<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 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 August
24, 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 June 30, 1999 and December 31, 1998 (Unaudited) .................. 2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended
June 30, 1999 and 1998 (Unaudited)......................................................................... 3
Condensed Consolidated Statement of Mandatorily Redeemable, Convertible Preferred Stock and Stockholders'
Deficit for the Six Months Ended June 30, 1998 (Unaudited)................................................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998
(Unaudited)................................................................................................ 5
Notes to Condensed Consolidated Financial Statements 7
(Unaudited)................................................................................................
Centennial Cayman Corp. and Subsidiaries Financial Statements and notes to the financial statements for the
Six Months Ended June 30, 1999 (Unaudited) 15
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................ 23
- ------
Item 3 - Quantitative and Qualitative Disclosures about Marked Risk........................................... 32
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings.................................................................................... 33
- ------
Item 2 - Changes in Securities and Use of Proceeds............................................................ 32
- ------
Item 5 - Other Information.................................................................................... 34
- ------
</TABLE>
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,547,535 $ 5,245,119
Restricted cash 10,472,021 11,770,859
Accounts receivable, net of allowances for doubtful
accounts of $900,013 and $829,933, respectively 703,104 886,494
Radios and accessories inventory 1,862,804 2,328,755
Other current assets 1,383,403 1,443,316
Current assets held for sale (Note 3) 82,899 53,011
------------- -------------
Total current assets 18,051,766 21,727,554
PROPERTY AND EQUIPMENT, net (Note 5) 8,696,408 8,937,917
SMR LICENSES, net of accumulated amortization of $993,652
and $608,007 13,660,019 13,287,358
LONG-TERM ASSETS HELD FOR SALE 925,418 1,166,962
OTHER NONCURRENT ASSETS, net 2,254,217 2,462,517
-------------- -------------
Total assets $ 43,587,828 $ 47,582,308
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,553,149 $ 2,144,964
Accrued liabilities 977,619 1,450,014
Payable to seller - 400,000
Deposits on assets held for sale (Note 3) 454,108 454,108
Current liabilities related to assets held for sale (Note 3) 107,831 154,170
-------------- -------------
Total current liabilities 3,092,707 4,603,256
CAPITAL LEASES PAYABLE - 24,607
CONVERTIBLE NOTES (Note 6) 11,370,710 10,881,063
PRIVATE NOTES (Note 6) 19,724,428 17,829,506
LONG-TERM LIABILITIES RELATED TO ASSETS HELD FOR SALE 359,343 386,694
-------------- -------------
Total liabilities 34,547,188 33,725,126
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE, CONVERTIBLE
PREFERRED STOCK:
Series A, $.01 par value, 352 authorized, issued and
outstanding 8,784,190 8,780,242
Series B, $.01 par value, 6,399,648 authorized,
5,735,251 issued and outstanding 20,608,079 20,541,125
Series C, $.01 par value, 11,000,000 authorized, 9,316,424
and 8,789,169 issued and outstanding, respectively 13,508,817 12,744,286
-------------- -------------
42,901,086 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 6,748,320 7,599,298
Accumulated deficit (40,691,013) (35,981,330)
Accumulated other comprehensive income 47,219 138,533
-------------- -------------
Total stockholders' deficit (33,860,446) (28,208,471)
-------------- -------------
Total liabilities and stockholders' deficit $ 43,587,828 $ 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 Six Months Ended
June 30, June 30,
--------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
REVENUE:
Radio service revenue $ 1,367,034 $ 1,235,704 $ 2,848,966 $ 2,462,523
Equipment sales 448,744 414,152 812,284 902,025
Other Revenue 9,374 40,260 40,034 77,253
-------------- -------------- ------------- ---------------
1,825,152 1,690,116 3,701,284 3,441,801
-------------- -------------- -------------- ---------------
COSTS AND EXPENSES RELATED TO REVENUE:
Network and site expense 44,169 22,363 97,762 42,794
Cost of equipment sold 371,252 488,949 831,635 1,080,296
Maintenance and other 111,767 65,804 207,133 185,091
-------------- -------------- ------------- ---------------
527,188 577,116 1,136,530 1,308,181
-------------- -------------- ------------- ---------------
1,297,964 1,113,000 2,564,754 2,133,620
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 1,813,617 2,494,757 3,475,533 4,785,065
Depreciation and amortization 887,527 464,016 1,456,090 896,667
-------------- -------------- -------------- ----------------
2,701,144 2,958,773 4,931,623 5,681,732
-------------- -------------- -------------- ----------------
OPERATING LOSS (1,403,180) (1,845,773) (2,366,869) (3,548,112)
-------------- -------------- -------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (1,359,052) (1,118,787) (2,730,923) (2,158,649)
Interest income 208,222 415,296 370,908 834,324
Other (361) (11,731) 17,201 (153,550)
-------------- -------------- -------------- ----------------
(1,151,191) (715,222) (2,342,814) (1,477,875)
-------------- -------------- -------------- ----------------
NET LOSS (2,554,371) (2,560,995) (4,709,683) (5,025,987)
DIVIDENDS ON AND ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED SHARES TO REDEMPTION
VALUE (435,374) (403,331) (850,978) (717,423)
-------------- -------------- -------------- ----------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS (2,989,745) (2,964,326) (5,560,661) (5,743,410)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (50,250) (45,309) (91,314) (39,876)
-------------- -------------- -------------- ----------------
COMPREHENSIVE LOSS $(3,039,995) $(3,009,635) $(5,651,975) $(5,783,286)
============== ============== ============== ================
BASIC NET LOSS PER COMMON SHARE $ (0.85) $ (0.85) $ (1.59) $ (1.64)
============== ============== ============== ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
3,502,750 3,502,750 3,502,750 3,502,748
============== ============== ============== ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
3
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CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE, CONVERTIBLE
-----------------------------------------------------------------------
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
-----------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Mandatorily Redeemable,
Convertible Preferred Stock
--------------------------------------------------------------------------------------
Series A Series B Series C
---------------------- ------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
---------------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1998 352 $8,780,242 5,735,251 $20,541,125 8,789,169 $12,744,286
Exercise of stock options - - - - - -
Conversion of Senior Convertible Notes
to Preferred Stock Series C - - - - - -
Warrants issued in connection with
Discount Notes - - - - - -
