UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number 0-19603
Centennial Cellular Corp.
(Exact name of registrant as specified in its charter)
Delaware 06-1242753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1305 Campus Parkway
Neptune, NJ 07753
(Address of principal executive offices, including zip code)
(732) 919-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class A Common - 31,224,462 outstanding shares as of July 12, 1999
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
February 28,
1999 May 31,
(Unaudited) 1998
--------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,914 $ 14,620
Restricted securities 38,813 -
Accounts receivable, less allowance for doubtful
accounts of $3,160 and $2,693, respectively 48,272 37,178
Inventory - phones and accessories, less allowance for 5,253 7,304
obsolescence of $1,318 and $529, respectively
Prepaid expenses and other current assets 3,313 548
--------------- ------------
TOTAL CURRENT ASSETS 129,565 59,650
PROPERTY, PLANT AND EQUIPMENT - net 283,097 263,661
EQUITY INVESTMENTS IN WIRELESS SYSTEMS - net 76,750 87,634
DEBT ISSUANCE COSTS, less accumulated amortization of
$1,161 and $6,097, respectively 59,957 8,538
CELLULAR TELEPHONE LICENSES, less accumulated
amortization of $300,188 and $263,633, respectively 201,137 235,508
PERSONAL COMMUNICATIONS SERVICES LICENSE, less accumulated
amortization of $3,500 and $2,324, respectively 59,258 60,435
GOODWILL, less accumulated amortization of $29,496
and $27,016, respectively 120,105 124,533
OTHER ASSETS - net 26,803 7,458
--------------- ------------
TOTAL $ 956,672 $ 847,417
=============== ============
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE>
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
February 28,
1999 May 31,
(Unaudited) 1998
------------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 4,500 $ -
Accounts payable 19,991 9,805
Accrued expenses and other current liabilities 76,332 64,445
Payable to affiliate 125 435
------------ -----------
TOTAL CURRENT LIABILITIES 100,948 74,685
LONG-TERM DEBT 1,458,857 510,000
DEFERRED LIABILITY - 2,200
DEFERRED INCOME TAXES 2,667 26,584
PREFERRED STOCK:
Convertible redeemable preferred stock
(at aggregate liquidation value) par value $.01 per share,
0 and 102,187 shares authorized, issued and outstanding
respectively (redemption value of $1,823.00 per share) - 186,287
Second series convertible redeemable preferred stock
(at aggregate liquidation value) par value $.01 per share,
0 and 3,978 shares authorized, issued and outstanding
respectively (redemption value of $1,823.00 per share) - 7,252
Senior preferred stock, par value $.01 per share, dividend
rate 14%, 0 and 250,000 shares authorized respectively, none issued - -
Additional preferred stock, par value $.01 per share, authorized
0 and 10,000,000 shares, 0 and 3,978 shares issued as second series
convertible redeemable preferred stock - -
COMMON STOCKHOLDERS' EQUITY (DEFICIT):
Common stock par value $.01 per share:
Class A, 1 vote per share, 50,000,000 and 100,000,000 shares authorized;
respectively; issued, 31,179,795 and 50,150,049 shares,
respectively; and outstanding 31,179,795 and 45,253,422 shares, respectively 312 501
Class B, 15 votes per share, 0 and 50,000,000 shares authorized respectively,
issued and outstanding 0 and 10,544,113 shares - 105
Additional paid-in capital 419,117 357,684
Accumulated deficit (1,024,779) (284,238)
------------- -----------
(605,350) 74,052
Less: Cost of 0 and 4,896,627, Class A common shares
in treasury - (30,614)
Deferred compensation (450) (3,029)
------------- -----------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIT) (605,800) 40,409
------------- -----------
TOTAL $ 956,672 $ 847,417
============= ===========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Service revenue - Domestic $ 60,876 $ 42,562 $ 171,787 $ 131,262
Service revenue - Puerto Rico 34,661 15,224 85,422 34,853
Equipment sales - Domestic 1,268 784 3,193 2,691
Equipment sales - Puerto Rico 1,188 371 2,189 899
----------- ----------- ----------- -----------
97,993 58,941 262,591 169,705
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of equipment sold - Domestic 5,455 4,126 13,658 12,501
Cost of equipment sold - Puerto Rico 519 267 1,778 529
Cost of services - Domestic 6,471 6,674 18,961 18,807
Cost of services - Puerto Rico 6,752 4,157 16,386 10,411
Selling, general and administrative - Domestic 18,964 15,196 50,841 42,396
Selling, general and administrative - Puerto Rico 11,054 7,261 30,619 19,746
Depreciation and amortization - Domestic 20,886 20,548 62,385 60,771
Depreciation and amortization - Puerto Rico 12,273 9,309 35,317 21,866
Recapitalization costs 58,852 - 58,852 -
----------- ----------- ----------- -----------
141,226 67,538 288,797 187,027
----------- ----------- ----------- -----------
OPERATING LOSS (43,233) (8,597) (26,206) (17,322)
----------- ----------- ----------- -----------
INCOME FROM EQUITY INVESTMENTS 1,862 2,391 9,352 9,843
GAIN (LOSS) ON SALE OF ASSETS (1,197) (4) 8,414 8
INTEREST EXPENSE - NET 26,613 11,223 48,553 31,801
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT
AND MINORITY INTEREST (69,181) (17,433) (56,993) (39,272)
INCOME TAX BENEFIT (15,950) (7,844) (10,114) (13,527)
----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (53,231) (9,589) (46,879) (25,745)
MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES 151 (81) 142 (337)
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS $ (53,080) $ (9,670) $ (46,737) $ (26,082)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF
DEBT, NET OF INCOME TAXES OF ($11,251) (40,526) - (40,526) -
----------- ----------- ----------- -----------
NET LOSS (93,606) (9,670) (87,263) (26,082)
=========== =========== =========== ===========
DIVIDEND ON PREFERRED STOCK $ 1,680 $ 4,112 $ 9,906 $ 12,338
=========== =========== =========== ===========
LOSS APPLICABLE TO COMMON SHARES $ (95,286) $ (13,782) $ (97,169) $ (38,420)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE:
LOSS FROM CONTINUING OPERATIONS $ (1.33) $ (0.25) $ (1.11) $ (0.66)
=========== =========== =========== ===========
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT $ (0.98) $ - $ (0.79) $ -
=========== =========== =========== ===========
NET LOSS APPLICABLE TO COMMON SHARES $ (2.31) $ (0.25) $ (1.90) $ (0.66)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD 41,317,000 56,052,000 51,026,000 57,838,000
=========== =========== =========== ===========
</TABLE>
3
<PAGE>
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Shareholder
Common Stock Additional
----------------------------------------- Note
Class A Class B Paid-In Treasury Deferred Accumulated
----------------------- ----------------- Receiv- Compen-
Shares Dollars Shares Dollars Capital Stock able sation Deficit Total
------------- ------- ---------- ------- --------- -------- -------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1997, 16,492,884 $ 165 10,544,113 $ 105 $ 369,704 $(1,801) $3,000) $ - $ (252,291) $112,882
as previously reported
3-for-1 common stock split
split effective 32,985,768 330 - - (330) - - - - -
