<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
CENTENNIAL COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1324155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1528 Wazee Street, Suite 200 80202
Denver, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 405-0475
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes ___ No X
-
The number of shares outstanding of the Registrant's common stock as of
November 15, 1999 was:
Common stock - 3,502,750 shares
<PAGE>
CENTENNIAL COMMUNICATIONS CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1 - Financial Statements
- ------
Condensed Consolidated Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998..... 2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited)...................................................... 3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998
(Unaudited)........................................................................................ 4
Notes to Condensed Consolidated Financial Statements (Unaudited)...................................... 6
Centennial Cayman Corp. and Subsidiaries Financial Statements and notes to the financial statements
for the Nine Months Ended September 30, 1999 (Unaudited)........................................... 14
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20
- ------
Item 3 - Quantitative and Qualitative Disclosures about Market Risk................................... 30
- ------
PART II - OTHER INFORMATION
-------------------------------
Item 1 - Legal Proceedings............................................................................ 31
- ------
Item 2 - Changes in Securities and Use of Proceeds.................................................... 31
- ------
Item 5 - Other Information............................................................................ 32
- ------
Item 6 - Exhibits and Reports on Form 8-K............................................................. 32
- ------
</TABLE>
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,381,297 $ 5,245,119
Restricted cash 7,755,055 11,770,859
Accounts receivable, net of allowances for doubtful
accounts of $900,013 and $829,933, respectively 737,754 886,494
Radios and accessories inventory 1,519,120 2,328,755
Other current assets 1,409,036 1,443,316
Current assets held for sale (Note 3) 370,734 53,011
------------- ------------
Total current assets 15,172,996 21,727,554
PROPERTY AND EQUIPMENT, net (Note 5) 9,201,712 8,937,917
SMR LICENSES, net of accumulated amortization of $1,110,998
and $608,007, respectively 15,079,562 13,287,358
LONG-TERM ASSETS HELD FOR SALE (Note 3) 480,143 1,166,962
OTHER NONCURRENT ASSETS, net 2,185,962 2,462,517
------------- ------------
Total assets $ 42,120,375 $ 47,582,308
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,435,687 $ 2,144,964
Accrued liabilities 1,755,106 1,450,014
Payable to seller - 400,000
Deposits on assets held for sale (Note 3) 327,500 454,108
Current liabilities related to assets held for sale (Note 3) - 154,170
------------- ------------
Total current liabilities 3,518,293 4,603,256
CAPITAL LEASES PAYABLE (Note 6) - 24,607
CONVERTIBLE NOTES (Note 6) 11,626,549 10,881,063
PRIVATE NOTES (Note 6) 20,772,585 17,829,506
LONG-TERM LIABILITIES RELATED TO ASSETS HELD FOR SALE 112,664 386,694
------------- ------------
Total liabilities 36,030,091 33,725,126
COMMITMENTS AND CONTINGENCIES (Note 7)
MANDATORILY REDEEMABLE, CONVERTIBLE
PREFERRED STOCK:
Series A, $.01 par value, 352 authorized, issued and outstanding 8,786,164 8,780,242
Series B, $.01 par value, 6,399,648 authorized,
5,735,251 issued and outstanding 20,641,556 20,541,125
Series C, $.01 par value, 11,000,000 authorized, 9,266,424
and 8,789,169 issued and outstanding, respectively 13,436,317 12,744,286
------------- ------------
42,864,037 42,065,653
------------- ------------
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 40,000,000 authorized,
3,502,750 issued and outstanding 35,028 35,028
Additional paid-in capital 6,300,822 7,599,298
Accumulated deficit (43,330,973) (35,981,330)
Accumulated other comprehensive income 221,370 138,533
------------- ------------
Total stockholders' deficit (36,773,753) (28,208,471)
------------- ------------
Total liabilities and stockholders' deficit $ 42,120,375 $ 47,582,308
============= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
2
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
----------------------------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------------
1999 1998 1999 1998
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
REVENUE:
Radio service revenue $ 1,401,690 $ 1,569,859 $ 4,250,656 $ 4,032,382
Equipment sales 104,136 308,282 654,962 1,210,307
Other revenue 88,750 40,094 128,784 117,347
----------- ------------ ------------ -------------
1,594,576 1,918,235 5,034,402 5,360,036
----------- ------------ ------------ -------------
COSTS AND EXPENSES RELATED TO REVENUE:
Network and site expense 51,524 23,974 149,286 66,768
Cost of equipment sold 134,705 515,055 704,882 1,595,351
Maintenance and other 90,244 114,279 297,377 299,370
----------- ------------ ------------ -------------
276,473 653,308 1,151,545 1,961,489
----------- ------------ ------------ -------------
1,318,103 1,264,927 3,882,857 3,398,547
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 1,627,338 2,147,896 5,102,871 6,932,961
Depreciation and amortization 813,446 565,656 2,269,536 1,462,323
Loss on divesture of investment - 2,403,700 - 2,403,700
----------- ------------ ------------ -------------
2,440,784 5,117,252 7,372,407 10,798,984
----------- ------------ ------------ -------------
OPERATING LOSS (1,122,681) (3,852,325) (3,489,550) (7,400,437)
----------- ------------ ------------ -------------
OTHER INCOME (EXPENSE):
Interest expense (1,436,904) (1,228,746) (4,167,827) (3,387,395)
Interest income 134,112 306,503 505,020 1,140,827
Other (214,487) (135,967) (197,286) (289,517)
----------- ------------ ------------ -------------
(1,517,279) (1,058,210) (3,860,093) (2,536,085)
----------- ------------ ------------ -------------
NET LOSS (2,639,960) (4,910,535) (7,349,643) (9,936,522)
DIVIDENDS ON AND ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED SHARES TO REDEMPTION
VALUE (447,499) (295,242) (1,298,476) (1,012,665)
----------- ------------ ------------ -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS (3,087,459) (5,205,777) (8,648,119) (10,949,187)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments 174,151 2,839 82,837 (37,037)
----------- ------------ ------------ -------------
COMPREHENSIVE LOSS $(2,913,308) $(5,202,938) $(8,565,282) (10,986,224)
BASIC NET LOSS PER COMMON SHARE $ (0.88) $ (1.49) $ (2.47) $ (3.13)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,502,750 3,502,750 3,502,750 3,502,749
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
3
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,349,643) $ (9,936,522)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 2,269,536 1,462,323
Loss on disposal of property and equipment (166,791) -
Loss on divesture of investment in affiliate - 2,403,700
Stock based compensation - 37,458
Allowance for doubtful accounts 109,135 481,340
Accretion of interest on private and
