<PAGE>
As filed with the Securities and Exchange Commission on June 14, 1999
Registration No. 333-62815
======================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
___________
CENTENNIAL COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 4812 84-1324155
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification Number)
incorporation or organization) Code Number)
</TABLE>
___________
1528 Wazee Street
Suite 200
Denver, CO 80202
(303) 405-0475
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
___________
Karl Maier
President and Chief Operating Officer
Centennial Communications Corp.
1528 Wazee Street
Suite 200
Denver, Colorado 80202
(303) 405-0475
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
___________
Copies to:
<TABLE>
<S> <C>
Mark D. Ebel, Esq.
Holland & Hart LLP
555 17TH Street, Suite 3200
Denver, Colorado 80202
(303) 295-8000
</TABLE>
___________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
___________
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
___________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 14, 1999
CENTENNIAL COMMUNICATIONS CORP.
Offer to Exchange
14% Senior Discount Notes Due 2005 ("Exchange Notes")
for any and all outstanding
14% Senior Discount Notes Due 2005 ("Private Notes")
________________
The Exchange Offer will expire at 5:00 p.m., New York City Time
on ___________, 1999 unless extended (the "Expiration Date").
Centennial Communications Corp., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus (the "Prospectus") and in the accompanying Letter of Transmittal (the
"Letter of Transmittal," which together with the Prospectus constitute the
"Exchange Offer"), to exchange its 14% Senior Discount Notes due 2005 (the
"Exchange Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to a registration statement of which
this Prospectus is a part (together with all amendments and exhibits thereto,
the "Registration Statement"), for an equal principal amount of its outstanding
14% Senior Discount Notes due 2005 (the "Private Notes"), of which $40 million
aggregate principal amount is outstanding on the date hereof. The Exchange
Notes and the Private Notes are sometimes collectively referred to herein as the
"Notes." The terms of the Exchange Notes are identical in all material respects
to those of the Private Notes, except (i) for certain transfer restrictions and
registration rights relating to the Private Notes; and (ii) that if the Exchange
Offer is not consummated in a timely manner, or if the Company fails to comply
with certain other registration obligations with respect to the Private Notes,
the Company is required to pay certain Liquidated Damages (as defined) to the
Holders (as defined) of the Private Notes. See "Description of Notes." The
Exchange Notes will be issued pursuant to, and be entitled to the benefits of,
an Indenture dated as of January 15, 1998 (the "Indenture").
The Notes mature on January 1, 2005. Interest on the Notes will not accrue
prior to January 1, 2003. Thereafter, interest on the Notes will be payable in
cash at a rate of 14% per annum, payable semi-annually in arrears on January 1
and July 1 of each year commencing July 1, 2003. The Company will not be
required to make any mandatory redemption or sinking fund payment with respect
to the Notes prior to maturity. The Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or after January 1, 2003 at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption. In addition, at any time
prior to January 1, 2001, the Company may, on one or more occasions, redeem up
to a maximum of 25% in aggregate principal amount at maturity of the Notes, at a
redemption price of 114% of the Accreted Value (as defined) thereof, plus
accrued and unpaid Liquidated Damages, if any, to the date of the redemption
with the net cash proceeds of certain sales of capital stock of the Company;
provided that at least 75% in aggregate principal amount at maturity of the
Notes remain outstanding immediately after the occurrence of each such
redemption. In the event of a Change of Control (as defined), the Holders of
the Notes will have the right to require the Company to purchase their Notes, in
whole or in part, at a price equal to 101% of the Accreted Value thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase or, in the case of any such purchase on or after January 1, 2003, at
101% of the aggregate principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of purchase. See "Description of
Notes."
(Continued on next page)
________________
See "Risk Factors" commencing on page 15 for certain information that
should be considered in connection with the Exchange Offer and an investment in
the Exchange Notes.
________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________________
The date of this Prospectus is _________, 1999.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
The Notes rank pari passu in right of payment with all existing and future
unsubordinated indebtedness of the Company and will rank senior in right of
payment to all subordinated indebtedness of the Company. The Notes are secured
by a pledge of (i) 100% of the Capital Stock (as defined) of SMR Direct USA,
Inc. (this entity has no operations and its financial position consists only of
a nominal capitalization) and all future domestic direct Restricted Subsidiaries
(as defined) of the Company and (ii) 100% of the Capital Stock (other than
Excluded Stock (as defined)) of each of SMR Direct Cayman Corp. (this entity is
solely a nominee shareholder in certain of the Company's Subsidiaries (as
defined) located in Latin America) and Centennial Cayman Corp. (together with
SMR Direct Cayman Corp., the "Cayman Entities") and 100% of the Capital Stock
(other than Excluded Stock) of all future foreign direct Restricted Subsidiaries
of the Company. Pursuant to the definition of Excluded Stock, the Company has
pledged approximately 66% of the total outstanding Capital Stock of each of the
Cayman Entities. The Notes are effectively subordinated to additional secured
indebtedness of the Company and the Notes are structurally subordinated to
indebtedness and other liabilities (including trade payables) of the Company's
Subsidiaries. As of March 31, 1999, the Notes were effectively subordinated to
approximately $393,000 of secured indebtedness of the Company and to
approximately $1.6 of indebtedness and other liabilities of the Company's
Subsidiaries (excluding intercompany payables to the Company).
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on ____________,
1999, unless the Exchange Offer is extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date. The Exchange Offer is not conditioned
upon any minimum principal amount of Private Notes being tendered for exchange,
but is subject to certain customary conditions. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Private
Notes, the Company will promptly return all previously tendered Private Notes to
the Holders thereof. See "The Exchange Offer."
The Private Notes were issued and sold on January 15, 1998 (the "Initial
Offering") to Salomon Brothers Inc and Prudential Securities Incorporated
(collectively, the "Initial Purchasers") pursuant to a Purchase Agreement dated
January 12, 1998 among the Company and the Initial Purchasers (the "Initial
Purchase Agreement"). The Initial Purchase Agreement provided for the sale by
the Company of 40,000 units (the "Units"), each consisting of a Private Note
having a principal amount at maturity of $1,000 and a warrant (an "Initial
Warrant") to purchase 64 shares of the Company's Common Stock. The Initial
Purchasers subsequently resold the Private Notes and the Initial Warrants in
reliance on Rule 144A under the Securities Act.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Notes Registration Rights Agreement dated
as of January 15, 1998, among the Company and the Initial Purchasers (the "Notes
Registration Rights Agreement"). Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties, the Company believes that the Exchange Notes
issued pursuant to the Exchange Offer in exchange for the Private Notes may be
offered for resale, resold and otherwise transferred by a Holder thereof (other
than (i) a broker-dealer who purchased such Private Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an affiliate within the meaning of
Rule 405 under the Securities Act (an "Affiliate") of the Company), without
compliance with the registration and prospectus delivery requirements of the
Securities Act; provided that the Holder is acquiring the Exchange Notes in the
ordinary course of its business and is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. Each broker-dealer that receives Exchange Notes for
its own account in exchange for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. The Company has
agreed that, for a period of 180 days from the date the Registration Statement
is declared effective (the "Effective Date") it will make this Prospectus
available to any broker-dealer for use in connection with any such resales. See
"Plan of Distribution." The Company believes that none of the registered Holders
of the Private Notes is an Affiliate of the Company.
The Private Notes have been designated eligible for trading by qualified
institutional investors in the Private Initial Offerings, Resales and Trading
through Automated Linkages ("PORTAL") Market of the National Association of
2
<PAGE>
Securities Dealers (the "NASD"). The Company does not intend to apply for
listing of the Exchange Notes on any securities exchange or to seek approval
through any automated quotation system. There can be no assurance regarding the
future development of a market for the Exchange Notes, or the ability of Holders
of the Exchange Notes to sell their Exchange Notes or the price at which such
Holders may be able to sell their Exchange Notes. If such a market were to
develop, the Exchange Notes could trade at prices that may be higher or lower
than their Accreted Value (or principal amount) depending on many factors,
including prevailing interest rates, the Company's operating results and the
market for similar securities. See "Risk Factors - Lack of a Public Market for
the Notes."
Holders of Private Notes whose Private Notes are not tendered and accepted in
the Exchange Offer will continue to hold such Private Notes and will be entitled
to all the rights and preferences and will be subject to the existing
restrictions upon transfer thereof. Except in certain circumstances, the
Company will not have any further obligation to such Holders to provide for the
registration under the Securities Act of the Private Notes held by them.
The Company will not receive any proceeds from, and has agreed to bear all
registration expenses of, the Exchange Offer. No underwriter is being used in
connection with the Exchange Offer. See "The Exchange Offer - Resale of the
Exchange Notes."
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or any accompanying Prospectus supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, or any underwriter, agent or dealer. Neither the delivery of
this Prospectus or any such Prospectus supplement nor any resale made thereunder
shall, under any circumstance, create an implication that there has been no
change in the affairs of the Company since the date hereof or thereof. This
Prospectus and any such related Prospectus supplement do not constitute an offer
to sell or a solicitation or an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction.
________________
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION
RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. SUCH
FORWARD-LOOKING STATEMENTS ARE PRINCIPALLY CONTAINED IN THE SECTIONS "SUMMARY,"
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AND INCLUDE WITHOUT LIMITATION THE
COMPANY'S EXPECTATION AND ESTIMATES AS TO ITS BUSINESS FOLLOWING THE EXCHANGE
OFFER. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS PROSPECTUS THE WORDS
"ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," "PLANS," "INTENDS" AND
SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE
INTENDED TO SPECIFICALLY IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
REFLECT THE CURRENT VIEWS OF THE COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISK
FACTORS DESCRIBED IN THIS PROSPECTUS. IN ADDITION TO FACTORS THAT MAY BE
DESCRIBED ELSEWHERE IN THIS PROSPECTUS, THE COMPANY SPECIFICALLY WISHES TO
ADVISE READERS THAT THE FACTORS LISTED UNDER THE CAPTION "RISK FACTORS" COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-
LOOKING STATEMENT. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED OR EXPECTED. THE COMPANY DOES NOT INTEND TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
________________
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH
3
<PAGE>
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
AVAILABLE INFORMATION
This Prospectus constitutes a part of an Exchange Offer Registration
Statement on Form S-4 filed by the Company with the Commission under the
Securities Act with respect to the Exchange Notes. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to such Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the Exchange Notes. Any statement contained herein concerning the
provisions of certain documents are not necessarily complete, and in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement for a more complete description of the matter
involved. Each such statement is qualified in its entirety by such reference.
As a result of the filing of the Registration Statement with the
Commission, the Company will be subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith will be required to file with or furnish to the Commission
certain reports and other information. The Registration Statement, the exhibits
and schedules thereto, reports and other information filed with or furnished to
the Commission by the Company may be inspected at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Additionally, the Commission maintains a Web site on the Internet
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that submit electronic filings to the
Commission, including the Company.
Pursuant to the Indenture, the Company has agreed, whether or not required
by the rules and regulations of the Commission, to furnish to the Holders of the
Notes reports and other information as it would be required to file with the
Commission if the Company were subject to the reporting requirements of the
Exchange Act. In addition, commencing after the consummation of the Exchange
Offer, whether or not required by the rules and regulations of the Commission,
the Company has agreed to file a copy of such reports and other information with
the Commission and make such information available to securities analysts and
prospective investors upon request.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
and related notes appearing elsewhere in this Prospectus. As used herein, the
term "Company" refers to Centennial Communications Corp. and its Subsidiaries
unless the context indicates otherwise. The Company operates under the names
(i) "Radio Trunking del Peru," "SMR Direct Peru, S.R.L.," "Telecom Supply
S.R.L.," "Pompano, S.R.L.," "C-Comunica S.R.L.," "Transnet del Peru, S.A." and
"Peru Tel S.A." in Peru, (ii) "Radio Trunking del Ecuador," "Brunacci Compania
Ltda.," and "Comovec S.A." in Ecuador, (iii) "Telecomunicaciones y Servicios
S.A." and "Centennial Cayman Corp. Chile Ltd." in Chile and (iv) "Radio Trunking
del El Salvador, S.R.L., C.V." in El Salvador. All references herein to "Latin
America" refer to Central America, the Caribbean, South America and Mexico.
Unless otherwise indicated, all discussions herein assume that the Company's
U.S. Operations (as defined) have been fully divested. See also "Glossary of
Terms" for definitions of certain terms used herein. Except as otherwise
indicated, all dollar amounts are expressed in United States dollars and
references to "dollars" and "$" are to United States dollars. All consolidated
historical financial statements contained in this Prospectus are prepared in
accordance with United States generally accepted accounting principles ("U.S.
GAAP") and are presented in dollars.
The Company
The Company is a provider of analog specialized mobile radio ("SMR")
services focusing on providing such service in Latin America. The Company
currently operates in Latin American markets that have approximately 29.1
million people ("POPs") and, as of March 31, 1999, the Company had 13,904
subscribers. The Company also provided SMR service in the United States but is
in the process of divesting its U.S. Operations. See "Business - Divestiture of
the United States Operations."
The Company was founded in October 1995 and, as of March 31, 1999, the
Company had operating losses totaling $38.3 million. As of March 31, 1999, the
Company is (i) the largest SMR operator in Peru, in terms of the number of
subscribers and channels, with over 7,137 subscribers and 321 channels in a
market of approximately 11.0 million POPs, and (ii) the largest SMR operator in
Ecuador, in terms of the number of subscribers and channels, with over 3,700
subscribers and 365 channels, in a market of approximately 4.0 million POPs.
The Company acquired an operating company in Chile (a market of approximately
7.5 million POPs) in January 1998, and, as of March 31, 1999, had over 2,300
subscribers and 325 channels in Chile. In August 1998, the Company completed
the buildout of 10 additional channels in Santiago, Chile and launched a full
scale sales and marketing program. The Company also holds concessions for 50
channels in El Salvador (a market of approximately 5.8 million POPs). In El
Salvador, the Company commenced operations in August 1998, and, as of March 31,
1999, the Company had 170 channels and provided service to 701 subscribers
through seven sites. The Company has not launched any sales or marketing
program in El Salvador as the Company has made the determination that it will
sell its El Salvadorian assets. The Company's strategy is focused on
consolidating its channel positions in the markets in which it operates. The
Company is also exploring the opportunity to provide wireless communications
services which utilize digital technology. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Company believes that significant market opportunities
exist to develop a leading position as a provider of SMR service in Latin
America.
Industry and Market Opportunity
SMR, also referred to as "trunked radio" or wireless dispatch
communications, is primarily a business communications tool which provides cost-
effective, "one-to-many" voice communications.
. The Company believes that demand for SMR service in Latin America
is significant due to the following economic and demographic
characteristics: (i) low teledensity and low wireless
communications penetration; (ii) high population densities found in
many urban markets; (iii) unreliable telecommunications
infrastructure; (iv) limited and relatively expensive
communications alternatives; and (v) economic growth fueled by
developing market economies.
5
<PAGE>
. Channel Holdings and Operations. The Company's current channel holdings
and existing operations are summarized below :
<TABLE>
<CAPTION>
POPs (mm)(1) Channel Holdings(2) Subscribers as of Service Launch Date
Country March 31, 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peru 11.0 321 7,137 May 1996
Ecuador 4.0 365 3,765 March 1997
Chile 7.5 325 2,301 August 1998(3)
El Salvador 5.8 170 701 August 1998
------------------------------------------------------------------------
Total(4) 28.3 1,181 13,904
========================================================================
</TABLE>
------------------
(1) Represents the approximate number of POPs in the markets in which the
Company has channels.
(2) Channels are voice paths on which mobile communications are transmitted.
Channels are licensed per geographic area and, using analog technology,
each channel can generally serve up to 125 subscribers in a given area.
(3) The Company completed the buildout of 10 additional channels and launched a
full scale sales and marketing program in August of 1998 with respect to an
operating company it acquired in January 1998.
(4) As of March 31, 1999 the Company also had channels and subscribers in the
United States. The Company is in the process of divesting its U.S.
Operations. See "Business - Divestiture of the United States
Operations."
Growth Strategy
The Company's growth strategy is to (i) expand its analog SMR operations
and subscriber base in Latin America; (ii) improve cash flow and profitability
by actively managing and controlling operating expenses; (iii) pursue additional
SMR opportunities; (iv) add incremental services to its existing service
offerings; and (v) explore the implementation of digital wireless communications
technologies.
Recent Developments
For a description of recently completed acquisitions, pending acquisitions
and auction results, see "Business - Recent Developments."
On May 13, 1999, at a meeting of the Board of Directors of the Company,
structural changes were made at both the Board of Directors and senior
management levels of the Company. At the board level, three members tendered
their resignation and a new member was elected to act as Chairman of the Board.
At the senior management level, the President and Chief Executive Officer and
the General Manager of Latin America, tendered their resignations. A new
President and Chief Operating Officer and a new General Manager of Latin America
were appointed at the same meeting. See "Management."
The Company was incorporated in Delaware on October 25, 1995. Its
principal executive offices are located at 1528 Wazee Street, Suite 200, Denver,
CO 80202, and its telephone number is (303) 405-0475.
Risk Factors
See "Risk Factors" as well as other information and data included in this
Prospectus for a discussion of certain factors that should be considered in
evaluating an investment in the Exchange Notes. Among other things, these
factors include risks related to the Company's historical operating losses and
limited operating history, future ability to service indebtedness, need for
additional financing, and uncertainty of market acceptance and potential lack of
subscriber demand.
<TABLE>
<CAPTION>
The Exchange Offer
<S> <C>
The Exchange Offer.......... The Company is hereby offering to exchange up
to $40 million aggregate principal amount of
the Exchange Notes for an equal principal
amount of Private Notes that are properly
tendered and accepted. A s of the date
hereof,
</TABLE>
6
<PAGE>
there is $40 million aggregate principal
amount of Private Notes outstanding. See "The
Exchange Offer."
Based on interpretations by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Private
Notes may be offered for resale, resold and
otherwise transferred by a Holder thereof
(other than (i) a broker dealer who purchased
such Private Notes directly from the Company
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act,
or (ii) a person that is an Affiliate of the
Company), without compliance with the
registration and prospectus delivery
requirements of the Securities Act; provided
that the Holder is acquiring Exchange Notes
in the ordinary course of its business and is
not participating, does not intend to
participate, and has no arrangement or
understanding with any person to participate,
in the distribution of the Exchange Notes.
Holders of Private Notes wishing to accept
the Exchange Offer must represent to the
Company that such conditions have been met.
Each broker-dealer that receives Exchange
Notes for its own account in exchange for
Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will
deliver a prospectus meeting the requirements
of the Securities Act in connection with any
resale of such Exchange Notes.
This Prospectus, as it may be amended or
supplemented from time to time, may be used
by a broker-dealer in connection with resales
of Exchange Notes received in exchange for
Private Notes acquired by such broker-dealer
as a result of market-making activities or
other trading activities. The Letter of
Transmittal that accompanies this Prospectus
states that by so acknowledging and by
delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. Any Holder of Private Notes
who tenders in the Exchange Offer with the
intention to participate in a distribution of
the Exchange Notes could not rely on the
above-referenced position of the staff of the
Commission and, in the absence of an
exemption under the Securities Act, would
have to comply with the registration and
prospectus delivery requirements contained
therein in connection with any resale
transaction. Failure to comply with such
requirements in such instance could result in
such Holder incurring liability under the
Securities Act for which the Holder is not
indemnified by the Company. See "The Exchange
Offer-Resale of the Exchange Notes."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on ________, 1999, unless
the Exchange Offer is extended by the Company
in its sole discretion, in which case the
term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is
extended. "The Exchange Offer -Expiration
Date; Extensions; Amendments."
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain
customary conditions that may be waived by
the Company. The Exchange Offer is not
conditioned upon any minimum aggregate
principal amount of Private Notes being
tendered for exchange. See "The Exchange
Offer - Conditions."
Procedures to Tendering
Each Holder of Private Notes wishing to
accept the Exchange Offer must
7
<PAGE>
Private Notes.............. complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Private Notes
and any other required documentation to State
Street Bank and Trust Company, as exchange
agent (the "Exchange Agent"), at the address
set forth herein. See "The Exchange Offer -
Procedures for Tendering."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender such Private
Notes in the Exchange Offer should contact
such registered Holder promptly and instruct
such registered Holder to tender on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on such beneficial
owner's behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering such owner's
Private Notes, either make appropriate
arrangements to register ownership of the
Private Notes in such owner's name or obtain
a properly completed bond power from the
registered Holder. The transfer of registered
ownership may take considerable time and may
not be able to be completed prior to the
Expiration Date. See "The Exchange Offer -
Procedures for Tendering."
Guaranteed Delivery
Procedures................. Holders of Private Notes who wish to tender
their Private Notes and whose Private Notes
are not immediately available or who cannot
deliver their Private Notes, the Letter of
Transmittal or any other documentation
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date
must tender their Private Notes according to
the guaranteed delivery procedures set forth
under "The Exchange Offer - Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes............. Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Private
Notes that are properly tendered in the
Exchange Offer prior to the Expiration Date.
The Exchange Notes issued pursuant to the
Exchange Offer will be delivered on the
earliest practical date following the
Expiration Date. See "The Exchange Offer-
Terms of the Exchange Offer."
Withdrawal Rights........... Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date. See
"The Exchange Offer - Withdrawal of Tenders."
Certain Tax Considerations.. For a discussion of certain tax
considerations relating to the Exchange
Notes, see "Certain U.S. Federal Income Tax
Considerations. "
Exchange Agent.............. State Street Bank and Trust Company is
serving as the Exchange Agent in connection
with the Exchange Offer. State Street Bank
and Trust Company also serves as trustee (the
"Trustee") under the Indenture.
Summary of the Terms of the Exchange Notes
The Exchange Offer applies to the $40 million aggregate principal amount
of the Private Notes. The form and terms of the Exchange Notes are identical in
all material respects to the form and terms of the Private Notes except (i) for
certain transfer restrictions and registration rights relating to the Private
Notes; and (ii) that if the
8
<PAGE>
Exchange Offer is not consummated in a timely manner, or if the Company fails to
comply with certain other registration obligations with respect to the Private
Notes, the Company is required to pay certain Liquidated Damages to the Holders
of the Private Notes. See "The Exchange Offer - Terms of the Exchange Offer."
The Exchange Notes will evidence the same indebtedness as the Private Notes
(which they replace) and will be issued under and entitled to the benefits of
the Indenture. For further information and for definitions of certain
capitalized terms, see "Description of Notes."
Maturity Date............... January 1, 2005.
Effective Yield............. 14%.
Interest.................... Cash interest will not accrue on the Exchange
Notes prior to January 1, 2003. Thereafter,
interest on the Exchange Notes will be
payable, in cash, at a rate of 14% per annum,
payable semi-annually in arrears on January 1
and July 1 of each year, commencing July 1,
2003.
Security.................... The Exchange Notes will be secured by a
pledge of (i) 100% of the Capital Stock of
SMR Direct USA, Inc. (this entity has no
operations and its financial position
consists only of a nominal capitalization)
and all future domestic direct Restricted
Subsidiaries of the Company and (ii) 100% of
the Capital Stock (other than Excluded Stock)
of each of the Cayman Entities (one of which
is solely a nominee shareholder in certain of
the Company's Latin American Subsidiaries)
and 100% of the Capital Stock (other than
Excluded Stock) of all future foreign direct
Restricted Subsidiaries of the Company.
Pursuant to the definition of Excluded Stock,
the Company has pledged approximately 66% of
the total outstanding Capital Stock of each
of the Cayman Entities. See "Description of
Notes - Security."
Optional Redemption......... The Exchange Notes will be redeemable at the
option of the Company, in whole or in part,
at any time on or after January 1, 2003, at
the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption.
In addition, at any time prior to January 1,
2001, the Company may, on one or more
occasions, redeem up to a maximum of 25% in
aggregate principal amount at maturity of the
Exchange Notes at a redemption price of 114%
of the Accreted Value thereof, plus accrued
and unpaid interest and Liquidated Damages,
if any, to the date of redemption with the
net cash proceeds of certain sales of capital
stock of the Company; provided, that at least
75% in aggregate principal amount at maturity
of the Exchange Notes remains outstanding
following each such redemption.
Change of Control........... In the event of a Change of Control, the
Holders of the Exchange Notes will have the
right to require the Company to purchase
their Exchange Notes at a price equal to 101%
of the Accreted Value thereof, plus accrued
and unpaid Liquidated Damages, if any, to the
date of purchase or, in the case of any such
purchase on or after January 1, 2003, at 101%
of the aggregate principal amount thereof,
plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
purchase. The failure by the Company to
purchase all Notes validly tendered upon the
occurrence of a Change of Control would
constitute an Event of Default under the
Indenture.
Ranking..................... The Exchange Notes will rank pari passu in
right of payment with all existing and future
unsubordinated indebtedness of the Company
and will rank senior in right of payment to
all future subordinated indebtedness of the
Company. The Exchange Notes will be
effectively subordinated to additional
secured
9
<PAGE>
indebtedness of the Company and the Exchange
Notes will be structurally subordinated to
indebtedness (including trade payables) of
the Company's Subsidiaries. As of March 31,
1999, the Notes were effectively subordinated
to approximately $_____ of secured
indebtedness of the Company and to
approximately $_____ of indebtedness and
other liabilities of the Company's
Subsidiaries (excluding intercompany payables
to the Company).
Covenants................... The Indenture that will govern the Exchange
Notes contains covenants that, among other
things: (i) limit the incurrence by the
Company and its Restricted Subsidiaries of
additional indebtedness; (ii) limit the
issuance by the Company of Disqualified Stock
(as defined) and the issuance by its
Restricted Subsidiaries of preferred stock;
(iii) restrict the ability of the Company and
its Restricted Subsidiaries to make dividends
and other restricted payments or investments;
(iv) limit transactions by the Company and
its Restricted Subsidiaries with Affiliates;
(v) limit the ability of the Company and its
Restricted Subsidiaries to make asset sales;
(vi) limit the ability of the Company and its
Restricted Subsidiaries to incur certain
liens; and (vii) limit the ability of the
Company to consolidate or merge with or into,
or to transfer all or substantially all of
its assets to, another person.
For additional information regarding the Exchange Notes, see "Description
of Notes."
Use of Proceeds
The Company will not receive any proceeds from the Exchange Offer. The
proceeds from the sale of the Private Notes were originally used for spectrum
acquisitions, capital expenditures, operating losses and working capital.
10
<PAGE>
Summary Historical Consolidated Financial and Other Information
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(unaudited)
Three Months
\Inception (October ------------------------
26, 1995) through Year Ended December 31, Ended March 31,
December 31, ------------------------------------- ------------------------
1995 1996 1997 1998 1998 1999
-------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ - $ 296 $ 4,826 $ 7,204 $ 1,752 $ 1,710
Costs and expenses related to
revenues -------- ---------- ---------- ---------- ---------- ----------
- 513 3,556 3,482 731 489
-------- ---------- ---------- ---------- ---------- ----------
Gross profit - (217) 1,270 3,722 1,021 1,221
Operating costs and expenses 62 4,590 15,837 15,304 2,723 2,184
-------- ---------- ---------- ---------- ---------- ----------
Operating loss (62) (4,807) (14,567) (11,582) (1,702) (963)
Other income (expense) 4 (79) (1,148) (3,851) (623) (1,192)
-------- ---------- ---------- ---------- ---------- ----------
Net loss before minority interest (58) (4,886) (15,715) (15,433) (2,325) (2,155)
Minority interest (1) - 111 - - - -
-------- ---------- ---------- ---------- ---------- ----------
Net loss $ (58) (4,775) (15,715) (15,433) (2,325) (2,155)
Accretion of mandatorily
redeemable preferred shares to
redemption value - (15) (142) (1,536) (314) (416)
-------- ---------- ---------- ---------- ---------- ----------
Net loss applicable to common
shareholders $ (58) $ (4,790) $ (15,857) $ (16,969) $ (2,640) $ (2,571)
======== ========== ========== ========== ========== ==========
Net loss per share $(0.09) $ (1.38) $ (4.53) $ (4.84) $ (.75) $ (.73)
Weighted average shares outstanding 639,091 3,480,466 3,502,534 3,502,749 3,502,746 3,502,746
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
1999
------------------------------------------------------------------------------- ---------------
Balance Sheet Data: 1995 1996 1997 1998 (unaudited)
------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $2,503 $14,821 $ 7,730 $ 5,230 $ 5,097
Restricted cash - 3,890 1,350 11,771 11,476(5)
Working capital 3,203 17,573 10,892 17,709 16,684
Total assets 3,265 34,916 29,872 47,041 45,417
Total long-term debt - 4,897 16,157 29,122 29,923
Mandatorily redeemable convertible
preferred stock - 28,829 29,252 42,066 42,101
Stockholder's equity (deficit) 3,212 (1,348) (17,169) (28,208) (30,820)
</TABLE>
<TABLE>
<CAPTION>
\Inception
(October 26, (unaudited)
1995) through Three Months
December 31, Year Ended December 31, Ended March 31,
-------------- -------------------------- -------------------------
1995 1996 1997 1998 1998 1999
--------------- ----------- --------- --------- --------- ---------------
Other Financial Data:
<S> <C> <C> <C> <C> <C> <C>
EBITDA(2) $(61) $(4,299) $(9,102) $(7,094) $(1,270) $(395)
Depreciation and amortization 1 508 2,259 2,085 433 569
Capital expenditures (3) 5 7,087 10,383 6,820 995 219
Deficiency of earnings to fixed
charges (4) 53 4,538 14,828 10,601 1,286 783
</TABLE>
(1) Reflects the acquisition of the capital stock of SMR Direct Peru, S.R.L.
(formerly Mobil Line Peru, S.A.), 51% of which was acquired in February
1996 and the remaining 49% of which was acquired in July 1996.
11
<PAGE>
(2) Represents operating loss before depreciation, amortization, interest
income and other income/loss. EBITDA is not a measurement under U.S. GAAP
and may not be similar to EBITDA measures of other companies. The Company
has included information concerning EBITDA herein because it understands
that such information is used by certain investors as the measure of an
issuer's ability to incur and service indebtedness; however, EBITDA should
not be considered a substitute for net income as a measure of the Company's
operating results or for cash flow as a measure of the Company's
liquidity.
(3) Represents cash used for purchases of property and inventory (subscriber
units).
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of loss before income taxes plus fixed charges. Fixed
charges consist of interest on all indebtedness and amortization of debt
expense. Because the Company's fixed charges exceeded earnings for the
period from inception through December 31, 1995, for the years ended
December 31, 1996, 1997 and 1998, and for the three months ended March 31,
1998 and 1999, the deficiency of earnings to fixed charges (rather than a
ratio of earnings to fixed charges) has been presented for such
periods.
(5) The majority of this amount is related to money which has been escrowed
under one of the Company's financing arrangements and is to be used in
Latin America only. In addition, it includes cash pledged by the Company
to secure its obligations in connection with the Company's bid for spectrum
in the Chile Concurso and the purchase of certain assets from a Chilean
company. On October 29, 1997 the Company received written notice from the
Chilean Ministry of Transportation and Telecommunications (the "Ministry")
that its proposal had been accepted and awarded, subject to final approval
by the Ministry of the completion of the build-out of the project as
submitted.
12
<PAGE>
GLOSSARY OF TERMS
Set forth below are certain technical terms defined as they are used in this
Prospectus:
<TABLE>
<S> <C>
800 MHz SMR: A two-way radio service (normally dispatch with
limited mobile-telephone usage) provided within a
designated portion of the 800 MHz frequency band.
900 MHz SMR: A two-way radio service (normally dispatch with
limited mobile-telephone usage) provided within a
designated portion of the 900 MHz frequency band.
Analog: A transmission method employing a continuous
(rather than pulsed or digital) electrical signal
that varies in amplitude or frequency in response
to changes in sound impressed on a transducer in
the sending device.
Channel: A wireless pathway for the transmission of
information between a sending point and a
receiving point (often "channel" refers to a
paired set of send and receive pathways).
Channels are often measured in terms of the
amount of spectrum they occupy (bandwidth),
measured in Hertz.
Churn Rate: The rate at which subscribers terminate service,
which is calculated by dividing the number of
subscribers disconnected by the average number of
subscribers on the network expressed as a
percentage and calculated for a g iven
measurement period.
Digital: A transmission method employing a sequence of
discrete, distinct pulses to indicate specific
information .
Dispatch: A service provided to clients who want to
transmit and receive short messages to and from a
group of users operating within range of the
system's transmission site. Dispatch is normally
structured in a one-to-many format between a
fixed base station and mobile units, but can also
be structured in a one- to-one format.
ESMR: Enhanced Specialized Mobile Radio. Radio
communications systems that employ digital
technology with a multi-site configuration that
pe rmits frequency reuse.
FCC: United States Federal Communications Commission.
Hertz/Hz: Industry convention for measuring frequency. One
Hertz (abbreviate Hz) equals one cycle per
second; kHz (kiloHertz) stands for thousands of
Hertz; MHz (megaHertz) stands for millions of
Hertz.
iDEN(TM): Integrated digital enhanced network. A digital
wireless technology developed by Motorola Inc.
for the provision of ESMR service. A tradem ark
of Motorola Inc.
Interconnect: With respect to SMR, interconnect refers to the
service provided to a subscriber which allows
such subscriber to have the capability to connect
to the public switched telephone network and
thereby communicate with a party that can be
reached over the local public telephone network.
POPs: The approximate number of persons in a market
potentially served by telecommunications
services, including SMR .
Repeater: A stationary transmitter device which retransmits
received signals on an outbound circuit in
amplified form.
Site: The location of a transmission station. In a
multi-site configuration with call hand-off
between stations, stations are located so that
the coverage areas of the individual stations
overlap in order to facilitate coverage over a
wide coverage area. The geographic coverage area
of a transmission site typically has a radius of
15 to 30 miles depending on the height of the
antenna and the topography of the market.
</TABLE>
13
<PAGE>
SMR: Specialized Mobile Radio. SMR refers to third-
party, two-way radio communications networks
which operate on a repeater which "repeats" an
incoming transmission on one channel onto an
appropriate outgoing designated or available
channel. In this manner, a message can be sent by
one user in a group to all the other users in the
same group at the same time ("one-to-many"
communications). This communications format is
well-suited to the dispatch market.
Spectrum: A term generally applied to radio frequencies.
Subscriber: An individual utilizing a subscriber unit on an
SMR network.
Subscriber Unit (Radio): An SMR portable, vehicle-mounted or base station
radio receiver/transmitter.
14
<PAGE>
RISK FACTORS
An investment in the Exchange Notes represents a high degree of risk.
There are a number of factors, including those specified below, which may
adversely affect the Company's ability to make payments on the Exchange Notes.
Holders of the Exchange Notes could therefore lose a substantial portion or all
of their investment in the Exchange Notes. Consequently, an investment in the
Exchange Notes should only be considered by persons who can assume such risk.
The risk factors described below are not necessarily exclusive and each
potential investor is encouraged to perform its own investigation with respect
to the Company.
Historical and Anticipated Operating Losses; Negative Cash Flow from Operations
Since inception, the Company has been primarily engaged in start-up
activities requiring substantial expenditures. Consequently, the Company has
reported operating losses before interest of approximately $11.6 million and
$964,000 for the fiscal year ended December 31, 1998 and the three months ended
March 31, 1999, respectively, and net cash outflow from operating and investing
activities of approximately $31.7 million and $87,000 for the year ended
December 31, 1998 and the three months ended March 31, 1999, respectively. From
its inception, the Company has never reported operating income or positive cash
flows from operations, and has had operating losses totaling $38.3 million.
Further development of the Company's business and the expansion of its analog
SMR networks, service offerings and subscriber base will require significant
additional expenditures, and the Company expects that it will have operating
losses and will record net cash outflow in the foreseeable future. There can be
no assurance that the Company's future operations will be profitable. As a
result, there can be no assurance that the Company will have sufficient
resources to make principal and interest payments with respect to the Notes. In
addition, if the Company does not achieve and sustain profitability, the value
of the Notes will be adversely affected. See " - Substantial Leverage; Ability
to Service Indebtedness;" " - Holding Company Structure; Inability to Access
Cash Flow;" " - Need for Additional Financing;" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources."
In connection with the sale of the Company's U.S. Operations, the Company's
management determined that a write-down of the assets comprising such operations
was necessary as of August 1997. The amount of the write-down recorded by
management was approximately $1.9 million, which represented management's best
estimate of the write-down necessary to state such assets and liabilities at
their fair value. This estimate was based upon the provisions contained in
certain Purchase Agreements (as defined) relating to the assets comprising the
U.S. Operations, as well as management's best estimate of the fair market value
of the remaining assets not then under contract. Additionally, the Company
recorded an approximate $1.3 million charge for termination and other
contractually committed costs in connection with the Divestiture of the U.S.
Operations in the third quarter of 1997. As of March 31, 1999, the Company had
completed the sale of all but three major trading areas ("MTAs")in the United
States to two purchasers. The remaining purchases are subject to the approval
by the FCC of assumption of debt, and the qualifications by the proposed
purchaser as a small or very small business, as defined by the FCC. Until the
contingencies related to the FCC are resolved, the Company has transferred the
majority of the risks and rewards of the U.S. Operations to the purchasers by
way of management agreements. The transactions were not, and for those
remaining, will not be recognized as a sale until substantially all of the
risks, rewards of ownership and full control of such licenses and the related
assets and liabilities are transferred to the purchasers.
Limited Operating History
The Company was formed in October 1995 and began providing analog SMR
service in Peru in May 1996, in the United States in September 1996 and in
Ecuador in March 1997. The Company acquired an operating company in Chile in
January 1998 and in August 1998, completed the buildout of 10 additional
channels in Santiago and launched a full scale sales and marketing program in
that country. The Company also commenced operations in El Salvador in August
1998, and, as of March 31, 1999, the Company had 170 channels and provided
service to 701 subscribers through seven sites in El Salvador. The Company has
not launched any sales or marketing program in El Salvador as the Company has
made the determination that it will sell its El Salvadorian assets. The Company
has not commenced operations in any other country and, to date, has not
15
<PAGE>
provided any wireless communications services other than analog SMR. The
Company's viability, profitability and growth depend upon the successful
implementation of its business plan. The implementation of the Company's
business plan is subject to numerous risks, any of which could require
substantial changes to proposed plans or otherwise alter the time frames or
budgets currently contemplated. Such risks include (i) securing the necessary
licenses and adhering to regulatory requirements relating thereto; (ii) locating
suitable sites for the Company's towers and antenna, obtaining any required
zoning variances or other governmental or local regulatory approvals and
negotiating acceptable purchase, lease, joint venture or other agreements; (iii)
obtaining additional spectrum at attractive prices; and (iv) risks typically
associated with any business venture such as the ability to effectively
implement its business strategy and unanticipated cost increases. There can be
no assurance that the implementation of the Company's business plan will be
successful.
Substantial Leverage; Ability to Service Indebtedness
The Company is highly leveraged. As of March 31, 1999, the Company had
approximately $29.9 million of indebtedness outstanding, mandatorily redeemable
preferred stock of approximately $42.1 million outstanding and a stockholders
deficit of approximately $30.8 million. The Company recorded a deficiency of
earnings to fixed charges for the year ended December 31, 1998 and the three
months ended March 31, 1999. See "Selected Consolidated Historical Financial
Data." The Indenture permits the Company and its subsidiaries to incur
substantial additional indebtedness. Commencing on January 1, 2003, semi-annual
cash interest payments of approximately $2.8 million will be due on the
Notes.
The ability of the Company to make scheduled payments with respect to its
indebtedness, including the Notes, will depend upon, among other things, its
ability to implement its business plan, to expand its operations and to
successfully develop its subscriber base in its target markets, by the ability
of the Company's Subsidiaries to remit cash to the Company in a timely manner
and the future operating performance of the Company and its Subsidiaries. Each
of these factors is, to a large extent, subject to economic, financial,
competitive, political, regulatory and other factors, many of which are beyond
the Company's control. The Company expects that it will continue to generate
cash losses for the foreseeable future. No assurance can be given that the
Company will be successful in developing and maintaining a level of cash flow
from operations sufficient to permit it to pay the principal of, and interest
on, its indebtedness, including the Notes. If the Company is unable to generate
sufficient cash flow from operations to service its indebtedness, including the
Notes, it may have to modify its growth plans, restructure or refinance its
indebtedness or seek additional capital. There can be no assurance that (i) any
of these strategies could be effected on satisfactory terms, if at all, in light
of the Company's high leverage or (ii) any such strategy would yield sufficient
proceeds to service the Company's indebtedness, including the Notes. Any
failure by the Company to satisfy its obligations with respect to the Notes at
maturity or prior thereto would constitute a default under the Indenture and
could cause a default under agreements governing other indebtedness of the
Company. See " - Historical and Anticipated Operating Losses; Negative Cash
Flow from Operations;" " - Holding Company Structure; Inability to Access Cash
Flow;" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences for Holders of the Notes, including (i) making it more difficult
for the Company to satisfy its obligations with respect to the Notes; (ii)
increasing the Company's vulnerability to general adverse economic and industry
conditions; (iii) limiting the Company's ability to obtain additional financing
to fund future working capital, capital expenditures or other general corporate
purpose requirements; (iv) requiring the dedication of a substantial portion of
the Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures or other general corporate
purposes; (v) limiting the Company's flexibility in planning for, or reacting
to, changes in its business and the wireless communications industry; and (vi)
placing the Company at a competitive disadvantage relative to less leveraged
competitors. In addition, the Company's operating and financial flexibility will
be limited by covenants contained in agreements governing the indebtedness of
the Company, including the Indenture. Among other things, these covenants limit
or may limit the ability of the Company and its Subsidiaries to incur additional
indebtedness, issue preferred stock, pay dividends or make distributions to its
stockholders or to make certain other restricted payments, create certain liens
upon assets, apply the proceeds from the disposition of certain assets or enter
into
16
<PAGE>
certain transactions with Affiliates. There can be no assurance that such
covenants will not adversely affect the Company's ability to finance its future
operations or capital needs or to engage in other business activities which may
be in the interests of the Company. See "Description of Notes - Certain
Covenants."
Need for Additional Financing
From inception until March 31, 1999, the Company invested approximately $72
million (in excess of revenues) in the development of its business, including
acquiring spectrum, building and operating its analog SMR networks, conducting
sales and marketing activities and establishing its management team. The
Company expects to continue to make significant capital outlays for the
foreseeable future in order to continue required development activities and to
fund operations until such time as the Company begins to generate positive cash
flow from operations. Based upon the Company's current business plan, the
Company currently believes that its cash reserves are sufficient to satisfy the
Company's liquidity needs for the succeeding 18 to 24 months; however, the
Company continuously evaluates new opportunities which could impact that
evaluation. If the Company's plans or assumptions change, if its assumptions
prove to be inaccurate, if it consummates investments or acquisitions in
addition to those currently contemplated, or if it experiences unanticipated
costs or competitive pressures, the Company will be required to seek additional
capital sooner than currently anticipated. In addition, there can be no
assurance that the Company's current projection of cash flow (and losses) from
operations (which will depend upon numerous future factors and conditions, many
of which are outside of the Company's control) will be accurate or that actual
results will not vary materially from such projections. Because the Company's
cost of expanding its SMR networks and operating its business, as well as the
Company's cash flow from operations, will depend on a variety of factors
(including the ability of the Company to meet its expansion schedules, the
number of subscribers and the service for which they subscribe, the nature and
penetration of new services that may be offered by the Company, regulatory
changes and changes in technology), it is likely actual costs and revenues will
vary from expected amounts, possibly to a material degree, and such variations
are likely to affect the Company's future capital requirements. The Company
intends to seek additional debt and/or equity financing necessary to fund the
Company's future liquidity needs. There can be no assurance that the Company
will be able to raise additional capital on satisfactory terms, if at all. If
the Company decides to raise additional funds through the incurrence of debt, it
may become subject to additional or more restrictive financial covenants and its
interest obligations will increase. In the event that the Company is unable to
obtain such additional capital or to obtain it on acceptable terms or in
sufficient amounts, the Company will be required to delay the expansion of its
business or take other actions that could materially adversely affect the
Company's business, operating results and financial condition and its ability to
achieve sufficient cash flow to service its indebtedness, including the
Notes.
Uncertainty of Market Acceptance; Potential Lack of Subscriber Demand
The Company's success is subject to a number of business, economic,
regulatory and competitive factors, many of which are beyond the Company's
control, including the extent to which prospective subscribers will use the
Company's services. The Company's ability to service its indebtedness,
including the Notes, is subject to the successful implementation of its growth
strategy which, in turn, is premised, among other things, on the Company's
expectation that demand for its current service will increase significantly in
its existing markets and that there will be strong demand for services
introduced by the Company in the future. The Company has only recently begun
providing SMR service in Peru, Ecuador, Chile and El Salvador. The subscriber
demand for the Company's service in the markets in which it currently operates
and in those in which it expects to operate is uncertain. See " - Competition"
and " - Risks Associated with Rapidly Changing Industry." Failure to gain
market acceptance for, or subscriber demand of, current or planned services
would have a material adverse effect on the Company. In addition, the Company
has incurred and will continue to incur significant operating expenses and has
made, and will continue to make, significant capital investments. Accordingly,
any material miscalculation by the Company with respect to its strategy or
business plan is likely to have a material adverse effect on the Company. See "
- - Need for Additional Financing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
17
<PAGE>
Competition
The Company faces significant competition in its Latin American markets.
The Company's SMR operations compete primarily with other SMR operators. Many
of the Company's competitors have substantially greater financial, marketing and
other resources than the Company and hold, or may be able to obtain, significant
channel positions. In addition, the Company also competes with regional and
small SMR operators in its markets.
The Company's use of analog technology for its SMR networks will compete
with the recently developed digital technology offered by certain of its
competitors, such as Nextel. The Company believes that the demand in Latin
America for high quality telecommunications services will be able to accommodate
both low cost analog SMR service as well as the more expensive digital
technology being offered by certain of the Company's competitors. There can be
no assurance that a significant number of potential subscribers in Latin America
will elect to use the Company's services. See " - Uncertainty of Market
Acceptance; Potential Lack of Subscriber Demand" and "Risks Associated with
Rapidly Changing Industry."
The Company's SMR operations also compete with other providers of wireless
communications services, including cellular and paging. While the Company
believes that its SMR services are differentiated from cellular and paging
services because they provide a cost-effective, one-to-many communications tool
for businesses, there can be no assurance that prices for cellular service will
not decline, that the functionality of cellular and paging services will not be
expanded or that the Company's SMR service will compete effectively with
cellular and paging services. In addition, if the Company expands into other
wireless communications services, it will face competition from established
companies who are likely to have greater market recognition and an existing
subscriber base.
The Company faces significant competition for additional spectrum in Latin
America. In seeking to obtain spectrum in each of the Company's targeted
markets, the Company competes with other SMR operators and potential SMR
operators, including large multinational telecommunications companies. A number
of the Company's competitors have significantly greater financial and operating
resources and international presence than the Company and, as a result, there is
no assurance that the Company will be able to compete effectively with such
companies. The successful implementation of the Company's growth strategy is
dependent in part upon the successful acquisition of additional licenses. There
can be no assurance that the Company will be able to acquire such licenses on
favorable terms, if at all. See "Business - Growth Strategy." In addition,
many existing telecommunications enterprises in the markets in which the Company
operates have successfully attracted significant investments from multinational
communications companies. These multinational communications companies, which
have invested in local landline and wireless communications entities, have
substantially greater financial resources than the Company and are attempting to
accelerate the modernization of the telecommunications sector in the regions in
which they operate by utilizing their operating and financial resources. See
"Industry Overview."
The Company continuously reviews opportunities to acquire additional
licenses, license holding and operating companies in its existing markets and in
other Latin American markets. In addition, the Company may in the future pursue
opportunities in other markets, such as Europe. In each new market, the Company
expects to face competition for such licenses, license holding and operating
companies from major international telecommunications entities, as well as from
local competitors. In addition, in each new market which the Company enters,
the Company believes that it will face competitive pressures similar to those
described above.
In the future, the Company also expects to experience competition from new
technologies, such as satellite technology, and from advances in existing
technologies such as cellular, paging and mobil data transmission. For
additional information regarding the competitive environment in each of the
markets in which the Company operates, see "Business - Country-by-Country
Operations."
18
<PAGE>
Risks Related to Potential Future Acquisitions
The Company intends in the future to pursue acquisitions of complementary
services, technologies or businesses, although the Company has no present
understandings, commitments or agreements with respect to any such acquisitions
except as described in this Prospectus. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and an increase in amortization
expenses related to goodwill and other intangible assets, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies, services and
products of the acquired companies and the diversion of management's attention
from other business concerns.
Holding Company Structure; Inability to Access Cash Flow
The Company is a holding company with substantially all of its operations
conducted through its Subsidiaries. Accordingly, the Company's cash flow and,
consequently, its ability to service its indebtedness, including the Notes, is
dependent upon the cash flow of its Subsidiaries and the payment of funds by
those Subsidiaries to the Company in the form of dividends, distributions or
otherwise. The Company's Subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Notes or to make any funds available therefor, whether in the form of
loans, dividends, distributions or otherwise.
The Company's Subsidiaries may become parties to financing arrangements,
including vendor financing and other debt financing, in connection with the
construction of the Company's SMR networks and the implementation of the
Company's business plan. Such arrangements may impose significant limitations
on the ability of such Subsidiaries to pay dividends or to make loans or
advances to the Company. In certain circumstances, these limitations will be
permitted under the Indenture.
The ability of the Company's Subsidiaries to pay dividends or make loans or
advances to the Company is subject to regulation within their respective
jurisdictions of organization and operation. While the existing laws and
regulations of these jurisdictions generally do not prohibit the Company's
Subsidiaries from paying dividends or making loans or advances to the Company,
there can be no assurance that such laws will continue to permit or will not
restrict such payments to be made.
The Company may develop additional operations in the future through joint
ventures. In addition to the restrictions described above, the ability of any
such joint venture to pay dividends or make distributions to the Company will be
subject to the terms of the documents governing such joint venture. Moreover,
to the extent that the Company is party to any joint venture in which the
Company owns, directly or indirectly, less than 50% of the equity interests, the
Company may lack the requisite control to cause such joint venture to pay
dividends or to make distributions to the equity holders or partners of such
joint venture, including the Company.
The Notes will not be guaranteed by any of the Company's Subsidiaries and,
consequently, the Notes will be structurally subordinated to all existing and
future indebtedness and other liabilities (including trade payables) of the
Company's Subsidiaries. Accordingly, any right of the Company to receive assets
of any of its Subsidiaries upon the latter's liquidation or reorganization (and
the consequent right of the Holders of the Notes to participate in those assets)
will be subordinated to the claims of that Subsidiary's creditors. As of March
31, 1999, the Notes were structurally subordinated to approximately $1.6 million
of indebtedness and other liabilities of the Company's Subsidiaries (excluding
intercompany payables to the Company). The Indenture will limit, but not
prohibit, the ability of the Company and its Subsidiaries to incur additional
indebtedness. See "Description of Notes - Certain Covenants."
In the event that the Company is unable to generate sufficient cash flow or
is otherwise unable to obtain funds necessary to meet required payments of
principal of, and interest on, its indebtedness, including the Notes, the
Company would be in default under the terms of the agreements governing such
indebtedness, including the Indenture. In the event of such default, the holders
of such indebtedness could elect to declare all of the funds
19
<PAGE>
borrowed thereunder to be due and payable together with accrued and unpaid
interest. If such an acceleration were effected and the Company did not have
sufficient funds to pay the accelerated indebtedness, the holders could initiate
foreclosure or other enforcement action against the Company. Any such
circumstances would materially adversely affect the Company's ability to pay
principal of, and interest on, the Notes and the market value of the Notes.
Ranking; Limited Security; Ability to Realize on Collateral
The Notes are secured by a pledge of (i) 100% of the Capital Stock of the
Company's direct wholly-owned Subsidiary, SMR Direct USA, Inc. (this entity has
no operations and its financial position consists only of a nominal
capitalization) and all future domestic direct Restricted Subsidiaries of the
Company, and (ii) 100% of the Capital Stock (other than Excluded Stock) of each
of the Cayman Entities (one of which is solely a nominee shareholder in certain
of the Company's Latin American Subsidiaries) and 100% of the Capital Stock
(other than Excluded Stock) of all future foreign direct Restricted Subsidiaries
of the Company.
Upon the occurrence and continuation of an Event of Default (as defined),
the Pledge Agreement provides that the Collateral Agent (as defined) may sell
the Pledged Collateral or any part thereof. The Collateral Agent's ability to
realize on the pledged collateral may require government, regulatory or
licensing agency approval. For example, in the United States, the approval of
the FCC would be required in connection with the sale of the Capital Stock of
SMR Direct USA, Inc. In addition, to the extent that the Collateral Agent
attempted to foreclose on or sell the Capital Stock of the Cayman Entities,
necessary approvals may need to be obtained from the appropriate entities in
each country in which the Cayman Entities have a Subsidiary. The approval
process could take several months and, accordingly, the ability of the
Collateral Agent to foreclose on or sell the collateral could be substantially
delayed or impaired. No assurance can be given that the Collateral Agent will
obtain the necessary government approvals to consummate the foreclosure on or
sale of all or any portion of the collateral. In addition to complying with
applicable licensing laws, the Collateral Agent will have to comply with all
applicable federal, state and foreign judicial or non-judicial foreclosure and
sale laws. Such laws may include cure provisions, mandatory sale notice
provisions, manner of sale provisions and redemption period provisions. Such
provisions may significantly increase the time associated with taking possession
of any collateral or the sale of any collateral. Failure to comply with any
applicable provision could void the foreclosure on or sale of such collateral.
The Indenture permits certain additional indebtedness of the Company to be
secured. The holders of any secured indebtedness of the Company or any
Restricted Subsidiary will have claims that are prior to the claims of the
Holders of the Notes to the extent of the assets securing such other
indebtedness. As of March 31, 1999, the Notes were effectively subordinated to
approximately $393,000 of secured indebtedness of the Company and to
approximately $1.6 million of indebtedness and other liabilities of the
Company's Subsidiaries (excluding intercompany payables to the Company).
Enforceability of Civil Liabilities
The Notes are secured by a pledge of 100% of the Capital Stock (other than
Excluded Stock) of each of the Cayman Entities and 100% of the Capital Stock
(other than Excluded Stock) of all future foreign direct Restricted Subsidiaries
of the Company. The Collateral Agent and/or the Holders of the Notes may be
unable to enforce a judgment by a United States court arising out of or in
relation to the obligations of the Company under the Pledge Agreement in the
Cayman Islands or any other foreign jurisdiction where the Capital Stock of a
direct foreign Restricted Subsidiary of the Company organized within such
jurisdiction is pledged pursuant to the Pledge Agreement. In addition, the
Pledge Agreement is governed by New York law. There can be no assurance that a
court in the Cayman Islands will apply New York law (as opposed to the law of
the Cayman Islands) to the extent an action under the Pledge Agreement with
respect to the Capital Stock of the Cayman Entities is commenced in the Cayman
Islands. The jurisdiction of organization of future foreign direct Restricted
Subsidiaries of the Company whose stock is pledged pursuant to the Pledge
Agreement may likewise refuse to apply New York law with respect to actions
under the Pledge Agreement.
20
<PAGE>
Risks Associated with Anticipated Growth and Expansion
The Company has a limited operating history and rapid growth by the Company
could place a strain on its management, operating and financial resources. In
addition, while the Company is currently an operator of SMR networks in Peru,
Ecuador, Chile and El Salvador, the Company will, on an on-going basis, explore
opportunities to provide additional wireless communications services in Latin
America. The Company's ability to manage growth and expansion effectively will
require continued implementation of, and improvements to, its operating and
financial systems and will require the Company to expand, train and manage its
employee base. Although the Company believes that it has made adequate
allowances for the costs and risks associated with future growth and expansion,
there can be no assurance that the Company's systems, procedures or controls or
financial resources will be adequate to support the Company's operations or that
management will be able to keep pace with such growth and/or expansion. If the
Company is unable to manage growth and/or expansion effectively, the Company's
business, operating results and financial condition and its ability to generate
sufficient cash flow to service its indebtedness, including the Notes, will be
materially adversely affected. See "Business - Growth Strategy" and
"Management."
In addition, the Indenture and the Convertible Notes (as defined) will
limit the Company's ability to engage in investment opportunities outside of
Latin America until such time as (i) the Company has consummated a Qualified
Public Offering (as defined) of its Qualified Capital Stock (as defined) and
(ii) the Notes have traded for 10 days, after the occurrence of such Qualified
Public Offering, at a price equal to 101% of their Accreted Value as
demonstrated by a bid in writing from a broker for at least $2 million in
aggregate principal amount of the Notes. While the Indenture does permit the
Company to use any Designated Equity Proceeds (as defined) raised by the Company
to pursue investment opportunities in Eastern Europe, the Company's ability to
reduce risk by diversifying its geographic operations may be impaired by such
restrictions.
Risks Associated with Divestiture of United States Operations
The Company and its U.S. Subsidiary, SMR Direct USA, Inc., have entered
into the Purchase Agreements providing for the sale of substantially all of the
U.S. Operations. Five of the transactions contemplated by the Purchase
Agreements have already closed. The remaining two Purchase Agreements are
subject to the receipt of necessary regulatory approvals. Among other things,
the Company's SMR licenses and related FCC Debt cannot be transferred or assumed
until the FCC has consented to such transfer. FCC approval of such transfer has
been received on all Purchase Agreements except two, and while the Company does
not anticipate any problems in obtaining FCC approval of the remaining Purchase
Agreements, there can be no assurance that such approval will be obtained in a
timely manner, if at all.
Prior to the closing of the remaining Purchase Agreements, the U.S.
Operations will be managed by the purchasers thereof pursuant to certain
Management Agreements (the "Management Agreements"). While the Company's U.S.
Operations are managed pursuant to the Management Agreements, the Company is
subject to the risk that any one of the purchasers of the U.S. Operations will
be unable to successfully operate and manage the portion of the U.S. Operations
that it is entitled to manage under the terms of the Management Agreements.
Certain of the purchasers of the U.S. Operations may pay a portion of the
purchase price with respect to the U.S. Operations so purchased in the form of a
promissory note. While the Company believes that each of these purchasers will
be able to fulfill their obligations pursuant to such promissory notes, there
can be no assurance that circumstances will not change or that such purchasers
will not default on such promissory notes. The Indenture limits the amount of
such promissory notes that the Company may receive in connection with the sale
of the U.S. Operations. See "Description of Notes."
Any failure to consummate the transactions (in whole or in part)
contemplated in the Purchase Agreements could have a material adverse effect on
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business - Divestiture of the United States
Operations."
21
<PAGE>
Dependence Upon Key Personnel
The Company's performance is substantially dependent upon the performance
of its officers and key employees, most of whom have worked together for only a
short period of time. The Company is dependent upon its ability to retain and
motivate high quality personnel, especially its management. The Company does
not have "key person" life insurance policies on any of its employees. There
can be no assurance that key personnel will continue to be employed by the
Company or that the Company will be able to attract and retain qualified
personnel in the future. The Company's future success also depends upon its
continuing ability to identify, hire, train and retain other highly qualified
technical, sales, marketing and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to attract and retain its officers and key employees and the necessary
technical, sales, marketing and managerial personnel and, failure to do so,
could have a material adverse effect upon the Company's business, operating
results and financial condition and its ability to generate sufficient cash flow
to service its indebtedness, including the Notes. See "Business - Employees"
and "Management."
Risks Associated with Rapidly Changing Industry
The telecommunications industry is subject to rapid and significant changes
in technology, which could lead to new products and services that compete with
those offered by the Company or lower the cost of current competing products and
services to the point where the Company's products and services could be
noncompetitive. While the Company is unaware of any proposed changes that will
materially affect the attractiveness of its product and service offerings, the
effect of technological changes on the Company's business cannot be predicted.
The Company currently offers analog SMR service because of its proven
quality and the lower cost of analog technology as compared to digital
technology being offered by certain of the Company's competitors. Digital
technology is a relatively new application to the SMR industry and, to date, is
a more expensive technology for potential subscribers to use. As the cost of
digital technology becomes more affordable, the Company's existing and
prospective subscribers may wish to migrate to services offering digital
technology which could adversely affect the Company's ability to maintain and
expand its subscriber base. In the future, the Company will experience
competition from new technologies such as satellite technology, as well as from
advances with respect to existing technologies such as cellular, paging and
mobile data transmission. See " - Uncertainty of Market Acceptance; Potential
Lack of Subscriber Demand" and " - Competition."
Risks Associated with Subscriber Unit Loss
The Company has implemented a sales and marketing strategy pursuant to
which the Company does not sell all subscriber units to its subscribers.
Instead, the Company retains ownership of such subscriber units and provides
them to its subscribers in exchange for the subscriber's agreement to use the
Company's service for a minimum period of time (typically, one year). Upon the
discontinuance of the Company's service, the subscriber is required to return
such units to the Company. Failure by subscribers to return such units could
have a material adverse effect on the Company. See "Business - Growth
Strategy."
Government Regulation; Changing Regulatory Landscape
The licensing, construction, ownership and operation of SMR and other
wireless communications networks, and the grant, maintenance and renewal of
applicable licenses and radio frequency allocations, are regulated by
governmental entities in the markets in which the Company operates. In
addition, such matters and certain other aspects of the operation of such
systems, including rates charged to customers and the resale of such services,
may also be subject to regulation in the jurisdiction in which service is
provided. Changes in the current regulatory environments in countries in which
the Company operates or future judicial intervention, including with respect to
requirements for increased capital investments or regulations affecting prices
the Company is able to charge for its services, could have a material adverse
effect on the Company.
22
<PAGE>
Licenses and spectrum allocations are subject to ongoing review and, in
some cases, to modification or early termination for failure to comply with
applicable regulations and the terms of the license grant. All of the Company's
licenses have fixed terms and certain of such licenses are not automatically
renewable. In cases where license terms are fixed, there can be no assurance
that license renewal will be effected or, if effected, that renewal will be on
acceptable economic terms. In addition, certain of the countries in which the
Company currently operates require the holders of licenses to pay on-going
license fees. There is no assurance that these or other fees imposed by the
regulatory authorities in the countries where the Company operates will not have
a material adverse effect on the Company's operating results. Moreover, certain
of the Company's SMR licenses are subject to network construction requirements
and minimum subscriber requirements which, if not complied with by the Company
within the enumerated time periods, could result in the imposition of fines or
forfeiture by the Company of the applicable license. Changes in the regulation
of the Company's activities including, without limitation, requirements for
increased capital investments or regulations affecting prices or license fees,
could also have a material adverse effect upon the Company's operating results.
In addition, there are various rule making proceedings pending before the
FCC which generally affect the wireless or SMR industries, and, thus, may impact
the Company's U.S. Operations which are in the process of being divested. See "
- - Risks Associated with Divestiture of United States Operations." Except for
the proceeding which implements the Communications Assistance for Law
Enforcement Act ("CALEA"), the Company does not believe that the outcome of such
proceedings will have a material adverse affect on its SMR operations. CALEA
was enacted in October 1994 to enable law enforcement agencies to expand
electronic surveillance activities to new wireless technologies. The United
States SMR industry has advised the FCC that SMR technology, particularly
dispatch analog systems, cannot comply with the proposed CALEA requirements.
The FCC has proposed to exclude non-common carrier systems, such as those
operated by the Company, from compliance with CALEA. Failure to exclude the
Company's systems from compliance may require the Company to reconfigure its
systems in such a manner that will either be economically or technically
infeasible.
Due to the fact that regulation of the telecommunications industry in Latin
America and the other emerging markets in which the Company may operate in the
future is still developing, certain of the applicable governmental authorities
in such markets have previously discouraged consolidation of ownership of
licenses. In those countries where the regulatory climate is currently opposed
to such consolidation activity, the Company is still pursuing acquisition of
licenses because it believes that, as was the case in the United States, the
regulatory climate will improve as regulators recognize the benefits of
consolidation. While the Company believes it has complied with the legal
requirements regarding consolidation in each country in which it operates, there
is, nevertheless, no assurance that the applicable governmental authorities will
change their regulatory approach or will not find the Company to be in violation
of existing rules and regulations. The Company has filed an application for the
consolidation of its operations in Peru.
Compliance with the terms of SMR licenses and certain regulatory
requirements, such as construction deadlines and minimum subscriber
requirements, can be difficult to meet. In addition, there can be no guarantee
that in the future all regulatory requirements will be met or that the Company
will not lose any applicable licenses as a result of its failure to meet such
requirements. The Company currently is not in compliance with certain minimum
subscriber loading requirements with respect to its channels in Peru. Failure to
comply with such requirements may subject the licenses relating to such channels
to punitive measures. Requests for amendment of such loading requirements have
been filed by the Company with the Peruvian Ministry of Transportation,
Communications, Housing and Construction (the "Ministry"); however, to date no
responses have been received. The Company expects to file an additional
amendment requesting lower subscriber loading requirements in the near future.
Based upon information currently available, the Company is optimistic that these
amendments will be approved; however, there can be no guarantee that the
amendments received by the Company will be the same as those applied for. The
Company is also not in compliance with certain terms of the concession
agreements including, homologation of equipment (certifying the equipment before
entering Peru), site to site transmission of signal (currently allowed only site
to handset), unauthorized transfer and use of channels between the Peruvian
companies and unauthorized use of certain frequencies granted. The Company has
applied to correct the non-compliance issues and is awaiting approval from the
Ministry. The Company believes that the applications will be approved and result
only in minimal fines, if any; however, there can be no assurance of such
outcome. In the past,
23
<PAGE>
Brunacci Compania Ltda., one of the Company's Ecuadorian operating Subsidiaries,
was not in full compliance with certain construction requirements relating to
its licenses. The Company believes that it is now in compliance in all material
respects with applicable Ecuadorian regulations in respect of such licenses.
Because many of the regulatory frameworks are relatively new and still
developing in the countries in which the Company operates and the enforcement of
such regulations is often uncertain, it is difficult to determine how regulators
will interpret the rules or judge compliance, and what degree of flexibility
will be available. For a more detailed description of the regulatory environment
in each of the markets in which the Company operates, see "Business - Country-
by-Country Operations."
Channel Capacity
There exists a maximum number of subscribers that may be loaded on each of
the Company's SMR channels in Peru, Ecuador, Chile and El Salvador. Loading in
excess of such maximum number may have a negative impact on the quality of
service provided by the Company and, in certain instances, may violate
applicable rules and regulations. Once the Company's SMR channels are fully
loaded with subscribers, the Company will need to secure additional channels in
the markets in which it operates in order to provide quality service and to
expand its subscriber base. There can be no assurance that additional channels
will be available to the Company at attractive prices or at all.
Country Risks
General. The Company has invested significant resources in Latin America
and intends to continue to make such investments in Latin America in the future.
Accordingly, the Company may be subject to economic, political or social
instability or other developments not typical of investments made in the United
States. Such events could adversely affect the financial condition and results
of operations of the Company, the ability of the Company to repay the Notes and
the market value and liquidity of the Notes. During the past several years,
countries in Latin America in which the Company operates or plans to operate
have been characterized by varying degrees of inflation, uneven growth rates and
political uncertainty. The Company currently does not have political risk
insurance in the countries in which it conducts business. While the Company
carefully considers these risks when evaluating investment opportunities and
seeks to mitigate these and other risks by diversifying its operations in a
number of Latin American countries, there is no assurance that the Company will
not be materially adversely affected as a result of such risks.
Currency Risks and Exchange Controls. Although the Company's Subsidiaries
have attempted, and will continue to attempt, to match costs and revenues and
borrowings and repayments in terms of their respective local currencies, payment
for a majority of purchased equipment has been, and may continue to be, required
to be made in currencies, including dollars, other than local currencies. In
addition, the value of the Company's investment in a Subsidiary is partially a
function of the currency exchange rate between the dollar and the applicable
local currency. In general, the Company does not execute hedge transactions to
reduce its exposure to foreign currency exchange rate risks. Accordingly, the
Company may experience economic loss and a negative impact on earnings with
respect to its holdings solely as a result of foreign currency exchange rate
fluctuations, which include foreign currency devaluations against the dollar.
