- --- ------------ ------------- -------- ---
Costs and expenses:
Cost of services 10,922 10,945 (23) - 37,004 31,140 5,864 19
Cost of equipment sold 301 115 186 162 849 338 511 151
Sales and marketing 1,820 1,448 372 26 5,352 4,317 1,035 24
General and administrative 5,723 4,872 851 17 16,488 15,106 1,382 9
------------ ------------- --------- --- ------------ ------------- -------- ---
Total costs and expenses 18,766 17,380 1,386 8 59,693 50,901 8,792 17
------------ ------------- --------- --- ------------ ------------- -------- ---
Adjusted operating income (1) $ 18,422 $ 12,102 $ 6,320 52% $ 44,126 $ 32,326 $ 11,800 37%
============ ============= ========= === ============ ============= ======== ===
(1) Adjusted operating income represents the profitability measure of
the segment - see Note 8 to the condensed consolidated financial
statements for a reconciliation of consolidated adjusted operating income
to the appropriate GAAP measure.
Revenue. Total Caribbean broadband revenue increased for the three and
nine months ended February 28, 2005, as compared to the three and nine months
ended February 29, 2004. This increase was due to a 16% increase in total access
lines and equivalents to 294,100 and an increase in inter-carrier compensation
revenue for the three and nine months ended February 28, 2005 as well as an
increase in wholesale termination revenue for the nine months ended February 28,
2005.
Switched revenue increased for the three and nine months ended February
28, 2005, as compared to the same period last year. The increase was primarily
due to a 23% increase in switched access lines to 59,200 as of the end of
February 28, 2005 and a corresponding growth in minutes of use.
Dedicated revenue increased for the three and nine months ended February
28, 2005, as compared to the same periods last year. The increase was primarily
the result of a 14% growth in voice grade equivalent dedicated lines to 234,900
partially offset by a decrease in revenue per circuit.
Wholesale termination revenue decreased for the three months ended
February 28, 2005 while increasing for the nine months ended February 28, 2005
as compared to the same periods last year. Wholesale termination revenue
represents service revenues we receive from carriers under negotiated rate
agreements for traffic that originates primarily in the United States and
terminates in the Caribbean. The three month decrease was primarily due to a
decrease in southbound minutes terminating in the Dominican Republic and Puerto
Rico. The nine month increase was primarily due to an increase in southbound
terminating minutes to the Dominican Republic. The wholesale termination revenue
has significantly lower gross margins than the switched and dedicated revenue.
Other revenue increased for the three and nine months ended February 28,
2005 from the same periods last year. The increase was primarily due to an
increase in inter-carrier compensation revenue of which, $2,502 related to prior
fiscal years received from carriers in connection with various settlements.
Costs and expenses. Cost of services increased during the nine months
ended February 28, 2005, 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 an increase in the number of international long distance minutes
to the Dominican Republic that we terminate, partially offset by decreased
termination expense in Puerto Rico. The decrease in Puerto Rico termination
expense was primarily due to credits, of which $1,112 was related to prior
fiscal years, received from a carrier in connection with a settlement of
interconnection disputes.
Sales and marketing expenses increased during the three and nine months
ended February 28, 2005, as compared to the three and nine months ended February
29, 2004. The increase was primarily due to increased costs associated with
growing the customer base.
28
General and administrative expenses increased during the three and nine
months ended February 28, 2005, as compared to the three and nine months ended
February 29, 2004. The increase was primarily due to increases in costs
associated with the expanding customer base and costs related to the Company's
compliance with the provisions of the Sarbanes-Oxley Act.