Convertible notes 3,896,575 2,994,357
Changes in operating assets and liabilities-
(Increase)/decrease in accounts receivable 39,605 (643,306)
(Increase)/decrease in inventory 809,635 (2,054,063)
(Increase)/decrease in other assets 46,811 (473,470)
Increase/(decrease) in accounts payable (709,277) 1,142,127
Increase/(decrease) in accrued liabilities (122,500) 464,631
------------ --------------
Net cash used in operating activities (1,176,914) (4,121,425)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,823,385) (5,422,371)
Acquisition of operating and non-operating,
entities and spectrum, net of cash acquired (2,620,823) (7,386,203)
Payment of contingent payable to seller (400,000) (2,390,000)
(Increase) decrease in restricted cash 4,015,804 (333,181)
Change in assets held for sale 83,266 (891,237)
------------ --------------
Net cash used in investing activities (745,138) (16,422,992)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from offering of private 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
Payments on capital leases payable (24,607) -
------------ --------------
Net cash provided by (used in) financing activities (24,607) 29,114,815
------------ --------------
CASH EFFECT OF EXCHANGE RATE CHANGES 82,837 (37,037)
------------ --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,863,822) 8,533,361
CASH AND CASH EQUIVALENTS, beginning of period 5,245,119 7,730,141
------------ --------------
CASH AND CASH EQUIVALENTS, end of period $ 3,381,297 $ 16,263,502
============ ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
4
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest 29,615 355,944
Income taxes 133,779 115,175
Supplemental schedule of noncash
investing and financing activities-
Accretion of preferred stock to redemption value 106,353 106,353
Dividends payable on preferred stock 685,252 1,012,665
Conversion of senior note and related accrued
interest to Series C preferred stock - 11,535,746
Payment of dividends on Series C preferred stock
in additional shares 764,531 403,751
Accrued acquisition of Chilean
Channels - 2,800,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
5
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
AS OF SEPTEMBER 30, 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 unaudited condensed consolidated financial statements
include the accounts of Centennial Communications Corp. and its subsidiaries,
all of which are wholly owned. All subsidiaries are consolidated and all
significant intercompany accounts and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In
management's opinion, all adjustments (which are of a normal recurring nature)
have been recorded which are necessary to present fairly the financial position
of the Company as of September 30, 1999 and the results of its operations for
the three and nine months ended September 30, 1999 and 1998. Operating results
for the interim periods are not necessarily indicative of results for an entire
year.
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. 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 lives, generally 40 years. In some cases, the Company currently is not in
compliance with applicable requirements and, where appropriate, has filed
requests for extensions and/or amendments with the
6
<PAGE>
appropriate government agency. The Company expects that such extension and/or
amendments requests will be granted and the risk of having these or any other
licenses revoked is remote.
Reclassifications
-----------------
Certain amounts in prior periods have been reclassified to conform with the
current presentation.
Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. As of September 30, 1999,
approximately $1.3 million was restricted for certain construction and
operational obligations related to SMR licenses in Chile, and approximately $6.5
million of cash and cash equivalents was restricted under one of the Company's
financing arrangements and is only to be used in Latin America. In November
1999, the $1.3 million was released.
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 all quarters and years
beginning after June 15, 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 September 30, 1999, the Company had completed the sale of all but one MTA
to one purchaser. The remaining purchase was subject to the approval by the
Federal Communications Commission (the "FCC") of the transfer of the spectrum
licenses. This approval was received on September 15, 1999. The sale of the
final MTA was consummated on October 7, 1999. Until the contingencies related to
the FCC were 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 recognized as sales 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. The Company is
not responsible for any losses incurred during the time covered by the
agreements with the buyer/managers. As of September 30, 1999, the Company had
received approximately $327,500 in cash proceeds related to the remaining sale,
and had recorded these amounts as deposit liabilities in the accompanying
balance sheet.
As of September 30, 1999 and December 31, 1998, financial information related to
the U.S. Operations was as follows:
<TABLE>
<CAPTION>
As of As of
September 30, 1999 December 31, 1998
-------------------- -------------------
<S> <C> <C>
Current assets $370,734 $ 53,011
Property and equipment 358,079 935,477
SMR licenses 122,064 231,485
-------------------- -------------------
Total Operating Assets 850,877 1,219,973
Current liabilities - 154,170
Capital leases - 173,035
Spectrum license debt 112,664 213,659
-------------------- -------------------
Total Liabilities 112,664 540,864
-------------------- -------------------
Net assets of the U.S. Operations $738,213 $ 679,109
==================== ===================
</TABLE>
7
<PAGE>
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, had 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. 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 September
30, 1999, the Company had made cash payments of the majority of this amount. The
amount of costs incurred and remaining liabilities related to the U.S.
Operations as of September 30, 1999 follow:
<TABLE>
<CAPTION>
Costs Incurred
during the Nine
Accrued Costs Months Ended Accrued Costs
December 31, 1998 September 30, 1999 September 30, 1999
------------------- -------------------- -------------------
<S> <C> <C> <C>
Legal and other professional fees $ 45,661 $ 33,261 $12,400
Taxes 86,695 66,005 20,690
Other selling costs (1) 16,440 16,440 -
------------------- -------------------- -------------------
Total $148,796 $115,706 $33,090
=================== ==================== ===================
</TABLE>
(1) Other selling costs include equipment lease costs, contract breakage fees
and moving and shipping costs.
No adjustments to these accruals were recorded during the nine months ended
September 30, 1999. The Company periodically reviewed the adequacy of the fair
market value writedown discussed above. Because the sale of the last MTA was
completed on October 7, 1999, the Company made a final determination of the
adequacy of the writedown, and determined that $268,938 of such amount was no
longer required, and was reversed during the period ended September 30, 1999.