Dividends payable on the Preferred
Stock Series C - - - - - -
Payment of dividends on the Preferred
Stock Series C in additional shares - - - - 527,255 764,531
Accretion of preferred stock to
redemption value - 3,948 - 66,954 - -
Stock based compensation - - - - - -
Net loss - - - - - -
Cumulative translation of adjustment - - - - - -
-------- ---------- ---------- ----------- ------------- -----------
BALANCES, June 30, 1999 352 $8,784,190 5,735,251 $20,608,079 9,316,424 $13,508,817
======== ========== ========= ============ ============= ===========
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------------------------------------------------------
Accumulated
Other
Compre- Total
Additional hensive Stockholders'
Common Stock Paid -In Accumulated Income Equity
--------------------
Shares Amount Capital Deficit (Loss) (Deficit)
--------- ------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1998 3,502,750 $35,028 $7,599,298 $(35,981,330) $138,533 $(28,208,471)
Exercise of stock options - - - - - -
Conversion of Senior Convertible Notes -
to Preferred Stock Series C - - - - - -
Warrants issued in connection with -
Discount Notes - - - - - -
Dividends payable on the Preferred -
Stock Series C - - (273,205) - - (273,205)
Payment of dividends on the Preferred -
Stock Series C in additional shares - - (506,871) - - (506,871)
Accretion of preferred stock to -
redemption value - - (70,902) - - (70,902)
Stock based compensation - - - - - -
Net loss - - - (4,709,683) - (4,709,683)
Cumulative translation of adjustment - - - - (91,314) (91,314)
-----------------------------------------------------------------------------
BALANCES, June 30, 1999 3,502,750 $35,028 $6,748,320 $(40,691,013) $ 47,219 $(33,860,446)
========= ======= ========== ============ ========== ============
</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 Six Months Ended
June 30,
------------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,709,683) $ (5,025,987)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,456,090 896,667
Loss on disposal of property and equipment 34,262 -
Stock based compensation - 37,458
Allowance for doubtful accounts 70,080 302,363
Accretion of interest on discount and
Convertible notes 2,521,129 1,903,637
Changes in operating assets and liabilities-
(Increase)/decrease in accounts receivable 113,310 (302,918)
(Increase)/decrease in inventory 465,951 (638,819)
(Increase)/decrease in other assets 110,669 (538,473)
Increase/(decrease) in accounts payable (591,815) 459,106
Increase/(decrease) in accrued liabilities (347,636) (76,297)
-------------------- -------------------
Net cash used in operating activities (877,643) (2,983,263)
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,206,310) (2,906,390)
Disposition of property and equipment 223,792 -
Acquisition of operating and non-operating,
entities and spectrum, net of cash acquired (758,306) (4,082,303)
Payment of contingent payable to seller (400,000) (2,040,000)
(Increase) decrease in restricted cash 1,298,838 (19,125,203)
Change in assets held for sale 137,966 (656,028)
-------------------- -------------------
Net cash used in investing activities (704,020) (28,809,924)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from offering of discount notes and warrants - 20,441,258
Proceeds from offering of convertible notes - 10,000,000
Deferred debt offering costs - (1,326,693)
Proceeds from issuance of common stock - 250
Payments on capital leases payable (24,607) -
-------------------- -------------------
Net cash provided by (used in) financing activities (24,607) 29,114,815
-------------------- -------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (91,314) (39,876)
-------------------- -------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,697,584) (2,718,248)
CASH AND CASH EQUIVALENTS, beginning of period 5,245,119 7,730,141
-------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 3,547,535 $ 5,011,893
==================== ===================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
5
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest $ 20,896 $ 246,760
Income taxes 52,172 96,804
Supplemental schedule of noncash investing and financing activities:
Accretion of preferred stock to redemption value 70,902 70,902
Dividends payable on preferred stock 273,205 646,521
Conversion of senior notes 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
Contingent payment of acquisition of Chilean channels - 2,800,000
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated
6
<PAGE>
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
AS OF JUNE 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 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.
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 June 30, 1999 and the results of its operations
for the three and six months ended June 30, 1999 and 1998. For a more complete
understanding of the Company's financial position and results of operations, see
the consolidated financial statements of the Company included in the Company's
424(b) Prospectus (the "Prospectus"), filed with the United States Securities
and Exchange Commission ("SEC") on August 12, 1999. Operating results for the
interim periods are not necessarily indicative of results for an entire fiscal
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 lifes, 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
7
<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 June 30, 1999, approximately
$1.3 million was restricted for certain construction and operational obligations
related to SMR licenses in Chile, and approximately $9.2 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.
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 June 30, 1999, the Company had completed the sale of all but three MTA's
to two purchasers. The remaining purchases are subject to the approval by the
Federal Communications Commission (the "FCC") of the transfer of the spectrum
licenses. Until the contingencies related to the FCC are resolved, the Company
transferred the majority of the risks and rewards of the U.S. Operations to the
purchasers by way of management agreements. The transactions were not, and for
those remaining, will not be recognized as a sale until substantially all of the
risks, rewards of ownership and full control of such licenses and the related
assets and liabilities are transferred to the purchasers. Should the FCC not
approve the transfer of the licenses, the Company would have the following
options: (1) operating the spectrum licenses and related assets, in which case
the carrying amount of such assets at that time would be reclassified as
operating assets, or (2) seeking other buyers for such spectrum licenses and
related assets, in which case the assets would remain classified as assets held
for sale. In each case, the assets would be reviewed for impairment based on
their classification, and impairment losses, if any, would be recorded at that
time. The Company is not responsible for any losses incurred during the time
covered by the agreements with the buyer/managers. As of June 30, 1999, the
Company had received approximately $454,000 in cash proceeds related to the two
remaining sales, and has recorded these amounts as deposit liabilities in the
accompanying balance sheet.