The countries in which the Company's Subsidiaries now conduct business generally
do not restrict the removal or conversion of local or foreign currency; however,
there can be no assurance that this situation will continue.
Dependence on Local Economies; Inflation. The Company's operations depend
upon the economies of the markets in which it operates. These markets include
countries with economies in various stages of development or structural reform,
some of which are subject to rapid fluctuations in terms of consumer prices,
employment levels, gross domestic product and interest and foreign exchange
rates. The Company may be subject to such fluctuations in the local economies
in which it operates. To the extent such fluctuations have an effect on the
ability of subscribers to pay for the Company's service, the growth of the
Company's services in such markets could be impacted negatively. Many of the
countries in which the Company operates or expects to operate, do not have
established credit bureaus, thereby making it more difficult for the Company to
ascertain the creditworthiness
24
<PAGE>
of potential subscribers. Accordingly, the Company may experience a higher level
of bad debt expense than otherwise would be the case.
The net monetary assets of certain of the Company's subsidiaries are
subject to foreign currency exchange risks since they are maintained in local
currency. Certain of the Company's subsidiaries operate in countries in which
the rate of inflation is significantly higher than that of the United States.
The Company will attempt to protect its earnings from inflation and possible
currency devaluation by setting prices in direct relation to the dollar and in
some cases by periodically adjusting prices in local currencies. However, there
can be no assurance that any significant devaluation against the dollar could be
offset, in whole or in part, by a corresponding price increase.
The Ecuadorian operations are currently faced with a devaluing sucre and a
volatile political and economic situation. When the Company launched service in
Ecuador in 1997, the exchange rate was approximately 4,300 sucres to one U.S.
dollar. As of March 31, 1999, it was approximately 10,925 sucres to one U.S.
dollar and since year-end, has fluctuated as high as 13,000 sucres per one U.S.
dollar. The devaluation has a direct impact on customer's ability to pay due to
the fact that the Company bills in U.S. dollars. The Company has been dealing
with this situation as proactively as possible and contacted the customer base
in early March 1999 to discuss the current billings of existing customers. The
Company believes that being proactive may keep more subscribers on the network
as initial customer reaction was positive. The declining sucre has recently
sparked a run on banks in Ecuador, causing the Ecuadorian government to impose
limits on withdrawals, and causing a number of banks, including Ecuador's
second-largest bank to close its doors. While the Company has not experienced
any difficulties due to the bank closures and limitations on withdrawals, there
can be no assurance that the Company will not experience such problems in the
future. The Company has been requiring the operating subsidiary in Ecuador to
send all excess funds to the U.S., thus, the Company does not believe that it
has a material amount of cash at stake. In addition, the country has been
hyperinflationary during the years in which the Company has been operating in
Ecuador. Ecuador has had a cumulative rate of inflation for the three years
ending December 31, 1997 of over 100%. The inflation rates for the years ended
December 31, 1996 and 1997 were 24.4% and 30.6%, respectively. The countries in
which the Company's subsidiaries now conduct business generally do not restrict
the repatriation or conversion of local or foreign currency. There can be no
assurance, however, that this will be the case in each market that the Company
may enter in the future or that this situation will continue in the Company's
existing markets. The Company's subsidiaries are all directly affected by their
respective countries' governmental, economic, fiscal and monetary policies and
other political factors.
Import Duties on Equipment. The Company's Latin American operations are
highly dependent upon the successful and cost-efficient importation of
infrastructure equipment and subscriber units from the United States. In the
Latin American markets where the Company operates, infrastructure equipment and
subscriber units are subject to significant import duties and other taxes that
are currently as high as 42%. Although the Company believes there is a trend
away from increased import duties, any significant increase in the future could
have a material adverse effect on the Company's results of operations.
Tax Risks Associated with Foreign Operations. Distributions of earnings
and other payments, including interest, received from the Company's Subsidiaries
and Affiliates may be subject to withholding taxes imposed by the jurisdictions
in which such entities are formed or operating, which will reduce the amount of
after-tax cash the Company can receive from such entities. In general, a United
States corporation may claim a foreign tax credit against its federal income tax
expense for such foreign withholding taxes and for foreign income taxes paid
directly by foreign corporate entities in which the Company owns 10% or more of
the voting stock. The ability to claim such foreign tax credits and to utilize
net foreign losses is, however, subject to numerous limitations, and the Company
may incur incremental tax costs as a result of these limitations or because the
Company is not in a tax-paying position in the United States.
The Company may also be required to include in its income for United States
federal income tax purposes its proportionate share of certain earnings of those
foreign corporate Subsidiaries that are classified as "controlled foreign
corporations" without regard to whether distributions have been actually
received from such Subsidiaries.
25
<PAGE>
Enforcement of Agreements. A number of the agreements the Company enters
into with its non-United States Subsidiaries, dealers, subscribers and agents
are governed by the laws of, and are subject to dispute resolution in the courts
of, or through arbitration proceedings in, the country or region in which the
operation is located. The Company cannot accurately predict whether such forum
will provide it with an effective and efficient means of resolving disputes that
may arise in the future. Even if the Company is able to obtain a satisfactory
decision through arbitration or a court proceeding, it could have difficulty
enforcing any award or judgment on a timely basis. The Company's ability to
obtain or enforce relief in the United States is uncertain.
Foreign Corrupt Practices Act. As a United States corporation, the Company
is subject to the regulations imposed by the Foreign Corrupt Practices Act (the
"FCPA"), which generally prohibits United States companies and their
intermediaries from making improper payments to foreign officials for the
purpose of obtaining or keeping business. Although the Company has instituted
an employee compliance program to comply with the FCPA, there can be no
assurance that the institution of such a program and the other related
precautions that the Company anticipates instituting will protect the Company
against liability under the FCPA, particularly as a result of actions which may
in the past have been taken or which may be taken in the future by agents and
other intermediaries for whom the Company may have exposure under the FCPA. In
particular, the Company may be held responsible for actions taken by any future
local partners even though the Company has no ability to control them. Any
determination that the Company has violated the FCPA could have a material
adverse effect on the Company.
Changes in Country Policy; Change in Regulatory Agencies and Political
Structures. The Company has obtained and is seeking to acquire licenses in
countries throughout Latin America and, accordingly, is subject to government
regulation in each market. The Company has confronted, and is likely to
continue to confront, changes in government policy or circumstances that can
affect the Company's business and results of operations. There can be no
assurance that such changes in the future will not have a material adverse
effect on the Company's results of operations. See "Business - Country-by-
Country Operations."
The governments of the countries in Latin America vary widely with respect
to structure, constitution and stability. While Latin American governments have
historically exercised extensive influence over their economies, the role of
government has declined as countries have liberalized their political structures
and economies. However, there can be no assurance that future developments in
the government administration of local economies would not materially and
adversely impair the Company's business and financial condition, the value of
the Notes or the Company's ability to pay principal of, or interest on, the
Notes.
Labor Issues. In most Latin American countries labor unions are considered
to be strong and influential. Accordingly, while none of the Company's
operations are currently unionized, no assurance can be given that the Company
will not encounter strikes or other types of conflicts with labor unions or the
Company's personnel in the Company's targeted markets or that such labor
disputes will not have an adverse effect on the Company. In addition, in
response to pressure by labor unions, many Latin American governments in which
the Company targets operations have, at times, actively regulated cross-border
transactions, including placing limitations on imported goods. Such regulations
may result in delays and increased costs.
Control by Existing Stockholders
The Company's executive officers and directors, together with entities
affiliated with such individuals, and other holders of 5% or more of the
Company's outstanding capital stock beneficially own over 95% of the Common
Stock (assuming the exercise and conversion of all Warrants (as defined) and the
conversion of all outstanding Preferred Stock (as defined) and assuming full
exercise of all options granted pursuant to the Option Plan (as defined)).
Accordingly, these stockholders will be able to elect a majority of the
Company's directors, will retain the voting power to approve all matters
requiring stockholder approval and will continue to have significant influence
over the affairs of the Company. This concentration of ownership could have the
effect of delaying or preventing a change in control of the Company. See
"Management" and "Principal Stockholders."
26
<PAGE>
Risk of Inability to Satisfy Change of Control Offer
In the event of a Change of Control, each Holder of Notes will have the
right to require the Company to purchase all or any part of such Holder's Notes
at a price in cash equal to 101% of the Accreted Value thereof, plus accrued and
unpaid Liquidated Damages, if any, to the date of purchase, or in the case of
any such purchase on or after January 1, 2003, at 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. There can be no assurance that, in
the event of a Change of Control, the Company would have sufficient funds to
purchase all Notes tendered or that such purchase would be permitted by the
terms of any other outstanding indebtedness of the Company. In the event a
Change of Control occurs at a time when the Company is unable to purchase the
Notes, the Company could seek to refinance the Notes. If the Company is
unsuccessful in refinancing the Notes, the Company's failure to purchase
tendered Notes would constitute an Event of Default under the Indenture. See
"Description of Notes - Repurchase at the Option of Holders - Change of
Control."
Radio Frequency Emission Concerns
Certain consumers have alleged that serious health risks have resulted from
the use of certain mobile communications devices. The actual or perceived
health risks of mobile communications devices could adversely affect mobile
communications services providers, including the Company, through reduced
subscriber growth, reduced network usage, the threat of product liability suits
or limitations on financing.
Lack of a Public Market for the Notes
The Private Notes are designated for trading in the PORTAL Market. The
Exchange Notes constitute securities for which there is no established trading
market. The Company does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system, and no active public market for the Exchange Notes is
currently anticipated. If a market for the Exchange Notes should develop, such
Exchange Notes could trade at a discount from their principal amount. There can
be no assurance of the liquidity of any markets that may develop for the
Exchange Notes, the ability of Holders of the Exchange Notes to sell their
Exchange Notes, or the price at which Holders would be able to sell their
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including prevailing interest rates, the Company's operating results
and the market for similar securities. To the extent that any Private Notes are
tendered and accepted in the Exchange Offer, a Holder's ability to sell
untendered Private Notes could be adversely affected.
No prediction can be made as to the effect, if any, that future sales of
Exchange Notes, or the availability of Exchange Notes for future sale, will have
on the market price of the Exchange Notes prevailing from time to time. Sales
of substantial amounts of Exchange Notes, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Exchange
Notes. No assurance can be given that sales of substantial amounts of Exchange
Notes will not occur in the foreseeable future or as to the effect that any such
sales, or the perception that such sales may occur, will have on the market or
the market price of the Exchange Notes. No assurance can be given as to the
liquidity of the trading market for the Exchange Notes or that an active public
market for the Exchange Notes will develop or, if developed, will continue. If
an active public market does not develop or is not maintained, the market price
and liquidity of the Exchange Notes may be adversely affected.
Risk Relating to the Year 2000
The Company is in the process of evaluating and addressing the Year 2000
compliance of its products, networks, information management systems, non-
information systems with embedded technology, suppliers and customers. Any Year
2000 problems that may arise with respect to the Company's critical systems
and/or the products and services of third party suppliers or customers, could
have a material adverse effect upon the Company's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000."
27
<PAGE>
THE EXCHANGE OFFER
Purpose of the Exchange Offer
The Exchange Offer is being made by the Company to satisfy certain
obligations of the Company under the Notes Registration Rights Agreement.
Pursuant to the Notes Registration Rights Agreement, the Company agreed, for the
benefit of the Holders of the Private Notes, at the Company's expense, to (i)
file within 300 days after the date of original issuance of the Private Notes
(such date to be the "Filing Date") the Registration Statement with the
Commission with respect to a registered offer to exchange the Private Notes for
the Exchange Notes to be issued under the Indenture in the same aggregate
principal amount as, and with terms that will be identical in all material
respects to, the Private Notes (except (a) for certain transfer restrictions and
registration rights relating to the Private Notes; and (b) that if the Exchange
Offer is not consummated in a timely manner, or if the Company fails to comply
with certain other registration obligations with respect to the Private Notes,
the Company is required to pay certain Liquidated Damages to the Holders of the
Private Notes) and (ii) use its best efforts to cause the Registration Statement
to be declared effective under the Securities Act at the earliest possible time,
but in no event later than 60 days after the Filing Date. Promptly after the
Registration Statement has been declared effective, the Company will offer the
Exchange Notes in exchange for the surrender of the Private Notes. The Company
will keep the Exchange Offer open for not less than 20 days (or longer if
required by the applicable law) after the date notice of the Exchange Offer is
mailed to the Holders of the Private Notes. For each Private Note tendered to
the Company pursuant to the Exchange Offer and not validly withdrawn by the
Holder thereof, the Holder of such Private Note will receive an Exchange Note
having a principal amount equal to the principal amount of such surrendered
Private Note.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue Exchange Notes in exchange for an equal aggregate
principal amount at maturity of outstanding Private Notes validly tendered
pursuant to the Exchange Offer and not withdrawn prior to the Expiration Date.
The terms of the Exchange Notes will be identical in all material respects
to the terms of the Private Notes except (i) for certain transfer restrictions
and registration rights relating to the Private Notes and (ii) that if the
Exchange Offer is not consummated in a timely manner, or if the Company fails to
comply with certain other registration obligations with respect to the Private
Notes, the Company is required to pay certain Liquidated Damages to the Holders
of the Private Notes. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under and entitled to
the benefits of the Indenture, which also authorized the issuance of the Private
Notes, such that the Notes will be treated as a single class of debt securities
under the Indenture.
The Exchange Offer is not being conditioned upon any minimum aggregate
principal amount of Private Notes being tendered for exchange. As of the date
of this Prospectus, $40 million in aggregate principal amount of the Private
Notes are outstanding. Only a registered Holder of the Private Notes (or such
Holder's legal representative or attorney-in-fact), as reflected on the records
of the Trustee under the Indenture may participate in the Exchange Offer.
Solely for reasons of administration, the Company has fixed the close of
business on ___________, 1999 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. There will be no fixed record date for
determining registered Holders of the Private Notes entitled to participate in
the Exchange Offer.
The Company shall be deemed to have accepted validly tendered Private Notes
when, and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company. The
28
<PAGE>
Company expressly reserves the right to amend or terminate the Exchange Offer,
and not to accept for exchange any Private Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions specified below under " -
Conditions."
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See " - Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
___________, 1999 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and mail to the registered
Holders of the Private Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension
termination or amendment to the Exchange Agent. Any such delay in acceptance
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered Holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
Prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
Resale of the Exchange Notes
Based upon interpretations by the staff of the Commission set forth in
certain no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Private
Notes may be offered for resale, resold and otherwise transferred by a Holder
thereof (other than (i) a broker-dealer who purchased such Private Notes
directly from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a person that is an Affiliate of the
Company), without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the Holder is acquiring
Exchange Notes in the ordinary course of its business and is not participating,
does not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the Exchange Notes. Holders of
Private Notes wishing to accept the Exchange Offer must represent to the Company
that such conditions have been met. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Private Notes, where such Private
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of any Exchange
29
<PAGE>
Notes received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Pursuant to the Notes
Registration Rights Agreement, the Company has agreed to make this Prospectus,
as it may be amended or supplemented from time to time, available to any such
broker-dealer that requests copies of such Prospectus in the Letter of
Transmittal for use in connection with any such resale for a period of 180 days
from the Effective Date. See "Plan of Distribution."
Conditions
The Exchange Offer shall not be subject to any conditions, other than (i)
that the Exchange Offer, or the making of any exchange by a Holder of Private
Notes, does not violate applicable law or any applicable interpretation of the
staff of the Commission; and (ii) the tendering of the Private Notes in
accordance with the Exchange Offer.
Procedures for Tendering
Only a registered Holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a Holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under " - Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Private Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Depository")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the Holder
must comply with the guaranteed delivery procedures described below.
The tender by a Holder that is not withdrawn prior to the Expiration Date
will constitute an agreement among such Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY
PRIVATE NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered Holder
promptly and instruct such registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered Holder. The transfer
of registered ownership may take considerable time and may not be able to be
completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see " - Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered Holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be
30
<PAGE>
guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
(within the meaning of Rule 17Ad-15 under the Exchange Act) that is a member of
one of the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Holder exactly as such registered Holder's name appears on such
Private Notes.
If the Letter of Transmittal or any Private Notes are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must submitted
with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Private Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, defects or irregularities in connection with tenders of
Private Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify Holders of defects or irregularities with
respect to tenders of Private Notes, neither the Company, the Exchange Agent nor
any other person shall incur any liability for failure to give such
notification. Tenders of Private Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder of Private Notes will represent to the Company
that, among other things, (i) the Exchange Notes to be acquired by such Holder
of Private Notes in connection with the Exchange Offer are being acquired by
such Holder in the ordinary course of business of such Holder, (ii) such Holder
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such Holder acknowledges and agrees
that any person who is participating in the Exchange Offer for the purposes of
distributing the Exchange Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the Exchange Notes acquired by such person and cannot rely
on the position of the staff of the Commission set forth in certain no-action
letters, (iv) such Holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such Holder in exchange for Private Notes acquired by such Holder directly from
the Company should be covered by an effective registration statement containing
the selling security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and (v) such Holder is not an
Affiliate of the Company. If the Holder is a broker-dealer that will receive
Exchange Notes for such Holder's own account in exchange for Private Notes that
were acquired as a result of market-making activities or other trading
activities such Holder will be required to acknowledge in the Letter of
Transmittal that such Holder will deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so acknowledging and by delivering a
31
<PAGE>
prospectus, such Holder will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
Return of Private Notes
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering Holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depository pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depository) as promptly as practicable.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Private Notes with the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make book-
entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository in accordance
with the Depository's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depository, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under " -
Exchange Agent" on or prior to the Expiration Date or pursuant to guaranteed
delivery procedures described below.
Guaranteed Delivery Procedures
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
Holder and the certificate number(s) of such Private Notes, stating that the
tender is being made thereby and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or a facsimile thereof),
together with the certificate(s) representing the Private Notes in proper form
for transfer or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof) as
well as the certificate(s) representing all tendered Private Notes in proper
form for transfer and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five business days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Private Notes according to guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date. To withdraw a tender of
Private Notes in the Exchange Offer, a written or facsimile transmission notice
of withdrawal must be received by the Exchange Agent at its address set forth
herein prior to the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Private Notes to
32
<PAGE>
be withdrawn, (ii) identify the Private Notes to be withdrawn (including
certificate number or numbers) and (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt of
such notices) will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes
withdrawn will be deemed not to have been validly tendered for purposes of
Exchange Offer, and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer - Procedures for Tendering" at any time prior to
the Expiration Date.
Exchange Agent
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
By Registered or Certified Mail: Facsimile Transmission By Hand/Overnight Delivery:
State Street Bank and Trust Company Number: State Street Bank and Trust Company
P.O. Box 778 (617) 664-5395 2 Avenue de Lafayette
Boston, MA 02102-0078 (For Eligible Institutions Only) 5th Floor Corporate Trust Window
Attn: Kellie Mullen Boston, MA 02111-1724
Attn: Kellie Mullen
Confirm by Telephone:
(617) 664-5587
</TABLE>
State Street Bank and Trust Company also serves as Trustee under the
Indenture.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and their Affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it its reasonable, out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and the Trustee, accounting and legal fees and
printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
Consequence of Failure to Exchange
Participation in the Exchange Offer is voluntary. Holders of Private Notes
are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
33
<PAGE>
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a person whom the
seller reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act purchasing for its own account or
for the account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A, (ii) in an offshore transaction complying with Rule
903 or Rule 904 of Regulation S under the Securities Act, (iii) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) pursuant to an effective registration statement
under the Securities Act or (v) to institutional accredited investors in a
transaction exempt from the registration requirements of the Securities Act,
and, in each case, in accordance with all other applicable securities laws and
the transfer restrictions set forth in the Indenture. See "Description of
Notes."
Accounting Treatment
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
USE OF PROCEEDS OF THE EXCHANGE NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Notes Registration Rights Agreement and the Indenture. The
Company will not receive any proceeds from the issuance of the Exchange Notes
offered hereby and has agreed to pay the expenses of the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive, in exchange, the Private Notes representing an equal
aggregate principal amount. The terms of the Exchange Notes are identical in
all material respects to the terms of the Private Notes, except (i) for certain
transfer restrictions and registration rights relating to the Private Notes; and
(ii) that if the Exchange Offer is not consummated in a timely manner, or if the
Company fails to comply with certain other registration obligations with respect
to the Private Notes, the Company is required to pay certain Liquidated Damages
to the Holders of the Private Notes. The Private Notes surrendered in exchange
for Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding indebtedness of the Company. The proceeds from the sale of the
Private Notes were originally used for spectrum acquisitions, capital
expenditures, operating losses and working capital.
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1999 on a historical basis and (ii) on a pro forma as adjusted basis
to give effect to the Divestiture (including the assumption by the purchasers of
the FCC Debt, a portion of which is subject to FCC approval). This table should
be read in conjunction with the Company's consolidated financial statements and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
(unaudited)
----------------------------
Pro Forma
Actual As Adjusted
<S> <C> <C>
(dollars in thousands)
Long-term debt:
Spectrum license debt (1)(2) $ 214 $ -
Capital Leases payable (2) 179 20
14% Senior Discount Notes due 2005 18,777 18,777
9% Convertible Subordinated Notes due 2006 11,126 11,126
-------- --------
Total long-term debt 30,296 29,923
-------- --------
Mandatorily redeemable, convertible preferred stock:
Series A Preferred, $.01 par value, 352 shares authorized, issued
and outstanding 8,782 8,782
Series B Preferred, $.01 par value, 6,399,648 shares authorized,
5,735,251 shares issued and outstanding 20,575 20,575
Series C Preferred, $.01 par value, 11,000,000 shares authorized, 12,744
8,789,169 issued and outstanding 12,744
Stockholders' equity (deficit):
Common stock, $.01 par value, 40,000,000 shares authorized,
3,502,750 shares issued and outstanding 35 35
Additional paid-in capital 7,341 7,341
Accumulated deficit (38,293) (38,293)
Accumulated other comprehensive income 97 97
-------- --------
Total stockholders' deficit (30,820) (30,820)
-------- --------
Total capitalization $ 41,577 $ 41,204
======== ========
</TABLE>
- ------------------
(1) Reflects the aggregate principal amount of such debt as of March 31, 1999,
in accordance with Accounting Principles Board Opinion No. 21. The
contractual principal amount of this debt was approximately $214,000 as of
March 31, 1999. The Company has decided to divest its U.S. Operations.
See "Business - Divestiture of the U.S. Operations."
(2) In the accompanying financial statements, such amounts have been classified
as a component of "Net assets held for sale." See Note 2 of the Notes to
the Company's Unaudited Condensed Consolidated Financial Statements as of
March 31, 1999 included in this Prospectus.
35
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected consolidated historical financial data for the Company as
of December 31, 1995 and for the period from October 26, 1995 (inception)
through December 31, 1995 and as of and for the years ended December 31, 1996,
1997 and 1998, with the exception of data presented under Other Financial Data,
were derived from the consolidated financial statements and the notes thereto of
the Company, which have been audited by Arthur Andersen LLP, independent public
accountants, whose report has been included herein. The selected consolidated
historical financial data of the Company for the three months ended March 31,
1998 and as of and for the three months ended March 31, 1999, are derived from
unaudited consolidated financial statements of the Company which, in the opinion
of management, include all adjustments, consisting of normal recurring accruals,
that are necessary for a fair presentation of the financial position and results
of operations for these periods. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of results for future periods. The
selected consolidated historical financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the related
notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Inception (October (unaudited)
26, 1995) through Three Months
December 31, Year Ended December 31, ------------------------
-------------------- ------------------------------------- Ended March 31,
------------------------
1995 1996 1997 1998 1998 1999
-------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ - $ 296 $ 4,826 $ 7,204 $ 1,752 $ 1,710
Costs and expenses related to
revenues - 513 3,556 3,482 731 489
---------- ---------- ---------- ---------- ---------- ----------
Gross profit - (217) 1,270 3,722 1,021 1,221
Operating costs and expenses 62 4,590 15,837 15,304 2,723 2,184
---------- ---------- ---------- ---------- ---------- ----------
Operating loss (62) (4,807) (14,567) (11,582) (1,702) (963)
Other income (expense) 4 (79) (1,148) (3,851) (623) (1,192)
---------- ---------- ---------- ---------- ---------- ----------
Net loss before minority (58) (4,886) (15,715) (15,433) (2,325) (2,155)
interest
Minority interest (1) - 111 - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net loss $ (58) (4,775) (15,715) (15,433) (2,325) (2,155)
Accretion of mandatorily
redeemable preferred shares
to redemption value - (15) (142) (1,536) (314) (416)
---------- ---------- ---------- ---------- ---------- ----------
Net loss applicable to common
shareholders $ (58) $ (4,790) $ (15,857) $ (16,969) $ (2,640) $ (2,571)
========== ========== ========== ========== ========== ==========
Net loss per share $ (0.09) $ (1.38) $ (4.53) $ (4.84) $ (.75) $ (.73)
Weighted average shares
outstanding 639,091 3,480,466 3,502,534 3,502,749 3,502,746 3,502,746
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of March 31, 1999
---------------------------------------------------------- ---------------------
Balance Sheet Data: 1995 1996 1997 1998 (unaudited)
---------------------------------------------------------- ---------------------
<S> <C> <C> <C>
Cash, cash equivalents and $ 5,230
short-term investments $2,503 $14,821 $ 7,730 $ 5,097
Restricted cash - 3,890 1,350 11,771 11,476(5)
Working capital 3,203 17,573 10,892 17,709 16,684
Total assets 3,265 34,916 29,872 47,041 45,417
Total long-term debt - 4,897 16,157 29,122 29,923
Mandatorily redeemable
convertible preferred stock - 28,829 29,252 42,066 42,101
Stockholder's equity (deficit) 3,212 (1,348) (17,169) (28,208) (30,820)
</TABLE>
<TABLE>
<CAPTION>
(unaudited)
Three Months
Inception (October -----------------
26, 1995) through Year Ended December 31, Ended March 31,
December 31, ---------------------------- -----------------
1995 1996 1997 1998 1998 1999
--------------------- -------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data:
EBITDA(2) $ (61) $(4,299) $(9,102) $(7,094) $(1,270) $(395)
Depreciation and amortization 1 508 2,259 2,085 433 569
Capital expenditures (3) 5 7,087 10,383 6,820 995 219
Deficiency of earnings to fixed
charges (4) 53 4,538 14,828 10,601 1,286 783
</TABLE>
(1) Reflects the acquisition of the capital stock of SMR Direct Peru, S.R.L.
(formerly Mobil Line Peru, S.A.), 51% of which was acquired in February
1996 and the remaining 49% of which was acquired in July 1996.
(2) Represents operating loss before depreciation, amortization interest income
and other income/loss. EBITDA is not a measurement under U.S. GAAP and may
not be similar to EBITDA measures of other companies. The Company has
included information concerning EBITDA herein because it understands that
such information is used by certain investors as the measure of an issuer's
ability to incur and service indebtedness; however, EBITDA should not be
considered a substitute for net income as a measure of the Company's
operating results or for cash flow as a measure of the Company's
liquidity.
(3) Represents cash used for purchases of property and inventory (subscriber
units).
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of loss before income taxes plus fixed charges. Fixed
charges consist of interest on all indebtedness and amortization of debt
expense. Because the Company's fixed charges exceeded earnings for the
period from inception through December 31, 1995, for the years ended
December 31, 1996, 1997 and 1998, and for the three months ended March 31,
1998 and 1999, the deficiency of earnings to fixed charges (rather than a
ratio of earnings to fixed charges) has been presented for such periods.
(5) The majority of this amount is related to money which has been escrowed
under one of the Company's financing arrangements and is to be used in
Latin America only. In addition, it includes reflects cash pledged by the
Company to secure its obligations in connection with the Company's bid for
spectrum in the Chile Concurso (the "Ministry") and the purchase of certain
assets from a Chilean company. On October 29, 1997 the Company received
written notice from the Chilean Ministry of Transportation and
Telecommunications that its proposal had been accepted and awarded, subject
to final approval by the Ministry of the completion of the build-out of the
project as submitted.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto appearing
elsewhere in this report. The Company is in the process of divesting its U.S.
Operations and the reader should factor this Divestiture into its reading of the
following discussion and analysis.
Overview
General
The Company currently offers analog SMR service in Peru, Ecuador, Chile and
El Salvador. In Peru, the Company commenced operations in May 1996, in Ecuador
the Company commenced operations in March 1997 and, in Chile the Company
acquired an operating company in January 1998 but did not launch a full scale
sales and marketing program until August 1998. The Company acquired subscribers
in El Salvador in August and September 1998 but has not launched a full scale
sales and marketing program as the Company has made the determination that it
will sell its assets in El Salvador. Due to the temporary hold position of
those assets, the Company does not consolidate the El Salvadorian operations,
but accounts for it under the equity method of accounting. The Company
commenced operations in the United States in September 1996 and is currently in
the process of divesting its U.S. Operations. See "Business - Divestiture of
United States Operations."
The Company has developed its operations in Latin America through the
acquisition of license holding companies whose primary assets were spectrum as
well as the acquisition of operating entities and through the grant of channels
from government auctions. The following table sets forth the name of each
entity acquired by the Company or the location where the channels have been
granted and the date of occurrence in each of its Latin American markets:
<TABLE>
<CAPTION>
Name Date of Acquisition
---- -------------------
<S> <C>
SMR Direct Peru, S.R.L. (Peru) (1)
Pompano, S.R.L. (Peru) November 22, 1996
Brunacci Compania Ltda. (Ecuador) November 22, 1996
Telecom Supply S.R.L. (Peru) December 9, 1996
C-Comunica S.R.L. (Peru) January 22, 1997
Transnet del Peru, S.A. (Peru) July 31, 1997
Telecomunicaciones y Servicios S.A. (Chile) January 2, 1998
Comovec S.A. (Ecuador) May 13, 1998
Peru Tel S.A. (Peru) May 22, 1998
El Salvador June 9, 1998, August 17, 1998, September 2 and 11, 1998
</TABLE>
- ------------------
(1) The Company purchased 51% of the capital stock of SMR Direct Peru, S.R.L.
(formerly Mobil Line Peru, S.A.) in February 1996 and the remaining 49% in
July 1996. These transactions were accounted for as a step acquisition
purchase.
Revenues
The Company derives its revenues primarily from (i) fixed monthly network
access fees, which vary depending on the plan chosen by the subscriber; (ii) the
sale and rental of subscriber units to subscribers; (iii) ancillary service
revenue, consisting of fees charged for maintenance and loss and damage
insurance; and (iv) ancillary equipment revenue, consisting of the sale of base
stations, antennae, and other complementary products. The Company sets the
pricing of the different components of its service, in accordance with its
marketing plans in each of the countries in which it operates, taking into
account, among other things, competitive factors (i.e. the Company subsidizes
the cost of the radios it sells). Monthly fixed network access fees as well as
ancillary service charges are billed in advance and recognized in the period in
which service is delivered. Subscriber unit and ancillary equipment sales are
recognized at the time of sale. During the three months ended March 31, 1999,
the Company's average monthly revenue per subscriber unit (consisting of fixed
monthly network
38
<PAGE>
access fees and ancillary service revenues) was approximately $31.95 in the
Company's Latin American markets. This is higher than in the United States and
is due, in part, to the poor quality of landline telephone service and to the
unsatisfied demand for communications services generally found in such Latin
American markets.
During October 1998, the Company changed its business model in order to
optimize operating performance and corporate value. The Company will no longer
rent subscriber units to new customers which will result in a reduction in the
rate of historical subscriber growth. The Company has also intensified its
efforts with respect to collection of accounts receivable and discontinuing
service to customers for not paying promptly. This, in the short term, has
resulted in a higher than normal rate of churn. Due to the changes described
above, the Company does not expect that revenues will increase at the rate that
revenues have been increasing historically.
Costs and Expenses Related to Revenues
Costs and expenses related to revenues include both the cost of service and
the cost of sales, exclusive of depreciation and amortization. The cost of
service represents the cost of maintaining the Company's analog SMR networks,
site lease costs, technical expenses and utilities. The Company anticipates that
the cost of service will increase with the expansion of its analog SMR networks.
However, as a percentage of revenue, the Company anticipates that the cost of
service will decrease over time as a result of economies of scale in its
operations. As the Company expands and sells a higher volume of subscriber units
in its Latin American markets, its operations will experience an overall
increase in the cost of sales offset, in part, by a decrease in the cost of
subscriber units. Cost of sales as a percentage of revenue is expected to
decrease over time as a result of the expected decrease in the cost of
subscriber units. Similar to most wireless companies, Centennial Communications
Corp. sells its handsets at a price below its cost. This is typical for the
industry and is expected to continue for the foreseeable future. The Company's
business model contemplates that this amount will be recovered over the
estimated life of the customer contract through revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of
compensation expenses and, to a lesser extent, include expenses such as
marketing, rent, professional fees and other general corporate expenses. At the
operating companies, selling, general and administrative expenses consist
primarily of subscriber acquisition costs, marketing and advertising, salaries
and office expenses. As the Company's subsidiaries expand their operations,
construct their analog SMR networks and add subscribers to such networks, the
Company expects a larger portion of selling, general and administrative expenses
to be incurred at the subsidiary level. The Company expects selling, general
and administrative expenses to increase over time as it continues to expand its
operations. As a percentage of revenues, however, the Company expects that
these expenses will decrease as a result of anticipated revenue growth as the
number of subscribers increases.
Depreciation and Amortization
The Company depreciates its infrastructure equipment over 10 years and its
subscriber units over five years using the straight line method. Subscriber
units represent the equipment which is used by a customer to access the SMR
service (i.e. portable and mobile radios). The Company retains title to the
subscriber units it rents and leases as part of the subscriber agreement. Upon
termination of service under a rental or lease contract, the subscriber is
required to return the unit to the Company and the unit is placed into service
with another subscriber. Spectrum is amortized over the term of the licenses
(including expected renewal periods), generally 40 years, using the straight-
line method.
39
<PAGE>
Other Income (Expense)
Other income (expense) is comprised primarily of interest expense and
interest income. The Company currently incurs non-cash interest expense on the
Private Notes and the Convertible Notes, and in 1997 and 1996, it incurred
interest expense on debt provided by the United States government for the
purpose of acquiring spectrum licenses in the FCC Auction (the "FCC Debt"), a
portion of which relates to the accretion to fair market value, and vendor
financing (capital leases payable). The Company has sold a majority of its U.S.
Operations and, in connection therewith, transferred the FCC Debt relating to
the U.S. Operations. See "Business - Divestiture of United States
Operations."
Income Tax Benefit
The Company is subject to income taxes in the United States and in each of
the jurisdictions in which it operates. Although the Company has not paid
income taxes because of its significant losses, it has been precluded from
recognizing an income tax benefit under Statement of Financial Accounting
Standards No. 109, because it is not currently considered more likely than not
that the Company will have significant future taxable income due to its history
of operating losses. As the Company expands its analog SMR networks and
increases its subscriber base, the Company expects to generate taxable income.
Results of Operations
The Company commenced commercial operations in Peru in May 1996, in the
United States in September 1996, in Ecuador in March 1997, and in Chile in
January 1998. In El Salvador, the Company acquired subscribers in August and
September 1998 and due to the decision to sell those assets, the Company has not
consolidated the operations in El Salvador and has accounted for those
operations using the equity method of accounting (see Note 1 and Note 2 of Notes
to Consolidated Financial Statements). In August 1997, the Company made the
decision to sell the U.S. Operations (see Note 3 of Notes to Consolidated
Financial Statements).
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues. Total revenue decreased approximately $42,000 during the three
months ended March 31, 1999, as compared to the three months ended March 31,
1998 as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Latin America:
Radio service revenue $1,401,326 $1,226,819
Equipment sales 277,679 487,873
Activation and other 30,660 36,993
Total $1,709,665 $1,751,685
---------------- ----------------
</TABLE>
The decrease in revenue is mainly due to the decrease in equipment sales. This
is because as of October 1998, the Company changed its pricing strategy by
ceasing rentals to new customers and by reducing the subsidy on radios sold to
new customers. As a result, sales of radio equipment decreased.
Costs and Expenses Related to Revenues. Total costs and expenses related to
revenue decreased approximately $242,000 during the three months ended March 31,
1999, as compared to the three months ended March 31, 1998 as follows:
40
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Latin America:
Network and site expense $ 37,783 $ 20,431
Cost of equipment sold 356,480 591,347
Maintenance and other 95,110 119,287
Total $489,373 $731,065
----------------- -----------------
</TABLE>
Costs and expenses related to revenues decreased due to the decrease of
equipment sales, as noted above, from the Company's change of pricing strategy.
The Company's cost of equipment sold is higher because the Company subsidizes
the cost of the radios it sells as part of its marketing strategy. As explained
above, the Company changed its pricing strategy by reducing the subsidy of
radios sold to customers.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses decreased approximately $675,000 during the three months
ended March 31, 1999 respectively, as compared to the three months ended March
31, 1998 as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Latin America:
Selling, general and $1,069,653 $1,134,030
administrative
Corporate
General and administrative 545,765 1,156,278
Total $1,615,418 $2,290,308
---------------- ----------------
</TABLE>
Selling, general and administrative expenses decreased due to the Company's
ongoing effort to reduce overhead expenses. Total headcount at the corporate
level reduced by 10 employees, from 19 to 9, for March 31, 1998 and 1999
respectively.
Depreciation and Amortization. Total depreciation and amortization
increased approximately $136,000 during the three months ended March 31, 1999,
as compared to the three months ended March 31, 1998 as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Latin America:
Depreciation and amortization $472,393 $338,994
Corporate
Depreciation and amortization 96,170 93,657
Total $568,563 $432,651
---------------- ----------------
</TABLE>
Depreciation and amortization expense increased due to the Company's growth of
the business resulting in an increase in infrastructure and equipment, and due
to the acquisitions of TyS in January 1998 and IWC in May 1998.
Loss on Divestiture of U.S. Operations. In August 1997, the Company made a
strategic decision to sell the U.S. Operations and began to seek purchasers for
these operations, consisting of licenses and related assets and
41
<PAGE>
liabilities in 20 United States MTA's. Accordingly, the Company's management
estimated the fair value of such assets, and determined that a write-down to
fair market value was necessary as of August 1997. The amount of the write-down
recorded by management was approximately $1,900,000. The Company's estimates
were based upon purchase agreements subsequently entered into and management's
estimate of fair market value of the remaining assets not under contract.
Additionally, the Company recorded an approximate $1,300,000 charge for
termination and other contractually committed costs in connection with the
Divestiture of the U.S. Operations. The sale of the U.S. Operations is currently
not finalized and thus, the risk exists that the write-down to fair market value
could be different than what was recorded.
Interest Expense. Interest expense increased approximately $332,000 during
the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998. This increase is due to interest on the Discount Notes and the
Convertible Notes (see Note 6 of Notes to Consolidated Financial Statements).
Interest Income. Interest income decreased approximately $256,000 during
the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998. This decrease is due to the decrease in the Company's cash
balance (including restricted cash) from the use of the proceeds from the sale
of the Senior Notes, the Discount Notes and the Convertible Notes, from
approximately $34.4 million as of March 31, 1998 to $16.6 million as of March
31, 1999.
For the Years Ended December 31, 1997 and 1998
Other income (expense) is comprised primarily of interest expense and
interest income. The Company currently incurs non-cash interest expense on the
Senior Discount Notes and the Convertible Notes. In the prior year, the Company
incurred cash interest expense on debt provided by the United States government
to acquire spectrum licenses in the FCC Auction (the "FCC Debt"), a portion of
which relates to the accretion to fair market value, and vendor financing
(capital leases payable). The Company has sold a majority of its U.S.
Operations and, in connection therewith, transferred the FCC Debt relating to
the U.S. Operations to the purchasers. See "Developments During 1998 -
Divestiture of the United States Operations."
Revenues. Total revenue increased approximately $2,377,000 during the year
ended December 31, 1998, compared to the corresponding amount in the prior year
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
-----------------------------------
<S> <C> <C>
Latin America:
Radio service revenue $2,272,721 $5,145,883
Equipment sales 1,376,396 1,911,159
Activation and other 65,587 146,736
---------- ----------
3,714,704 7,203,778
U.S. Operations:
Radio service revenue 607,693 -
Equipment sales 295,992 -
Activation and other 207,966 -
----------
1,111,651 -
Total $4,826,355 $7,203,778
========== ==========
</TABLE>
42
<PAGE>
The increase in revenue is due to an increase in subscribers in Latin
America of 4,057 (38%) during the year ended December 31, 1998, compared to the
corresponding amount in the prior year. The increase is due to the Company's
growth of the business in Latin America and due to the acquisitions completed
throughout 1997 and 1998. This increase is offset by the Company's decision to
sell the U.S. Operations, which had revenue of $1,111,651 during the year ended
December 31, 1997, and none during the year ended December 31, 1998 (see
"Developments During 1998 - Divestiture of the United States Operations").
Cost and Expenses Related to Revenues. Total costs and expenses related to
revenue decreased approximately $75,000 during the year ended December 31, 1998,
compared to the corresponding amount in the prior year as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1998
------------------------------------
<S> <C> <C>
Latin America:
Network and site expense $ 79,492 $ 88,388
Cost of equipment sold 2,028,366 2,779,821
Maintenance and other 176,380 613,699
2,284,238 3,481,908
------------------------------------
U.S. Operations:
Network and site expense 527,642 -
Cost of equipment sold 218,877 -
Maintenance and other 525,653 -
1,272,172 -
------------------------------------
Total $3,556,410 $3,481,908
========== ==========
</TABLE>
Costs and expenses related to revenues increased in Latin America due to
the increase in subscribers in Latin America, as noted above, from the Company's
growth of the business and due to the acquisitions completed in 1997 and 1998.
This increase is offset by the Company's decision to sell the U.S. Operations
(see "Developments During 1998 - Divestiture of the United States Operations"),
which had costs and expenses related to revenues of $1,272,172 during the year
ended December 31, 1997, and none during the year ended December 31, 1998.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses increased approximately $444,000 during the year ended
December 31, 1998, compared to the corresponding amount in the prior year as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998
--------------------------------
<S> <C> <C>
Latin America:
Selling, general and administrative $ 4,245,785 $ 6,407,572
U.S. Operations:
Selling, general and administrative 3,001,663 -
Corporate:
General and administrative 3,124,095 4,408,157
--------------------------------
Total $10,371,543 $10,815,729
=========== ===========
</TABLE>
Selling, general and administrative expenses increased due to the Company's
growth of the business in Latin America and due to the acquisitions in 1997 and
1998. This increase is offset by the Company's decision to sell the U.S.
Operations (see "Developments During 1998 - Divestiture of the United States
Operations"), which had selling, general and administrative expenses of
$3,001,663 during the year ended December 31, 1997, and
43
<PAGE>
none during the year ended December 31, 1998. The Corporate general and
administrative expenses increased due to additional employees as the business
grew, severance payments and due to the additional development costs incurred as
the Company pursued additional opportunities throughout Latin America. These
development opportunities included other wireless opportunities (iDENtm) and
expenses incurred in determining what other countries, if any, to enter into to
operate.
Depreciation and Amortization. Total depreciation and amortization
decreased approximately $174,000 during the year ended December 31, 1998,
compared to the corresponding amount in the prior year as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1998
---------- ----------
<S> <C> <C>
Latin America:
Depreciation and amortization $1,014,885 $1,694,231
U.S. Operations:
Depreciation and amortization 1,143,346 -
Corporate:
Depreciation and amortization 100,751 390,768
---------- ----------
Total $2,258,982 $2,084,999
========== ==========
</TABLE>
Depreciation and amortization expense increased due to the Company's growth
of the business in Latin America resulting in an increase in infrastructure and
equipment and due to the acquisitions in 1997 and 1998. The overall increase is
offset by the decision to sell the U.S. Operations (see "Developments During
1998 - Divestiture of the United States Operations"), which had depreciation and
amortization expense of $1,143,346 during the year ended December 31, 1997 and
none during the year ended December 31, 1998.
Loss on Impairment of Investments. In October 1998, the Company made a
strategic decision to sell its investment El Salvador.. The Company signed a
letter of intent on November 11, 1998 for the purchase of these assets. Due to
this letter of intent, the Company wrote down its investment in El Salvador to
the fair market value of $1,560,000 and recognized a loss of approximately
$2,400,000. This letter of intent has expired.
Loss on Divestiture of U.S. Operations. In August 1997, the Company made a
strategic decision to sell the U.S. Operations and began to seek purchasers for
these operations, consisting of licenses and related assets and liabilities in
20 U.S. MTAs. As of December 31, 1997 the Company had entered into the U.S.
Purchase Agreements with seven different purchasers to sell substantially all of
the assets related to the Company's U.S. Operations in each of the 20 United
States MTAs in which it had operations. Accordingly, the Company's management
estimated the fair value of such assets, and determined that a write-down to
fair market value was necessary as of August 1997. The amount of the write-down
recorded by management was approximately $1,900,000. The Company's estimates
are based upon executed U.S. Purchase Agreements and management's estimate of
fair market value of the remaining assets not under contract. Additionally, the
Company recorded an approximate $1,300,000 charge for termination and other
contractually committed costs in connection with the divestiture of the U.S.
Operations. During 1998, the Company completed the sale of a majority of the
U.S. Operations (see "Developments During 1998 - Divestiture of the United
States Operations").
Interest Expense. Interest expense increased approximately $3,945,000
during the year ended December 31, 1998 as compared to the corresponding amount
in the prior year. This increase is due to interest on the Senior Discount
Notes and the Convertible Notes.
Interest Income. Interest income increased approximately $992,000 during
the year ended December 31, 1998 as compared to the corresponding amount in the
prior year. This increase is due to the increase in the Company's cash balance
from the sale of the Senior Notes (as defined), the Senior Discount Notes and
the Convertible Notes at the end of fiscal 1997 and in January 1998.
44
<PAGE>
For the Years Ended December 31, 1996, and 1997
In general, the Company reported increases in all categories of revenue and
expense during 1997 compared to 1996 due to the Company's significant expansion
of operations and increase in subscribers in 1997.
Revenues. Total revenue increased approximately $4.5 million during the
year ended December 31, 1997 as compared to the year ended December 31, 1996 as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997
------------------------------
<S> <C> <C>
Latin America:
Radio service revenue $123,479 $2,272,721
Equipment sales 45,992 1,376,396
Activation and other 46,848 65,587
-------- ----------
U.S. Operations:
Radio service revenue 29,680 607,693
Equipment sales - 295,992
Activation and other 49,882 207,966
-------- ----------
Total $295,881 $4,826,355
======== ==========
</TABLE>
Cost and Expenses Related to Revenues. Total costs and expenses related to
revenue increased approximately $3.0 million during the year ended December 31,
1997 as compared to the year ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
-------- ----------
<S> <C> <C>
Latin America:
Network and site expense $ 28,167 $ 79,492
Cost of equipment sold 40,765 2,028,366
Maintenance and other 34,448 176,380
U.S. Operations:
Network and site expense 244,743 527,642
Cost of equipment sold - 218,877
Maintenance and other 165,302 525,653
-------- ----------
Total $513,425 $3,556,410
======== ==========
</TABLE>
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses increased approximately $5.7 million during the year
ended December 31, 1997 as compared to the year ended December 31, 1996 as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
---------- -----------
<S> <C> <C>
Latin America:
Selling, general and $ 807,149 $ 4,245,785
administrative
U.S. Operations:
Selling, general and 2,597,131 3,001,663
administrative
Corporate:
General and administrative 677,776 3,124,095
Total $4,082,056 $10,371,543
========== ===========
</TABLE>
45
<PAGE>
Depreciation and Amortization. Total depreciation and amortization
increased approximately $1.8 million during the year ended December 31, 1997 as
compared to the year ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
------- ----------
<S> <C> <C>
Latin America:
Depreciation and amortization $171,416 $1,014,885
U.S. Operations:
Depreciation and amortization 327,791 1,143,346
Corporate:
Depreciation and amortization 8,604 100,751
-------- ----------
Total $507,811 $2,258,982
======== ==========
</TABLE>
Loss on Divestiture of U.S. Operations. In August 1997, the Company made a
strategic decision to sell the U.S. Operations and began to seek purchasers for
these operations, consisting of licenses and related assets and liabilities in
20 United States MTAs (as defined). As of December 31, 1997 the Company had
entered into the Purchase Agreements with seven different purchasers to sell
substantially all of the assets related to the Company's U.S. Operations in each
of the 20 United States MTAs in which it had operations. The Purchase Agreements
generally provide that the consideration for the assets will consist of some
combination of cash, promissory notes and the assumption of the FCC Debt. See
"Business - Divestiture of United States Operations."
Accordingly, the Company's management estimated the fair value of such
assets, and determined that a write-down to fair market value was necessary as
of August 1997. The amount of the write-down recorded by management was
approximately $1.9 million. The Company's estimates were based upon the
Purchase Agreements and management's estimate of fair market value of the
remaining assets not under contract. Additionally, the Company recorded an
approximate $1.3 million charge for termination and other contractually
committed costs in connection with the Divestiture of the U.S. Operations. The
final outcome of the Divestiture and the proceeds to be received therefrom is
not currently known and a risk exists that the ultimate outcome of such sale,
including the amount of the ultimate write-down necessary to state such assets
and liabilities at their fair market value, will be materially different from
management's estimates, and that the ultimate outcome could result in an
additional write-down of such assets.
Liquidity and Capital Resources
Since inception, the Company has been primarily engaged in start-up
activities requiring substantial expenditures. Consequently, the Company has
reported operating losses before interest of approximately $964,000 for the
three months ended March 31, 1999, and net cash outflow from operating and
investing activities of approximately $87,000. Further development of the
Company's business and the expansion of its analog SMR networks, service
offerings and subscriber base in certain markets will require additional
expenditures. The Company expects that it will have net cash outflows from
investing activities for the foreseeable future. Through March 31, 1999, funds
necessary to finance the Company's operating and investing activities have been
obtained by the Company through the sale of its Common Stock, Series A Preferred
Stock ("Series A Preferred") Series B Preferred Stock ("Series B Preferred"),
Senior Secured Convertible Notes due 2002 (the "Senior Notes"), the Senior
Discount Notes and the Convertible Notes. Since inception, the Company has
raised total cash gross proceeds from the sale of such stock and notes of
approximately $74.6 million.
On October 3, 1997, the Company consummated an approximately $11.1 million
financing (the "Series C Offering") with an investor group led by the Company's
existing stockholders and Prudential Securities Incorporated and its affiliates.
In connection therewith, the Company issued the Senior Notes which were
convertible into shares of the Company's Common Stock at an initial conversion
price of $1.45 per share. On January 15, 1998, the outstanding principal amount
of the Senior Notes and all accrued and unpaid interest thereon was converted
into 7,955,691 shares of Series C Preferred at a conversion price of $1.45 per
share. The Series C Preferred bears a 12% dividend per annum payable on a semi-
annual basis, at the Company's option in
46
<PAGE>
cash or in additional shares of Series C Preferred. The indenture restricts the
ability of the Company to pay cash dividends on the Series C Preferred. In April
1998, the Company issued 278,450 shares of Series C Preferred Stock for the 12%
dividend at $1.45 per share. In October 1998, the Company issued 505,028 shares
of Series C Preferred Stock for the 12% dividend at $1.45 per share.
On January 15, 1998, the Company raised total gross proceeds of
approximately $20.4 million from the private offering of $40.0 million of 14%
Senior Discount Notes due 2005. The Senior Discount Notes consist of 40,000
units each consisting of $1,000 in principal amount at maturity of 14% Senior
Discount Notes due 2005 of the Company (the "Notes") and one warrant (the
"Warrants") to purchase 64 shares of common stock of the Company at an exercise
price of $0.01 per share, subject to certain adjustments. The Senior Discount
Notes will mature January 1, 2005. Interest will be payable, in cash, at a rate
of 14% per annum, payable semi-annually in arrears on January 1 and July 1 of
each year commencing July 1, 2003. For accounting purposes, the Senior Discount
Notes accrete at a rate of 21.26% per annum compounding semi-annually. Pursuant
to a registration rights agreement (the "Senior Discount Notes Registration
Rights Agreement") among the Company and the purchasers of the Senior Discount
Notes, the Company agreed: (i) to file with the Commission on or prior to the
earlier to occur of (a) an offering of securities of the Company pursuant to
which the Company is thereafter subject to the reporting requirements of the
Exchange Act and (b) 300 days after the closing of the Senior Discount Notes
offering, a registration statement with respect to an offer to exchange (the
"Exchange Offer") the Senior Discount Notes for a new issue of senior discount
notes of the Company (the "New Notes") with terms substantially identical to
those of the Senior Discount Notes and (ii) to use its best efforts to cause
such registration statement to become effective within 60 days following the
date of this filing. The Company has not currently completed the registration
process for the Exchange Offer and has incurred approximately $56,000 in
liquidated damages through March 31, 1999. The liquidated damages are due and
payable with the first interest payment on July 1, 2003. The liquidated damages
are charged on a weekly basis per $1,000 bond and increase every 90 days for a
fee of $2,000 up to $10,000 per week during 1999 until the registration
statement is declared effective.
In addition, on January 15, 1998 the Company issued $10.0 million in
aggregate principal amount of Convertible Notes pursuant to a purchase agreement
dated January 15, 1998. Cash interest will not accrue on the Convertible Notes
prior to January 1, 2000. Thereafter, interest on the Convertible Notes are
payable in cash at a rate of 9% per annum on January 1 and July 1 of each year,
commencing on July 1, 2000. The Convertible Notes are convertible into shares
of Common Stock at a conversion price of $2.25 per share, subject to adjustments
in certain circumstances.
The ability of the Company to make scheduled payments with respect to its
indebtedness, including the Senior Discount Notes and the Convertible Notes,
will depend upon, among other things, its ability to implement its business
plan, to expand its operations and to successfully develop its subscriber base
in its target markets, by the ability of the Company's subsidiaries to remit
cash to the Company in a timely manner and the future operating performance of
the Company and its subsidiaries. Each of these factors is, to a large extent,
subject to economic, financial, competitive, regulatory, political and other
factors, many of which are beyond the Company's control. The Company expects
that it will continue to generate cash losses for the foreseeable future. No
assurance can be given that the Company will be successful in developing and
maintaining a level of cash flow from operations sufficient to permit it to pay
the principal of, and interest on, its indebtedness, including the Senior
Discount Notes and the Convertible Notes. If the Company is unable to generate
sufficient cash flow from operations to service its indebtedness, including the
Senior Discount Notes and the Convertible Notes, it may have to modify its
growth plans, restructure or refinance its indebtedness or seek additional
capital. There can be no assurance that (i) any of these strategies could be
effected on satisfactory terms, if at all, in light of the Company's high
leverage or (ii) any such strategy would yield sufficient proceeds to service
the Company's indebtedness, including the Senior Discount Notes and the
Convertible Notes. Any failure by the Company to satisfy its obligations with
respect to the Senior Discount Notes and the Convertible Notes at maturity or
prior thereto would constitute a default under the indenture governing the
Senior Discount Notes and the agreement governing the Convertible Notes.
The Company believes that the cash on hand, together with the cash
generated from operations, will be sufficient to satisfy the Company's liquidity
needs for the succeeding 18 to 24 months; however, there can be no assurance to
that effect. The Company intends to use its cash on hand primarily to fund
capital expenditures
47
<PAGE>
(capital expenditures will include the purchase of equipment (including
subscriber units), the cost of constructing the Company's analog SMR networks),
operating losses, acquisitions of license holding companies and licenses in the
wireless communications industry as contemplated by current contracts in Chile
and for general corporate purposes. Assuming that the Company consummates
certain development projects, the aggregate cash purchase price to be paid in
respect of such transactions will be approximately $3.0 million (as of March 31,
1999). In addition, the Company anticipates funding approximately $900,000 to
build-out channels and to fund operating losses for the remainder of 1999. The
Company continually evaluates opportunities for acquisition of spectrum and
other assets that are consistent with its current strategy. The Company
currently has no commitments for acquisitions other than what has been disclosed
herein.
In June and July 1996, the Company issued 352 shares of Series A Preferred
which have an aggregate liquidation value of $8.8 million or $25,000 per share.
In November and December 1996, the Company issued 5,670,851 shares of Series B
Preferred which have an aggregate liquidation value of approximately $20.7
million or $3.65 per share. In October 1997, the Company issued 50,000 shares
of Series C Preferred which have an aggregate liquidation value of approximately
$72,500 or $1.45 per share. In January of 1998, upon conversion of the Senior
Notes, the Company issued 7,955,691 shares of Series C Preferred which have an
aggregate liquidation value of approximately $11.5 million or $1.45 per share.
The indenture restricts the ability of the Company to pay cash dividends on the
Series A Preferred, the Series B Preferred or the Series C Preferred.
In April 1996, the Company acquired 430 channels in an FCC auction for a
purchase price of approximately $5.1 million. Because the Company qualified for
"small business" status under FCC regulations, the Company (i) needed only to
make a 10% down payment; (ii) received a 15% bidding credit against its spectrum
purchase price; and (iii) received United States government financing at 7% per
annum on the balance of the purchase price to be paid by the Company over a 10-
year period. The note for the FCC debt provides for interest payments only in
the first five years and quarterly principal and interest payments thereafter.
The FCC has canceled the FCC debt on the MTA's the Company has sold and the
Company anticipates that the purchasers of the remaining MTA's will be issued
new notes and the Company's remaining notes ($214,000 as of March 31, 1999) will
be canceled.
The Company secured an aggregate of approximately $2.3 million of vendor
financing with E.F. Johnson Company ("E.F. Johnson") and approximately $1.8
million in infrastructure equipment financing for use in constructing its United
States analog SMR networks. On June 2, 1997, E.F. Johnson assigned the
Company's lease in respect of such equipment to Boston Financial & Equity
Corporation ("Boston Financial"). In addition, in February 1997, the Company
secured approximately $500,000 in infrastructure equipment financing from E.F.
Johnson to construct network facilities at additional site locations in the
United States. The amounts financed are payable monthly over a five year period
and bear interest at 12% per annum. Total principal outstanding on this vendor
financing was $179,000 as of March 31, 1999. In addition, the Company paid 30%
of the cost of the purchased equipment (approximately $1.0 million in the
aggregate) as a down payment. In conjunction with the Divestiture of the U.S.
Operations, the Company intends to pay off the entire amount of the E.F. Johnson
and Boston Financial indebtedness attributable to the assets being sold.
During 1998, the Company entered into additional agreements with E.F.
Johnson regarding the purchase of infrastructure equipment and subscriber units.
E.F. Johnson has made available to the Company a $1.5 million credit line
associated with the purchase of infrastructure equipment for build-out in Chile.
The amounts financed will be payable quarterly over a one year period and no
interest will be charged. The Company has determined the market rate for this
debt to be 14%. The Company made a down payment in the amount of 25% of the
cost of the purchased equipment pursuant to the agreement. The Company owes
approximately $517,000 on this vendor financing as of March 31, 1999. The
Company also entered into a radio purchase agreement with E.F. Johnson to
acquire 5,000 radios at a discounted price during 1998 and took delivery of
3,600 radios. The Company is currently in discussions with E.F. Johnson
regarding the remaining 1,400 radios.
During 1998, the Company entered into a radio purchase agreement with
Motorola to acquire 10,000 radios at a discount during 1998 and took delivery of
8,325 radios. The Company is currently in discussions with Motorola regarding
the remaining 1,675 radios.
48
<PAGE>
Foreign Investment Risk
The Company's foreign operating subsidiaries are all directly affected by
their respective countries' governmental, economic, fiscal and monetary policies
and other political factors. The Company believes that its operating
subsidiaries' financial conditions or results of income (loss) from operations
have not historically been materially adversely affected by these factors.
Inflation and Foreign Currency Exchange
The net monetary assets of certain of the Company's subsidiaries are
subject to foreign currency exchange risks since they are maintained in local
currency. Certain of the Company's subsidiaries operate in countries in which
the rate of inflation is significantly higher than that of the United States.
The Company will attempt to protect its earnings from inflation and possible
currency devaluation by setting prices in direct relation to the dollar and in
some cases by periodically adjusting prices in local currencies. However, there
can be no assurance that any significant devaluation against the dollar could be
offset, in whole or in part, by a corresponding price increase.
The Ecuadorian operations are currently faced with a devaluing sucre and a
volatile political and economic situation. When the Company launched service in
Ecuador in 1997, the exchange rate was approximately 4,300 sucres to one U.S.
dollar. As of March 31, 1999, it was approximately 10,925 sucres to one U.S.
dollar and since year-end, has fluctuated as high as 13,000 sucres per one U.S.
dollar. The devaluation has a direct impact on customer's ability to pay due to
the fact that the Company bills in U.S. dollars. The Company has been dealing
with this situation as proactively as possible and contacted the customer base
in early March 1999 to discuss the current billings of existing customers. The
Company believes that being proactive may keep more subscribers on the network
as initial customer reaction was positive. The declining sucre has recently
sparked a run on banks in Ecuador, causing the Ecuadorian government to impose
limits on withdrawals, and causing a number of banks, including Ecuador's
second-largest bank to close its doors. While the Company has not experienced
any difficulties due to the bank closures and limitations on withdrawals, there
can be no assurance that the Company will not experience such problems in the
future. The Company has been requiring the operating subsidiary in Ecuador to
send all excess funds to the U.S., thus, the Company does not believe that it
has a material amount of cash at stake. In addition, the country has been
hyperinflationary during the years in which the Company has been operating in
Ecuador. Ecuador has had a cumulative rate of inflation for the three years
ending December 31, 1997 of over 100%. The inflation rates for the years ended
December 31, 1996 and 1997 were 24.4% and 30.6%, respectively. The countries in
which the Company's subsidiaries now conduct business generally do not restrict
the repatriation or conversion of local or foreign currency. There can be no
assurance, however, that this will be the case in each market that the Company
may enter in the future or that this situation will continue in the Company's
existing markets. The Company's subsidiaries are all directly affected by their
respective countries' governmental, economic, fiscal and monetary policies and
other political factors.
Net Operating Loss Carryforwards
At December 31, 1998, the Company had net operating loss carry forwards
("NOLs") for United States federal tax purposes of approximately $17.5 million
which expire through the year 2013. These NOLs are available to offset future
taxable income. The Company's foreign consolidated Subsidiaries in Peru,
Ecuador, Venezuela, and Chile are considered pre-operating entities for income
tax purposes, and therefore the losses are deferred for income tax purposes and
amortized against future taxable income or loss over a period of four years
commencing in 1996. The Company may be limited in its ability to use the NOLs in
any one year depending on the Company's ability to generate sufficient taxable
income.
Year 2000
GENERAL. The "Year 2000 issue" arises as a result of the potential
inability of some computer software to interpret correctly any date after
December 31, 1999 in entries in which the year is represented by two digits
rather than four. Any such failure could result in data processing errors or
miscalculations, and consequently, interruption in services, operations,
customer billing and other date-sensitive processes.
49
<PAGE>
STATE OF READINESS. The Company has taken actions to address any Year 2000
issues in its critical business areas related to products, networks, information
management systems, non-information systems with embedded technology, suppliers
and customers by the end of 1999.
The Company has identified five phases that assist in defining the status of its
progress toward Year 2000 issue compliance. The five phases are:
(i) awareness -- locating, listing and prioritizing specific Information
Technology ("IT") that is potentially subject to Year 2000 issues;
(ii) assessment -- determining the level of risk of Year 2000 issues that
exist on the Company's systems through inquiry, research and testing;
(iii) renovation -- determining and resolving Year 2000 issues that were
identified in previous phases through replacement, upgrade or repair
and planning for the scheduled implementation of the selected Year
2000 compliant resolution;
(iv) validation -- testing, monitoring, certification and verification of
the correct manipulation of dates and date-related data on non-IT and
IT systems, including those of material third parties; and
(v) implementation -- installing and integrating the application of Year
2000 issue compliant resolutions by replacement, upgrade or repair of
non-IT and IT systems, including those of material third parties.
As of May 31, 1999 and as of the date of this filing, the Company is in various
phases noted as follows: the Company prepared a comprehensive inventory of the
computer systems and computer controlled devices that are potentially affected
by the Year 2000 issue. The critical systems were tested and the Company
initiated a remediation process for those systems that were determined to have
Year 2000 problems. The Company's ability to reach its Year 2000 issue
compliance goal, however, is and will continue to be dependent on the parallel
efforts of certain third party vendors, suppliers, subcontractors to and
business partners of the Company. The Company initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company is in the process of obtaining reasonable
verification and written assurances from these suppliers as to their Year 2000
readiness, by September 30, 1999. The Company believes that certain of these
third party vendors, suppliers, subcontractors and business partners are not yet
Year 2000 compliant. As part of its remediation plan, the Company is monitoring
the progress of these third parties by obtaining relevant details and schedules
concerning their contemplated development of applications that comply with the
Year 2000 issue for use in its operations and systems. In particular, the
Company relies on services and products offered by the following third parties:
E. F. Johnson and Motorola for system infrastructure and subscriber handsets;
Microsoft, Peachtree and ARCServe for software for billing and accounting
systems; and Gateway and Compaq for computer hardware.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Based on preliminary
information obtained to date as a result of the Company's assessment efforts,
the Company believes that the incremental costs of upgrading or replacing its
systems and equipment or modification of certain software applications will not
have a material effect on the Company's liquidity, financial condition or
results of operation. The Company does not separately track the internal costs
incurred for the Year 2000 project. Such costs are principally the related
payroll costs for personnel involved in the Company's Year 2000 project. It
also includes the implementation of the integrated systems that the Company
requires for each of its subsidiaries. The Company has ensured that these
systems are Year 2000 compliant.
To date, the Company has not deferred any costs related to specific projects,
goals or objectives relating to its operations as a result of implementing the
Company's Year 2000 issue compliance efforts.
50
<PAGE>
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. Subject to the foregoing, the
Company does not anticipate delays or postponements in finalizing and
implementing Year 2000 issue resolutions by the end of 1999. Until the
Company's renovation and validation phases are substantially complete, however,
the Company cannot fully and accurately estimate the risks of its Year 2000
issues. Moreover, any failure by third parties that have a material
relationship with the Company may be a potential risk if such failure adversely
impacts the ability of such parties to provide any products or services that are
critical to the Company's operations. Finally, where the Company is not in a
position to validate or certify that technology provided by third parties is
Year 2000 compliant, the Company is seeking to obtain assurances from such third
parties that their systems are or will be Year 2000 issue compliant no later
than the end of 1999. If these third parties fail to address Year 2000 issues
appropriately, there could be a materially adverse effect on the Company's
financial condition and results of operations. Such risks include, but are not
limited to the inability of subscribers to make or receive calls. Other risks
associated with the failure of the Company or material third parties to develop
and deploy Year 2000 issues solutions in a timely and successful manner involve
or result in conditions that could preclude the Company from
(a) obtaining equity or debt financing;
(b) deploying an alternative technology that is Year 2000 compliant;
(c) commencing commercial service in new markets, expanding service in
existing markets or introducing new services in existing markets;
(d) pursuing additional business opportunities.
The Company cannot independently assess the impact of Year 2000 risks, issues
and compliance activities and programs involving operators of public other
service providers (such as electric utilities). The Company, therefore, must
rely on the respective utility providers' estimates of its own Year 2000 issue
and the status of such utility providers' related compliance activities and
programs in the Company's own Year 2000 issue assessment process. The Company
has considered that certain of its customers, suppliers and operations located
in foreign countries may not be at the same advanced level of awareness or
assessment of the Year 2000 issue as their U.S. counterparts, consequently
resulting in delays and lag in remediation efforts. To the extent that other
service providers (such as electric utilities) fail to address their respective
Year 2000 issue in a timely manner, any resulting disruption in the Company's
service could have a materially adverse effect on the Company's operations.