January 13, 1999 ----------- ----- ----------- ----- --------- ------- ------ -------- ---------- --------
Balance at June 1, 1997 49,478,652 495 10,544,113 105 369,374 (1,801) (3,000) - (252,291) 112,882
Common stock issued in
conjunction with 671,397 6 - - 4,761 - - (3,029) - 1,738
incentive plans
Preferred stock dividends - - - - (16,451) - - - - (16,451)
Treasury stock purchases - - - - - (28,813) - - - (28,813)
Repayment of shareholder
note receivable - - - - - - 3,000 - - 3,000
Net loss - - - - - - - - (31,947) (31,947)
------------ ----- ---------- ----- ---------- -------- ------ ------- -------- --------
Balance at May 31, 1998 50,150,049 501 10,544,113 105 357,684 (30,614) - (3,029) (284,238) 40,409
Common stock issued in
connection with 1,403,823 14 - - 4,880 - - - - 4,894
incentive plans
Deferred compensation
employment agreement 54,216 1 - - 749 - - (750) - -
Recapitalization:
Repurchase of the class
A & B common stock (44,447,328) (444) (10,544,113) (105) (340,336) - - 2,573 (688,098)(1,026,410)
Retirement of treasury (4,896,627) (49) - - - 30,614 - - (30,565) -
stock
Recapitalization costs - - - - (16,165) - - - 65,385 49,220
Capital contributions 28,915,662 289 - - 422,211 - - - - 422,500
Preferred stock dividends - - - - (9,906) - - - - (9,906)
Amortization of deferred - - - - - - - 756 - 756
compensation
Net loss - - - - - - - - (87,263) (87,263)
------------ ----- ---------- ----- --------- ------- ------ ------- -------- -------
Balance at February 28, 31,179,795 $ 312 - $ - $ 419,117 $ - $ - $ (450) $(1,024,779) $(605,800)
1999 (unaudited) ============ ===== ========== ===== ========= ======= ====== ======== ============ ==========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------
February 28, February 28,
1999 1998
--------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Cash received from subscribers and others $ 282,115 $ 188,957
Cash paid to suppliers, employees and
governmental agencies (148,416) (118,283)
Interest paid (35,045) (24,478)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 98,654 46,196
---------- ----------
INVESTING ACTIVITIES:
Proceeds from sale of equipment 466 36
Capital expenditures (69,819) (103,187)
Acquisition of other assets (2,200) (6,125)
Disposition of equity investment 13,500 -
Acquisition of equity investment (3,000)
Distributions received from equity investments 9,791 10,051
Capital contributed to equity investments - (65)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (51,262) (99,290)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 1,481,500 196,000
Repayment of long-term debt (528,518) (135,000)
Debt issuance costs paid (61,118) (1,131)
Early Extinguishment of Debt (44,634) -
Proceeds from issuance of Class A Common Stock 427,394 267
Redemption of Preferred Stock (128,154) -
Purchase of Common Stock in conjunction with
recapitalization (1,052,436)
Dividends paid (18,131) (12,338)
Treasury stock purchases - (23,524)
Acquisition Costs (46,500) -
Purchase of Restricted Securities (57,501) -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (28,098) 24,274
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,294 (28,820)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,620 43,415
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,914 $ 14,595
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
February 28, February 28,
1999 1998
------------ -------------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (87,263) $ (26,082)
------------ -------------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 97,702 82,637
Minority interest in income (loss) of subsidiaries (142) 337
Deferred income taxes (10,114) (16,194)
Equity in undistributed earnings of investee companies (9,352) (9,843)
Gain on sale of assets (8,414) (8)
Extraordinary loss on extinguishment of debt 40,526
Recapitalization expenses 58,852
Other 3,384 1,889
Change in assets and liabilities net of effects of
acquired wireless telephone systems:
Accounts receivable - (increase) (13,653) (4,791)
Prepaid expenses and other current assets -
(increase) (763) (904)
Accounts payable and accrued expenses -
increase 26,101 16,971
Customer deposits and prepayments -
increase 1,790 2,184
----------- -------------
Total adjustments 185,917 72,278
----------- -------------
Net cash provided by operating activities $ 98,654 $ 46,196
=========== =============
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands except share data)
Note 1. Interim Financial Statements
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the consolidated
financial position of Centennial Cellular Corp. and Subsidiaries (the "Company")
as of February 28, 1999 and the results of its consolidated operations and cash
flows for the periods ended February 28, 1999 and 1998. These financial
statements do not include all disclosures required by generally accepted
accounting principles. The statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
May 31, 1998 Annual Report on Form 10-K, which includes a summary of significant
accounting policies and other disclosures. The consolidated balance sheet at May
31, 1998 is audited.
Reclassifications
Certain prior period balances have been reclassified to conform with the current
period presentation.
Stock Split
On January 13, 1999, outstanding shares of Class A common stock were split
three-for-one. All Class A common share and per share amounts have been restated
to reflect the split.
Note 2. The Merger
On January 7, 1999, CCW Acquisition Corp. ("Acquisition"), a Delaware
corporation organized at the direction of Welsh, Carson, Anderson & Stowe VIII,
L.P. ("WCAS VIII"), merged with and into the Company (the "Merger"). The Company
continued as the surviving corporation in the Merger (the "Surviving
Corporation"). The Merger was accounted for as a recapitalization in which the
historical basis of the Company's assets and liabilities are not affected and no
new goodwill related to the Merger is created.
Pursuant to the terms of the Merger Agreement, dated as of July 2, 1998 and
amended as of November 29, 1998, between the Company and Acquisition (as
amended, the "Merger Agreement"), at the time of the Merger, (i) the Company's
outstanding Class A Common Stock ("Class A Common Stock") was converted into the
right to receive $13.83 per share (adjusted for a three for one stock split for
holders' of record on January 8, 1999) in cash or to receive common shares of
the Surviving Corporation (the "Surviving Corporation Shares") representing 7.1%
of the Surviving Corporation Shares outstanding immediately after the Merger,
7
<PAGE>
(ii) the Company's outstanding Class B Common Stock was converted into the right
to receive $13.83 per share in cash, and (iii) all outstanding Convertible
Redeemable Preferred Stock and Second Series Convertible Redeemable Preferred
Stock was converted into the right to receive $13.83 per share in cash on an
as-converted basis. Holders of Class A Common Stock who elected to receive
Surviving Corporation Shares each received approximately 9.3% of the shares with
respect to which they had made an effective election.