8
<PAGE>
As of June 30, 1999 and December 31, 1998, financial information related to the
U.S. Operations was as follows:
<TABLE>
<CAPTION>
As of As of
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Current assets $ 82,899 $ 53,011
Property and equipment 693,933 935,477
SMR licenses 231,485 231,485
------------- -----------------
Total Operating Assets 1,008,317 1,219,973
Current liabilities 107,831 154,170
Capital leases 145,684 173,035
Spectrum license debt 213,659 213,659
------------- -----------------
Total Liabilities 467,174 540,864
------------- -----------------
Net assets of the U.S. Operations $ 541,143 $ 679,109
============= =================
</TABLE>
Effective August 1997, the property, equipment and SMR licenses related to the
U.S. Operations were considered to be assets to be disposed of, as that term has
been defined by Statement of Financial Accounting Standards No. 121, because
management, having the authority to do so, has committed to the sale of these
assets. Accordingly, the Company's management estimated the fair value of such
assets, and determined that a write-down to fair market value was necessary as
of August 1997. 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 June 30,
1999, the Company has made cash payments of a substantial majority of this
amount. The Company expects to close the remaining two sales within the next
quarter. These amounts were accrued at the date the Company committed to the
disposal plan and relate to severance associated with work force reductions,
lease termination costs, costs to terminate certain contractual obligations,
legal and other professional fees and taxes and other. The amount of costs
incurred and remaining liabilities related to the U.S. Operations as of June 30,
1999 follow:
<TABLE>
<CAPTION>
Costs Incurred
during the six
Accrued Costs Months Ended Accrued Costs
December 31, 1998 June 30, 1999 June 30, 1999
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Legal and other professional fees $ 45,661 $ 1,030 $ 44,631
Taxes 86,695 42,062 44,633
Other selling costs (1) 16,440 2,707 13,733
-------------------- -------------------- --------------------
Total $148,796 $45,799 $102,997
</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 six months ended June
30, 1999.
NOTE 4. ACQUISITIONS
- ------- ------------
On January 2, 1998, the Company purchased 100% of the outstanding capital stock
of Telecommunicaciones y Servisios 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
9
<PAGE>
$2,800,000. On May 12, 1999, the Company completed the last part of the IWC
closing, and acquired the Chilean assets of RMD Agencia Chile, consisting of its
800 MHZ channels: 20 channels in Santiago, 20 channels in Valparaiso/Vina del
Mar, and 25 channels in Concepcion/Talcahuano for $400,000. In addition to
acquisitions, the Company was awarded 40 nationwide channels of 800 MHz spectrum
on June 9, 1998 in El Salvador. The Company paid $620,000 for the channels,
which have a 20 year term.
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. This transaction closed on
July 26, 1999 for the purchase price of $1,855,200, of which $710,000 was paid
June 30, 1999 and the remaining balance was paid on July 26, 1999 upon the
transfer of the channels.
On October 22, 1998, the Company signed an agreement to purchase 100% of the
shares of Trunking S.A. a Chilean company having (i) 20 800 MHz channels in
Santiago and (ii) 176 800 MHz channels in various Chilean cities for $700,000.
This transaction closed on July 26, 1999.
The Company used its existing 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>
June 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Network infrastructure $ 7,257,296 $ 6,975,994
Radios 3,463,654 3,321,641
Computer equipment and software 736,258 723,746
Furniture and fixtures 341,059 397,775
Leasehold improvements 217,341 303,754
---------------- ----------------
12,015,608 11,722,910
Accumulated depreciation (3,319,200) (2,784,993)
---------------- ----------------
Property and equipment, net $ 8,696,408 $ 8,937,917
================ ================
</TABLE>
10
<PAGE>
The Company depreciates infrastructure over ten years, radios over five years,
computer equipment and software over three years and leasehold improvements over
the life of the lease.
Depreciation expense was $560,616 and $368,239 for the three months ended June
30, 1999, and 1998, respectively and $1,049,461 and $698,005 for the six months
ended June 30, 1999, and 1998, respectively.
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASES PAYABLE
- ------- -----------------------------------------
<TABLE>
<CAPTION>
June 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 145,684 173,035
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 213,659 213,659
14% Private Notes due 2005 (the "Private Notes"), net of unamortized
discount of $20,275,572 and $22,170,494, interest payable semi-annually
in arrears commencing July 1, 2003 19,724,428 17,829,506
9% Convertible Notes due 2005 (the "Convertible Notes"), interest
payable annually Commencing July 1, 2000 11,370,710 10,881,063
-------------- --------------
31,454,481 29,121,870
Less amount classified as Assets Held for Sale (359,343) (386,694)
-------------- --------------
$ 31,095,138 $ 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.
NOTE 7. COMMITMENTS AND CONTINGENCIES
- ------- -----------------------------
Recovery of Investments
-----------------------
Since its inception, the Company's efforts have been primarily directed towards
raising capital and acquiring, developing and operating SMR networks. Further,
the Company has made significant investments in pre-operating entities in
various Latin American countries whose primary assets were SMR licenses. The
Company's Peruvian operations and revenue generating activity began in May 1996,
its Ecuadorian operations and revenue generating activity began in March 1997,
its Chilean operations and revenue generating activity began in January 1998 and
its El Salvadoran operations and revenue generating activity began in September
1998. The ability of the Company to recover its current investment in property,
equipment and spectrum and to generate positive cash flow and operating profits
is contingent upon a number of factors, including the Company's ability to
continue to build out and develop the SMR and other low-cost, wireless
communications networks it currently owns and to attract
11
<PAGE>
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 filed by three of the
Peruvian subsidiaries, with certain changes as a result of their technical
reviews of the systems. The remaining amendments are expected to be approved in
the near future. However, based upon meetings held with the Ministry, and based
on advice from the Company's outside legal advisors, the Company plans to file
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.
The Company, based on its own discussions with the Peruvian authorities and
based on advice from the Company's outside legal advisors in such matters,
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.