THE COMPANY'S CONTINGENCY PLANS. The Company has not completed all systems
and software testing in its critical systems nor has it been advised of the
completion of such activities by all third party vendors of critical products
and services. Consequently, the Company has not fully assessed its exposure
from potential Year 2000 issues noncompliance. The Company has not yet
determined whether it will require, and thus has not developed Year 2000 issue
contingency plans. Following testing of the Company's critical systems, the
Company will evaluate alternative plans designed to address various potential
business interruptions that may occur as a result of noncompliance.
Additionally, because contingency plans may also be provided by third parties,
resulting from any anticipated failure on their part to be Year 2000 issue
compliant, the Company will have to assess development of appropriate
alternative solutions advanced by any such third party to determine its
effectiveness and likely impact on the Company.
51
<PAGE>
INDUSTRY OVERVIEW
Wireless Communications
Three types of systems dominate the market for commercial wireless
communications services: SMR, cellular and paging. SMR, also referred to as
"trunked radio" or wireless dispatch communications, is primarily a business
communications tool which provides cost-effective "one-to-many" voice
communications. SMR service provides a defined group of users, typically within
a business or "work group," with reliable, flexible and convenient
communications. Cellular, on the other hand, is used to provide mobile voice
communications on a point-to-point basis. However, due to the relatively high
costs and the inability to provide one-to-many communications, cellular is often
less appealing to businesses which require group communications. Paging, while
significantly less expensive than cellular and slightly less expensive than SMR,
does not provide the same functionality as SMR since it does not allow for two-
way, real-time voice communications.
The table below outlines some of the differences between SMR, cellular and
paging.
Comparison of SMR/PLMR, Cellular and Paging
<TABLE>
<CAPTION>
SMR/PLMR Cellular Paging
-------- -------- ------
<S> <C> <C> <C>
Services Offered........ Voice, data, instant Voice and data (one-to- Data only (one-
conferencing (one-to- one) to-one)
many and one-to-one)
Subscribers (Est.)
United States...... 18.8 million (1)(2) 48.0 million (3) 49.5 million (3)
Latin America...... 292,735 (4) 6.4 million (3)(5) 935,500 (6)
Target Customer.......... Businesses Individuals and Individuals and
Businesses Businesses
Typical Frequency
Range.................... 800 MHz 800 MHz Lowband and
900 MHz 931 MHz
220 MHz
512 MHz and below
</TABLE>
- -------------------------
(1) Source: The Strategis Group, The State of SMR Digital Mobile Radio: 1997.
(2) Consists of approximately 2.3 million SMR subscribers and approximately
16.5 million PLMR network subscribers.
(3) Source: The MultiMedia Telecomunications Association ("MMTA") and
Telecommunications Industry Association ("TIA"), 1998 Multimedia
Telecommunications Market Review and Forecast.
(4) Source: International Mobile Telecommunications Association ("IMTA"), The
Global Digest for Commercial Trunked Radio Systems (SMR, PAMR, TRS) 1997.
(5) Sources: Worldwide breakdown and forecast of total Cellular/PCS subscribers
1995-2002, Dataquest, Merrill Lynch estimates, IDC/LINK, Northern Business
Information, Ericsson; includes cellular and PCS subscribers.
(6) Source: U.S. Department of Commerce, Office of Telecommunications.
December 31, 1995 and Pyramid Research, a division of the Economist
Intelligence Unit. December 31, 1995.
SMR
SMR was originally developed in the United States in order to provide an
efficient mobile communications service for businesses that required internal
communications capabilities. Prior to allocating frequencies for SMR in the
United States, most intra-company dispatch communications utilized private land
mobile radio ("PLMR") networks. These PLMR networks typically use the frequency
bands below 512 MHz, and often have a variety of companies in various industries
sharing the same frequencies in the same geographic areas.
52
<PAGE>
Some of these systems have been built and operated by government agencies,
utility companies and large transportation companies with the capital and
expertise necessary to build and manage their own internal systems. In the mid-
1970s, in recognition of the communications needs of small and medium size
businesses which lacked the capital or were too small to justify the expense of
building and operating more efficient, technically advanced trunked radio
systems, the FCC authorized third-party operators to provide SMR service.
SMR service has traditionally emphasized radio dispatch service, which
involves shorter duration communications than mobile telephone service and
places less demand on system capacity. The traditional SMR market, therefore,
has been oriented primarily to business customers such as contractors, service
companies, security firms and delivery service companies that have significant
field operations and need to provide their personnel with the ability to
communicate directly with one another, either on a one-to-one or on a one-to-
many basis.
SMR networks receive transmissions from a subscriber unit and retransmit
the signal through the channel to other subscriber units. A multi-channel
trunked network automatically searches for an open channel for each
transmission. Once the system has assigned a user (or group) a channel per
transmission, no other unauthorized user (or group) can access that channel.
Channels are licensed per geographic area and, using analog technology, each
channel can generally serve up to 125 SMR subscribers in a given area.
SMR service employs a simplex or half-duplex ("push-to-talk") mode.
Dispatch entails short bursts of communication, with a new transmission
initiated with each pause in the communication. Each voice transmission occurs
on the then available channel. In contrast, cellular communications utilizes
two dedicated channels, one for each side of the conversation. Once a cellular
call is initiated the channel pair remains utilized throughout the entire
duration of the call, thereby potentially blocking channels for an extended
period of time. Cellular and SMR networks differ significantly in terms of the
complexity of network architecture, costs of network construction, subscriber
capacity and operating costs. SMR networks are similar to cellular networks in
that both utilize site locations to receive and rebroadcast transmission to and
from subscriber units. Unlike cellular, however, SMR utilizes networks of one
to four towers per geographic coverage area which broadcast a high-powered
signal, generally between 75 and 175 watts. Cellular networks use anywhere from
20 to 90 antennae towers per geographic coverage area which broadcast a low-
powered signal and are networked with expensive and complex switching equipment.
SMR network construction also differs from cellular in that the network build-
out is modular. Because SMR infrastructure is designed to allow for modular
expansion, network capacity increases are easily and economically accomplished
by adding repeaters in increments that closely match growth in subscriber
demand.
Traditionally, SMR service has employed analog technology which has proven
to be a reliable, cost-effective technology. Analog technology allows for the
actual voice of the user to be translated. In comparison, digital technology
takes the user's voice, digitizes and reconfigures it, then recodes it prior to
transmission.
Recently, digital technology, known as ESMR, has been introduced into the
SMR industry. ESMR is based upon the division of a given geographical area into
a number of cells and the simultaneous reuse of radio channels in non-contiguous
cells within the network. ESMR allows a greater number of subscribers to be
placed on a single channel and provides the capability to offer integrated
wireless communications services utilizing common cell and digital switching
infrastructure as well as multi-functional subscriber units. The Company is in
the process of investigating ESMR alternatives, including iDEN(TM). See "Risk
Factors - Risks Associated with Rapidly Changing Industry" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Cellular
Cellular telephone systems are capable of providing high quality, high
capacity voice and data communications to and from vehicle-mounted and hand-held
radio telephones. Cellular telephone systems are capable of handling thousands
of calls at any one time and providing service to hundreds of thousands of
subscribers in any particular area.
53
<PAGE>
Cellular telephone technology is based upon the division of a given
geographical area into a number of cells and the simultaneous re-use of radio
channels in non-contiguous cells within the system. Each cell contains a low
power transmitter-receiver at a base station that communicates by a switch that
controls the routing of calls and that, in turn, is connected to the public
switched telephone network. The switch enables cellular telephone users to move
freely from cell to cell while continuing their calls.
Cellular telephone systems generally offer subscribers the most up-to-date
landline telephone features and services. Cellular telephone systems are
interconnected with the landline telephone network which allows subscribers to
receive and originate local, long-distance and international calls from their
cellular telephones. As a result, cellular telephone system operators require
an interconnection arrangement with the local landline telephone companies and
the terms of such arrangements are material to the economic viability of the
system.
Paging
Paging is a well-established wireless technology, and is widely available
in many countries. A paging system typically consists of a number of
transmitter sites connected to a central messaging center. The messaging center
receives incoming messages from the public telephone network and prepares
batches of messages for transmission to subscribers. There are two basic types
of paging services: (i) numeric (digital display) and (ii) alphanumeric, which
allows subscribers to receive and store messages of up to 5,000 characters
consisting of both letters and numbers. Historically, paging was a one-way
communications service; however, technological advances in wireless messaging
have made two-way communications possible. Two-way paging systems allow message
acknowledgment responses and the transmission of short data messages by the
paging subscriber.
Telecommunications in Latin America
Traditional landline telephone service remains poor in many parts of Latin
America due to, among other reasons, underinvestment in landline infrastructure
and long waiting periods for the installation of telephone lines and service.
Landline telephone penetration is still extremely low, and where installed, the
quality of service is often lacking. As a result, while wireless communications
in the United States provide attractive supplemental services to a well
developed and reliable landline telephone system, in Latin America, wireless
communications have become an important alternative to the relatively
antiquated, overburdened and unreliable landline telephone systems.
Furthermore, in the Latin American markets where the Company operates, wireless
communications services tend to be more readily available and, in many cases,
provide higher quality service than landline telephone systems. In addition,
wireless networks can be constructed relatively quickly and are less expensive
to install than landline networks. See "Business - Industry and Market
Opportunity."
SMR in Latin America. The Company believes that demand for SMR service in
Latin America will be significant due to the following economic and demographic
characteristics: (i) low teledensity and low wireless communications
penetration; (ii) high population densities found in urban markets; (iii)
unreliable telecommunications infrastructure; (iv) limited and relatively
expensive communications alternatives; and (v) economic growth fueled by
developing market economies.
The economic growth in many Latin American countries, fueled in part by the
move toward more open market economies, is generating an increasing demand for
mobile work groups to communicate more frequently and effectively. The
accompanying emphasis on productivity means that Latin American businesses are
increasingly focused on securing competitive advantages over their business
rivals and reducing their own operating cost structures. The Company believes
that SMR is a cost-effective tool for businesses to increase their productivity
and enhance service quality and performance.
SMR is in the early stage of development in Latin America. In many
markets, the assignment of spectrum needed to operate an SMR network first began
in 1992. Frequency has generally been granted in most Latin American countries
on a fragmented basis, with many countries granting licenses in five to 20
channel increments. Competition for channels is growing as foreign and United
States companies are beginning to recognize the opportunities presented by SMR.
See "Risk Factors - Competition." In addition, similar to the United States,
54
<PAGE>
consolidation of channels has begun in certain countries in Latin America, and
the Company believes that such consolidation will continue in the foreseeable
future.
The Company believes SMR provides the most attractive group communications
solution for Latin American businesses. While cellular communications
represents the fastest growing segment in the Latin American telecommunications
industry, the high cost of cellular communications is uneconomical for many
Latin American businesses. Moreover, cellular service may not meet the
communications needs of many Latin American businesses, because cellular does
not provide inexpensive, one-to-many communications. Paging services have also
experienced growth and market penetration in Latin America in the last few
years. However, because paging services do not provide the same functionality
as SMR (as they do not allow for two-way, real-time voice or one-to-many
communications), the Company believes that they are also of limited utility to
businesses compared to SMR and are best suited to be a complementary
communications medium.
To be successful in the Latin American SMR market, the Company believes a
service provider must accumulate channels in populated areas and have the
financial resources available to build large-scale SMR networks. Further, the
SMR operator must be able to provide reliable and affordable service to its
subscriber base. The Company believes that there are few SMR providers
positioned to meet these subscriber and market demands in Latin America. In
addition, the Company believes that its pricing strategy of providing a fixed
monthly network access fee with unlimited airtime usage and a flexible
subscriber purchase program will encourage the use of SMR service by all types
of businesses. This strategy has resulted in the expansion of the Company's
potential subscriber base beyond the traditional commercial user to financial
institutions and other "white collar" service organizations.
55
<PAGE>
BUSINESS
The Company is a provider of analog SMR services focusing on providing such
service in Latin America. The Company currently operates in Latin American
markets that have approximately 28.3 million POPs and, as of March 31, 1999, the
Company had 13,904 subscribers. The Company also provided SMR service in the
U.S. but is in the process of divesting its United States Operations. See
"Business - Divestiture of the United States Operations."
The Company was founded in October 1995 and, as of March 31, 1999, is (i)
the largest SMR operator in Peru, in terms of the number of subscribers and
channels, with over 7,100 subscribers and 321 channels in a market of
approximately 11.0 million POPs, and (ii) the largest SMR operator in Ecuador,
in terms of the number of subscribers and channels, with over 3,700 subscribers
and 365 channels, in a market of approximately 4.0 million POPs. The Company
acquired an operating company in Chile (a market of approximately 7.5 million
POPs) in January 1998 and, as of March 31, 1999, had over 2,300 subscribers and
325 channels in Chile. In August 1998, the Company completed the buildout of 10
additional channels in Santiago, Chile and launched a full scale sales and
marketing program. The Company also holds concessions for 50 channels in El
Salvador (a market of approximately 5.8 million POPs). In El Salvador, the
Company commenced operations in August 1998, and, as of March 31, 1999, the
Company had 170 channels and provided service to 701 subscribers through seven
sites. The Company has not launched any sales or marketing program in El
Salvador as the Company has made the determination that it will sell its El
Salvadorian assets. The Company's strategy is focused on consolidating its
channel positions in the markets in which it operates. The Company is also
exploring the opportunity to provide wireless communications services which
utilize digital technology. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." The Company believes that significant market opportunities exist to
develop a leading position as a provider of SMR service in Latin America.
Industry and Market Opportunity
SMR, also referred to as "trunked radio" or wireless dispatch
communications, is primarily a business communications tool which provides cost-
effective, "one-to-many" voice communications. The Company believes that the
SMR industry offers attractive economic characteristics as compared to other
wireless communications services, such as cellular. The low fixed cost
operating structure of SMR permits operators, such as the Company, to achieve
positive operating cash flow with a limited subscriber base and to generate
incremental operating cash flow as additional subscribers are added to the
networks. SMR networks are significantly less expensive to build-out than
cellular systems, requiring only one to four sites per geographic coverage area
as compared to 20 to 90 sites for cellular. In addition, the modular nature of
SMR infrastructure allows for incremental network build-out as demand for
service increases, which limits initial capital requirements.
The Company believes that demand for SMR service in Latin America is
significant due to the following economic and demographic characteristics: (i)
low teledensity and low wireless communications penetration; (ii) high
population densities found in many urban markets; (iii) unreliable
telecommunications infrastructure; (iv) limited and relatively expensive
communications alternatives; and (v) economic growth fueled by developing market
economies. Traditional landline telephone service in Latin America remains poor
due to, among other reasons, underinvestment in landline infrastructure and long
waiting periods for the installation of telephone lines and service. In many
Latin American markets, wireless communications have become an important
alternative to the relatively antiquated, overburdened and unreliable landline
telephone system. The economic growth in many Latin American countries, fueled
in part by the move toward more open market economies, is generating an
increasing demand for mobile work groups to communicate more frequently and
effectively. The accompanying emphasis on productivity means that Latin
American businesses are increasingly focused on securing competitive advantages
over their business rivals and reducing their operating cost structures.
Growth Strategy
The Company's growth strategy is to (i) expand its analog SMR operations
and subscriber base in Latin America; (ii) improve cash flow and profitability
by actively managing and controlling operating expenses;
56
<PAGE>
(iii) pursue additional SMR opportunities; (iv) add incremental services to its
existing service offerings; and (v) explore the implementation of digital
wireless communications technologies.
Recent Developments
Recently Completed Acquisitions
On January 2, 1998, the Company purchased 100% of the outstanding capital
stock of Telecomunicaciones y Servicios S.A. ("TyS"), a Chilean operating
company. TyS holds 10 800 MHz channels in the metropolitan region of Santiago,
Chile. The total purchase price for the Chilean company was approximately $3.2
million in cash, of which $0.8 million was paid at closing and approximately
$2.0 million was paid June 29, 1998 and $0.4 million on July 8, 1998 upon the
transfer of 290 additional channels (40 of which are in the metropolitan region
of Santiago) to the operating company.
On April 14, 1998 the Company executed a purchase agreement with certain
non-operating subsidiaries of International Wireless Communications Holdings,
Inc. ("IWC") for the acquisition of certain assets in Peru, Ecuador and Chile
for a purchase price of approximately $3.5 million in cash. On May 13, 1998 the
Company completed the first part of the acquisition and acquired a non-operating
entity in Ecuador (Comovec S.A.) for approximately $0.3 million. Comovec S.A.
holds licenses to operate SMR networks and has 40 800 MHz channels and 20 900
MHz channels in each of Quito and Guayaquil and 25 800 MHz channels in Cuenca.
On May 22, 1998, the Company completed the second part of the acquisition and
acquired a non-operating entity in Peru (Peru Tel S.A.) for approximately $2.8
million. Peru Tel S.A. holds licenses to operate SMR networks and has 32 800
MHz channels in Lima/Callao and 100 800 MHz channels among eight other cities.
On May 12, 1998, the Company completed the last part of this closing, and
acquired the Chilean assets of RMD Agencia Chile, consisting of its 800 MHz
channels: 20 channels in Santiago, 20 channels in Valparaiso/Vina del Mar, and
25 channels in Concepcion/Talcahuano.
The Company was awarded 40 nationwide channels of 800 MHz spectrum on June
9, 1998 in El Salvador. The Company paid $0.6 million in cash for the channels,
which have a 20 year term. In August 1998, the Company completed the
acquisition of a concession for 10 nationwide channels of 800 MHz spectrum in El
Salvador for approximately $0.3 million in cash. The acquisition of assets
included certain infrastructure and approximately 140 subscribers. In September
1998 the Company was awarded 65 nationwide channels of 800 MHz spectrum in El
Salvador. The Company paid approximately $2.0 million in cash for the channels,
which have a 20 year term. Also, in September 1998, the Company acquired a
concession for 30 nationwide channels of 800 MHz spectrum in El Salvador for
approximately $0.9 million in cash. The acquisition of assets also included
certain infrastructure and approximately 600 subscribers. The Company was
awarded a concession for 25 nationwide channels of 800 MHz spectrum in El
Salvador for approximately $10,000 in cash. The Company has entered into a
option agreement whereby a third party has the option to acquire the Company's
El Salvadorian subsidiary for a specified price.
Pending Acquisitions
. On October 15, 1998, the Company signed a purchase agreement for the
acquisition of certain Chilean assets, including a license for 20 800 MHz
channels in Santiago, certain infrastructure and subscribers for an
aggregate anticipated purchase price of $1.9 million. The Company is
currently waiting for final government approval for the transfer of the
assets to the Company before it can close the acquisition. The purchase
price was placed into escrow and is to be released to the seller upon
approval of the transfer by the Chilean Government.
. On October 22, 1998, the Company signed an agreement to purchase 100% of
the shares of a Chilean company having (i) 20 800 MHz channels in Santiago
and (ii) 200 800 MHz channels in various Chilean cities for an aggregate
anticipated purchase price of $700,000. The approval of the transfer of
this concession has been given, and this acquisition is expected to close
within 30 days.
57
<PAGE>
Each of the transactions described above is subject to (i) the completion
of the Company's financial, legal and regulatory due diligence; and (ii)
certain other conditions to closing, including the execution of definitive
documentation and the receipt of necessary governmental and regulatory
approvals. In addition, each transaction is subject to the approval of the
Company's board of directors (the "Board of Directors"). The Company cannot
predict the results of such due diligence, whether the Company will proceed with
all or any of such transactions following completion of its due diligence or
whether the Board of Directors will authorize the Company to consummate such
transactions. There can be no assurance that all or any of these transactions
will be consummated or that they will be consummated on the terms set forth in
this Prospectus.
Auctions
The Company has submitted a proposal to build out 40 nationwide 800 MHz
channels in the Chilean SMR concurso which was held in July 1997 (the "Chile
Concurso"). On October 29, 1997, the Company received written notice from the
Chilean Ministry of Transportation and Telecommunications (the "Chilean
Ministry") that its proposal had been accepted and awarded. Certain parties
appealed this award, however, such appeals were denied and the legal appeal
process has been exhausted. While the Company anticipates that the final award
will be made by the Chilean Ministry upon the Company's completion of the build-
out of the project as submitted, there can be no assurance that the Company will
be successful in obtaining any channels as a result of such proposal.
In addition, the Company may participate in other Latin American auctions,
none of which have been officially scheduled. If the Company participates in
such auctions, there can be no assurance that the Company will be successful in
obtaining any channels.
Other Developments
On May 13, 1999, at a meeting of the Board of Directors, structural changes
were made at both the Board of Directors and senior management levels of the
Company. At the board level, three members tendered their resignation and a new
member was elected to act as Chairman of the Board. At the senior management
level, the President and Chief Executive Officer and the General Manager of
Latin America, tendered their resignations. A new President and Chief Operating
Officer and a new General Manager of Latin America were appointed at the same
meeting. See "Management."
The Company was incorporated in Delaware on October 25, 1995. Its
principal executive offices are located at 1528 Wazee Street, Suite 200, Denver,
CO 80202, and its telephone number is (303) 405-0475.
58
<PAGE>
Channel Holdings
The table below sets forth the Company's channel holdings and subscriber
information in its Latin American markets.
<TABLE>
<CAPTION>
Total Subscribers as of Subscribers as of
POPs (mm) Channel Holdings March 31, 1999 March 31, 1998
- -------------------------- (1) (2)
<S> <C> <C> <C> <C>
Peru
Lima/Callao 7.5 176 7,137 9,094
Other 3.5 145 - -
---- ----- ------ ------
Total 11.0 321 7,137 9,094
---- ----- ------ ------
Ecuador
Guayaquil 1.9 150 2,290 3,763
Quito 1.4 150 1,475 -
Cuenca 0.2 40 - -
Other 0.5 25 - -
---- ----- ------ ------
Total 4.0 365 3,765 3,763
---- ----- ------ ------
Chile
Metropolitan Region of
Santiago 5.8 50 2,301 167
Other 1.7 275 - -
---- ----- ------ ------
Total 7.5 325 2,301 167
---- ----- ------ ------
El Salvador
Nationwide 5.8 170 701 -
---- ----- ------ ------
TOTAL (3) 28.3 1,181 13,904 13,024
==== ===== ====== ======
</TABLE>
- -------------------
(1) Represents the approximate number of people ("POPs") in the markets in
which the Company has channels.
(2) Channels are voice paths on which mobile communications are transmitted.
Channels are licensed per geographic area and, using analog technology,
each channel can generally serve up to 125 subscribers in a given area.
All of the Company's channels are in the 800 MHz spectrum except 20 in each
of Guayaquil and Quito which are in the 900 MHz spectrum.
(3) As of March 31, 1999 the Company also had channels and subscribers in the
United States that are under management agreements. The Company is in the
process of divesting its U.S. Operations. See "Business - Divestiture of
the United States Operations."
59
<PAGE>
Corporate Structure
The chart below sets forth the corporate ownership structure of the Company
and its Subsidiaries and the date each such entity was formed or acquired. Each
of the Company's Subsidiaries is wholly-owned, either directly or indirectly, by
the Company. Unless otherwise noted, each entity is 100% owned by its parent.
[CORPORATE STRUCTURE CHART APPEARS HERE]
Country-by-Country Operations
Overview
The Company currently has 1,181 channels in Peru, Ecuador, Chile and El
Salvador covering an aggregate of approximately 28.3 million POPs and, as of
March 31, 1999, provided service to 13,904 subscribers. The Company's Latin
American operations are coordinated through the Company's Latin American
headquarters in Miami, Florida.
Sales and Marketing
General. The Company focuses its sales and marketing efforts on businesses
that require reliable, cost-effective group communications solutions, a high
degree of mobility or that have multiple work locations. Such customers include,
but are not limited to, trucking concerns, bus companies, construction
companies, security firms, messenger service companies, sales and distribution
operations, repair operations, and utilities. In addition, the Company has been
successful in extending the reach of its SMR services to non-traditional users
such as financial institutions and other "white collar" organizations. The
Company markets its analog SMR services as a low cost, high quality, wireless
communications solution that enables businesses to lower their operating costs
and improve productivity by providing two-way, real-time group communications.
The Company's primary sales channel is a sales force of independent
representatives dedicated solely to the sale of the Company's analog SMR
service. In addition, the Company's analog SMR service is sold through
equipment dealers who have customer contacts and knowledge of the local market.
The independent sales representatives and equipment dealers are compensated by
commissions and other performance-based incentives.
Pricing Strategy. The Company's pricing strategy focuses on subscriber
growth and recurring revenues rather than on up-front equipment margins. The
Company's pricing strategy includes a fixed monthly network access fee and
unlimited airtime usage. The monthly network access and activation fees vary in
each Latin American market depending on the competition, economic environment
and availability of competing wireless communications solutions. In order to
satisfy local market demand, the Company also offers subscribers the option to
either (i) purchase; (ii) rent; or (iii) lease subscriber units with an option
to purchase the unit at the end of the service contract. In order to mitigate
the risk of inflation and currency devaluations, the Company's contracts specify
dollar prices payable in the local currency at the then prevailing exchange
rate.
Additional Programs and Products. The Company offers equipment maintenance
and insurance programs, which the Company self-insures, to its subscribers. The
Company also offers its subscribers ancillary products such as base stations,
antennae and other complementary products.
Operations and Systems. The Company has developed a subscriber management
system which consists of four databases: (i) a sales information database,
which provides sales tools to assist customer representatives and contains
information, including pricing and other terms and conditions; (ii) a
fulfillment database, which contains information regarding all orders-in-
process; (iii) a historical database, which contains information regarding all
closed orders; and (iv) a site maintenance database, which contains information
such as network operations site inventory, maintenance providers, antenna site
operators and contact names and phone numbers.
60
<PAGE>
Churn Management. The Company recognizes that managing subscriber churn is
an important factor in maximizing revenues and cash flow. In order to minimize
subscriber churn caused by subscribers voluntarily terminating service, the
Company has implemented a number of programs and seeks to ensure that its
service is high quality and its prices are competitive. The Company has
instituted a program requiring subscribers to enter into a service contract
having a term of at least one year which provides for penalties for early
termination. To reduce Company-initiated disconnections resulting from non-
payment, the Company (i) conducts thorough credit checks; and (ii) may require
subscribers to pay in advance and/or make a significant deposit with the
Company.
Peru
Country Overview. Peru currently has a population of over 24.3 million and
had an annual population growth rate of approximately 1.6% from 1992 through
1997. Approximately 70% of Peru's population lived in urban areas. In the
early 1990s, the Peruvian government implemented a number of programs designed
to improve the economy, including liberalizing trade and privatizing state-owned
enterprises. Peru's gross domestic product ("GDP") measured approximately $62
billion, equivalent to approximately $2,551 per capita and grew at a compound
annual growth rate of 8.1% from 1992 to 1997. Industry (including, mining,
manufacturing and construction) accounted for approximately 37% of Peru's GDP.
The lack of telecommunications infrastructure has left many Peruvian
businesses without any access to telephones and has created a demand for
alternative communications solutions. Demand by businesses for reliable
communications services is growing as the Peruvian government continues its
aggressive privatization plan and investment in infrastructure projects.
Currently, existing telephone service in Peru is not capable of serving this
demand. Peru's telephone density of 6.8 lines per 100 POPs was one of the
lowest number of lines per capita in any Latin American country with a publicly
traded telephone company.
The first licenses for SMR service were granted by the Peruvian government
in 1995 and, by early 1996, 11 companies had been awarded SMR licenses for an
aggregate of approximately 300 channels in Lima/Callao. Of the 11 companies,
the Company has acquired six. The Organization for Supervision of Private
Investments in Telecommunications ("OSIPTEL") is the governmental agency charged
with overseeing SMR operations.
Operating Overview. The Company operates in Peru through six indirect
wholly-owned subsidiaries: SMR Direct Peru, S.R.L. (formerly Mobil Line Peru,
S.A.); Pompano, S.R.L.; C-Comunica S.R.L.; Telecom Supply, S.R.L. (formerly
Beacon Supply Comunicaciones S.A.); Transnet del Peru, S.A; and Peru Tel S.A.
These companies hold an aggregate of 176 800 MHz channels in Lima/Callao and an
aggregate of 145 800 MHz channels in 11 other cities. The Company has
centralized the management and operation of its Peruvian SMR networks in SMR
Direct Peru, S.R.L. The Company has filed an application with the Peruvian
government seeking approval for the merger of its operating companies into a
single entity in order to consolidate its operations.
The Company is the largest SMR operator in Peru in terms of number of
channels and subscribers. As of March 31, 1999, the Company was operating 216
channels (154 of which it constructed and 62 of which were previously
constructed) and provided service to 7,137 subscribers through seven sites. The
Company's average monthly revenue per subscriber unit ("ARPU") (consisting of
fixed monthly network access fees and ancillary service revenue) for the year
ended December 31, 1998 in Peru is approximately $34.31.
Competition. The Company believes that its primary SMR competitor in Peru
is Nextel International which owns a majority share in a joint venture with
Motorola, Inc. ("Motorola") and a local Peruvian company (the "Nextel JV"). The
Company believes that the Nextel JV currently owns 130 SMR channels in
Lima/Callao and has approximately 3,000 analog subscribers. The Nextel JV
deployed an iDENtm network in Lima/Callao for the provision of ESMR service in
January 1999. There is another smaller analog SMR operator, CEMA
Comunicaciones, in Peru that competes with the Company. The Company's SMR
service also competes with the cellular and paging services offered to
businesses by Telefonica del Peru and TELE 2000, an affiliate of BellSouth
Corporation. The Company believes that the demand in Peru for high quality
telecommunications services will be
61
<PAGE>
able to accommodate both low cost analog SMR service as well as the more
expensive alternatives being offered by certain of the Company's competitors,
although there can be no assurance in this regard.
Regulatory and Legal Overview. In 1994, Peru established, by Ministerial
Resolution 412-94-MTC/15, a regulatory framework for the SMR industry. This
framework has been amended by Ministerial Resolution 373-97-MTC, published on
August 6, 1997. The Telecommunications Law passed by Supreme Decree No. 013-93-
TCC dated April 28, 1993 and the adjoining Regulation, approved by Supreme
Decree No. 06-94-TCC dated February 11, 1994 and modified by Supreme Decree 005-
98-MTC on March 28, 1998 and Supreme Decree 002-99-MTC on January 21, 1999, are
the source of Peruvian SMR regulations. Pursuant to the Telecommunications Law,
the Ministry is responsible for general oversight and regulation of the
telecommunications industry, and governmental entity, OSIPTEL, is responsible
for regulating the activities of companies holding public services concessions,
such as SMR concessions, as well as supervising the quality of services provided
to end users, and the fairness of tariffs. Each SMR concession sets forth
expansion, penetration and service quality mandates, each of which is monitored
by OSIPTEL. The Ministry has the authority to grant or revoke concessions,
permits and licenses for public telecommunication services.
Under Peruvian law, telecommunications concessions are subject to private
law and may not be modified, amended or terminated unilaterally by the Peruvian
government except as set forth in each concession. Telecommunications
concessions are granted for a maximum term of 20 years, and may be renewed
without limitation.
Seven hundred twenty channels have been reserved in each market in the 800
MHz frequency band for SMR use, including 535 channels for public service and
185 channels for private service. An applicant for a concession must indicate
the specific geographic area it expects the concession to cover.
The holders of concessions must submit a five-year Minimum Expansion Plan
(a "MEP") to the Ministry at the time of application for a concession. Each MEP
must outline the number of repeaters and subscribers the concession holder will
have loaded on its network by the end of each of the initial five years of
operation. In January of each year, the concession holder must file a report
with the Ministry and OSIPTEL indicating compliance with its MEP. MEPs may be
amended at the end of the first and second years of operation by petitioning
OSIPTEL and the Ministry. Each concession holder must post a performance bond
for the first year of the concession and pay an annual commercial exploitation
fee, an annual canon for the use of the spectrum, a fee to OSIPTEL for
supervision of the SMR system and a special contribution to the
Telecommunications Investment Fund (FiTEL). Concession holders must also
complete construction of their networks and commence operations within 12 months
of execution of a concession contract, otherwise the concession will be
canceled. The Company currently is not in compliance with certain minimum
subscriber loading requirements with respect to a portion of its channels in
Peru and with respect to the obligation of constructing and starting operations
in certain cities inside Peru. Failure to comply with such requirements may
subject the licenses relating to such channels to punitive measures. Requests
for amendment of such loading requirements and for a one-year extension of the
start-up deadline have been filed by the Company with the Peruvian Ministry of
Transportation, Communications, Housing and Construction; however, to date no
responses have been received. Based upon information currently available, the
Company is optimistic that these amendments will be approved; however, there can
be no assurance that the amendments received by the Company, if any, will be the
same as those applied for. The Company is also not in compliance with certain
terms of the concession agreements including, homologation of equipment
(certifying the equipment before entering Peru), site to site transmission of
signal (currently allowed only site to handset), unauthorized transfer and use
of channels between the Peruvian companies and unauthorized use of certain
frequencies granted. The Company has applied to correct the non-compliance
issues and is waiting on approval from the Ministry. The Company believes that
the applications will be approved and result only in minimal fines, if any;
however, there can be no assurance of such outcome.
Concessions may be transferred or assigned with the prior approval of the
Ministry. There are currently no restrictions on foreign ownership and
investment in Peru's telecommunications sector, except for broadcasting (public
TV and radio).
62
<PAGE>
Under current Peruvian law, SMR operators are permitted to provide
interconnection to the public switched telephone network.
By Supreme Decree 021-98-MTC and 020-98-MTC on August 5, 1998, the Peruvian
government has accelerated the end of Telefonica del Peru S.A.'s monopoly on
public telephone service and national and international long distance service.
The market for the provision of these services opened effective August 1, 1998.
New regulations governing the process for granting new telephone and long
distance licenses have recently been enacted. At this point in time, it is
unclear what the impact of this liberalization will have on the Company's
operations in Peru.
Ecuador
Country Overview. Ecuador currently has a population of approximately 12
million people and had an annual population growth rate of approximately 2.3%
from 1992 to 1997. Approximately 60% of Ecuador's population lived in urban
areas, 3.3 million of which reside in Guayaquil and Quito. Ecuador's GDP
measures approximately $19 billion, equivalent to $1,584 per capita and grew at
a compound annual growth rate of 8.5% from 1992 to 1997. Industry (including
mining, manufacturing and construction) accounts for approximately 36% of the
country's GDP.
The Ecuadorian operations are currently faced with a devaluing sucre and a
volatile political and economic situation. When the Company launched service in
Ecuador in 1997, the exchange rate was approximately 4,300 sucres to one U.S.
dollar. As of December 31, 1998, it was approximately 6,880 sucres to one U.S.
dollar and since year end, has fluctuated as high as 13,000 sucres per one U.S.
dollar. The devaluation has a direct impact on customer's ability to pay due to
the fact that the Company bills in U.S. dollars. The Company has been dealing
with this situation as proactively as possible and contacted the customer base
in early March 1999 to discuss the current billings of existing customers. The
Company believes that being proactive may keep more subscribers on the network
as initial customer reaction was positive. The declining sucre has recently
sparked a run on banks in Ecuador, causing the Ecuadorian government to impose
limits on withdrawals, and causing a number of banks, including Ecuador's
second-largest bank to close its doors. While the Company has not experienced
any difficulties due to the bank closures and limitations on withdrawals, there
can be no assurance that the Company will not experience such problems in the
future. The Company has been requiring the operating subsidiary in Ecuador to
send all excess funds to the U.S., thus, the Company does not believe that it
has a material amount of cash at stake. In addition, the country has been
hyperinflationary during the years in which the Company has been operating in
Ecuador. Ecuador has had a cumulative rate of inflation for the three years
ending December 31, 1997 of over 100%. The inflation rates for the years ended
December 31, 1996 and 1997 were 24.4% and 30.6%, respectively.
Ecuador's teledensity is approximately 7.5 telephone lines per 100 POPs,
far below the Latin American average and, in the last few years, budgetary
constraints have prevented EMETEL, the government-owned telephone company, from
making many service improvements. In August 1992, Ecuador opened the market for
wireless dispatch services to private investment and the government began
issuing SMR concessions in 1994.
Operating Overview. The Company operates in Ecuador through its wholly-
owned indirect subsidiaries Brunacci Compania Ltda., and Comovec S.A. which hold
(i) concession and frequency contracts for 150 channels in each of the cities of
Quito and Guayaquil; (ii) a concession and frequency contract for 40 channels in
the city of Cuenca; (iii) a concession and frequency contract for five channels
in each of the cities of Machala, Portoviejo/Manta and Quevdo; and (iv) a
concession for five channels in each of the cities of Salinas and Santo Domingo
de los Colorados. The Company has applied for (i) a concession and frequency
contract for 10 channels in the province of Manabi; (ii) a concession and
frequency contract for 30 channels in Quito; (iii) a concession and frequency
contract for 30 channels in Guayaquil; and (iv) a concession and frequency
contract for an additional five channels in Machala. The Company intends to
apply for frequency contracts for the five channels in each of Salinas and Santo
Domingo de los Colorados for which it holds a concession.
63
<PAGE>
The Company commenced service in Guayaquil in March 1997 and in Quito in
July 1997. As of March 31, 1999, the Company had constructed and was operating
an aggregate of 90 channels in such cities and provided service to 3,765
subscribers through four sites. The Company plans to construct and operate the
remaining 275 channels for which it holds frequency contracts in Quito and
Guayaquil as needed in order to meet subscriber demand. The Company's current
monthly ARPU in Ecuador is approximately $32.46.
Competition. The Company believes that the only other companies currently
providing SMR service in Ecuador are Multicom (Grupo Isaias and Motorola) which
has 190 channels and approximately 3,500 subscribers and Grupo Marconi which
currently has approximately 70 channels and approximately 1,000 subscribers and
Fleetcall (Monttcashire) which currently has approximately 240 channels and
approximately 2,100 subscribers. The Company also competes with cellular
services offered by CONECEL and OTECEL. See "Risk Factors - Competition,"
"Industry Overview" and "-Industry and Market Opportunity."
Regulatory and Legal Overview. The Superintendency of Telecommunications
(the "Superintendency"), was the governmental entity responsible for
administration of the SMR industry. In August 1995, the Ecuadorian government
created two new government entities, the Consejo Nacional de Telecomunicaciones
("CONATEL") and the Secretaria Nacional de Telecomunicaciones (the
"Secretariat") which, together with the Superintendency, administer and regulate
the country's telecommunications sector. The Superintendency continues to exist
with limited functions, including the supervision of SMR operators and
compliance with concession contracts.
SMR licenses and channels are granted in two stages. First, an applicant
is granted an SMR license, and then must apply for, and be granted, an SMR
frequency contract which enumerates the granted channels. Concessions have a
term of five years and may be renewed for similar five year periods without
limitation by submission of an application to the Secretariat. Under Ecuadorian
law, there are no minimum subscriber requirements.
Each frequency contract contains subscriber loading restrictions which
limit the number of subscribers the licensee is permitted to load onto its SMR
network. The minimum number of subscribers that the CONATEL will authorize for
loading onto a five channel system is 100 and the maximum number is generally
500. However, the Secretariat is empowered to permit the loading of a larger
number of subscribers if it is demonstrated that transmission quality and
service will not suffer.
The Secretariat may unilaterally revoke a concession which is transferred
by the original holder without CONATEL consent and failure to meet concession
requirements may result in the early termination of the concession or in the
imposition of penalties. Equity interests in the original concession holder may
be transferred upon notification to the Superintendency of Companies (the
Ecuadorian governmental agency responsible for supervising domestic corporations
and branches of foreign companies domiciled in Ecuador).
Current Ecuadorian telecommunications regulations do not permit SMR
operators to interconnect to the public switched telephone network.
Ecuadorian telecommunications regulations expressly allow for foreign
investment in the SMR industry. However, foreign investors are required to
register their investments with the Central Bank of Ecuador.
Chile
Country Overview. Chile has a population of approximately 14.7 million
and had an annual population growth rate of approximately 1.6% from 1992 to
1997. Approximately 84% of Chile's population live in urban areas, 5.8 million
of which reside in the greater metropolitan Santiago area. Twenty-four years of
market-led reforms have resulted in 14 years of uninterrupted economic growth,
which has averaged 13.6% per year from 1992 to 1997. In 1990, Chile emerged from
17 years of military government with an overall consensus about the general
parameters of economic management, and since then has experienced a rise in
productivity, an increase in domestic savings and a more efficient use of labor.
Industry (including mining, manufacturing and construction) accounts for
approximately 33% of the country's GDP.
64
<PAGE>
The telecommunications sector was privatized in 1989 when the sale of all
state-owned telecommunications companies was completed, and competition was
allowed in long distance telephone services. Teledensity in Chile is
approximately 18 lines per 100 POPs. The privatization of the telecommunications
sector paved the way for private investment in telecommunications services and
allowed for the introduction of the commercial SMR industry. Today, about 30
companies have been awarded SMR licenses. The Subtel (as defined) is not
currently planning to allocate any more frequencies to SMR use.
Operating Overview. The Company operates in Chile under the trade name
Centennial Radio Trunking de Chile through two wholly-owned subsidiaries,
Telecommunicaciones y Servicios, S.A. and Centennial Cayman Corp. Chile Ltda.,
which hold 50 800 MHz channels in the greater metropolitan region of Santiago,
55 800 MHz channels in Valparaiso/Vina del Mar region, 35 800 MHz channels in
Concepcion region and 185 800 MHz channels in 18 other cities. The Company has
received initial government approvals for the acquisition of a third wholly
owned subsidiary and certain other licenses, as well as a nationwide license
(800MHz) which contemplates 40 channels for the metropolitan region of Santiago,
20 channels in the Valparaiso region, 20 channels in the Talcahuano region and 1
channel in all other regions in the country. Final approvals are expected
during the next six months, although there can be no assurance that such
approvals will be granted.
The Company acquired its first operating company in Santiago in January
1998 and began providing service at that time. Following additional acquisitions
the Company initiated its formal service launch in August 1998. Upon final
approvals as described above, the Company will be the largest SMR operator in
Chile in terms of channel holdings. As of March 31, 1999, the Company provided
SMR service to 2,301 subscribers in Santiago from one site and had 20
constructed channels. The Company's monthly ARPU for the year ended March 31,
1999 in Chile is approximately $35.18. The Company plans to construct and
operate the remaining channels as needed in order to meet subscriber demand.
Competition. The Company's main competitors in Chile are Multicom Ltda.
(100%-owned by Motorola), Telecommunicaciones Gallyas S.A., and CTC-Startel S.A.
Assuming certain governmental approvals are given, these three companies will
have 70, 80 and 10 800 MHz channels and approximately 5,000, 8,000, and 1,900
subscribers in Santiago, respectively. There are several smaller SMR operators
in Chile. The Company also competes with cellular, PCS and paging services
provided by CTC-Startel and BellSouth. The Company believes that the demand for
high quality telecommunications services will be able to accommodate a wide
range of service offerings.
Regulatory and Legal Overview. The regulating entity for telecommunications
in Chile is the Chilean Ministry, which acts through the Subsecretary of
Telecommunications (the `Subtel'). The Chilean Ministry, acting through Subtel,
is responsible for general oversight and regulation of the telecommunications
industry, regulating the activities of companies holding public service
concessions, such as SMR concessions, as well as supervising the quality of
services provided to end users, and the fairness of tariffs.
Each SMR concession sets forth expansion, penetrations and service quality
mandates, each of which is monitored by the Subtel. The Chilean Ministry,
through a Decree Supreme, has the authority to grant, revoke or amend
concessions for public, intermediate and broadcasting services.
The holders of concessions must submit a technical proposal with each
application for a concession. Concession holders must initiate and complete
construction of their networks and commence operations within the time frames
set forth in their technical proposal. Failure to comply with the terms set
forth in a technical proposal can result in sanctions, including the
cancellation of the concession.
Concessions, which may only be granted to legal entities incorporated and
domiciled in Chile, are not limited as to their number, type of service or
geographical area. Therefore, it is possible to grant two or more concessions
for the provision of the same service in the same location, except where
technical limitations exist, such as in the case of mobile telephony, in which
case only two concessions may be granted for a single service area.
Telecommunications concessions are granted for a maximum term of 30 years, and
may be renewed for identical periods if so requested by the concessionaire which
has a legal preference to renew its concession.
65
<PAGE>
Concessions and permits cannot be assigned, transferred or leased without
the prior authorization of the Subtel, which cannot be denied without a
reasonable basis.
Chilean telecommunications law establishes the grounds upon which the
concessions or permits may be terminated by a decree of the Chilean Ministry or
a resolution of the Subtel. The grounds for termination include the following:
(a) expiration of the term of the concession; (b) dissolution of the holder of
the concession, or (c) noncompliance with the terms and conditions specified in
Chilean telecommunications law, the regulations enacted thereunder or the
concession itself. The holder of a concession may appeal against a decree
effecting such a termination if it believes that such decree is illegal.
There are currently no restrictions on foreign ownership and investment in
Chile's telecommunications sector, but the corporate entity holding the
concession must be incorporated and domiciled in Chile.
El Salvador
Country Overview. El Salvador has a population of approximately 5.8
million and has experienced an annual population growth rate of approximately
1.4% from 1992 to 1997. Approximately 50% of El Salvador's population live in
urban areas, 1.2 million of which reside in the greater San Salvador area. El
Salvador's gross domestic product ("GDP") measures approximately $11.2 billion,
equivalent to approximately $1,931 per capita. El Salvador experienced GDP
growth at an annual rate of 15.6% from 1992 to 1997. The spectrum awarded in
the 800 MHz and other frequency bands is not restrictive as to the types of
services that may be offered. To date, approximately 545 nationwide commercial
channels have been awarded to approximately twelve companies in the 800 MHz
band.
In spite of the government's efforts to modernize the telephone
infrastructure, the demand for communications services continues to grow at a
rapid rate in El Salvador. Thousands of individuals have been waiting for years
for phone service and teledensity stands at a meager 5.6 lines per 100 POPs.
Operating Overview. The Company operates in El Salvador through its wholly
owned subsidiary, Radio Trunking de El Salvador Ltda., and holds 170 nationwide
channels. Of these channels, 70 are contiguous, presenting a variety of
opportunities for the provision of telecommunications services.
The Company acquired its leading license position in El Salvador through
two acquisitions and by participating in a number of auctions. The Company
launched service in El Salvador in August 1998. The Company is currently the
largest SMR operator in El Salvador in terms of channel holdings. As of March
31, 1999, the Company provided SMR service to 701 subscribers in San Salvador
from 7 sites and 20 constructed channels. Monthly average revenue per unit for
the three months ended March 31, 1999 approximates $29. In the fourth quarter
of 1998, the Company made the determination that it would sell its El Salvador
assets. The Company is continuing to entertain offers for these assets and is
committed to sell this subsidiary.
Competition. Several small, local operators compete with the Company for
SMR customers in El Salvador. The Company also competes with cellular and paging
services provided by Telemovil and the state-owned phone company, Antel.
Regulatory and Legal Overview. The entities regulating El Salvador's
spectrum licenses are part of the Division Radioelectrico, which reports to the
President of the country. The Department of Authorizations grants permission to
use the licenses, and the Department of Technical Analysis of Frequencies is
responsible for spectrum planning and frequency allocation. The regulatory body
known as the Superintendency of Electricity and Telecommunications ("SIGET")
authorizes the spectrum allocation and is responsible for applications and
auctions, as well as for resolving license-related disputes. The new licenses
have been granted for a period of 20 years and the Company believes that the
licenses are renewable upon request. There are no revocation provisions in the
Company's concessions. The Company believes that it is in compliance with all
regulations and requirements under its licenses.
66
<PAGE>
Divestiture of the United States Operations
The Company previously offered analog SMR service in the United States.
The Company commenced operations in the United States in September 1996.
In August 1997, the Company's Board of Directors reached the conclusion
that the Company's wireless communications investment opportunities in Latin
America were more attractive than its opportunities in the United States. As a
result, the Board of Directors decided to sell the Company's United States SMR
operations and related assets (the "U.S. Operations") and focus the Company's
ongoing efforts solely in Latin America (the "Divestiture"). As of May 31,
1999, the Company had executed purchase agreements (the "Purchase Agreements")
to sell substantially all of the assets related to the Company's U.S. Operations
in each of the 20 MTAs in which it currently has operations.
The Purchase Agreements generally provide that the consideration for the
assets will consist of some combination of (i) cash; (ii) promissory notes; and
(iii) assumption of the FCC Debt incurred in connection with the FCC Auction.
The aggregate net cash proceeds to be received by the Company in connection with
the sale of the U.S. Operations (based on the Purchase Agreements) is expected
to be $5.5 million although there can be no assurance in this regard. The
transactions contemplated in the Purchase Agreements are subject to the receipt
of necessary regulatory approval. Among other things, the Company's SMR
licenses and related FCC Debt cannot be transferred or assumed until the FCC
consents to such transfer. FCC approval of these transfers has been received on
all but two purchasers.
During the period of time between the execution of each Purchase Agreement
and the receipt of FCC approval to transfer the SMR licenses and related FCC
Debt, the Company has entered into the Management Agreements with the purchasers
whereby the purchasers, subject to the Company's control, will be responsible
for all management aspects of the U.S. Operations being purchased, will be
obligated to reimburse the Company for all required payments under the FCC Debt,
and will receive most of the economic benefits of managing the U.S. Operations.
In connection with the Divestiture, the Company has determined that it is
necessary to write-down the value of the assets comprising the U.S. Operations.
See "Risk Factors - Historical and Anticipated Operating Losses; Negative Cash
from Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SMR Equipment and Network Design and Implementation
SMR Equipment. SMR equipment is comprised of infrastructure equipment
(repeaters, towers and associated equipment) and subscriber units. The primary
vendors of SMR equipment are Kenwood, Motorola, Ericsson, Inc., Uniden America
Corporation and E.F. Johnson. Motorola and Ericsson provide equipment which
uses a proprietary protocol while Uniden, Kenwood and E.F. Johnson provide
equipment which conforms to the Logic Trunked Radio ("LTR") standard, the
industry's only open protocol standard. SMR networks such as the Company's that
use LTR infrastructure equipment can use subscriber equipment from diverse
suppliers while SMR networks based on a proprietary protocol, such as Motorola
or Ericsson, can only use subscriber equipment based on the same proprietary
standard. The Company currently has equipment purchase arrangements with E.F.
Johnson and Motorola and also purchases equipment from other leading
manufacturers.
SMR Network Design and Expansion. The Company has established its networks
utilizing proven analog SMR equipment. The Company believes that analog
technology permits the Company to offer high quality SMR service at a relatively
low cost. The Company's analog SMR networks consist of multiple channels in a
single site linked together to form what is known as a trunked system, employing
one or more antennae and associated equipment. The Company secures a site for a
tower (often co-locating with other providers on existing sites), generally
through leasing the site, and then installs the necessary infrastructure
equipment. The Company deploys one to five high-powered sites per geographic
coverage area in its analog SMR networks. To optimize SMR network design and
location of sites, the Company has at its disposal state-of-the-art computer-
based Radio
67
<PAGE>
Frequency propagation tools. As of the date of this Prospectus, the Company had
20 sites with 366 channels in operation in Latin America. Each SMR network is
planned and constructed to meet a certain volume of subscriber traffic demand
within its geographic coverage area. When the Company initially establishes SMR
service in a given market it typically deploys a 10 channel trunking system
which represents an installed cost of approximately $150,000.
The Company currently deploys single site systems with a coverage radius
ranging from 15 to 30 miles, depending on the height of the antennae and the
topography of the market. Once a system is activated, the Company can begin
offering commercial services in the coverage area. The initial 10 channel
system can then be expanded up to 20 channels by adding additional repeaters to
the existing installation. Modular increments are usually done in blocks of
five channels. System expansions are done when system capacity is approached
and market demand is expected to exceed installed capacity.
The initial 10 channel trunked system can service, on average, 100
subscriber units per channel without any material service degradation. When the
system is expanded to 20 channels (full capacity), the system can provide
service to approximately 125 subscriber units per channel without material
service degradation. Repeater sharing efficiency is improved as more trunked
channels are added. LTR systems are expandable to a maximum of 20 channels,
each requiring its own repeater control manager. Once a system is fully
constructed, another system (of five to 20 channels) can be installed using the
same site and facilities.
Capacity Management. The Company closely monitors channel loading in order
to ensure high quality service. The primary limit on channel capacity is usage
during peak hours, which usually occurs around the middle of the business day.
Excess loading during the peak hours can result in service degradation in the
form of busy signals or interference. The Company believes that active
management of the network will result in maximizing the Company's revenue per
channel. In addition, while the Company believes, based on current customer
usage patterns, that its analog SMR channels could each service as many as 125
subscribers, it does not presently intend to add in excess of 100 subscribers
per channel in order to protect service quality.
Equipment Supply Relationships
In connection with the construction and deployment of its analog SMR
networks in the United States and Latin America, the Company has entered into
supply arrangements with leading infrastructure and subscriber unit vendors such
as E.F. Johnson and Motorola.
E.F. Johnson. The Company has secured an aggregate of $2.1 million of
vendor financing with E.F. Johnson. In June and August 1996, the Company
secured approximately $1.8 million in infrastructure equipment financing from
E.F. Johnson for use in constructing its United States analog SMR networks. On
June 2, 1997, E.F. Johnson assigned the Company's lease in respect of such
equipment to Boston Financial. In addition, in February 1997, the Company
secured approximately $500,000 in infrastructure equipment financing to
construct network facilities at additional site locations in the United States.
The amounts financed are payable monthly over a five year period and bear
interest at 12% per annum. Purchases made under this financing arrangement were
classified as capital leases payable. The majority of the capital leases have
been paid off in the divestiture of the U.S. Operations and the remaining will
also be paid off at closing of the remaining U.S. operations.
The Company entered into additional agreements with E.F. Johnson regarding
the purchase of infrastructure equipment and subscriber units. E.F. Johnson has
made available to the Company a $2.1 million credit line associated with the
purchase of infrastructure equipment for build-out in Chile. The amounts
financed will be payable quarterly over a one year period and no interest will
be charged. The Company has determined the market rate for this debt to be 14%.
The Company is required to make a down payment in the amount of 25% of the cost
of the purchased equipment pursuant to the agreement. As of March 31, 1999, the
Company owed approximately $517,000 on the new financing. The Company also
entered into a radio purchase agreement with E.F. Johnson to acquire 5,000
radios at a discounted price during 1998 and took delivery of 3,600 radios. The
Company is currently in discussions with E.F. Johnson regarding the remaining
1,400 radios.
68
<PAGE>
The Company also entered into a radio purchase agreement with Motorola to
acquire up to 10,000 radios during 1998 and took delivery of 8,325. The Company
is currently in discussions with Motorola regarding the remaining 1,675
radios.
Employees
As of March 31, 1999, the Company employed a total of 114 employees. In
the United States, the Company employed 9 employees. Through the Company's
Latin American subsidiaries, the Company employed 48 employees in Peru, 34
employees in Ecuador, 20 employees in Chile and 3 in El Salvador. The Company
is not a party to any collective bargaining agreements and the Company believes
its relationship with its employees is good.
Properties
The Company currently leases (i) 7,000 square feet for its principal
executive and administrative offices in Denver, Colorado and payments under such
lease are approximately $126,000 per year, of which the Company subleases 6,000
square feet for approximately $84,000 per year. The Company also currently
leases (i) 4,741 square feet of office space in Miami, Florida for its Latin
American operations of which the Company subleased 2,400 square feet, (ii) 523
square meters in Lima for its Peruvian operations, (iii) 343 square meters in
Guayquil and 139 square meters in Quito for its Ecuadorian operations, and (iv)
450 square meters in Santiago for its Chilean operations. In addition, the
Company has an aggregate of 7 leases for sites (3 in the United States and 4 in
Latin America). In connection with the Divestiture, the Company anticipates
transferring the United States site leases and is in the process of attempting
to sublease the remaining space in Miami, Florida.
Litigation
Maxon America, Inc. ("Maxon") filed suit against the Company on December
31, 1998 in the Platte County, Missouri Circuit Court demanding total damages of
approximately $1,700,000 based upon claims that the Company failed to meet its
contractual obligations under two purchase orders executed in 1996 and 1997.
The Company was served on February 18, 1999. The Company has retained counsel
to defend this action and to bring the Company's counterclaim for breach of
contract, breach of warranty and other possible claims under the Uniform
Commercial Code. The Company has removed the case to the United States District
Court for the Western District of Missouri, filed its answer and counterclaim,
and is in the process of quantifying the damages caused to the Company's
business due to Maxon's failure to deliver on time and its delivery of equipment
not merchantable.
69
<PAGE>
MANAGEMENT
Executive Officers, Key Employees and Directors
The executive officers, key employees and directors of the Company as of
May 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Positions
- ------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Steven C. Halstedt (4) 52 Chairman of the Board
Karl Maier 31 President and Chief Operating Officer
Barbara H. Vonderheid 43 Vice President - Business Development
Rafael Luces 43 Senior Vice President and General Manager - Latin America
Nanny Laverde 30 Controller
Stephen W. Schovee (1)(4) 39 Director
Robert F. McKenzie (3) 55 Director
William W. Sprague (1)(3) 41 Director
William D. Stanfill (2) 63 Director
Mark A. Leavitt (2) 40 Director
Bernard G. Dvorak (1)(4) 39 Director
</TABLE>
- --------------------
(1) Member of Finance Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Executive Committee
Steven C. Halstedt has been the Chairman of the Board of the Company since May
13, 1999. Previously, he was executive vice president and director of Daniels &
Associates, Inc., a private communications service company involved in cable
television system operations, from 1976 to 1981. Mr. Halstedt is chairman of
Verio Inc., a publicly traded company, and is currently a member of the Board of
Directors of V-I-A Internet, Inc., Formus Communications, Inc., WLL
International, Inc., Gabriel Communications, Inc. and ViViD Connections, Inc.
He is former chairman of the board of OneComm Corporation, PageAmerica Group,
Inc., and Orion Network Systems, Inc., all of which became publicly traded
telecommunications companies. He is a former member of the Board of Directors
of Cencom Cable Associates, Inc. and Comlinear Corporation. Mr. Halstedt co-
founded the Centennial Funds, a venture capital fund, in 1981. Mr. Halstedt
received a B.S. with distinction in Management Engineering from Worcester
Polytechnical Institute and an M.B.A. from the Amos Tuck School of Business
Administration at Dartmouth College.
Karl Maier has been President and Chief Operating Officer of the Company since
May 13, 1999. Prior to that he was Vice President - Finance and Secretary of
the Company since March 1998, Director of Finance from March 1997 to March 1998,
and Director of Business Planning from September 1996 to March 1997. From 1995
to 1996, Mr. Maier was a Vice President at Freyberg Hambros GmbH, an investment
banking firm in Frankfurt, Germany. From 1993 to 1995, Mr. Maier was Chief
Financial Officer of Berlin Cosmetics, a cosmetics manufacturer in Berlin,
Germany. From 1989 to 1993, Mr. Maier was an Assistant Vice President in the
First National Bank of Boston's Foreign Multinational Division. Mr. Maier
received his B.A. in History and German from Bowdoin College in 1989.
Barbara H. Vonderheid has been Vice President - Business Development of the
Company since February 1996. From January 1993 through January 1996, Ms.
Vonderheid was Vice President of Acquisitions at Alert Centre, Inc., a security
alarm company. From June 1990 until January 1993, Ms. Vonderheid was Assistant
General Counsel and Acquisitions Staff Counsel at Alert Centre, Inc. Ms.
Vonderheid received her B.A. from Colorado State University in Political Science
in 1977 and her J.D. from the University of Denver in 1986.
70
<PAGE>
Rafael Luces has been Senior Vice President - General Manager Latin America
since May 13, 1999. Prior to that date he was the Director of Operations -
Andean Region since from July 1998 to May 1999, and was Director of Sales and
Marketing - Latin America from August 1996 to July 1998. From 1994 to 1996, Mr.
Luces was Sales Marketing Manager for RMD. From 1990 to 1994, Mr. Luces was
Special Product Division Manager for Moore Business Forms. Mr. Luces received
his Bachelor in International Commerce from Universidad Simon Rodriguez in 1983.
Mr. Luces also speaks Spanish and Portuguese.
Nanny Laverde has been Controller of the Company since April 26, 1999. From
September 1996 to April 1999 she worked at Arthur Andersen in the audit
division. She received her B.S. in Accounting from the University of Colorado -
Denver in 1995. Ms. Laverde is a native of Colombia.
Stephen W. Schovee is a co-founder of the Company and has been a Director of the
Company since October 1995. Mr. Schovee is a Managing Member of the General
Partner of Telecom Partners L.P., and Telecom Partners II, L.P., venture
capital funds focused on early stage telecommunication services companies. Mr.
Schovee joined The Centennial Funds, a telecommunications-oriented venture
capital firm, in 1987 and became a general partner in 1991. In 1989, Mr.
Schovee co-founded OneComm, and served as its Chief Executive Officer from 1992
to 1995. Mr. Schovee is a director of Verio, Inc., Formus Communications, Inc.,
Product Partners, Inc., InfoBeat, Inc., Intergram Corporation and WLL
International, Inc.. Mr. Schovee received his B.S. in engineering from Bucknell
University in 1981 and his M.B.A. from The Wharton School in 1986.
Robert F. McKenzie has been a Director of the Company since December 1995. Mr.
McKenzie was a founder and a director of OneComm and was President and Chief
Operating Officer from 1990 to 1994. Currently, Mr. McKenzie serves on the
Executive Board of the University of Colorado Interdisciplinary
Telecommunications Program and is on the board of the Castle Tower Corporation
and WLL International, Inc. Mr. McKenzie received his B.S. in Business
Administration from the University of Colorado in 1966.
William W. Sprague has been a Director of the Company since December 1996 and is
co-founder and President of Crest International Holdings L.L.C., a private
equity fund. Prior to founding Crest International Holdings L.L.C., Mr. Sprague
was employed by Smith Barney Inc. where he was a Managing Director and the Head
of the MediaCom Group from November 1994 to February 1996 and Co-Head of the
Mergers and Acquisitions Group from April 1992 to November 1994. Mr. Sprague is
also a director of Ethan Allen, Inc., Orb Image, One-on-One Sports Radio, Inc.
and Communication Resources, Inc. Mr. Sprague received his B.A. in Political
Economy from Williams College in 1980 and his M.B.A. from The Wharton School in
1984.
William D. Stanfill has been a Director of the Company since October 1996 and is
a general partner of Trailhead Ventures, L.P., a venture capital fund. Mr.
Stanfill is also President of Larimer Venture Advisors, Inc., which manages a
$38 million fund-of-funds activity. In 1974, Mr. Stanfill co-founded the
investment advisory firm of Morrill, Stanfill and Co. Mr. Stanfill serves on
the advisory boards of several United States venture capital partnerships,
including: American Health Care Fund, Glenwood Ventures, O'Donnell and Masur,
Technology Partners West, The Woodlands Venture Fund, Utah Ventures, and Arizona
Growth Partners. Mr. Stanfill also serves on the advisory board of Euro
Venture, Geneva and on several non-profit boards including the University of
Denver's Social Science Foundation and the Colorado Outward Bound School. In
addition, Mr. Stanfill serves on the endowment committee of the University of
Denver. Mr. Stanfill received his B.A. from the University of Colorado in 1962.
Mark A. Leavitt has been a Director of the Company since October 1997. Since
August 1996, Mr. Leavitt has been a Managing Director and Head of the Media and
Telecommunications Investment Banking Group at Prudential Securities
Incorporated. Prior to joining Prudential Securities Incorporated, Mr. Leavitt
was at Oppenheimer & Co., Inc. for approximately ten years, where he headed the
Media and Communications Group. Mr. Leavitt received his A.B. in Economics from
Trinity College in 1980, and M.B.A. from the University of Chicago Graduate
School of Business in 1983.
Bernard G. Dvorak has been a Director of the Company since February 1998. From
February 9, 1998 to May 13, 1999, he was President and Chief Executive Officer
of the Company and prior to that was Chief Financial Officer
71
<PAGE>
of the Company since February 3, 1997. From 1989 to 1996, Mr. Dvorak was Chief
Financial Officer and one of the founders of UIH. Mr. Dvorak received his B.S.
in accounting from Ferris State University in 1981.
72
<PAGE>
EXECUTIVE COMPENSATION
The Company was formed on October 26, 1995 and the current executive
officers did not receive any compensation from the Company in any fiscal year
prior to fiscal year 1996. The following table provides a summary of
compensation for fiscal 1996, 1997 and 1998 with respect to the Chief Executive
Officer and the other most highly compensated officers of the Company whose
annual salary and bonus during the calendar year ended December 31, 1998
exceeded $100,000 (collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Name and Awards
ensation Year Salary Bonus Other Annual Securities Underlying All Other
Principal Position ---- --------- ---------- Compensation(1) Options (#) Composition
- ------------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bernard G. Dvorak (2) 1998 $218,981 $ - $1,320 250,000 $ 0
President and Chief 1997 160,417 50,000 2,082 250,000 0
Executive Officer
Fred A. Gallart 1998 169,063 34,609 0 - 0
Senior Vice President - 1997 144,792 81,250 0 212,000 0
Business Development and 1996 46,474 22,916 0 38,000 35,000(3)
General Manager - Latin
America
Barbara H. Vonderheid 1998 147,069 30,000 1,320 - 0
Vice President - 1997 100,000 50,000 2,028 95,000 0
Business Development 1996 70,890 41,500(4) 1,083 30,000 0
Karl Maier 1998 96,614 16,875 1,320 20,000 0
Vice President - Finance 1997 81,667 20,000 1,365 50,000 0
1996 23,333 5,833(4) 1,306 20,000 0
Rafael Luces 1998 96,800 6,605 0 - 0
Director of Operations - 1997 85,917 20,900 0 77,500 0
Andean Region 1996 61,384 23,588 0 22,500 0
Michael N. Simkin (5) 1998 143,828 - 220 - 25,000(3)
Chief Executive Officer 1997 105,000 50,000 1,132 500,000(6) 22,223(3)
and Director
</TABLE>
- --------------------------------
(1) Yearly parking fee.
(2) Mr. Dvorak was the Chief Financial Officer of the Company until February
9, 1998 at which time he became the President and Chief Executive Officer.
Mr. Dvorak resigned his employment with the Company effective May 13,
1999, although he was elected as a director of the Company on that date,
and continues to serve as a director.
(3) Consists of moving expenses.
(4) Ms. Vonderheid's bonus consisted of: $20,750 in cash and $20,750 in the
Company's Series B Preferred Stock. Mr. Maier's bonus consisted of :
$2,917 in cash and $2,916 in the Company's Series B Preferred Stock.
(5) Mr. Simkin's employment with the Company ended February 19, 1998.
(6) Mr. Simkin was granted 500,000 options during fiscal 1997, however, due to
his resignation, he vested in only 100,000 of such options.
73
<PAGE>
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock
options to the Named Officers during the fiscal year ended December 31,
1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential realizable value
Number of % of Total at assumed annual rates of
Securities Options stock price appreciation
Underlying Granted to Exercise or for option term (1)
Options Employees in Base Price Expiration --------------------------
Name Granted Fiscal Year ($/Share) Date 5% 10%
- ---- ---------- ------------ ----------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Bernard G. Dvorak 250,000 45% $1.45 3/19/08 $227,974 $577,732
Fred A. Gallart - - - - - -
Barbara H. Vonderheid - - - - - -
Michael N. Simkin (2) - - - - - -
Karl Maier 20,000 4% $1.45 3/19/08 $ 18,238 $46,219
Rafael Luces - - - - - -
- --------------------------------
</TABLE>
(1) The potential realizable value is calculated based on the term of the
option at the date of grant (10 years). It is calculated assuming that the
options are granted with exercise prices equal to fair market value and
that the fair market value of the Company's stock on the date of grant
appreciates at the indicated annual rate compounded annually for the entire
term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. The fair market value of
the Company's common stock on the date of grant of these options (March 19,
1998) was determined by the Company's Board of Directors to be $1.45 per
share, which was also the price of the Company's Series C Preferred Stock
sold in the Company's most recent round of equity financing. The Series C
Preferred round was consummated on October 3, 1997.