Pursuant to the Merger Agreement, at the time of the Merger, each option to
purchase Class A Common Stock (an "Option") granted under the Company's 1991
Employee Stock Option Plan and Non-Employee/Officer Director Option Plan, as
amended (collectively, the "Option Plans") was exercised or canceled pursuant to
its terms or in exchange for a cash amount equal to the difference between
$13.83 and the exercise price of the Option prior to the effective time of the
Merger.
All costs and expenses incurred in connection with the Merger, the Merger
Agreement and the transactions contemplated by the Merger Agreement have been
paid by the party incurring such expenses.
In connection with the Merger, the Company and certain of its subsidiaries have
entered into a Credit Facility ("Credit Facility") with Merrill Lynch Capital
Corporation, Nations Bank, N.A. , the Chase Manhattan Bank, The Bank of Nova
Scotia and Morgan Stanley Senior Funding, Inc. and certain other financial
institutions (collectively, with the Agents, the "Lenders"), pursuant to which
the Lenders provided an aggregate amount of approximately $1,050,000 in the form
of senior secured credit facilities, of which approximately $936,000 was
borrowed upon consummation of the Merger and related transactions. Additionally,
an affiliate of WCAS VIII purchased $180,000 of subordinated notes and common
shares of the Company. Finally, WCAS VIII and other equity investors purchased
approximately $400,000 of common stock of the Company. This funding was used to
pay the cash merger consideration to holders of the Company's common shares as
described above, repay or repurchase certain indebtedness of the Company and pay
fees and expenses in connection with the Merger and related transactions.
Additionally, in connection with the Merger, the Company consummated tender
offers to repurchase its two outstanding public debt issuances (the "Debt
Offers"). At the expiration of the Debt Offers, the Company paid consent
solicitation fees and tender offer payments to 99.4% of holders of its 8 7/8%
Senior Notes due 2001 and 99.8% of its 10 1/8% Senior Notes due 2005. The cost
to the Company of the redemption, including accrued interest, premium and
expenses were $396,812. In conjunction with the Merger the Company wrote off all
of the debt issuance costs related to the extinguished debt. The Company
recognized an extraordinary loss of $40,526, net of income taxes of $11,251 for
the early extinguishment of the Senior Notes.
As part of the financing necessary to effect the Merger, the Company and a
wholly-owned subsidiary of the Company issued $370,000 of senior subordinated
notes to qualified institutional buyers under a private placement offering
pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as
amended. Approximately $57,500 of the proceeds from this offering was used to
purchase a portfolio of government securities that has been pledged for the
benefit of holders of the senior subordinated notes to pay the first three
interest payments on the notes. The current portion is recorded as restricted
securities and the non-current portion of approximately $18,700 is recorded in
other assets in the consolidated balance sheet.
8
<PAGE>
On January 7, 1999, the Company finalized the Merger with Acquisition. The
Company recorded one-time charges of $58,852 as recapitalization costs. These
costs are primarily due to the purchase by the Company of non-qualifying
disposition of stock options exercised, restricted shares and the outstanding
options from employees. As part of the Merger all outstanding options purchased
were recorded as additional compensation. The Puerto Rico wireless and wireline
operation accounted for $2,857 of the recapitalization costs.
Note 3. Long-Term Debt
The Company and its subsidiaries had the following debt outstanding at February
28, 1999 and May 31,1998:
February 28, May 31,
1999 1998
------------ -------
Centennial 8 7/8% Senior Notes due 2001......... $ 1,388 $ 250,000
Centennial 10 1/8% Senior Notes due 2005........ 219 100,000
Centennial Domestic Credit Facility............. 0 10,000
Term Loans...................................... 898,875 0
Revolving Credit Facility....................... 35,000 0
Mezzanine Debt.................................. 157,875 0
Centennial 10 3/4% Subordinated Debt due 2008... 370,000 0
Puerto Rico Credit Facility..................... 0 150,000
---------- ---------
Total Long Term Debt............................ $1,463,357 $ 510,000
Current Portion of Term Loan (4,500) 0
----------- ---------
Net Long Term Debt $1,458,857 $ 510,000
========== =========
In connection with the Merger, the Company and certain of its subsidiaries have
entered into the Credit Facility with the Lenders, pursuant to which the Lenders
will provide credit facilities to the Company. The credit facilities consists of
three term loans in the aggregate principal amount of $900,000, and a revolving
credit facility in the aggregate principal amount of $150,000. The borrowers
under these facilities are Centennial Cellular Operating Co. LLC and, for a
portion thereof, Centennial Wireless PCS Operations Corp. ("PR Borrower" or "PCS
Wireless"). Borrowings under the term loans and the revolving credit facility
will bear interest at a rate per annum of the LIBOR rate plus the Applicable
Margin. The maximum Applicable Margin for the term loans range between 3.00% and
3.75% above LIBOR. Based upon the Company's leverage ratio after the delivery of
certain financial statements after May 31, 1999, the Applicable Margin for
portions of the term loans and the revolving credit facility may be reduced by
up to 1.25%. In connection with the Merger, WCAS Capital Partners III, L.P., an
investment partnership affiliated with Welsh, Carson, Anderson & Stowe,
purchased unsecured subordinated notes due 2009 and common shares of the Company
at an aggregate price of $180,000 ("Mezzanine Debt"). The issuance has been
9
<PAGE>
allocated $157,500 to debt and $22,500 to equity. The Mezzanine Debt bears cash
interest at a rate of 10% or pay-in-kind interest at a rate of 13% per annum.
The aggregate annual principal payments for the next five years and thereafter
under the Company's debt at February 28, 1999 are summarized as follows:
February 29, 2000 $ 4,500
February 28, 2001 4,500
February 28, 2002 17,138
February 28, 2003 55,125
February 29, 2004 77,625
February 28, 2005 and thereafter 1,304,469
---------
$1,463,357
The Company was in compliance with all covenants of their debt agreements at
February 28, 1999.
Interest expense, as reflected on the financial statements has been partially
offset by interest income. The gross interest expense for the nine months ended
February 28, 1999 and 1998 were $51,179 and $33,262, respectively. The gross
interest expense for the three months ended February 28, 1999 and 1998 were
$28,342 and $11,461, respectively.