LIQUIDITY AND CAPITAL RESOURCES
Weighted Average Debt Outstanding and Interest Expense
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
(in millions) 2005 2004 CHANGE 2005 2004 CHANGE
------------ ------------- ------ ------------ ------------- ------
Weighted Average Debt Outstanding........... $ 1,725.1 $ 1,721.8 $ 3.3 $ 1,729.3 $ 1,737.0 $ 7.7
Weighted Average Gross Interest Rate(1)..... 8.8% 9.8% (1.0%) 8.6% 9.6% (1.0%)
Weighted Average Gross Interest Rate(2)..... 8.4% 9.3% (0.9%) 8.2% 9.1% (0.9%)
Gross Interest Expense(1)................... $ 38.061 $ 42.000 $ (3.939) $ 112.098 $ 125.283 $ (13.185)
Interest Income............................. $ .898 $ .111 $ .787 $ 1.518 $ .385 $ 1.133
----------- ------------ -------- ----------- ------------ ---------
Net Interest Expense........................ $ 37.163 $ 41.889 $ (4.726) $ 110.580 $ 124.898 $ (14.318)
=========== ============ ======== =========== ============ =========
(1) Including amortization of debt issuance costs
(2) Excluding amortization of debt issuance costs
The $4.7 million and $14.3 million decrease in net interest expense for
the three and nine months ended February 28, 2005, respectively, resulted
primarily from a lower weighted average interest rate of approximately 1.0%
which resulted from the Company's Debt Refinancing described below.
At February 28, 2005, we had total liquidity of $311.4 million, consisting
of cash and cash equivalents totaling $161.8 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:
- $627.6 million to repay all principal amounts outstanding under our
Old Senior Secured Credit Facility, which extinguished the Old
Senior Secured Credit Facility;
- $197.3 million to repurchase all of our outstanding unsecured
subordinated notes due 2009 ("Mezzanine Debt"), which was 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
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 $594.0 million
remained outstanding at February 28, 2005 and which requires aggregate principal
payments of $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
February 28, 2005, $149.6 million was available under the revolving credit
facility. If the remaining 2008 Senior Subordinated Notes are not
29
refinanced by June 15, 2008, the aggregate amount outstanding under the New
Senior Secured Credit Facility will become immediately due and payable.
On February 10, 2005, we amended our New Senior Secured Credit Facility
to, among other things, lower the interest rate on term loan borrowings by 0.50%
through a reduction in the London Inter-Bank Offering Rate ("LIBOR") spread from
2.75% to 2.25%.
Under the terms of the New Senior Secured Credit Facility, as amended on
February 10, 2005, term and revolving loan borrowings will bear interest at
LIBOR (weighted average rate of 2.21% as of February 28, 2005) plus 2.25% 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 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 ("Welsh Carson"), 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.
Additionally, on January 27, 2005, we redeemed an additional $115.0 million
aggregate principal amount of such notes. Approximately $59.6 million, or 51.8
%, of the $115.0 million of the 2008 Senior Subordinated Notes redeemed were
owned by the affiliate of Welsh Carson. As of February 28, 2005, $185 million of
the 2008 Senior Subordinated Notes are still outstanding, of which,
approximately $95.0 million remain held by the affiliate of Welsh Carson. In
March 2005, we announced that we will redeem $40.0 million of our 2008 Senior
Subordinated Notes. The redemption will occur on or about April 25, 2005, at a
redemption price of 103.583 percent. Following the redemption, $145.0 million of
our 2008 Senior Subordinated Notes will remain outstanding.
In 1999, we issued the Mezzanine Debt, which was held by an affiliate of
Welsh Carson. The issuance was allocated $157.5 million to debt and $22.5
million to equity. The difference between the face value of the Mezzanine Debt
and the amount allocated to debt was being amortized or accreted over the term
of the Mezzanine Debt. On November 10, 2003, proceeds of $36.8 million from our
equity offering were used to prepay a portion of the Mezzanine Debt. Proceeds of
$197.3 million from the Debt Refinancing were used to repurchase all of our
remaining outstanding Mezzanine Debt, which was accruing paid-in-kind interest
at a rate of 13.0%. As of February 28, 2005, 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 February 28,
2005.
30
For the three months ended February 28, 2005, fixed charges exceeded
earnings by $23.6 million and for the nine months ended February 28, 2005, the
ratio of earnings to fixed charges was 1.31. 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.