(2) Mr. Simkin's employment with the Company ended February 19, 1998.
74
<PAGE>
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information as to options exercised
during the fiscal year ended December 31, 1998 and as to unexercised options
held at the end of such fiscal year by the Named Officers.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised in-the-
Unexercised Options Money Options At Fiscal
at Fiscal Year-End Year-End (1)
------------------------------- ----------------------------
Shares
Acquired on
Name Exercise Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Bernard G. Dvorak - 58,275 441,725 $ - $ -
Fred Gallart - 52,384 197,616 - -
Barbara H. Vonderheid - 30,077 94,923 3,600 5,400
Karl Maier - 14,988 75,012 - -
Rafael Luces - 17,648 67,352 2,700 4,050
Michael N. Simkin (2) - 100,000 - - -
- ----------------------------
</TABLE>
(1) Based on the estimated fair market value of the Company's common stock as
of December 31, 1998, minus the per share exercise price, multiplied by the
number of shares underlying the option.
(2) Mr. Simkin's employment with the Company ended February 19, 1998.
Directors' Compensation
During the year ended December 31, 1998, except for Mr. Elsner, Mr.
McKenzie and Mr. Fullmer, who each received $1,000 in cash for each board of
directors meeting attended and $500 in cash for each telephonic board of
director meeting participated in, members of the Board of Directors did not
receive cash compensation for acting as members of the Board or Committees of
the Board, other than reimbursement for reasonable out-of-pocket expenses
incurred in connection with their attendance at meetings of the Board and its
committees. Currently, Mr. McKenzie and Mr. Dvorak are the only directors
entitled to receive cash compensation for attendance at board meetings.
Directors' Stock Options
From time to time the Board has granted options to purchase shares of
Common Stock to various members of the Board who are not officers of the Company
in consideration for their service as directors. For the year ended December
31, 1998 no options were granted to directors in consideration for serving on
the Board.
Employment Agreements
The Company currently has no employment agreements with any officer or
employee.
On November 17, 1997, the Company entered into an agreement (the "Rhodes
Agreement") with Jeff E. Rhodes, the former President of the Company, pursuant
to which, among other things, Mr. Rhodes resigned from his position as President
of the Company and from the Board of Directors of the Company and each of the
Company's Subsidiaries, but agreed to stay on as a part-time employee of the
Company for a period of six months for the purpose of providing assistance on
certain corporate development projects. Mr. Rhodes was paid a monthly salary of
$16,667 during this period. The Rhodes Agreement also provides for the immediate
vesting of 80% of
75
<PAGE>
Mr. Rhodes' unvested options, contains non-competition, non-solicitation and
confidentiality covenants on behalf of Mr. Rhodes, contains a limited right of
first refusal giving the Company the right to pursue certain business
opportunities identified by Mr. Rhodes, and contains mutual releases by Mr.
Rhodes and the Company.
On February 19, 1998, the Company entered into an agreement (the "Simkin
Agreement") with Michael N. Simkin, the former Chief Executive Officer of the
Company, pursuant to which, among other things, Mr. Simkin resigned from his
position as Chief Executive Officer of the Company and from the Board of
Directors of the Company and each of the Company's Subsidiaries. Mr. Simkin
received (i) a payment equal to six months salary, paid in one lump sum in the
amount of $105,000 and (ii) a relocation payment in the amount of $25,000. The
Simkin Agreement also provides for the immediate vesting of 20% of Mr. Simkin's
unvested options, contains non-competition, non-solicitation and confidentiality
covenants on Mr. Simkin's behalf, contains a no-change provision with regard to
a Promissory Note under which Mr. Simkin is obligated to pay to the Company
$72,500 on or before October 3, 1999, and contains mutual releases by Mr. Simkin
and the Company.
On May 31, 1999, the Company entered into an agreement (the "Gallart
Agreement") with Federico A. Gallart, the former Senior Vice President of the
Company, pursuant to which, among other things, Mr. Gallart resigned from his
position as Senior Vice President of the Company. Mr. Gallart received a
payment equal to $100,000, composed of (i) a bonus equal to 25% of Mr. Gallart's
annual salary ($42,500) for achieving certain goals in Lima, Peru, and (ii)
$57,500 as additional severance. In addition, Mr. Gallart is entitled to the
following compensation: (i) 25% of the accounts receivable collected on accounts
that are more than 60 days past due customer accounts in Peru and Ecuador for
the period ending May 31, 1999; (ii) 10% of the amount actual EBITDA exceeded
budgeted 1999 EBITDA for all Latin American operations for the months of March,
April and May 1999; and (iii) $24,397 representing 298.5 hours of vacation paid.
The Gallart Agreement also provides for the accelerated vesting of Mr. Gallart's
Stock Options. These options will continue to vest through December 31, 1999.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors in January 1996. A total of 1,250,000 shares of Common Stock
were originally authorized for issuance under the Option Plan. The Option Plan
was amended in February 1997 to authorize the Company to grant up to 1,488,000
shares of common stock and on October 3, 1997, the Board of Directors increased
the shares of Common Stock authorized for issuance under the Option Plan to
2,307,972 shares. At May 31, 1999, 2,032,228 shares of Common Stock were the
subject of outstanding stock options granted under the Option Plan and 295,744
shares remained available for future grants. The Board of Directors may suspend
or terminate the Option Plan at any time. Unless sooner terminated, the Option
Plan will terminate on the 10th anniversary of its adoption by the Board of
Directors.
The Option Plan provides for the grant of (i) options intended to qualify
as incentive stock options under the Internal Revenue Code of 1986 (as amended)
(the "Code") and (ii) nonstatutory stock options. Incentive stock options may
be granted only to employees of the Company and its Affiliates. Nonstatutory
options may be granted only to employees or consultants of the Company or its
Affiliates, or members of the Board of Directors of the Company.
The Option Plan is administered by the Board of Directors or a committee
appointed by the Board (the "Committee"). Subject to the terms of the Option
Plan, the Board of Directors or the Committee determines which of the eligible
persons shall be granted options and the types of options to be granted,
including the exercise price, the number of shares subject to the option and the
exercisability thereof.
The terms of options granted under the Option Plan may not exceed 10 years.
The exercise price of options granted under the Option Plan is determined by the
Board of Directors; provided that (i) the exercise price for an incentive stock
option cannot be less than 100% of the fair market value of the Common Stock on
the date of the option grant, and (ii) the exercise price for a nonstatutory
stock option cannot be less than 85% of the fair market value of the Common
Stock on the date of the option grant. Options granted under the Option Plan
vest at
76
<PAGE>
the rate specified in each individual option agreement. No option may be
transferred by the optionee other than by will or the laws of descent or
distribution or, in certain limited instances, pursuant to a qualified domestic
relations order; provided that an optionee may designate a beneficiary who may
exercise the option following the optionee's death. An optionee whose
relationship with the Company or any of its Affiliates ceases for any reason,
other than by death or permanent disability, may (to the extent that such
optionee was entitled to exercise the option on the date of the termination)
exercise options during the three month period following such cessation (unless
such options expire sooner by their terms) or in such longer period as may be
provided in the option agreement. If an optionee's relationship with the Company
or any of its Affiliates ceases due to death or disability, his or her options
may be exercised during the 12 month period following such cessation due to
disability and during the 18 month period following such cessation due to death
(unless in each case, the option sooner expires by its terms).
The Option Plan provides that no incentive stock option may be granted to
any person who, at the time of grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any of its Affiliates, unless the exercise price is at least 110% of the fair
market value of the stock subject to the option on the date of grant, and the
term of the option does not exceed five years from the date of the grant. To
the extent that the aggregate fair market value, determined at the date of grant
of the shares of Common Stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year (under
all such plans of the Company and its Affiliates), exceeds $100,000, such
options (or portion thereof) shall be treated as nonstatutory options.
Shares subject to options that expire or otherwise terminate without having
been exercised in full become available again for the grant of options under
the Option Plan.
Under the terms of the Option Plan, the Board of Directors or the Committee
has the authority to re-price options outstanding under the Option Plan and to
reduce the exercise price of such options. In addition, the Board of Directors
or the Committee may, with the consent of affected option holders, provide for
the cancellation of outstanding options and the substitution of new options
therefor. Such new options may be exercisable for the same or different number
of shares, and shall have an exercise price of not less than 50% of fair market
value of such shares in the case of nonstatutory options, or not less than 100%
of fair market value of such shares in the case of incentive stock options (or
110% of the fair market value of such shares in the case of incentive stock
options granted to a 10% stockholder).
The Option Plan provides that upon the occurrence of a dissolution,
liquidation, merger, consolidation, sale of substantially all of the assets of
the Company, or other similar corporate event as provided in the Option Plan,
the right to exercise under all outstanding options under the Option Plan will
be accelerated to permit the optionee to exercise such options in full prior to
such event.
Adjustment of Exercise Price of Outstanding Options
On October 3, 1997, the Board of Directors authorized the reduction of the
exercise price to $1.45 of the outstanding options held by certain employees and
directors granted under the Option Plan with an exercise price greater than
$1.45 (the "Qualified Options"). Each Qualified Option was amended and replaced
with a new option with an exercise price of $1.45 (the "New Options"). Each New
Option (i) automatically vested to the extent that the Qualified Option it
amended and replaced was vested; (ii) continues to vest upon each anniversary of
the Qualified Option; and (iii) has a term of 10 years from the date of the
grant of the New Option.
77
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June and July 1996, the Company issued a total of 352 shares of its
Series A Preferred for $25,000 per share. On November 22, 1996, the Company
issued 5,670,851 shares of its Series B Preferred for $3.65 per share.
Purchasers of these securities included Centennial Fund IV, L.P. ("Centennial
IV"), Centennial Fund V, L.P. ("Centennial V"), Crest Funding Partners, L.P.
("Crest Funding"), Crest SMR, L.L.C. ("Crest SMR"), Banc Boston Ventures
Incorporated ("Banc Boston Ventures"), Telecom Partners, L.P. ("Telecom
Partners"), and Trailhead Ventures, L.P. ("Trailhead Ventures"), each of which
is the beneficial owner of more than 5% of the Company's voting securities. See
"Item 12 - Security Ownership of Certain Beneficial Owners and Management."
On October 3, 1997, the Company consummated the Series C Offering with an
investor group led by the Company's existing stockholders (including Centennial
IV, Centennial V, Crest Funding, Crest SMR, Bank Boston Ventures, Telecom
Partners and Trailhead Ventures) and Prudential Securities Incorporated and its
affiliates (collectively, "PSI"). In connection therewith, the Company issued
an aggregate principal amount of approximately $11.1 million of Senior Notes
convertible into shares of the Company's Common Stock or shares of the Company's
Series C Preferred at an initial conversion price of $1.45.
In connection with these transactions, the Company, the purchasers of the
Series A Preferred, the Series B Preferred, the Senior Notes and the holders of
the Company's Common Stock, entered into a Stockholders Agreement (as amended to
the date hereof, the "Stockholders Agreement"). Pursuant to the Stockholders
Agreement, each of Centennial IV, Centennial V, Telecom Partners, Crest Funding
and PSI (so long as it holds 15% of the Company's Common Stock on a fully
diluted basis) is entitled to designate one director to the Company's board of
directors (in each case, so long as such person holds at least 5% of the
Company's Common Stock on a fully diluted basis). The total number of directors
is set at eleven, which cannot be changed without the consent of the parties to
the Stockholders Agreement. Under the terms of the Stockholders Agreement, any
holder of Senior Notes, Series Preferred or Common Stock issued upon conversion
of Senior Notes or Series Preferred that desires to transfer its securities,
must first offer to sell its securities to the Company and then to the other
holders of Series Preferred and Senior Notes, subject to exceptions for
transfers to affiliates or family members. In any private sale of 25% or more
of the total holdings of Series Preferred and Common Stock (in the aggregate)
held by Centennial IV and Centennial V (and their respective affiliates and
subsidiaries), such holders are obligated to offer the other holders of Senior
Notes or Series Preferred the opportunity to participate in such sale on a pro
rata basis. In addition, PSI is entitled to participate on a pro rata basis in
any private sale by holders of more than 25% of the shares of Series C Preferred
or Common Stock issued on the conversion of the Series C Preferred. The
restrictions on transfer in the Stockholders Agreement will terminate upon the
earlier of (i) any sale of Series Preferred, Senior Notes or Common Stock issued
upon the conversion of Series Preferred or Senior Notes pursuant to a registered
offering under the Securities Act of 1933, as amended (the "Securities Act") or
in a transaction pursuant to Rule 144 under the Securities Act; (ii) the
transfer of such securities pursuant to the transfer provisions in the
Stockholders Agreement; (iii) a Sale (as defined in the Stockholders Agreement)
of the Company; or (iv) closing of an underwritten public offering by the
Company, at a per share price paid by the public of at least $6 a share (subject
to adjustment for stock splits, stock dividends, reverse stock splits and
similar recapitalizations) and an aggregate price paid by the public of at least
$20 million.
The purchasers of the Senior Notes and the Series Preferred also received
certain registration rights in connection with their purchase of such
securities. At any time after the earlier of October 3, 2000 or the completion
of an initial public offering by the Company, the holders of at least 20% of the
Common Stock underlying the Series Preferred or otherwise held by the Series
Preferred holders party to the registration rights agreement with the Company
(subject to adjustment for stock splits, stock dividends, reverse stock splits
and similar recapitalizations) (the "Registrable Securities") may make four
demands that the Company register their Registrable Securities on Form S-1 under
the Securities Act. Two of the demand registrations are to be paid for by the
Company and two are to be paid for by the holders requesting registration. In
addition, the holders of Registrable Securities may request an unlimited number
of registrations on Form S-2 or Form S-3, which shall be paid for by the
Company. The holders also have piggyback registration rights so that if the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security
78
<PAGE>
holders, the Company is required to include the Registrable Securities requested
to be included in such registration, subject to certain cut backs required by
underwriters.
In addition to the registration rights granted to the holders of the Series
Preferred, PSI, so long as it holds at least 33% of the Registrable Securities
held by PSI on October 3, 1997, is entitled to two demand registrations which
are to be paid for by the Company (the "PSI Demand Right"). The PSI Demand
Right is exercisable at any time after 120 days following the date the Company
has completed a public offering of its equity securities.
Pursuant to a registration rights agreement (the "Senior Discount Notes
Registration Rights Agreement") among the Company and the purchasers of the
Senior Discount Notes, the Company agreed: (i) to file with the Commission on or
prior to the earlier to occur of (a) an offering of securities of the Company
pursuant to which the Company is thereafter subject to the reporting
requirements of the Exchange Act and (b) 300 days after the closing of the
Senior Discount Notes offering, a registration statement with respect to an
offer to exchange (the "Exchange Offer") the Senior Discount Notes for a new
issue of senior discount notes of the Company (the "New Notes") with terms
substantially identical to those of the Senior Discount Notes and (ii) to use
its best efforts to cause such registration statement to become effective within
60 days following the date of this filing. The Company has not currently
completed the registration process for the Exchange Offer and has incurred
approximately $56,000 in liquidated damages through March 31, 1999. The
liquidated damages are due and payable with the first interest payment on July
1, 2003.
The Company will be required under the terms of the Warrant Agreement with
the Purchasers of the Senior Discount Notes to (i) file and use its best efforts
to cause to become effective prior to the Exercise Commencement Date a shelf
registration statement (the "Warrant Shelf Registration Statement") with respect
to the Warrant Shares issuable upon the exercise of the Warrants and (ii) keep
the Warrant Shelf Registration Statement continuously effective until the
earlier of such time as the Warrants have been exercised and the expiration date
there of.
Holders of the Warrant Shares will also be entitled to piggyback
registration rights, subject to customary pro rata cut backs and to certain
registration rights of the Company's existing stockholders.
On July 1, 1997 the Company loaned Michael N. Simkin, the former Chief
Executive Officer of the Company, $162,056 to purchase 44,521 shares of the
Company's Series B Preferred (the "Simkin Loan"). In connection with the Series
C Offering, Mr. Simkin returned the shares of Series B Preferred previously
issued to him for cancellation and was issued 50,000 shares of Series C
Preferred at an issue price of $1.45 per share. In addition, the Simkin Loan
was terminated and replaced with a new loan having the following terms: (i) a
principal amount of $72,500, and (ii) a maturity date of October 3, 1999.
Interest is payable annually on the principal amount of this loan at 6.5% per
annum and is secured by a pledge of the purchased shares of Series C Preferred.
79
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the voting securities of the Company as of May 31, 1999 by (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Company's voting securities, (ii) each of the
Company's directors and executive officers, and (iii) all of the Company's
executive officers and directors as a group. See "Certain Relationships and
Related Transactions."
<TABLE>
<CAPTION>
Fully Diluted Common
Shares Upon Conversion(6)
-------------------------
Aggregate
Number of Principal Number
Shares of Number of Amount of of Shares
Number of Series A Shares of Convertible of Series Percentage
Shares of Preferred Series B Notes C Preferred of Voting
Beneficial Owner(1) Common Stock (2) Preferred(3) (4) (5) Number Stock
- --------------------------------- ------------ --------- ------------ ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Executive Officers and
Directors:
Bernard G. Dvorak (7)(8) -- -- 13,700 -- 5,685 174,918 0.50%
Barbara H. Vonderheid (7)(9) -- -- 5,685 -- 2,397 38,378 0.11%
Karl Maier (7)(10) -- -- 799 -- 500 23,622 0.07%
Rafael Luces (7)(11) -- -- -- -- -- 23,500 0.07%
Steven C. Halstedt (7) -- -- -- -- -- -- --
Mark A. Leavitt (7) -- -- -- -- -- -- --
Robert McKenzie (7)(12) 30,000 3 10,000 -- 26,756 118,171 0.34%
Stephen Schovee (7)(13) -- -- -- -- -- -- --
William Sprague (7)(14) -- -- -- -- -- -- --
William Stanfill (7)(15) -- -- -- -- -- -- --
All directors and executive 30,000 3 30,184 -- 35,338 471,422 1.34%
officers as a group (ten
persons)
5% Shareholders:
Centennial Fund IV, L.P. 1,638,000 175 274,000 -- 934,349 5,020,682 15.28%
(16)(17)(21)
Centennial Fund V, L.P. -- -- 2,391,787 -- 1,460,108 4,817,809 14.66%
(16)(18)(21)
Centennial Entrepreneurs Fund V, -- -- 73,973 -- 45,162 149,009 0.45%
L.P. (16)(19)(21)
Centennial Holdings, I, LLC. 95,381 10 43,157 -- 85,208 360,468 1.10%
(16)(20)(21)
Crest Funding Partners, L.P. -- -- 700,000 -- 294,813 1,277,505 3.89%
(22)
Crest SMR, LLC (22) -- -- 669,863 -- 282,122 1,222,507 3.72%
Banc Boston Ventures -- -- 821,918 -- 231,377 1,385,223 4.22%
Incorporated (23)
Telecom Partners, L.P. (24) 1,500,000 30 68,493 -- 850,384 2,800,311 8.52%
Trailhead Ventures, L.P. (25) -- 80 136,986 -- 356,953 1,492,657 4.54%
Prudential Securities -- -- -- -- 3,741,274 3,741,274 11.38%
Incorporated (26)
MGVF II Ltd. (27) -- 26 205,479 -- 182,673 777,738 2.37%
FG-CC (28) -- -- -- -- 41,570 41,570 0.13%
Merrill Lynch Global Allocation -- -- -- 10,000,000 -- 7,841,061 24.86%
Fund Inc. (29)
- --------------------------------
</TABLE>
(1) "Beneficial owner" means generally any person who, directly or indirectly,
has or shares voting power or investment power with respect to a security,
as well as the voting power of Common Stock subject to dividends on the
Series C Preferred to be issued within 60 days of such date and options
which were exercisable as of May 31, 1999, or which will become exercisable
within 60 days of such date, held by each individual or entity listed.
80
<PAGE>
(2) Each share of Series A Preferred is convertible into Common Stock at any
time in accordance with the following formula, subject to adjustment for
dilutive sales and corporate reorganizations:
(Number of Shares of Series A Preferred) x ($25,000)
----------------------------------------------------
$2.12
Holders of shares of Series A Preferred vote with the Series B Preferred,
the Series C Preferred, and the Common Stock on an as-converted basis and
also have certain separate voting rights in their capacity as holders of
Series A Preferred.
(3) Each share of Series B Preferred is convertible into Common Stock at any
time in accordance with the following formula, subject to adjustment for
dilutive sales and corporate reorganizations:
(Number of Shares of Series B Preferred) x ($3.65)
--------------------------------------------------
$2.60
Holders of shares of Series B Preferred vote with the Series A Preferred,
the Series C Preferred, and the Common Stock on an as-converted basis and
also have certain separate voting rights in their capacity as holders of
Series B Preferred.
(4) The Convertible Notes plus all accrued and unpaid interest thereon are
convertible at any time directly into Common Stock in accordance with the
following formula, subject to adjustment for dilutive sales and corporate
reorganizations.
(Outstanding principal of each Convertible Note plus all accrued and unpaid
---------------------------------------------------------------------------
interest thereon)
-----------------
$2.25
(5) Each share of Series C Preferred is convertible into Common Stock at any
time in accordance with the following formula, subject to adjustment for
dilutive sales and corporate reorganizations:
(Number of Shares of Series C Preferred) x ($1.45)
--------------------------------------------------
$1.45
Holders of shares of Series C Preferred vote with the Series A Preferred,
the Series B Preferred, and the Common Stock on an as-converted basis and
also have certain separate voting rights in their capacity as holders of
Series C Preferred.
(6) Assumes (a) conversion into Common Stock of all outstanding shares of
Series A Preferred, Series B Preferred, Series C Preferred and of the
Convertible Notes, (b) exercise of all options which were exercisable on
May 31, 1999 or will become exercisable within 60 days after that date.
Does not include the accrued and unpaid interest component of the
Convertible Notes.
(7) The address of all of the officers and directors of the Company is c/o
Centennial Communications Corp., 1528 Wazee Street, Suite 200, Denver, CO
80202.
(8) The fully diluted number of shares includes 150,000 shares of Common Stock
issuable upon exercise of stock options exercisable within 60 days of May
31, 1999.
(9) The fully diluted number of shares includes 28,000 shares of Common Stock
issuable upon exercise of stock options exercisable within 60 days of May
31, 1999.
(10) The fully diluted number of shares includes 22,000 shares of Common Stock
issuable upon exercise of stock options exercisable within 60 days of May
31, 1999.
(11) The fully diluted number of shares includes 23,500 shares of Common Stock
issuable upon exercise of stock options exercisable within 60 days of May
31, 1999.
(12) The fully diluted number of shares includes 12,000 shares of Common Stock
issuable upon exercise of stock options exercisable within 60 days of May
31, 1999.
(13) Excludes Shares owned directly by Telecom Partners. Mr. Schovee may be
deemed to have an indirect pecuniary interest in an intermediate portion of
the Shares beneficially owned by Telecom Partners. Mr. Schovee disclaims
beneficial ownership of these Shares within the meaning of Rule 13d-3 under
the Exchange Act.
81
<PAGE>
(14) Excludes Shares owned directly by Crest Funding and Crest SMR. Mr. Sprague
may be deemed to have an indirect pecuniary interest in an intermediate
portion of the Shares beneficially owned by Crest Funding and Crest SMR.
Mr. Sprague disclaims beneficial ownership of these Shares within the
meaning of Rule 13d-3 under the Exchange Act.
(15) Excludes Shares owned directly by Trailhead Ventures. Mr. Stanfill may be
deemed to have an indirect pecuniary interest in an intermediate portion of
the Shares beneficially owned by Trailhead Ventures. Mr. Stanfill
disclaims beneficial ownership of these Shares within the meaning of Rule
13d-3 under the Exchange Act.
(16) The address of Centennial Fund IV, L.P., Centennial Fund V, L.P.,
Centennial Entrepreneurs Fund V, L.P., and Centennial Holdings I, LLC is
1428 15th Street, Denver, CO 80202.
(17) Centennial IV is the direct beneficial owner of the shares of Common
Stock, Series A Preferred, Series B Preferred and Series C Preferred (the
"Shares") set forth beside its name in the table above. Centennial
Holdings IV, L.P. ("Holdings IV"), the sole General Partner of Centennial
IV, may be deemed to indirectly beneficially own Centennial IV's Shares and
Senior Notes by virtue of its authority to make decisions regarding the
voting and disposition of Shares beneficially owned by Centennial IV.
Steven C. Halstedt, Jeffrey H. Schutz, Adam Goldman, Donald H. Parsons,
Jr., and David C. Hull, Jr. are the sole general partners of Holdings IV
(the "Individual Partners"). By virtue of the relationships described
above and their roles with Centennial IV and Holdings IV, each of the
Individual Partners may be deemed to control Centennial IV and Holdings IV
and may be deemed to possess indirect beneficial ownership of the Shares
held by Centennial IV. However, none of the Individual Partners, acting
alone, has voting or investment power with respect to the Shares directly
beneficially held by Centennial IV and, as a result, each Individual
Partner disclaims beneficial ownership of the Shares and Senior Notes held
by Centennial IV.
(18) Centennial V is the direct beneficial owner of the shares of Series B
Preferred and Series C Preferred set forth beside its name in the table
above. Centennial Holdings V, L.P ("Holdings V") is the sole general
partner of Centennial V and may be deemed to indirectly beneficially own
Centennial V's Shares by virtue of its authority to make decisions
regarding the voting and disposition of Shares beneficially owned by
Centennial V. The Individual Partners are also the sole general partners
of Holdings V. By virtue of the relationships described above and their
roles with Centennial V and Holdings V, each of the Individual Partners may
be deemed to control Centennial V and Holdings V and may be deemed to
possess indirect beneficial ownership of the Shares held by Centennial V.
However, none of the Individual Partners, acting alone, has voting or
investment power with respect to the Shares directly beneficially held by
Centennial V and, as a result, each Individual Partner disclaims beneficial
ownership of the held by Centennial V.
(19) Centennial Entrepreneurs Fund V, L.P. ("Entrepreneurs Fund") is the direct
beneficial owner of the shares of Series B Preferred and Series C Preferred
set forth beside its name in the able above. Holdings V is the sole
general partner of Entrepreneurs Fund and may be deemed to indirectly
beneficially own Entrepreneurs Fund's Shares by virtue of its authority to
make decisions regarding the voting and disposition of Shares beneficially
owned by Entrepreneurs Fund. The Individual Partners are also the sole
general partners of Holdings V. By virtue of the relationships described
above and their roles with Entrepreneurs Fund and Holdings V, each of the
Individual Partners may be deemed to control Entrepreneurs Fund and
Holdings V and may be deemed to possess indirect beneficial ownership of
the Shares held by Entrepreneurs Fund. However, none of the Individual
Partners, acting alone, has voting or investment power with respect to the
Shares directly beneficially held by Entrepreneurs Fund, and as a result,
each Individual Partner disclaims beneficial ownership of the Shares and
Senior Notes held by Entrepreneurs Fund.
(20) Each of the Individual Partners are officers and stockholders, and two of
the Individual Partners are directors, of Centennial Holdings, I, L.L.C.
("Holdings I"). Holdings I is the Managing Member and each of the
Individual Partners is a unit holder of Centennial Holdings I, L.L.C.
("Holdings LLC"). Holdings I is the direct beneficial owner of 95,381
shares of Common Stock and 10 shares of Series A Preferred (which are
convertible into 60,586 shares of Common Stock) and 85,208 of Series C
Preferred (which are convertible into 85,208 shares of Common Stock).
Holdings LLC is the direct beneficial owner of shares of Series B Preferred
and Series C Preferred. By virtue of being the Managing Member of Holdings
LLC, Holdings I may be deemed to beneficially own Shares directly
beneficially owned by Holdings LLC. However, no Individual Partner or
other person, acting alone, has voting or investment power with respect to
any of the Shares directly held by either Holdings I or Holdings LLC, and,
as a result, each Individual Partner disclaims beneficial ownership of the
Shares held by Holdings I and Holdings LLC.
(21) Centennial V, Holdings V, the Individual Partners, Entrepreneurs Fund,
Holdings I and Holdings LLC each disclaim beneficial ownership of the
Shares held by Centennial IV. Centennial IV, Holdings IV, the Individual
Partners, Entrepreneurs Fund, Holdings I and Holdings LLC each disclaim
beneficial ownership of the Shares held by Centennial V. Centennial V,
Centennial IV, Holdings IV, the Individual Partners, Holdings I and
Holdings LLC each disclaim beneficial ownership of the Shares held by
Entrepreneurs Fund. Centennial V, Holdings V, Centennial IV, Holdings IV,
the Individual Partners, Entrepreneurs Fund and Holdings LLC each disclaim
beneficial ownership of the Shares held by Holdings I Centennial V,
Holdings V, Centennial IV, Holdings IV, the Individual Partners and
Entrepreneurs Fund each disclaim beneficial ownership of the Shares held by
Holdings LLC.
(22) The address of Crest Funding Partners, L.P. and Crest SMR, L.L.C. is 320
Park Avenue, 17th Floor, New York, NY 10022.
(23) The address of BancBoston Ventures Incorporated is 100 Federal St., 32nd
Floor, Boston, MA 02110.
(24) The address of Telecom Partners, L.P. is 6400 South Fidler's Green Circle,
Suite 720, Englewood, CO 80111.
(25) The address of Trailhead Ventures, L.P. is 730 17th Street, Suite 690,
Denver, CO 80202.
(26) The address of Prudential Securities Incorporated is One New York Plaza,
18th Floor, New York, NY 10292.
82
<PAGE>
(27) The address of MGVF II Ltd. is 910 Travis, Suite 2400, Houston, TX
77002.
(28) FG-CC is the direct beneficial owner of the Series C Preferred Shares set
forth beside its name in the table above. FG-CC is a Florida general
partnership, the address of FG-CC is c/o FG II, 72 Cummings Point Road,
Stamford, CT 06902.
(29) Included in the fully diluted number of shares is 2,560,000 shares issuable
upon exercise of the warrants issued in connection with the Senior Discount
Notes. The address of Merrill Lynch Global Allocation Fund, Inc. is 800
Scudders Mill Road, Plainsboro, New Jersey, 08536.
83
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
terms of the capital stock contained in the Company's Amended and Restated
Certificate of Incorporation.
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 40,000,000 shares of common stock, par value $0.01 per share
("Common Stock") and 17,400,000 shares of preferred stock, par value $0.01 per
share ("Preferred Stock"). Of the Preferred Stock, 352 shares are designated
Series A Preferred, 6,399,648 shares are designated Series B Preferred and
11,000,000 shares are designated Series C Preferred. As of the date of this
Prospectus, the Company had outstanding 3,502,750 shares of Common Stock, 352
shares of Series A Preferred, 5,735,251 shares of Series B Preferred and
9,316,424 shares of Series C Preferred. The Common Stock and options to acquire
Common Stock held by certain members of the Company's management issued as part
of the Option Plan ("Management Stock") are subject to certain buy-back
provisions and rights of first refusal in favor of the Company. See "Management
- - 1996 Stock Option Plan." The Series Preferred and Common Stock issuable upon
conversion of the Series Preferred are subject to a right of first offer in
favor of the Company.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive ratably the dividends, if any,
that may be declared from time to time by the Company's Board of Directors out
of funds legally available for such dividends. The Company has never declared a
dividend and does not anticipate doing so in the foreseeable future. In the
event of a liquidation, dissolution or winding up of the Company, subject to the
prior rights of the Preferred Stock, the holders of Common Stock are entitled to
share ratably in any remaining assets after payment of liabilities. Holders of
Common Stock have no cumulative voting rights and there are no conversion rights
or redemption or sinking fund provisions with respect to such stock. The Common
Stock is not subject to any future calls or assessments. All of the outstanding
shares of Common Stock are fully paid and nonassessable. The initial purchasers
of the Common Stock (Telecom Partners, Centennial IV, Holdings Inc., Jeff E.
Rhodes, William Elsner and Robert McKenzie), each have rights of first refusal
which give them an option to acquire an amount of Common Stock or rights to
acquire Common Stock being offered by the Company equal to their percentage
ownership of all outstanding Common Stock.
Preferred Stock
Conversion. Each share of Series Preferred is initially convertible, at
any time at the holder's option, into a number of shares of Common Stock
determined by dividing the original issue price of such share by the conversion
price in effect at the time of conversion. The original issue price of each
share of Series A Preferred was $25,000 and the conversion price currently is
$2.12. The original issue price of the Series B Preferred was $3.65 and the
conversion price currently is $2.60. The original issue price and the current
conversion price of each share of Series C Preferred is $1.45. The conversion
price of each share of Series Preferred is subject to "institutional weighted-
average" anti-dilution adjustments upon the issuance of Common Stock and certain
Common Stock equivalents at prices less than the conversion price of the Series
Preferred then in effect. The Series Preferred also is subject to proportional
adjustment upon the occurrence of certain events, including stock dividends,
stock splits and similar transactions affecting the Common Stock. If the Company
issues any shares of Common Stock (or Common Stock equivalents) for a price less
than $1.93 per share (the "Per Share Issue Price"), the conversion price of the
Series C Preferred may be reduced to a price which is the lesser of (i) 25% of
the Per Share Issue Price (but in no event less than $1.25 per share) and (ii)
the conversion price obtained by application of the "institutional weighted
average" anti-dilution adjustments set forth in the Company's Amended and
Restated Certificate of Incorporation. This latter conversion price adjustment
is applicable only to the succeeding $7,500,000 in aggregate equity capital
raised by the Company after October 3, 1997. The Company may require the
conversion of all of the outstanding shares of Series Preferred at any time upon
or following the closing of a firm commitment underwritten public offering at a
per share price paid by the public of at least $6 per share (as adjusted for
stock splits, stock dividends, reverse stock splits and similar
recapitalizations) and an aggregate price paid by the public of at least $20
million (a "qualified public offering").
84
<PAGE>
Liquidation. Upon the liquidation, dissolution or winding up of the
Company (a "Liquidation Event"), before any distribution or payment is made upon
any other stock of the Company, each holder of Series C Preferred is entitled to
receive the greater of (i) the amount such holder would have received in such
Liquidation Event on an as-converted to Common Stock basis and (ii) $1.45 (plus
all declared, accrued and unpaid dividends) per share of Series C Preferred.
Upon the occurrence of a Liquidation Event, each holder of Series B Preferred in
priority to the holders of Series A Preferred and any other stock of the Company
other than the Series C Preferred ("Junior Securities") is entitled to receive
the greater of (i) the amount such holder would have received in such
Liquidation Event on an as-converted to Common Stock basis and (ii) $3.65 (plus
all declared, accrued and unpaid dividends) per share of Series B Preferred.
Upon the occurrence of a Liquidation Event, each holder of Series A Preferred in
priority to the holders of Junior Securities is entitled to receive the greater
of (i) the amount such holder would have received in such Liquidation Event on
an as-converted to Common Stock basis and (ii) $25,000 (plus all declared,
accrued and unpaid dividends) per share of Series A Preferred. At the option of
the holders of at least a majority of the outstanding shares of Series
Preferred, each of the following will be deemed a Liquidation Event: (i) the
sale or transfer of more than 50% of the assets of the Company (excluding the
Company's U.S. Operations); (ii) any sale or issuance of capital stock in a
single or series of related transactions by the Company or any holder thereof
which results in a change of more than 50% of the voting control of the Company;
or (iii) any merger, consolidation or other corporate reorganization which
results in a change of more than 50% of the voting control of the Company or its
successor.
Voting. The holders of Series Preferred are entitled to vote as a single
class with the holders of the Company's Common Stock on all matters to be voted
on by the stockholders of the Company. Each holder is entitled to the number of
votes equal to the number of shares of Common Stock into which its Series
Preferred may be converted at the time the vote is taken. Under the terms of
the Stockholders Agreement, each of the following stockholders has the right to
elect one director, so long as such stockholder holds at least 5% of the
Company's Common Stock on a fully diluted basis: Centennial IV, Centennial V,
Telecom Partners, Crest Funding, the holders of Series A Preferred (voting as a
single class) and the Series C Preferred (voting as a single class). PSI shall
also have the right to designate one director so long as it owns at least 15% of
the Common Stock represented by the Series C Preferred. Five additional
directors will be designated by the Company's Board of Directors.
Dividends. Dividends on each share of Series C Preferred accrue on a daily
basis at a rate per annum of 12% on the liquidation value (equal to $1.45) of
each such share from and including the date of issuance until the earlier of the
date (i) that the liquidation value of such share is paid in full or (ii) that
such share is converted into a share of Common Stock. Dividends on the Series C
Preferred are (i) cumulative; (ii) payable on April 30 and October 31 of each
year; and (iii) at the option of the Company, are payable in cash or by the
issuance of additional shares of Series C Preferred (based on an issue price of
$1.45 per share). The Indenture restricts the ability of the Company to pay cash
dividends on the Series C Preferred. If a "qualified public offering" occurs
during the Effective Period, (x) no further dividends accrue on the shares of
Series C Preferred except when and as declared by the Board of Directors; (y)
any accrued but unpaid dividends on the shares of Series C Preferred are deemed
waived; and (z) each holder of shares of Series C Preferred is required to
return all previously paid dividends in respect of such shares to the Company.
No dividends shall be payable on shares of Series A Preferred, Series B
Preferred or Junior Securities until all accrued but unpaid dividends due in
respect of the shares of Series C Preferred have been paid. The holders of
Series B Preferred are entitled, prior to the holders of Series A Preferred and
the holders of Junior Securities, to any dividends when and as declared by the
Board of Directors out of funds legally available. The holders of Series A
Preferred are entitled, prior to the holders of Junior Securities, to any
dividends when and as declared by the Board of Directors out of funds legally
available.
Preemptive Rights. In the event the Company chooses to issue equity
securities (other than certain issuances of stock to employees of the Company
and to unaffiliated entities for non-cash consideration), the Company is
obligated to offer each holder of Series B Preferred Stock or Series C Preferred
the right to purchase a pro rata portion, on an as-converted to Common Stock
basis, of 75% of such securities on the same terms offered others, and to offer
to each holder of Series A Preferred, the right to purchase a pro rata portion,
on an as-converted to Common Stock basis, of 50% of such securities on the same
terms offered to others.
Redemption. On or after January 31, 2006, at the option of the holders
holding at least 5% of the outstanding shares of Series C Preferred, the Company
is obligated to redeem shares of Series C Preferred tendered to the Company at a
redemption price currently equal to $1.45 per share plus all declared, accrued
and unpaid dividends. The Company is only required to redeem shares of Series C
Preferred on four occasions in each 12-
85
<PAGE>
month period. The Company is obligated to redeem the Series A Preferred and the
Series B Preferred annually in one-third increments beginning on March 1, 2006,
at a redemption price currently equal to $25,000 for each share of Series A
Preferred and $3.65 for each share of Series B Preferred, plus all declared,
accrued and unpaid dividends. The number of shares of any series of Series
Preferred to be redeemed from each holder shall be determined proportionally by
comparing the number of such shares then held by each holder of that series of
Series Preferred (adjusted to include shares of such series of Series Preferred
previously converted by such holder) to the total number of such shares then
being redeemed by the Company. The holders of Series Preferred shall have an
opportunity to convert any or all of the redeemable shares of Series Preferred
to Common Stock prior to each scheduled annual redemption.
Restrictions and Limitations. In addition to any vote required by law, the
consent of the holders of a majority of each of the Series A Preferred and
Series B Preferred and the consent of the holders of 75% of the Series C
Preferred then outstanding is required for the Company to take certain actions
including (i) the issuance of additional equity securities or debt containing
equity features senior to or on a parity with the Series Preferred; (ii) an
increase in the number of shares of Common Stock reserved for employees or the
issuance of Management Stock in excess of 15% of the Company's fully-diluted
Common Stock on July 31, 1996 (in the case of the approval of the Series A
Preferred), 10% of the Company's fully-diluted Common Stock on November 22, 1996
(in the case of the Series B Preferred) and 9% of the Company's fully-diluted
Common Stock on October 3, 1997 (in the case of the Series C Preferred); (iii)
the repurchase of any equity securities other than the Series Preferred or in
connection with the termination of employment; and (iv) the conduct of a
business other than wireless communications and ancillary activities. The
consent of the holders of a majority of the shares of the Series A Preferred,
the consent of at least 70% of the shares of the Series B Preferred then
outstanding and the consent of at least 75% of the shares of Series C Preferred
then outstanding is required to approve mergers, consolidations,
recapitalizations, liquidations and sales of substantial assets of the Company
and certain transactions with Affiliates. The consent of the holders of at
least 70% of the shares of the Series B Preferred then outstanding and the
consent of at least 75% of the shares of Series C Preferred then outstanding is
required to approve the commencement by the Company of a case, proceeding or
other action under any law relating to a bankruptcy, insolvency or relief of
debtors or seeking an appointment of a receiver, trustee, custodian or any other
similar Person for the Company. In addition, the Company may not take any
action which would adversely alter or change any of the rights, preferences or
privileges of any series of Series Preferred without the consent of the holders
of a majority of the Series A Preferred, the consent of at least 75% of the
Series B Preferred then outstanding and the consent of at least 75% of the
shares of Series C Preferred then outstanding, respectively.
The Company has also entered into certain affirmative covenants with the
holders of the Series Preferred, including, but not limited to, maintenance of
the Company's corporate existence and assets, compliance with laws and
agreements, payment of taxes and other obligations.
Delaware Anti-Takeover Statute
Section 203 of the Delaware General Corporation Law (the "Delaware
Statute") applies to Delaware corporations with a class of voting stock listed
on a national securities exchange, authorized for quotation on an inter-dealer
quotation system, or held of record by 2000 or more Persons, and restricts
transactions that may be entered into by such a corporation and certain of its
stockholders. The Delaware Statute provides, in essence, that a stockholder
acquiring more than 15% of the outstanding voting shares of a corporation
subject to the Delaware Statute (an "Interested Stockholder") but less than 85%
of such shares may not engage in certain "Business Combinations" with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date the
corporation's board of directors approved either the Business Combination or the
transaction in which the stockholder became an Interested Stockholder or (ii)
the Business Combination is approved by the corporation's board of directors and
authorized by a vote of at least 66 2/3% of the outstanding voting stock of the
corporation not owned by the Interested Stockholder. The Company has elected
not to be governed by the provisions of Section 203 of the Delaware Statute.
Limitation on Directors' Liability under Delaware Law
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. Generally, the duty of care requires that, when acting on behalf of the
corporation, directors must exercise an
86
<PAGE>
informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
could be accountable to corporations and their stockholders for monetary damages
for conduct that does not satisfy their duty of care. Although Delaware law does
not change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Company's
Certificate of Incorporation limits the liability of the Company's directors to
the Company and its stockholders to the fullest extent permitted by Delaware
law. The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders.
Other Securities
As of May 31, 1999, the Company had issued and outstanding options
exercisable with respect to 2,012,228 shares of Common Stock issued under the
Company's Option Plan described in "Management - 1996 Stock Option Plan." As of
May 31, 1999, other than these employee stock options, the Common Stock, the
Series Preferred, the Private Notes, the Initial Warrants and the Convertible
Notes, the Company had no outstanding options, warrants or similar rights to
acquire any securities convertible into or exchangeable for, any indebtedness,
Common Stock or Preferred Stock of the Company.
87
<PAGE>
DESCRIPTION OF NOTES
General
Except as otherwise indicated below, the following summary applies to both
the Private Notes and the Exchange Notes. As used herein, the term "Notes"
means the Private Notes and the Exchange Notes, unless otherwise indicated.
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Private Notes, except that the Exchange
Notes will be registered under the Securities Act, and therefore such Exchange
Notes will not be subject to certain transfer restrictions and registration
rights applicable to the Private Notes. See "The Exchange Offer."
The Notes are issued pursuant to an Indenture dated as of January 15, 1998
(the "Indenture") between the Company and State Street Bank and Trust Company,
as trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
the material provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. Copies of the Indenture and
Notes Registration Rights Agreement are available without charge from the
Company or the Trustee as set forth under " - Additional Information." The
definitions of certain terms used in the following summary are set forth below
under " - Certain Definitions." For purposes of this "Description of Notes,"
the term "Company" refers only to Centennial Communications Corp. and not to any
of its Subsidiaries.
Ranking
The Notes rank senior in right of payment to all subordinated Indebtedness
(as defined) of the Company incurred in the future, if any. The Notes rank pari
passu in right of payment with all unsubordinated Indebtedness of the Company
incurred in the future, if any. The Notes are secured by a pledge of (i) 100%
of the Capital Stock of SMR Direct USA, Inc. and all future domestic direct
Restricted Subsidiaries of the Company and (ii) 100% of the Capital Stock (other
than Excluded Stock) of each of the Cayman Entities and 100% of the Capital
Stock (other than Excluded Stock) of all future foreign direct Restricted
Subsidiaries of the Company. Holders of additional secured Indebtedness of the
Company will have claims that are effectively prior to the claims of the Holders
of the Notes with respect to the assets securing such Indebtedness.
The Company is a holding company with substantially all of its operations
conducted through its Subsidiaries. Accordingly, the Company's cash flow and,
consequently, its ability to service its debt (including the Notes), is
dependent on the cash flow of its Subsidiaries and the payment of funds by those
Subsidiaries in the form of dividends, distributions or otherwise. The Notes
are structurally subordinated to all Indebtedness and other liabilities and
commitments (including trade payables) of the Company's Subsidiaries. Any right
of the Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the Holders of the
Notes to participate in those assets) will be subordinated to the claims of that
Subsidiary's creditors. As of March 31, 1999, the Notes were structurally
subordinated to the Company's approximately $1.6 million of Indebtedness and
other liabilities of the Company's Subsidiaries (excluding inter-company
payables to the Company). In addition, under the Indenture, the Company's
Subsidiaries are permitted to incur Vendor Indebtedness and Acquired Debt the
terms of which may restrict the ability of the Company's Subsidiaries to pay
dividends to the Company. See " - Certain Covenants - Incurrence of
Indebtedness and Issuance of Preferred Stock." Thus, the ability of the Company
to meet the Obligations under the Indenture and the Notes may be restricted by
the terms of such Indebtedness. See "Risk Factors - Substantial Leverage;
Ability to Service Indebtedness."
88
<PAGE>
Security
The Company entered into a pledge agreement (the "Pledge Agreement")
providing for the pledge by the Company to State Street Bank and Trust Company,
as collateral agent (in such capacity, the "Collateral Agent"), for the benefit
of the Holders of the Notes and the holders of the Convertible Notes of (i) 100%
of the Capital Stock of SMR Direct USA, Inc. and all future domestic direct
Restricted Subsidiaries of the Company and (ii) 100% of the Capital Stock (other
than Excluded Stock) of each of the Cayman Entities and 100% of the Capital
Stock (other than Excluded Stock) of all future foreign direct Restricted
Subsidiaries of the Company (the "Pledged Collateral"). Pursuant to the
definition of Excluded Stock, the Company has pledged approximately 66% of the
total outstanding Capital Stock of each of the Cayman Entities. Such pledges
secure the payment and performance when due of all of the Obligations of the
Company under the Indenture and the Notes, as well as any Obligations of the
Company under a Convertible Note Purchase Agreement (the "Convertible Note
Purchase Agreement") and the Convertible Notes as provided in the Pledge
Agreement. The rights of the holders of the Convertible Notes under the Pledge
Agreement are subordinated to the rights of the Holders of the Notes. On the
occurrence of a Triggering Event, the holders of the Convertible Notes will not
have any further rights under the Pledge Agreement.
So long as no Event of Default shall have occurred and be continuing and,
subject to certain terms and conditions in the Indenture and the Pledge
Agreement, the Company is entitled to receive all cash dividends, interest and
other payments made upon or with respect to the Pledged Collateral and to
exercise any voting and other consensual rights pertaining to the Pledged
Collateral. Upon the occurrence and during the continuance of an Event of
Default, (i) all rights of the Company to exercise such voting or other
consensual rights shall cease, and all such rights shall become vested in the
Collateral Agent, which, to the extent permitted by law, shall have the right to
exercise such voting and other consensual rights at the written direction of the
Majority Noteholders, (ii) all rights of the Company to receive all cash
dividends, interest and other payments made upon or with respect to the pledged
collateral will cease and such cash dividends, interest and other payments will
be paid to the Collateral Agent and (iii) the Collateral Agent may, at the
written direction of the Majority Noteholders, sell the pledged collateral or
any part thereof in accordance with the terms of the Pledge Agreement. All
funds distributed under the Pledge Agreement and received by the Collateral
Agent for the benefit of the Holders of the Notes and the holders of the
Convertible Notes will be distributed by the Collateral Agent in accordance with
the provisions of the Pledge Agreement.
Under the terms of the Pledge Agreement, the Collateral Agent will
determine the circumstances and manner in which the Pledged Collateral shall be
disposed of, including, but not limited to, the determination of whether to
release all or any portion of the Pledged Collateral from the Liens created by
the Pledge Agreement and whether to foreclose on the Pledged Collateral
following the occurrence and continuance of an Event of Default. Moreover, upon
the full and final payment and performance of all obligations of the Company
under the Indenture, the Notes, the Convertible Note Purchase Agreement and the
Convertible Notes, the Pledge Agreement shall terminate and the Pledged
Collateral shall be released. In addition, in the event that the Capital Stock
of any Subsidiary of the Company is sold and the Net Proceeds are applied in
accordance with the terms of the covenant entitled "Asset Sales," the Collateral
Agent shall release the Liens in favor of the Collateral Agent in the assets
sold; provided, that the Collateral Agent shall have received from the Company
an Officers' Certificate that such Net Proceeds have been or will be so applied.
Principal Maturity and Interest
The Notes consist of $40 million in aggregate principal amount at maturity
($20.4 million of initial Accreted Value as of January 15, 1998 that will fully
accrete to the face amount on December 31, 2002). The Notes will mature on
January 1, 2005. No interest will accrue on the Notes until January 1, 2003 (the
"Full Accretion Date"), but the Accreted Value will accrete (representing the
amortization of original issue discount) between the date of original issuance
and such date, on a semi-annual bond equivalent basis using a 360-day year
comprised of twelve 30-day months such that the Accreted Value shall be equal to
the full principal amount of the Notes on the Full Accretion Date. The initial
Accreted Value per $1,000 principal amount of Notes was $511.03 (representing
the original purchase price). Beginning on January 1, 2003, interest on the
Notes will accrue at the rate of 14% per annum and will be payable in cash semi-
annually on January 1 and July 1, commencing on July 1, 2003 to holders of
record on the immediately preceding December 15 and May 15. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the Full Accretion Date.
89
<PAGE>
Interest will be computed on the basis of a 360-day year comprised of twelve 30-
day months. The Notes will be payable both as to principal and interest at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders of Notes; provided that all payments with
respect to Notes the Holders of which have given wire transfer instructions to
the Company will be required to be made by wire transfer of same day funds to
the accounts specified by the Holders thereof. Until otherwise designated by the
Company, its office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes have been and will be issued only in
registered form, without coupons, and in denominations of $1,000 and integral
multiples thereof.
Optional Redemption
The Notes will not be redeemable at the Company's option prior to January
1, 2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on January 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
2003........................................................... 114.00%
2004........................................................... 107.00%
</TABLE>
The Notes are redeemable at 100% of the principal amount on January 1,
2005. Notwithstanding the foregoing, at any time on or before January 1, 2001,
the Company may, on any one or more occasions, redeem up to a maximum of 25% in
aggregate principal amount at maturity of Notes at a redemption price equal to
114% of the Accreted Value thereof (determined at the redemption date), plus
accrued and unpaid Liquidated Damages, if any, to the date of redemption, with
the net cash proceeds received by the Company after the date of the Indenture
from the issuance and sale of its Qualified Capital Stock in a public or private
offering to the extent that such net cash proceeds have been, and continue to
be, designated as Designated Equity Proceeds to be used for such purpose as
provided in the definition thereof; provided that at least 75% aggregate
principal amount at maturity of the Notes remain outstanding immediately after
the occurrence of each such redemption; provided, further, that with respect to
any private offering of Qualified Capital Stock of the Company to an Affiliate
of the Company (or to any Person who would be an Affiliate of the Company upon
consummation of any such offering), such Qualified Capital Stock shall be issued
and sold at a price no lower than (i) the price at which the Qualified Capital
Stock is being sold to Persons that are not Affiliates of the Company in such
offering if such Persons are purchasing a majority of the Qualified Capital
Stock being sold in such offering or (ii) in all other cases, the fair market
value thereof, as evidenced by an independent investment banking firm of
national standing delivered to the Trustee and provided, further, that such
redemption shall occur within 60 days of the date of the closing of any such
public or private offering.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided,
however, that no Notes of $1,000 in principal amount at maturity or less shall
be redeemed in part. Notices of redemption shall be mailed by first class mail
at least 30 but not more than 60 days before the redemption date to each Holder
of Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on
the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption (or, if such
redemption date is prior to the Full Accretion Date, the Notes, or any portion
of them called for redemption, cease to accrete).
90
<PAGE>
Mandatory Redemption
Except as set forth below under " - Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash (the
"Change of Control Payment") equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon, to the date of repurchase (or if such Change of Control Offer is
consummated prior to the Full Accretion Date, 101% of the Accreted Value thereof
on the date of repurchase plus accrued and unpaid Liquidated Damages, if any).
Within 20 days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount (or, if prior to the Full Accretion Date, the
Accreted Value) of Notes or portions thereof being purchased by the Company.
The Paying Agent will promptly mail to each Holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount at maturity of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
The sale, lease, transfer, conveyance or other disposition (that is not for
security purposes) of any of the assets of the Company's U.S. Operations or the
sale of all of the Capital Stock of the Company's wholly-owned Subsidiary, SMR
Direct USA, Inc. in conjunction with the sale of the Company's U.S. Operations,
will not constitute a Change of Control. Although there is a developing body of
case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a Holder of Notes to require the Company to repurchase such Notes as
a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of the Company and its Restricted Subsidiaries taken as a
whole to another Person or group may be uncertain.
Future Vendor Indebtedness and Acquired Debt may restrict the Company's
current and future Subsidiaries from paying any dividends or making any other
distribution to the Company. Thus, in the event a Change of Control occurs, the
Company could seek the consent of its Subsidiaries' lenders under such Vendor
Indebtedness or Acquired Debt, as applicable, to the purchase of the Notes or
could attempt to refinance the borrowings that contain such restrictions. If
the Company did not obtain such a consent or repay such borrowings,
91
<PAGE>
the Company would likely not have the financial resources to purchase Notes and
the Subsidiaries would be restricted in paying dividends to the Company for the
purpose of such purchase. In addition, any future Credit Facility may prohibit
the Company from purchasing any Notes prior to its maturity, and may also
provide that certain change of control events with respect to the Company would
constitute a default thereunder. In the event a Change of Control occurs at a
time when the Company is prohibited from purchasing Notes, the Company could
seek the consent of its lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company did not
obtain such consent or repay such borrowings, the Company would remain
prohibited from purchasing Notes. In such event, the Company would be required
to seek to refinance the Notes or such other borrowings, and there can be no
assurance that the Company would be able to consummate any such refinancing. See
"Risk Factors - Substantial Leverage; Ability to Service Indebtedness." The
failure of the Company to make a Change of Control Offer and purchase all Notes
validly tendered and not withdrawn would constitute an Event of Default.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 80% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash and/or Cash Equivalents; provided that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the Company
or such Restricted Subsidiary from further liability and (y) any securities,
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are, within 30 days, converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision. The
Company shall not be required to comply with the foregoing sentence to the
extent an Asset Sale consists solely of the sale or other disposition of
obsolete or damaged equipment; provided that any cash received by the Company in
connection with any such sale or disposition shall be applied in accordance with
the second paragraph of this covenant.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay
Indebtedness under a Credit Facility (and to correspondingly reduce commitments
with respect thereto in the case of revolving borrowings) or (b) to the
acquisition of a controlling interest in another Permitted Business or the
making of a capital expenditure or the acquisition of other long-term assets, in
each case, in a Permitted Business. Pending the final application of any such
Net Proceeds, the Company may temporarily reduce Indebtedness under any Credit
Facility or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the Accreted Value thereof, plus
accrued and unpaid Liquidated Damages, if any, thereon, to the date of purchase
(if such offer is prior to the Full Accretion Date) or 100% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon, to the date of purchase (if such offer is on or after the Full
Accretion Date), in accordance with the procedures set forth in the Indenture.
To the extent that the Accreted Value or the aggregate principal amount, as the
case may be, of Notes tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the Accreted Value or the aggregate principal amount, as
the case may be, of Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
92
<PAGE>
Certain Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's or
any of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or such Restricted Subsidiary or dividends or
distributions payable to the Company or any Wholly Owned Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent of
the Company; (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes, except a payment of interest or principal, or
premium, if any, at Stated Maturity; or (iv) make any Restricted Investment (all
such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness (other than Permitted Debt)
pursuant to the Debt to Cash Flow Ratio test set forth in the first paragraph of
the covenant described below under the caption "-Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments declared or made after the date of Indenture (other
than Restricted Payments permitted by clauses (ii), (iii) or (iv) of the
following paragraph) shall not exceed, at the date of determination, the sum of
(i) 50% to the Company's Consolidated Net Income for the period (taken as one
accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of the Company's most recently ended
full fiscal quarter for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, minus 100% of such deficit), plus (ii) an amount equal to
the net cash proceeds received by the Company after the date of the Indenture
from the issuance and sale of its Qualified Capital Stock to the extent such net
cash proceeds have been, and continue to be, designated as Designated Equity
Proceeds to be added to the cumulative amount calculated pursuant to this clause
(c) as provided in the definition thereof, plus (iii) an amount equal to the net
cash proceeds received by the Company from the sale of Disqualified Stock or
debt securities of the Company that have been converted into Equity Interests
(other than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of the Company and other than Disqualified
Stock or convertible debt securities that have been converted into Disqualified
Stock), plus (iv) to the extent that any Restricted Investment that was made
after the date of the Indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (1) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (2) the
initial amount of such Restricted Investment, plus (v) 50% of any dividends
received by the Company or any Wholly Owned Restricted Subsidiary of the Company
after the date of the Indenture from an Unrestricted Subsidiary of the Company,
to the extent that such dividends were not otherwise included in Consolidated
Net Income of the Company for such period; provided that no cash proceeds
received by the Company from the issuance or sale of any Equity Interests issued
by the Company will be counted in determining the amount available for
Restricted Payments under this clause (c) to the extent such proceeds were used
to redeem, repurchase, retire or acquire any Equity Interests of the Company
pursuant to clause (ii) of the next succeeding paragraph.
The foregoing provisions will not prohibit the following Restricted
Payments: (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture; (ii) the redemption, repurchase,
retirement, defeasance or other acquisition of any subordinated Indebtedness or
Equity Interests of the Company in exchange for, or out of the net
93
<PAGE>
cash proceeds (other than any such net cash proceeds that constitute Designated
Equity Proceeds) of the substantially concurrent sale (other than to a
Subsidiary of the Company) of, other Equity Interests of the Company (other than
any Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Restricted Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; (v) the payment of cash (in lieu of the issuance
of fractional shares of Common Stock) to holders of Warrants at the time of
exercise of such Warrants as required by the terms of the Warrant Agreement (as
defined); provided that the aggregate amount of such payments shall not exceed
$100,000; (vi) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted Subsidiary of the
Company held by (A) any member of the Company's (or any of its Restricted
Subsidiaries') management or Board of Directors or (B) any consultant to the
Company (or any of its Restricted Subsidiaries), in each case, pursuant to any
management equity subscription agreement, stock option agreement or other
similar agreement; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$250,000 in any twelve-month period and no Default or Event of Default shall
have occurred and be continuing immediately after such transaction; and (vii)
the payment of amounts in respect of Equity Interests by any Restricted
Subsidiary organized as a partnership, limited liability company or comparable
entity necessary for the holders of such Equity Interests to pay taxes in
respect of the Net Income of such Restricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $5 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
The Board of Directors may designate any Restricted Subsidiary (other than
any Subsidiary of the Company that owns all or a material portion of the assets
owned by the Company or any Subsidiary of the Company on the date of the
Indenture) to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) and issue shares of Disqualified Stock if (a) the Company's Debt to Cash
Flow Ratio at the time of incurrence of such Indebtedness or the issuance of
such Disqualified Stock, after giving pro forma effect to such incurrence or
issuance as of such date and to the use of proceeds therefrom as if the same had
occurred at the beginning of the most recently ended four full fiscal quarter
period of the Company for which internal financial statements are available,
would have been no greater than 4 to 1 and (b) the Company's Fixed Charge
Coverage Ratio at the time of incurrence of such Indebtedness or the issuance of
such Disqualified Stock, after giving pro forma effect to such incurrence or
issuance as of such date and to the use of proceeds therefrom as if the same had
occurred at the
94
<PAGE>
beginning of the most recently ended four full fiscal quarter periods of the
Company for which internal financial statements are available, would have been
at least 2.75 to 1; provided that after the occurrence of the Triggering Event
(as defined), the Convertible Notes shall not be included as Indebtedness for
purposes of calculating the Company's Debt to Cash Flow Ratio or the Company's
Fixed Charge Coverage Ratio.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness under Credit Facilities;
provided that the aggregate principal amount of all Indebtedness (with
outstanding letters of credit being deemed to have a principal amount equal to
the maximum potential liability of the Company thereunder) outstanding under all
Credit Facilities after giving effect to such incurrence, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace any
other Indebtedness incurred pursuant to this clause (i), does not exceed an
amount equal to $10 million less the aggregate amount of all Net Proceeds of
Asset Sales that have been applied since the date of the Indenture to repay
Indebtedness under Credit Facilities (or any such Permitted Refinancing
Indebtedness) pursuant to the covenant described above under the caption " -
Repurchase at the Option of Holders - Asset Sales;"
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by (A)
the Notes issued as part of the Initial Offering on January 15, 1998 and (B)
additional Notes issued pursuant to the exercise of the option granted to the
Initial Purchasers in an amount not to exceed $20 million in aggregate principal
amount at maturity (which option has expired);
(iv) the incurrence by the Company or any Restricted Subsidiary of the
Company of up to $25 million in aggregate principal amount of Vendor
Indebtedness; provided that (A) to the extent such Vendor Indebtedness is
incurred for any purpose other than financing the cost of subscriber units, the
aggregate principal amount (or accreted value, as applicable) of such Vendor
Indebtedness does not exceed, as of the date of incurrence thereof, the lesser
of 75% of (1) the fair market value (as determined in good faith by the Board of
Directors and set forth in an Officer's Certificate delivered to the Trustee) of
the assets purchased with the proceeds of such Vendor Indebtedness and (2) the
cost of such assets and (B) to the extent such Vendor Indebtedness is incurred
to finance the cost of subscriber units, the aggregate principal amount (or
accreted value, as applicable) of such Vendor Indebtedness does not exceed, as
of the date of incurrence thereof, the lesser of 100% of the fair market value
of such subscriber units (as determined in good faith by the Board of Directors
and set forth in an Officers' Certificate delivered to the Trustee) and the cost
of such subscriber units;
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Restricted
Subsidiary; provided that such Indebtedness was incurred by the prior owner of
such assets or such Subsidiary prior to such acquisition by the Company and was
not incurred in connection with, or in contemplation of, such acquisition by the
Company; and provided further that the principal amount (or accreted value, as
applicable) of such Indebtedness, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (v), does not exceed the amount equal to (A) $8
million less (B) the principal amount (or accreted value, as applicable) of
Indebtedness outstanding pursuant to clause (vi) below at any time outstanding;
(vi) the incurrence by the Company of Indebtedness represented by Company
Notes incurred substantially simultaneously with, and for the purpose of
financing all or any part of the purchase price or cost of any acquisition of
assets or a new Restricted Subsidiary; provided that the principal amount (or
accreted value, as applicable) of such Indebtedness, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (vi), does not exceed the amount
equal to (A) $8 million less (B) the principal amount (or accreted value, as
applicable) of Indebtedness outstanding pursuant to clause (v) above;
(vii) the incurrence by the Company of Indebtedness represented by the
Convertible Notes incurred simultaneously with the date of the Indenture;
95
<PAGE>
(viii) Indebtedness of the Company not to exceed, at any one time
outstanding, the net cash proceeds received by the Company after the date of the
Indenture from the issuance and sale of its Qualified Capital Stock to the
extent that such net cash proceeds have been, and continue to be, designated as
Designated Equity Proceeds to be used for the purpose of incurring additional
Indebtedness pursuant to this clause (viii) as provided in the definition
thereof, not to exceed $50 million;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to be incurred;
(x) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Restricted
Subsidiaries; provided, however, that (A) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior payment
in full in cash of all Obligations with respect to the Notes and (B)(1) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Restricted
Subsidiary and (2) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Restricted Subsidiary shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by the
Company or such Restricted Subsidiary, as the case may be;
(xi) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company; and
(xii) Indebtedness of the Company or any Restricted Subsidiary of the
Company (A) in respect of statutory obligations, performance, surety or appeal
bonds or other obligations of a like nature incurred in the ordinary course of
business, (B) under Hedging Obligations; provided that such agreements (1) are
designed solely to protect the Company or its Restricted Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates and (2) do not
increase the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest rates or
by reason of fees, indemnities and compensation payable thereunder.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of
accreted value will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
Notwithstanding the foregoing, the Indenture also provides that the Company
will not incur any Indebtedness that is contractually subordinated to any other
Indebtedness of the Company unless such Indebtedness is also contractually
subordinated to the Notes on substantially identical terms; provided, however,
that no Indebtedness of the Company shall be deemed to be contractually
subordinated to any other Indebtedness of the Company solely by virtue of being
unsecured.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company may enter into a sale and leaseback
transaction if (i) the Company could have incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the Debt to Cash Flow Ratio test set forth in the first paragraph of
the covenant described above under the caption " - Incurrence of Indebtedness
and Issuance of Preferred Stock" and (ii) the Lien to secure such Indebtedness
does not extend to or cover any assets of the Company other than the assets
which are the subject of the sale and leaseback transaction, (iii) the gross
cash proceeds of such sale and leaseback transaction are at least equal to the
fair market value (as determined in good faith by the Board of Directors and set
forth in an Officers' Certificate delivered to the Trustee) of the property that
is the subject of such sale and leaseback transaction and (iv) the transfer of
assets in such sale and leaseback
96
<PAGE>
transaction is permitted by, and the Company applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
" - Repurchase at the Option of Holders -Asset Sales."
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) the terms of any
Permitted Debt permitted to be incurred by any Restricted Subsidiary of the
Company, (b) Existing Indebtedness as in effect on the date of the Indenture,
(c) the Indenture and the Notes, (d) applicable law, rules and regulations, (e)
any instrument governing Indebtedness or Capital Stock of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (f) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (g) purchase money
obligations or installment purchase agreements for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired or (h) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) such transaction will
not result in the loss or suspension or material impairment of any licenses or
other authorizations that are material to the future prospects of the Company
and its Restricted Subsidiaries, taken as a whole; and (v) except in the case of
a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth in the first
paragraph of the covenant described above under the caption " - Incurrence of
Indebtedness and Issuance of Preferred Stock."
97
<PAGE>
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing; provided that (x) any employment, consulting or service agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the Company
or such Restricted Subsidiary, (y) transactions between or among the Company
and/or its Restricted Subsidiaries and (z) Restricted Payments that are
permitted by the provisions of the Indenture described above under the caption "
- - Certain Covenants - Restricted Payments," in each case, shall not be deemed
Affiliate Transactions.