The Company is also not in compliance with certain terms of the concession
agreements including, homologation of equipment (certifying the equipment before
entering Peru), site to site transmission of signal (currently allowed only site
to handset), unauthorized transfer and use of channels between the Peruvian
companies and unauthorized use of certain frequencies granted. The Company has
applied to correct the non-compliance issues and is awaiting approval from the
Ministry. The Company believes that the applications will be approved and result
only in minimal fines, if any; however, there can be no assurance of such
outcome. The Company, based on its own discussions with the Peruvian authorities
and based on advice from the Company's outside legal advisors in such matters,
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.
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 dividends in amounts determined by
the Board of Directors. No distributions may be mad 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.
12
<PAGE>
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 30, 1999, the Company
issued an additional 527,255 shares of Series C Preferred Stock at $1.45 per
share for the 12% dividend due on such date.
NOTE 9. OPERATING SEGMENTS
- ------- ------------------
The Company's reportable segments are strategic geographic units that develop
and operate SMR networks as well as the corporate unit, which oversees all
operations. The Company is managed by country as each country may require a
slightly different business strategy. The accounting policies of the segments
are the same as those for the Company on a consolidated basis. The segments are
evaluated based upon gains in subscribers and based upon EBITDA. EBITDA
represents operating loss before depreciation and amortization and is not a
measurement under U.S. generally accepted accounting principles and may not be
similar to EBITDA measures of other companies.
The following information presents certain summarized balance sheet and
statement of operations data by segment as of June 30, 1999 and 1998 and for the
six 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>
June 30, 1999
- -------------
Revenues $ - $ 2,030 $ 947 $ 500 $ 224 $ - $ - $ 3,701
EBITDA - 399 214 (283) (74) (1,167) - (911)
Operating income (loss) - (208) (209) (453) (182) (1,315) - (2,367)
Total assets $ 937 $16,199 $3,344 $9,837 $1,316 $ 51,610 $(39,621) $43,622
June 30, 1998
- -------------
Revenues $ - $ 2,045 $1,343 $ 54 $ - $ - $ - $ 3,442
EBITDA - 382 (161) (441) - (2,431) - (2,651)
Operating income (loss) - (15) (446) (463) - (2,624) - (3,548)
Total assets $ 10,724 $15,732 $4,579 $5,381 $ 500 $ 56,631 $ (34,978) $58,569
</TABLE>
For the three months ended June 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>
June 30, 1999
Revenues $ - $ 1,108 $ 405 $ 254 $ 58 $ - $ - $ 1,825
EBITDA - 251 17 (161) (4) (619) - $ (516)
Operating income (loss) - (144) (213) (265) (112) (669) - $(1,403)
Total assets $ 937 $16,199 $3,344 $9,837 $1,316 $ 51,610 $ (39,621) $43,622
June 30, 1998
Revenues $ - $ 978 $ 674 $ 38 $ - $ - $ - $ 1,690
EBITDA - 46 (82) (71) - (1,274) - $(1,381)
Operating income (loss) - (158) (243) (71) - (1,374) - $(1,846)
Total assets $ 10,724 $15,732 $4,579 $5,381 $ 500 $ 56,631 $ (34,978) $58,569
</TABLE>
(1) In August 1997 the Company made the decision to sell its U.S. operations
(see Note 3).
13
<PAGE>
Note 10. SUBSEQUENT EVENT
- -------- ----------------
In August 1999 the Company's registration statement relating to the Company's
outstanding Private Notes, for an equal principal amount of registered 14%
Senior Discount Notes due 2005 (the "Exchange Notes") became effective under the
Securities Act of 1933. The terms of the Exchange Notes are identical in all
material respects to those of the Private Notes, except (i) for certain transfer
restrictions and registration rights relating to the Private Notes; and (ii)
that if the Exchange Offer is not consummated in a timely manner, or if the
Company fails to comply with certain other registration obligations with respect
to the Private Notes, the Company is required to pay certain Liquidated Damages
to the Holders of the Private Notes. As of August 12, 1999 the Company had
incurred approximately $152,000 in Liquidated Damages, which are accrued for.
14
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 420,411 $ 559,789
Restricted cash 1,622,607 386,562
Accounts receivable - trade, net of allowance for doubtful
accounts of $900,013 and $829,933, respectively 703,104 886,494
Inventory 1,862,804 1,896,822
VAT receivable 562,440 754,000
Prepaid licenses and other current assets 581,375 483,702
------------ ------------
Total current assets 5,752,741 4,967,369
PROPERTY AND EQUIPMENT, net 8,669,798 8,392,841
SMR LICENSES, net of accumulated amortization
of $993,652 and $608,007, respectively 13,660,019 13,287,358
OTHER NONCURRENT ASSETS, net 265,544 354,618
------------ ------------
Total assets $ 28,348,102 $ 27,002,186
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 436,220 $ 443,382
Accounts payable - affiliates 24,850,354 20,870,243
Payable to seller - 400,000
Accrued liabilities 747,878 898,623
------------ ------------
Total liabilities 26,034,452 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 (18,591,948) (16,606,974)
Accumulated other comprehensive income 47,219 138,533
------------ ------------
Total stockholder's equity 2,313,650 4,389,938
------------ ------------
Total liabilities and stockholder's equity $ 28,348,102 $ 27,002,186
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
15
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
-------------------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Radio service revenue 1,367,034 1,235,704 2,848,966 2,462,523
Equipment sales 448,744 414,152 812,284 902,025
Other 9,374 40,260 40,034 77,253
-------------- -------------- -------------- --------------
1,825,152 1,690,116 3,701,284 3,441,801
-------------- -------------- -------------- --------------
COSTS AND EXPENSES RELATED TO REVENUE:
Network and site expense 44,169 22,363 97,762 42,794
Cost of equipment sold 371,252 488,949 831,635 1,080,296
Maintenance and other 111,767 65,804 207,133 185,091
-------------- -------------- -------------- --------------
527,188 577,116 1,136,530 1,308,181
-------------- -------------- -------------- --------------
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 1,763,603 1,987,158 3,349,429 4,007,156
Depreciation and amortization 836,817 367,460 1,309,210 707,624
-------------- -------------- -------------- --------------
2,600,420 2,354,618 4,658,639 4,714,780
-------------- -------------- -------------- --------------
OPERATING LOSS (1,302,456) (1,241,618) (2,093,885) (2,581,160)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest Expense (10,578) (854) (39,123) (2,233)
Interest Income 45,340 - 45,340 -
Other 85,132 (155,622) 102,694 (175,759)