The Company expects that the remaining accrual will be utilized during the forth
quarter and in next fiscal year.
NOTE 4. 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 for
a purchase price of $3,200,000.
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. 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. On May
12, 1999, the Company completed the last part of the IWC closing, and acquired
for $400,000 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. 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 licenses, which have a 20 year term.
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. On July 26, 1999, the Company
completed this acquisition for approximately $1,855,000. Approximately $325,000
represented the fair value of the net tangible assets. The excess purchase price
over the fair value of the net tangible assets acquired was approximately
$1,530,000, which was allocated to SMR licenses. These licenses will be
amortized over 23 years, the remaining term of the license.
8
<PAGE>
On October 22, 1998, the Company signed an agreement to purchase 100% of the
shares of Trunking S.A. a Chilean non-operating development stage company having
(i) 20 800 MHz channels in Santiago and (ii) 176 800 MHz channels in various
Chilean cities. This acquisition closed on July 26, 1999 and was accounted for
as a purchase. Total consideration paid by the Company was $700,000, which was
allocated entirely to SMR licenses. These licenses will be amortized over 26
years, the remaining term of the license.
The Company used its existing restricted cash for these acquisitions.
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 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.
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.
The composition of property and equipment follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Network infrastructure $ 7,793,920 $ 6,975,994
Radios 3,533,180 3,321,641
Computer equipment and software 891,499 723,746
Furniture and fixtures 496,072 397,775
Leasehold improvements 219,832 303,754
----------- -----------
12,934,503 11,722,910
Accumulated depreciation (3,732,791) (2,784,993)
----------- -----------
Property and equipment, net $ 9,201,712 $ 8,937,917
=========== ===========
</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 $661,070 and $470,337 for the three months ended
September 30, 1999, and 1998, respectively and $1,710,531 and $1,168,342 for the
nine months ended September 30, 1999, and 1998, respectively.
9
<PAGE>
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASES PAYABLE
- ------- -----------------------------------------
<TABLE>
<CAPTION>
September 30, 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 $ - $ 173,035
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 - 24,607
Notes payable for purchase of SMR license, quarterly payments of
$4,823 are interest-only (at the stated rate) through March 2001,
after which quarterly payments of $16,454 include principal and
interest for the next five years, imputed interest rate of 12%,
secured by related SMR licenses 112,664 213,659
14% Private Notes due 2005 (the "Private Notes"), net of unamortized
discount of $19,227,415 and $22,170,494, interest payable
semi-annually in arrears commencing July 1, 2003 20,772,585 17,829,506
9% Convertible Notes due 2005 (the "Convertible Notes"), interest
payable annually commencing July 1, 2000 11,626,549 10,881,063
-------------- -----------------
32,511,798 29,121,870
Less amount classified as Assets Held for Sale (112,664) (386,694)
-------------- -----------------
$32,399,134 $28,735,176
</TABLE>
On April 15, 1999 the Company sold the phone system and cancelled the remaining
balance on the capital lease secured by the phone system. On August 13, 1999 the
Company completed the payment of the capital lease secured by infrastructure.
On February 18, 1998, the Company entered into an agreement with E.F. Johnson
regarding the purchase of infrastructure equipment and subscriber units.
Pursuant to this agreement, E.F. Johnson 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 were payable quarterly over a one year
period and no interest was charged. The Company determined the market rate for
this debt to be 14%. The Company was required to make a down payment in the
amount of 25% of the cost of the purchased equipment pursuant to the agreement.
The Company made the final payment pursuant to this agreement on September 4,
1999.
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
10
<PAGE>
generating activity began in September 1998. The ability of the Company to
recover its 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. In 1996, 1997 and 1998 amendments for all of the Company's six
Peruvian subsidiaries were filed with the Peruvian Ministry of Transportation,
Communications, Housing and Construction (the "Ministry"). In June 1999, the
Company received preliminary approval to the amendments for three of the
Peruvian subsidiaries, with certain changes as a result of their technical
reviews of the systems. Based upon meetings held with the Ministry, and based on
advice from the Company's outside legal advisors, on August 10, 1999 the Company
filed additional amendments to the build out requirements in the Minimum
Expansion Plan together with its application to merge certain of the affiliated
companies for administrative reasons, which applications have received
preliminary approval from the Ministry.
After various discussions with the Peruvian authorities and based on advice from
the Company's outside legal advisors for such matters, the Company believes that
the outcome of the items raised by the regulators will not result in an
impairment of the carrying amount of the Peruvian licenses. As the Company
continues its discussions with the Peruvian Ministry, the Company will continue
to review the carrying amount of its licenses for impairment in light of such
discussions.
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
designations rights, preferences and limitations established by the Company's
Board of Directors.
Holders of preferred stock are entitled to dividend payments as and when
declared 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 indenture relating to the Company's Private Notes (the
"Indenture"), restricts the Company's ability to pay cash dividends.
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. In April 1999, the
Company issued additional 527,255 shares of Series C Preferred Stock at $1.45
per share for the 12% dividend due on such date.
On October 3, 1997 the Company loaned Michael N. Simkin, the former Chief
Executive Officer of the Company, $72,500 to purchase 50,000 shares of the
Company's Series C Preferred Stock (the "Simkin Loan") with a maturity date of
October 3, 1999. Interest was payable annually on the principal amount of this
loan at 6.5% per annum and was secured by a pledge of the purchased shares of
Series C Preferred
11
<PAGE>
Stock. On September 30, 1999 Mr. Simkin agreed to return the shares of
Series C Preferred Stock previously issued to him for cancellation of the
loan.