Limitation on Foreign Subsidiary Structure
Notwithstanding anything in the Indenture to the contrary, the Indenture
provides that (i) each of the Cayman Entities and each future foreign direct
Wholly Owned Restricted Subsidiary of the Company will at all times continue to
be a direct Wholly Owned Restricted Subsidiary of the Company, (ii) all foreign
Restricted Subsidiaries of the Company will also be (A) a direct or indirect
Subsidiary of either or both of the Cayman Entities, (B) a direct Wholly Owned
Restricted Subsidiary of the Company or (C) a direct or indirect Subsidiary of a
direct Wholly Owned Restricted Subsidiary of the Company, (iii) neither of the
Cayman Entities nor any future foreign direct Wholly Owned Restricted Subsidiary
of the Company will consolidate or merge with or into any other Person other
than a direct Wholly Owned Restricted Subsidiary of the Company whose stock has
been pledged pursuant to the Pledge Agreement, (iv) the Company will not, and
will not permit either of the Cayman Entities or any future foreign direct
Wholly Owned Restricted Subsidiary of the Company to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than pursuant to the
Pledge Agreement) on any of its Capital Stock or any other assets of either of
the Cayman Entities or any foreign direct Wholly Owned Restricted Subsidiary of
the Company; (v) neither of the Cayman Entities nor any future foreign direct
Wholly Owned Restricted Subsidiary of the Company will incur any Indebtedness,
(vi) the Company will not permit either of the Cayman Entities to issue any
Equity Interest to any Person after the date of the Indenture and (vii) the
Company will not permit any future foreign direct Wholly Owned Subsidiary of the
Company to (A) issue any Equity Interests other than Capital Stock or (B) issue
any Capital Stock to any Person other than the Company or any Wholly Owned
Subsidiary of the Company. This paragraph will not prohibit the Company from
designating any foreign Restricted Subsidiary as an Unrestricted Subsidiary in
accordance with the terms of the Indenture or from selling Capital Stock of any
foreign Restricted Subsidiary in accordance with the terms of the Indenture.
Limitation on Domestic Subsidiary Structure
Notwithstanding anything in the Indenture to the contrary, the Indenture
provides that each of (i) SMR Direct USA, Inc. and (ii) each future domestic
Restricted Subsidiary of the Company will either be a direct Wholly Owned
Restricted Subsidiary of the Company or a direct or indirect Wholly Owned
Restricted Subsidiary of SMR Direct USA, Inc. or the Company for so long as such
Subsidiary is a Restricted Subsidiary of the Company. The foregoing sentence
will not prohibit the Company from designating any Restricted Subsidiary to be
an Unrestricted Subsidiary in accordance with the terms of the Indenture or from
selling the Capital Stock of any domestic Restricted Subsidiary in accordance
with the terms of the Indenture.
Contingent Warrants
98
<PAGE>
The Indenture provides that the Company shall issue to Holders of the Notes
the Contingent Warrants (as defined) in the event that the Company does not
consummate a Qualified Public Offering of its Qualified Capital Stock on or
prior to January 1, 2001; provided that if the Company consummates a public or
private offering or offerings of its Qualified Capital Stock resulting in
aggregate gross proceeds of at least $25 million, the Company shall have until
June 30, 2002 to consummate a Qualified Public Offering; provided, further, that
with respect to any private offering of Qualified Capital Stock of the Company
to an Affiliate of the Company (or to any Person who would be an Affiliate of
the Company upon consummation of any such offering), such Qualified Capital
Stock shall be issued and sold at a price no lower than (a) the price at which
the Qualified Capital Stock is being sold to Persons that are not Affiliates of
the Company in such offering if such Persons are purchasing a majority of the
Qualified Capital Stock being sold in such offering or (b) in all other cases,
the fair market value thereof, as evidenced by an independent investment banking
firm of national standing delivered to the Trustee. Such Contingent Warrants
will have certain rights pursuant to the Warrant Agreement and holders thereof
will have the benefit of the Registration Agreement. The Company shall not be
obligated to issue the Contingent Warrants in the event of a Change of Control
prior to January 1, 2001.
Escrow Arrangements
The Indenture and the Convertible Note Purchase Agreement provided that
$28.6 million of the proceeds from the initial sale of the Units and the
Convertible Notes be placed in the Escrow Account with the Escrow Agent. The
Company shall not use any funds released from the Escrow Account or request the
release of such funds except in connection with and upon compliance with the
following conditions and any certification requirements set forth in the Escrow
Agreement:
(i) with respect to the funding of the acquisition of an Acquisition
Target (as defined in the Escrow Agreement), (a) the Company shall have
prepared, with the assistance of U.S. and local counsel, as appropriate, a
detailed and complete due diligence report with respect to the Acquisition
Target, including legal advice regarding each significant legal issue (to be
considered in the light of the circumstances, but including for example opinions
as to the effectiveness of the licenses or concessions for channels), (b) the
Company shall have prepared, with the assistance of financial advisors, a
financial analysis of the Acquisition Target (including verification of the
number of subscribers, if any, of the Acquisition Target) and reviewed an audit
of the financial statements for the most recent fiscal period practicable, and
(c) the Company's Board of Directors shall have, on the basis of the reports,
analysis and review referred to above, approved the acquisition of the
Acquisition Target. In addition, the Acquisition Target shall be a direct or
indirect Subsidiary of the Cayman Entities or the Company as required by the
provisions described under the caption " - Limitation on Foreign Subsidiary
Structure;" and
(ii) with respect to (a) the funding of Permitted Investments (except
working capital, unless permitted by clause (c) below), (b) the funds required
for the acquisition of channels, spectrum and other assets related to the
operation of a Permitted Business, or (c) the funding of buildout in connection
with the acquisition of a Permitted Business, a Permitted Investment or
channels, spectrum and other assets related to the operation of a Permitted
Business or the funding of operating losses, not to exceed $3 million in the
aggregate, in connection with the Company's current and future operations in the
Republic of Chile (each a "Permitted Transaction"), the Company's Board of
Directors shall have approved the Permitted Transaction. In addition, the
assets and/or services which comprise the Permitted Transaction shall be held in
an entity that is a direct or indirect Subsidiary of the Cayman Entities or the
Company as required by the provisions described under the caption "-Limitation
on Foreign Subsidiary Structure."
The Escrow Agreement also provides for the automatic release of the
remainder of the money held in the Escrow Account, if the Escrow Account has
been in existence for more than 12 months and the value of such account drops
below $3 million.
Notwithstanding the foregoing, the Company may, with the consent of the
Majority Noteholders (as defined in the Pledge Agreement), request the release
of funds deposited into the Escrow Account for other valid business purposes.
99
<PAGE>
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Permitted Business.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its Restricted Subsidiaries and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports, in each case, within the time periods set forth in the
Commission's rules and regulations. In addition, commencing after the
consummation of the Exchange Offer, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless the
Commission will not accept such a filing) within the time periods set forth in
the Commission's rules and regulations and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any Notes remain outstanding, it will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest and
Liquidated Damages, if any, on the Notes; (ii) default in payment when due of
the principal of or premium, if any, on the Notes; (iii) failure by the Company
to comply with the provisions described under the captions " - Repurchase at the
Option of Holders - Change of Control," " - Repurchase at the Option of Holders
- - Asset Sales," " - Certain Covenants - Restricted Payments," " - Certain
Covenants - Incurrence of Indebtedness and Issuance of Preferred Stock" or " -
Certain Covenants - Merger, Consolidation or Sale of Assets;" (iv) failure by
the Company for 60 days after notice to comply with any of its other agreements
in the Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (a) is caused by a failure to pay
principal of or premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the date of such
default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $5 million or more; (vi) failure by
the Company or any of its Subsidiaries to pay final judgments aggregating in
excess of $5 million, which judgments are not paid, discharged or stayed for a
period of 90 days; (vii) certain events of bankruptcy or insolvency with respect
to the Company or any of its Significant Subsidiaries or any group of
Subsidiaries that, taken together, would constitute a Significant Subsidiary;
(viii) breach by the Company of any representation or warranty set forth in the
Pledge Agreement, or default by the Company in the performance of any covenant
set forth in the Pledge Agreement, or repudiation by the Company of its
obligations under the Pledge Agreement or
100
<PAGE>
the unenforceability of the Pledge Agreement against the Company for any reason;
and (ix) default by the Company in the performance of any covenant set forth in
the Escrow Agreement, or repudiation by the Company of its obligations under the
Escrow Agreement or the unenforceability of the Escrow Agreement against the
Company for any reason.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount at maturity of the then outstanding
Notes may declare all the Notes to be due and payable immediately. Upon such
declaration, the principal of (or, if prior to the Full Accretion Date, the
Accreted Value of), premium, if any, and accrued and unpaid interest and
Liquidated Damages, if any, on the Notes shall be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, the foregoing amount shall ipso facto
become due and payable without further action or notice. Holders of the Notes
may not enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount at
maturity of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice
of any continuing Default or Event of Default (except a Default or Event of
Default relating to the payment of principal or interest or Liquidated Damages,
if any) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
January 1, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to January 1, 2003, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of principal of premium, if any, interest or Liquidated Damages,
if any on the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and the Pledge Agreement, and the
Company is required upon becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or the Pledge Agreement or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time,
101
<PAGE>
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable Federal income tax law, in
either case, to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for Federal income tax purposes as a result of such Legal
Defeasance and will be subject to Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of such Covenant Defeasance and will be subject to Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Significant Subsidiaries is a
party or by which the Company or any of its Significant Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of counsel in the
United States to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel in the United States, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture,
the Notes or the Pledge Agreement may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount at maturity of
the Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing default or compliance with any provision of the Indenture or
the Notes may be waived with the consent of the Holders of a majority in
principal
102
<PAGE>
amount of the then outstanding Notes (including consents obtained in connection
with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption " -
Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest or Liquidated Damages, if any, on any Note, or
reduce the rate of accretion on the Accreted Value or alter the Full Accretion
Date, (iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest or Liquidated Damages, if any, on the Notes (except
a rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount at maturity of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest or Liquidated Damages, if any, on the Notes, (vii) waive a redemption
payment with respect to any Note (other than a payment required by one of the
covenants described above under the caption " - Repurchase at the Option of
Holders"), (viii) make any change in the foregoing amendment and waiver
provisions or (ix) contractually subordinate in right of payment or, otherwise
contractually subordinate, the Notes to any indebtedness or obligation of the
Company.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Notes Registration Rights Agreement without charge by writing to Centennial
Communications Corp., 1600 Wynkoop Street, Suite 300, Denver, Colorado 80202,
Attention: Chief Executive Officer.
Registration Rights; Liquidated Damages
The Company and the Initial Purchasers entered into the Notes Registration
Rights Agreement on January 15, 1998. Pursuant to the Notes Registration Rights
Agreement, the Company agreed, for the benefit of the Holders of the Private
Notes, at the Company's expense, to (i) file within 300 days after the date of
original issuance of the Notes (such date to be the "Filing Date") with the
Commission with respect to a registered offer to exchange the Private Notes for
the Exchange Notes to be issued under the Indenture or a substantially similar
103
<PAGE>
indenture in the same aggregate principal amount as and with terms that will be
identical in all respects to the Private Notes (except (a) for certain transfer
restrictions and registration rights relating to the Private Notes and (b) that
if the Exchange Offer is not consummated in a timely manner, or if the Company
fails to comply with certain other registration obligations with respect to the
Private Notes, the Company is required to pay certain Liquidated Damages to the
Holders of the Private Notes), and (ii) use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act at the
earliest possible time, but in no event later than 60 days after the Filing
Date. Promptly after the Registration Statement has been declared effective,
the Company will offer the Exchange Notes in exchange for surrender of the
Private Notes (the "Exchange Offer"). The Company will keep the Exchange Offer
open for not less than 20 days (or longer if required by applicable law) after
the date notice of the Exchange Offer is mailed to the Holders of the Private
Notes. For each Private Note tendered to the Company pursuant to the Exchange
Offer and not validly withdrawn by the Holder thereof, the Holder of such
Private Note will receive an Exchange Note having a principal amount equal to
the principal amount of such surrendered Note.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to the immediately following sentence, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange for the Private Notes
may be offered for resale, resold and otherwise transferred by the Holders
thereof (other than (i) a broker-dealer who purchased such Private Notes
directly from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a Person that is an Affiliate of the
Company), without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the Holder is acquiring
Exchange Notes in the ordinary course of its business and is not participating,
does not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the Exchange Notes. Holders of
Private Notes wishing to accept the Exchange Offer must represent to the Company
that such conditions have been met. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Private Notes, where such Private
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Commission has taken the position that
exchanging dealers may fulfill their prospectus delivery requirements with
respect to the Exchange Notes (other than a resale of an unsold allotment from
the original sale of the Notes) with the prospectus contained in the
Registration Statement. Under the Notes Registration Rights Agreement, the
Company is required to allow exchanging dealers to use the prospectus contained
in the Registration Statement in connection with the resale of such Exchange
Notes.
In the event that (i) any changes in law or applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or (ii) any Holder of the Private Notes shall notify the Company prior to
the 20th day following the consummation of the Exchange Offer that (A) such
Holder was prohibited by law or Commission policy from participating in the
Exchange Offer, (B) such Holder may not resell the Exchange Notes to the public
without delivering a prospectus, and this Prospectus is not appropriate or
available for such resales, or (C) such Holder is a broker-dealer and holds
Private Notes directly from the Company or one of its Affiliates, the Company
will, at its expense, (x) as promptly as practicable, and in any event on or
prior to 30 days after the date on which the Company determines that it is not
required or permitted to file the Registration Statement, or 30 days after the
date on which the Company receives the notice described in clause (ii) above,
file with the Commission a shelf registration statement (the "Shelf Registration
Statement") covering resales of the Notes, (y) use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
on or prior to 90 days after the date on which the Company becomes obligated to
file such Shelf Registration Statement and (z) keep effective the Shelf
Registration Statement until two years after its effective date (or such shorter
period that will terminate when all the Notes covered thereby have been sold
pursuant thereto or in certain other circumstances). The Company will, in the
event of the filing of a Shelf Registration Statement, provide to each Holder of
the Notes covered by the Shelf Registration Statement copies of the prospectus
that is a part of the Shelf Registration Statement, notify each such Holder when
the Shelf Registration Statement for the Notes has become effective and take
certain other actions as are required to permit unrestricted resales of the
Notes. A Holder of Notes that sells such Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to the
purchaser, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Notes Registration Rights Agreement that are applicable to
such Holder (including certain indemnification obligations). In addition, each
Holder of the Notes will be required to deliver certain information to be used
in connection with the Shelf Registration Statement in order to have its Notes
included in the Shelf Registration Statement.
104
<PAGE>
If (a) the Company fails to file any of the Registration Statements
required by the Notes Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 days of the Effectiveness Target Date
with respect to the exchange Offer Registration Statement or (d) the Shelf
Registration Statement or the Registration Statement is declared effective but
thereafter ceases to be effective during the periods specified in the Notes
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above, a "Registration Default"), then the Company will pay
liquidated damages ("Liquidated Damages") to each Holder of Notes, with respect
to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount at maturity of Notes held by such Holder. The amount of the Liquidated
Damages of $.50 per week per $1,000 principal amount at maturity of Notes for
all Registration Defaults. All accrued Liquidated Damages will be paid by the
Company on each interest payment date with respect to the Notes. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will cease
and all accrued and unpaid Liquidated Damages shall be paid promptly thereafter.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date prior to January 1, 2003, an amount
per $1,000 principal amount at maturity of Notes that is equal to the sum of (i)
the initial offering price ($511.03 per $1,000 principal amount at maturity of
Notes) of such Notes and (ii) the portion of the excess of the principal amount
of such Notes over such initial offering price which shall have been amortized
through such date, such amount to be so amortized on a daily basis and
compounded semi-annually on each January 1 and July 1 at the rate of 14% per
annum from the date of original issue of the Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months
and as of any date on or after January 1, 2003, the principal amount of each
Note.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
(that is not for security purposes) of any assets or rights (including, without
limitation, by way of a sale and leaseback) other than in the ordinary course of
business consistent with past practices (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole will be governed by the provisions
of the Indenture described above under the caption " - Repurchase at the Option
of Holders - Change of Control" and/or the provisions described above under the
caption " - Certain Covenants - Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1 million or (b) for net proceeds in excess of $1 million.
Notwithstanding the foregoing: (i) a transfer of assets by the Company to a
Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another
Restricted Subsidiary, (ii) an issuance of Equity Interests by a Restricted
Subsidiary to the Company or to another Restricted Subsidiary, (iii) the
granting of a Lien that is permitted by the covenant described above under the
caption " -
105
<PAGE>
Certain Covenants - Liens," and (iv) a Restricted Payment that is permitted by
the covenant described above under the caption " - Certain Covenants -
Restricted Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than 270
days from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits maturing not more than 270 days from the date of acquisition,
bankers' acceptances with maturities not exceeding 270 days, overnight bank
deposits and money market deposit accounts, in each case with any domestic
commercial bank having capital and surplus in excess of $500 million and a
Thompson Bankwatch, Inc. rating of "B" or better, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above and (v)
commercial paper having the highest rating obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Corporation and in each case maturing not
more than 270 days from the date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
(other than the sale, lease, transfer, conveyance or other disposition (that is
not for security purposes) of any of the assets of the Company's U.S. Operations
or all of the Capital Stock of the Company's wholly-owned Subsidiary, SMR Direct
USA, Inc. in conjunction with the sale of the Company's U.S. Operations), taken
as a whole, to any "Person" (as such term is defined in Section 13(d)(3) of the
Exchange Act) or "group" (as such term is defined in Sections 13(d)(3) and
14(d)(2) of the Exchange Act) other than the Principals and their Related
Parties, (ii) the adoption of a plan relating to the liquidation or dissolution
of the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"Person" (as defined above), or "group" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all securities that
such Person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50.1% of the Voting Stock of
the Company (measured by voting power rather than number of shares), (iv) the
Company consolidates with, or merges with or into, another "Person" (as defined
above) or "group" (as defined above) in a transaction or series of related
transactions in which the Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any transaction
where (a) the outstanding Voting Stock of the Company is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee corporation and (b) the "beneficial owners" (as defined above) of the
outstanding Voting Stock of the Company immediately prior to such transaction
own beneficially, directly or indirectly through one or more Subsidiaries, not
less than a majority of the total outstanding Voting Stock of the surviving or
transferee corporation immediately after such transaction or (v) the first day
on which a majority of the members of the Board of Directors of the Company are
not Continuing Directors.
106
<PAGE>
"Company Notes" means bonds, notes, debentures or similar instruments of
the Company issued in connection with the acquisition of assets or a new
Restricted Subsidiary.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) provision
for taxes based on income or profits of such Person and its subsidiaries for
such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (ii) Consolidated Interest Expense
of such Person and its Restricted Subsidiaries for such period to the extent
that any such expense was deducted in computing such Consolidated Net Income,
plus (iii) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Restricted Subsidiaries for such
period to the extent that such depreciation, amortization and other non-cash
expenses were deducted in computing such Consolidated Net Income, minus (iv)
non-cash items increasing such Consolidated Net Income for such period, in each
case, on a consolidated basis determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of, a
Restricted Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in the same
proportion) that the Net Income of such Restricted Subsidiary was included in
calculating the Consolidated Net Income of such Person.
"Consolidated Indebtedness" means, with respect to any Person as of any
date of determination, the sum, without duplication, of (i) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) the total
amount of Indebtedness of any other Person, to the extent that such Indebtedness
has been guaranteed by the referent Person or one or more of its Restricted
Subsidiaries, plus (iii) the aggregate liquidation value of all Disqualified
Stock of such Person and all preferred stock of Restricted Subsidiaries of such
Person, in each case, determined on a consolidated basis in accordance with
GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of (i) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization or original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest of such Person and its
Restricted Subsidiaries that was capitalized during such period, and (iii) any
interest expense on Indebtedness of another Person that is guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (a) all dividend payments on any
series of preferred stock of such Person or any of its Restricted Subsidiaries,
times (b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net
Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (which has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded and (v)
the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Subsidiaries.
107
<PAGE>
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election or (iii) became a member of the Board of Directors as a
result of being designated by a stockholder pursuant to, and in accordance with,
the terms of Section 1 of the Stockholders Agreement, as such section is in
effect on the date of the Indenture.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders (including, without limitation, leasing companies) providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"Debt to Cash Flow Ratio" means, as of any date of determination, the ratio
of (i) the Consolidated Indebtedness of the Company as of such date to (ii) the
Consolidated Cash Flow of the Company for the four most recent full fiscal
quarters ending immediately prior to such date for which internal financial
statements are available, determined on a pro forma basis after giving effect to
all acquisitions or dispositions of assets made by the Company and its
Restricted Subsidiaries from the beginning of such four-quarter period through
and including such date of determination (including any related financing
transactions) as if such acquisitions and dispositions had occurred at the
beginning of such four-quarter period. In addition, for purposes of calculating
Consolidated Cash Flow for the computation referred to above, (i) acquisitions
that have been made by the Company or any of its Restricted Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the date on which the event for which the
calculation of the Debt to Cash Flow Ratio is made (the "Calculation Date")
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Equity Proceeds" means any net cash proceeds received by the
Company after the date of the Indenture from the issuance and sale of its
Qualified Capital Stock (other than Qualified Capital Stock sold to a Subsidiary
of the Company) providing the basis for (i) a redemption of Notes in a
transaction consummated in compliance with the second paragraph of the section
captioned " - Optional Redemption," (ii) an addition to the cumulative account
calculated pursuant to clause (c) of the first paragraph of the covenant
described above under the caption " - Certain Covenants - Restricted Payments,"
(iii) the incurrence of additional Indebtedness pursuant to clause (viii) of the
second paragraph of the covenant described above under the caption " - Certain
Covenants -Incurrence of Indebtedness and Issuance of Preferred Stock," (iv) an
Investment pursuant to clause (vii) of the definition of "Permitted Investments"
or (v) an Investment in a Permitted Business in Eastern Europe pursuant to the
definition of "Permitted Business." In no event shall the same net cash
proceeds be treated as Designated Equity Proceeds for more than one purpose
under the Indenture. Once designated and used for a particular purpose, such
net cash proceeds may not be redesignated or used for an alternative purpose.
Not later than the date on which any such net cash proceeds are to be used for a
particular purpose, the Company shall deliver to the Trustee an Officer's
Certificate stating the purpose for which such net cash proceeds are to be used.
The Company will not be required, by virtue of this definition, to "earmark,"
segregate or otherwise separate any such net cash proceeds received by the
Company from the issuance and sale of its Qualified Capital Stock.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date on which the Notes mature.
108
<PAGE>
"Eastern Europe" shall mean the countries of Albania, Armenia, Azerbaijan,
Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia,
Georgia, Hungary, Latvia, Lithuania, Moldava, Poland, Romania, Russia, Slovenia,
Slovakia, Ukraine and Yugoslavia.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excluded Stock" means all of the outstanding shares of Capital Stock of
each foreign Subsidiary that, if pledged, would cause the undistributed earnings
of such foreign Subsidiary (if such foreign Subsidiary had any such
undistributed earnings) as determined for U.S. Federal income tax purposes to be
treated as a deemed dividend to any parent company of such foreign Subsidiary
for U.S. Federal income tax purposes; provided, however, that if any shares of
Capital Stock of a foreign Subsidiary may subsequently be pledged without
resulting in such a deemed dividend, such shares shall no longer be Excluded
Stock and shall be pledged pursuant to the Pledge Agreement.
"Existing Indebtedness" means up to $6,700,000 in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under any Credit Facility) in existence on the date of the
Indenture, until such amounts are repaid.
"Expansion Event" shall mean such time as (i) the Company has consummated a
Qualified Public Offering of its Qualified Capital Stock and (ii) the Notes have
traded for 10 days after the occurrence of such Qualified Public Offering at a
price equal to 101% of their Accreted Value as demonstrated by a bid in writing
from a broker for at least $2 million in aggregate principal amount of the
Notes.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations); (ii) the consolidated interest expense of such Person
and its Subsidiaries that was capitalized during such period; (iii) any interest
expense on Indebtedness of another Person that is guaranteed by such Person or
one of its Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such guarantee or Lien is called upon); and
(vi) the product of (a) all dividend payments, whether or not in cash, on any
series of preferred stock of such Person or any of its Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests of the
Company, times (b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person and its Subsidiaries for such period. In
the event that the Company or any of its Subsidiaries incurs, assumes,
guarantees or redeems any Indebtedness (other than revolving credit borrowings)
or issues preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption of Indebtedness, or such issuance of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
In addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and the
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income; (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded,
109
<PAGE>
but only to the extent that the obligations giving rise to such Fixed Charges
will not be obligations of the referent Person or any of its Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligation" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements, interest rate collar agreements and other agreements and
arrangements designed to protect such Person against fluctuations in interest
rates and (ii) foreign exchange swap agreements, foreign exchange option
agreements, foreign exchange futures agreements and other agreements and
arrangements designed to protect such Person against fluctuations in foreign
currency exchange rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Initial Public Offering" shall mean the first underwritten public offering
(excluding any offering pursuant to Form S-8 under the Securities Act or any
other publicly registered offering pursuant to the Securities Act pertaining to
the issuance of shares of Common Stock or securities exercisable therefor under
any benefit plan, employee compensation plan, or employee or director stock
purchase plan) of Common Stock of the Company pursuant to an effective
registration statement under the Securities Act.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Person held by the Company or such Restricted Subsidiary immediately following
any such sale, disposition or issuance.
"Latin America" means the countries of South America, Central America, the
Caribbean and the Republic of Mexico.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof,
110
<PAGE>
any option or other agreement to sell or give a security interest in and any
filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends or accretion of mandatorily redeemable
preferred stock to redemption value, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
in connection with such Asset Sale, and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness of an Unrestricted Subsidiary (i) as
to which neither the Company nor any of its Restricted Subsidiaries (a) provides
credit support of any kind (including any undertaking, agreement or instrument
that would constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise) or (c) constitutes the lender; (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means (i) any wireless telecommunications business in
Latin America or (ii) any business that is ancillary or related thereto in Latin
America; provided that (a) on the occurrence of an Expansion Event, "Permitted
Business" shall mean (i) any wireless telecommunications business or (ii) any
business that is ancillary or related thereto and (b) the Company may apply the
aggregate net cash proceeds received by the Company after the date of the
Indenture from the issuance and sale of its Qualified Capital Stock to an
Investment in a Permitted Business in Eastern Europe to the extent that such net
cash proceeds have been, and continue to be, designated as Designated Equity
Proceeds to be applied pursuant to this definition as provided in the definition
of "Designated Equity Proceeds" and such Investment shall be treated as a
"Permitted Investment."
"Permitted Investments" means (i) any Investment in the Company or in a
Restricted Subsidiary of the Company that is engaged in a Permitted Business;
(ii) any Investment in Cash Equivalents; (iii) any Investment by the Company in
a Person, if as a result of such Investment (a) such Person becomes a Restricted
Subsidiary of the Company that is engaged in a Permitted Business or (b) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Restricted Subsidiary of the Company and that is engaged in a Permitted
Business; (iv) any Restricted Investment made as a result of the receipt of non-
cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption " - Repurchase at
the Option of Holders - Asset Sales"; (v) any acquisition of assets in exchange
for the issuance of Equity Interests (other than Disqualified Stock) of the
Company; (vi) any non-cash consideration received in connection with an Asset
Sale that complies with the covenant described above under the caption "-
Repurchase at the Option of Holders - Asset Sales;" and (vii) Investments in a
Person engaged in a Permitted Business, having an aggregate fair market value
(measured on the date each such Investment was made and without giving effect to
subsequent changes in value), when taken together with all other Investments
made pursuant to this clause (vii) that are at the time outstanding, not to
exceed
111
<PAGE>
the sum of (a) $7 million (which sum may only be used in connection with
Permitted Businesses in the Republic of Chile ) plus (b) 100% of the aggregate
net cash proceeds received by the Company after the date of the Indenture from
the issuance and sale of its Qualified Capital Stock to the extent that such net
cash proceeds have been, and continue to be, designated as Designated Equity
Proceeds to be applied to make Investments pursuant to this clause (vi) as
provided in the definition thereof.
"Permitted Liens" means, without duplication, each of the following:
(i) Liens on assets of the Company securing borrowings under Credit
Facilities permitted by the terms of the Indenture to be incurred and
outstanding;
(ii) Liens in favor of the Company or any of its Restricted Subsidiaries;
(iii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary of the
Company; provided that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company or such Restricted
Subsidiary;
(iv) Liens on property existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary of the Company, provided that such Liens
were not incurred in connection with, or in contemplation of, such acquisition
and do not extend to any assets of the Company or any of its Restricted
Subsidiaries other than the property so acquired;
(v) Liens existing on the date of the Indenture;
(vi) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature incurred
in the ordinary course of business;
(vii) Liens securing Obligations (other than Indebtedness) under
governmental licenses, concessions or other authorizations;
(viii) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor;
(ix) Liens securing Permitted Debt of Restricted Subsidiaries of the
Company;
(x) Liens securing Vendor Indebtedness permitted by clause (iv) of the
covenant described above under the caption " - Certain Covenants - Incurrence of
Indebtedness and Issuance of Preferred Stock;" provided that such Liens shall
not extend to any other property or assets of the Company or of any Restricted
Subsidiary other than the property or assets so acquired;
(xi) Liens securing the Notes;
(xii) Liens securing the Convertible Notes until the earlier of such time
as the Convertible Notes (a) are no longer outstanding or (b) have been
converted pursuant to the terms thereof;
(xiii) Liens on assets of Unrestricted Subsidiaries that secure Non-
Recourse Debt of Unrestricted Subsidiaries;
(xiv) Liens securing Indebtedness incurred to refinance Indebtedness that
has been secured by a Lien permitted under the Indenture; provided that (a) any
such Lien shall not extend to or cover any assets or property not securing the
Indebtedness so refinanced and (b) the refinancing Indebtedness secured by such
Lien shall have been permitted to be incurred under the covenant described under
the caption " - Certain Covenants - Incurrence of Indebtedness and Issuance of
Preferred Stock;"
112
<PAGE>
(xv) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that do not
exceed $1 million at any one time outstanding;
(xvi) Liens to secure Attributable Debt that is permitted to be incurred
pursuant to the covenant described above, under the caption " - Certain
Covenants - Sale and Leaseback Transactions;" provided that any such Lien shall
not extend to or cover any assets of the Company other than the assets which are
the subject of the sale and leaseback transaction in which the Attributable Debt
is incurred; and
(xvii) Liens securing Indebtedness permitted by clause (vi) of the
covenant described above under the caption " - Certain Covenants - Incurrence of
Indebtedness and Issuance of Preferred Stock;" provided that such Liens shall
not extend to any other property or assets of the Company or of any Restricted
Subsidiary other than the property or assets so acquired.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses and reasonable prepayment premiums incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof.
"Principals" means any of (i) William J. Elsner, Jeff E. Rhodes, Bernard G.
Dvorak, Stephen W. Schovee, William D. Stanfill, Robert F. McKenzie, Adam
Goldman, William Sprague, Michael N. Simkin, John Fullmer and Mark A. Leavitt,
(ii) Prudential Securities Incorporated and its Affiliates and (iii) Merrill
Lynch Global Allocation Fund, Inc. and its Subsidiaries (or a wholly owned
Subsidiary of the sole stockholder of any of the foregoing).
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Public Offering" means the sale, in an underwritten Initial
Public Offering registered under the Securities Act, of shares of the Company's
Common Stock in which (i) the aggregate gross proceeds received by the Company
for the shares is at least $25,000,000 and (ii) the price per share paid by the
public is at least $6.00 (as adjusted for stock splits, reverse stock splits,
stock dividends and similar recapitalizations).
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (i).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
113
<PAGE>
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Stockholders Agreement" means the second amended and restated stockholders
agreement, dated as of October 3, 1997, by and among the Company and the Persons
identified on the signature pages thereto as in effect on the date of the
Indenture, and as amended from time to time thereafter.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Triggering Event" means the date immediately following the occurrence of
the last of the following: (i) the Company has consummated a public or private
offering or offerings of its capital stock resulting in aggregate gross proceeds
of $50 million; (ii) the Company has consummated a Qualified Public Offering
(which may be satisfied by the occurrence of a public offering described in
clause (i) above, that is a Qualified Public Offering); (iii) the Convertible
Notes are freely convertible into shares of Common Stock; and (iv) after the
occurrence of a Qualified Public Offering, the Common Stock is, for 10
consecutive days, trading at a price equal to two times the Conversion Price (as
defined in the Convertible Notes) then in effect at the time of such Qualified
Public Offering. The Convertible Notes will be deemed freely convertible into
shares of Common Stock if the sole reason they are not so convertible is that
they are subject to that certain Conversion Rights Agreement between the Company
and the holder of the Convertible Notes.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than any
Subsidiary of the Company that owns all or a material portion of the assets
owned by the Company or any Subsidiary of the Company on the date of the
Indenture) that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a Board Resolution; but only to the extent that such
Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not
party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Company; (c) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries has
any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; (d) has
not guaranteed or otherwise directly or indirectly provided credit support for
any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e)
has at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the Trustee
a certified copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under the
caption " - Certain Covenants - Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption " - Certain Covenants -
Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall
be in default of such covenant). The Board of Directors of the Company may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted
114
<PAGE>
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant described under the caption " - Certain
Covenants - Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period, and (ii) no Default or Event of
Default would be in existence following such designation.
"Vendor Indebtedness" means any Indebtedness (including, without
limitation, Indebtedness under any credit facility entered into with any vendor
or supplier or any financial institution acting on behalf of such vendor or
supplier, including, without limitation, any financing provided by the Overseas
Private Investment Corporation); provided that such Indebtedness is incurred
solely for the purpose of financing the cost (including, without limitation, the
cost of design, development, delivery, freight, insurance, import duties, value-
added taxes, improvement, construction or integration) of equipment or other
tangible assets necessary for the operation of wireless telecommunications
networks or systems.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the board of
directors, managers or trustees of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than (i) directors' qualifying shares or
(ii) shares of non-U.S. Restricted Subsidiaries sold to non-U.S. nationals as
required by the laws of the jurisdiction of incorporation of such non-U.S.
Restricted Subsidiary) shall at the time be owned by such Person or by one or
more Wholly Owned Restricted Subsidiaries of such Person.
115
<PAGE>
DESCRIPTION OF CONVERTIBLE NOTES
Concurrent with the offering of the Private Notes, the Company issued $10.0
million in aggregate principal amount of Convertible Notes (the "Convertible
Notes") pursuant to a Purchase Agreement dated January 15, 1998 between the
Company and Merrill Lynch Global Allocation Fund, Inc. (the "Convertible Note
Purchase Agreement") The Convertible Notes mature on January 1, 2006. The
Convertible Notes are subordinated in right of payment to the Notes and will be
pari passu with all Indebtedness (as defined in the Convertible Notes) of the
Company existing on the date of the issuance of the Convertible Notes and any
future Indebtedness of the Company; provided, however, that on the occurrence of
the Triggering Event (as defined) the Convertible Notes shall become
subordinated to all other Indebtedness of the Company that is permitted to be
incurred by the Company pursuant to the Indenture. Cash interest will not
accrue on the Convertible Notes prior to January 1, 2000. Thereafter, interest
on the Convertible Notes will be payable in cash at a rate of 9% per annum on
January 1 and July 1 of each year, commencing on July 1, 2000. The Convertible
Notes will be convertible into shares of Common Stock at a conversion price of
$2.25 per share, subject to adjustments in certain circumstances (the
"Conversion Price").
The Convertible Notes will be redeemable at the option of the Company, in
whole or in part, at any time after January 1, 2004, at redemption prices equal
to 102% and 101%, respectively, of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase if such redemption
occurs during the seventh and eighth years, respectively, of the term of the
Convertible Notes. The Convertible Notes will not be mandatorily convertible on
the occurrence of an initial public offering by the Company.
In addition, from January 1, 2003 to January 1, 2004, the Company may
redeem all but not less than all of the Convertible Notes, if the Closing Price
(as defined in the Convertible Notes) of the Common Stock is 150% of the
Conversion Price then in effect for 10 consecutive trading days, at a redemption
price equal to 100% of the principal amount thereof plus accrued and unpaid
interest thereon, if any.
The Convertible Notes are secured by the Pledged Collateral. Pursuant to
the Pledge Agreement, the rights of the holders of the Convertible Notes in the
Pledged Collateral are subordinated to the rights of the Holders of the Notes.
The holders of the Convertible Notes have no rights to the Pledged Collateral
under the Pledge Agreement upon the occurrence of the following events (the
"Triggering Event"): (i) the Company has consummated a public or private
offering or offerings of its capital stock resulting in aggregate gross proceeds
of $50 million; (ii) the Company has consummated a Qualified Public Offering
(which may be satisfied by the occurrence of a public offering described in
clause (i) above, that is a Qualified Public Offering); (iii) the Convertible
Notes are freely convertible into shares of Common Stock; and (iv) after the
occurrence of a Qualified Public Offering, the Company's Common Stock is, for 10
consecutive days, trading at a price equal to two times the Conversion Price (as
defined in the Convertible Notes) then in effect at the time of the consummation
of such Qualified Public Offering. The Convertible Notes will be deemed freely
convertible into shares of Common Stock if the sole reason they are not so
convertible is that they are subject to that certain Conversion Rights Agreement
between the Company and the holder of the Convertible Notes.
Pursuant to the Company's Third Amended and Restated Registration
Agreement, the Company has agreed to file with the Commission a registration
statement on the appropriate form under the Securities Act with respect to each
of the Convertible Notes and the shares of the Company's Common Stock
convertible on exercise thereof (the "Convertible Shares"). Each such
registration statement shall be filed on the earlier to occur of (i) three years
from the date of the consummation of the offering of the Convertible Notes, (ii)
60 days after an initial public offering of the Company's equity securities or
(iii) a Change in Control (as defined in the Indenture). The Company will cause
each such registration statement to remain effective and usable until such time
as the Convertible Notes or the Convertible Shares, as the case may be, are
freely tradeable under the Securities Act (and the holders thereof have received
an opinion of counsel to the Company to such effect) or until all of such
Convertible Notes or such Convertible Shares, as the case may be, available for
sale thereunder have been sold thereunder or otherwise converted.
116
<PAGE>
DESCRIPTION OF WARRANTS
In connection with the issuance of the Private Notes, the Company issued
the Initial Warrants to purchase an aggregate of 2,560,000 shares of Common
Stock. The Notes and the Initial Warrants will not be separately transferable
until the earlier to occur of (i) 360 days from the date of issuance of the
Initial Warrants; (ii) such date as Salomon Brothers Inc may, in its discretion,
deem appropriate; and (iii) in the event of a Change of Control, the date the
Company mails a notice thereof. The Initial Warrants were issued pursuant to a
Warrant Agreement (the "Warrant Agreement") between the Company and State Street
Bank and Trust Company, as Warrant Agent (the "Warrant Agent"). The following
summary of certain provisions of the Warrant Agreement does not purport to be
complete and is qualified in its entirety by reference to the Warrant Agreement,
including the definitions therein of certain terms used below.
General
Each Initial Warrant, when exercised, entitles the holder thereof to
receive 64 fully paid and non-assessable shares of Common Stock of the Company,
par value $0.01 per share ("Initial Warrant Shares"), at the Exercise Price. In
the event that the Company does not consummate a Qualified Public Offering of
its Qualified Capital Stock by January 1, 2001, the Company will be obligated to
issue certain contingent warrants (the "Contingent Warrants," and together with
the Initial Warrants, the "Warrants") to the Holders of the Notes representing
7.5% of the Common Stock on a fully diluted basis as of the date of the issuance
of the Contingent Warrants after giving effect to such issuance; provided that
if the Company consummates a public or private offering or offerings of its
Qualified Capital Stock resulting in aggregate gross proceeds of at least $25
million, the Company shall have until June 30, 2002 to consummate a Qualified
Public Offering; provided, further, that with respect to any private offering of
Qualified Capital Stock of the Company to an Affiliate of the Company (or to any
Person who would be an Affiliate of the Company upon consummation of any such
offering), such Qualified Capital Stock shall be issued and sold at a price no
lower than (i) the price at which the Qualified Capital Stock is being sold to
Persons that are not Affiliates of the Company in such offering if such Persons
are purchasing a majority of the Qualified Capital Stock being sold in such
offering or (ii) in all other cases, the fair market value thereof, as evidenced
by an independent investment banking firm of national standing delivered to the
Trustee. The Exercise Price and the number of Warrant Shares are both subject to
adjustment in certain cases referred to below. Upon exercise, the holders of
the Initial Warrants are entitled, in the aggregate, to purchase shares of
Common Stock representing approximately 7.5% of the Company's Common Stock on a
fully diluted basis as of the date of the issuance of the Initial Warrants (the
"Warrant Percentage"). The Company shall not be obligated to issue the
Contingent Warrants in the event of a Change of Control prior to January 1,
2001.
The number of Initial Warrant Shares to be received on exercise of each
Initial Warrant shall be increased in the event that (i) there has not been a
Qualified Public Offering by October 3, 2000 and (ii) the holders of shares of
Series C Preferred are not required to return to the Company any additional
shares of Series C Preferred received as dividends on the outstanding shares of
Series C Preferred ("Dividend Shares") on or prior to October 3, 2000. Such
adjustment (the "Adjustment") shall be effected by adding to the number of
shares of Common Stock of the Company calculated on a fully diluted basis as of
January 15, 1998, the number of shares of Common Stock receivable on the
conversion of the Dividend Shares and then recalculating the Warrant Percentage.
The additional Warrant Shares resulting from the Adjustment will be allocated on
a pro rata basis among the Initial Warrants.
The Initial Warrants are exercisable at any time on or after the earlier to
occur of (i) one year from the date of issuance, (ii) in the event of a Change
of Control, the date the Company mails a notice thereof, and (iii) 180 days
after the consummation of an Initial Public Offering of the Company's Common
Stock (such date, the "Exercise Commencement Date"). Unless exercised, the
Warrants will automatically expire on January 1, 2005 (the "Warrant Expiration
Date"). The Company will give notice of expiration not less than 90 and not
more than 120 days prior to the Warrant Expiration Date to the registered
holders of the then outstanding Warrants. If the Company fails to give such
notice, the Warrants will not expire until 90 days after the Company gives such
notice. In no event will holders be entitled to any damages or other remedy for
the Company's failure to give such notice other than any such extension.
117
<PAGE>
The Warrants may be exercised by surrendering to the Company the warrant
certificates evidencing the Warrants to be exercised with the accompanying form
of election to purchase properly completed and executed, together with payment
of the Exercise Price. Payment of the Exercise Price may be made (i) in the
form of cash or by certified or official bank check payable to the order of the
Company, (ii) by tendering Notes having an aggregate principal amount, plus
accrued and unpaid interest, if any, thereon, to the date of exercise (or if
such exercise takes place prior to the Full Accretion Date, an Accreted Value on
the date of exercise) equal to the Exercise Price, (iii) by tendering Warrants
having a fair market value (as determined in good faith by the Company's Board
of Directors) equal to the Exercise Price or (iv) by tendering a combination of
cash, Notes and Warrants. Upon surrender of the warrant certificate and payment
of the Exercise Price, the Company will deliver or cause to be delivered, to or
upon the written order of such holder, stock certificates representing the
number of whole shares of Common Stock to which the holder is entitled. If less
than all of the Warrants evidenced by a warrant certificate are to be exercised,
a new warrant certificate will be issued for the remaining number of Warrants.
Pursuant to the Warrant Agreement, the Company will effect a registration of the
Warrants and the Warrant Shares to permit exercise of Warrants commencing on the
Exercise Commencement Date and continuing through the Warrant Expiration Date.
No fractional shares of Common Stock will be issued upon exercise of the
Warrants. The Company will pay to the holder of the Warrant at the time of
exercise an amount in cash equal to the current market value of any such
fractional share of Common Stock less a corresponding fraction of the Exercise
Price.
The holders of the Warrants have no right to vote on matters submitted to
the stockholders of the Company and have no right to receive dividends. The
holders of the Warrants are not entitled to share in the assets of the Company
in the event of liquidation, dissolution or the winding up of the Company. In
the event a bankruptcy or reorganization is commenced by or against the Company,
a bankruptcy court may hold that unexercised Warrants are executory contracts
which may be subject to rejection by the Company with approval of the bankruptcy
court, and the holders of the Warrants may, even if sufficient funds are
available, receive nothing or a lesser amount as a result of any such bankruptcy
case than they would be entitled to if they had exercised their Warrants prior
to the commencement of any such case.
Adjustments
The number of shares of Common Stock purchasable upon exercise of Warrants
and the Exercise Price is subject to adjustment in certain events including: (i)
the payment by the Company of dividends and other distributions on its Common
Stock in Common Stock, (ii) subdivisions, combinations and reclassifications of
the Common Stock, (iii) the issuance to all holders of Common Stock of rights,
options or warrants entitling them to subscribe for Common Stock or securities
convertible into, or exchangeable or exercisable for, Common Stock at an
offering price (or with an initial conversion, exchange or exercise price) which
is less than the Current Market Price per share (as defined) of Common Stock,
(iv) the distribution to all holders of Common Stock of any of the Company's
assets (including cash), debt securities, preferred stock or any rights or
warrants to purchase any such securities (excluding those rights and warrants
referred to in clause (iii) above), (v) the issuance of shares of Common Stock
for a consideration per share less than the then current market price per share
of Common Stock which shall not be less than $2.25 (the "Current Market Price")
(excluding securities issued in transactions referred to in clauses (i) through
(iv) above), (vi) the issuance of securities convertible into or exchangeable
for Common Stock for a conversion or exchange price plus consideration received
upon issuance less than the then Current Market Price per share of Common Stock
(excluding securities issued in transactions referred to in clauses (i) through
(iv) above), and (vii) certain other events that could have the effect of
depriving holders of the Warrants of the benefit of all or a portion of the
purchase rights evidenced by the Warrants. The events described in clause (v)
and (vi) above are subject to certain exceptions described in the Warrant
Agreement, including, without limitation, (A) certain bona fide public
offerings, (B) Common Stock (and options exercisable therefor) issued to the
Company's employees and directors under bona fide employee benefit plans and (C)
Common Stock issued upon conversion of the Preferred Stock in accordance with
the Certificates of Designation related thereto and as in effect on the date
hereof.
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least 1% in the Exercise Price;
provided however, that any adjustment that is not made will be carried forward
and taken into account in any subsequent adjustment.
118
<PAGE>
In the case of certain consolidations or mergers of the Company, or the
sale of all or substantially all of the assets of the Company to another
corporation, each Warrant will thereafter be exercisable for the right to
receive the kind and amount of shares of stock or other securities or property
to which such holder would have been entitled as a result of such consolidation,
merger or sale had the Warrants been exercised immediately prior thereto.
Reservation of Shares
The Company has authorized and reserved for issuance, and will at all times
reserve and keep available, such number of shares of Common Stock as will be
issuable upon the exercise of all outstanding Warrants. Such shares of Common
Stock, when paid for and issued, will be duly and validly issued, fully paid and
non-assessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issuance thereof.
Amendment
From time to time, the Company and the Warrant Agent, without the consent
of the holders of the Warrants, may amend or supplement the Warrant Agreement
for certain purposes, including curing defects or inconsistencies or making any
change that does not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants will require the written
consent of the holders of a majority of the then outstanding Warrants (excluding
Warrants held by the Company or any of its Affiliates). The consent of each
holder of the Warrants affected will be required for any amendment pursuant to
which the Exercise Price would be increased or the number of shares of Common
Stock purchasable upon exercise of Warrants would be decreased (other than
pursuant to adjustments provided in the Warrant Agreement).
Registration Rights
The holders of the Warrants and the Warrant Shares are entitled to certain
rights with respect to the registration of the Warrants and the Warrant Shares
under the Securities Act as discussed below.
Shelf Registration Rights. The Company is required under the terms of the
Warrant Agreement to (i) file and use its best efforts to cause to become
effective prior to the Exercise Commencement Date a shelf registration statement
(the "Warrant Shelf Registration Statement") with respect to the Warrant Shares
issuable upon the exercise of the Warrants and (ii) to keep the Warrant Shelf
Registration Statement continuously effective until the earlier of such time as
all Warrants have been exercised and the Warrant Expiration Date.
Piggyback Registration Rights. If the Company proposes to register any of
its Common Stock under the Securities Act, either for its own account or for the
account of other security holders, the holders of the Warrant Shares are
entitled to notice of the registration and are entitled to include, at the
Company's sole expense (excluding underwriter discounts), all or any portion of
their Warrant Shares therein, subject to pro rata cut-back provisions in the
event that the managing underwriter in any underwritten offering determines that
the inclusion of such Warrant Shares and any other securities entitled to
piggyback registration rights would adversely affect the offering being
registered and subject to certain rights of the Company's existing stockholders.
119
<PAGE>
PROVISIONS GENERALLY APPLICABLE TO ALL SECURITIES
Book-Entry, Delivery and Form
Except as set forth under "- Certificated Notes," the Exchange Notes will
be issued in the form of one Global Exchange Note. Ownership of beneficial
interest in a Global Exchange Note will be limited to Persons who have accounts
with DTC ("participants") or Persons who hold interests through participants.
Ownership of beneficial interests in a Global Exchange Note will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of participants) and
the records of participants (with respect to interests of Persons other than
participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the related Exchange Notes represented by
such Global Exchange Note for all purposes under the Indenture and the Exchange
Notes. No beneficial owner of an interest in a Global Exchange Note will be able
to transfer that interest except in accordance with applicable procedures of
DTC, in addition to those provided for under the Indenture.
Payments of the principal of, and interest on, Exchange Notes represented
by the Global Exchange Note registered in the name of and held by the Depository
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any Paying Agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Exchange Note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Exchange
Note as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Exchange Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
If a holder requires physical delivery of a certificated Note for any reason,
such holder must transfer its interest in the Global Exchange Note in accordance
with the procedures described under "Notice to Investors," as well as DTC's
applicable procedures and, if applicable, those of Euroclear and Cedel Bank.
The Company expects that DTC will take any action permitted to be taken by
a Holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Exchange Note is credited and
only in respect of such portion of the aggregate principal amount of Exchange
Notes, as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Exchange Notes,
DTC will exchange the applicable Global Exchange Note for certificated Exchange
Notes, which it will distribute to its participants.
The Company understands that: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
120
<PAGE>
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Exchange
Note among participants of DTC, Euroclear and Cedel Bank, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by DTC, Euroclear or Cedel Bank
or their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated Notes
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, the Company will issue certificated Exchange Notes in
exchange for the Global Exchange Notes. Holders of an interest in the Global
Exchange Note may receive a certificated Exchange Note in accordance with DTC's
rules and procedures in addition to those provided for under the Indenture.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material U.S. federal income tax
consequences of the exchange of the Private Notes for the Exchange Notes
pursuant to the Exchange Offer. This discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative history,
judicial authority, current administrative rulings and practice, and existing
and proposed Treasury Regulations, all as in effect and existing on the date
hereof. Legislative, judicial or administrative changes or interpretations
after the date hereof could alter or modify the validity of this discussion and
the conclusions set forth below. Any such changes or interpretations may be
retroactive and could adversely affect a Holder of the Private Notes or the
Exchange Notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that might be relevant to particular Holders in light of their
personal investment or tax circumstances or status, nor does it discuss the U.S.
federal income tax consequences to certain types of Holders subject to special
treatment under the U.S. federal income tax laws, such as certain financial
institutions, insurance companies, dealers in securities or foreign currency,
tax-exempt organizations, foreign corporations or non- resident alien
individuals, or persons holding Private Notes or Exchange Notes that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle or conversion transaction, or persons whose functional currency is not
the U.S. dollar. Moreover, the effect of any state, local or foreign tax laws is
not discussed.
EACH HOLDER OF A PRIVATE NOTE THAT IS PARTICIPATING IN THE EXCHANGE OFFER
IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT
OF SUCH HOLDER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN TAX LAWS OF THE
EXCHANGE OF THE PRIVATE NOTES FOR THE EXCHANGE NOTES PURSUANT TO THE EXCHANGE
OFFER.
The exchange of the Private Notes by any Holder for the Exchange Notes
pursuant to the Exchange Offer should not be treated as an "exchange" for
federal income tax purposes because the Exchange Notes should not be considered
to differ materially in kind or extent from the Private Notes. Rather, Exchange
Notes received by any Holder should be treated as a continuation of the Private
Notes in the hands of such Holder for tax purposes. As a result, there should be
no adverse federal income tax consequences to Holders exchanging the Private
Notes for Exchange Notes pursuant to the Exchange Offer, and the federal income
tax consequences of holding and disposing of the Exchange Notes should be the
same as the federal income tax consequences of holding and disposing of the
Private Notes. Accordingly, a Holder's adjusted tax basis in the Exchange Notes
will be the same as its adjusted tax basis in the Private Notes exchanged
therefor and its holding period for the Private Notes will be included in its
holding period for the Exchange Notes. Thus, the determination of gain on a
subsequent sale or other disposition of the Exchange Notes will be the same as
for the Private Notes.
121
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Each broker-dealer that
receives Exchange Notes for its own account in exchange for such Private Notes
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company has
agreed that for a period of 180 days from the Effective Date, it will make this
Prospectus, as amended or supplemented, available to any such broker-dealer that
requests copies of this Prospectus in the Letter Transmittal for use in
connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other Persons. Exchange Notes received by broker-
dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market,
negotiated transactions or through the writing of options on the Exchange Notes
or a combination of such methods of resale, at market prices prevailing at the
time of resale or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer in exchange for Private Notes acquired by such broker-dealer as a result
of market-making or other trading activities and any broker-dealer participates
in a distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on such resale of
Exchange Notes and any commissions or concessions received by such Persons may
be deemed to be underwriting compensation under the Securities Act. The Letter
of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Notes Registration Rights Agreement and
will indemnify the Holders of Private Notes (including any broker-dealers),
certain parties related to such Holders, against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Holland & Hart LLP.
EXPERTS
The financial statements included in this registration statement to the
extent and for the periods indicated in their report have been audited by Arthur
Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
122
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. (dba SMR DIRECT) AND SUBSIDIARIES
----------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AND REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
---------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CENTENNIAL COMMUNICATIONS CORP. (dba SMR DIRECT) AND SUBSIDIARIES
Consolidated Financial Statements F-2 - F-27
Consolidated Interim Financial Statements (Unaudited) F-28 - F-41
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES:
Consolidated Financial Statements F-42 - F-60
Consolidated Interim Financial Statements (Unaudited) F-61 - F-71
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Centennial Communications Corp.:
We have audited the accompanying consolidated balance sheets of Centennial
Communications Corp. (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1998, and the related consolidated statements of operations and
comprehensive loss; mandatorily redeemable, convertible preferred stock and
stockholders' equity (deficit); and cash flows for each of the three years ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Centennial Communications Corp.
and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years ended December 31,
1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 29, 1999.
F-2
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1998
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
- ---------------
Cash and cash equivalents $ 7,730,141 $ 5,229,942
Restricted cash (Note 2) 1,349,536 11,770,859
Accounts receivable, net of allowances for doubtful
accounts of $517,986 and $829,933, respectively 1,283,409 863,756
Radios and accessories inventory 1,371,762 2,227,459
Prepaid licenses and other current assets 1,371,041 1,387,274
Net assets held for sale (Note 3) 4,430,661 679,109
-------------- --------------
Total current assets 17,536,550 22,158,399
PROPERTY AND EQUIPMENT, net (Note 5) 5,004,903 8,934,667
INVESTMENT IN SUBSIDIARY (Note 2) - 1,496,443
SMR LICENSES, net of accumulated amortization of $289,196
and $527,477 (Note 4) 5,921,315 11,989,418
OTHER NONCURRENT ASSETS, net 1,409,615 2,462,517
-------------- --------------
Total assets $ 29,872,383 $ 47,041,444
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,019,208 $ 2,144,964
Accrued liabilities 1,016,610 1,450,014
Deposits on assets held for sale (Note 3) 4,609,077 454,108
Payable to seller (Note 4) - 400,000
-------------- --------------
Total current liabilities 6,644,895 4,449,086
CAPITAL LEASES PAYABLE (Note 6) - 24,607
CONVERTIBLE NOTES (Note 6) - 10,881,063
SENIOR DISCOUNT NOTES (Note 6) - 17,829,506
SENIOR SECURED NOTES (Note 6) 11,144,703 -
-------------- --------------
Total liabilities 17,789,598 33,184,262
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 3, 6 and 9)
MANDATORILY REDEEMABLE, CONVERTIBLE
PREFERRED STOCK:
Series A, $.01 par value, 352 authorized, issued 8,772,346 8,780,242
and outstanding
Series B, $.01 par value, 6,399,648 authorized, 20,407,217 20,541,125
5,735,251 issued and outstanding
Series C, $.01 par value, 11,000,000 authorized, 50,000 and 72,500 12,744,286
8,789,169
issued and outstanding, respectively
-------------- --------------
29,252,063 42,065,653
-------------- --------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 16,000,000 and 40,000,000 35,027 35,028
authorized, 3,502,650 and 3,502,750 issued and outstanding,
respectively
Additional paid-in capital 3,351,790 7,755,801
Accumulated deficit (20,562,630) (36,137,833)
Accumulated other comprehensive income 6,535 138,533
-------------- --------------
Total stockholders' equity (deficit) (17,169,278) (28,208,471)
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 29,872,383 $ 47,041,444
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F-3
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE:
Radio service revenue $ 153,159 $ 2,880,414 $ 5,145,883
Equipment sales 45,992 1,672,388 1,911,159
Activation and other 96,730 273,553 146,736
------------- ------------- -------------
295,881 4,826,355 7,203,778
------------- ------------- -------------
COSTS AND EXPENSES RELATED TO REVENUE
(exclusive of depreciation shown separately below):
Network and site expenses 272,910 612,632 88,388
Cost of equipment sold 40,765 2,256,993 2,779,821
Maintenance and other 199,750 686,785 613,699
------------- ------------- -------------
513,425 3,556,410 3,481,908
------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 4,082,056 10,371,543 10,815,729
Depreciation and amortization 507,811 2,258,982 2,084,999
Loss on impairment of investment - - 2,403,700
Loss on divestiture of U.S. operations - 3,206,510 -
------------- ------------- -------------
4,589,867 15,837,035 15,304,428
------------- ------------- -------------
OPERATING LOSS (4,807,411) (14,567,090) (11,582,558)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (237,060) (887,324) (4,832,475)
Interest income 156,731 349,662 1,341,811
Other 1,614 (610,279) (360,173)
------------- ------------- -------------
(78,715) (1,147,941) (3,850,837)
------------- ------------- -------------
LOSS BEFORE MINORITY INTEREST (4,886,126) (15,715,031) (15,433,395)
MINORITY INTEREST SHARE OF LOSS 111,310 - -
------------- ------------- -------------
NET LOSS (4,774,816) (15,715,031) (15,433,395)
DIVIDENDS AND ACCRETION
OF MANDATORILY REDEEMABLE
PREFERRED SHARES TO REDEMPTION VALUE (14,695) (141,808) (1,535,504)
------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS (4,789,511) (15,856,839) (16,968,899)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (6,469) 13,004 131,998
------------- ------------- -------------
COMPREHENSIVE LOSS $ (4,795,980) $ (15,843,835) $ (16,836,901)
============= ============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (1.38) $ (4.53) $ (4.84)
============= ============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 3,480,466 3,502,534 3,502,749
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-4
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE, CONVERTIBLE
--------------------------------------------------------------
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------
<TABLE>
<CAPTION>
Mandatorily Redeemable, Stockholders'
Convertible Preferred Stock Equity (Deficit)
----------------------------------------------------------- -------------------
Series A Series B Series C Common Stock
------------------ ---------------------- --------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 - $ - - $ - - $ - 3,270,000 $32,700
Common stock issued for
cash at $1.00 per share - - - - - - 230,000 2,300
Common stock issued at $2.50
per share to settle liability - - - - - - 2,500 25
Preferred stock issued in
connection with private
placement (net of offering
costs of $39,502) (Note 10) 352 8,760,498 - - - - - -
Preferred stock issued in
connection with private
placement (net of offering
costs of $644,716) (Note 10) - - 5,670,851 20,053,923 - - - -
Accretion of preferred stock to
redemption value - 3,950 - 10,745 - - - -
Net loss - - - - - - - -
Cumulative translation
adjustment - - - - - - - -
--- --------- --------- ---------- ------ ------ --------- -------
BALANCES, December 31, 1996 352 8,764,448 5,670,851 20,064,668 - - 3,502,500 35,025
Exercise of stock options - - - - - - 150 2
Preferred stock issued as bonus - - 40,241 146,890 - - - -
Preferred stock issued for services,
net of expenses - - 24,159 61,749 - - - -
Preferred stock issued for note
receivable (Note 10) - - - - 50,000 72,500 - -
<CAPTION>
Stockholders' Equity (Deficit)
---------------------------------------------------
Accumulated
Other
Compre- Total
Additional hensive Stockholders'
Paid-in Accumulated Income Equity
Capital Deficit (Loss) (Deficit)
---------- ------------ --------- -------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1995 $3,237,300 $ (58,088) $ $ 3,211,912
Common stock issued for
cash at $1.00 per share 227,700 - - 230,000
Common stock issued at $2.50
per share to settle liability 6,225 - - 6,250
Preferred stock issued in
connection with private
placement (net of offering
costs of $39,502) (Note 10) - - - -
Preferred stock issued in
connection with private
placement (net of offering
costs of $644,716) (Note 10) - - - -
Accretion of preferred stock to
redemption value (14,695) - - (14,695)
Net loss - (4,774,816) - (4,774,816)
Cumulative translation
adjustment - - (6,469) (6,469)
--------- ---------- ------ ----------
BALANCES, December 31, 1996 3,456,530 (4,832,904) (6,469) (1,347,818)
Exercise of stock options 373 - - 375
Preferred stock issued as bonus - - - -
Preferred stock issued for services,
net of expenses - - - -
Preferred stock issued for note
receivable (Note 10) - - - -
</TABLE>
F-5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accretion of preferred stock to
redemption value - 7,898 - 133,910 - - - -
Stock based compensation - - - - - - - -
Net loss - - - - - - - -
Cumulative translation adjustment - - - - - - - -
--- --------- --------- ---------- ------ ------ --------- ------
BALANCES, December 31, 1997 352 8,772,346 5,735,251 20,407,217 50,000 72,500 3,502,650 35,027
<CAPTION>
<S> <C> <C> <C> <C>
Accretion of preferred stock to (141,808) - - (141,808)
redemption value
Stock based compensation 22,000 - - 22,000
Net loss - (15,715,031) - (15,715,031)
Cumulative translation adjustment - - 13,004 13,004
--------- ----------- ------ -----------
BALANCES, December 31, 1997 3,351,790 (20,562,630) 6,535 (17,169,278)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-6
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE, CONVERTIBLE
--------------------------------------------------------------
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
--------------------------------------------------------------
<TABLE>
<CAPTION>
Mandatorily Redeemable,
Convertible Preferred Stock
-----------------------------------------------------------------------------------------------
Series A Series B Series C Common Stock
----------------- ----------------------- ---------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ---------- --------- ----------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1997 352 8,772,346 5,735,251 20,407,217 50,000 72,500 3,502,650 35,027
Exercise of stock options - - - - - - 100 1
Conversion of Senior
Convertible Notes to
Preferred Stock Series C - - - - 7,955,691 11,535,746 - -
Warrants issued in connection
with Discount Notes - - - - - - - -
Dividends payable on the
Preferred Stock Series C - - - - - - - -
Payment of dividends on the
Preferred Stock Series C in
additional shares - - - - 783,478 1,136,040 - -
Accretion of preferred stock
to redemption value - 7,896 - 133,908 - - - -
Stock based compensation - - - - - - - -
Net loss - - - - - - - -
Cumulative translation
adjustment - - - - - - - -
------ ---------- --------- ----------- --------- ----------- --------- -------
BALANCES, December 31, 1998 352 $8,780,242 5,735,251 $20,541,125 8,789,169 $12,744,286 3,502,750 $35,028
====== ========== ========= =========== ========= =========== ========= =======
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------------------------------------
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Stockholders'
Capital Deficit (Loss) (Deficit)
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1997 3,493,598 (20,704,438) 6,535 (17,169,278)
Exercise of stock options 249 - - 250
Conversion of Senior
Convertible Notes to
Preferred Stock Series C - - - -
Warrants issued in connection
with Discount Notes 5,760,000 - - 5,760,000
Dividends payable on the
Preferred Stock Series C (1,393,700) - - (1,393,700)
Payment of dividends on the
Preferred Stock Series C in
additional shares - - - -
Accretion of preferred stock
to redemption value (141,804) - - (141,804)
Stock based compensation 37,458 - - 37,458
Net loss - (15,433,395) - (15,433,395)
Cumulative translation
adjustment - - 131,998 131,998
----------- ------------ -------- ------------
BALANCES, December 31, 1998 $ 7,755,801 $(36,137,833) $138,533 $(28,208,471)
=========== ============ ======== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-7
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,774,816) $(15,715,031) $(15,433,395)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 507,811 2,258,982 2,084,999
Write down El Salvador business - - 2,403,700
Loss on divestiture of U.S. operations - 3,206,510 -
Write-off of Argentine investment - 615,588 -
Stock based compensation - 83,761 37,458
Allowance for doubtful accounts - 597,751 348,087
Accretion of interest on discount and convertible notes - - 4,296,131
Accretion of spectrum license debt 33,109 72,091 -
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable (430,225) (1,761,812) 71,566
Increase in inventory (432,383) (833,714) (855,697)
Increase in other assets (435,080) (2,370,381) (223,140)
Increase in accounts payable and other 1,236,912 331,054 1,147,780
Increase in accrued liabilities 726,841 401,718 480,198
------------ ------------ ------------
Net cash used in operating activities (3,567,831) (13,113,483) (5,642,313)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,654,843) (6,877,907) (5,403,095)
Acquisition of businesses, net of cash acquired (2,552,248) (4,482,325) (7,426,003)
Payment of contingent payable to seller - - (2,390,000)
Cash deposits received related to sale of U.S. operations - 4,609,077 -
(Increase) decrease in restricted cash (3,890,262) 2,540,726 (10,421,323)
Change in net assets held for sale - - (403,417)
Refunds for acquisition of spectrum 243,369 - -
Funding of organizational costs (171,188) - -
------------ ------------ ------------
Net cash used in investing activities (13,025,172) (4,210,429) (26,043,838)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from offering of discount notes and warrants - - 20,441,258
Proceeds from offering of convertible notes - - 10,000,000
Proceeds from issuance of common stock 230,000 375 250
Proceeds from issuance of Series A and Series B preferred
stock, net 28,814,421 - -
Proceeds from issuance of Senior Notes - 11,144,703 -
Offering costs - (713,356) (1,369,964)
Payments on capital leases payable (126,921) (211,256) (17,590)
------------ ------------ ------------
Net cash provided by financing activities 28,917,500 10,220,466 29,053,954
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6,469) 13,004 131,998
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 12,318,028 (7,090,442) (2,500,199)
CASH AND CASH EQUIVALENTS, beginning of year 2,502,555 14,820,583 7,730,141
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 14,820,583 $ 7,730,141 $ 5,229,942
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-8
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest $ 182,354 $561,725 $ 372,169
Income taxes 707 52,221 225,188
Supplemental schedule of noncash
investing and financing activities-
Stock issued for services and notes receivable 6,250 219,390 -
Accretion of preferred stock to redemption value 14,695 141,808 141,804
Dividends payable on preferred stock - - 1,393,700
Series C preferred stock issued in payment of - - 1,136,040
dividends
Conversion of senior notes and related accrued - - 11,535,746
interest to Series C preferred stock
Contingent payment on acquisition of Chilean channels - - 400,000
Acquisition of SMR licenses in exchange for debt 3,428,746 - -
Equipment acquired through capital lease 1,872,432 716,464 -
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-9
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 1997 AND 1998
--------------------------------
NOTE 1. ORGANIZATION AND OWNERSHIP
- ------- --------------------------
Centennial Communications Corp. and subsidiaries (collectively, the "Company")
is a Delaware corporation engaged in the acquisition, development and operation
of specialized mobile radio ("SMR") and other low-cost, wireless communications
networks, the sale of communications services using those networks, and the sale
and servicing of related accessories and equipment in certain countries of Latin
America . Prior to August, 1997, the Company also had operations in the United
States. The Company has acquired SMR licenses through direct applications to
governments and through acquisitions of interests in other entities (all of
which are wholly owned) that have been granted or have applied for SMR licenses.