Note 4. Dispositions
On June 8, 1998, the Company disposed of its investment interest in the
Coconino, Arizona RSA, representing approximately 43,500 Net Pops, for $13,500
in cash. The Company recorded a pre-tax gain of $8,355 in relation to the sale
of this investment interest during the nine months ended February 28, 1999.
Note 5. Revenue Recognition
Service Revenue includes earned subscriber service revenue and charges for
installation and connections, net of associated roaming costs of $33,841 and
$26,410 for the nine months ended, and $10,284 and $8,384 for the three months
ended February 28, 1999 and 1998, respectively.
Note 6. Commitments and Contingencies
Prior to the Merger, the Company was controlled by Century Communications Corp.
("Century"). The Company and Century entered into a Services Agreement,
effective August 30, 1996 (the "Services Agreement"), pursuant to which Century,
through its personnel, provided design, construction, management, operational,
technical and maintenance services for the wireless telephone, paging and
related systems owned and operated by the Company. Such services also included
all the services necessary for the monitoring, to the extent possible, of the
activities of the partnerships in which the Company has minority equity
10
<PAGE>
interests in such manner as to protect the interests of the Company. Prior to
the Merger, such services had historically been provided to the Company by
Century. As consideration for the services rendered under the Services
Agreement, the Company paid Century the annual sum of $1,000 and reimburses
Century for all costs incurred by Century or its affiliates (excluding the
Company and its subsidiaries) directly attributable to the design, construction,
management, operation and maintenance of the wireless telephone, paging and
related systems of the Company or to the performance by Century of its other
duties under the Services Agreement. For the nine months ended February 28,
1999, the Company has recorded expenses of $583 under the Services Agreement of
which $333 is recorded within accrued expenses on the Company's consolidated
balance sheet. As of the effective time of the Merger, Century and the Company
terminated the Service Agreement.
Effective January 7, 1999, the Company has entered into a stockholders'
agreement with WCAS VIII and Blackstone Capital Partners ("Blackstone"), under
which an affiliate of each of WCAS VIII and Blackstone receives an annual
monitoring fee of $450 and $300, respectively. For the period ended February 28,
1999, the Company has recorded expenses of $125, all of which is recorded within
payable to affiliate on the Company's consolidated balance sheet.
During the nine months ended Febraury 28, 1998, the Company purchased 3,810,600
shares of its Class A Common Stock in the open market for an aggregate purchase
price of $23,524 pursuant to previous authorizations by the Company's Board of
Directors. These shares were accounted for as treasury shares and retired as
part of the Merger.
In September 1998, the Commonwealth of Puerto Rico sustained damage as a result
of the effects of Hurricane Georges. The Company has evaluated the extent of
damage to its Puerto Rico network infrastructure and the impact the Hurricane
has had on the Company's Puerto Rico service revenue during the three and nine
month periods ended February 28, 1999. After consideration of expected insurance
recoveries, the Company believes it will not incur significant losses as a
result of the effects of the damage caused by Hurricane Georges. During the nine
months ended February 28, 1999, the Company recorded approximately $1,700 of
insurance recoveries related to subscriber refunds within service revenue.
Note 7. Segment Information
The Company's consolidated financial statements include two distinct business
segments. The domestic segment owns, operates and invests in wireless telephone
systems in the domestic United States ("Domestic"). The Company's Puerto Rico
segment includes the accounts of PCS Wireless as well as Lambda Operations Corp.
("Wireline", and collectively with PCS Wireless "Centennial de Puerto Rico").
Centennial de Puerto Rico is wholly owned by the Company. PCS Wireless began
providing service in Puerto Rico in December, 1996 and Wireline participates in
the wireline telecommunication business in Puerto Rico pursuant to the FCC's
requirements for interstate service and pursuant to an authorization issued to
Wireline in December, 1994 by the Public Service Commission of the Commonwealth
of Puerto Rico for intrastate service. Wireline began providing wireline
telecommunication services in September, 1997.
11
<PAGE>
Information about the Company's operations in its two business segments for the
nine months ended February 28, 1999 and 1998 is as follows:
Nine Months Ended February 28,
1999 1998
Gross revenue:
Domestic $ 174,980 $133,953
Puerto Rico 87,611 35,752
--------- --------
$ 262,591 $169,705
========= ========
Operating income (loss):
Domestic $ (26,860) $ (522)
Puerto Rico 654 (16,800)
--------- --------
$ (26,206) $(17,322)
========= ========
Net loss:
Domestic $ (76,736) $ (1,890)
Puerto Rico (10,527) (24,192)
--------- --------
$ (87,263) $(26,082)
========= ========
Assets, at end of period:
Domestic $ 998,289 $722,877
Puerto Rico 241,289 205,389
Elimination (282,906) (91,210)
--------- --------
$ 956,672 $837,056
========== ========
Depreciation and amortization:
Domestic $ 62,385 $ 60,771
Puerto Rico 35,317 21,866
--------- --------
$ 97,702 $ 82,637
========= ========
Capital expenditures:
Domestic $ 25,130 $ 31,363
Puerto Rico 44,689 71,824
--------- --------
$ 69,819 $103,187
========= ========
12
<PAGE>
NOTE 7. CONTINUED
The information provided below is that of Centennial Cellular Corp. (before
consolidation), CCOC, PCS Wireless and the Company's consolidated information.