NOTE 9. OPERATING SEGMENTS
------- ------------------
The Company's reportable segments are geographic units that develop and
operate SMR networks as well as the corporate unit, which oversees all
operations. EBITDA represents operating income/(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 September 30, 1999 and 1998
and for the nine months then ended (in 000's):
<TABLE>
<CAPTION>
United Latin America
--------------------------------------------
States (1) Peru Ecuador Chile El Salvador Corporate Elimination Total
---------- --------- -------- --------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999
- ------------------
Revenues $ - $ 2,495 $1,382 $ 872 $ 285 $ - $ - $ 5,034
EBITDA - 537 221 (319) (84) (1,575) - (1,220)
Operating income (loss) - (457) (505) (621) (150) (1,757) - (3,490)
Total assets $ 738 $13,862 $2,980 $11,019 $ 1,427 $50,992 $(38,898) $42,120
September 30, 1998
- ------------------
Revenues $ - $ 3,157 $2,040 $ 163 $ - $ - $ - $ 5,360
EBITDA - 749 (353) (360) (2,414) (3,560) - (5,938)
Operating income (loss) - 101 (822) (425) (2,414) (3,840) - (7,400)
Total assets $6,136 $16,738 $4,784 $ 5,679 $ 1,623 $61,246 $(39,933) $47,582
</TABLE>
For the three months ended September 30, 1999 and 1998 (in 000's):
<TABLE>
<CAPTION>
United Latin America
--------------------------------------------
States (1) Peru Ecuador Chile El Salvador Corporate Elimination Total
---------- --------- -------- --------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999
Revenues $ - $ 727 $ 435 $ 372 $ 61 $ - $ - $1 ,595
EBITDA - 138 7 (36) (10) (408) - (309)
Operating income (loss) - (249) (296) (168) 32 (442) - (1,123)
Total assets $ 738 $13,862 $2,980 $11,019 $ 1,427 $50,992 $(38,898) 42,120
September 30, 1998
Revenues $ - $ 1,111 $ 697 $ 110 $ - $ - $ - $ 1,918
EBITDA - 367 (192) (200) (2,414) (1,979) - $(4,418)
Operating income (loss) - 116 (376) (317) (2,414) (861) - $(3,852)
Total assets $6,136 $16,738 $4,784 $ 5,679 $ 1,623 $61,246 $(39,933) $56,273
</TABLE>
(1) In August 1997 the Company made the decision to sell its U.S.
operations (see Note 3).
NOTE 10. SUBSEQUENT EVENT
-------- ----------------
On October 7, 1999, the Company closed the sale of the final MTA related to
the U.S. Operations (see Note 3).
On October 31, 1999, the Company issued 568,341 additional shares of Series
C Preferred Stock at a price of $1.45 per share in connection with the
dividend earned by the Series C Preferred Stock.
On November 8, 1999, the $1.3 million that were restricted for certain
construction and operational obligations related to SMR licenses in Chile
were released to the Company.
12
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ----------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 421,749 $ 559,789
Restricted cash 400,885 386,562
Accounts receivable - trade, net of allowance for doubtful
Accounts of $900,013 and $829,933, respectively 737,754 886,494
Inventory 1,489,107 1,896,822
VAT receivable 950,629 754,000
Prepaid licenses and other current assets 344,247 483,702
----------------- -----------------
Total current assets 4,344,371 4,967,369
PROPERTY AND EQUIPMENT, net 9,112,992 8,392,841
SMR LICENSES, net of accumulated amortization
of $1,110,998 and $608,007, respectively 15,079,562 13,287,358
OTHER NONCURRENT ASSETS, net 283,884 354,618
----------------- -----------------
Total assets $ 28,820,809 $ 27,002,186
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 776,686 $ 443,382
Accounts payable - affiliates 25,906,481 20,870,243
Payable to seller - 400,000
Accrued liabilities 734,846 898,623
----------------- -----------------
Total liabilities 27,418,013 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 (19,676,953) (16,606,974)
Accumulated other comprehensive income 221,370 138,533
----------------- -----------------
Total stockholder's equity 1,402,796 4,389,938
----------------- -----------------
Total liabilities and stockholder's equity $ 28,820,809 $ 27,002,186
================= =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
13
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
-------------------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------------- ----------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUE:
Radio service revenue 1,401,690 1,569,859 4,250,656 4,032,382
Equipment sales 104,136 308,282 654,962 1,210,307
Other 88,750 40,094 128,784 117,347
----------------- ----------------- ----------------- -----------------
1,594,576 1,918,235 5,034,402 5,360,036
----------------- ----------------- ----------------- -----------------
COSTS AND EXPENSES RELATED TO REVENUE:
Network and site expense 51,524 23,974 149,286 66,768
Cost of equipment sold 134,705 515,055 704,882 1,595,351
Maintenance and other 90,244 114,279 297,377 299,370
----------------- ----------------- ----------------- -----------------
276,473 653,308 1,151,545 1,961,489
----------------- ----------------- ----------------- -----------------
1,318,103 1,264,927 3,882,857 3,398,547
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 1,614,701 1,463,921 4,964,130 5,471,077
Depreciation and amortization 780,211 468,150 2,089,421 1,175,774
Loss on divesture of investment - 2,403,700 - 2,403,700
----------------- ----------------- ----------------- -----------------
2,394,912 4,335,771 7,053,551 9,050,551
----------------- ----------------- ----------------- -----------------
OPERATING LOSS (1,076,809) (3,070,844) (3,170,694) (5,652,004)
----------------- ----------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest Expense (15,448) (1,754) (54,571) (3,987)
Interest Income (407) 11,672 44,933 11,672
Other 7,659 (176,136) 110,353 (351,895)
----------------- ----------------- ----------------- -----------------
(8,196) (166,218) 100,715 (344,210)
----------------- ----------------- ----------------- -----------------
NET LOSS (1,085,005) (3,237,062) (3,069,979) (5,996,214)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation
adjustments 130,056 (3,696) 221,370 (37,037)
----------------- ----------------- ----------------- -----------------
COMPREHENSIVE LOSS (954,949) (3,240,758) (2,848,609) (6,033,251)
================= ================= ================= =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
14
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (3,069,979) (5,996,214)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 2,089,421 1,175,774
Loss on divestiture of investment in affiliate - 2,403,700
Loss on disposal of property and equipment 88,680 -
Allowance for doubtful accounts 109,135 481,340
Accretion of interest on discount and
Convertible notes - -
Changes in operating assets and liabilities-
(Increase)/decrease in accounts receivable 39,605 (643,306)
(Increase)/decrease inventory 407,715 (1,413,707)
(Increase)/decrease in other assets 22,988 (409,225)
Increase/(decrease) in accounts payable and other 333,304 116,038
Increase/(decrease) in accrued liabilities (163,777) 421,536
------------ ------------
Net cash used in operating activities (142,908) (3,864,064)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,079,061) (3,744,093)
Acquisition of operating and non-operating,
entities and spectrum, net of cash acquired (2,620,823) (7,386,203)
Payment of contingent payable to seller (400,000) (2,390,000)
(Increase) decrease in restricted cash (14,323) (333,181)
------------ ------------
Net cash used in investing activities (5,114,207) (13,853,477)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates 5,036,238 17,919,256
------------ ------------
Net cash provided by (used in) financing activities 5,036,238 17,919,256
EFFECT OF EXCHANGE RATE CHANGES ON CASH 82,837 (37,037)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (138,040) 164,678
CASH AND CASH EQUIVALENTS, beginning of period 559,789 908,048
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 421,749 $ 1,072,726
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
15
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
AS OF SEPTEMBER 30, 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 September 30, 1999 and the results of its
operations for the nine months ended September 30, 1999 and 1998.