The Company commenced significant operations during 1996, and prior to that date
had been a development stage enterprise. The Company's business model is
subject to significant modification to address rapid change in
telecommunications technology and newly emerging marketplaces which the Company
believes offer significant opportunity. Reflecting such circumstances, in
August 1997, the Company reached the conclusion that its wireless communications
investment opportunities in Latin America and other emerging markets were more
attractive than its opportunities in the United States. As a result, the
Company decided to sell its United States SMR operations and related assets (the
"U.S. Operations") and focus its ongoing efforts solely in Latin America (See
Note 3).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------- ------------------------------------------
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Centennial
Communications Corp. and its subsidiaries, all of which are wholly owned. All
subsidiaries are consolidated except the El Salvador subsidiary which was
acquired in August and September of 1998, which the Company has made the
decision to sell (See Note 4). Accordingly, due to temporary majority control,
such investment has been accounted for using the equity method of accounting.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Minority interest share of loss results from minority ownership
interests in entities now wholly owned by the Company.
Foreign Currency Translation
----------------------------
For subsidiaries whose functional currency is the local currency and do not
operate in highly inflationary economies, all assets and liabilities are
translated at current exchange rates and translation adjustments are included in
stockholders' equity as a component of other comprehensive income. Revenues and
expenses are translated at the weighted average rate for the period. The
Company's Peruvian and Ecuadorian subsidiaries functional currency is the United
States dollar because the revenue stream is earned in the United States dollar.
Currently, Ecuador is the only hyper-inflationary economy in which the Company
has operations.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include short-
term, highly liquid investments with original maturities of three months or less
which are readily convertible into cash and are not subject to significant risk
from fluctuations in interest rates. Cash equivalents consist of overnight
investments
Restricted Cash
---------------
Restricted cash includes approximately $1.3 million and $11.8 million on deposit
with financial institutions at December 31, 1997 and 1998, respectively. The
December 31, 1997 balance and $1.3 million of the December 31, 1998 balance is
restricted by guarantees for performance bonds for certain construction and
operational obligations related to SMR licenses in Chile. This amount is
invested in a money market account. As of December 31, 1998, approximately $9.7
million is related to money which has been escrowed under one of the Company's
financing arrangements and is to only be used in Latin America. This escrow is
invested in highest obtainable Moody's rated commercial paper. Amounts can be
released upon board approval. Approximately $0.4 million of the December 31,
F-10
<PAGE>
1998 balance is related to an acquisition as discussed in Note 4. The remainder
of the balance is a performance bond for the build out of certain channels in
Peru.
Credit Risk and Concentration of Operations
-------------------------------------------
The Company typically does not require collateral from its customers. Accounts
receivable are comprised of small balances due from numerous customers located
primarily in Peru, Ecuador, Chile and El Salvador. The Company has assets
totaling approximately $27,000,000 located in Latin America. Accordingly, while
the Company believes that it has minimized it exposure to any single customer,
the Company is exposed to credit risk resulting from adverse general economic
conditions which may affect these countries and Latin America. The Company has
not entered into any foreign currency contracts, hedges or options. The
Company, as of December 31, 1998 has approximately $545,000 of unrestricted cash
and approximately $387,000 of restricted cash in Latin America. The Company
sweeps all excess cash from its operations on a weekly basis. The Company
invests its cash, cash equivalents and restricted cash with financial
institutions that the Company believes to be of high credit quality.
Accessories Inventory
---------------------
Accessories inventory represents radio accessories that are held for sale to the
Company's subscribers. Accessories are stated at the lower of their cost or
market. Cost is determined using the first-in, first-out method.
Revenue Recognition
-------------------
Radio service fees as well as charges for maintenance and loss and damage
insurance coverage are recognized in the period service is provided. Equipment
sales are recognized when the equipment is delivered and title passes to the
subscriber. In the Company's U.S. Operations, activation fees were recorded as
revenue in the month the activation occurred. The Company does not receive
activation fees outside the U.S.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Maintenance and repair
expenditures are charged to expense as incurred and expenditures for
improvements which increase the expected useful lives of the assets are
capitalized. Depreciation expense is computed using the straight-line method
over the useful lives of the respective assets (See Note 5).
Direct costs associated with the construction of SMR networks are capitalized
and amortized over the system's expected useful life upon placing the system in
service. Such costs include amounts incurred in securing tower sites, site
preparation, procurement and installation of infrastructure, and equipment
costs.
Also included in property and equipment are radios owned by the Company which
are leased to the Company's subscribers under operating lease agreements. The
Company retains title to these radios as part of the subscriber agreement and
depreciates the radios over five years. Upon termination of service, the
subscribers are required to return the radios to the Company. Certain
subscribers desire to own their radios; therefore, the cost or depreciated net
book value of radios sold to such subscribers is recorded as a charge to cost of
goods sold at the time of sale.
SMR Licenses
------------
Direct and certain indirect costs of obtaining SMR licenses, such as
application, legal and consulting fees, as well as the fair market value of
licenses obtained in certain acquisitions, are capitalized and amortized using
the straight-line method over the period of the related license (generally 10 to
40 years) upon commencement of service (See Note 4). SMR licenses in the
countries in which the Company operates are issued conditionally for various
periods of time. The SMR licenses are generally renewable providing the licensee
has complied with applicable rules and policies. In most instances, the Company
believes it has complied and intends to comply with these standards and is
amortizing the related costs using the straight line method over their estimated
useful life, generally 40 years. In some cases, the Company currently is not in
compliance with applicable requirements and, where appropriate, has filed
requests for extensions with the appropriate government agency. The Company
expects that such extension requests will be granted and the risk of having
these or any other licenses revoked is remote.
Income Taxes
------------
The current provision for income taxes represents actual or estimated amounts
payable on tax return filings each year. Deferred tax assets and liabilities
are recorded for the estimated future tax effects of temporary differences
between the tax basis of assets and liabilities and amounts reported in the
accompanying balance sheets, and for operating loss and
F-11
<PAGE>
tax credit carryforwards. The change in deferred tax assets and liabilities for
the period measures the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets and liabilities
are reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been reduced by a valuation
allowance to the extent it is more likely than not, that some or all of the
deferred tax assets will not be realized (See Note 8).
Net Loss Per Common and Common Equivalent Share
-----------------------------------------------
Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." Basic loss per
share is computed by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
net loss per share reflects the potential dilution assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period. As a result of the Company's net losses, all potentially dilutive
securities would be anti-dilutive. Potentially dilutive securities include the
Convertible Notes (See Note 6), Mandatorily Redeemable Convertible Preferred
Stock (See Note 10), and options and warrants for the Company's common stock.
On January 15, 1998, the Company completed a financing whereby warrants for
2,560,000 shares of common stock were issued to the holders of the Senior
Discount Notes (as defined in Note 6). As of December 31, 1998, an additional
29,419,703 shares of common stock would have been issued if all outstanding
options and conversion features were exercised.
Mandatorily Redeemable Preferred Stock
--------------------------------------
The Company's mandatorily redeemable preferred stock is recorded at its issuance
price less offering costs. The carrying value is increased to the redemption
value at June 2002 by a charge to stockholders' deficit ratably over the period
from issue date to redemption date.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
The Company is subject to the laws and regulations governing telecommunication
services in effect in each of the countries in which it operates. These laws and
regulations can have a significant influence on the Company's results of
operations and are subject to change by the responsible governmental agencies.
The financial statements as presented reflect certain assumptions based on laws
and regulations currently in effect in each of the various countries. The
Company cannot predict what future laws and regulations might be passed that
could have a material effect on the Company's results of operations. The Company
assesses the impact of significant changes in laws and regulations on a regular
basis and updates the assumptions used to prepare its financial statements
accordingly.
Long-lived Assets
-----------------
Long-lived assets and certain identifiable intangibles to be held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company continuously evaluates the recoverability of its long-
lived assets based on estimated future cash flows from and the estimated
liquidation value of such long-lived assets, and provides for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the
long-lived asset. If an impairment is indicated, the amount of the charge is
calculated as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. During 1998, the Company determined that its spectrum
licenses and other long-lived assets related to its El Salvador subsidiary was
impaired based upon third party offers, and recorded a write down to estimated
fair value. At December 31, 1998, the Company determined that there were no
other impairments of long-lived assets.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. From its inception through
December 31, 1998, the change in the cumulative translation adjustment is the
sole material item of other comprehensive income or loss.
F-12
<PAGE>
Stock Options
-------------
The Company accounts for its stock incentive plan in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Effective January 1, 1996, the Company adopted the disclosure-only provisions of
Statement of Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (See Note 11).
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). The Company is required to adopt SFAS No. 133 in the year ended December
31, 2000. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," Which provides
guidance on accounting for the cost of such software. SOP No. 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 had no impact on the Company's financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities." This statement will be effective in 1999 and will
require costs of start-up activities and organization costs to be expensed as
incurred. The adoption of this statement had no effect on the Company's
financial position or results of operations.
NOTE 3. SALE OF THE U.S. OPERATIONS
- ------- ---------------------------
In August 1997, the Company made a strategic decision to sell the U.S.
Operations and began to seek purchasers for these operations, consisting of
licenses and related assets and liabilities in 20 major trading areas ("MTAs").
As of December 31, 1998, the Company had completed the sale of all but three
MTA's to two purchasers. The remaining purchases are subject to the approval by
the Federal Communications Commission (the "FCC") of assumption of debt, and the
qualifications by the proposed purchaser as a small or very small business, as
defined by the FCC. Until the contingencies related to the FCC are resolved,
the Company transfered a majority of the risks and rewards of the U.S.
Operations to the purchasers by way of management agreements. The management
agreements give the purchasers the ability to operate the MTA's purchased and
perform all the necessary functions of operating the wireless networks, billing
the customers, collecting cash receipts and servicing its customer base. In
August 1997 and subsequent to transferring assets and the related operations,
which are the subject of management agreements, the Company ceased recording
revenue and related operating expenses. The transactions were not, and for those
remaining, will not be recognized as a sale until substantially all of the
risks, rewards of ownership and full control of such licenses and the related
assets and liabilities are transferred to the purchasers. As of December 31,
1998, the Company had received approximately $454,000 in cash proceeds related
to the two remaining sales and has recorded these amounts as deposit liabilities
in the accompanying balance sheet.
At December 31, 1997 and 1998 and for each of the three years ended December
31, 1998, financial information related to the U.S. Operations was as
follows:
F-13
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------------------------------------- ---------------------
<S> <C> <C> <C>
Revenue $ 79,562 $ 1,111,651 $ -
Costs and expenses related to revenue 410,045 1,272,172 -
------------------------------------------- ---------------------
Gross loss (330,483) (160,521) -
Selling, general and administrative 2,597,131 3,001,663 -
Depreciation and amortization 327,791 1,143,346 -
---------------------
(3,255,405) (4,305,530) -
Loss on Divestiture of U.S. Operations - (3,206,510) -
------------------------------------------- ---------------------
Operating Loss $(3,255,405) $(7,512,040) $ -
=========== ==================== =====================
Current assets $ 474,591 $ 53,011
Property and equipment 6,714,290 935,477
SMR licenses 3,828,794 231,485
-------------------- ---------------------
Total Operating Assets 11,017,675 1,219,973
Current liabilities 1,574,184 154,170
Capital leases 1,478,884 173,035
Spectrum license debt 3,533,946 213,659
-------------------- ---------------------
Total Liabilities 6,587,014 540,864
-------------------- ---------------------
Net assets of the U.S. Operations $ 4,430,661 $ 679,109
==================== =====================
</TABLE>
Effective August 1997, the property, equipment and SMR licenses related to the
U.S. Operations were considered to be assets to be disposed of, as that term has
been defined by Statement of Financial Accounting Standards No. 121, because
management, having the authority to do so, has committed to the sale of these
assets. Accordingly, the Company's management estimated the fair value of such
assets, and determined that a write-down to fair market value was necessary as
of August 1997. In order to reflect these assets at fair value less selling
costs, the amount of the write-down recorded by management was approximately
$1,900,000. The Company's estimates were based upon executed sales contracts.
Additionally, the Company recorded an approximate $1,300,000 charge for
termination and other contractually committed costs in connection with the
divestiture of the U.S. Operations in the third quarter of 1997. As of December
31, 1998, the Company has made cash payments of a substantial majority of this
amount. The Company expects to close the remaining two sales within the next six
months.
NOTE 4. ACQUISITIONS
- ------- -------------
The Company completed several acquisitions of non-operating entities whose
primary assets were SMR licenses as well as the acquisition of operating
entities and spectrum. Included in the accompanying consolidated financial
statements, from the date of their acquisition, are the results of operations
for these entities (except El Salvador - see below) as follows:
F-14
<PAGE>
<TABLE>
<CAPTION>
Name and Location of Entity Date Acquired
- --------------------------- -------------
<S> <C>
SMR Direct Peru S.R.L. (formerly Mobil Line S.A.); Lima, Peru February and July 1996 (1)
Pompano S.R.L.; Lima, Peru November 1996
Brunacci S.R.L.; Guayaquil, Ecuador November 1996
Telecom Supply S.R.L.; Lima, Peru December 1996
C-Comunica S.R.L.; Lima, Peru January 1997
Transnet del Peru S.A.; Lima, Peru July 1997
Telecomunicaciones y Servicios S.A.; Santiago, Chile January 1998
Peru Tel S.A.; Lima, Peru May 1998
Comovec S.A.; Quito, Ecuador May 1998
El Salvador June, August and September 1998
</TABLE>
(1) The Company acquired 51% of Mobil Line S.A. in February 1996. The remaining
49% was acquired in July 1996.
In February 1996, the Company purchased 51% of the capital stock of Mobil Line
S.R.L. ("Mobil Line"), a Peruvian non-operating development stage company which
owned a Peruvian SMR spectrum concession, for $900,000. The Company acquired
the remaining 49% of Mobil Line in July 1996 for approximately $600,000. These
transactions were accounted for as a step acquisition purchase and, accordingly,
operating results of the Company from March 1996 include the operations of Mobil
Line from acquisition, with the minority interest reflected for the five-month
period ending in July. Of the total consideration paid approximately $900,000
remained in Mobil Line to purchase infrastructure and approximately $600,000 was
paid to the founders of Mobil Line. As a result of these transactions
approximately $692,000 of the total consideration paid was allocated to SMR
licenses. SMR licenses are amortized over 40 years. The purchase price was
financed by the Company with available cash.
In November 1996, the Company, through wholly owned subsidiaries, acquired all
of the common stock of Pompano S.R.L. ("Pompano"), a Peruvian non-operating
development stage company which owned a Peruvian SMR spectrum concession. The
acquisition was accounted for as a purchase and, accordingly, operating results
of Pompano subsequent to the date of acquisition are included in the
accompanying consolidated financial statements. Total consideration paid by the
Company was approximately $419,000, of which approximately $16,000 was allocated
to tangible net assets and $403,000 was allocated to SMR licenses. SMR licenses
are amortized over 40 years. The purchase price was financed by the Company
with available cash.
In November 1996, the Company, through wholly owned subsidiaries, acquired all
of the common stock of Brunacci S.R.L. ("Brunacci") and of its wholly owned
subsidiary, Multisistemas Electronics M.S.E. S.A. ("Multisistemas"), both
Ecuadorian non-operating development stage companies which owned Ecuadorian SMR
spectrum concessions. The acquisition was accounted for as a purchase and,
accordingly, operating results of Brunacci and Multisistemas subsequent to the
date of acquisition are included in the accompanying consolidated financial
statements. Total consideration given and liabilities assumed for both of the
acquired companies was approximately $947,000, of which $297,000 was allocated
to tangible net assets and $650,000 was allocated to SMR licenses. SMR
licenses are amortized over 10 years, the expected term of the license. The
purchase price was financed by the Company with available cash.
In December 1996, the Company, through wholly owned subsidiaries, acquired all
of the common stock of Telecom Supply S.R.L. ("Telecom"), a Peruvian non-
operating development stage company which owned a Peruvian SMR spectrum
concession. The acquisition was accounted for as a purchase and, accordingly,
operating results of Telecom, subsequent to the date of acquisition, are
included in the accompanying consolidated financial statements. Total
F-15
<PAGE>
consideration paid by the Company was approximately $400,000, of which
approximately $14,000 represented the fair value of tangible assets acquired and
the excess purchase price over fair value of the net tangible assets acquired
was approximately $386,000, which was allocated to SMR licenses. SMR licenses
are amortized over 40 years. The purchase price was financed by the Company with
available cash.
Because the above entities were acquired prior to commencing their operations,
the Company believes that pro-forma revenue and results of operations for 1995
and the period in 1996 prior to their acquisition by the Company are not
meaningful.
In January 1997, the Company acquired all of the common stock of C-Comunica S.A.
("C-Comunica"), a Peruvian SMR operating company. The acquisition was accounted
for as a purchase. The total consideration given and liabilities assumed for C-
Comunica was approximately $2.9 million, of which approximately $800,000
represented the fair value of the net tangible assets as of the date of
acquisition and the excess purchase price over the fair value of the net
tangible assets acquired was approximately $2.1 million, which was allocated to
SMR licenses. SMR licenses are amortized over 40 years. The purchase price was
financed by the Company with available cash.
In July 1997, the Company acquired all of the common stock of Transnet del Peru
S.A. ("Transnet"), a Peruvian SMR operating company. The acquisition was
accounted for as a purchase. The total consideration given and liabilities
assumed for Transnet was approximately $1.5 million, of which approximately
$300,000 represented the fair value of the net tangible assets as of the date of
acquisition and the excess purchase price over the fair value of the net
tangible assets acquired was approximately $1.2 million, which was allocated to
SMR licenses. SMR licenses are amortized over 40 years. The purchase price was
financed by the Company with available cash.
Also in July 1997, the Company pledged $1.3 million to secure its obligations in
connection with the Company's bid for additional spectrum with Chile Concurso.
On October 29, 1997, the Company received written notice from the Chilean
Ministry of Transportation and Telecommunications (the "Ministry") that its
proposal had been accepted and awarded; although such award is subject to appeal
by the other participants in the Chile Concurso. During 1997 and 1998 appeals
were filed and the Ministry has denied such appeals. The Company believes that
it will be awarded the channels in the next six months.
In September 1997, the Company acquired all of the common stock of Fastcom S.A.
("Fastcom") and Radioservicios Moviles, S.A. ("Radioservicios"), Argentine non-
operating development stage companies which owned an Argentine paging
concession. The total consideration given and liabilities assumed for Fastcom
was approximately $526,000. The Company paid $110,000 cash at closing and
signed a note to the seller for the remainder of the purchase price due December
2, 1997. The Company pledged the shares of Fastcom and Radioservicios to the
previous owners and related parties (the "Lienholders") to secure certain
payment obligations of the Company. The Company did not satisfy these payment
obligations on December 2, 1997, and as such, the Lienholders foreclosed on the
shares of Fastcom and Radioservicios. This resulted in the Company taking an
approximately $600,000 (included in general and administrative expenses) charge
in December 1997, which consists of the $110,000 initial purchase price and
approximately $490,000 in capitalized costs made in connection with the
Radioservicios transaction during 1997.
On January 2, 1998, the Company purchased 100% of the outstanding capital
stock of Telecomunicaciones y Servicios S.A. ("TyS"), a Chilean operating
company. TyS holds 10 800 MHz channels in the metropolitan region of Santiago,
Chile. The acquisition was accounted for as a purchase. The total
consideration given and liabilities assumed for the Chilean company was
approximately $3,200,000, of which $800,000 was paid at closing and
approximately $2,040,000 was paid June 29, 1998 and $350,000 on July 8, 1998
upon the transfer of 290 additional channels (40 of which are in the
metropolitan region of Santiago) to the operating company. Approximately $80,000
represented the fair value of the net tangible assets as of the date of
acquisition and the excess purchase price over the fair value of the net
tangible assets acquired was approximately $3,120,000, which was allocated to
SMR licenses. SMR licenses are amortized over 40 years. The purchase price was
financed by the Company with available cash.
On April 14, 1998 the Company executed a purchase agreement with certain
non-operating subsidiaries of International Wireless Communications Holdings,
Inc. ("IWC") for the acquisition of certain assets in Peru, Ecuador and Chile
for a purchase price of approximately $3,500,000. On May 13, 1998 the Company
completed the first part of the acquisition and acquired a non-operating entity
in Ecuador (Comovec S.A.) for approximately $300,000. Comovec S.A. holds
licenses to operate SMR networks and has 40 800 MHz channels and 20 900 MHz
channels in each of Quito and Guayaquil and 25 800 MHz channels in Cuenca.
Approximately $20,000 represented the fair value of the net tangible assets of
Comovec S.A. as of the date of acquisition. The excess purchase price over the
fair value of the net tangible assets acquired was approximately $250,000, which
was allocated to SMR licenses. Comovec S.A.'s licenses will be amortized over
40 years beginning on the date that the channels are launched. On May 22, 1998,
the Company
F-16
<PAGE>
completed the second part of the acquisition and acquired a non-operating entity
in Peru (Peru Tel S.A.) for approximately $2,800,000. Peru Tel S.A. holds
licenses to operate SMR networks and has 32 800 MHz channels in Lima/Callao and
100 800 MHz channels among eight other cities. Approximately $400,000
represented the fair value of the net tangible assets of Peru Tel S.A. as of the
date of acquisition. The excess purchase price over the fair value of the net
tangible assets acquired was approximately $2,400,000, which was allocated to
SMR licenses. Peru Tel S.A.'s SMR licenses will be amortized over approximately
40 years beginning on the date that the channels are launched. The Company is
currently waiting for final government approval for the transfer of the license
in Chile to the Company (which it expects will occur in the next six months)
before it can close the final part of the acquisition for approximately
$400,000, which amount was placed into escrow upon the Chilean government's
initial approval of the transfer. The Company used its existing cash to acquire
Comovec S.A. and Peru Tel S.A.
<TABLE>
<CAPTION>
Detail of net assets of acquisitions: 1997 1998
--------------------- --------------------------
<S> <C> <C>
Property and equipment $ 896,688 $ 71,039
SMR licenses 3,326,723 5,792,621
Other assets 928,538 105,405
Accounts payable and accrued liabilities (669,624) (106,762)
--------------------- --------------------------
Acquisition, net of cash acquired 4,482,325 5,862,303
Cash acquired 443,675 420,930
Payable to seller - 400,000
--------------------- --------------------------
Purchase price $4,926,000 $6,683,233
========== ==========
</TABLE>
In addition to acquisitions, the Company was awarded 40 nationwide
channels of 800 MHz spectrum on June 9, 1998 in El Salvador. The Company paid
$620,000 for the channels, which have a 20 year term. In August 1998, the
Company completed the acquisition of a concession for 10 nationwide channels of
800 MHz spectrum in El Salvador for approximately $300,000. The acquisition of
assets included certain infrastructure and approximately 140 subscribers. In
September 1998 the Company was awarded 65 nationwide channels of 800 MHz
spectrum in El Salvador. The Company paid approximately $2,027,000 for the
channels, which have a 20 year term. Also, in September 1998, the Company
acquired a concession for 30 nationwide channels of 800 MHz spectrum in El
Salvador for approximately $949,000. The acquisition of assets also included
certain infrastructure and approximately 600 subscribers. The Company was
awarded a concession for 25 nationwide channels of 800 MHz spectrum in El
Salvador for approximately $10,000. These assets have been recorded as an
investment in subsidiary and accounted for using the equity method of
accounting. The Company has not consolidated this subsidiary because its
control is temporary, as the Company had signed a letter of intent to sell the
subsidiary. The letter of intent was not consummated, however, the Company is
entertaining offers to sell and is committed to selling this subsidiary. Based
on third party offers to buy the subsidiary, the Company wrote down the carrying
value of this subsidiary to $1,560,000 and took an approximate $2,400,000 write
off (see Note 2).
NOTE 5. PROPERTY AND EQUIPMENT
- ------- ----------------------
The composition of property and equipment follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1997 1998
---------------------------- ---------------------------
<S> <C> <C>
Network infrastructure $ 3,527,655 $ 6,975,994
Radios 2,017,071 3,321,641
Computer equipment and software 392,276 719,846
Furniture and fixtures 229,174 397,775
Leasehold improvements 44,496 303,754
------------ ------------
6,210,672 11,719,010
Accumulated depreciation (1,205,769) (2,784,343)
------------ ------------
Property and equipment, net $ 5,004,903 $ 8,934,667
=========== ===========
</TABLE>
The Company leases its phone system under a capital lease. As of December 31,
1998 the net book value of such equipment was approximately $9,400 net of
accumulated depreciation of approximately $38,900.
F-17
<PAGE>
The Company depreciates infrastructure over 10 years, radios over five years,
computer equipment and software over three years and leasehold improvements over
the life of the lease.
Depreciation expense was $446,652, $1,802,283 and $1,718,203 for the years ended
December 31, 1996, 1997 and 1998, respectively.
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASES PAYABLE
- ------- -----------------------------------------
In April 1996, the Company acquired 430 channels in MTA's in the United States
through the Federal Communications Commission's ("FCC") 900 MHz spectrum auction
for a purchase price of approximately $5.1 million. In connection with such
auction, the Company qualified for "small business" status under the FCC's
regulations which allowed the Company to (i) make a 10% down payment; (ii)
receive a 15% bidding credit against its spectrum purchase price; and (iii)
receive United States government financing at 7% per annum on the balance of the
purchase price to be paid by the Company over a 10-year period. The contractual
principal amount on this debt totals approximately $4.6 million and $214,000 as
of December 31, 1997 and 1998, respectively. The note provides for interest
payments only in the first five years and quarterly principal and interest
payments thereafter. In accordance with Accounting Principles Board Opinion No.
21, "Interest on Receivables and Payables", the Company has determined that the
market rate for such debt is 12%, and accordingly, recorded this debt and
related spectrum at approximately $3.5 million. As discussed in Note 3, the
Company has decided to sell the U.S. Operations and a majority of the FCC debt
has been, and the Company believes that the remaining balance will be, assumed
by the buyers of the U.S. Operations.
In July through October 1996, the Company secured approximately $1.8 million in
fixed equipment infrastructure financing from E.F. Johnson, a leading equipment
manufacturer, for use in constructing its U.S. network. Total principal
outstanding on this vendor financing was approximately $1.4 million at December
31, 1997. In addition, in February 1997, the Company secured an additional $0.5
million in fixed equipment infrastructure financing from E.F. Johnson to
construct network facilities at additional site locations in the U.S. The terms
of this financing required that the Company pay 30% of the cost of the equipment
at the time of purchase with the balance of the purchase price payable monthly
over a five year period and bearing interest at a rate of 12% per annum.
Purchases made under this financing arrangement were classified as capital
leases payable. The majority of the capital leases have been paid off in the
divestiture of the U.S. Operations and the remaining will also be paid off at
closing of the remaining U.S. operations.
The Company entered into additional agreements with E.F. Johnson regarding the
purchase of infrastructure equipment and subscriber units. E.F. Johnson has
made available to the Company a $1.5 million credit line associated with the
purchase of infrastructure equipment for build-out in Chile. The amounts
financed are payable quarterly over a one year period and no interest is
charged. The Company has determined the market rate for this debt to be 14%.
The Company is required to make a down payment in the amount of 25% of the cost
of the purchased equipment pursuant to the agreement. The amount outstanding on
this financing at December 31, 1998 was approximately $873,000. The Company
also entered into a radio purchase agreement with E.F. Johnson to acquire 5,000
radios during 1998 and took delivery of 3,600. The Company is currently in
discussions with E.F. Johnson regarding the remaining 1,400 radios.
The Company entered into a radio purchase agreement with Motorola to acquire
10,000 radios during 1998 and took delivery of 8,325. The Company is currently
in discussions with Motorola regarding the remaining 1,675 radios.
Senior Notes Financing
----------------------
On October 3, 1997, the Company finalized an approximately $11.1 million
financing of Senior Secured Convertible Notes, due 2002 (the "Senior Notes"),
which were convertible into shares of the Company's common stock at an initial
conversion price of $1.45 per share. The Senior Notes were secured by 66% of
the Company's shares of its holding companies for its Latin American operations,
and bear interest at 12% (payable semi-annually beginning on April 30, 1998).
Due to the Senior Discount Notes offering completed on January 15, 1998, the
principal amount of the Senior Notes and related accrued interest were
automatically converted into 7,955,691 shares of the Company's Series C
Preferred stock at a conversion price of $1.45 per share (see Note 10).
On January 15, 1998, the Company finalized a $40 million financing of Senior
Discount Notes (the "Senior Discount Notes") due 2005. The financing consisted
of 40,000 units, each unit consisting of $1,000 in principal at maturity and one
warrant to purchase 64 shares of common stock of the Company at an exercise
price of $.01 per share. The Senior Discount Notes were issued at a substantial
discount from their principal amount and interest does not accrue on the
F-18
<PAGE>
Senior Discount Notes prior to January 1, 2003. Thereafter, interest accrues at
14% per annum, payable semi-annually in arrears on January 1 and July 1 of each
year commencing July 1, 2003. For accounting purposes, the Senior Discount Notes
accrete at a rate of 21.26% per annum compounding semi-annually. Net proceeds to
the Company were $19.1 million, after deducting $19.5 million of debt discount
and $1.4 million in offering expenses. The warrants issued in connection with
the notes were valued at $5,760,000 and were recorded directly to additional
paid-in capital. The Senior Discount Notes are secured by 66% of the Company's
shares of its Cayman Island holding companies for its Latin American operations.
The Senior Discount Notes are also secured by 100% of the Company's stock in SMR
Direct USA, Inc., a wholly-owned subsidiary of the Company. This entity has no
operations and its financial position consists only of a nominal capitalization.
Pursuant to a registration rights agreement (the "Senior Discount Notes
Registration Rights Agreement") among the Company and the purchasers of the
Senior Discount Notes, the Company agreed: (i) to file with the Commission on or
prior to the earlier to occur of (a) an offering of securities of the Company
pursuant to which the Company is thereafter subject to the reporting
requirements of the Exchange Act and (b) 300 days after the closing of the
Senior Discount Notes offering, a registration statement with respect to an
offer to exchange (the "Exchange Offer") the Senior Discount Notes for a new
issue of senior discount notes of the Company (the "New Notes") with terms
substantially identical to those of the Senior Discount Notes and (ii) to use
its best efforts to cause such registration statement to become effective within
60 days following the date of this filing. The Company has not currently
completed the registration process for the Exchange Offer and has incurred
approximately $14,000 in liquidated damages through December 31, 1998. The
liquidated damages are due and payable with the first interest payment on July
1, 2003. The liquidated damages are charged on a weekly basis per $1,000 bond
and increase every 90 days for a fee of $4,000 beginning in January 1999 and
increasing to $10,000 per week at the end of 1999 until the registration
statement is declared effective. The Company intends to complete the
registration process during 1999.
In addition, on January 15, 1998 the Company issued $10.0 million in aggregate
principal amount of convertible notes (the "Convertible Notes") pursuant to a
purchase agreement dated January 15, 1998. Cash interest will not accrue on
the Convertible Notes prior to January 1, 2000. Thereafter, interest on the
Convertible Notes will be payable in cash at a rate of 9% per annum on January 1
and July 1 of each year, commencing on July 1, 2000. The Convertible Notes are
convertible into shares of common stock at a conversion price of $2.25 per
share, subject to adjustments in certain circumstances.
F-19
<PAGE>
Notes and capital leases payable consist of the following at December 31, 1997
and 1998:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1998
---------------------- -------------------
<S> <C> <C>
Capital lease, payable in monthly principal and interest payments of $ 1,436,686 $ 173,035
$40,577, for 60 months beginning on various dates from July 1, 1996
through October 31, 1996, effective interest rate of 12%, secured by
infrastructure equipment
Capital lease, payable in monthly principal and interest payments of 42,198 24,607
$1,226 for 48 months beginning July 28, 1996, effective interest
rate of 10.1%, secured by a phone system
Notes payable for purchase of SMR license, quarterly payments of 3,533,946 213,659
$79,786 (1997) and $4,824 (1998) are interest-only (at the stated
rate) for first five years after which quarterly payments of
$272,144 (1997) and $16,454 (1998) include principal and interest
for remaining five years, imputed interest rate of 12%, secured by
related SMR licenses
Senior Notes (see above) 11,144,703 -
Senior Discount Notes (see above) - 17,829,506
Convertible Notes (see above) - 10,881,063
------------ ------------
16,157,533 29,121,870
Less amount classified as Net Assets Held for Sale (5,012,830) (386,694)
------------ ------------
$11,144,703 $28,735,176
=========== ===========
</TABLE>
F-20
<PAGE>
Contractual maturities of debt outstanding and capital leases at December 31,
1998 (including those classified as Net Assets Held for Sale), are as
follows:
<TABLE>
<CAPTION>
Capital
Debt Leases
---------- --------------
<S> <C> <C>
1999 $ 19,295 $ 97,568
2000 554,003 81,945
2001 1,104,216 40,671
2002 1,135,229 -
2003 3,935,229 -
Thereafter 63,131,431 -
------------ ------------
69,879,403 220,184
Less interest (17,721,370) (22,542)
Less discount (61,986) -
Less accretion (23,171,819) -
------------ ------------
$ 28,924,228 (1) $ 197,642 (1)
============== ===========
</TABLE>
(1) A portion of these amounts are included in the Net Assets Held for Sale line
on the balance sheet. Certain of the Company's long-term debt contain
restrictive covenants regarding the Company's ability to pay dividends, incur
additional debt and issue additional equity securities as well as other
restrictions. At December 31, 1998 the Company was in compliance with
covenants.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ------- -----------------------------------
Fair values of cash equivalents and other current amounts receivable and payable
approximate the carrying amount due to their short-term nature.
The fair market value of the Senior Discount Notes and the Convertible Notes,
based upon comparable, publicly traded debt, is approximately $17,800,000 and
$10,900,000, respectively. Using the estimated fair market value of the
Company's common stock, the Company's Convertible Notes' fair market value would
approximate $7,700,000.
Mandatorily redeemable, convertible preferred stock is carried on the Company's
consolidated balance sheet at December 31, 1998 at $42.1 million. Fair value of
the Company's mandatorily redeemable, convertible Preferred Stock is based upon
the estimated fair value of the Company's common stock of $1.45 per share, as
established by recent third party offers as follows:
Fair Value
----------
Series A Preferred $ 6,018,867
Series B Preferred $11,674,560
Series C Preferred $12,744,295
-----------
$30,437,722
===========
NOTE 8. INCOME TAXES
- ------- ------------
The Company is subject to federal, state and foreign income taxes but has
incurred minimal liability for such taxes due to losses it has incurred since
inception. At December 31, 1998, the Company had net operating loss
carryforwards for U.S. federal tax purposes of approximately $17.5 million which
expire through the year 2013. These carryforwards are available to offset
future taxable income, if any. The Company's foreign consolidated subsidiaries
in Peru, Ecuador, Chile and El Salvador are considered pre-operating entities
for income tax purposes and therefore the losses are deferred for income tax
purposes and amortized against future taxable income or loss over a period of
approximately four years commencing in 1996.
The Company's net deferred tax assets result primarily from the future benefit
of net operating loss carryforwards and deferred pre-operating losses. Net
deferred tax assets by country as of December 31, 1997 and 1998 are as
follows:
F-21
<PAGE>
<TABLE>
<CAPTION>
U.S. Peru Ecuador Chile Other Total
------------ --------- --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
1997: $ 6,356,024 $ 779,561 $ 338,773 $ 10,526 $ 12,530 $ 7,497,414
Net operating losses and
deferred pre-operating
losses
Valuation allowance (6,356,024) (779,561) (338,773) (10,526) (12,530) (7,497,414)
------------ --------- --------- --------- -------- ------------
$ - $ - $ - $ - $ $ -
============ ========= ========= ========= ======== ============
1998: $ 10,176,982 $ 702,909 $ 465,122 $ 425,094 $ 14,189 $ 11,784,296
Net operating losses and
deferred pre-operating
losses
Valuation allowance (10,176,982) (702,909) (465,122) (425,094) (14,189) (11,784,296)
------------ --------- --------- --------- -------- ------------
$ - $ - $ - $ - $ - $ -
============ ========= ========= ========= ======== ============
</TABLE>
The reconciliation of income taxes computed at the statutory rates to the income
tax benefit is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998
------------------ -----------------
<S> <C> <C>
Income tax benefit at statutory rates $(5,660,909) $(3,591,767)
Increase in valuation allowance 5,660,909 3,591,767
------------------ -----------------
Tax benefit $ - -
================== =================
</TABLE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
- ------- -----------------------------
Recovery of Investments
-----------------------
Since its inception, the Company's efforts have been primarily directed towards
raising capital and acquiring, developing and operating SMR and other low-cost,
wireless communications networks. Further, the Company has made significant
investments in pre-operating entities in various Latin American countries whose
primary assets were SMR licenses. The Company's Peruvian operations and
revenue-generating activity began in May 1996, its Ecuadorian operations and
revenue generating activity began in March 1997, its Chilean operations and
revenue generating activity began in January 1998 and its El Salvadoran
operations and revenue generating activity began in September 1998. The ability
of the Company to recover its current investment in property, equipment and
spectrum and to generate positive cash flow and operating profits is contingent
upon a number of factors, including the Company's ability to continue to build
out and develop the SMR and other low-cost, wireless communications networks it
currently owns and to attract and retain sufficient subscribers on its existing
systems and those which are under development in sufficient numbers to achieve
profitable operations.
Recoverability of Licenses
--------------------------
The terms of the Company's SMR license agreements contain provisions whereby the
Company must achieve certain levels of subscriber load and network build out.
If such commitments are not met, the Company could be subject to the revocation
of the applicable licenses.
Compliance with the terms of SMR licenses and certain regulatory requirements,
such as construction deadlines and minimum subscriber requirements, can be
difficult to meet. In addition, there can be no guarantee that in the future
all regulatory requirements will be met or that the Company will not lose any
applicable licenses as a result of its failure to meet such requirements. The
Company currently is not in compliance with certain minimum subscriber loading
requirements with respect to a portion of its channels in Peru. Failure to
comply with such requirements may subject the licenses relating to such channels
to punitive measures. Requests for amendment of such loading requirements have
been filed by the Company with the Peruvian Ministry of Transportation,
Communications, Housing and Construction (the "Ministry"); however, to date no
responses have been received. Based upon information currently available, the
Company is optimistic that these amendments will be approved; however, there can
be no guarantee that the amendments received by the Company will be the same as
those applied for. The Company is also not in compliance with certain terms of
the concession agreements including, homologation of equipment (certifying the
equipment before entering Peru), site to site transmission of signal (currently
allowed only site to handset),
F-22
<PAGE>
unauthorized transfer and use of channels between the Peruvian companies and
unauthorized use of certain frequencies granted. The Company has applied to
correct the non-compliance issues and is waiting on approval from the Ministry.
The Company believes that the applications will be approved and result only in
minimal fines, if any; however, there can be no assurance of such outcome.
Lease Commitments
-----------------
The Company leases certain office facilities and transmission sites under
operating leases. Lease terms for office facilities range from one to three
years. Lease terms for transmission sites on buildings range from one to three
years, with varying renewal terms. Future minimum rental payments for such
office facilities and antenna site leases are as follows as of December 31,
1998.
<TABLE>
<S> <C>
1999 $ 752,374
2000 493,866
2001 347,276
2002 -
2003 -
Thereafter -
-
_______________
$1,593,516
==========
</TABLE>
Lease expense for the years ended December 31, 1997 and 1998 was $279,972 and
$426,154, respectively.
Litigation
----------
In the normal course of business, the Company is subject to, and may become a
party to, litigation. In management's opinion, none of the matters currently in
litigation will have a material impact on the Company's financial position or
results of operations.
NOTE 10. PREFERRED STOCK
- -------- ---------------
The Company is authorized to issue 17,400,000 shares of preferred stock. Shares
of preferred stock may be issued from time to time in one or more series with
designations, rights, preferences and limitations established by the Company's
Board of Directors.
Holders of preferred stock are entitled to dividends in amounts determined by
the Board of Directors. No distributions may be made to holders of common stock
until all dividends declared, if any, on the preferred stock have been paid.
The Senior Discount Notes indenture (the "Indenture") restricts the Company's
ability to pay cash dividends.
In the event of the liquidation of the Company, holders of Series C Preferred
Stock have a preference of $12,744,295 over all other stock. Holders of Series
B Preferred Stock have a preference of $20,933,670 plus any declared and unpaid
dividends, if any, over holders of Series A Preferred Stock and common stock.
Holders of Series A Preferred Stock have a preference of $8,800,000 plus any
declared and unpaid dividends, if any, over holders of common stock. All such
series of preferred stock are collectively referred to as "Preferred Stock."
After all such payments have been made, any remaining assets will be distributed
to holders of all preferred stock and common stock ratably based on the number
of common shares outstanding, assuming the holders of Preferred Stock had
converted their shares into common stock.
Each share of Preferred Stock is convertible, at the option of the holder, into
shares of the Company's common stock at the rate of 11,792 shares of common
stock for each share of Series A Preferred Stock, 1.4 shares of common stock for
each share of Series B Preferred Stock and 1 share of common stock for each
share of Series C Preferred Stock. This conversion rate is subject to
adjustment based on a formula to prevent dilution. Each share of Preferred
Stock is automatically convertible into common stock immediately prior to the
closing of a public offering which meets certain conditions.
The Company is obligated to redeem the Preferred Stock in three equal annual
payments beginning on June 27, 2002. The redemption price for the Series A
Preferred Stock is $25,000 per share ($8,800,000 in total), the redemption price
for the Series B Preferred Stock is $3.65 per share ($20,933,670 in total), the
redemption price for the Series C
F-23
<PAGE>
Preferred Stock is $1.45 per share ($12,744,295 in total). The holders of
Preferred Stock have an option to convert any or all of the redeemable shares of
Preferred Stock to common stock prior to each scheduled annual redemption. In
connection with the issuance of the Discount Notes and the Convertible Notes,
this obligation has been extended past the maturity of the Discount Notes and
the Convertible Notes.
On October 3, 1997, the Company issued 50,000 shares of Series C Preferred Stock
to an officer of the Company in exchange for a promissory note payable in the
amount of $72,500. On January 15, 1998, the Senior Notes and related accrued
interest were automatically converted into 7,955,691 shares of Series C
Preferred Stock at a conversion price of $1.45 per share. The Series C
Preferred Stock bears a 12% dividend per annum and is payable semi-annually in
each April and October in either cash or additional shares of Series C Preferred
stock at the option of the Company. The Indenture restricts the ability of the
Company to pay cash dividends on the Series C Preferred. In April 1998, the
Company issued 278,450 shares of Series C Preferred Stock for the 12% dividend
at $1.45 per share. In October 1998, the Company issued 505,028 shares of
Series C Preferred Stock for the 12% dividend at $1.45 per share.
NOTE 11. STOCKHOLDERS' EQUITY (DEFICIT)
- -------- ------------------------------
Stock Option Plan
-----------------
During 1996, the Company adopted the 1996 Stock Option Plan ("the Plan") under
which the Company is authorized to grant options for up to 1,250,000 shares of
the Company's common stock to employees and directors of the Company. The Plan
was amended in February 1997 to authorize the Company to grant up to 1,488,000
shares of the Company's common stock and again in October 1997 to grant up to
2,307,972. The Company has outstanding options on 1,772,285 shares of the
Company's common stock at December 31, 1998. Under the Plan, the option
exercise price equals the market price of the stock on date of grant. The
options vest at various terms with a maximum vesting period of five years and
expire after a maximum of 10 years. The Company accounts for the Plan under
Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25") under which
$22,000 and $37,458 of compensation cost was recognized during the years ended
December 31, 1997 and 1998, respectivley.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 ("SFAS No. 123") which defines a fair value-based method of accounting for
employee stock options and similar equity instruments. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value-based method of accounting prescribed by APB Opinion No. 25.
Entities electing to remain with the accounting prescribed in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to make the pro forma disclosures in accordance with
SFAS No. 123 set forth below.
Had compensation cost for the Plan been determined consistent with SFAS 123, the
Company's net loss and net loss per common and common equivalent share would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss: As Reported $(4,789,511) $(15,856,839) $(16,968,899)
=========== ============ ============
Pro Forma $(4,803,081) $(15,870,576) $(17,058,000)
=========== ============ ============
Basic loss per common and As Reported $ (1.38) $ (4.53) $ (4.84)
common equivalent share: =========== ============ ============
Pro Forma $ (1.38) $ (4.53) $ (4.87)
=========== ============ ============
</TABLE>
Because the fair value method of accounting required by SFAS 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
A summary of the status of the Plan at December 31, 1997 and 1998 and changes
during the year then ended is presented in the table and narrative below:
F-24
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ---------------------------- ------------------------
Weighted Avg. Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- ------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 572,750 $1.89 1,896,011 $ 1.46
Granted 573,500 1.88 2,438,750 1.96 559,000 1.65
Exercised - - (150) 2.50 (100 2.50
Forfeited or canceled (750) 2.50 (1,115,339) 2.77 (682,626 1.61
Expired - - - - - -
-------- -------- ----------- -------------- --------- -------------
Outstanding at end of year 572,750 1.89 1,896,011 1.46 1,772,285 1.46
======== ======== =========== ============== ========= =============
Exercisable at end of year - - 254,604 1.64 587,106 1.53
======== ======== =========== ============== ========= =============
Weighted average fair value of options granted $ 0.22 $ 0.44 $ 0.77
======== =========== =========
</TABLE>
The status of total stock options outstanding and exercisable under the Stock
Option Plan as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
- ---------------------------------------------------------------------------------- ----------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Shares Life (Years) Price Shares Price
- ------------------ ------------------- -------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.45 1,687,365 4.51 $1.40 502,186 $1.32
$1.46 - $2.50 65,720 2.13 $2.42 65,720 $2.42
$2.51 - $3.25 19,200 1.92 $3.25 19,200 $3.25
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions used for grants in 1996, 1997 and 1998, respectively; risk-free
interest rate of 6.1%, 5.9% and 5.6%; expected dividend yield of 0%; expected
lives of 4.7, 4.4 and 2.9 years; and, expected volatility of 0%.
On October 3, 1997, the Board of Directors authorized the reduction of the
exercise price to $1.45 for the outstanding options held by certain employees
and directors with an exercise price greater than $1.45. The other terms of
such options remained substantially the same.
During 1997, the Company modified the terms of 200,000 stock options held by an
officer of the Company. The terms were modified to allow for immediate vesting
of a portion of these options. The Company recorded compensation expense
related to this modification. During 1998, the Company modified the terms of
100,000 stock options held by an officer of the Company. The terms were
modified to allow for immediate vesting of these options.
The Company has warrants outstanding issued in connection with the Senior
Discount Notes totaling 2,560,000 which were valued at $5,760,000 and recorded
as additional paid-in capital and debt discount.
The warrants were valued using the Black-Scholes option pricing model and the
following assumptions: Risk-free interest rate of 5.9%, expected dividend yield
of 0%, expected lives of 3 years and expected volatility of 50%.
F-25
<PAGE>
NOTE 12. GEOGRAPHIC DATA
- -------- ---------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. In accordance with the provisions of SFAS
No. 131, the Company has determined that its reportable segments are strategic
geographic units that develop and operate SMR networks as well as the corporate
unit which oversees all operations. The Company is managed by country as each
country may require a slightly different business strategy. The accounting
policies of the segments are the same as those for the Company on a consolidated
basis. The segments are evaluated based upon gains in subscribers and based upon
EBITDA. EBITDA represents operating loss before depreciation and amortization
and is not a measurement under U.S. generally accepted accounting principles and
may not be similar to EBITDA measures of other companies.
The following information presents certain summarized balance sheet and
statement of operations data by geographic region as of December 31, 1998, 1997
and 1996 and for the years then ended (in 000's).
<TABLE>
<CAPTION>
United Latin America
States(1) Peru Ecuador Chile Corporate(2) Elimination Total
---------- -------- -------- -------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
- -----------------
Revenues $ - $ 4,251 $ 2,538 $ 415 $ - $ - $ 7,204
EBITDA - (928) (586) (976) (4,604) - (7,094)
Operating income (loss) - (1,843) (1,249) (1,092) (7,399) - (11,583)
Total assets $ 1,220 $16,103 $ 4,041 $ 6,754 $56,531 $(37,608) $ 47,041
Capital expenditures - 1,917 1,924 2,844 135 - 6,820
December 31, 1997
- -----------------
Revenues $ 1,112 $ 2,939 $ 775 $ - $ - $ - $ 4,826
EBITDA (3,162) (1,916) (855) - (3,169) - (9,102)
Operating loss (7,512) (2,698) (1,132) - (3,225) - (14,567)
Total assets $11,017 $11,440 $ 3,181 $ - $27,452 $(23,218) $ 29,872
Capital expenditures 4,681 4,615 802 - 285 - 10,383
December 31, 1996
- -----------------
Revenues $ 80 $ 216 $ - $ - $ - $ - $ 296
EBITDA (2,928) (522) (35) - (815) - (4,300)
Operating income (loss) (3,255) (767) (45) - (740) - (4,807)
Total assets $ 9,977 $ 4,139 $ 1,420 $ - $24,376 $ (4,996) $ 34,916
Capital expenditures 6,557 2,433 - - - - 8,990
</TABLE>
- --------------------
(1) In August 1997 the Company made the decision to sell its U.S. operations
(see Note 3).
(2) Included in total assets for December 31, 1998 noted for Corporate is
$1,496,443 of an investment in an affiliate in El Salvador (See Note 2 and
Note 4).
The Company conducts a significant portion of its business in Peru, Ecuador and
Chile. Accordingly, the Company's cash flow and its ability to service its
indebtedness is significantly dependent upon the cash flow of its Peruvian and
Ecuadorian subsidiaries. The Company's ability to recover its investment in
these subsidiaries, to fund operations in other countries, and to service its
indebtedness, among other things, depends to a significant degree on its ability
to transfer funds from such subsidiaries to the United States parent (the
"Parent").
The ability of the Company's subsidiaries to pay dividends or make loans or
advances to the Parent is subject to regulation within their respective
jurisdictions of organization and operations. While the existing laws and
regulations of these jurisdictions generally do not prohibit the Company's
subsidiaries from paying dividends or making loans or advances to the Parent,
there can be no assurance that such laws will continue to permit or will not
restrict such payments.
Further, the Company is exposed to credit risk related to receivables
denominated in non-United States Dollar currencies in those foreign countries.
Note 13. PRO FORMA INFORMATION (UNAUDITED)
- -------- ---------------------------------
F-26
<PAGE>
The following pro forma information for the year ended December 31, 1997 gives
effect to the disposition of U.S. Operations and the acquisitions of C-Comunica
and Transnet, as if each had occurred on January 1, 1997. The majority of the
1998 acquisitions were of spectrum and non-operating entities, with no revenue
and the impact on net loss applicable to common shareholders is not significant.
The pro forma financial information does not purport to represent what the
Company's results of operations would actually have been if such transactions
had in fact occurred on such date. The pro forma results presented below are
based upon currently available information and upon certain assumptions that
management believes are current circumstances.
<TABLE>
<CAPTION>
(Unaudited)
For the Year Ended
December 31,
------------------------------------
1997
------------------------------------
<S> <C>
Revenues $ 3,807,161
Net loss applicable to common shareholders $(8,703,458)
Net loss per share $ (2.48)
</TABLE>
F-27
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------ ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,096,702 $ 5,229,942
Restricted cash 11,475,940 11,770,859
Accounts receivable, net of allowances for doubtful 843,650 863,756
accounts of $834,336 and $829,933, respectively
Radios and accessories inventory 1,881,145 2,227,459
Prepaid licenses and other current assets 858,475 1,387,274
Net assets held for sale (Note 3) 741,343 679,109
-------------- --------------
Total current assets 20,897,255 22,158,399
PROPERTY AND EQUIPMENT, net (Note 5) 8,850,416 8,934,667
SMR LICENSES, net of accumulated amortization of $648,032 11,868,863 11,989,418
and $527,274
INVESTMENT IN SUBSIDIARY 1,412,326 1,496,443
OTHER NONCURRENT ASSETS, net 2,387,761 2,462,517
-------------- --------------
Total assets $ 45,416,621 $ 47,041,444
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,990,647 $ 2,144,964
Accrued liabilities 1,368,417 1,450,014
Payable to seller (Note 4) 400,000 400,000
Deposits on assets held for sale (Note 3) 454,108 454,108
-------------- --------------
Total current liabilities 4,213,172 4,449,086
CAPITAL LEASES PAYABLE (Note 6) 19,943 24,607
CONVERTIBLE NOTES (Note 6) 11,125,886 10,881,063
SENIOR DISCOUNT NOTES (Note 6) 18,776,967 17,829,506
-------------- --------------
Total liabilities 34,135,968 33,184,262
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 3, 6 and 7)
MANDATORILY REDEEMABLE, CONVERTIBLE
PREFERRED STOCK:
Series A, $.01 par value, 352 authorized, issued 8,782,216 8,780,242
and outstanding
Series B, $.01 par value, 6,399,648 authorized, 20,574,602 20,541,125
5,735,251 issued and outstanding
Series C, $.01 par value, 11,000,000 authorized, 8,789,169 12,744,286 12,744,286
issued and outstanding
-------------- --------------
42,101,104 42,065,653
-------------- --------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 40,000,000 authorized, 35,028 35,028
3,502,750 issued and outstanding
Additional paid-in capital 7,340,197 7,755,801
Accumulated deficit (38,293,145) (36,137,833)
Accumulated other comprehensive income 97,469 138,533
-------------- --------------
Total stockholders' equity (deficit) (30,820,451) (28,208,471)
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 45,416,621 $ 47,041,444
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-28
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
----------------------------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
------------------------------------------------------------
1999 1998
-------------------------- ----------------------------
<S> <C> <C>
REVENUE:
Radio service revenue $ 1,401,326 $ 1,226,819
Equipment sales 277,679 487,873
Activation and other 30,660 36,993
---------------- ----------------
1,709,665 1,751,685
---------------- ----------------
COSTS AND EXPENSES RELATED TO REVENUE:
Network and site expense 37,783 20,431
Cost of equipment sold 356,480 591,347
Maintenance and other 95,110 119,287
---------------- ----------------
489,373 731,065
---------------- ----------------
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 1,615,418 2,290,308
Depreciation and amortization 568,563 432,651
---------------- ----------------
2,183,981 2,722,959
---------------- ----------------
OPERATING LOSS (963,689) (1,702,339)
---------------- ----------------
OTHER INCOME (EXPENSE):
Interest Expense (1,371,871) (1,039,862)
Interest Income 162,686 419,028
Other 17,562 (2,541)
---------------- ----------------
(1,191,623) (623,375)
---------------- ----------------
NET LOSS (2,155,312) (2,325,714)
DIVIDENDS ON AND ACCRETION OF
MANDITORILY REDEEMABLE PREFERRED
SHARES TO REDEMPTION VALUE
(415,604) (314,092)
---------------- ----------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS (2,570,916) (2,639,806)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (41,064) (225,414)
---------------- ----------------
COMPREHENSIVE LOSS $(2,611,980) $(2,865,220)
BASIC AND DILUTED NET LOSS PER COMMON SHARE
$(0.73) $(0.75)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 3,502,746 3,502,746
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-29
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE, CONVERTIBLE
-----------------------------------------------------------------------
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Mandatorily Redeemable,
Convertible Preferred Stock
----------------------------------------------------------------------------------------------------
Series A Series B Series C Common Stock
-----------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December
31, 1998 352 $8,780,242 5,735,251 $20,541,125 8,789,169 $12,744.286 3,502,750 $35,028
=== ========== ========= =========== ========= =========== ========= =======
Dividends payable
on the Preferred - - - - - - - -
Stock Series C
Payment of dividends
on the Preferred - - - - - - - -
Stock Series C in 1,974 - 33,477 - - - -
additional shares
accretion
of preferred stock
to redemption value
Stock based
compensation - - - - - - - -
Net loss - - - - - - - -
Cumulative
translation
adjustment - - - - - - - -
---- ---- ---- ---- ---- ---- ---- ----
BALANCES, March 31, 352 $8,782,216 5,735,251 $20,574,602 8,789,169 $12,744,286 3,502,750 $35,028
1999 === ========== ========= =========== ========= =========== ========= =======
</TABLE>
<TABLE>
Stockholders' Equity (Deficit)
-----------------------------------------------
Accum-
ulated
Other
Compre- Total
Additional Accumu- hensive Stockholders'
Paid-In lated Income Equity
Capital Deficit (Loss) (Deficit)
------------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
BALANCES, December
31, 1998 $7,755,801 $(36,137,833) $(138,533) $(28,208,471)
========== ============ ========= ============
Dividends payable
on the Preferred
Stock Series C (380,153) - - (380,153)
Payment of dividends
on the Preferred
Stock Series C in
additional shares
accretion
of preferred stock
to redemption value (35,457) (35,451)
Stock based
compensation - - - -
Net loss - (2,155,312) - (2,155,312)
Cumulative
translation - - (41,064) (41,064)
adjustment
---------- ------------ --------- -----------
BALANCES, March 31,
1999 $7,340,197 $(38,293,145) $ 97,469 $(30,820,451)
========== ============ ========= ============
</TABLE>
F-30
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
-----------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------------
1999 1998
----------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,155,312) $(2,325,714)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 568,563 432,651
Stock based compensation - 24,972
Allowance for doubtful accounts 4,403 29,043
Accretion of interest on discount and convertible notes 1,260,564 895,708
Changes in operating assets and liabilities-
Decrease (increase) in accounts receivable 15,703 (337,080)
Decrease (increase) in inventory 346,314 258,535
Decrease (increase) in other assets 603,018 200,473
Decrease (increase) in accounts payable and other (154,280) (136,839)
Decrease (increase) in accrued liabilities (461,750) (488,804)
------------- -------------
Net cash provided (used) in operating activities 27,223 (1,447,055)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (361,507) (1,155,303)
Acquisition of and investment in operating and non-operating,
entities and spectrum, net of cash acquired 14,124 (781,586)
(Increase) decrease in restricted cash 294,919 (627,497)
Change in net assets held for sale (62,234) (172,987)
------------- -------------
Net cash used in investing activities (114,698) (2,737,373)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from offering of discount notes and warrants - 20,441,258
Proceeds from offering of convertible notes - 10,000,000
Deferred debt offering costs - (1,326,693)
Proceeds from issuance of common stock - 250
Proceeds from issuance of Series A and Series B
preferred stock, net - -
Payments on capital leases payable (4,701) -
------------- -------------
Net cash provided (used) by financing activities (4,701) 29,114,815
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (41,064) (225,414)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (133,240) 24,704,973
CASH AND CASH EQUIVALENTS, beginning of period 5,229,942 7,730,141
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 5,096,702 $32,435,114
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-31
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(CONTINUED)
-----------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
----------------------------------------------
1999 1998
-------------------- ------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for -
Interest $ 10,940 $ 124,324
Income taxes 26,075 58,037
Supplemental schedule of non cash
investing and financing activities-
Accretion of preferred stock to redemption value 35,451 35,451
Dividends payable on preferred stock 380,153 278,641
Conversion of senior note and related accrued - 11,535,746
interest to Series C preferred stock
Contingent payment of acquisition of Chilean 400,000 2,400,000
Operating company
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-32
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
AS OF MARCH 31, 1999
--------------------
(UNAUDITED)
-----------
NOTE 1. ORGANIZATION AND OWNERSHIP
- ------- --------------------------
Centennial Communications Corp. and subsidiaries (collectively, the "Company")
is a Delaware corporation engaged in the acquisition, development and operation
of specialized mobile radio ("SMR") and other low-cost, wireless communications
networks, the sale of communications services using those networks, and the sale
and servicing of related accessories and equipment in certain countries of Latin
America . Prior to August, 1997, the Company also had operations in the United
States. The Company has acquired SMR licenses through direct applications to
governments and through acquisitions of interests in other entities (all of
which are wholly owned) that have been granted or have applied for SMR licenses.
The Company commenced significant operations during 1996, and prior to that date
had been a development stage enterprise. The Company's business model is
subject to significant modification to address rapid change in
telecommunications technology and newly emerging marketplaces, which the Company
believes, offer significant opportunity. Reflecting such circumstances, in
August 1997, the Company reached the conclusion that its wireless communications
investment opportunities in Latin America and other emerging markets were more
attractive than its opportunities in the United States. As a result, the
Company decided to sell its United States SMR operations and related assets (the
"U.S. Operations") and focus its ongoing efforts solely in Latin America (See
Note 3).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------- ------------------------------------------
Basis of Presentation
---------------------
The accompanying interim consolidated financial statements include the accounts
of Centennial Communications Corp. and its subsidiaries, all of which are wholly
owned. All subsidiaries are consolidated except the El Salvador subsidiary
which was acquired in August and September of 1998, which the Company has made
the decision to sell (See Note 4). Accordingly, due to temporary majority
control, such investment has been accounted for using the equity method of
accounting. All significant intercompany accounts and transactions have been
eliminated in consolidation.
In management's opinion, all adjustments (which are of a normal recurring
nature) have been made which are necessary to present fairly the financial
position of the Company as of March 31, 1999 and the results of its operations
for the three months ended March 31, 1999 and 1998. For a more complete
understanding of the Company's financial position and results of operations, see
the consolidated financial statements of the Company included in the Company's
annual report for the year ended December 31, 1998.
SMR Licenses
------------
Direct and certain indirect costs of obtaining SMR licenses, as well as the fair
market value of licenses obtained in certain acquisitions, are capitalized and
amortized using the straight-line method over the period of the related license
(generally 10 to 40 years) upon commencement of service (See Note 4). SMR
licenses in the countries in which the Company operates are issued conditionally
for various periods of time. The SMR licenses are generally renewable providing
the licensee has complied with applicable rules and policies. In most instances,
the Company believes it has complied and intends to comply with these standards
and is amortizing the related costs using the straight line method over their
estimated useful life, generally 40 years. In some cases, the Company currently
is not in compliance with applicable requirements and, where appropriate, has
filed requests for extensions with the appropriate government agency. The
Company expects that such extension requests will be granted and the risk of
having these or any other licenses revoked is remote.
Mandatorily Redeemable Preferred Stock
--------------------------------------
F-33
<PAGE>
The Company's mandatorily redeemable preferred stock is recorded at its issuance
price less offering costs. The carrying value is increased to the redemption
value at June 2002 by a charge to stockholders' deficit ratably over the period
from issue date to redemption date.
Comprehensive Income
--------------------
Effective January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130").
Comprehensive income, as defined by SFAS No. 130, includes all changes in equity
(net assets) during a period from non-owner sources. From its inception through
March 31, 1999, the change in the cumulative translation adjustment is the sole
material item of other comprehensive income or loss.
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). The Company is required to adopt SFAS No. 133 in the year ended December
31, 2000. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
NOTE 3. SALE OF THE U.S. OPERATIONS
- ------- ---------------------------
In August 1997, the Company made a strategic decision to sell the U.S.
Operations and began to seek purchasers for these operations, consisting of
licenses and related assets and liabilities in 20 major trading areas ("MTAs").
As of March 31, 1999, the Company had completed the sale of all but three MTA's
to two purchasers. The remaining purchases are subject to the approval by the
Federal Communications Commission (the "FCC") of assumption of debt, and the
qualifications by the proposed purchaser as a small or very small business, as
defined by the FCC. Until the contingencies related to the FCC are resolved,
the Company transferred the majority of the risks and rewards of the U.S.
Operations to the purchasers by way of management agreements. The transactions
were not, and for those remaining, will not be recognized as a sale until
substantially all of the risks, rewards of ownership and full control of such
licenses and the related assets and liabilities are transferred to the
purchasers. As of March 31, 1999, the Company had received approximately
$454,000 in cash proceeds related to the two remaining sales and has recorded
these amounts as deposit liabilities in the accompanying balance sheet.
At March 31, 1999 and December 31, 1998, financial information related to the
U.S. Operations were as follows:
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1999 1998
----------------------- ----------------------
<S> <C> <C>
Current assets $ 69,324 $ 53,011
Property and equipment 925,240 935,477
SMR licenses 231,485 231,485
----------------------- ----------------------
Total Operating Assets 1,226,049 1,219,973
Current liabilities 111,484 154,170
Capital leases 159,563 173,035
Spectrum license debt 213,659 213,659
Total Liabilities 484,706 540,864
----------------------- ----------------------
Net assets of the U.S. Operations $ 741,343 $ 679,109
========== ==========
</TABLE>
Effective August 1997, the property, equipment and SMR licenses related to the
U.S. Operations were considered to be assets to be disposed of, as that term has
been defined by Statement of Financial Accounting Standards No. 121, because
management, having the authority to do so, has committed to the sale of these
assets. Accordingly, the
F-34
<PAGE>
Company's management estimated the fair value of such assets, and determined
that a write-down to fair market value was necessary as of August 1997. The
amount of the write-down recorded by management was approximately $1,900,000.
The Company's estimates were based upon executed sales contracts. Additionally,
the Company recorded an approximate $1,300,000 charge for termination and other
contractually committed costs in connection with the divestiture of the U.S.
Operations in the third quarter of 1997. As of March 31, 1999, the Company has
made cash payments of a substantial majority of this amount. The Company expects
to close the remaining two sales within the next quarter.
NOTE 4. ACQUISITIONS
- ------- -------------
During the year ended December 31, 1998 the Company completed certain
acquisitions of operating and non-operating entities and the acquisition of
spectrum. Included in the accompanying consolidated financial statements, from
the date of their acquisition, are the results of operations for these entities
(except El Salvador - see below) as follows:
<TABLE>
<CAPTION>
Name and Location of Entity Date Acquired
- --------------------------- -------------
<S> <C>
Telecomunicaciones y Servicios S.A.; Santiago, Chile January 1998
Peru Tel S.A.; Lima, Peru May 1998
Comovec S.A.; Quito, Ecuador May 1998
El Salvador June, August and
September 1998
</TABLE>
On January 2, 1998, the Company purchased 100% of the outstanding capital stock
of Telecomunicaciones y Servicios S.A. ("TyS"), a Chilean operating company.
TyS holds 10 800 MHz channels in the metropolitan region of Santiago, Chile.
The acquisition was accounted for as a purchase. The total consideration given
and liabilities assumed for the Chilean company was approximately $3,200,000, of
which $800,000 was paid at closing and approximately $2,040,000 was paid June
29, 1998 and $350,000 on July 8, 1998 upon the transfer of 290 additional
channels (40 of which are in the metropolitan region of Santiago) to the
operating company. Approximately $80,000 represented the fair value of the net
tangible assets as of the date of acquisition and the excess purchase price over
the fair value of the net tangible assets acquired was approximately $3,120,000,
which was allocated to SMR licenses. SMR licenses are amortized over
approximately 40 years, the average remaining life of the licenses. The
purchase price was financed by the Company with available cash.
On April 14, 1998 the Company executed a purchase agreement with certain non-
operating subsidiaries of International Wireless Communications Holdings, Inc.
("IWC") for the acquisition of certain assets in Peru, Ecuador and Chile for a
purchase price of approximately $3,500,000. On May 13, 1998 the Company
completed the first part of the acquisition and acquired a non-operating entity
in Ecuador (Comovec S.A.) for approximately $300,000. Comovec S.A. holds
licenses to operate SMR networks and has 40 800 MHz channels and 20 900 MHz
channels in each of Quito and Guayaquil and 25 800 MHz channels in Cuenca.