-------------- -------------- -------------- --------------
119,894 (156,476) 108,911 (177,992)
-------------- -------------- -------------- --------------
NET LOSS (1,182,562) (1,398,094) (1,984,974) (2,759,152)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation
adjustments 88,283 192,073 91,314 (33,341)
-------------- -------------- -------------- --------------
COMPREHENSIVE LOSS (1,094,279) (1,206,021) (1,893,660) (2,792,493)
============== ============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
16
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
-----------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Stockholder's Equity
--------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
------------
Paid-in Accumulated Comprehensive Stockholder's
Shares Amount Capital Deficit Income (Loss) Equity
------ ------ ------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 2 $ 2 $ 20,858,377 $ (16,606,974) $ 138,533 $ 4,389,938
Net loss - - - (1,984,974) - (1,984,974)
Cumulative translation
Adjustment - - - - (91,314) (91,314)
--- ------ --------------- -------------- -------------- --------------
Balances, June 30, 1999 2 $ 2 $ 20,858,377 $ (18,591,948) $ 47,219 $ 2,313,650
=== ====== =============== ============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
17
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,984,974) $ (2,759,152)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,309,210 714,795
Allowance for doubtful accounts 70,080 302,363
Changes in operating assets and liabilities-
(Increase)/decrease in accounts receivable 113,310 (302,918)
(Increase)/decrease in inventory 34,018 (395,113)
(Increase)/decrease in other assets 176,749 (129,166)
Increase/(decrease) in accounts payable (7,162) (306,734)
Increase/(decrease) in accrued liabilities (150,745) 2,851
----------------- -----------------
Net cash used in operating activities (439,514) (2,873,074)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,194,310) (2,700,453)
Acquisition of operating and non-operating,
entities and spectrum, net of cash acquired (758,306) (4,082,303)
(Increase) decrease in restricted cash (1,236,045) (327,823)
Payment of contingent payable to seller (400,000) (2,040,000)
----------------- -----------------
Net cash used in investing activities (3,588,661) (9,150,579)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates 3,980,111 12,099,077
----------------- -----------------
Net cash provided by (used in) financing activities 3,980,111 12,099,077
----------------- -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (91,314) (39,876)
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (139,378) 35,548
CASH AND CASH EQUIVALENTS, beginning of period 559,789 908,048
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 420,411 $ 943,596
================= =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
18
<PAGE>
CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
AS OF MARCH 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 June 30, 1999 and the results of its operations
for the six months ended June 30, 1999 and 1998. For a more complete
understanding of the Company's financial position and results of operations, see
the consolidated financial statements of the Company included in the Company's
Prospectus, filed with the SEC on August 12, 1999.
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 Servisios 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.
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 the Chilean
assets of RMD Agencia Chile, consisting of its 800 MHZ channels: 20 channels in
Santiago, 20 channels in Valparaiso/Vina del Mar, and 25 channels in
Concepcion/Talcahuano for $400,000. In addition to acquisitions, the Company was
awarded 40 nationwide channels of 800 MHz spectrum on June 9, 1998 in El
Salvador. The Company paid $620,000 for the channels, which have a 20 year term.
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. This transaction closed on
July 26, 1999 for the purchase price of $1,855,200, of which $710,000 was paid
June 30, 1999 and the remaining balance was paid on July 26, 1999 upon the
transfer of the channels.
On October 22, 1998, the Company signed an agreement to purchase 100% of the
shares of Trunking S.A. a Chilean company having (i) 20 800 MHz channels in
Santiago and (ii) 176 800 MHz channels in various Chilean cities for $700,000.
This transaction closed on July 26, 1999.
19
<PAGE>
The Company used its existing cash for these acquisitions.
NOTE 3. PROPERTY AND EQUIPMENT
- ------- ----------------------
The composition of property and equipment follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Network infrastructure $ 7,257,296 $ 6,975,994
Radios 3,244,410 3,321,641
Computer equipment and software 650,426 723,746
Furniture and fixtures 395,422 397,775
Leasehold improvements 217,341 303,754
-------------- ----------------
11,764,895 11,722,910
Accumulated depreciation (3,095,097) (2,784,993)
-------------- ----------------
Property and equipment, net $ 8,669,798 $ 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 $522,428 and $290,255 for the three months ended June
30, 1999 and 1998, respectively and $917,353 and $530,011 for the six months
ended June 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 current investment in property,
equipment and spectrum and to generate positive cash flow and operating profits
is contingent upon a number of factors, including the Company's ability to
continue to build out and develop the SMR and other low-cost, wireless
communications networks it currently owns and to attract and retain sufficient
subscribers on its existing systems and those which are under development in
sufficient numbers to achieve profitable operations.
Recoverability of Licenses
--------------------------
The terms of the Company's SMR license agreements contain provisions whereby the
Company must achieve certain levels of subscriber load and network build out. If
such commitments are not met, the Company could be subject to the revocation of
the applicable licenses.
Compliance with the terms of SMR licenses and certain regulatory requirements,
such as construction deadlines and minimum subscriber requirements, can be
difficult to meet. In addition, there can be no
20
<PAGE>
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 filed by
three of the Peruvian subsidiaries, with certain changes as a result of their
technical reviews of the systems. The remaining amendments are expected to be
approved in the near future. However, based upon meetings held with the
Ministry, and based on advice from the Company's outside legal advisors, the
Company plans to file 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.
The Company, based on its own discussions with the Peruvian authorities and
based on advice from the Company's outside legal advisors in such matters,
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.