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 June 15,
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
- ------- -------------
On January 2, 1998, the Company purchased 100% of the outstanding capital stock
of Telecomunicaciones y Servicios S.A. ("TyS"), a Chilean operating company for
a purchase price of $3,200,000.
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. 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. On May
12, 1999, the Company completed the last part of the IWC closing, and acquired
for $400,000 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. 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 licenses, which have a 20 year term.
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. On July 26, 1999, the Company
completed this acquisition for approximately $1,855,000. Approximately $325,000
represented the fair value of the net tangible assets. The excess purchase price
over the fair value of the net tangible assets acquired was approximately
$1,530,000, which was allocated to SMR licenses. These licenses will be
amortized over 23 years, the remaining term of the license.
16
<PAGE>
On October 22, 1998, the Company signed an agreement to purchase 100% of the
shares of Trunking S.A. a Chilean non-operating development stage company having
(i) 20 800 MHz channels in Santiago and (ii) 176 800 MHz channels in various
Chilean cities. This acquisition closed on July 26, 1999 and was accounted for
as a purchase. Total consideration paid by the Company was $700,000, which was
allocated to SMR licenses. These licenses will be amortized over 26 years, the
remaining term of the license.
NOTE 3. PROPERTY AND EQUIPMENT
- ------- ----------------------
The composition of property and equipment follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Network infrastructure $ 7,793,920 $ 6,392,786
Radios 3,533,180 3,321,641
Computer equipment and software 716,349 515,225
Furniture and fixtures 418,376 310,284
Leasehold improvements 219,832 210,706
------------ -------------
12,681,657 10,750,642
Accumulated depreciation (3,568,665) (2,357,801)
------------ -------------
Property and equipment, net $ 9,112,992 $ 8,392,841
============ =============
</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 $632,529 and $383,098 for the three months ended
September 30, 1999 and 1998, respectively and $1,549,882 and $913,109 for the
nine months ended September 30, 1999 and 1998, respectively.
NOTE 4. 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 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.
17
<PAGE>
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. In 1996, 1997 and 1998 amendments for all of the Company's six
Peruvian subsidiaries were filed with the Peruvian Ministry of Transportation,
Communications, Housing and Construction (the "Ministry"). In June 1999, the
Company received preliminary approval to the amendments for three of the
Peruvian subsidiaries, with certain changes as a result of their technical
reviews of the systems. Based upon meetings held with the Ministry, and based on
advice from the Company's outside legal advisors, on August 10, 1999 the Company
filed additional amendments to the build out requirements in the Minimum
Expansion Plan together with its application to merge certain of the affiliated
companies for administrative reasons, which applications have received
preliminary approval from the Ministry.
After various discussions with the Peruvian authorities and based on advice from
the Company's outside legal advisors for such matters, the Company believes that
the outcome of the items raised by the regulators will not result in an
impairment of the carrying amount of the Peruvian licenses. As the Company
continues its discussions with the Peruvian Ministry, the Company will continue
to review the carrying amount of its licenses for impairment in light of such
discussions.
NOTE 5. OPERATING SEGMENTS
- ------- ------------------
The Company's reportable segments are geographic units that develop and operate
SMR networks as well as the corporate unit, which oversees all operations.
EBITDA represents operating income/(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 September 30, 1999 and 1998 (in
000's):
<TABLE>
<CAPTION>
El
--
Peru Ecuador Chile Salvador Other Elimination Total
---- ------- ----- -------- ----- ----------- -----
(1)
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999
- ------------------
Revenues $ 2,495 $1,382 $ 872 $ 285 $ - $ 5,034
EBITDA 537 221 (319) (84) (1,436) - (1,081)
Operating income (loss) (457) (505) (621) (150) (1,438) - (3,171)
Total assets $13,862 $2,980 $11,019 $ 1,427 - (468) $ 28,820
<CAPTION>
September 30, 1998
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 3,157 $2,040 $ 163 $ - $ - $ 5,360
EBITDA 749 (353) (371) (2,414) (2,087) - (4,476)
Operating income (loss) 101 (822) (425) (2,414) (2,092) - (5,652)
Total assets $16,738 $4,784 $ 5,679 $ 1,623 $ 20 (1,842) $ 27,002
</TABLE>
18
<PAGE>
For the three months ended September 30, 1999 and 1998 (in 000's):
<TABLE>
<CAPTION>
El
--
Peru Ecuador Chile Salvador Other Elimination Total
---- ------- ----- -------- ----- ----------- -----
(1)
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999
- ------------------
Revenues $ 727 $ 435 $ 372 $ 61 $ - $ 1,595
EBITDA 138 7 (36) (10) (395) - (296)
Operating income (loss) (249) (296) (168) 32 (396) - (1,077)
Total assets $13,862 $2,980 $11,019 $ 1,427 - (624) $ 28,664
<CAPTION>
September 30, 1998
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 1,111 $ 697 $ 110 $ - $ _ $ 1,918
EBITDA 367 (192) (200) (2,414) (164) - (2,603)
Operating income (loss) 116 (376) (317) (2,414) (80) - (3,071)
Total assets $16,738 $4,784 $ 5,679 $ 1,623 $ 20 (1,842) $ 27,002
</TABLE>
(1) Other includes Corporate allocation of approximately $1.4 million.