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET FINANCIAL DATA
FEBRUARY 28, 1999
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Centennial
Cellular
Corp. before
Consolidation
of Centennial
Cellular
Operating Co. LLC Centennial
and Centennial Cellular Centennial
de Puerto Rico Operating Co. LLC de Puerto Rico Eliminations Consolidated
----------------- ----------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 31,168 $ 2,746 $ - $ 33,914
Restricted cash - 38,813 - - 38,813
Accounts receivable - net - 29,855 18,417 - 48,272
Inventory - phones and accessories - 4,794 459 - 5,253
Prepaid expenses and other
current assets - 624 2,689 - 3,313
----------------- ----------------- ---------------- --------------- -----------------
Total current assets - 105,254 24,311 - 129,565
Property, plant & equipment - net - 137,847 145,250 - 283,097
Investment in Puerto Rico, at cost - 90,100 - (90,100) -
Equity investments in wireless
systems - net - 76,750 - - 76,750
Debt issuance costs - net - 53,116 6,841 - 59,957
Cellular telephone licenses - net - 201,137 - - 201,137
Personal communications services
license - net - - 59,258 - 59,258
Goodwill - net - 120,105 - - 120,105
Other assets - net 180,000 33,980 5,629 (192,806) 26,803
----------------- ----------------- ---------------- --------------- -----------------
$ 180,000 $ 818,289 $ 241,289 $ (282,906) $ 956,672
================= ================= ================ =============== =================
</TABLE>
13
<PAGE>
NOTE 7. CONTINUED
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET FINANCIAL DATA
FEBRUARY 28, 1999
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Centennial
Cellular
Corp. before
Consolidation
of Centennial
Cellular
Operating Co. LLC Centennial
and Centennial Cellular Centennial
de Puerto Rico Operating Co. LLC de Puerto Rico Eliminations Consolidated
----------------- ----------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long term debt $ - $ 4,500 $ - $ - $ 4,500
Accounts payable - 4,142 15,849 - 19,991
Accrued expenses and other
current liabilities 1,699 51,002 23,631 - 76,332
Payable to affiliate - 125 - - 125
----------------- ----------------- ----------------- --------------- ----------------
Total current liabilities 1,699 59,769 39,480 - 100,948
Long-term debt 157,875 1,140,982 160,000 - 1,458,857
Deferred liability - 180,000 12,806 (192,806) -
Deferred income taxes - 4,070 (1,403) - 2,667
Common stockholders' equity:
Common stock, par value $.01 per share:
Class A 16 296 - - 312
Additional paid-in capital 22,484 396,701 90,032 (90,100) 419,117
Accumulated deficit (2,074) (963,079) (59,626) - (1,024,779)
----------------- ----------------- ----------------- --------------- ----------------
Total common stockholders' equity 20,426 (566,082) 30,406 (90,100) (605,350)
Deferred compensation - (450) - - (450)
----------------- ----------------- ----------------- --------------- ----------------
$ 180,000 $ 818,289 $ 241,289 $ (282,906) $ 956,672
================= ================= ================= =============== ================
</TABLE>
14
<PAGE>
NOTE 7. CONTINUED
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
NINE MONTH PERIOD ENDED FEBRUARY 28, 1999
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Centennial
Cellular
Corp. before
Consolidation
of Centennial
Cellular Centennial
Operating Co. LLC Cellular
and Centennial de Operating Centennial de
Puerto Rico Co. LLC Puerto Rico Eliminations Consolidated
----------------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ 174,980 $ 87,611 $ - $ 262,591
----------------- -------------- ------------ ------------ -------------
Costs and expenses:
Cost of equipment sold - 13,658 1,778 - 15,436
Cost of services - 18,961 16,386 - 35,347
Selling, general & administrative - 50,841 30,619 - 81,460
Depreciation and amortization - 62,385 35,317 - 97,702
Recapitalization costs - 55,995 2,857 - 58,852
----------------- -------------- ------------ ------------ -------------
- 201,840 86,957 - 288,797
----------------- -------------- ------------ ------------ -------------
Operating income (loss) - (26,860) 654 - (26,206)
----------------- -------------- ------------ ------------ -------------
Income from equity investments - 9,352 - - 9,352
Gain on sale of assets - 8,359 55 - 8,414
Interest expense 2,074 37,532 8,947 - 48,553
----------------- -------------- ------------ ------------ -------------
Loss before income tax
expense and minority interest (2,074) (46,681) (8,238) - (56,993)
Income tax benefit - (10,114) - - (10,114)
----------------- -------------- ------------ ------------ -------------
Loss before minority interest (2,074) (36,567) (8,238) - (46,879)
Minority interest in income
of subsidiaries - 142 - - 142
----------------- -------------- ------------ ------------ -------------
Loss from continuing operations (2,074) (36,425) (8,238) - (46,737)
Extraordinary loss on early
extinguishment of debt - net of
income tax of $11,251 - (38,237) (2,289) - (40,526)
----------------- -------------- ------------ ------------ -------------
Net Loss $ (2,074) $ (74,662) $ (10,527) $ - $ (87,263)
================= ============== ============ ============ =============
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Part I, Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1998, in
addition to the interim consolidated financial statements and accompanying notes
presented in Part 1, Item 1 of this Form 10-Q.
Results of Operations (Amounts in thousands, except subscriber and share data)
On January 7, 1999, CCW Acquisition Corp. ("Acquisition"), a Delaware
corporation organized at the direction of Welsh, Carson, Anderson & Stowe VIII,
L.P. ("WCAS VIII"), merged with and into the Company (the "Merger"). The Company
continued as the surviving corporation in the Merger (the "Surviving
Corporation"). The Merger was accounted for as a recapitalization in which the
historical basis of the Company's assets and liabilities are not affected and no
new goodwill related to the Merger is created.
Pursuant to the terms of the Merger Agreement, dated as of July 2, 1998 and
amended as of November 29, 1998, between the Company and Acquisition (as
amended, the "Merger Agreement"), at the time of the Merger, (i) the Company's
outstanding Class A Common Stock ("Class A Common Stock") was converted into the
right to receive $13.83 per share (adjusted for a three for one stock split for
holders' of record on January 8, 1999) in cash or to receive common shares of
the Surviving Corporation (the "Surviving Corporation Shares") representing 7.1%
of the Surviving Corporation Shares outstanding immediately after the Merger,
(ii) the Company's outstanding Class B Common Stock was converted into the right
to receive $13.83 per share in cash, and (iii) all outstanding Convertible
Redeemable Preferred Stock and Second Series Convertible Redeemable Preferred
Stock was converted into the right to receive $13.83 per share in cash on an
as-converted basis. Holders of Class A Common Stock who elected to receive
Surviving Corporation Shares each received approximately 9.3% of the shares with
respect to which they had made an effective election.
Pursuant to the Merger Agreement, at the time of the Merger, each option to
purchase Class A Common Stock (an "Option") granted under the Company's 1991
Employee Stock Option Plan and Non-Employee/Officer Director Option Plan, as
amended (collectively, the "Option Plans") was exercised or canceled pursuant to
its terms or in exchange for a cash amount equal to the difference between
$13.83 and the exercise price of the Option prior to the effective time of the
Merger.
The Company is in a highly competitive business, competing with other providers
of wireless telephone service and providers of telephone services using
different and competing technologies. Since August 1988, the Company has
acquired cellular licenses for twenty-nine wireless telephone markets in the
United States that it owns and manages ("Domestic"). In addition, the Company
acquired one of two Metropolitan Trading Area ("MTA") licenses to provide
broadband personal communications services ("PCS") in the Commonwealth of Puerto
Rico and the U.S. Virgin Islands ("PCS Wireless or PR Borrower"). The Company
also participates in the alternative access business in Puerto Rico ("Wireline",
16
<PAGE>
and collectively with PCS Wireless, "Centennial de Puerto Rico"). The Company
wholly owns Centennial de Puerto Rico. In December, 1996, the Company began
providing wireless telephone services in Puerto Rico.