The Company is also not in compliance with certain terms of the concession
agreements including, homologation of equipment (certifying the equipment before
entering Peru), site to site transmission of signal (currently allowed only site
to handset), unauthorized transfer and use of channels between the Peruvian
companies and unauthorized use of certain frequencies granted. The Company has
applied to correct the non-compliance issues and is awaiting approval from the
Ministry. The Company believes that the applications will be approved and result
only in minimal fines, if any; however, there can be no assurance of such
outcome. The Company, based on its own discussions with the Peruvian authorities
and based on advice from the Company's outside legal advisors in such matters,
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.
NOTE 5. OPERATING SEGMENTS
- ------- ------------------
The Company's reportable segments are strategic geographic units that develop
and operate SMR networks. The Company is managed by country as each country may
require a slightly different business strategy. The accounting policies of the
segments are the same as those for the Company on a consolidated basis. The
segments are evaluated based upon gains in subscribers and based upon EBITDA.
EBITDA represents operating loss before depreciation and amortization and is not
a measurement under U.S. generally accepted accounting principles and may not be
similar to EBITDA measures of other companies.
21
<PAGE>
The following information presents certain summarized balance sheet and
statement of operations data by segment as of June 30, 1999 and 1998 (in 000's):
<TABLE>
<CAPTION>
El
Peru Ecuador Chile Salvador Other (1) Elimination Total
--------- -------- -------- ------------ ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1999
- -------------
Revenues $ 2,030 $ 947 $ 500 $ 224 $ - $ - $ 3,701
EBITDA 399 214 (283) (74) (1,041) - $ (785)
Operating income (loss) (208) (209) (453) (182) (1,042) - $ (2,094)
Total assets $ 16,199 $ 3,344 $ 9,837 $ 1,316 $ - $ (2,348) $ 28,348
June 30, 1998
- -------------
Revenues $ 2,045 $ 1,343 $ 54 $ - $ - $ - $ 3,442
EBITDA 382 (161) (441) - (1,654) - $ (1,874)
Operating income (loss) (15) (446) (463) - (1,657) - $ (2,581)
Total assets $ 15,732 $ 4,579 $ 5,381 $ 500 $ 21 $ (648) $ 25,565
</TABLE>
For the three months ended June 30, 1999 and 1998 (in 000's):
<TABLE>
<CAPTION>
El
Peru Ecuador Chile Salvador Other (1) Elimination Total
--------- -------- -------- ------------ ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1999
- -------------
Revenues $ 1,108 $ 405 $ 254 $ 58 $ - $ - $ 1,825
EBITDA 251 17 (161) (4) (569) - $ (466)
Operating income (loss) (144) (213) (265) (112) (569) - $ (1,303)
Total assets $ 16,199 $ 3,344 $ 9,837 $ 1,316 $ - (2,348) $ 28,348
June 30, 1998
- -------------
Revenues 978 674 38 - - - $ 1,690
EBITDA 46 (82) (71) - (768) - $ (875)
Operating income (loss) (158) (243) (71) - (770) - $ (1,242)
Total assets $ 15,732 $ 4,579 $ 5,381 $ 500 $ 21 $ (648) $ 25,565
</TABLE>
(1) Other include Corporate allocation of approximately $1 million.
22
<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; competition; 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; 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 the
Company 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 June 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 was spectrum, as well
as by acquiring operating entities and through the grant of channels from
government auctions.
23
<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 June 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
(1) The Company purchased 51% of the capital stock of SMR Direct Peru, S.R.L.
(formerly Mobil Line Peru, S.A.) in February 1996 and the remaining 49% in July
1996. These transactions were accounted for as a step acquisition purchase.
Revenues
The Company derives its revenues primarily from (i) fixed monthly network access
fees, which vary depending on the plan chosen by the subscriber; (ii) the sale
and rental of subscriber units to subscribers; (iii) ancillary service revenue,
consisting of fees charged for maintenance and loss and damage insurance; and
(iv) ancillary equipment revenue, consisting of the sale of base stations,
antennae, and other complementary products. The Company sets the pricing of the
different components of its service, in accordance with its marketing plans in
each of the countries in which it operates, taking into account, among other
things, competitive factors (i.e. the Company subsidizes the cost of the radios
it sells). Monthly fixed network access fees as well as ancillary service
charges are billed in advance and recognized in the period in which service is
delivered. Subscriber unit and ancillary equipment sales are recognized at the
time of sale. During the six months ended June 30, 1999, the Company's average
monthly revenue per subscriber unit (consisting of fixed monthly network access
fees and ancillary service revenues) was approximately $32.15 in the Company's
Latin American markets.
During October 1998, the Company changed its business model in order to optimize
operating performance and corporate value. Through June 30, 1999 the Company no
longer rented subscriber units to new customers in some of its markets, which
resulted in a reduction in the rate of historical subscriber growth. The Company
has also intensified its efforts with respect to collection of accounts
receivable and discontinuing service to customers for not paying promptly. This,
in the short term, has resulted in a higher than normal rate of churn.
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 scales offset, in part, by a decrease in the cost of subscriber units. Cost
of sales as a percentage of revenue is expected to decrease over time as a
result of the expected decrease in the cost of subscriber units. Similar to most
wireless companies, Centennial Communications Corp. sells its handsets at a
price below its cost. This is typical for the industry and is expected to
continue for the foreseeable future. The Company's business model contemplates
that this amount will be recovered over the estimated life of the customer
contract through revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation
expenses and, to a lesser extent, include expenses such as marketing, rent,
professional fees and other general corporate expenses.
24
<PAGE>
At the operating companies, selling, general and administrative expenses consist
primarily of subscriber acquisition costs, marketing and advertising, salaries
and office expenses. The Company expects selling, general and administrative
expenses to flatten or decrease over time due to cost cutting measures which the
Company has taken in order to optimize performance.
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. 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. Although the Company has not paid income
taxes in the United States because of its significant losses, it has been
precluded from recognizing an income tax benefit under Statement of Financial
Accounting Standards No. 109, because it is not currently considered likely that
the Company will have significant future taxable income due to its history of
operating losses.