19
<PAGE>
Item 2. 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. During 1998, the Company completed the sale of a
majority of its U.S. Operations and the reader should factor these divestitures
into its reading of the following discussion and analysis.
Risks Relating to Forward-Looking Statements
Certain statements contained in this report including, without limitation,
statements containing the words "believes," "anticipates," "intends," "expects,"
"projects," and words of similar import constitute "forward-looking statements"
within the meaning of the United States Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally,
internationally and in the regions in which the Company operates; demographic
changes; existing government regulations and changes in, or the failure to
comply with, government regulations; the quality and price of similar or
comparable wireless communications services offered or to be offered by
competitors; the loss of any significant subscribers or suppliers; changes in
business strategy or development plans; technological developments; the ability
to attract and retain qualified personnel; the significant indebtedness of the
Company; the availability and terms of capital to fund the expansion of the
Company's business, including the construction and deployment of the Company's
networks; the success of efforts to improve and satisfactorily address any
issues relating to the Company's performance and other factors referenced in
this report. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligations to update any such factors or publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
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 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 licenses and subscribers in El Salvador in August and
September 1998. The Company commenced operations in the United States in
September 1996 and as of September 30, 1999, had sold a majority of its U.S.
Operations (see Note 3).
The Company has developed its operations in Latin America through the
acquisition of non-operating entities, whose primary asset were spectrum, as
well as by acquiring operating entities and through the grant of channels from
government auctions.
20
<PAGE>
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 as of September 30, 1999:
Name Date of Acquisition
---- -------------------
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
TyS (Chile) January 2, 1998
Comovec S.A. (Ecuador) May 13, 1998
Peru Tel S.A. (Peru) May 22, 1998
El Salvador June 9, August 17, September 2 and 11, 1998
Trunking S.A. July 29, 1999
(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 equipment maintenance and loss and damage
insurance; and (iv) ancillary equipment revenue, consisting of the sale of base
stations, antennas, 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 nine months ended September 30, 1999,
the Company's average monthly revenue per subscriber unit (consisting of fixed
monthly network access fees and ancillary service revenues) was approximately
$30.75 in the Company's Latin American markets compared to $36.18 on September
30, 1998.
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
21
<PAGE>
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
expense 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
Depreciation and Amortization
The Company depreciates its infrastructure equipment over 10 years and its
subscriber units over five years using the straight-line method. 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.
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. As of September 30, 1999 the Company has sold
a majority of its U.S. Operations and, in connection therewith, transferred a
substantial portion of the FCC Debt relating to the U.S. Operations to the
purchasers (see Note 3).
Income Tax Benefit
The Company is subject to income taxes in the United States and in each of the
jurisdictions in which it operates. The Company has not paid income taxes in the
United States because of its significant losses. The Company has been precluded
from recognizing an income tax benefit for loss carryforwards because under
Statement of Financial Accounting Standards No. 109, because it is not currently
considered likely that the Company will have significant future taxable income
due to its history of operating losses.
Results of Operations
Revenues. Total revenue decreased approximately $324,000 and $326,000
during the three and nine months ended September 30, 1999, respectively, as
compared to the amounts for the corresponding periods in the prior year as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Latin America:
Radio service revenue $ 1,401,690 $ 1,569,859 $ 4,250,656 $ 4,032,382
Equipment sales 104,136 308,282 654,962 1,210,307
Activation and other 88,750 40,094 128,784 117,347
--------------- -------------- ------------- --------------
Total $ 1,594,576 $ 1,918,235 $ 5,034,402 $ 5,360,036
=============== ============== ============= ==============
</TABLE>
The decrease in revenue is mainly due to the decrease in equipment sales.
During the nine months ended September 30, 1998 the Company sold 3,745 radios as
compared to 2,209 for the corresponding
22
<PAGE>
period in 1999. In addition, the average sales price of each radio decreased by
$27 from 1998 to 1999, this decrease in price is due to the fact during 1999 the
Company began selling used radios. The decrease in revenue is partially offset
by the increase in subscribers in certain countries. In Chile, subscribers
increased from 952 to 3,698 from September 30, 1998 as compared to September 30,
1999. Approximately 10% of the added subscribers between this period represent
units sold. In Ecuador the number of subscribers increased by 181 for the same
period. The increase in subscribers is due to the fact that the Company had
operations in Chile the full nine months in 1999, as compared to one month for
the same period during 1998. The increase of subscribers in Ecuador is due to a
decrease in churn.
Costs and Expenses Related to Revenues. Total costs and expenses related to
revenue decreased approximately $377,000 and $810,000 during the three and nine
months ended September 30, 1999, respectively, as compared to the amounts for
the corresponding periods in the prior year as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
September 30, September 30,
---------------------------------- -----------------------------------------
1999 1998 1999 1998
-------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Latin America:
Network and site expense $ 51,524 $ 23,974 $ 149,286 $ 66,768
Cost of equipment sold 134,705 515,055 704,882 1,595,351
Maintenance and other 90,244 114,279 297,377 299,370
-------------- ------------- ---------------- -----------------
Total $ 276,473 $ 653,308 $ 1,151,545 $ 1,961,489
============== ============= ================ =================
</TABLE>
Costs and expenses related to revenues decreased due partially to the decrease
in equipment sales. In addition, the decrease in costs and expenses related to
revenue is attributable to the fact that the Company began selling used radios
during 1999, as noted above. These factors are partially offset by an increase
in maintenance and network and site expense related to the increased number of
operating sites as compared to the same period in the prior year.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses decreased approximately $521,000 and $1,830,000 during
the three and nine months ended September 30, 1999 respectively, as compared to
the amounts for the corresponding periods in the prior year as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------
1999 1998 1999 1998
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Latin America:
Selling, general and administrative $ 1,614,701 $1,463,921 $4,964,130 $5,471,077
Corporate:
General and administrative 12,637 683,975 138,741 1,461,884
-------------- ----------- ----------- -----------
Total $ 1,627,338 $2,147,896 $5,102,871 $6,932,961
============== =========== =========== ===========
</TABLE>
Selling, general and administrative expenses decreased in Corporate due to the
Company's ongoing effort to reduce overhead expenses both at corporate and in
Latin America. Total headcount at the corporate level was reduced by 15
employees, from 21 to 6, over the past twelve months. The Company allocates a
portion of its corporate overhead to Latin American operations based on the
estimated level of activity performed by the Company on behalf of the Latin
American operations. Such allocations of indirect expenses totaled
approximately $325,000 and $406,000 for the three months ended September 30,
1999 and 1998 respectively and $1,361,000 and $2,061,000 for the nine months
ended September 30, 1999 and 1998 respectively. In Latin America selling,
general and administrative expenses increased because the Company had operations
in Chile and El Salvador for the nine months ended September 30, 1999. The
23
<PAGE>
Chile office was open in April 1998 and began full operations in August. El
Salvador office began operations in August 1998. In addition, the Company
reviewed the adequacy of the writedown related to the divestiture of the U.S.