The Company must continue to adapt its business to technological and economic
changes. It is dependent on its ability to increase its number of subscribers,
net of cancellations, and to achieve acceptable revenue per subscriber levels in
increasingly competitive markets. The Company expects net losses to continue
until such time as its Domestic and Centennial de Puerto Rico businesses
generate sufficient earnings to offset the costs of such activities. There can
be no assurance that profitability will be achieved in the foreseeable future.
The Company is highly leveraged. The Company requires substantial capital to
operate, construct, expand and acquire wireless telephone systems, to build out
its Puerto Rico telecommunications network, and to pay debt service.
Historically, the Company has been dependent upon borrowings, the issuance of
its equity securities and operating cash flow to provide funds for such
purposes. There can be no assurance that the Company will continue to have
access to such sources of funds.
Nine Months ended February 28, 1999 and February 28, 1998
Revenue for the nine months ended February 28, 1999 was $262,591, an increase of
$92,886 or 55% over revenue of $169,705 for the nine months ended February 28,
1998.
Service revenue for the nine months ended February 28, 1999 was $257,209, an
increase of $91,094 or 55% over service revenue of $166,115 for the nine months
ended February 28, 1998. Total Domestic service revenue, excluding roaming usage
increased $26,519 to $112,576 representing a 31% increase from the nine months
ended February 28, 1998, primarily due to an increase in subscribers. During the
nine months ended February 28, 1999, Domestic roamer usage increased to $59,211
or 31% over roamer revenues of $45,205 for the nine months ending February 28,
1998, primarily due to increased usage partially offset by a decrease in the
rate per minute. Centennial de Puerto Rico accounted for $50,569 or 56% of the
total increase in revenue. Total PCS Wireless service revenue increased $40,308
to $73,903 or 120%. This increase reflects PCS Wireless subscriber growth of
$54,603, partially offset by subscriber rate reductions of $14,295. This
increase also reflects Wireline revenue growth of $10,261 to $11,519.
Revenue from the sale of wireless telephones and accessories to subscribers for
the nine months ended February 28, 1999 increased by $1,792 to $5,382 or 50% as
compared to the nine months ended February 28, 1998. Domestic telephone and
accessory equipment sales increased $502 to $3,193, while PCS Wireless increased
143% to $2,189. The increase in revenue was due to a larger number of telephone
and accessory units sold during the current nine-month period.
Continued growth in revenue is dependent upon increased levels of wireless
subscriptions and maintenance of the current subscriber base and the average
revenue per subscriber. The Company's subscribers at February 28, 1999 were
approximately 426,700, an increase of 43% from the 298,500 subscribers at
17
<PAGE>
February 28, 1998. Increases from new activations of 225,500 were partially
offset by subscriber cancellations of 97,300. The cancellations experienced by
the Company are primarily the result of competitive factors. PCS Wireless had
approximately 117,400 and 60,600 subscribers at February 28, 1999, and 1998,
respectively, and, as a result, accounted for 44% of the net increase in
subscriptions.
Consolidated revenue per subscriber per month, based upon an average number of
subscribers for the nine months ended February 28, 1999, was $74 as compared to
$73 for the nine months ended February 28, 1998. The average monthly revenue per
subscriber was approximately $69 in the domestic markets, as compared to
approximately $91 in PCS Wireless. The Company expects that revenue per
subscriber will be impacted by competition and lower reciprocal per minute
roaming rates with other wireless carriers.
Cost of equipment sold during the nine months ended February 28, 1999 was
$15,436, an increase of $2,406 or 18% as compared to the nine months ended
February 28, 1998. Cost of equipment sold for PCS Wireless was $1,778 and $529
for the nine months ended February 28, 1999 and 1998, respectively.
Cost of services during the nine months ended February 28, 1999 was $35,347, an
increase of $6,129 or 21% from the nine months ended February 28, 1998. The
increase was primarily due to the continued growth of PCS telephone service in
Puerto Rico. Cost of services for PCS Wireless and Wireline were $12,885 and
$3,501 for the nine months ended February 28, 1999, respectively. Domestic cost
of services increased by $154 to $18,961. The increases are primarily due to the
variable costs associated with a larger revenue and subscription base and
increased coverage areas resulting from the continued expansion of the Company's
network.
Selling, general and administrative expenses rose to $81,460 for the nine months
ended February 28, 1999, an increase of $19,318 or 31% above the expenses of
$62,142 for the nine months ended February 28, 1998. The Domestic and Centennial
de Puerto Rico managerial, customer service and sales staff increased
approximately 11% and 42% respectively, to accommodate the larger subscription
and revenue base and anticipated growth of its wireless telephone business.
Selling, general and administrative expenses for PCS Wireless and Wireline were
$27,584 and $3,035 for the nine months ended February 28, 1999, respectively.
The Company anticipates continued increases in the cost of services and selling,
general and administrative expenses as the growth of its existing wireless
telephone business continues. In addition, the Company expects that the
continued development of its markets as well as its participation in the Puerto
Rico telecommunications business will contribute to a continued increase in the
level of expenses.
Depreciation and amortization for the nine months ended February 28, 1999 was
$97,702 an increase of $15,065 or 18% over the nine months ended February 28,
1998. The increase resulted from capital expenditures made during the nine
months ended February 28, 1999 and during the fiscal year ended May 31, 1998 in
connection with the development and network expansion of the Company's wireless
telephone systems and the purchase of PCS phones in Puerto Rico. Depreciation
18
<PAGE>
and amortization for the nine months ending February 28, 1999 related to the
Domestic operation was $62,385 and PCS Wireless and Wireline were $33,485 and
$1,832, respectively.
On January 7, 1999, the Company finalized the Merger with the WCAS VII and
certain other investors. The Company recorded one-time recapitalization costs of
$58,852. These costs are primarily due to the purchase by the Company of
non-qualifying disposition of stock options exercised, restricted shares and the
outstanding options from employees. As part of the Merger all outstanding
options purchased were recorded as additional compensation.
Centennial de Puerto Rico accounted for $2,857 of the recapitalization costs.
As a result of the factors noted above, the operating loss for the nine months
ended February 28, 1999 was $26,206, an increase of $8,884 from the operating
loss of $17,322 for the nine months ended February 28, 1998. The operating
income for Centennial de Puerto Rico was $654 for the nine months ended February
28, 1999 compared to an operating loss of $16,800 for the nine months ended
February 28 1998.