As of February 28, 2005, we had approximately $609.4 million of property,
plant and equipment, net, placed in service. Capital expenditures for the U.S.
wireless operations were $14.5 million and $40.0 million, representing 39.5% and
39.7% of total capital expenditures, for the three and nine month period ended
February 28, 2005, respectively. 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 as well as the build out of our newly
acquired spectrum in Grand Rapids and Lansing Michigan. Capital expenditures for
the Caribbean wireless operations were $17.3 and $43.1 million, representing
47.3% and 42.7% of total capital expenditures for the three and nine months
ended February 28, 2005, respectively. These expenditures were to add capacity
and services and to continue the development and expansion of our Caribbean
wireless systems and to replace and upgrade our Puerto Rico Wireless and U.S.
Virgin Islands Network. Capital expenditures for the Caribbean broadband
operations were $4.8 million and $17.8 million, representing 13.2% and 17.6% of
total capital expenditures for the three and nine months ended February 28,
2005, respectively. These expenditures were to continue the expansion of our
Caribbean Broadband network infrastructure. During fiscal 2005, we anticipate
capital expenditures of approximately $170.0 million, which includes funding for
a network upgrade in Puerto Rico as well as the build out of the Grand Rapids
and Lansing, Michigan markets.
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, including our recently completed sale of our
cable television business in Puerto Rico. 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.
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) 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 December 28, 2004 we sold our wholly owned subsidiary, Centennial
Cable, to an affiliate of Hicks, Muse, Tate & Furst Incorporated for $157.6
million in cash, which consisted of a purchase price of $155.0 million and a
working capital adjustment of $2.6 million. We accounted for the disposition as
a discontinued operation in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144").
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 consummated the
31
transactions on October 1, 2004. 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 February 2005, the Federal Communication Commission's auction of
broadband PCS licenses ended and we were the highest bidder for the 10 MHz PCS
license in the Lafayette, Indiana market which covers approximately 275,000
Pops. The purchase price for the license is $0.9 million and we expect to close
on the purchase during the fourth quarter of the fiscal year ended May 31, 2005.
COMMITMENTS AND CONTINGENCIES
We have filed a shelf registration statement with the SEC for the sale of
up to 72,000,000 shares of our common stock that may be offered from time to
time in connection with acquisitions. The SEC declared the registration
statement effective on July 14, 1994. As of February 28, 2005, 37,613,079 shares
remain available for issuance under the shelf.
On July 7, 2000, the SEC declared effective our universal shelf
registration statement, which registered our sale of up to an aggregate of
$750.0 million of securities (debt, common stock, preferred stock and warrants),
as well as the resale of up to 20,000,000 shares of our common stock out of
approximately 87,000,000 shares owned by certain of our controlling stockholders
including Welsh Carson and an affiliate of The Blackstone Group). As of February
28, 2005, 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.
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.
In June 2004, we signed an amendment to our billing services agreement
with Convergys Information Management Group, Inc. ("Convergys"). 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, which include a requirement to
meet certain 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. As of February 28, 2005, we have paid approximately
$10.2 million in connection with this agreement.
In December 2004, we entered into an agreement with Nortel Networks to
upgrade our wireless network equipment in Puerto Rico and the U.S. Virgin
Islands. We have committed to purchase approximately $20.0 million of equipment
and services under the agreement. As of February 28, 2005, we have paid
approximately $5.8 million in connection with this agreement.
The following table summarizes our scheduled contractual cash obligations
and commercial commitments at February 28, 2005 (unless otherwise noted), and
the effect that such obligations are expected to have on liquidity and cash flow
in future periods.
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
- ----------------------- ----------- --------- --------- --------- -----------
Long-term debt obligations...................... $ 1,657,695 $ 5,764 $ 11,779 $ 197,476 $ 1,442,676
Operating leases obligations (1)................ 103,745 11,813 17,807 11,831 62,294
Purchase obligations............................ 78,712 19,368 20,878 21,665 16,801
----------- --------- --------- --------- -----------
Total contractual cash obligations.............. 1,840,152 36,945 50,464 230,972 1,521,771
----------- --------- --------- --------- -----------
Sublessor agreements (1)........................ 1,893 681 855 357 -
----------- --------- --------- --------- -----------
Net........................................... $ 1,838,259 $ 36,264 $ 49,609 $ 230,615 $ 1,521,771
=========== ========= ========= ========= ===========
(1) Represents our commitments associated with operating leases as of May 31,
2004.