operations (see Note 3), and determined that approximately $269,000 of such
amount was no longer necessary and therefore reverse this amount during this
period.
Depreciation and Amortization. Total depreciation and amortization increased
approximately $248,000 and $807,000 during the three and nine months ended
September 30, 1999 respectively, as compared to the amounts for the
corresponding periods in the prior year as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Latin America:
Depreciation and amortization $ 780,211 $ 468,150 $ 2,089,421 $ 1,175,774
Corporate:
Depreciation and amortization 33,235 97,506 180,115 286,549
-------------- ------------ ------------- ------------
Total $ 813,446 $ 565,656 $ 2,269,536 $ 1,462,323
============== ============ ============= ============
</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 in Peru, Ecuador, Chile and El Salvador in mid-1998.
Interest Expense. Interest expense increased approximately $208,000 and
$780,000 during the three and nine months ended September 30, 1999 as compared
to the amounts for the corresponding amounts in the prior year. This increase is
due to interest on the Private and Convertible Notes. As Of September 30, 1999,
the Company had $20.8 million outstanding of its 14% Private Notes and $11.6 of
its 9% Convertible Notes.
Interest Income. Interest income decreased approximately $172,000 and
$636,000 during the three and nine months ended September 30, 1999 as compared
to the amounts for the corresponding periods in the prior year. This decrease is
due to the decrease in the Company's cash balance (including restricted cash)
resulting from the use of the proceeds from the sale of the Senior Notes, the
Private Notes and the Convertible Notes, from approximately $17.9 million as of
September 30, 1998 to $11.1 million as of September 30, 1999.
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 $7.3 million for the nine
months ended September 30, 1999, and net cash outflow from operating and
investing activities of approximately $1.9 million. This amount is net of the
change of restricted cash of $4.0 million. This decrease in restricted cash was
used for additional acquisitions and capital expenditures. 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 outflow from
investing activities for the foreseeable future. Through September 30, 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, Preferred
Stock, Senior Notes, Private Notes and 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.
24
<PAGE>
As of September 30, 1999, the Company had entered into the following financing
facilities: (i) the sale of Private Notes financing; and (ii) the sale of
Convertible Notes financing as follows:
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 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 for the 12% dividend at $1.45 per share. In October
1998, the Company issued 505,028 shares of Series C Preferred 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 sale of the Private Notes and the Warrants. This offering
consisted of 40,000 units each consisting of $1,000 in principal amount at
maturity of Private Notes and one Initial Warrant (as defined) to purchase 64
shares of Common Stock at an exercise price of $0.01 per share, subject to
certain adjustments. The 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 Notes accrete at a rate of 21.26% per annum compounding semi-
annually. Pursuant to the Notes Registration Rights Agreement among the Company
and the purchasers of the Private 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 Private Notes offering, a registration statement with respect to
an offer to exchange (the "Exchange Offer") the Private Notes for the Exchange
Notes having terms substantially identical to those of the Private Notes and
(ii) the Exchange Notes to use its best efforts to cause the Notes Registration
Rights Agreement to become effective within 60 days following the date of such
filing. The Company completed the registration process for the Exchange Offer on
August 12, 1999 and incurred approximately $160,000 in liquidated damages
through August 12, 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 was 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 is 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 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 12 to 18 months; however, there can be no assurance to that
effect. The Company intends to use its cash on hand and cash generated by
operations primarily to fund:
- - capital expenditures (capital expenditures will include the purchase of
equipment including subscriber units)
- - the cost of enhancing the Company's analog SMR networks
- - operating losses in certain markets
- - acquisitions of license holding companies and licenses in the wireless
communications industry,
25
<PAGE>
- - debt service requirements; and
- - other general corporate expenditures.
The ability of the Company to make scheduled payments with respect to its
indebtedness, including the Private 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, 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 Private and the Convertible Notes.
If the Company is unable to generate sufficient cash flow from operations to
service its indebtedness, including the Private 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 Private and the
Convertible Notes. Any failure by the Company to satisfy its obligations with
respect to the Private and the Convertible Notes at maturity or prior thereto
would constitute a default under the indenture governing the Private Notes and
the agreement governing the Convertible Notes, and would likely have a material
adverse impact on the Company's operations and financial condition.
The Company currently estimates its remaining net cash decrease for its fiscal
year ending December 31, 1999 to be approximately $930,000. This amount consists
of cash to fund operations in certain markets, capital expenditures for the
construction and enhancement of its analog networks, and for subscriber units.
On April 30, 1999, the Company issued additional 527,255 shares of Series C
Preferred Stock which increased the liquidation value of the Series C Preferred
Stock to $13.4 million or $1.45 per share.
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, with the
exception of Ecuador where the Company's subscriber and revenue base has
declined as a result of economic volatility.
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
26
<PAGE>
approximately 4,300 sucres to one U.S. dollar. As of September 30, 1999, it was
approximately 13,850 sucres to one U.S. dollar and, since year-end, has
fluctuated as high as 14,300 sucres per one U.S. dollar. The declining value of
the sucre has a direct impact on customer's ability to pay due to the fact that
the Company stes prices 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 and subsequently to discuss the current pricing of existing
customers. The Company believes that being proactive may keep more subscribers
on the network as customer reaction has been 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 risk. 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, 1998 of over 100%. The inflation rates for the years ended
December 31, 1996, 1997 and 1998 were 24.4%, 30.6% and 43%, 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.