Net interest expense was $48,553 for the nine months ended February 28, 1999, an
increase of $16,752 or 53% from the nine months ended February 28, 1998. The
increase in interest expense reflects an increase in long-term debt of $973,357.
On January 7, 1999 the Company utilized a portion of these additional borrowings
to repay existing debt, including the early extinguishment 99.5% of its Senior
Notes due in 2003 and 2004. Gross interests costs for the nine months ended
February 28, 1999 and 1998 were $51,179 and $33,262, respectively. The average
debt outstanding during the nine months ended February 28, 1999 was $687,913, an
increase of $226,807 as compared to the average debt level of $461,106 during
the nine months ended February 28, 1998. The Company's weighted average interest
rate increased to 9.9% for the nine months ended February 28, 1999 from 9.6% for
the nine months ended February 28, 1998.
After loss attributable to minority interests in subsidiaries for the nine
months ended February 28, 1999, pretax loss was $56,851 as compared to a pretax
loss of $39,609 for the nine months ended February 28, 1998. The income tax
benefit of $10,114 for the nine months ended February 28, 1999, represents a
reduction of the deferred tax liability by the tax effect of the current period
losses of the Company, offset by current state and local taxes for the period.
The tax benefits are non-cash in nature.
The loss from continuing operations of $46,737 for the nine months ended
February 28, 1999 represents an increase of $20,655 from the loss of $26,082 for
the nine months ended February 28, 1998. The Company had a $40,526 extraordinary
loss on the early extinguishment of debt, net of income taxes of $11,251 for the
nine months ended February 28, 1999. These factors resulted in a net loss of
$87,263 for the nine months ended February 28, 1999, compared to a net loss of
$26,082 for the nine months ended February 28, 1998.
19
<PAGE>
Three Months ended February 28, 1999 and February 28, 1998
Revenue for the three months ended February 28, 1999 was $97,993; an increase of
$39,052 or 66% over revenue of $58,941 for the three months ended February 28,
1998.
Service revenue for the three months ended February 28, 1999 was $95,537, an
increase of $37,751 or 65% over service revenue of $57,786 for the three months
ended February 28, 1998. Total domestic service revenue, excluding roaming
usage, increased $8,637 to $39,280. The 28% increase from the three months ended
February 28, 1998 was primarily due to an increase in subscribers. During the
three months ended February 28, 1999, Domestic roamer usage increased to $21,596
or 81% above $11,919 for the three months ending February 28, 1998, primarily
due to increased usage partially offset by a decrease in the rate per minute.
Centennial de Puerto Rico accounted for $19,437 or 51% of the total increase in
service revenue. PCS Wireless service revenue increased $15,200 or 106% to
$29,576 as a result of a larger subscriber base. Wireline service revenue
increased $4,237 to $5,085.
Revenue from the sale of wireless telephones and accessories to subscribers for
the three months ended February 28, 1999 increased by $1,301 to $2,456 or 113%
as compared to the three months ended February 28, 1998. Domestic telephone and
accessory equipment sales increased $484 to $1,268, while PCS Wireless increased
220% to $1,188. The increase in revenue was due to a larger number of telephone
and accessory units sold during the current three-month period.
Consolidated revenue per subscriber per month, based upon an average number of
subscribers for the three months ended February 28, 1999, was $75 as compared to
$67 for the three months ended February 28, 1998. The average monthly revenue
per subscriber was approximately $68 in the domestic markets, as compared to
approximately $95 in PCS Wireless. The Company expects that revenue per
subscriber will be impacted by competition and lower reciprocal per minute
roaming rates with other wireless carriers.
Cost of equipment sold during the three months ended February 28, 1999 was
$5,974, an increase of $1,581 or 36% as compared to the three months ended
February 28, 1998. Cost of equipment sold for PCS Wireless was $519 and $267 for
the three months ended February 28, 1999 and 1998, respectively.
Cost of services during the three months ended February 28, 1999 was $13,223, an
increase of $2,392 or 22% from the three months ended February 28, 1998.
Domestic cost of services decreased to $6,471. Cost of services for PCS Wireless
and Wireline were $5,332 and $1,420 for the three months ended February 28,
1999, respectively. The increases are primarily due to the variable costs
associated with a larger revenue and subscription base and increased coverage
areas resulting from the continued expansion of the Company's network.
Selling, general and administrative expenses rose to $30,018 for the three
months ended February 28, 1999, an increase of $7,561 or 34% above the expenses
of $22,457 for the three months ended February 28, 1998. The Domestic and
20
<PAGE>
Centennial de Puerto Rico managerial, customer service and sales staff increased
approximately 11% and 42% respectively, to accommodate the larger subscription
and revenue base and anticipated growth of its wireless telephone business.
Selling, general and administrative expenses for PCS Wireless and Wireline were
$9,871 and $1,183 for the three months ended February 28, 1999, respectively.
The Company anticipates continued increases in the cost of services and selling,
general and administrative expenses as the growth of its existing wireless
telephone business continues. In addition, the Company expects that the
continued development of its markets as well as its participation in the Puerto
Rico telecommunications business will contribute to a continued increase in the
level of expenses.
Depreciation and amortization for the three months ended February 28, 1999 was
$33,159, an increase of $3,302 or 11% over the three months ended February 28,
1998. The increase resulted from capital expenditures made during the three
months ended February 28, 1999 and during the fiscal year ended May 31, 1998 in
connection with the development and network expansion of the Company's wireless
and wireline telephone systems and the purchase of PCS phones in Puerto Rico.
Depreciation and amortization for the three months ending February 28, 1999
related to the Domestic operation was $20,886 and the PCS Wireless and Wireline
operations were $11,555 and $718, respectively.
On January 7, 1999, the Company finalized the Merger with WCAS VIII. The Company
recorded one-time charges of $58,852 as recapitalization costs. These costs are
primarily due to the purchase by the Company of non-qualifying disposition of
stock options exercised, restricted shares and the outstanding options from
employees. As part of the Merger all outstanding options purchased were recorded
as additional compensation. Centennial de Puerto Rico accounted for $2,857 of
the recapitalization costs.
As a result of the factors noted above, the operating loss for the three months
ended February 28, 1999 was $43,233, an increase of $34,636 from the operating
loss of $8,597 for the three months ended February 28, 1998. The operating
income for Centennial de Puerto Rico was $2,394 for the three months ended
February 28, 1999 compared to an operating loss of $5,399 for the three months
ended February 28, 1998.
Net interest expense was $26,613 for the three months ended February 28, 1999,
an increase of $15,390 or 137% from the three months ended February 28, 1998.