Results of Operations
The Company commenced commercial operations in Peru in May 1996, in the United
States in September 1996, in Ecuador in March 1997, and in Chile in January
1998. In El Salvador, the Company acquired licenses and subscribers in August
and September 1998. In August 1997, the Company made the decision to sell the
U.S. Operations (see Note 3).
Revenues. Total revenue increased approximately $136,000 and $261,000
during the three and six months ended June 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
June 30, June 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Latin America:
Radio service revenue $ 1,367,034 $ 1,235,704 $ 2,848,966 $ 2,462,523
Equipment sales 448,744 414,152 812,284 902,025
Activation and other 9,374 40,260 40,034 77,253
----------------- ---------------- ----------------- -----------------
Total $ 1,825,152 $ 1,690,116 $ 3,701,284 $ 3,441,801
================= ================ ================= =================
</TABLE>
The increase in revenue is due to the acquisitions of certain assets in Peru,
Ecuador, Chile and El Salvador during 1998. In August 1998, Chile launched a
full scale sales and marketing program, and the Company commenced operations in
El Salvador during the same month. This increase is offset by a decrease in
25
<PAGE>
subscribers in certain countries. In Peru the Company experienced a decline in
subscribers of 1,946 from June 30, 1998 as compared to June 30, 1999. This
decline was offset by the increase in equipment sales. In Ecuador the number of
subscribers declined by 1,007 for the same period. The loss of subscribers in
these countries relates to the Company's decision to cease new rentals to new
customers and by reducing the subsidy on radios sold to new customers. In
addition, during 1999 Ecuador has been under an economic crisis, which has
affected the results of our operations.
Costs and Expenses Related to Revenues. Total costs and expenses related to
revenue decreased approximately $50,000 and $172,000 during the three and six
months ended June 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
June 30, June 30,
------------------------------------ -------------------------------------------
1999 1998 1999 1998
---------------- --------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Latin America:
Network and site expense $ 44,169 $ 22,363 $ 97,762 $ 42,794
Cost of equipment sold 371,252 488,949 831,635 1,080,296
Maintenance and other 111,767 65,804 207,133 185,091
---------------- --------------- ------------------ -------------------
Total $ 527,188 $ 577,116 $ 1,136,530 $ 1,308,181
================ =============== ================== ===================
</TABLE>
Costs and expenses related to revenues increased due to the acquisitions in
Peru, Ecuador, Chile and in El Salvador, as noted above. This increase is offset
by a decrease in equipment sales, as noted above, from the Company's change of
pricing strategy.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses decreased approximately $681,000 and $1,310,000 during
the three and six months ended June 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
June 30, June 30,
----------------------------------------- ------------------------------------------
1999 1998 1999 1998
----------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Latin America:
Selling, general and administrative $ 1,197,083 $ 1,218,353 $ 2,313,234 $ 2,352,383
Corporate:
General and administrative 616,534 1,276,404 1,162,299 2,432,682
----------------- ------------------- ------------------ ------------------
Total $ 1,813,617 $ 2,494,757 $ 3,475,533 $ 4,785,065
================= =================== ================== ==================
</TABLE>
Selling, general and administrative expenses decreased due to the Company's
ongoing effort to reduce overhead expenses. Total headcount at the corporate
level was reduced by 16 employees, from 21 to 5, for June 30, 1998 and 1999
respectively. 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 $470,000 and $1,036,000 for the three and six
months ended June 30, 1999 respectively.
26
<PAGE>
Depreciation and Amortization. Total depreciation and amortization
increased approximately $424,000 and $559,000 during the three and six months
ended June 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
June 30, June 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Latin America:
Depreciation and amortization $836,817 $367,460 $1,309,210 $707,624
Corporate:
Depreciation and amortization 50,710 96,556 146,880 189,043
---------------- ----------------- ----------------- -----------------
Total $887,527 $464,016 $1,456,090 $896,667
================ ================= ================= =================
</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.
Interest Expense. Interest expense increased approximately $240,000 and
$572,000 during the three and six months ended June 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.
Interest Income. Interest income decreased approximately $207,000 and
$463,000 during the three and six months ended June 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 $25,487,000 as of
June 30, 1998 to $14,020,00 as of June 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 $2,367,000 for the six months
ended June 30, 1999, and net cash outflow from operating and investing
activities of approximately $1,582,000. Further development of the Company's
business and the expansion of its analog SMR networks, service offerings and
subscriber base in certain markets will require additional expenditures. The
Company expects that it will have net cash outflow from investing activities for
the foreseeable future. Through June 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, Series A Preferred Stock ("Series A
Preferred"), Series B Preferred Stock ("Series B Preferred"), Series C
Preferred, 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.
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 primarily to fund:
- capital expenditures (capital expenditures will include the purchase of
equipment including subscriber units)
27
<PAGE>
- the cost of constructing the Company's analog SMR networks
- operating losses in certain markets
- acquisitions of license holding companies and licenses in the wireless
communications industry,
- debt service requirements; and
- other general corporate expenditures.
As of June 30, 1999, the Company had entered into the following financing
facilities: (i) the Federal Communications Commission Financing relating to the
acquisition of channels: (ii) the Vendor Financing recieved from E.F. Johnson in
connection with the acquisition of equipment (iii) the sale of Private Notes
Financing; and (iv) the sale of Convertible Notes financing. The terms and
conditions of these financing facilities are described in the Prospectus'
"Management's Discussion and Analysis of Financial Condition sections and
Results of Operations --Liquidity and Capital Resources."
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.
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 $13.5 million or $1.45 per share.
The Company currently estimates its remaining cash expenditures for its fiscal
year ending December 31, 1999 to be approximately $2.5 million. This amount
consists of cash to fund operations in certain markets, capital expenditures for
the construction and enhancement of its analog networks, and the acquisition of
certain assets.
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
28
<PAGE>
direct relation to the dollar and in some cases by periodically adjusting prices
in local currencies. However, there can be no assurance that any significant
devaluation against the dollar could be offset, in whole or in part, by a
corresponding price increase.