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.
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) remediation -- 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
27
<PAGE>
(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 September 30, 1999 and as of the date of this filing, the Company
completed the awareness and assessment phases of the Year 2000 readiness project
for all systems. All mission critical systems are in or have completed the
remediation, validation, and in most cases the implementation phase. Several
major systems have been validated by the respective vendor and are now in the
implementation phase.
All of the Company's local markets have tested the critical local IT systems for
Year 2000 readiness. The assessment phase has been completed and all markets are
in various stages of remediation, validation and implementation phases. However,
the Company's ability to reach its Year 2000 issue compliance goal continues 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's principal vendors of
subscriber units are Motorola and E.F. Johnson. Both vendors have represented
that all subscriber units used by the Company are year 2000 ready. In addition,
the Company has confirmed with these vendors the compliance of the
infrastructure used by the Company. The Company believes that certain other
third party vendors, suppliers, subcontractors and business partners are not yet
Year 2000 compliant. As part of its remediation plan, the Company continuously
monitors 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: 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 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.
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
remediation 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
28
<PAGE>
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;
(a) 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 is preparing guidelines
for addressing Year 2000 readiness business contingency plans for external and
internal systems should it be determined that contingency plans are necessary.
Following testing of the Company's critical systems, the Company will evaluate
and create 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.
29
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial market prices and rates. The Company is exposed to market risk in the
area of changes in foreign currency exchange rates as measured against the
United States dollar. These exposures are directly related to its normal
operating activities. The Company has used mandatorily redeemable preferred
stock, private notes, convertible notes and vendor credit facilities to finance
it operations. These financial instruments all are at a fixed rate of interest
and therefore do not expose the Company to any interest rate market risk.
All of the Company's revenues for the nine months ended September 30, 1999 and
1998 are from foreign subsidiaries while a significant portion of its operations
were financed through the financial instruments noted above. The Company has
attempted to protect its earnings from inflation and possible currency
devaluation by setting prices in direct relation to the dollar and 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. In the near term, the
Company's foreign currency exchange rate exposure associated with the repayment
of the principal and interest on the Private Notes and the Convertible Notes is
limited as the terms of the Private Notes and the Convertible Notes do not
require payments until the year 2003 and 2000, respectively. Additionally, the
Company has been transferring available cash generated by its foreign
subsidiaries to the United States frequently to minimize risk of foreign
exchange loses. Accordingly, as of September 30, 1999 the Company has not
established any hedge or risk reduction strategies related to its foreign
currency exchange rate exposure other than what was noted above for Peru and
Ecuador. See Item 2 "Management's Discussion and Analysis of Financial condition
and Results of Operations - Inflation and Foreign Currency Exchange."
30
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
- ---------------------------
Maxon America, Inc. ("Maxon was settled in September 1999 and did not have a
material impact on the Company's financial statements.
Item 2. - Change in Securities and Use of Proceeds
- --------------------------------------------------
a. On October 31, 1999, the Company issued 568,341 additional shares of Series
C Preferred Stock at a price of $1.45 per share in connection with the
dividend earned by the Series C Preferred Stock. The Series C Preferred
Stock bears a 12% dividend payable semi-annually in each April and October
in either cash or additional shares at the option of the Company. As of
September 30, 1999 the outstanding amount of Series C Preferred Stock was
9,266,424.
(a) Inapplicable.
(b) Inapplicable.
(c) Inapplicable
31
<PAGE>
Item 5. - Other Information
- ---------------------------
Channel Holdings
The table below sets forth the Company's channel holdings and subscriber
information in its Latin American markets.
<TABLE>
<CAPTION>
POPs Total Channel Subscribers as of Subscribers as of
(mm) (1) Holdings (2) September 30, September 30,
1999 1998
- ----------------
Peru
<S> <C> <C> <C> <C>
Lima/Callao 7.5 176 7,327 8,950
Other 3.5 145 - -
------ ------- ------- -------
Total 11.0 321 7,327 8,950
Ecuador
Guayaquil 1.9 150 2,587 2,552
Quito 1.4 150 1,621 1,475
Cuenca 0.2 40 - -
Other 0.5 15 - -
------ ------- ------- -------
Total 4.0 355 4,208 4,027
Chile
Metropolitan Region
of Santiago 5.8 150 3,698 952
Other 1.7 637 - -
------ ------- ------- -------
7.5 787 3,698 952
El Salvador
Nationwide 5.8 170 789 -
------ ------- ------- -------
- ---------------------
TOTAL (3) 28.3 1,633 16,022 13,929
====== ======= ======= =======
- ---------------------
</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 September 30, 1999 the Company also had channels and subscribers in
the United States that were under management agreements. The Company
completed the divesture of its United States Operations on October 7, 1999
(see Note 3).
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
32
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999.
CENTENNIAL COMMUNICATIONS CORP.
a Delaware corporation
By: /s/ Nanny G. Laverde
----------------------------
Name: Nanny G. Laverde
Title: Controller
(Principal Financial and Accounting Officer)
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
COMMUNICAATIONS CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,136,352
<SECURITIES> 0
<RECEIVABLES> 1,637,767
<ALLOWANCES> 900,013
<INVENTORY> 1,519,120
<CURRENT-ASSETS> 1,409,036
<PP&E> 12,934,503
<DEPRECIATION> 3,732,791
<TOTAL-ASSETS> 42,120,375
<CURRENT-LIABILITIES> 3,518,293
<BONDS> 32,399,134
42,864,037
0
<COMMON> 35,028
<OTHER-SE> (36,773,753)
<TOTAL-LIABILITY-AND-EQUITY> 42,120,375
<SALES> 4,905,618
<TOTAL-REVENUES> 128,784
<CGS> 704,882
<TOTAL-COSTS> 8,523,952
<OTHER-EXPENSES> 197,286
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,167,827
<INCOME-PRETAX> (7,349,643)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,349,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,349,643)
<EPS-BASIC> (2.47)
<EPS-DILUTED> 0
</TABLE>