Approximately $20,000 represented the fair value of the net tangible assets of
Comovec S.A. as of the date of acquisition. The excess purchase price over the
fair value of the net tangible assets acquired was approximately $250,000, which
was allocated to SMR licenses. Comovec S.A.'s licenses will be amortized over
40 years beginning on the date that the channels are launched. On May 22, 1998,
the Company completed the second part of the acquisition and acquired a non-
operating entity in Peru (Peru Tel S.A.) for approximately $2,800,000. Peru Tel
S.A. holds licenses to operate SMR networks and has 32 800 MHz channels in
Lima/Callao and 100 800 MHz channels among eight other cities. Approximately
$400,000 represented the fair value of the net tangible assets of Peru Tel S.A.
as of the date of acquisition. The excess purchase price over the fair value of
the net tangible assets acquired was approximately $2,400,000, which was
allocated to SMR licenses. Peru Tel S.A.'s SMR licenses will be amortized over
approximately 40 years beginning on the date that the channels are launched. The
Company used its existing cash to acquire Comovec S.A. and Peru Tel S.A. On May
12, 1999, the Company completed the last part of the IWC closing, and acquired
the Chilean assets of RMD Agencia Chile, consisting of its 800 MHZ channels: 20
channels in Santiago, 20 channels in Valparaiso/Vina del Mar, and 25 channels in
Concepcion/Talcahuano for $400,000.
F-35
<PAGE>
<TABLE>
<CAPTION>
Detail of net assets of acquisitions during: 1998
- -------------------------------------------- -------------------------
<S> <C>
Property and equipment $ 71,039
SMR licenses 5,792,621
Other assets 105,405
Accounts payable and accrued liabilities (106,762)
-------------------------
Acquisition, net of cash acquired 5,862,303
Cash acquired 420,930
Payable to seller 400,000
-------------------------
Purchase price $6,683,233
==========
</TABLE>
In addition to acquisitions, the Company was awarded 40 nationwide channels of
800 MHz spectrum on June 9, 1998 in El Salvador. The Company paid $620,000 for
the channels, which have a 20 year term. In August 1998, the Company completed
the acquisition of a concession for 10 nationwide channels of 800 MHz spectrum
in El Salvador for approximately $300,000. The acquisition of assets included
certain infrastructure and approximately 140 subscribers. In September 1998,
the Company was awarded 65 nationwide channels of 800 MHz spectrum in El
Salvador. The Company paid approximately $2,027,000 for the channels, which
have a 20 year term. Also, in September 1998, the Company acquired a concession
for 30 nationwide channels of 800 MHz spectrum in El Salvador for approximately
$949,000. The acquisition of assets also included certain infrastructure and
approximately 600 subscribers. The Company was awarded a concession for 25
nationwide channels of 800 MHz spectrum in El Salvador for approximately
$10,000. These assets have been recorded as an investment in an affiliate and
accounted for using the equity method of accounting and not consolidated due to
temporary control, as these assets are for sale. The Company wrote down the
assets to $1,560,000 and took an approximate $2,400,000 loss on divestiture in
1998 (see Note 2).
On October 15, 1998, the Company signed a purchase agreement for the acquisition
of certain Chilean assets, including a license for 20 800 MHz channels in
Santiago, certain infrastructure and subscribers. The Company is currently
waiting for final government approval for the transfer of the assets to the
Company before it can close the acquisition. The purchase price is
approximately $1,900,000, which amount was placed into escrow and is to be
released to the seller upon the Chilean government's approval of the transfer.
On October 22, 1998, the Company signed an agreement to purchase 100% of the
shares of a Chilean company having (i) 20 800 MHz channels in Santiago and (ii)
200 800 MHz channels in various Chilean cities for approximately $700,000. The
approval of the transfer of this concession has been given, and this acquisition
is expected to close in 1999.
NOTE 5. PROPERTY AND EQUIPMENT
- ------- ----------------------
Property and equipment are recorded at cost. Maintenance and repair
expenditures are charged to expense as incurred and expenditures for
improvements which increase the expected useful lives of the assets are
capitalized. Depreciation expense is computed using the straight-line method
over the useful lives of the respective assets.
Direct costs associated with the construction of SMR networks are capitalized
and amortized over the system's expected useful life upon placing the system in
service. Such costs include amounts incurred in securing tower sites, site
preparation, procurement and installation of infrastructure and equipment costs.
Also included in property and equipment are radios owned by the Company which
are leased to the Company's subscribers under operating lease agreements. The
Company retains title to these radios as part of the subscriber agreement and
depreciates the radios over five years. Upon termination of service, the
subscribers are required to return the radios to the Company. Certain
subscribers desire to own their radios; therefore, the cost or depreciated net
book value of radios sold to such subscribers is recorded as a charge to cost of
goods sold at the time of sale.
F-36
<PAGE>
The composition of property and equipment follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Network infrastructure $ 7,354,517 $ 6,975,994
Radios 3,301,664 3,321,641
Computer equipment and software 728,696 719,846
Furniture and fixtures 436,537 397,775
Leasehold improvements 306,123 303,754
------------ ------------
12,127,537 11,719,010
Accumulated depreciation (3,277,121) (2,784,343)
------------ ------------
Property and equipment, net $ 8,850,416 $ 8,934,667
=========== ===========
</TABLE>
The Company depreciates infrastructure over ten years, radios over five years,
computer equipment and software over three years and leasehold improvements over
the life of the lease.
Depreciation expense was $488,845 and $329,766 for the three months ended March
31, 1999 and 1998, respectively.
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASES PAYABLE
- ------- -----------------------------------------
In April 1996, the Company acquired 430 channels in MTAs in the United States
through the Federal Communications Commission's ("FCC") 900 MHz spectrum auction
(the "FCC Auction") for a purchase price of approximately $5,100,000. In
connection with such auction, the Company qualified for "very small business"
status under the FCC's regulations which allowed the Company to (i) make a 10%
down payment; (ii) receive a 15% bidding credit against its spectrum purchase
price; and (iii) receive United States government financing at 7% per annum on
the balance of the purchase price to be paid by the Company over a 10-year
period. The contractual principal amount on this debt totals approximately
$4,600,000 as of March 31, 1999 and December 31, 1998. The note provides for
interest payments only in the first five years and quarterly principal and
interest payments thereafter. In accordance with Accounting Principles Board
Opinion No. 21, "Interest on Receivables and Payables", the Company has
determined that the market rate for such debt is 12%, and accordingly, has
recorded this debt and related spectrum at approximately $3,600,000. As
discussed in Note 3, the Company decided to sell the U.S. Operations and it is
intended that the buyers of the U.S. Operations will assume the FCC debt.
In July and October 1996, the Company secured approximately $1,800,000 in
infrastructure equipment financing from E.F. Johnson for use in constructing its
United States analog SMR networks. Total principal outstanding on this vendor
financing was approximately $1,400,000 at December 31, 1997. In addition, in
February 1997, the Company secured an additional $500,000 in fixed equipment
infrastructure financing from E.F. Johnson to construct network facilities at
additional site locations in the U.S. The terms of this financing required that
the Company pay 30% of the cost of the equipment at the time of purchase with
the balance of the purchase price payable monthly over a five year period and
bearing interest at a rate of 12% per annum. Purchases made under this
financing arrangement were classified as capital leases payable. The majority
of the capital leases have been paid off in the divestiture of the U.S.
Operations and the remaining will also be paid off at closing of the remaining
U.S. operations.
The Company entered into additional agreements with E.F. Johnson regarding the
purchase of infrastructure equipment and subscriber units. E.F. Johnson has
made available to the Company a $2,100,000 credit line associated with the
purchase of infrastructure equipment for build-out in Chile. The amounts
financed will be payable quarterly over a one year period and no interest will
be charged. The Company has determined the market rate for this debt to be 14%.
The Company is required to make a down payment in the amount of 25% of the cost
of the purchased equipment pursuant to the agreement. As of March 31, 1999, the
Company owed approximately $517,000 on the new financing. The Company also
entered into a radio purchase agreement with E.F. Johnson to acquire 5,000
radios at a discounted price during 1998 and took delivery of 3,600 radios. The
Company is currently in discussions with E.F. Johnson regarding the remaining
1,400 radios.
F-37
<PAGE>
The Company also entered into a radio purchase agreement with Motorola to
acquire up to 10,000 radios during 1998 and took delivery of 8,325. The Company
is currently in discussions with Motorola regarding the remaining 1,675 radios.
Senior Discount Notes Financing
- -------------------------------
On January 15, 1998, the Company finalized a $40,000,000 financing of Senior
Discount Notes (the "Senior Discount Notes") due 2005. The financing consisted
of 40,000 units, each unit consisting of $1,000 in principal at maturity and one
warrant to purchase 64 shares of common stock of the Company at an exercise
price of $.01 per share. The Senior Discount Notes were issued at a substantial
discount from their principal amount and interest does not accrue on the Senior
Discount Notes prior to January 1, 2003. Thereafter, interest accrues at 14%
per annum, payable semi-annually in arrears on January 1 and July 1 of each year
commencing July 1, 2003. For accounting purposes, the Senior Discount Notes
accrete at a rate of 21.26% per annum compounding semi-annually. Net proceeds
to the Company were $18,900,000, after deducting $19,600,000 of debt discount
and $1,500,000 in offering expenses. The warrants issued in connection with the
notes were valued at $5,760,000 and were recorded directly to additional paid-in
capital. The Senior Discount Notes are secured by 66% of the Company's shares of
its Cayman Island holding companies for its Latin American operations. The
Senior Discount Notes are also secured by 100% of the Company's stock in SMR
Direct USA, Inc., a wholly-owned subsidiary of the Company. This entity has no
operations and its financial position consists only of a nominal capitalization.
Pursuant to a registration rights agreement (the "Senior Discount Notes
Registration Rights Agreement") among the Company and the purchasers of the
Senior Discount Notes, the Company agreed: (i) to file with the Commission on or
prior to the earlier to occur of (a) an offering of securities of the Company
pursuant to which the Company is thereafter subject to the reporting
requirements of the Exchange Act and (b) 300 days after the closing of the
Senior Discount Notes offering, a registration statement with respect to an
offer to exchange (the "Exchange Offer") the Senior Discount Notes for a new
issue of senior discount notes of the Company (the "New Notes") with terms
substantially identical to those of the Senior Discount Notes and (ii) to use
its best efforts to cause such registration statement to become effective within
60 days following the date of this filing. The Company has not currently
completed the registration process for the Exchange Offer and has incurred
approximately $56,000 in liquidated damages through March 31, 1999. The
liquidated damages are due and payable with the first interest payment on July
1, 2003. The liquidated damages are charged on a weekly basis per $1,000 bond
and increase every 90 days for a fee of $2,000 per week beginning in January
1999 and increasing to $10,000 per week at the end of 1999 until the
registration statement is declared effective. The Company intends to complete
the registration process during the third quarter of 1999.
Convertible Notes Financing
- ----------------------------
In addition, on January 15, 1998 the Company issued $10,000,000 in aggregate
principal amount of convertible notes (the "Convertible Notes") pursuant to a
purchase agreement dated January 15, 1998. Cash interest will not accrue on
the Convertible Notes prior to January 1, 2000. Thereafter, interest on the
Convertible Notes will be payable in cash at a rate of 9% per annum on January 1
and July 1 of each year, commencing on July 1, 2000. The Convertible Notes are
convertible into shares of common stock at a conversion price of $2.25 per
share, subject to adjustments in certain circumstances.
Notes and capital leases payable consist of the following at March 31, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- ----------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
Capital lease, payable in monthly principal and interest payments of
$6,395, for 60 months beginning on various dates from July 1, 1996
through October 31, 1996, effective interest rate of 12%, secured by
infrastructure equipment 159,563 173,035
</TABLE>
F-38
<PAGE>
<TABLE>
<S> <C> <C>
Capital lease, payable in monthly principal and interest payments of
$1,736 for 48 months beginning July 28, 1996, effective interest rate
of 10.1%, secured by a phone system 19,943 24,607
Notes payable for purchase of SMR license, quarterly payments of $4,823
are interest-only (at the stated rate) for first five years, after
which quarterly payments of $16,454 include principal and interest for
remaining five years, imputed interest rate of 12%, secured by related
SMR licenses 213,659 213,659
Senior Discount Notes (see above) 18,776,967 17,829,506
Convertible Notes (see above) 11,125,886 10,881,063
------------ ------------
30,296,018 29,121,870
Less amount classified as Net Assets Held for Sale (373,222) (386,694)
------------ ------------
$29,922,796 $28,735,176
=========== ===========
</TABLE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
- ------- ---------------------------
Recovery of Investments
-------------------------
Since its inception, the Company's efforts have been primarily directed towards
raising capital and acquiring, developing and operating SMR networks. Further,
the Company has made significant investments in pre-operating entities in
various Latin American countries whose primary assets were SMR licenses. The
Company's Peruvian operations and revenue generating activity began in May 1996,
its Ecuadorian operations and revenue generating activity began in March 1997,
its Chilean operations and revenue generating activity began in January 1998 and
its El Salvadoran operations and revenue generating activity began in September
1998. The ability of the Company to recover its current investment in property,
equipment and spectrum and to generate positive cash flow and operating profits
is contingent upon a number of factors, including the Company's ability to
continue to build out and develop the SMR and other low-cost, wireless
communications networks it currently owns and to attract and retain sufficient
subscribers on its existing systems and those which are under development in
sufficient numbers to achieve profitable operations.
Recoverability of Licenses
- --------------------------
The terms of the Company's SMR license agreements contain provisions whereby the
Company must achieve certain levels of subscriber load and network build out.
If such commitments are not met, the Company could be subject to the revocation
of the applicable licenses.
Compliance with the terms of SMR licenses and certain regulatory requirements,
such as construction deadlines and minimum subscriber requirements, can be
difficult to meet. In addition, there can be no guarantee that in the future
all regulatory requirements will be met or that the Company will not lose any
applicable licenses as a result of its failure to meet such requirements. The
Company currently is not in compliance with certain minimum subscriber loading
requirements with respect to its channels in Peru. Failure to comply with such
requirements may subject the licenses relating to such channels to punitive
measures. Requests for amendment of such loading requirements have been filed
by the Company with the Peruvian Ministry of Transportation, Communications,
Housing and Construction (the "Ministry"); however, to date no responses have
been received. The Company expects to file an additional amendment requesting
lower subscriber loading requirements in the near future. Based upon
information currently available, the Company is optimistic that these amendments
will be approved; however, there can be no guarantee that the amendments
received by the Company will be the same as those applied for. The Company is
also not in compliance with certain terms of the concession agreements
including, homologation of equipment (certifying the equipment before entering
Peru), site to site transmission of signal (currently allowed only site to
handset), unauthorized transfer and use of channels between the Peruvian
companies and unauthorized use of certain frequencies granted. The Company has
applied to correct the non-compliance issues and is awaiting approval from the
Ministry. The Company believes that the applications will be approved and
result only in minimal fines, if any; however, there can be no assurance of such
outcome.
F-39
<PAGE>
NOTE 8. PREFERRED STOCK
- ------- ---------------
The Company is authorized to issue 17,400,000 shares of preferred stock. Shares
of preferred stock may be issued from time to time in one or more series with
designation rights, preferences and limitations established by the Company's
Board of Directors.
Holders of preferred stock are entitled to dividends in amounts determined by
the Board of Directors. No distributions may be made to holders of common stock
until all dividends declared, if any, on the preferred stock have been paid.
The Senior Discount Notes indenture (the "Indenture") restricts the Company's
ability to pay cash dividends.
In the event of the liquidation of the Company, holders of Series C Preferred
Stock have a preference of $12,744,295 over all other stock. Holders of Series
B Preferred Stock have a preference of $20,933,670 plus any declared and unpaid
dividends, if any, over holders of Series A Preferred Stock and common stock.
Holders of Series A Preferred Stock have a preference of $8,800,000 plus any
declared and unpaid dividends, if any, over holders of common stock. All such
series of preferred stock are collectively referred to as "Preferred Stock."
After all such payments have been made, any remaining assets will be distributed
to holders of all preferred stock and common stock ratably based on the number
of common shares outstanding, assuming the holders of Preferred Stock had
converted their shares into common stock.
Each share of Preferred Stock is convertible, at the option of the holder, into
shares of the Company's common stock at the rate of 11,792 shares of common
stock for each share of Series A Preferred Stock, 1.4 shares of common stock for
each share of Series B Preferred Stock and 1 share of common stock for each
share of Series C Preferred Stock. This conversion rate is subject to
adjustment based on a formula to prevent dilution. Each share of Preferred
Stock is automatically convertible into common stock immediately prior to the
closing of a public offering, which meets certain conditions.
The Company is obligated to redeem the Preferred Stock in three equal annual
payments beginning on June 27, 2002. The redemption price for the Series A
Preferred Stock is $25,000 per share ($8,800,000 in total), the redemption price
for the Series B Preferred Stock is $3.65 per share ($20,933,670 in total), the
redemption price for the Series C Preferred Stock is $1.45 per share
($12,744,295 in total). The holders of Preferred Stock have an option to
convert any or all of the redeemable shares of Preferred Stock to common stock
prior to each scheduled annual redemption. In connection with the issuance of
the Discount Notes and the Convertible Notes, this obligation has been extended
past the maturity of the Discount Notes and the Convertible Notes.
On October 3, 1997, the Company issued 50,000 shares of Series C Preferred Stock
to an officer of the Company in exchange for a promissory note payable in the
amount of $72,500. The Series C Preferred Stock bear a 12% dividend per annum
and is payable semi-annually in each April and October in either cash or
additional shares of Series C Preferred stock at the option of the Company. The
Indenture restricts the ability of the Company to pay cash dividends on the
Series C Preferred. In April 1998, the Company issued 278,450 shares of Series
C Preferred Stock for the 12% dividend at $1.45 per share. In October 1998, the
Company issued 505,028 shares of Series C Preferred Stock for the 12% dividend
at $1.45 per share.
NOTE 9. OPERATING SEGMENTS
- ------- ------------------
The Company's reportable segments are strategic geographic units that develop
and operate SMR networks as well as the corporate unit, which oversees all
operations. The Company is managed by country as each country may require a
slightly different business strategy. The accounting policies of the segments
are the same as those for the Company on a consolidated basis. The segments are
evaluated based upon gains in subscribers and based upon EBITDA. EBITDA
represents operating loss before depreciation and amortization and is not a
measurement under U.S. generally accepted accounting principles and may not be
similar to EBITDA measures of other companies.
The following information presents certain summarized balance sheet and
statement of operations data by segment as of March 31, 1999 and 1998 (in
000's):
F-40
<PAGE>
<TABLE>
<CAPTION>
United Latin America
-------------------------------
States (1) Peru Ecuador Chile Corporate (2) Elimination Total
---------- --------- -------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999
- --------------
Revenues $ - $ 922 $ 542 $ 246 $ - $ - $ 1,710
EBITDA - 148 197 (122) (618) - (395)
Operating income - (64) 4 (188) (716) - $ (964)
(loss)
Total assets $ - $16,314 $3,756 $7,884 $55,278 ($ 37,816) $45,416
March 31, 1998
- --------------
Revenues $ - $ 1,067 $ 669 $ 16 $ - $ - $ 1,752
EBITDA - 336 (79) (370) (1,157) (1,270)
Operating income - 143 (203) (392) (1,250) (1,702)
(loss)
Total assets $10,447 $11,574 $3,515 $3,844 $56,328 ($ 25,282) $60,426
</TABLE>
(1) In August 1997 the Company made the decision to sell its U.S. operations
(see Note 3).
(2) Included in total assets noted for Corporate is $1,500,000 of an investment
in an affiliate in El Salvador (see Note 2 and Note 4).
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Centennial Cayman Corp.:
We have audited the accompanying consolidated balance sheets of Centennial
Cayman Corp. (a Cayman Islands corporation) and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of operations and
comprehensive loss, stockholder's equity and cash flows for the period from
inception (February 29, 1996) to December 31, 1996 and for the years ended
December 31, 1997 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. United States generally accepted auditing standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Centennial Cayman Corp. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from inception (February 29,
1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998 in
conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
---------------------------------
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 29, 1999.
F-42
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
----------------------- ------------------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 908,048 $ 544,612
Restricted cash 44,536 386,562
Accounts receivable - trade, net of allowance for doubtful
----------------------- ------------------------
accounts of $517,986 and $829,933, respectively 1,283,409 863,756
Inventory 1,371,762 1,795,526
VAT receivable 785,787 723,808
Prepaid licenses and other current assets 337,517 457,852
----------------------- ------------------------
Total current assets 7,148,313 4,731,059 4,772,116
PROPERTY AND EQUIPMENT, net 4,474,619 8,389,591
SMR LICENSES, net of accumulated amortization
of $289,196 and $527,477, respectively 5,921,315 11,989,418
INVESTMENT IN SUBSIDIARY - 1,496,443
OTHER NONCURRENT ASSETS, net 584,918 354,618
----------------------- ------------------------
Total assets $15,711,911 $ 27,002,186
======================= ========================
LIABILITIES AND STOCKHOLDER'S EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 251,957 $ 443,382
Accounts payable - affiliates - 20,870,243
Payable to seller - 400,000
Accrued liabilities 308,268 898,623
----------------------- ------------------------
Total liabilities 560,225 22,612,248
COMMITMENTS AND CONTINGENCIES (Notes 1, 3 and 6)
STOCKHOLDER'S EQUITY :
Common stock, $1 par value, 50,000 authorized,
2 issued and outstanding, respectively 2 2
Additional paid-in capital 20,858,377 20,858,377
Accumulated deficit (5,713,228) (16,606,974)
Accumulated other comprehensive income 6,535 138,533
----------------------- ------------------------
Total stockholder's equity 15,151,686 4,389,938
----------------------- ------------------------
Total liabilities and stockholder's equity $15,711,911 $ 27,002,186
======================= ========================
</TABLE>
F-43
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
------------------------------------------------------------
<TABLE>
<CAPTION>
Inception
(February 29, Year Ended Year Ended
1996) to December 31 December 31, December 31,
1996 1997 1998
------------------- -------------------- -------------------------
REVENUE:
<S> <C> <C> <C>
Radio service revenue $ 123,479 $ 2,247,494 $ 5,145,883
Equipment sales 92,840 1,376,396 1,911,159
Other - 65,587 146,736
------------------- -------------------- -------------------------
216,319 3,689,477 7,203,778
------------------- -------------------- -------------------------
COSTS AND EXPENSES RELATED
TO REVENUE (exclusive of depreciation
shown below):
Network and site expense 62,615 79,492 88,388
Cost of equipment sold 40,765 2,038,116 2,779,821
Maintenance and other - 176,380 613,699
------------------- -------------------- -------------------------
103,380 2,293,988 3,481,908
------------------- -------------------- -------------------------
OPERATING COSTS AND EXPENSES:
Selling, general and administrative
(including $223,000, $936,011 and
$3,485,656 in allocations from
Parent, respectively) 996,678 5,181,796 10,037,820
Write down of investment in affiliate - - 2,403,700
Depreciation and amortization 179,707 1,014,885 1,698,911
------------------- -------------------- -------------------------
1,176,385 6,196,681 14,140,431
------------------- -------------------- -------------------------
OPERATING LOSS (1,063,446) (4,801,192) (10,418,561)
------------------- -------------------- -------------------------
OTHER INCOME (EXPENSE):
Interest expense (130) (3,894) (241,244)
Other (17,734) 61,858 (233,941)
------------------- -------------------- -------------------------
(17,864) 57,964 (475,185)
------------------- -------------------- -------------------------
NET LOSS BEFORE MINORITY INTEREST
(1,081,310) (4,743,228) (10,893,746)
MINORITY INTEREST SHARE OF LOSS 111,310 - -
------------------- -------------------- -------------------------
NET LOSS (970,000) (4,743,228) (10,893,746)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (6,469) 13,004 131,998
------------------- -------------------- -------------------------
COMPREHENSIVE LOSS $ (976,469) $(4,730,224) $(10,761,748)
=========== =========== ============
</TABLE>
F-44
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Stockholder's Equity
----------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
-------------- Paid-In Accumulated Comprehensive Stockholder's
Shares Amount Capital Deficit Income (Loss) Equity
------ ------ ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Inception, February 29, 1996 - $ - $ - $ - $ - $ -
Common stock issuance 2 2 498 - - 500
Equity contributions from parent - - 4,820,087 - - 4,820,087
Net loss - - - (970,000) - (970,000)
Cumulative translation
adjustment - - - - (6,469) (6,469)
------ ------ ------------ ------------- -------------- --------------
Balances, December 31, 1996 2 2 4,820,585 (970,000) (6,469) 3,844,118
Equity contributions from parent - - 16,037,792 - - 16,037,792
Net loss - - - (4,743,228) - (4,743,228)
Cumulative translation
adjustment - - - - 13,004 13,004
Balances, December 31, 1997 2 2 20,858,377 (5,713,228) 6,535 15,151,686
------ ------ ------------ ------------- -------------- --------------
Net loss - - - (10,893,746) - (10,893,746)
Cumulative translation
adjustment - - - - 131,998 131,998
------ ------ ------------ ------------- -------------- --------------
Balances, December 31, 1998 2 $2 $20,858,377 $(16,606,974) $138,533 $ 4,389,938
====== ====== =========== ============= ============== ==============
</TABLE>
F-45
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Inception
(February 29, Year Year
1996) to Ended Ended
December 31, December 31, December 31,
----------------- --------------------- ---------------------
1996 1997 1998
----------------- --------------------- ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (970,000) $(4,743,228) $(10,893,746)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 179,707 1,014,885 1,698,911
Write-down El Salvador business - - 2,403,700
Write-off of Argentine investment - 615,598 -
Allowance for doubtful accounts - 517,986 348,087
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable -
trade (362,529) (1,331,582) 71,566
(Increase) decrease in accounts receivable -
affiliates (25,000) 25,000 -
Increase in inventory (140,429) 2,177,991 (423,764)
Increase in other assets (152,582) (2,183,481) (65,674)
Increase in accounts payable and other 92,156 525,409 111,675
Increase in accrued liabilities 68,242 162,620 563,343
----------------- --------------------- ---------------------
Net cash used in operating activities (1,310,435) (3,218,802) (6,185,902)
----------------- --------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,312,641) (975,289) (5,021,746)
Acquisition of businesses, net of cash (2,552,248) (4,482,325) (7,426,003)
acquired
Payment of contingent payable to seller - - (2,390,000)
(Increase) decrease in restricted cash (86,000) 41,464 (342,026)
Funding of organizational costs (167,356) - -
----------------- --------------------- ---------------------
Net cash used in investing activities (4,118,245) (5,416,150) (15,179,775)
----------------- --------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 500 - -
Contribution from parent 4,268,876 10,695,769 -
Advances (payments) from affiliates 1,336,846 (1,336,846) 20,870,243
----------------- --------------------- ---------------------
Net cash provided by financing activities
5,606,222 9,358,923 20,870,243
----------------- --------------------- ---------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(6,469) 13,004 131,998
----------------- --------------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS
171,073 736,975 (363,436)
CASH AND CASH EQUIVALENTS, beginning of period
- 171,073 908,048
----------------- --------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period
$ 171,073 $ 908,048 $ 544,612
================= ===================== =====================
</TABLE>
F-46
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Inception Year Year
(February 29, Ended Ended
1996) to December 31, December 31,
December 31, ----------------------------------------------
1996 1997 1998
--------------------- --------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for-
<S> <C> <C> <C>
Interest $ - $ 24,562 $ 1,647
Income taxes - 52,221 255,188
Supplemental schedule of non-cash
investing and financing activities-
Equipment contributed by parent $ 551,211 $5,342,023 $ -
Contingent payment of acquisition
of Chilean channels - - 400,000
</TABLE>
F-47
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 1997 AND 1998
--------------------------------
NOTE 1. ORGANIZATION AND OWNERSHIP
- ------- --------------------------
Centennial Cayman Corp. was incorporated in June 1996 as a wholly owned
subsidiary of Centennial Communications Corp. (the "Parent Company").
Centennial Cayman Corp. and subsidiaries (collectively, the "Company") is a
Cayman Islands corporation engaged in the acquisition, development and operation
of specialized mobile radio ("SMR") and other low-cost, wireless communications
networks, the sale of communications services using those networks, and the sale
and servicing of related accessory equipment in certain countries of Latin
America. The accompanying consolidated financial statements for the period from
inception (February 29, 1996) to December 31, 1996 include the operations of an
entity purchased by the Parent Company in February 1996. As this entity and the
Company are under the common control of the Parent Company, this entity was
contributed to the Company upon its formation in June 1996. The Company has
acquired SMR licenses through direct applications to governments, contributions
from the Parent Company and through acquisitions of interests in other entities
(all of which are wholly owned at December 31, 1997 and 1998) that have been
granted or have applied for SMR licenses. As more fully discussed in Note 6,
the Company is subject to various risks and uncertainties, primarily those of an
enterprise in the early stage of operations.
To date, the Company has been primarily dependent on funds provided by the
Parent Company, however, during the end of 1998, certain of the subsidiaries
have been paying back receivables owed. The Company has received equity
contributions as well as extensions of credit from the Parent Company to fund
its activities and anticipates that the Parent Company will make additional
equity contributions to the Company. The Parent Company is under no obligation
to provide additional advances or loans to the Company; however, if the
Company's operating cash flow is not sufficient to meet its needs, the Parent
Company has committed that it will continue to make advances to the Company as
necessary, through at least December 31, 1999.
In October 1997, the Parent Company completed a financing which resulted in
proceeds to the Parent Company of approximately $11.1 million. In addition, in
January 1998, the Parent Company completed financings which resulted in proceeds
to the Parent Company of approximately $30.4 million.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------- ------------------------------------------
Basis of Presentation
---------------------
The consolidated financial statements have been prepared in conformity with
United States generally accepted accounting principles which are substantially
the same as Cayman Islands generally accepted accounting principles.
The consolidated financial statements include the accounts of Centennial Cayman
Corp. and its subsidiaries, all of which are wholly owned. All subsidiaries
are consolidated except the El Salvador subsidiary which was acquired in August
and September of 1998, which the Company has made the decision to sell (See Note
3). Accordingly, due to temporary majority control, such investment has been
accounted for using the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Minority interest share of loss results from minority ownership interests in
entities now wholly owned by the Company.
The Company's Parent incurs certain direct and indirect expenses on behalf of
the Company including management, financing and other corporate overhead items.
Items directly identifiable to the Company's
F-48
<PAGE>
operations are charged to the Company by the Parent. The Parent also allocates a
portion of its corporate overhead based on the estimated level of activity
performed by the Parent on behalf of the Company. Such allocations of indirect
expenses totaled approximately $223,000 during the period from inception
(February 29, 1996) through December 31, 1996, $936,011 and $3,485,686 for the
years ended December 31, 1997 and 1998, respectively.
Foreign Currency Translation
----------------------------
For subsidiaries whose functional currency is the local currency and do not
operate in highly inflationary economies, assets and liabilities are translated
at current exchange rates and translation adjustments are included in
stockholder's equity as a component of other comprehensive income. Revenues and
expenses are translated at the weighted average rate for the period. The
Company's Peruvian and Ecuadorian subsidiaries functional currency is the United
States dollar because the revenue stream is earned in the United States
dollar.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include short-
term, highly liquid investments with original maturities of three months or less
which are readily convertible into cash and are not subject to significant risk
from fluctuations in interest rates.
Restricted Cash
---------------
Restricted cash includes $44,536 and $386,562 as of December 31, 1997 and 1998,
respectively, held as guarantees for performance bonds for certain construction
and operational obligations related to SMR licenses held in Peru.
Credit Risk and Concentrations of Operations
--------------------------------------------
The Company typically does not require collateral from its customers. Accounts
receivable are comprised of small balances due from numerous customers located
primarily in Peru, Ecuador, Chile and El Salvador. The Company has assets
totaling approximately $26,900,000 located in Latin America. Accordingly, while
the Company believes that it has minimized its exposure to any single customer,
the Company is exposed to credit risk resulting from adverse general economic
conditions which may affect these countries and Latin America. The Company has
not entered into any foreign currency contracts, hedges or options. The Company,
as of December 31, 1998 has approximately $545,000 of unrestricted cash and
approximately $387,000 of restricted cash in Latin America. The Company sweeps
all excess cash from its operations on a weekly basis. The Company invests its
cash, cash equivalents and restricted cash with financial institutions that the
Company believes to be of high credit quality.
Accessories Inventory
---------------------
Accessories inventory represents radio accessories that are held for sale to the
Company's subscribers. Accessories are stated at the lower of their cost or
market. Cost is determined using the first-in, first-out method.
Revenue Recognition
-------------------
Radio service fees, as well as charges for maintenance and loss and damage
insurance coverage are recognized in the period service is delivered. Equipment
sales are recognized when the equipment is delivered and title passes to the
subscriber.
Property and Equipment
----------------------
F-49
<PAGE>
Property and equipment are recorded at cost. Maintenance and repair expenditures
are charged to expense as incurred, and expenditures for improvements that
increase the expected useful lives of the assets are capitalized. Depreciation
expense is computed using the straight-line method over the useful lives of the
respective assets (see Note 4).
Direct costs associated with the construction of SMR networks are capitalized
and amortized over the system's expected useful life upon placing the system in
service. Such costs include amounts incurred in securing tower sites, site
preparation, procurement and installation of infrastructure and equipment costs.
Also included in property and equipment are radios owned by the Company, which
are leased to the Company's subscribers under operating lease agreements. The
Company retains title to these radios as part of the subscriber agreement and
depreciates the radios over five years. Upon termination of service, the
subscribers are required to return the radios to the Company and the radios are
placed with another subscriber. Certain subscribers desire to own their radios.
The cost or depreciated net book value of radios sold to such subscribers is
recorded as a charge to cost of goods sold at the time of sale.
SMR Licenses
------------
Direct and certain indirect costs of obtaining SMR licenses, such as
application, legal and consulting fees, as well as the fair market value of
licenses obtained in certain acquisitions, are capitalized and amortized using
the straight-line method over the period of the related license (generally 10 to
40 years) upon commencement of service. SMR licenses in the countries in which
the Company operates are issued conditionally for various periods of time. The
SMR licenses are generally renewable providing the licensee has complied with
applicable rules and policies. In most instances, the Company believes it has
complied and intends to comply with these standards and is amortizing the
related costs using the straight line method over their estimated useful life,
generally 40 years. In some cases, the Company currently is not in compliance
with applicable requirements and, where appropriate, has filed requests for
extensions with the appropriate government agency. The Company expects that
such extension requests will be granted and the risk of having these or any
other licenses revoked is remote.
Income Taxes
------------
The Company is not subject to income taxes under the laws of the Cayman Islands.
The Company's foreign participant subsidiaries are subject to foreign income
taxes in their respective taxing jurisdictions. The current provision for income
taxes represents actual or estimated amounts payable on tax return filings each
year. Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in the accompanying balance sheets, and for
operating loss and tax credit carryforwards. The change in deferred tax assets
and liabilities for the period measures the deferred tax provision or benefit
for the period. Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to the tax provision or benefit in
the period of enactment. The Company's deferred tax assets have been reduced by
a valuation allowance to the extent it is more likely than not, that some or all
of the deferred tax assets will not be realized (See Note 5).
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
F-50
<PAGE>
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
The Company is subject to the laws and regulations governing telecommunication
services in effect in each of the countries in which it operates. These laws and
regulations can have a significant influence on the Company's results of
operations and are subject to change by the responsible governmental agencies.
The financial statements as presented reflect certain assumptions based on laws
and regulations currently in effect in each of the various countries. The
Company cannot predict what future laws and regulations might be passed that
could have a material effect on the Company's results of operations. The Company
assesses the impact of significant changes in laws and regulations on a regular
basis and updates the assumptions used to prepare its financial statements
accordingly.
Fair Value of Financial Instruments
-----------------------------------
Fair values of cash equivalents and other current amounts receivable and payable
approximate the carrying amount due to their short-term nature.
Long-Lived Assets
-----------------
In accordance with Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
long-lived assets and certain identifiable intangibles to be held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company continuously evaluates the recoverability of its long-
lived assets based on estimated future cash flows and the estimated liquidation
value of such long-lived assets, and provides for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the
long-lived asset. If an impairment charge is indicated, the amount of the charge
is calculated as the amount by which the carrying amount of the asset exceeds
the fair value of the asset. During 1998, the Company determined that its
Spectrum Licenses and other long-lived assets related to its El Salvador
subsidiary was impaired based upon third party offers, and recorded a write down
to estimated fair value. At December 31, 1998, the Company determined that there
were no other impairments of long-lived assets.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. From its inception through
December 31, 1998, the change in the cumulative translation adjustment is the
sole item of other comprehensive income or loss.
Recently Issued Accounting Standards
------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required
to adopt SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. To date, the Company has not entered into any derivative financial
instruments or hedging activities.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," Which provides
guidance on accounting for the cost of such software. SOP No. 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 had no impact on the Company's financial statements.
F-51
<PAGE>
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities." This statement will be effective in 1999 and will
require costs of start-up activities and organization costs to be expensed as
incurred. The adoption of this statement had no effect on the Company's
financial position or results of operations.
NOTE 3. ACQUISITIONS
- ------- ------------
The Company completed several acquisitions of non-operating entities whose
primary assets were SMR licenses as well as the acquisition of operating
entities and spectrum. The Parent Company also made an acquisition of such an
entity which was subsequently contributed to the Company. Included in the
accompanying consolidated financial statements, from the date of their
acquisition, are the results of operations for these entities (except El
Salvador - see below) as follows:
<TABLE>
<CAPTION>
Name and Location of Entity Date Acquired
- --------------------------- -------------
<S> <C>
SMR Direct Peru S.R.L. (formerly Mobil Line S.A.); Lima, Peru February and July 1996 (1)
Pompano S.R.L.; Lima, Peru November 1996
Brunacci S.R.L.; Guayaquil, Ecuador November 1996
Telecom Supply S.R.L.; Lima, Peru December 1996
C-Comunica S.R.L.; Lima, Peru January 1997
Transnet del Peru S.A.; Lima, Peru July 1997
Telecomunicaciones y Servicios S.A.; Santiago, Chile January 1998
Peru Tel S.A.; Lima, Peru May 1998
Comovec S.A.; Quito, Ecuador May 1998
El Salvador June, August and September 1998
</TABLE>
(1) The Parent Company acquired 51% of Mobil Line S.A. in February 1996. This
interest was contributed to the Company by the Parent upon the formation of the
Company. The remaining 49% was acquired by the Company in July 1996.
In February 1996, the Parent Company purchased 51% of the capital stock of Mobil
Line S.R.L. ("Mobil Line"), a Peruvian non-operating development stage company
which owned a Peruvian SMR spectrum concession, for $900,000. Upon formation of
the Company in June 1996, the ownership interest in Mobil Line was transferred
to the Company at its carrying value. Operations between February 1996 and June
1996 were not significant. This transfer was treated as a reorganization of
entities under common control, and operations of this entity have been included
in the Company's accompanying consolidated financial statements for all periods
presented as if the Company had owned the investment in Mobil Line since the
date of purchase. The Company acquired the remaining 49% of Mobil Line in July
1996 for approximately $600,000. This transaction was accounted for as a step
acquisition; and accordingly, operating results of the Company from March 1996
include the operations of Mobil Line from February 1996, with the minority
interest reflected for the five-month period ending in July. Of the total
consideration paid, approximately $900,000 remained with Mobil Line to purchase
infrastructure and
F-52
<PAGE>
approximately $600,000 was paid to the founders of Mobil Line. As a result of
these transactions, approximately $692,000 of the total consideration paid was
allocated to SMR licenses. The SMR licenses are amortized over 40 years. The
purchase price was financed by the Company with cash made available to it by a
Parent Company investment.
In November 1996, the Company, through wholly owned subsidiaries, acquired all
of the common stock of Pompano S.R.L. ("Pompano"), a Peruvian non-operating
development stage company which owned a Peruvian SMR spectrum concession. The
acquisition was accounted for as a purchase; and accordingly, operating results
of Pompano subsequent to the date of acquisition are included in the
accompanying consolidated financial statements. Total consideration paid by the
Company was approximately $419,000, of which approximately $16,000 was allocated
to tangible net assets and $403,000 was allocated to SMR licenses. SMR licenses
are amortized over 40 years. The purchase price was financed by the Company
with cash made available to it by a Parent Company investment.
In November 1996, the Company, through wholly owned subsidiaries, acquired all
of the common stock of Brunacci S.R.L. ("Brunacci") and of its wholly owned
subsidiary, Multisistemas Electronics M.S.E. S.A. ("Multisistemas"), both
Ecuadorian non-operating development stage companies which owned Ecuadorian SMR
spectrum concessions. The acquisition was accounted for as a purchase; and
accordingly, operating results of Brunacci and Multisistemas subsequent to the
date of acquisition are included in the accompanying consolidated financial
statements. Total consideration given and liabilities assumed for both of the
acquired companies was approximately $947,000, of which $297,000 was allocated
to tangible net assets and $650,000 was allocated to SMR licenses. SMR
licenses are amortized over 10 years, the expected term of the license. The
purchase price was financed by the Company with cash made available to it by a
Parent Company investment.
In December 1996, the Company, through wholly owned subsidiaries, acquired all
of the common stock of Telecom Supply S.R.L. ("Telecom"), a Peruvian non-
operating development stage company which owned a Peruvian SMR spectrum
concession. The acquisition was accounted for as a purchase; and accordingly,
operating results of Telecom, subsequent to the date of acquisition, are
included in the accompanying consolidated financial statements. Total
consideration paid by the Company was approximately $400,000, of which
approximately $14,000 represented the fair value of tangible assets acquired and
the excess purchase price over fair value of the net tangible assets acquired
was approximately $386,000, which was allocated to SMR licenses. SMR licenses
are amortized over 40 years. The purchase price was financed by the Company with
cash made available to it by a Parent Company investment.
Because the above purchased entities were acquired prior to their operations,
the Company believes that pro-forma revenue and results of operations for the
period in 1996 prior to their acquisition by the Company are not meaningful.
In January 1997, the Company acquired the majority of the common stock of C-
Comunica S.A. ("C-Comunica"), a Peruvian SMR operating company. The acquisition
was accounted for as a purchase. The total consideration given and liabilities
assumed for C-Comunica was approximately $2.9 million, of which approximately
$800,000 represented the fair value of the net tangible assets as of the date of
acquisition and the excess purchase price over the fair value of the net
tangible assets acquired was approximately $2.1 million, which was allocated to
SMR licenses. SMR licenses are amortized over 40 years. The purchase price was
financed by the Company with cash made available to it by a Parent Company
investment.
In July 1997, the Company acquired all of the common stock of Transnet del Peru
S.A. ("Transnet"), a Peruvian SMR operating company. The acquisition was
accounted for as a purchase. The total consideration given and liabilities
assumed for Transnet was approximately $1.5 million, of which approximately
$300,000 represented the fair value of the net tangible assets as of the date of
acquisition and the excess purchase price over the fair value of the net
tangible assets acquired was approximately
F-53
<PAGE>
$1.2 million, which was allocated to SMR licenses. SMR licenses are amortized
over 40 years. The purchase price was financed by the Company with available
cash.
Also in July 1997, the Parent Company pledged $1.3 million to secure its
obligations in connection with the Company's bid for additional spectrum with
Chile Concurso. On October 29, 1997, the Company received written notice from
the Chilean Ministry of Transportation and Telecommunications (the "Chilean
Ministry") that its proposal had been accepted and awarded; although such award
is subject to appeal by the other participants in the Chile Concurso. During
1997 and 1998 appeals were filed and the Nimistry denied such appeals. The
company believes that it will be awarded the channels in the next six
months.
In September 1997, the Company acquired all of the common stock of Fastcom S.A.
("Fastcom") and Radioservicios Moviles, S.A. ("Radioservicios"), Argentine non-
operating development stage companies which owned an Argentine paging
concession. The acquisition was accounted for as a purchase. The total
consideration given and liabilities assumed for Fastcom was approximately
$526,000. The Company paid $110,000 cash at closing and signed a note to the
seller for the remainder of the purchase price due December 2, 1997. The Company
has pledged the shares of Fastcom and Radioservicios to the previous owners and
related parties (the "Lienholders") to secure certain payment obligations of the
Company. The Company did not satisfy these payment obligations on December 2,
1997; as such, the Lienholders foreclosed on the shares of Fastcom and
Radioservicios. This resulted in the Company taking an approximately $600,000
(included in general and administrative expenses) charge in December 1997, which
consists of the $110,000 initial purchase price and approximately $490,000 in
capitalized costs made in connection with the Radioservicios transaction during
1997.
On January 2, 1998, the Company purchased 100% of the outstanding capital
stock of Telecomunicaciones y Servicios S.A. ("TyS"), a Chilean operating
company. TyS holds 10 800 MHz channels in the metropolitan region of Santiago,
Chile. The acquisition was accounted for as a purchase. The total
consideration given and liabilities assumed for the Chilean company was
approximately $3,200,000, of which $800,000 was paid at closing and
approximately $2,040,000 was paid June 29, 1998 and $350,000 on July 8, 1998
upon the transfer of 290 additional channels (40 of which are in the
metropolitan region of Santiago) to the operating company. Approximately $80,000
represented the fair value of the net tangible assets as of the date of
acquisition and the excess purchase price over the fair value of the net
tangible assets acquired was approximately $3,120,000, which was allocated to
SMR licenses. SMR licenses are amortized over 40 years. The purchase price was
financed by the Company with available cash.
On April 14, 1998 the Company executed a purchase agreement with certain
non-operating subsidiaries of International Wireless Communications Holdings,
Inc. ("IWC") for the acquisition of certain assets in Peru, Ecuador and Chile
for a purchase price of approximately $3,500,000. On May 13, 1998 the Company
completed the first part of the acquisition and acquired a non-operating entity
in Ecuador (Comovec S.A.) for approximately $300,000. Comovec S.A. holds
licenses to operate SMR networks and has 40 800 MHz channels and 20 900 MHz
channels in each of Quito and Guayaquil and 25 800 MHz channels in Cuenca.
Approximately $20,000 represented the fair value of the net tangible assets of
Comovec S.A. as of the date of acquisition. The excess purchase price over the
fair value of the net tangible assets acquired was approximately $250,000, which
was allocated to SMR licenses. Comovec S.A.'s licenses will be amortized over
40 years beginning on the date that the channels are launched. On May 22, 1998,
the Company completed the second part of the acquisition and acquired a non-
operating entity in Peru (Peru Tel S.A.) for approximately $2,800,000. Peru Tel
S.A. holds licenses to operate SMR networks and has 32 800 MHz channels in
Lima/Callao and 100 800 MHz channels among eight other cities. Approximately
$400,000 represented the fair value of the net tangible assets of Peru Tel S.A.
as of the date of acquisition. The excess purchase price over the fair value of
the net tangible assets acquired was approximately $2,400,000, which was
allocated to SMR licenses. Peru Tel S.A.'s SMR licenses will be amortized over
approximately 40 years beginning on the date that the channels are launched.
The
F-54
<PAGE>
Company is currently waiting for final government approval for the transfer
of the license in Chile to the Company (which it expects will occur in the next
six months) before it can close the final part of the acquisition for
approximately $400,000, which amount was placed into escrow upon the Chilean
government's initial approval of the transfer. The Company used its existing
cash to acquire Comovec S.A. and Peru Tel S.A.
<TABLE>
<CAPTION>
Detail of net assets of acquisitions: 1997 1998
------------------ ---------------
<S> <C> <C>
Property and equipment $ 896,688 $ 71,039
SMR licenses 3,326,723 5,792,621
Other assets 928,538 105,405
Accounts payable and accrued liabilities (669,624) (106,762)
------------------ ---------------
Acquisition, net of cash acquired 4,482,325 5,862,303
Cash acquired 443,675 420,930
Payable to seller - 400,000
------------------ ---------------
Purchase price $4,926,000 $6,683,233
========== ==========
</TABLE>
In addition to acquisitions, the Company was awarded 40 nationwide
channels of 800 MHz spectrum on June 9, 1998 in El Salvador. The Company paid
$620,000 for the channels, which have a 20 year term. In August 1998, the
Company completed the acquisition of a concession for 10 nationwide channels of
800 MHz spectrum in El Salvador for approximately $300,000. The acquisition of
assets included certain infrastructure and approximately 140 subscribers. In
September 1998 the Company was awarded 65 nationwide channels of 800 MHz
spectrum in El Salvador. The Company paid approximately $2,027,000 for the
channels, which have a 20 year term. Also, in September 1998, the Company
acquired a concession for 30 nationwide channels of 800 MHz spectrum in El
Salvador for approximately $949,000. The acquisition of assets also included
certain infrastructure and approximately 600 subscribers. The Company was
awarded a concession for 25 nationwide channels of 800 MHz spectrum in El
Salvador for approximately $10,000. These assets have been recorded as an
investment in subsidiary and accounted for using the equity method of
accounting. The Company has not consolidated this subsidiary because its control
is temporary, as the Company has signed a letter of intent to sell the
subsidiary. The letter of intent was not consummated, however, the Company is
entertaining offers to sell and is committed to selling this subsidiary. Based
on third party offers to buy the subsidiary, the Company wrote down the carrying
value to $1,560,000 and took an approximate $2,400,000 loss on write off (see
Note 2).
NOTE 4. PROPERTY AND EQUIPMENT
- ------- ----------------------
The composition of property and equipment follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1998
------------------------------------------------
<S> <C> <C>
Network infrastructure $ 3,214,106 $ 6,392,786
Radios 2,017,071 3,321,641
Computer equipment and software 241,928 511,325
Furniture and fixtures 146,648 310,284
Leasehold improvements - 210,706
------------- -------------
5,619,753 10,746,742
Accumulated depreciation (1,145,134) (2,357,151)
----------- --------------
Property and equipment, net $ 4,474,619 $ 8,389,591
=========== ===========
</TABLE>
F-55
<PAGE>
The Company depreciates infrastructure over ten years, radios over five years,
computer equipment and software over three years and leasehold improvements over
the life of the lease.
Depreciation expense was approximately $160,000, $635,135 and $1,343,786 for the
years ended December 31, 1996, 1997 and 1998, respectively.
NOTE 5. INCOME TAXES
- ------- ------------
The Company is not subject to income taxes under the laws of the Cayman Islands.
The Company's foreign participant subsidiaries are subject to foreign income
taxes in their respective taxing jurisdictions but have incurred no liability
for such taxes due to losses that have been incurred since inception. At
December 31, 1998, the Company's foreign participants have net operating and
deferred pre-operating loss carryforwards for income tax purposes of
approximately $9.4 million that expire starting in the year 2001. These
carryforwards are available to offset future taxable income in the respective
taxing jurisdictions in which they were incurred. The Company's foreign
participants in Peru, Ecuador, Chile and El Salvador are considered pre-
operating entities for income tax purposes, and therefore, the losses are
deferred for income tax purposes. The losses may be utilized against future
taxable income generated in the respective taxing jurisdictions over a period of
approximately four years commencing in 1998.
F-56
<PAGE>
The Company's net deferred tax assets result primarily from the future benefit
of loss carryforwards and deferred pre-operating losses. Net deferred tax
assets, by country, as of December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Peru Ecuador Chile Other Total
<S> <C> <C> <C> <C> <C>
1997:
Net deferred tax assets $ 779,561 $ 338,773 $ 10,526 $ 12,530 $1,141,390
Valuation allowance (779,561) (338,773) (10,526) (12,530) (1,141,390)
---------- ----------- ---------- ---------- ----------
$ - $ - $ - $ - $ -
========== =========== ========== ========== ==========
1998:
Net deferred tax asssets $ 702,909 $ 465,122 $ 425,094 $ 14,189 $1,607,314
Valuation assets (702,909) (465,122) (425,094) (14,189) (1,607,314)
---------- ----------- ---------- ---------- ----------
$ - $ - $ - $ - $ -
========== =========== ========== ========== ==========
</TABLE>
The reconciliation of income taxes computed at the statutory rates to the income
tax benefit is as follows:
<TABLE>
<CAPTION>
Inception
Through Year Ended
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Income tax benefit at statutory rate $(886,717) $(1,607,314)
Increase in valuation allowance 886,717 1,607,314
--------- -----------
Tax benefit $ - $ -
========= ===========
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
- ------- -----------------------------
Recovery of Investments
-----------------------
Since its inception, the Company's efforts have been primarily directed towards
raising capital and acquiring, developing and operating SMR and other low-cost,
wireless communications networks. Further, the Company has made significant
investments in pre-operating entities in various Latin American countries whose
primary assets were SMR licenses. The Company's Peruvian operations and
revenue-generating activity began in May 1996, its Ecuadorian operations and
revenue generating activity began in March 1997, its Chilean operations and
revenue generating activity began in January 1998 and its El Salvadoran
operations and revenue generating activity began in September 1998. The ability
of the Company to recover its current investment in property, equipment and
spectrum and to generate positive cash flow and operating profits is contingent
upon a number of factors, including the Company's ability to continue to build
out and develop the SMR and other low-cost, wireless communications networks it
currently owns and to attract and retain sufficient subscribers on its existing
systems and those which are under development in sufficient numbers to achieve
profitable operations.
Recoverability of Licenses
--------------------------
The terms of the Company's SMR license agreements contain provisions whereby the
Company must achieve certain levels of subscriber load and network build out.
If such commitments are not met, the Company could be subject to the revocation
of the applicable licenses.
F-57
<PAGE>
Compliance with the terms of SMR licenses and certain regulatory requirements,
such as construction deadlines and minimum subscriber requirements, can be
difficult to meet. In addition, there can be no assurance that in the future
all regulatory requirements will be met or that the Company will not lose any
applicable licenses as a result of its failure to meet such requirements. The
Company currently is not in compliance with certain minimum subscriber loading
requirements with respect to a portion of its channels in Peru. Failure to
comply with such requirements may subject the licenses relating to such channels
to punitive measures. Requests for amendment of such loading requirements have
been filed by the Company with the Peruvian Ministry of Transportation,
Communications, Housing and Construction (the "Ministry"); however, to date no
responses have been received. Based upon information currently available, the
Company is optimistic that these amendments will be approved; however, there can
be no assurance that the amendments received by the Company will be the same as
those applied for. The Company is also not in compliance with certain terms of
the concession agreements including, homologation of equipment (certifying the
equipment before entering Peru), site to site transmission of signal (currently
allowed only site to handset), unauthorized transfer and use of channels between
the Peruvian companies and unauthorized use of certain frequencies granted. The
Company has applied to correct the non-compliance issues and is waiting on
approval from the Ministry. The Company believes that the applications will be
approved and result only in minimal fines, if any; however, there can be no
assurance of such outcome.
Lease Commitments
-----------------
The Company leases certain office facilities and transmission sites under
operating leases. Lease terms for office facilities range from one to three
years. Lease terms for transmission sites on buildings range from one to three
years, with varying renewal terms. Future minimum rental payments for such
office facilities and antenna site leases are as follows as of December 31,
1998:
1999 $ 557,245
2000 405,692
2001 286,878
2002 -
2003 -
Thereafter -
----------
$1,249,815
==========
The Company recognized lease expense during the years ended December 31, 1997
and 1998 of $113,295 and $281,290, respectively.
NOTE 7. GEOGRAPHIC DATA
- ------- ---------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. In accordance with the provisions of SFAS
No. 131, the Company has determined that its reportable segments are strategic
geographic units that develop and operate SMR networks. The Company is managed
by country as each country may require a slightly different business strategy.
The accounting policies of the segments are the same as those for the Company on
a consolidated basis. The segments are evaluated based upon gains in
subscribers and based upon EBITDA. EBITDA represents operating loss before
depreciation and amortization and is not a measurement under U.S. generally
accepted accounting principles and may not be similar to EBITDA measures of
other companies.
F-58
<PAGE>
The following information presents certain summarized balance sheet and
statement of operations data by geographic region as of December 31, 1998, 1997
and 1996 and for the years then ended (in 000's).
<TABLE>
<CAPTION>
Peru Ecuador Chile Other(2) Total
---- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
December 31, 1998
- -----------------
Revenues $ 4,251 $ 2,538 $ 415 $ - $ 7,204
EBITDA (928) (586) (976) (3,826) (6,316)
Operating loss (1,843) (1,249) (1,092) (6,235) (10,419)
Total assets $16,103 $ 4,041 $ 6,754 $ 104 $ 27,002
Capital expenditures 1,917 1,924 2,844 - 6,685
December 31, 1997
- -----------------
Revenues $ 2,939 $ 775 $ - $ (25) $ 3,689
EBITDA (1,916) (855) - (1,015) (3,786)
Operating loss (2,698) (1,132) - (971) (4,801)
Total assets $11,440 $ 3,181 $ - $ 1,091 $ 15,712
Capital expenditures 4,615 802 - - 5,417
December 31, 1996
- -----------------
Revenues $ 216 $ - $ - $ - $ 216
EBITDA (522) (172) - (190) (884)
Operating loss (767) (45) - (251) (1,063)
Total assets $ 4,139 $ 1,390 $ - $ 30 $ 5,559
Capital expenditures 2,433 - - - 2,433
</TABLE>
(1) Included in total assets for December 31, 1998 noted for Other is
$1,496,443 of an investment in an affiliate in El Salvador and in operating
loss, a write down of $2,403,700 on the affiliate in El Salvador (See Note
2 and Note 3).
The Company conducts a significant portion of its business in Peru, Ecuador and
Chile. Accordingly, the Company's cash flow and its ability to make
distributions to the Parent Company is significantly dependent upon the cash
flow of its Peruvian and Ecuadorian subsidiaries. The Company's ability to
recover its investment in these subsidiaries, to fund operations in other
countries and to make distributions to the Parent Company, among other things,
depends to a significant degree on its ability to transfer funds from such
subsidiaries to the Parent Company.
The ability of the Company's subsidiaries to pay dividends or make loans or
advances to the Parent Company is subject to regulation within their respective
jurisdictions of organization and operation. While the existing laws and
regulations of these jurisdictions generally do not prohibit the Company's
subsidiaries from paying dividends or making loans or advances to the Parent
Company, there can be no assurance that such laws will continue to permit or
will not restrict such payments to be made.
Further, the Company is exposed to credit risk related to receivables
denominated in non-United States dollar currencies in these foreign countries.
NOTE 8. PRO FORMA INFORMATION (UNAUDITED)
- ------------------------------------------
The following pro forma information for the year ended December 31, 1997 gives
effect to the acquisitions of C-Comunica and Transnet as if each had occurred on
January 1, 1997. The majority of the 1998 acquisitions were of spectrum and non-
operating entities, thus there are no pro forma results. The pro forma
financial information does not purport to represent what the Company's results
of operations would actually have been if such transactions had in fact occurred
on such date. The pro forma results
F-59
<PAGE>
presented below are based upon currently available information and upon certain
assumptions that management believes are current circumstances.
<TABLE>
<CAPTION>
(Unaudited)
For the Year Ended
December 31,
1997
--------------------------------------
<S> <C>
Revenues $ 3,781,934
Net loss applicable to common shareholders $(5,101,887)
</TABLE>
F-60
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------ ------------------------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 590,695 $ 544,612
Restricted cash 1,617,389 386,562
Accounts receivable - trade, net of allowance for doubtful
---------------------- ------------
accounts of $834,336 and $829,933, respectively 868,650 863,756
Inventory 1,053,833 1,795,526
VAT receivable 646,777 723,808
Prepaid licenses and other current assets 680,434 457,852
------------------------ ------------------------
Total current assets 5,457,778 4,772,116
PROPERTY AND EQUIPMENT, net 8,407,185 8,389,591
SMR LICENSES, net of accumulated amortization
of $648,032 and $527,477, respectively 11,868,863 11,989,418
INVESTMENT IN SUBSIDIARY 1,412,326 1,496,443
OTHER NONCURRENT ASSETS, net 350,392 354,618
------------------------ ------------------------
Total assets $ 27,496,544 $ 27,002,186
======================== ========================
LIABILITIES AND STOCKHOLDER'S EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 540,064 $ 443,382
Accounts payable - affiliates 22,292,048 20,870,243
Payable to seller 400,000 400,000
Accrued liabilities 717,970 898,623
------------------------ ------------------------
Total liabilities 23,950,082 22,612,248
STOCKHOLDER'S EQUITY :
Common stock, $1 par value, 50,000 authorized,
2 issued and outstanding, respectively 2 2
Additional paid-in capital 20,858,377 20,858,377
Accumulated deficit (17,409,386) (16,606,974)
Accumulated other comprehensive income 97,469 138,533
------------------------ ------------------------
Total stockholder's equity 3,546,462 4,389,938
------------------------ ------------------------
Total liabilities and stockholder's equity $ 27,496,544 $ 27,002,186
======================== ========================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
F-61
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
-------------------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
REVENUE:
Radio service revenue 1,401,326 $ 1,226,819
Equipment sales 277,679 487,873
Activation and other 30,660 36,993
------------------- -----------------
1,709,665 1,751,685
------------------- -----------------
COSTS AND EXPENSES RELATED TO REVENUE:
Network and site expense 37,783 20,431
Cost of equipment sold 356,480 591,347
Maintenance and other 95,110 119,287
------------------- -----------------
489,373 731,065
------------------- -----------------
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 1,539,328 2,019,998
Depreciation and amortization 472,393 340,164
------------------- -----------------
2,011,721 2,360,162
------------------- -----------------
OPERATING LOSS (791,429) (1,339,542)
------------------- -----------------
OTHER INCOME (EXPENSE):
Interest Expense (28,545) (1,379)
Interest Income - -
Other 17,562 (20,137)
------------------- -----------------
(10,983) (21,516)
------------------- -----------------
NET LOSS (802,412) (1,361,058)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (41,064) (225,414)
------------------- -----------------
COMPREHENSIVE LOSS $(843,476) $(1,586,472)
=================== =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
F-62
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
-----------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Stockholder's Equity
-----------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
-------------- Paid-in Accumulated Comprehensive Stockholder's
Shares Amount Capital Deficit Income (Loss) Equity
------ ------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 2 $2 $20,858,377 $(16,606,974) $138,533 $4,389,938
Net loss - - - (802,412) - (802,412)
Cumulative translation
Adjustment - - - - (41,064) (41,064)
Balances, March 31, 1999 2 $2 $20,858,377 $(17,409,386) $ 97,469 $3,546,462
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
F-63
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------
1999 1998
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (802,412) $(1,361,058)
Adjustments to reconcile net loss to net cash
used in operating activities- 472,393 340,164
Depreciation and amortization
Allowance for doubtful accounts 4,403 29,043
Changes in operating assets and liabilities-
(Increase) in accounts receivable (9,297) (174,252)
Decrease in inventory 94,916 258,535
Decrease in other assets 573,195 112,894
Increase in accounts payable and other 96,682 44,909
Increase / (decrease) in accrued liabilities (180,653) 213
------------- -------------
Net cash used in operating activities 249,227 (749,552)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (367,182) (789,786)
Acquisition of and investment in operating and non-operating,
entities and spectrum, net of cash acquired 14,124 (781,586)
(Increase) in restricted cash (1,230,827) (627,497)
------------- -------------
Net cash used in investing activities (1,583,885) (2,198,869)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates 1,421,805 2,488,039
------------- -------------
Net cash provided (used) by financing activities 1,421,805 2,488,039
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (41,064) (225,414)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 46,083 (685,796)
CASH AND CASH EQUIVALENTS, beginning of period 544,612 908,048
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 590,695 $ 222,252
=========== ===========
</TABLE>
F-64
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
- --
1999 1998
----------------- ---------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for -
Interest $ 1,193 $ -
Income taxes 26,075 58,037
Supplemental schedule of non cash
Investing and financing activities-
Contingent payment of acquisition of Chilean
Operating company 400,000 2,400,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
F-65
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
AS OF MARCH 31, 1999
--------------------
(UNAUDITED)
-----------
NOTE 1. BASIS OF PRESENTATION
- ------- ---------------------
The accompanying interim consolidated financial statements include the accounts
of Centennial Cayman Corp. and its subsidiaries (collectively, the "Company"),
all of which are wholly owned. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In management's opinion, all adjustments (which are of a normal recurring
nature) have been made which are necessary to present fairly the financial
position of the Company as of March 31, 1999 and the results of its operations
for the three months ended March 31, 1999 and 1998. For a more complete
understanding of the Company's financial position and results of operations, see
the consolidated financial statements of the Company included in the Company's
annual report for the year ended December 31, 1998.
Comprehensive Income
--------------------
In 1998, the company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130"), which requires
companies to report all changes in equity during a period, except those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The Company has chosen
to disclose Comprehensive Income, which encompasses net income and foreign
currency translation adjustments, in the Condensed Consolidated Statements of
Operations. Prior years have been restated to conform to the SFAS No. 130
requirements.
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). The Company is required to adopt SFAS No. 133 in the year ended December
31, 2000. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities
NOTE 2. ACQUISITIONS
- ------- -------------
During the year ended December 31, 1998 the Company completed certain
acquisitions of operating and non-operating entities and the acquisition of
spectrum. Included in the accompanying consolidated financial statements, from
the date of their acquisition, are the results of operations for these entities
(except El Salvador - see below) as follows:
F-66
<PAGE>
<TABLE>
<CAPTION>
Name and Location of Entity Date Acquired
- --------------------------- -------------
<S> <C>
Telecomunicaciones y Servicios S.A.; Santiago, Chile January 1998
Peru Tel S.A.; Lima, Peru May 1998
Comovec S.A.; Quito, Ecuador May 1998
El Salvador June, August and
September 1998
</TABLE>
On January 2, 1998, the Company purchased 100% of the outstanding capital stock
of Telecomunicaciones y Servicios S.A. ("TyS"), a Chilean operating company.
TyS holds 10 800 MHz channels in the metropolitan region of Santiago, Chile.
The acquisition was accounted for as a purchase. The total consideration given
and liabilities assumed for the Chilean company was approximately $3,200,000, of
which $800,000 was paid at closing and approximately $2,040,000 was paid June
29, 1998 and $350,000 on July 8, 1998 upon the transfer of 290 additional
channels (40 of which are in the metropolitan region of Santiago) to the
operating company. Approximately $80,000 represented the fair value of the net
tangible assets as of the date of acquisition and the excess purchase price over
the fair value of the net tangible assets acquired was approximately $3,120,000,
which was allocated to SMR licenses. SMR licenses are amortized over
approximately 40 years, the average remaining life of the licenses. The
purchase price was financed by the Company with available cash.
On April 14, 1998 the Company executed a purchase agreement with certain non-
operating subsidiaries of International Wireless Communications Holdings, Inc.
("IWC") for the acquisition of certain assets in Peru, Ecuador and Chile for a
purchase price of approximately $3,500,000. On May 13, 1998 the Company
completed the first part of the acquisition and acquired a non-operating entity
in Ecuador (Comovec S.A.) for approximately $300,000. Comovec S.A. holds
licenses to operate SMR networks and has 40 800 MHz channels and 20 900 MHz
channels in each of Quito and Guayaquil and 25 800 MHz channels in Cuenca.
Approximately $20,000 represented the fair value of the net tangible assets of
Comovec S.A. as of the date of acquisition. The excess purchase price over the
fair value of the net tangible assets acquired was approximately $250,000, which
was allocated to SMR licenses. Comovec S.A.'s licenses will be amortized over
40 years beginning on the date that the channels are launched. On May 22, 1998,
the Company completed the second part of the acquisition and acquired a non-
operating entity in Peru (Peru Tel S.A.) for approximately $2,800,000. Peru Tel
S.A. holds licenses to operate SMR networks and has 32 800 MHz channels in
Lima/Callao and 100 800 MHz channels among eight other cities. Approximately
$400,000 represented the fair value of the net tangible assets of Peru Tel S.A.
as of the date of acquisition. The excess purchase price over the fair value of
the net tangible assets acquired was approximately $2,400,000, which was
allocated to SMR licenses. Peru Tel S.A.'s SMR licenses will be amortized over
approximately 40 years beginning on the date that the channels are launched. The
Company used its existing cash to acquire Comovec S.A. and Peru Tel S.A. On May
12, 1999, the Company completed the last part of the IWC closing, and acquired
the Chilean assets of RMD Agencia Chile, consisting of its 800 MHZ channels: 20
channels in Santiago, 20 channels in Valparaiso/Vina del Mar, and 25 channels in
Concepcion/Talcahuano for $400,000.