32
SUBSEQUENT EVENTS
On March 1, 2005, we entered into an interest rate swap agreement (the
"swap") to hedge variable interest rate risk on $250.0 million of our $594.0
million of variable interest rate term loans. The swap is effective as of March
31, 2005, for a term of two years and the fixed interest rate on the swap is
6.29%.
In March 2005, we announced that we will redeem $40.0 million of our 2008
Senior Subordinated Notes. The redemption will occur on or about April 25, 2005,
at a redemption price of 103.583 percent. Following the redemption, $145.0
million of our 2008 Senior Subordinated Notes will remain outstanding.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Statements in this report that are not historical facts are hereby
identified as "forward-looking statements." Where, in any forward-looking
statement, we or our management expresses an expectation or belief as to future
results or actions, there can be no assurance that the statement of expectation
or belief will result or be achieved or accomplished. Our actual results may
differ materially from our expectations, plans or projections. Forward-looking
statements can be identified by the use of the words "believe," "expect,"
"estimate," "anticipate," "project," "intend," "may," "will" and similar
expressions, or by discussion of competitive strengths or 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;
- our ability to attract new wireless subscribers in Grand Rapids and
Lansing, Michigan;
- 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;
- our access to the latest technology handsets in a timeframe and cost
similar to our competitors;
- 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;
33
- 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 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 $594.0 million of our long-term debt has variable interest rates.
We were not party to any interest rate swap or collar agreements as of February
28, 2005. On March 1, 2005,
34
we entered into an interest rate swap agreement to hedge variable interest rate
risk on $250.0 million of our $594.0 million variable interest rate term loans.
The swap is effective as of March 31, 2005, for a term of two years and the
fixed interest rate on the swap is 6.29%.
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 February 28, 2005:
FISCAL YEAR ENDED
---------------------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 2006 28, 2007 29, 2008 28, 2009 28, 2010 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ---------- ----- ----------
(IN THOUSANDS)
Long-term debt:
Fixed rate $ (236) $ (171) $ (50) $185,157 $ 319 $ 878,676 $1,063,695 $1,162,008
Average fixed interest rate 10.9% 10.3% 10.0% 10.8% 10.0% 9.4% 9.6% --
Variable rate $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000 564,000 $ 594,000 $ 594,000
Average variable interest
rate(1) 4.3% 4.6% 4.8% 5.0% 5.2% 5.4% 5.4% --
(1) Represents the average interest rate before applicable margin on the New
Senior Secured Credit Facility debt.
We have variable rate debt that at February 28, 2005 and February 29, 2004
had outstanding balances of $594.0 million and $600.0 million, respectively. The
fair value of such debt approximates the carrying value at February 28, 2005.
Based on our unhedged variable rate obligations outstanding at February 28, 2005
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 $1.3 million.
ITEM 4. CONTROLS AND PROCEDURES
As discussed in Note 11 to the Condensed Consolidated Financial
Statements, we restated certain of 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 February 28, 2005.
There was no change in our internal control over financial reporting
during the third quarter of fiscal 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
We are party to several lawsuits in which plaintiffs have alleged,
depending on the case, breach of contract, misrepresentation or unfair practice
claims relating to 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 any damage payments
would have a material adverse effect on its consolidated results of operations,
consolidated financial position or consolidated cash flows.
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 any damage payments would have a material
adverse effect on our consolidated results of operations, consolidated financial
position or consolidated cash flows.
35
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 its business or
consolidated 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
36
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 Acts
of 2002
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
April 07, 2005
CENTENNIAL COMMUNICATIONS CORP.
/s/ Thomas J. Fitzpatrick
-------------------------------
Thomas J. Fitzpatrick
Executive Vice President,
Chief Financial Officer
(Chief Financial Officer)
/s/ Francis P. Hunt
-------------------------------
Francis P. Hunt
Sr. Vice President-Controller
(Chief Accounting Officer)
38