The Ecuadorian operations are currently faced with a devaluing sucre and a
volatile political and economic situation. When the Company launched service in
Ecuador in 1997, the exchange rate was approximately 4,300 sucres to one U.S.
dollar. As of June 30, 1999, it was approximately 10,600 sucres to one U.S.
dollar and since year-end, has fluctuated as high as 13,000 sucres per one U.S.
dollar. The devaluation has a direct impact on customer's ability to pay due to
the fact that the Company bills in U.S. dollars. The Company has been dealing
with this situation as proactively as possible and contacted the customer base
in early March 1999 and subsequently to discuss the current billings 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, 1997 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;
29
<PAGE>
(iv) validation -- testing, monitoring, certification and verification of
the correct manipulation of dates and date-related data on non-IT and
IT systems, including those of material third parties; and
(v) implementation -- installing and integrating the application of Year
2000 issue compliant resolutions by replacement, upgrade or repair of
non-IT and IT systems, including those of material third parties.
As of June 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 both IT
and non-IT systems. All material systems are in or have completed the
remediation 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 is in the process
of obtaining reasonable verification and written assurances from these suppliers
as to their Year 2000 readiness, by September 30, 1999. The Company believes
that certain of these third party vendors, suppliers, subcontractors and
business partners are not yet Year 2000 compliant. As part of its remediation
plan, the Company is monitoring the progress of these third parties by obtaining
relevant details and schedules concerning their contemplated development of
applications that comply with the Year 2000 issue for use in its operations and
systems. In particular, the Company relies on services and products offered by
the following third parties: E. F. Johnson and Motorola for system
infrastructure and subscriber handsets; Microsoft, Peachtree and ARCServe for
software for billing and accounting systems; and Gateway and Compaq for computer
hardware.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Based on 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
30
<PAGE>
materially adverse effect on the Company's financial condition and results of
operations. Such risks include, but are not limited to the inability of
subscribers to make or receive calls. Other risks associated with the failure of
the Company or material third parties to develop and deploy Year 2000 issues
solutions in a timely and successful manner involve or result in conditions that
could preclude the Company from:
(a) obtaining equity or debt financing;
(b) deploying an alternative technology that is Year 2000 compliant;
(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.
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 six months ended June 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. Accordingly, as of
June 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 Ecuador. See Item 2 "Management's Discussion and
Analysis of Financial condition and Results of Operations - Inflation and
Foreign Currency Exchange."
31
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
- ---------------------------
Maxon America, Inc. ("Maxon") filed suit against the Company on December 31,
1998 in the Platte County, Missouri Circuit Court demanding total damages of
approximately $1,700,000 based upon claims that the Company failed to meet its
contractual obligations under two purchase orders executed in 1996 and 1997.
The Company was served on February 18, 1999. The Company has retained counsel
to defend this action and to bring the Company's counterclaim for breach of
contract, breach of warranty and other possible claims under the Uniform
Commercial Code. The Company has filed its answer and counterclaim, and is in
the process of preparing for trial and quantifying the damages caused to the
Company's business due to Maxon's failure to deliver on time and its delivery of
equipment that was not merchantable.
Item 2. - Change in Securities and Use of Proceeds
- --------------------------------------------------
(a) In April 1999, the Company issued an additional 527,255 shares of Series C
Preferred Stock at $1.45 per share. These shares were issued 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 June 30, 1999 the outstanding amount of Series C Preferred
Stock is 9,316,424.
(b) Inapplicable.
(c) Inapplicable.
(d) Inapplicable.
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) June 30, 1999 June 30, 1998
Peru
<S> <C> <C> <C> <C>
Lima/Callao 7.5 176 7,307 9,253
Other 3.5 145 - -
---- ----- ------ ------
Total 11.0 321 7,307 9,253
Ecuador
Guayaquil 1.9 150 2,372 3,188
Quito 1.4 150 1,543 1,584
Cuenca 0.2 40 - -
Other 0.5 25 - -
---- ----- ------ ------
Total 4.0 365 3,915 4,772
Chile
Metropolitan Region
of Santiago 5.8 55 2,722 412
Other 1.7 275 - -
---- ----- ------ ------
7.5 330 2,722 412
El Salvador
Nationwide 5.8 170 765 -
---- ----- ------ ------
- --------------------------
TOTAL (3) 28.3 1,186 14,709 14,437
- -------------------------- ==== ===== ====== ======
</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 June 30, 1999 the Company also had channels and subscribers in the
United States that are under management agreements. The Company is in the
process of divesting its United States Operations (see Note 3).
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: August 24, 1999.
CENTENNIAL COMMUNICATIONS CORP.
a Delaware corporation
By: /s/ Nanny G. Laverde
--------------------------
Name: Nanny G. Laverde
Title: Controller
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
COMMUNICATIONS CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 14,019,556 17,015,978
<SECURITIES> 0 0
<RECEIVABLES> 1,603,117 1,716,427
<ALLOWANCES> 900,013 829,933
<INVENTORY> 1,862,804 2,328,755
<CURRENT-ASSETS> 1,466,302 1,496,327
<PP&E> 12,015,608 11,722,910
<DEPRECIATION> 3,319,200 2,784,993
<TOTAL-ASSETS> 43,587,828 47,582,308
<CURRENT-LIABILITIES> 3,092,707 4,603,256
<BONDS> 31,095,138 28,710,569
42,901,086 42,065,653
0 0
<COMMON> 35,028 35,028
<OTHER-SE> (33,895,474) (28,243,499)
<TOTAL-LIABILITY-AND-EQUITY> 43,587,828 47,582,308
<SALES> 3,661,250 3,364,548
<TOTAL-REVENUES> 40,034 77,253
<CGS> 831,635 1,080,296
<TOTAL-COSTS> 6,068,153 6,989,913
<OTHER-EXPENSES> 0 153,550
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,730,923 2,158,649
<INCOME-PRETAX> (4,709,683) (5,025,987)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,709,683) (5,025,987)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,709,683) (5,025,987)
<EPS-BASIC> (1.59) (1.64)
<EPS-DILUTED> 0 0
</TABLE>