<TABLE>
<CAPTION>
Detail of net assets of acquisitions during: 1998
- --------------------------------------------------- ---------------
<S> <C>
Property and equipment $ 71,039
SMR licenses 5,792,621
Other assets 105,405
Accounts payable and accrued liabilities (106,762)
---------------
Acquisition, net of cash acquired 5,862,303
Cash acquired 420,930
Payable to seller 400,000
---------------
Purchase price $6,683,233
==========
</TABLE>
In addition to acquisitions, the Company was awarded 40 nationwide channels of
800 MHz spectrum on June 9, 1998 in El Salvador. The Company paid $620,000 for
the channels, which have a 20 year term. In August 1998, the Company completed
the acquisition of a concession for 10 nationwide channels of 800 MHz spectrum
in El Salvador for approximately $300,000. The acquisition of assets included
certain
F-67
<PAGE>
infrastructure and approximately 140 subscribers. In September 1998 the
Company was awarded 65 nationwide channels of 800 MHz spectrum in El Salvador.
The Company paid approximately $2,027,000 for the channels, which have a 20 year
term. Also, in September 1998, the Company acquired a concession for 30
nationwide channels of 800 MHz spectrum in El Salvador for approximately
$949,000. The acquisition of assets also included certain infrastructure and
approximately 600 subscribers. The Company was awarded a concession for 25
nationwide channels of 800 MHz spectrum in El Salvador for approximately
$10,000. These assets have been recorded as an investment in an affiliate and
accounted for using the equity method of accounting and not consolidated due to
temporary control, as these assets are for sale. The Company wrote down the
assets to $1,560,000 and took an approximate $2,400,000 loss on divestiture in
1998 (see Note 2).
On October 15, 1998, the Company signed a purchase agreement for the acquisition
of certain Chilean assets, including a license for 20 800 MHz channels in
Santiago, certain infrastructure and subscribers. The Company is currently
waiting for final government approval for the transfer of the assets to the
Company before it can close the acquisition. The purchase price is
approximately $1,900,000, which amount was placed into escrow and is to be
released to the seller upon the Chilean government's approval of the transfer.
On October 22, 1998, the Company signed an agreement to purchase 100% of the
shares of a Chilean company having (i) 20 800 MHz channels in Santiago and (ii)
200 800 MHz channels in various Chilean cities for approximately $700,000. The
approval of the transfer of this concession has been given, and this acquisition
is expected to close in 1999.
NOTE 3. PROPERTY AND EQUIPMENT
- ------- ----------------------
The composition of property and equipment follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Network infrastructure $ 6,779,234 $ 6,392,786
Radios 3,301,664 3,321,641
Computer equipment and software 520,174 511,325
Furniture and fixtures 349,047 310,284
Leasehold improvements 213,075 210,706
------------ ------------
11,163,194 10,746,742
Accumulated depreciation (2,756,009) (2,357,151)
------------ ------------
Property and equipment, net $ 8,407,185 $ 8,389,591
=========== ===========
</TABLE>
The Company depreciates infrastructure over ten years, radios over five years,
computer equipment and software over three years and leasehold improvements over
the life of the lease.
Depreciation expense was $394,925 and $239,756 for the three months ended March
31, 1999 and 1998, respectively.
NOTE 4. COMMITMENTS AND CONTINGENCIES
- ------- -----------------------------
Recovery of Investments
-----------------------
The Company has made significant investments in pre-operating entities in
various Latin American countries whose primary assets were SMR licenses. The
Company's Peruvian operations and revenue generating activity began in
May 1996,its Ecuadorian operations and revenue generating activity began in
F-68
<PAGE>
March 1997, its Chilean operations and revenue generating activity began in
January 1998 and its El Salvadoran operations and revenue generating activity
began in September 1998. The ability of the Company to recover its current
investment in property, equipment and spectrum and to generate positive cash
flow and operating profits is contingent upon a number of factors, including the
Company's ability to continue to build out and develop the SMR and other low-
cost, wireless communications networks it currently owns and to attract and
retain sufficient subscribers on its existing systems and those which are under
development in sufficient numbers to achieve profitable operations.
Recoverability of Licenses
- --------------------------
The terms of the Company's SMR license agreements contain provisions whereby the
Company must achieve certain levels of subscriber load and network build out.
If such commitments are not met, the Company could be subject to the revocation
of the applicable licenses.
Compliance with the terms of SMR licenses and certain regulatory requirements,
such as construction deadlines and minimum subscriber requirements, can be
difficult to meet. In addition, there can be no guarantee that in the future
all regulatory requirements will be met or that the Company will not lose any
applicable licenses as a result of its failure to meet such requirements. The
Company currently is not in compliance with certain minimum subscriber loading
requirements with respect to its channels in Peru. Failure to comply with such
requirements may subject the licenses relating to such channels to punitive
measures. Requests for amendment of such loading requirements have been filed
by the Company with the Peruvian Ministry of Transportation, Communications,
Housing and Construction (the "Ministry"); however, to date no responses have
been received. The Company expects to file an additional amendment requesting
lower subscriber loading requirements in the near future. Based upon
information currently available, the Company is optimistic that these amendments
will be approved; however, there can be no guarantee that the amendments
received by the Company will be the same as those applied for. The Company is
also not in compliance with certain terms of the concession agreements
including, homologation of equipment (certifying the equipment before entering
Peru), site to site transmission of signal (currently allowed only site to
handset), unauthorized transfer and use of channels between the Peruvian
companies and unauthorized use of certain frequencies granted. The Company has
applied to correct the non-compliance issues and is awaiting approval from the
Ministry. The Company believes that the applications will be approved and
result only in minimal fines, if any; however, there can be no assurance of such
outcome.
NOTE 5. OPERATING SEGMENTS
- ------- ------------------
The Company's reportable segments are strategic geographic units that develop
and operate SMR networks. The Company is managed by country as each country may
require a slightly different business strategy. The accounting policies of the
segments are the same as those for the Company on a consolidated basis. The
segments are evaluated based upon gains in subscribers and based upon EBITDA.
EBITDA represents operating loss before depreciation and amortization and is not
a measurement under U.S. generally accepted accounting principles and may not be
similar to EBITDA measures of other companies.
The following information presents certain summarized balance sheet and
statement of operations data by segment as of March 31, 1999 and 1998 (in
000's):
<TABLE>
<CAPTION>
Peru Ecuador Chile Other (2) Elimination Total
------------ ------------ ------------ ----------------- --------------- ------------
March 31, 1999
- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 922 $ 542 $ 246 $ - $ - $ 1,710
EBITDA 148 197 (122) (542) - (319)
Operating income (64) 4 (188) (543) - $ (791)
(loss)
Total assets $16,314 $3,756 $7,884 $ 1,470 $ 1,927 $ 27,497
March 31, 1998
- --------------
Revenues $ 1,067 $ 669 $ 16 $ - $ - $ 1,752
EBITDA 336 (79) (370) (886) (999)
Operating income 143 (203) (392) (888) (1,340)
(loss)
Total assets $11,574 $3,515 $3,844 $ 185 $ 35 $ 19,083
</TABLE>
(1) Included in total assets noted for Corporate is approximately $1,500,000 of
an investment in an affiliate in El Salvador.
F-69
<PAGE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations in connection with the offer
contained herein other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or the solicitation of any offer to buy any security other than those to which
it relates, nor does it constitute an offer to sell, or the solicitation of an
offer to buy, to any person in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any Person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof nor that the information contained herein is correct as of any time
subsequent to the date hereof.
__________
TABLE OF CONTENTS
Prospectus Summary.................................................. 5
Glossary of Terms...................................................15
Risk Factors........................................................28
The Exchange Offer..................................................34
Use of Proceeds of the Exchange Notes...............................35
Capitalization......................................................36
Selected Consolidated Historical Financial Data.....................41
Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................38
Industry Overview...................................................52
Business............................................................56
Management..........................................................70
Executive Compensation..............................................73
Certain Relationships and Related Transactions......................78
Principal Stockholders..............................................80
Description of Capital Stock........................................84
Description of Notes................................................88
Description of Convertible Notes...................................116
Description of Warrants............................................117
Provisions Generally Applicable to All Securities..................120
Certain U.S. Federal Income Tax Considerations.....................121
Plan of Distribution...............................................122
Legal Matters......................................................122
Experts............................................................122
Index to Financial Statements..................................... F-1
Until ________, 1999, all dealers effecting transactions in the Exchange Notes,
whether or not participating in this Exchange Offer, may be required to deliver
a prospectus.
CENTENNIAL
COMMUNICATIONS CORP.
Offer to Exchange 14% Senior
Discount Notes Due 2005 for any and
all outstanding 14% Senior Discount
Notes Due 2005
PROSPECTUS
_____________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
the indemnification of the directors and officers of the Company. The Company's
Amended and Restated Certificate of Incorporation provides that it will
indemnify the officers, directors, employees and agents of the Company to the
extent permitted by the DGCL.
The Company's Amended and Restated Certificate of Incorporation and Bylaws
provide for the indemnification of directors and officers of the Company, and
persons who serve or have served at the request of the Company as a director,
officer, employee, fiduciary or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, against all expense, liability and loss
(including attorneys' fees actually and reasonably incurred by such person in
connection with such proceeding) provided, however, the Company shall indemnify
any such person seeking indemnification in connection with a proceeding
initiated by such person only if such proceeding was authorized by the Company's
Board of Directors. In the event a claim for indemnification by any person has
not been paid in full by the Company within 30 days after written request has
been received by the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim and, if successful
in whole or in part, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The right to indemnification conferred in the
Company's Amended and Restated Certificate of Incorporation is a contract right
and shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition. The Company
maintains insurance, at its expense, to protect itself and any director,
officer, employee or agent of the Company against any such expense, liability or
loss, whether or not the Company would have the power to indemnify such person
against such expense, liability or loss under state law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------- -----------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Company, as amended
3.2* Bylaws of the Company
4.1* Purchase Agreement dated January 12, 1998 between the Company and Salomon Brothers Inc
and Prudential Securities Incorporated
4.2* Indenture dated January 15, 1998 between the Company and State Street Bank and Trust
Company
4.3* Form of Private Note
4.4** Form of Exchange Note
4.5* Notes Registration Rights Agreement dated January 15, 1998 by and among the Company and
Salomon Brothers Inc and Prudential Securities Incorporated
4.6* Collateral Pledge Agreement dated January 15, 1998 between the Company and State Street
Bank and Trust Company
4.7* Escrow Agreement dated January 15, 1998 between the Company and Morgan Stanley, Dean
Witter and Discover & Co.
5.1** Opinion of Holland & Hart LLP
10.1* Founders Round Purchase Agreement dated as of December 8, 1995 between the Company and
the persons listed on the Schedule of Purchasers attached thereto
10.2* Founders Round Stockholders Agreement dated as of December 8, 1995 between the Company
and the Investors listed on the Schedule of Purchasers attached thereto
10.3* Series A Purchase Agreement dated as of June 27, 1996 between the Company and the
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
persons listed on the Schedule of Purchasers attached thereto
10.4* Series B Purchase Agreement dated as of November 22, 1996 between the Company and the
persons listed on the Schedule of Purchasers attached thereto
10.5* Series C Purchase Agreement dated as of October 3, 1997 between the Company and the
Purchasers set forth therein
10.6* Second Amended and Restated Stockholders Agreement dated as of October 3, 1997 between
the Company and each of the Investors listed on the Schedule of Investors attached thereto
10.7* Convertible Note Purchase Agreement dated as of January 15, 1998 between the Company and
the Purchasers set forth therein
10.8* Third Amended and Restated Registration Agreement dated January 15, 1998 between the
Company and the persons listed as Investors on the schedule attached thereto
10.9* Centennial Communications Corp. 1996 Stock Option Plan including amendments and forms of
Incentive Stock Option Agreement and Non-statutory Stock Option Agreement
10.10* Warrant Agreement dated as of January 15, 1998 between Centennial Communications Corp.
and State Street Bank and Trust Company
10.11* Confidential Termination and Release Agreement dated February 19, 1998 between the
Company and Michael N. Simkin
10.12* Confidential Termination and Release Agreement dated November 17, 1997 between the
Company and Jeff E. Rhodes
10.13 Confidential Termination and Release Agreement dated as of May 31, 1999 between the
Company and Federico A. Gallart.
12.1* Statement re Computation of Ratio of Earnings to Fixed Charges
21.1* List of Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2** Consent of Holland & Hart LLP, included in Exhibit 5.1
24.1 Power of Attorney
25.1* Statement on Form T-1 of the eligibility of the Trustee
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter of Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees
99.4 Form of Letter to Clients
</TABLE>
* Filed previously
** To be filed by amendment
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
II-2
<PAGE>
no more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
(d) That insofar as indemnification for liabilities arising under the
Securities Act, may be permitted to directors, officers and controlling Persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling Person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling Person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Centennial
Communications Corp. has duly caused this Amendment No. 1 to Form S-4
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Denver, Colorado, on June 9, 1999.
CENTENNIAL COMMUNICATIONS CORP.
By: *
---------------------------------------
Karl Maier
President and Chief Operating Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 9, 1999.
Signatures
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
* Controller (Principal Financial and Accounting June 9, 1999
- ------------------------------------------------ Officer)
Nanny Laverde
* Chairman of the Board June 9, 1999
- ------------------------------------------------
Steven C. Halstedt
* Director June 9, 1999
- ------------------------------------------------
Stephen W. Schovee
* Director June 9, 1999
- ------------------------------------------------
Robert F. McKenzie
* Director June 9, 1999
- ------------------------------------------------
Bernard G. Dvorak
* Director June 9, 1999
- ------------------------------------------------
William W. Sprague
Director June 9, 1999
- ------------------------------------------------
William D. Stanfill
* Director June 9, 1999
- ------------------------------------------------
Mark A. Leavitt
</TABLE>
*By: /s/ Nanny Laverde
------------------------------------
Nanny Laverde
Pursuant to Powers of Attorney filed
herewith or previously with the
Securities and Exchange Commission
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Company, as amended
3.2* Bylaws of the Company
4.1* Purchase Agreement dated January 12, 1998 between the Company and Salomon Brothers Inc
and Prudential Securities Incorporated
4.2* Indenture dated January 15, 1998 between the Company and State Street Bank and Trust
Company
4.3* Form of Private Note
4.4** Form of Exchange Note
4.5* Notes Registration Rights Agreement dated January 15, 1998 by and among the Company and
Salomon Brothers Inc and Prudential Securities Incorporated
4.6* Collateral Pledge Agreement dated January 15, 1998 between the Company and State Street
Bank and Trust Company
4.7* Escrow Agreement dated January 15, 1998 between the Company and Morgan Stanley, Dean
Witter and Discover & Co.
5.1** Opinion of Holland & Hart LLP
10.1* Founders Round Purchase Agreement dated as of December 8, 1995 between the Company and
the persons listed on the Schedule of Purchasers attached thereto
10.2* Founders Round Stockholders Agreement dated as of December 8, 1995 between the Company
and the Investors listed on the Schedule of Purchasers attached thereto
10.3* Series A Purchase Agreement dated as of June 27, 1996 between the Company and the persons
listed on the Schedule of Purchasers attached thereto
10.4* Series B Purchase Agreement dated as of November 22, 1996 between the Company and the
persons listed on the Schedule of Purchasers attached thereto
10.5* Series C Purchase Agreement dated as of October 3, 1997 between the Company and the
Purchasers set forth therein
10.6* Second Amended and Restated Stockholders Agreement dated as of October 3, 1997 between
the Company and each of the Investors listed on the Schedule of Investors attached thereto
10.7* Convertible Note Purchase Agreement dated as of January 15, 1998 between the Company and
the Purchasers set forth therein
10.8* Third Amended and Restated Registration Agreement dated January 15, 1998 between the
Company and the persons listed as Investors on the schedule attached thereto
10.9* Centennial Communications Corp. 1996 Stock Option Plan including amendments and forms of
Incentive Stock Option Agreement and Non-statutory Stock Option Agreement
10.10* Warrant Agreement dated as of January 15, 1998 between Centennial Communications Corp.
and State Street Bank and Trust Company
10.11* Confidential Termination and Release Agreement dated February 19, 1998 between the
Company and Michael N. Simkin
10.12* Confidential Termination and Release Agreement dated November 17, 1997 between the
Company and Jeff E. Rhodes
10.13 Confidential Termination and Release Agreement dated as of May 31, 1999 between the
Company and Federico A. Gallart.
12.1* Statement re Computation of Ratio of Earnings to Fixed Charges
21.1* List of Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2** Consent of Holland & Hart LLP, included in Exhibit 5.1
24.1 Power of Attorney
25.1* Statement on Form T-1 of the eligibility of the Trustee
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
99.3 Form of Letter of Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees
99.4 Form of Letter to Clients
</TABLE>
* Filed previously
** To be filed by amendment
<PAGE>
EXHIBIT 10.13
CONFIDENTIAL TERMINATION AND RELEASE AGREEMENT
THIS CONFIDENTIAL TERMINATION AND RELEASE AGREEMENT (this "Agreement")
effective as of May 31, 1999, is entered into by and between Centennial
Communications Corp., a Delaware corporation (the "Company"), and Federico A.
Gallart ("Employee").
RECITALS
A. Employee has been an employee and Sr. Vice President of the Company and has
held various positions with certain of the Company's affiliates and
subsidiaries.
B. The Company is in the process of restructuring the Company, and the Company
and Employee have agreed terminate Employee's employment with the Company and to
settle fully and finally all claims.
In consideration of the mutual covenants and agreements set forth in this
Agreement, the parties agree as follows:
TERMS AND CONDITIONS
Section 1. Termination of Employee. Employee's employment is hereby
terminated as an employee of the Company effective as of the date set forth
above.
Section 2. Compensation. In consideration for the release by Employee
contained in Section 6 and the other covenants of Employee contained in this
Agreement, including, but not limited to the agreement set forth in Section 1
above, the Company shall pay Employee, upon expiration of the revocation period
specified in Section 13 below but no more than 10 days after the execution of
this Agreement, a severance payment of $100,000, composed of (i) a bonus equal
to 25% of Employee's annual salary ($42,500) for achieving certain goals in
Lima, Peru, and (ii) $57,500 as additional severance. In addition, the parties
acknowledge that Employee is entitled to the following compensation: (i) 25%
of the accounts receivable collected on accounts that are more than 60 days past
due customer accounts in Peru and Ecuador for the period ending May 31, 1999;
(ii) 10% of the amount actual EBITDA exceeded budgeted 1999 EBITDA for all Latin
American operations for the months of March, April and May 1999; and (iii)
$24,396.63 representing 298.5 hours of vacation pay.
Section 3. Incentive Stock Options. The Company granted Employeee certain
incentive stock options ("Incentive Stock Options") (representing options in
shares of the Company's Common Stock) granted pursuant to the Company's 1996
Stock Option Plan adopted January 12, 1996, as amended. Employee's Incentive
Stock Options shall continue to vest through December 31, 1999 as though he had
remained an Employee through such date, and Employee shall have two years from
December 31, 1999 to exercise such Incentive Stock Options.
<PAGE>
Section 4. Withholding. Employee authorizes the Company to withhold, in
accordance with applicable law, from the compensation specified in Sections 2
and 3, any taxes required to be withheld by any federal, state or local law or
regulation arising out of such compensation.
Section 5. Nonsolicitation and Confidentiality Covenants.
(a) Employee acknowledges that he possesses proprietary and trade
secret information concerning the Company. Employee further acknowledges the
highly competitive nature of the Company's business. For a period of 12 months
from the date hereof, Employee shall keep in strictest confidence and trust all
Proprietary Information (as defined below), and shall not use or disclose any
Proprietary Information without the written consent of the Company. Moreover,
Employee shall deliver to the Company all documents, notes, drawings,
blueprints, computer programs, data, security card keys and similar devices, and
other materials of any nature pertaining to any Proprietary Information or to
Employee's work with the Company, and Employee shall not take any of the
foregoing, or any reproduction of any of the foregoing, that is embodied in a
tangible medium of expression. The term "Proprietary Information" includes,
without limitation, discoveries, developments, designs, improvements,
inventions, blueprints, processes, computer programs, know how, data, marketing
and business plans and outlines, budgets, projections, unpublished financial
statements, costs, fee schedules, client and supplier lists, client and
prospective client databases, and access codes and similar security information
and procedures; provided, however, that the term "Proprietary Information" shall
not include any of the foregoing which is in the public domain other than as the
result of a breach of Employee's obligations under this Section 5(a).
(b) If, at the time of enforcement of this Section 5, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
(c) In the event of the breach or a threatened breach by Employee
of any of the provisions of this Section 5, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof.
Section 6. Release.
(a) As a material inducement to the Company to enter into this
Agreement, Employee hereby irrevocably and unconditionally releases, acquits and
forever discharges the Company, each of the Company's owners, stockholders,
predecessors, successors, assigns, agents, directors, Employees, employees,
representatives, attorneys, divisions and persons controlling, controlled by or
under common control with the Company ("Affiliates") (and present or former
agents,
2
<PAGE>
directors, Employees, employees, representatives and attorneys of such
Affiliates) acting by, through or in concert with the Company and all other
persons acting by, through or in concert with any of them (collectively,
"Releasees") and each of them, from any and all charges, complaints, claims,
demands and liabilities whatsoever of every name and nature (including
reasonable attorney's fees and costs actually incurred), known or unknown,
existing or that may hereafter exist, and any and all causes of action which
could have been asserted by claim, counterclaim or otherwise, against any of the
Releasees pertaining to the business and affairs of the Company, Employee's
employment with the Company or the termination thereof, the relationships
between Employee and any of the Releasees or any other act of omission which has
previously transpired up to the date of execution of this Agreement. The claims
released by this Section 6(a) include but are not limited to any claims under
the Age Discrimination in Employment Act, 29 U.S.C. (S) 621, et seq. ("ADEA"),
or any other statute or law prohibiting discrimination in employment on the
basis of age, race, religion, disability, gender or national origin or other
status (collectively, "Claims").
(b) As a material inducement to Employee to enter into this
Agreement, the Company, on behalf of itself and its subsidiaries, hereby
irrevocably and unconditionally releases, acquits and forever discharges
Employee from any and all charges, complaints, claims, demands and liabilities
whatsoever of every name and nature (including reasonable attorney's fees and
costs actually incurred), known or unknown, existing or that may hereafter
exist, and any and all causes of action which could have been asserted by claim,
counterclaim or otherwise, pertaining to the business and affairs of the
Company, Employee's employment with the Company or the termination thereof, the
relationships between Employee and any of the Releasees, or any other act of
omission which has previously transpired up to the date of execution of this
Agreement (collectively, "Company Claims").
Section 7. Representation Regarding No Complaints or Charges and
Covenant Not to Sue. Employee and the Company each represents to the other that
it has not filed any complaints or charges against any of the Releasees or
Employee, respectively, with any local, state or federal agency or court.
Employee and the Company each further represents, agrees and covenants to the
other that it will not file any such complaints or charges against any of the
Releasees or Employee, respectively, with any local, state or federal agency or
court at any time hereafter with respect to any Claim or Company Claim, as the
case may be. If any complaint or charge against the Company or any Releasee is
filed on behalf of Employee, Employee agrees to take all reasonable steps
necessary to effectuate the withdrawal of such complaint or charge. In the event
that any local, state or federal agency or court undertakes any proceeding
relating to Employee's employment by the Company or the circumstances of his
leaving the Company's employ, Employee hereby waives any right he may have to
recover any damages or any remedy of whatever nature as a result of any such
proceeding.
Section 8. Ownership of Claims. Employee represents and agrees that he
has not previously assigned or transferred, or purported to have assigned or
transferred, to any person whomsoever, any Claim or portion thereof or interest
therein against any of
3
<PAGE>
the Releasees. Employee agrees to indemnify, defend and hold harmless each and
all of the Releasees against any and all claims based on, arising out of, or in
connection with any such transfer or assignment, or purported transfer or
assignment, of any Claims or any portion thereof or interest therein. The
Company represents and agrees that it has not, and to the best of its knowledge
no other Releasee has, previously assigned or transferred, or purported to have
assigned or transferred, to any person whomsoever, any Company Claim or portion
thereof or interest therein against Employee. The Company agrees to indemnify,
defend and hold harmless Employee against any and all claims based on, arising
out of, or in connection with any such transfer or assignment, or purported
transfer or assignment, of any Company Claims or any portion thereof or interest
therein.
Section 9. No Admission of Liability. Employee and the Company each
acknowledge that neither the execution of this Agreement nor the performance of
its terms shall constitute an admission by the Company or Employee of any
wrongful acts whatsoever against any other party or any other person, and the
Company and Employee each specifically disclaim any liability to any other party
or any other person.
Section 10. Disclosure. Except as otherwise required by law, Employee
agrees that he will not disclose or cause to be disclosed any negative, adverse
or derogatory comments or information about the Company and its Affiliates or
its management or about the Company's and its Affiliates' prospects for the
future, to any person or entity, including, but not limited to, any current,
former, or prospective employee or investor in the Company or any of its
Affiliates. Except as otherwise required by law or by the instruments governing
the Company's existing indebtedness, the Company agrees that it will not
disclose or cause to be disclosed any negative, adverse or derogatory comments
or information about Employee to any person or entity, including any prospective
employer of Employee.
Section 11. Confidentiality. Employee and the Company agree that they will
keep the facts associated with this matter, and the terms of this Agreement
strictly confidential; provided, however, that Employee and the Company may
disclose such matters to attorneys, tax advisors or as may be required by law.
Further, it is expressly understood and agreed that this confidentiality
provision is an essential provision of this Agreement.
Section 12. Complete Agreement. This Agreement embodies the complete
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have related to the subject matter of this Agreement
in any way. Employee represents and agrees that he has been informed by the
Company that he should consult with his own attorney before executing this
Agreement, that he has carefully read and fully understands all of the
provisions of this Agreement and that he is voluntarily entering into this
Agreement. The Company and Employee each further represent and agree that, with
respect to the matters set forth in this Agreement, none of them can rely on any
statements or representations other than those set forth in this Agreement.
4
<PAGE>
Section 13. Revocation. Employee acknowledges that he is knowingly and
voluntarily waiving and releasing any rights he may have under the ADEA. He also
acknowledges that the consideration given for the release in Section 6 hereof is
in addition to anything of value to which he was already entitled. He further
acknowledges that he has been advised by this writing, as required by the ADEA,
that: (a) his waiver and release do not apply to any rights or claims that may
arise after the execution date of this Agreement; (b) he has 21 days to consider
this Agreement (although he may choose to voluntarily execute this Agreement
earlier); and (c) he has seven days following the execution of this Agreement by
the parties to revoke the Agreement. Notice of revocation, together with any
shares of the Company's common stock exercised pursuant to Section 3, should be
sent to the Company in accordance with Section 17.
Section 14. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Employee and the Company and their
respective successors and assigns.
Section 15. Choice of Law. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Colorado.
Section 16. Modifications and Waivers. No provision of this Agreement may
be modified, altered or amended except by an instrument in writing executed by
each of the parties to this Agreement. No waiver by any party to this Agreement
of any breach by another party to this Agreement of any term or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar terms or provisions at the time or at any prior or
subsequent time.
Section 17. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class mail
(postage prepaid) or sent by reputable overnight courier service (charges
prepaid) at the respective addresses set forth below or at such address or to
the attention of such other person as the recipient party has specified by prior
written notice to the sending party. Notices will be deemed to have been given
hereunder when delivered personally, three days after deposit in the U.S. mail
and one day after deposit with a reputable overnight courier service. The
Company's address is:
Centennial Communications Corp.
1528 Wazee Street, Suite 200
Denver, CO 80202
Facsimile: 303-405-0465
Attention: President
5
<PAGE>
Employee's address is:
Federico A. Gallart
1411 Agua Ave.
Coral Gables, FL 33156
Section 18. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same Agreement.
Section 19. Authority. The Company represents to Employee that Barbara
Vonderheid, as Vice President, has the authority to execute this Agreement on
its behalf.
Section 20. Further Action. Employee agrees to execute all resignations
from his positions with the Company and its affiliates and subsidiaries upon
request at any time after the effective date of this Agreement.
CENTENNIAL COMMUNICATIONS CORP.
By: /s/ Barbara H. Vonderheid
-------------------------
Barbara H. Vonderheid
Date: May 24, 1999
/s/ Federico A. Gallart
-----------------------
Federico A. Gallart
Date: May 24, 1999
6
<PAGE>
ARTHUR ANDERSEN LLP
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of all our
reports (and to all references to our firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
June 11, 1999
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Nanny Laverde as such person's true and
lawful attorney-in-fact and agent with full power of substitution for such
person and in such person's name, place and stead, in any and all capacities, to
sign and to file with the Securities and Exchange Commission an Amendment No. 1
to the Registration Statement of Centennial Communications Corp., a Delaware
corporation (the "Company"), on Form S-4 with respect to the exchange of certain
14% Senior Discount Notes due 2005 of the Company for new 14% Senior Discount
Notes due 2005 of the Company, and any and all additional amendments and post-
effective amendments to said Registration Statement, with exhibits thereto and
other documents in connection therewith, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or any
substitute therefore, may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Karl Maier President and Chief Operating Officer June 9, 1999
- ---------------------------------------- (Principal Executive Officer)
Karl Maier
/s/ Nanny Laverde Controller (Principal Financial and June 9, 1999
- ---------------------------------------- Accounting Officer)
Nanny Laverde
/s/ Steven C. Halstedt Chairman of the Board June 9, 1999
- ----------------------------------------
Steven C. Halstedt
/s/ Stephen W. Schovee Director June 9, 1999
- ----------------------------------------
Stephen W. Schovee
/s/ Robert F. McKenzie Director June 9, 1999
- ----------------------------------------
Robert F. McKenzie
/s/ Bernard G. Dvorak Director June 9, 1999
- ----------------------------------------
Bernard G. Dvorak
/s/ William W. Sprague Director June 9, 1999
- ----------------------------------------
William W. Sprague
Director June 9, 1999
- ----------------------------------------
William D. Stanfill
/s/ Mark A. Leavitt Director June 9, 1999
- ----------------------------------------
Mark A. Leavitt
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
COMMUNICATIONS CORP.'S DECEMBER 31, 1998 AND UNAUDITED MARCH 31, 1999 FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 MAR-31-1999
<CASH> 9,079,677 17,000,801 16,572,642
<SECURITIES> 0 0 0
<RECEIVABLES> 1,801,395 1,693,689 1,677,986
<ALLOWANCES> 517,986 829,933 834,336
<INVENTORY> 1,371,762 1,387,274 1,881,145
<CURRENT-ASSETS> 17,536,550 22,158,399 20,897,255
<PP&E> 6,210,672 11,719,010 12,127,537
<DEPRECIATION> 1,205,769 2,784,343 3,277,121
<TOTAL-ASSETS> 29,872,383 47,041,444 45,416,621
<CURRENT-LIABILITIES> 6,664,895 4,449,086 4,213,172
<BONDS> 11,144,703 28,710,569 29,902,853
29,252,063 42,065,653 42,101,104
0 0 0
<COMMON> 35,027 35,028 35,028
<OTHER-SE> (17,204,305) (28,243,499) (30,855,479)
<TOTAL-LIABILITY-AND-EQUITY> 29,872,383 47,041,444 45,416,621
<SALES> 1,672,383 1,911,159 277,679
<TOTAL-REVENUES> 4,826,355 7,203,778 1,709,665
<CGS> 2,256,993 2,779,821 356,480
<TOTAL-COSTS> 3,556,410 3,481,908 489,373
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 597,751 0 0
<INTEREST-EXPENSE> 887,324 4,832,475 1,371,871
<INCOME-PRETAX> (15,715,031) (15,433,395) (2,155,312)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (15,715,031) (15,433,395) (2,155,312)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (15,715,031) (15,433,395) (2,155,312)
<EPS-BASIC> (4.53) (4.84) (0.73)
<EPS-DILUTED> 0 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR TENDERS OF
$40,000,000 Aggregate Principal Amount of
14% Senior Subordinated Notes due 2005
CENTENNIAL COMMUNICATIONS CORP.
Pursuant to the Prospectus
dated ________, 1999 of Centennial Communications Corp.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON THE EARLIER
OF ___________, 1999 (UNLESS EXTENDED) OR THE DATE ON WHICH 100% OF THE OLD
NOTES ARE VALIDLY TENDERED AND NOT WITHDRAWN (THE "EXPIRATION DATE"). TENDERED
OLD NOTES MAY BE WITHDRAWN AT ANY TIME ON OR PRIOR TO THE EXPIRATION DATE OF THE
EXCHANGE OFFER.
Deliver to: State Street Bank and Trust Company, Exchange Agent
By Registered or Certified Mail: By Overnight Courier or Hand:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two International Place
Boston, MA 02102-0078 Boston, MA 02110
Attn: Kellie Mullen Attn: Kellie Mullen
Telephone Number:
(617) 664-5587
By Facsimile for Eligible Institutions:
(617) 664-5395
Delivery of this instrument to an address other than as set forth above, or
transmission of instructions via facsimile other than as set forth above, will
not constitute a valid delivery.
The undersigned (the "Holder") acknowledges that he or she has received the
Prospectus, dated _____, 1999 (the "Prospectus"), of Centennial Communications
Corp., a Delaware corporation (the "Company"), and this Letter of Transmittal,
which may be amended from time to time (the "Letter"), which together constitute
the Company's offer (the "Exchange Offer") to exchange an aggregate principal
amount of up to $40,000,000 of its 14% Senior Discount Notes due 2005 (the
"Exchange Notes"), which have been registered under the Securities Act of 1933
(the "Securities Act"), pursuant to a Registration Statement of which the
Prospectus constitutes a part, for a like principal amount of the issued and
outstanding 14% Senior Discount Notes due 2005 (the "Old Notes") of which
$40,000,000 aggregate principal amount is outstanding.
<PAGE>
For each Old Note accepted for exchange, the Holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note. The Exchange Notes will bear interest from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid on the Old Notes, from January 15, 1998. Old Notes accepted for
exchange will cease to accrue interest from and after the date of consummation
of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old Notes
otherwise payable on any interest payment date the record date for which occurs
on or after consummation of the Exchange Offer.
This Letter is to be used: (i) by all Holders who are not members of the
Automated Tender Offering Program ("ATOP") at the Depository Trust Company
("DTC"), (ii) by Holders who are ATOP members but choose not to use ATOP or
(iii) if the Old Securities are to be tendered in accordance with the guaranteed
delivery procedures set forth in "The Exchange Offer - Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 2 hereto. Delivery of
this Letter to DTC does not constitute delivery to the Exchange Agent.
Notwithstanding anything to the contrary in the Notes Registration Rights
Agreement, dated January 15, 1998, among the Company and the initial purchasers
of Old Notes (the "Registration Rights Agreement"), the Company will accept for
exchange any and all Old Notes validly tendered on or prior to 5:00 p.m., New
York City time, on the earlier of _________, 1999 (unless the Exchange Offer is
extended by the Company) or the date on which 100% of the Old Notes are validly
tendered and not withdrawn (the "Expiration Date"). Tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
IMPORTANT: HOLDERS WHO WISH TO TENDER OLD NOTES IN THE EXCHANGE OFFER MUST
COMPLETE THIS LETTER OF TRANSMITTAL AND TENDER THE OLD NOTES TO THE EXCHANGE
AGENT AND NOT TO THE COMPANY.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject
to certain conditions. Please see the Prospectus under the section titled "The
Exchange Offer - Conditions."
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, Holders of Old Notes in any jurisdiction in which the making or
acceptance of the Exchange Offer would not be in compliance with the laws of
such jurisdiction.
The instructions included with this Letter of Transmittal must be followed
in their entirety. Questions and request for assistance or for additional
copies of the prospectus or this Letter of Transmittal may be directed to the
Exchange Agent at the address listed above.
2
<PAGE>
APPROPRIATE SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company the principal amount of Old
Notes indicated below under "Description of Old Notes," in accordance with and
upon the terms and subject to the conditions set forth in the Prospectus,
receipt of which is hereby acknowledged, and in this Letter of Transmittal, for
the purpose of exchanging the principal amount of Old Notes designated herein
held by the undersigned and tendered hereby for the equal principal amount of
the Exchange Notes. Holders may tender all or a portion of their Old Notes
pursuant to the Exchange Offer.
Subject to, and effective upon, the acceptance for exchange of the Old
Notes tendered herewith in accordance with the terms of the Exchange Offer, the
undersigned hereby sells, assigns and transfers to, or upon the order of, the
Company all right, title and interest in and to all such Old Notes that are
being tendered hereby and that are being accepted for exchange pursuant to the
Exchange Offer. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as the true and lawful agent and attorney-in-fact of the
undersigned (with full knowledge that the Exchange Agent also acts as the agent
of the Company), with respect to the Old Notes tendered hereby and accepted for
exchange pursuant to the Exchange Offer with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest) to deliver the Old Notes tendered hereby to the Company (together with
all accompanying evidences of transfer and authenticity) for transfer or
cancellation by the Company.
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall not be affected by, and shall survive, the death or incapacity
of the undersigned and any obligation of the undersigned hereunder shall be
binding upon the heirs, executors, administrators, legal representatives,
successors and assigns of the undersigned. Any tender of Old Notes hereunder
may be withdrawn only in accordance with the procedures set forth in the
instructions contained in this Letter of Transmittal. See Instruction 4 hereto.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, exchange, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The undersigned will, upon request, execute
and deliver any additional documents deemed by the Company to be necessary or
desirable to complete the assignment and transfer of the Old Notes tendered.
The undersigned has read and agrees to all of the terms of the Exchange Offer.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in
3
<PAGE>
bankruptcy and legal representatives of the undersigned and shall not be
affected by, and shall survive, the death or incapacity of the undersigned. This
tender may be withdrawn only in accordance with the procedures set forth in "The
Exchange Offer - Withdrawal of Tenders" section of the Prospectus and the
instructions contained in this Letter of Transmittal. See Instruction 4 hereto.
The name(s) and address(es) of the registered Holder(s) should be printed
herein under "Description of Old Notes" (unless a label setting forth such
information appears thereunder), exactly as they appear on the Old Notes
tendered hereby. The certificate number(s) and the principal amount of Old
Notes to which this Letter of Transmittal relates, together with the principal
amount of such Old Notes that the undersigned wishes to tender, should be
indicated in the appropriate boxes herein under "Description of Old Notes."
The undersigned agrees that acceptance of any tendered Old Notes by the
Company and the issuance of Exchange Notes in exchange therefor shall constitute
performance in full by the Company of its obligations under the Registration
Rights Agreement and that, upon the issuance of the Exchange Notes, the Company
will have no further obligations or liabilities thereunder.
The undersigned understands that the tender of Old Notes pursuant to one of
the procedures described in the Prospectus under "The Exchange Offer -
Procedures for Tendering" and the Instructions hereto will constitute the
tendering Holder's acceptance of the terms and the conditions of the Exchange
Offer. The undersigned hereby represents and warrants to the Company that the
Exchange Notes to be acquired by such Holder pursuant to the Exchange Offer are
being acquired in the ordinary course of such Holder's business, that such
Holder has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes. The Company's acceptance of Old Notes for
exchange tendered pursuant to the Exchange Offer will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT IT IS NOT ENGAGED IN,
AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION OF THE EXCHANGE NOTES.
The undersigned also acknowledges that this Exchange Offer is being made
based on interpretations by the staff of the Securities and Exchange Commission
(the "Commission") set forth in no-action letters issued to third parties in
other transactions substantially similar to the Exchange Offer, which lead the
Company to believe that the Exchange Notes issued in exchange for the Old Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, (ii) an Initial Purchaser who acquired the Old Notes directly from the
Company solely in order to resell pursuant to Rule 144A of the Securities Act or
any other available exemption under the Securities Act, or (iii) a broker-dealer
who acquired the Old Notes as a result of market making or other trading
activities), without further compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
4
<PAGE>
acquired in the ordinary course of such holders' business and such holders are
not participating and have no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
such Exchange Notes. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes and has no arrangement or understanding to
participate in a distribution of Exchange Notes. If any holder is an affiliate
of the Company or is engaged in or has any arrangement or understanding with
respect to the distribution of the Exchange Notes to be acquired pursuant to the
Exchange Offer, such holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus deliver requirements of the Securities Act, including the requirement
that any such secondary resale transaction be covered by an effective
registration statement containing the selling security holder information
required by Item 507 of Regulation S-K of the Securities Act. If the
undersigned is a broker-dealer that will receive Exchange Notes for its own
account in exchange of Old Notes, it represents that the Old Notes to be
exchanged for the Exchange Notes were acquired by it as a result of market-
making activities or other trading activities and acknowledges that it will
deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
Section 2(11) of the Securities Act.
The undersigned understands that the Exchange Notes issued in consideration
of Old Notes accepted for exchange, and/or any principal amount of Old Notes not
tendered or not accepted for exchange, will only be issued in the name of the
Holder(s) appearing herein under "Description of Old Notes." Unless otherwise
indicated under "Special Delivery Instructions," please mail the Exchange Notes
issued in consideration of Old Notes accepted for exchange, and/or any principal
amount of Old Notes not tendered or not accepted for exchange (and accompanying
documents, as appropriate), to the Holder(s) at the address(es) appearing herein
under "Description of Old Notes." In the event that the Special Delivery
Instructions are completed, please mail the Exchange Notes issued in
consideration of Old Notes accepted for exchange, and/or any Old Notes for any
principal amount not tendered or not accepted for exchange, in the name of the
Holder(s) appearing herein under "Description of Old Notes," and send such
Exchange Notes and/or Old Notes to, the address(es) so indicated. Any transfer
of Old Notes to a different holder must be completed, according to the
provisions on transfer of Old Notes contained in the Indenture.
5
<PAGE>
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1 and 7)
To be completed ONLY if the Exchange Notes issued in consideration of Old Notes
exchanged, or certificates for Old Notes in a principal amount not surrendered
for exchange are to be mailed to someone other than the undersigned or to the
undersigned at an address other than that below.
Mail to:
Name:___________________________________________________________
(Please Print)
Address:________________________________________________________
(Zip Code)
DESCRIPTION OF OLD NOTES
(See Instructions 2 and 7)
<TABLE>
<CAPTION>
Name(s) and Address(es) of Certificate(s)
Registered Holder(s) (Attach additional signed list, if necessary)
(Please fill in, in blank)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
---------------------------------------------------------------
Certificate Aggregate Principal Principal Amount of
Number(s)* Amount of Old Notes Old Notes Tendered**
Evidenced by
Certificate(s)
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Total
===============================================================
</TABLE>
- --------------------------
* Need not be completed if Old Notes are being tendered by book-entry transfer.
** Unless otherwise indicated, the entire principal amount of Old Notes
evidenced by any certificate will be deemed to have been tendered.
6
<PAGE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution______________________________________________
DTC Account Number_________________________________________________________
Transaction Code Number____________________________________________________
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)____________________________________________
Window Ticket Number (if any)______________________________________________
Date of Execution of Notice of Guaranteed Delivery_________________________
Name of Institution which Guaranteed Delivery______________________________
If Guaranteed Delivery is to be made by Book-Entry Transfer:_______________
Name of Tendering Institution______________________________________________
DTC Account Number_________________________________________________________
Transaction Code Number____________________________________________________
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:_____________________________________________________________________
Address:__________________________________________________________________
7
<PAGE>
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
BELOW AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX BELOW.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), TOGETHER WITH
ALL REQUIRED DOCUMENTS, OR A NOTICE OF GUARANTEED DELIVERY, MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
PLEASE SIGN HERE
WHETHER OR NOT OLD NOTES ARE BEING
PHYSICALLY TENDERED HEREBY
<TABLE>
<CAPTION>
x
---------------------------------------------- ------------------------------------------------
x
---------------------------------------------- ------------------------------------------------
Signature(s) of Owner(s) of Authorized Dated
Signatory
<S> <C>
Area Code and Telephone Number:_________________________________________________________________________
</TABLE>
This box must be signed by registered holder(s) of Old Notes as their
name(s) appear(s) on certificate(s) for Old Notes hereby tendered or on a
security position listing, or by any person(s) authorized to become registered
holder(s) by endorsement and documents transmitted with this Letter of
Transmittal (including such opinions of counsel, certifications and other
information as may be required by the Company or the Trustee for the Old Notes
to comply with the restrictions on transfer applicable to the Old Notes). If
signature is by an attorney-in-fact, trustee, executor, administrator, guardian,
officer or other person acting in a fiduciary or representative capacity, such
person must set forth his or her full title below.
Name(s):_______________________________________________________________________
Capacity (full title):_________________________________________________________
Address:_______________________________________________________________________
Area Code and Telephone Number:________________________________________________
Tax Identification or Social Security Number(s):_______________________________
_______________________________________________________________________________
Guarantee of Signature(s)
(See Instructions 1 and 6 to determine if required)
Authorized Signature:__________________________________________________________
Name:__________________________________________________________________________
Name of Firm:__________________________________________________________________
Title:_________________________________________________________________________
Address:_______________________________________________________________________
Area Code and Telephone Number:________________________________________________
Dated:_________________________________________________________________________
8
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. Guarantee of Signatures. Signatures on this Letter of Transmittal or
notice of withdrawal, as the case may be, must be guaranteed by an institution
which falls within the definition of "eligible guarantor institution" contained
in Rule 17Ad-15 as promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended (hereinafter, an "Eligible
Institution") unless (i) the Old Notes tendered hereby are tendered by the
Holder(s) of the Old Notes who has (have) not completed the box entitled
"Special Delivery Instructions" on this Letter of Transmittal or (ii) the Old
Notes are tendered for the account of an Eligible Institution.
2. Delivery of this Letter of Transmittal and Old Notes; Guaranteed
Delivery Procedures. This Letter of Transmittal is to be used: (i) by all
Holders who are not ATOP members, (ii) by Holders who are ATOP members but
choose not to use ATOP or (iii) if the Old Notes are to be tendered in
accordance with the guaranteed delivery procedures set forth in the Prospectus
under "The Exchange Offer - Guaranteed Delivery Procedures." To validly tender
Old Notes, a Holder must physically deliver a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) with any required
signature guarantees and all other required documents to the Exchange Agent at
its address set forth on the cover of this Letter of Transmittal prior to the
Expiration Date(as defined below) or the Holder must properly complete and duly
execute an ATOP ticket in accordance with DTC procedures. Otherwise, the Holder
must comply with the guaranteed delivery procedures set forth in the next
paragraph. Notwithstanding anything to the contrary in the Registration Rights
Agreement, the term "Expiration Date" means 5:00 p.m., New York City time, on
the earlier of _____, 1999 (or such later date to which the Company may, in its
sole discretion, extend the Exchange Offer) or the date on which 100% of the Old
Notes are validly tendered and not withdrawn. If this Exchange Offer is
extended, the term "Expiration Date" shall mean the latest time and date to
which the Exchange Offer is extended. The Company expressly reserves the right,
at any time or from time to time, to extend the period of time during which the
Exchange Offer is open by giving oral (confirmed in writing) or written notice
of such extension to the Exchange Agent and by mailing to the Holders of the Old
Notes a notice of such extension prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
LETTERS OF TRANSMITTAL SHOULD NOT BE SENT TO THE COMPANY OR TO DTC.
If a Holder of the Old Notes desires to tender such Old Notes and time
will not permit such Holder's required documents to reach the Exchange Agent
before the Expiration Date, a tender may be effected if (a) the tender is made
through an Eligible Institution, (b) on or prior to the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed and
duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery (by telegram, facsimile transmission,
9
<PAGE>
mail or hand delivery) setting forth the name and address of the Holder of the
Old Notes and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange trading days after the Expiration Date, any documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and (c) all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date. See "The Exchange Offer -
Guaranteed Delivery Procedures" as set forth in the Prospectus.
Only a Holder of Old Notes may tender Old Notes in the Exchange Offer. The
term "Holder" as used herein with respect to the Old Notes means any person in
whose name Old Notes are registered on the books of the Trustee. If the Letter
of Transmittal or any Old Notes are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority to so act must be so submitted.
Any beneficial Holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to validly surrender those Old Notes in the Exchange Offer should contact such
registered Holder promptly and instruct such registered Holder to tender on his
behalf. If such beneficial Holder wishes to tender on his own behalf, such
beneficial Holder must, prior to completing and executing the Letter of
Transmittal, make appropriate arrangements to register ownership of the Old
Notes in such beneficial holder's name. It is the responsibility of the
beneficial holder to register ownership in his own name if he chooses to do so.
The transfer of record ownership may take considerable time.
The method of delivery of this Letter of Transmittal (or facsimile hereof)
and all other required documents is at the election and risk of the exchanging
Holder, but, except as otherwise provided below, the delivery will be deemed
made only when actually received or confirmed by the Exchange Agent. If sent by
mail, registered mail with return receipt requested, properly insured, is
recommended. In all cases, sufficient time should be allowed to assure timely
delivery to the Exchange Agent before the Expiration Date. No Letters of
Transmittal or Old Notes should be sent to the Company.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of this Letter of Transmittal (or facsimile
hereof), waive any right to receive notice of acceptance of their Old Notes for
exchange.
3. Inadequate Space. If the space provided herein is inadequate, the
certificate numbers and principal amount of the Old Notes to which this Letter
of Transmittal relates should be listed on a separate signed schedule attached
hereto.
4. Withdrawal of Tender. Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written or facsimile transmission notice of withdrawal
must (i) be received by the Exchange Agent at the address set forth herein prior
to 5:00 p.m., New
10
<PAGE>
York City time, on the Expiration Date, (ii) specify the name of the person
having tendered the Old Notes to be withdrawn, (iii) identify the Old Notes to
be withdrawn and (iv) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees). If Old Notes have been tendered
pursuant to the ATOP procedure with DTC, any notice of withdrawal must otherwise
comply with the procedures of DTC. Old Notes properly withdrawn will thereafter
be deemed not validly tendered for purposes of the Exchange Offer; provided,
however, that withdrawn Old Notes may be retendered by again following one of
the procedures described herein at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. All questions as to the validity, form and
eligibility (including time of receipt) of notice of withdrawal will be
determined by the Company, whose determinations will be final and binding on all
parties. Neither the Company, the Exchange Agent, nor any other person will be
under any duty to give notification of any defects or irregularities in any
notice of withdrawal or incur any liability for failure to give any such
notification. The Exchange Agent intends to use reasonable efforts to give
notification of such defects and irregularities.
5. Partial Tenders; Pro Rata Effect. If less than the entire principal
amount evidenced by any Old Notes is to be tendered, fill in the principal
amount that is to be tendered in the box entitled "Principal Amount Tendered"
below. The entire principal amount of all Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
6. Signatures on this Letter of Transmittal; Bond Powers and Endorsements.
If this Letter of Transmittal is signed by the registered Holder(s) of the Old
Notes tendered hereby, the signature must correspond with the name as written on
the face of the certificate representing such Old Notes without alteration,
enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any one of the Old Notes tendered hereby are registered in different
names, it will be necessary to complete, sign and submit as many separate copies
of this Letter of Transmittal and any necessary accompanying documents as there
are different registrations.
When this Letter of Transmittal is signed by the Holder(s) of Old Notes
listed and tendered hereby, no endorsements or separate bond powers are
required.
If this Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority to so act must be submitted.
7. Special Delivery Instructions. Tendering Holders should indicate in the
applicable box the name and address to which Exchange Notes issued in
consideration of Old Notes accepted for exchange, or Old Notes for principal
amounts not exchanged or not
11
<PAGE>
tendered, are to be sent, if different from the name and address of the person
signing this Letter of Transmittal.
8. Waiver of Conditions. The Company reserves the absolute right to waive
any of the specified conditions in the Exchange Offer, in whole at any time or
in part from time to time, in the case of any Old Notes tendered hereby. See
"The Exchange Offer - Conditions" in the Prospectus.
9. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, Exchange Notes and/or substitute Old Notes for principal amounts not
exchanged are to be delivered to any person other than the Holder of the Old
Notes or if a transfer tax is imposed for any reason other than the exchange of
Old Notes pursuant to the Exchange Offer, the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted, the amount of such transfer taxes will be
billed directly to such tendering Holder.
10. Irregularities. All questions as to validity, form, eligibility
(including time of receipt), acceptance and withdrawal of tendered Old Notes
will be resolved by the Company, in its sole discretion, whose determination
shall be final and binding. The Company reserves the absolute right to reject
any or all tenders of any particular Old Notes that are not in proper form, or
the acceptance of which would, in the opinion of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defect,
irregularity or condition of tender with regard to any particular Old Notes. The
Company's interpretation of the terms of, and conditions to, the Exchange Offer
(including the instructions herein) will be final and binding. Unless waived,
any defects or irregularities in connection with tenders must be cured within
such time as the Company shall determine. Neither the Company nor the Exchange
Agent shall be under any duty to give notification of defects in such tenders or
shall incur any liability for failure to give such notification. The Exchange
Agent intends to use reasonable efforts to give notification of such defects and
irregularities. Tenders of Old Notes will not be deemed to have been made until
all defects and irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that are not properly tendered and as to which the
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holder, unless otherwise provided by this Letter of
Transmittal, as soon as practicable following the Expiration Date.
11. Mutilated, Lost, Stolen or Destroyed Certificates. Holders whose
certificates for Old Notes have been mutilates, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated above for further
instructions.
12
<PAGE>
IMPORTANT TAX INFORMATION
Under Federal income tax law, a registered Holder of Old Notes or Exchange
Notes is required to provide the Trustee (as payer) with such Holder's correct
TIN on Substitute Form W-9 below or otherwise establish a basis for exemption
from backup withholding. If such Holder is an individual, the TIN is his social
security number. If the Trustee is not provided with the correct TIN, a $50
penalty may be imposed by the Internal Revenue Service, and payments made to
such Holder with respect to Old Notes or Exchange Notes may be subject to backup
withholding.
Certain Holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Trustee a properly completed Internal Revenue Service Form W-8, signed under
penalties of perjury, attesting to that Holder's exempt status. A Form W-8 can
be obtained from the Trustee.
If backup withholding applies, the Trustee is required to withhold 31% of
any payments made to the Holder or other payee. Backup withholding is not an
additional Federal income tax. Rather, the Federal income tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withhold. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
Purpose of Substitute Form W-9
To prevent backup withholding on payments made with respect to Old Notes or
Exchange Notes that the Holder is required to provide the Trustee with: (i) the
Holder's correct TIN by completing the form below, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such Holder is awaiting a
TIN) and that (A) such Holder is exempt from backup withholding, (B) the Holder
has not been notified by the Internal Revenue Service that the Holder is subject
to backup withholding as a result of failure to report all interest or dividends
or (C) the Internal Revenue Service has notified the Holder that the Holder is
no longer subject to backup withholding; and (ii) if applicable, an adequate
basis for exemption.
13
<PAGE>
PAYER'S NAME: STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND CERTIFY BY Social Security Number
SIGNING AND DATING BELOW
Form W-9
Department of the
Treasury-Internal OR ______________________
Revenue Service Employer Identification Number
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Payer's Request for Part 2 - Certification - Under penalties of perjury, I certify that:
Taxpayer (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a
number Identification Number to be issued to me); and
("TIN") (2) I am not subject to backup withholding because (i) I am exempt from backup withholding, (ii) I have
not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a
result of failure to report all interest or dividends, or (iii) the IRS has notified me that I am no
longer subject to backup withholding.
Certificate instruction - You must cross out item (2) in Part 2 above if you have been notified by the
IRS that you are subject to backup withholding because of under reporting interest or dividends on
your tax return. However, if after being notified by the IRS that you were subject to backup
withholding you received another notification from the IRS stating that you are no longer subject to
backup withholding, do not cross out item (2).
- ------------------------------------------------------------------------------------------------------------------------------------
Part 3
[ ]Awaiting TIN
SIGNATURE______________________________ DATE__________, 1998
NAME (Please Print)____________________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (i) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security administration Office or (ii) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within 60 days, 31% of all reportable
payments made to me thereafter will be withheld until I provide a number.
Signature _________________________________________________ Date________________
Name (Please Print)_____________________________________________________________
14
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payer.
Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-
0000. Employer identification numbers have nine digits separated by only one
hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
-------------------------------------------------------- ------------------------------------------------------
For this type of account Give the SOCIAL For this type of Give the
SECURITY number account: EMPLOYER
of - IDENTIFICATION
number of
-------------------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C>
1. Individual The individual 6. Sole proprietorship The owner(1)
2. Two or more Individuals The actual owner of the 7. A valid trust, estate, Legal entity(1)
(joint account account or, if combined or pension trust
funds, the first
individual on the
account(2)
3 Custodian account of a The minor (4) 8. Corporate The corporation
minor (Uniform Gift to
Minors Act)
4a. The usual revocable savings The grantor-trustee 9. Association, club, The organization
trust (grantor is also religious, charitable,
trustee) educational or other
tax-exempt organization
b. So-called trust account The actual owner 10. Partnership The partnership
that is not a legal or
valid trust under State law
c. Sole proprietorship The Owner(1) 11. A broker or registered The broker or nominee
nominee
12. Account with Department The public entity
of Agriculture in the
name of a public entity
(such as a State or
local government, school
district, or prison)
that receives
agricultural program
payments
</TABLE>
- -------------------
(1) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your SSN or EIN.
(2) List first and circle the name of the person whose number you furnish.
(3) List first and circle the name of the legal trust, estate, or pension trust
(Do not furnish the identifying number of the personal representative or
trustee unless the legal entity itself is not designated in the account
title.)
(4) Circle the minor's name and furnish the minor's social security number.
15
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
Obtaining a Number
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
Payees Exempt from Backup Withholding
The following is a list of payees exempt from backup withholding and for which
no information reporting is required. For interest and dividends, all listed
payees are exempt except item (9). For broker transactions, payees listed in
items (1) through (13) and a person registered under the Investment Advisers Act
of 1940 U.S. who regularly acts as a broker are exempt. Payments subject to
reporting under sections 6041 and 6041A are generally exempt from backup
withholding only if made to payees described in items (1) through (7), except a
corporation that provides medical and health care services or bills and collects
payments for such services is not exempt from backup withholding or information
reporting. Only payees described in items (2) through (6) are exempt from
backup withholding for barter exchange transactions, patronage dividends, and
payments by certain fishing boat operators.
(1) A corporation.
(2) An organization exempt from tax under Section 501(a), or an individual
retirement plan or custodial account under section 403(b)(7).
(3) The United States or any agency or instrumentality thereof.
(4) A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
(5) A foreign government, a political subdivision of a foreign government, or
an agency or instrumentality thereof.
(6) An international organization or any agency or instrumentality thereof.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S. or a
possession of the U.S.
(9) A futures commission merchant registered with the Commodity Futures Trading
Commission.
(10) A real estate investment trust.
(11) An entity registered at all times under the Investment Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc. Nominee List.
(15) An exempt charitable remainder trust, or a non-exempt trust described in
section 4947.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
Payments to nonresident aliens subject to withholding under section 1441.
Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
Payments of patronage dividends not paid in money.
Payments made by certain foreign organizations.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you have
not provided your correct taxpayer identification number to the payer.
Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
Payments described in section 6049(b)(5) to nonresident aliens.
Payments on tax-free covenant bonds under section 1451.
Payments made by certain foreign organizations.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER. WRITE "EXEMPT" ON THE FACE OF THE FORM AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, royalties, and patronage dividends that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
Privacy Act Notice. Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be
16
<PAGE>
given the numbers whether or not recipients are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
Penalties
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
17
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
Ladies and Gentlemen:
The undersigned hereby tender to the Company, upon the terms and conditions
set forth in the Prospectus and the Letter of Transmittal (which together
constitute the "Exchange Offer"), receipt of which are hereby acknowledged, the
aggregate principal amount of Old Notes set forth below pursuant to the
guaranteed delivery procedure described in "The Exchange Offer--Guaranteed
Delivery Procedures" section in the Prospectus and the Letter of Transmittal.
<TABLE>
<CAPTION>
<S> <C>
Principal Amount of Old Notes Signature(s):_________________________________
Tendered $:__________________________________ ______________________________________________
Certificate Nos.:____________________________ Name(s) of Registered Holders:________________
Total Principal Amount Represented by Old Address:______________________________________
Notes Certificate(s):_______________________ ______________________________________________
If Old Notes will be tendered by book-entry Area Code and Telephone Number(s):____________
transfer, provide the following information: ______________________________________________
DTC Account Number:__________________________
Dated: __________________________ , 1999
</TABLE>
GUARANTEE
(Not to be Used for Signature Guarantee)
The undersigned, a firm or entity identified in Rule 17Ad-15 under
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," hereby guarantees to deliver to the Exchange Agent either the Old
Notes tendered hereby in proper form for transfer, or confirmation of the book-
entry transfer of such Old Notes pursuant to the procedures for book-entry
transfer set forth in the Prospectus, in either case together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees, and any other documents required by the
Letter of Transmittal within five New York Stock Exchange trading days after the
date of execution of this Notice of Guaranteed Delivery.
<TABLE>
<CAPTION>
<S> <C>
Name of Firm:___________________________ _____________________________________________
(Authorized Signature)
Address:________________________________ Name:________________________________________
________________________________________ Date:________________________________________
Area Code and
Telephone Number:_______________________
</TABLE>
<PAGE>
EXHIBIT 99.3
Centennial Communications Corp.
Offer for All Outstanding
14% Senior Discount Notes due 2005
in Exchange for
14% Senior Discount Notes due 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON THE
EARLIER OF __________, 1999 (UNLESS EXTENDED) OR THE DATE ON WHICH 100% OF THE
OLD NOTES ARE VALIDLY TENDERED AND NOT WITHDRAWN (THE "EXPIRATION DATE").
TENDERED OLD NOTES MAY BE WITHDRAWN AT ANY TIME ON OR PRIOR TO THE EXPIRATION
DATE OF THE EXCHANGE OFFER.
To: Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees
Centennial Communications Corp. (the "Company") is offering, upon and
subject to the terms and conditions set forth in the Prospectus, dated
____________, 1999 (as the same may be amended or supplemented from time to
time, the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of
Transmittal"), to exchange (the "Exchange Offer") certain 14% Senior Discount
Notes Due 2005 (the "Exchange Notes") for its outstanding 14% Senior Discount
Notes Due 2005 (the "Old Notes"). The Exchange Offer is being made in order to
satisfy certain obligations of the Company contained in the Notes Registration
Rights Agreement dated January 15, 1998 by and among the Company, Salomon
Brothers Inc and Prudential Securities Incorporated.
We are requesting that you contact your clients for whom you hold Old Notes
registered in your name or in the name of your nominee regarding the Exchange
Offer. For your information and for forwarding to your clients for whom you
hold Old Notes registered in your name or in the name of your nominee, or who
hold Old Notes registered in their own names, we are enclosing the following
documents:
1. Prospectus dated ________________, 1999;
2. The Letter of Transmittal for your use and for the information of
your clients, including Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if time will not permit all required documents to reach the Exchange
Agent (as defined below) prior to the Expiration Date (as defined below) or
if the procedures for book-entry transfer cannot be completed on a timely
basis;
<PAGE>
4. A form of letter which may be sent to your clients for whose
account you hold Old Notes registered in your name or the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Exchange Offer;
5. Return envelopes addressed to State Street Bank and Trust Company,
the Exchange Agent (the "Exchange Agent") for the Old Notes.
Your prompt action is requested. The Exchange Offer will expire at 5:00
p.m., New York City time, on ____________, 1999 (unless extended by the Company)
or the date on which 100% of the Old Notes are validly tendered and not
withdrawn (the "Expiration Date"). Old Notes tendered pursuant to the Exchange
Offer may be withdrawn, subject to the procedures described in the Prospectus,
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent, all in accordance with the instructions set forth in the Letter
of Transmittal and the Prospectus.
If holders of Old Notes wish to tender but time will not permit all
required documents to reach the Exchange Agent prior to the Expiration Date or
to comply with the book-entry transfer procedures on a timely basis, a tender
may be effected by following the guaranteed delivery procedures described in the
Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures."
The Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs and expenses
incurred by them in forwarding the Prospectus and the related documents to the
beneficial owners of Old Notes held by them as nominee or in a fiduciary
capacity. The Company will pay or cause to be paid all transfer taxes
applicable to the exchange of Old Notes pursuant to the Exchange Offer, except
as set forth in Instruction 9 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to State
Street Bank and Trust Company, the Exchange Agent for the Old Notes, at its
address set forth on the front of the Letter of Transmittal.
Very truly yours,
CENTENNIAL COMMUNICATIONS CORP.
2
<PAGE>
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF
THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN
THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
3
<PAGE>
EXHIBIT 99.4
CENTENNIAL COMMUNICATIONS CORP.
Offer for all Outstanding
14% Senior Discount Notes Due 2005
in Exchange for
14% Senior Discount Notes due 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON THE
EARLIER OF ___________, 1999 (UNLESS EXTENDED) OR THE DATE ON WHICH 100% OF THE
OLD NOTES ARE VALIDLY TENDERED AND NOT WITHDRAWN (THE "EXPIRATION DATE").
TENDERED OLD NOTES MAY BE WITHDRAWN AT ANY TIME ON OR PRIOR TO THE EXPIRATION
DATE OF THE EXCHANGE OFFER.
To Our Clients:
Enclosed for your consideration is a Prospectus, dated _______, 1999 (as
the same may be amended or supplemented from time to time, the "Prospectus"),
and the related Letter of Transmittal (the "Letter of Transmittal"), relating to
the offer (the "Exchange Offer") of Centennial Communications Corp. (the
"Company") to exchange certain 14% Senior Discount Notes Due 2005 (the "Exchange
Notes") for its outstanding 14% Senior Discount Notes due 2005 (the "Old
Notes"), upon the terms and subject to the conditions described in the
Prospectus and the Letter of Transmittal. The Exchange Offer is being made in
order to satisfy certain obligations of the Company contained in the Notes
Registration Rights Agreement dated January 15, 1998, by and among the Company,
Salomon Brothers Inc and Prudential Securities Incorporated.
Holders of Old Notes who cannot deliver all required documents to the
Exchange Agent on or prior to the Expiration Date (as defined below), or who
cannot complete the procedures for book-entry transfer on a timely basis, must
complete the Notice of Guarnateed Delivery attached hereto, and follow the
guaranteed delivery described in the Prospectus under "The Exchange Offer--
Guaranteed Delivery Procedures."
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A tender
of such Old Notes may only be made by us as the holder of record and pursuant to
your instructions.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Notes held by us for your account, pursuant to the terms and
conditions set forth in the enclosed Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on ____________, 1999, unless extended by the Company. Any
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time
before the Expiration Date.
<PAGE>
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in the
Prospectus under "The Exchange Offer--Conditions."
3. Any transfer taxes incident to the transfer of Old Notes from the
holder to the Company will be paid by the Company, except as otherwise provided
in Instruction 9 of the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on
_________, 1999 (unless extended by the Company) or the date on which 100% of
the Old Notes are validly tendered and not withdrawn.
If you wish to have us tender your Old Notes, please so instruct us by
completing, executing and returning to us the instruction form on the back of
this letter. The Letter of Transmittal is furnished to you for informational
purposes only and may not be used directly by you to tender Old Notes held by us
and registered in our name for your account or benefit.
<PAGE>
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by Centennial
Communications Corp. with respect to its Old Notes.
This will instruct you to tender the Old Notes held by you for the account
of the undersigned, upon and subject to the terms and conditions set forth in
the Prospectus and the related Letter of Transmittal.
Please tender the Old Notes held by you for my account as indicated below:
<TABLE>
<CAPTION>
Aggregate Principal Amount of Old Notes
-----------------------------------------------
<S> <C>
14% Senior Discount
Notes Due 2005................................ -----------------------------------------------
[ ] Please do not tender my Old Notes held by
you for my account
Dated: __________________ , 1999 -----------------------------------------------
-----------------------------------------------
Signature(s)
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Please print name(s) here
-----------------------------------------------
-----------------------------------------------
Address(es)
-----------------------------------------------
Area Code and Telephone Number
-----------------------------------------------
Tax Identification or Social Security No(s).
</TABLE>
None of the Old Notes held by us for your account will be tendered unless
we receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signature(s) hereon shall
constitute an instruction to us to tender all the Old Notes held by us for your
account.