The increase in interest expense reflects an increase in long-term debt of
$973,357. On January 7, 1999 the Company utilized a portion of these additional
borrowings to repay existing debt, including consent solicitation fees and
tender offer payments to 99.4% of holders of its 8 7/8% Senior Notes due 2001
and 99.8% of its 10 1/8% Senior Notes due 2005. Gross interest costs for the
three months ended February 28, 1999 and 1998 were $28,342 and $11,461,
respectively. The average debt outstanding during the three months ended
February 28, 1999 was $1,063,014, an increase of $582,237 as compared to the
average debt level of $480,777 during the three months ended February 28, 1998.
The Company's weighted average interest rate increased to 10.7% for the three
months ended February 28, 1999 from 9.5% for the three months ended February 28,
1998.
21
<PAGE>
After loss attributable to minority interests in subsidiaries for the three
months ended February 28, 1999, a pretax loss of $69,030 was incurred, as
compared to a pretax loss of $17,514 for the three months ended February 28,
1998. The income tax benefit of $15,950 for the three months ended February 28,
1999, represents a reduction of the deferred tax liability by the tax effect of
the current period losses of the Company, offset by current state and local
taxes for the period. The tax benefits are non-cash in nature.
The loss from continuing operations of $53,080 for the three months ended
February 28, 1999 represents an increase of $43,410 from the loss of $9,670 for
the three months ended February 28, 1998. The Company had a $40,526
extraordinary loss on the early extinguishment of debt, net of income taxes of
$11,251 for the three months ended February 28, 1999. These factors resulted in
a net loss of $93,606 for the three months ended February 28, 1999, compared to
a net loss of $9,670 for the three months ended February 28, 1998.
Liquidity and Capital Resources
For the nine months ended February 28, 1999, earnings exceeded fixed charges by
$56,993. Fixed charges consist of interest expense, including amortization of
debt issuance costs and the portion of rents deemed representative of the
interest portion of leases. The amount by which earnings exceeded fixed charges
reflects non-cash charges of $97,702 relating to depreciation and amortization.
During the nine months ended February 28, 1999, the Company made capital
expenditures of $69,819, primarily to continue the construction of its
Centennial de Puerto Rico and its Domestic systems to expand the coverage areas
and to upgrade its cell sites and call switching equipment. Capital expenditures
for Centennial de Puerto Rico were $44,689 for the nine months ended February
28, 1999, representing 64% of the Company's total capital expenditures.
Centennial de Puerto Rico capital expenditures included $24,742 to continue the
buildout of its network infrastructure and $19,947 to purchase telephone units
which remain the property of the Company while in use by subscribers. The
Company's future commitments for property and equipment include the addition of
cell sites to expand coverage and enhancements to the existing infrastructure of
its wireless telephone systems. During fiscal 1999, the Company anticipates
capital expenditures in the Domestic Wireless Telephone Systems of approximately
$40,000. The Company currently estimates that the cost to continue the build-out
of its Puerto Rico network infrastructure and to purchase phones through fiscal
1999 will be approximately $70,000. It is anticipated that the Company will seek
various sources of external financing including, but not limited to, bank
financing, joint ventures, partnerships and placement of debt or equity
securities of the Company.
In connection with the Merger, the Company and certain of its subsidiaries have
entered into the Credit Facility with Merrill Lynch Capital Corporation, Nations
Bank, N.A., the Chase Manhattan Bank, The Bank of Nova Scotia and Morgan Stanley
Senior Funding, Inc. and certain other financial institutions (collectively,
22
<PAGE>
with the Agents, the "Lenders"), pursuant to which the Lenders will provide
credit facilities to the Company. The credit facility consists of three term
loans in aggregate principal amount of $900,000, and a revolving credit facility
in an aggregate principal amount of $150,000. The borrowers under these
facilities are Centennial Cellular Operating Co. LLC and, for a portion thereof,
the PR Borrower. Borrowings under the Credit Facility will bear interest at a
rate per annum of the LIBOR rate plus the Applicable Margin. The maximum
Applicable Margin for the term loans range between 3.00% and 3.75% above LIBOR.
Based upon the Company's leverage ratio after the delivery of certain financial
statements after May 31, 1999, the Applicable Margin for portions of the term
loan and the revolving credit loans may be reduced by up to 1.25%. WCAS VIII, in
connection with the Merger purchased unsecured subordinated notes due 2009 and
common shares of the Company at an aggregate price of $180,000 ("Mezzanine
Debt"). The issuance has been allocated $157,500 to debt and $22,500 to equity.
The Mezzanine Debt bears cash interest at a rate of 10% or pay-in-kind interest
rate of 13% per annum. The Company also has an outstanding public issuance of
debt securities, its $370,000 10 3/4% Senior Notes due 2008, which bear interest
at the rate of 10 3/4% per annum.
The Company had outstanding two classes of preferred stock, which are held by
Citizens Utilities Company ("Citizens") and Century, respectively. The preferred
stock issues carried no cash dividend requirements through August 30, 1996 but
the shares accreted liquidation preference and redemption value at the rate of
7.5% per annum, compounded quarterly until then. The fully accreted liquidation
preference and redemption value of the shares held by Citizens and Century at
August 30, 1996 was $186,287 and $7,252, respectively. Beginning September 1,
1996, the holders of the preferred stock were eligible to receive cash dividends
at the rate of 8.5% per annum, when and as declared by the Board of Directors of
the Company, in its discretion. During the nine months ended February 28, 1999
and 1998, the Company paid quarterly cash dividends with respect to both classes
of preferred stock totaling $18,131 and $12,338, respectively. Pursuant to the
Merger all outstanding preferred stock was redeemed and all unpaid dividends
were paid.
In order to meet its obligations with respect to its operating needs, capital
expenditures and debt service, it is important that the Company continue to
improve operating cash flow. In order to do so, the Company's revenue must
increase at a faster rate than operating expenses. Increases in revenue will be
dependent upon continuing growth in the number of subscribers and maximizing
revenue per subscriber. The Company has continued the development of its
managerial, administrative and marketing functions, and is continuing the
construction of wireless systems in its existing and recently acquired markets
in order to achieve these objectives. There is no assurance that growth in
subscribers or revenue will occur. In addition, the Company's participation in
the Puerto Rico telecommunications business has been, and is expected to
continue to be, capital intensive. Further, due to the start-up nature of the
Puerto Rico telecommunications operations, the Company expects that it will
require additional cash investment to fund its operations over the next several
years. The Puerto Rico telecommunications operations have been, and are expected
to continue to be, highly competitive with the two existing wireless telephone
providers, as well as the other Puerto Rico telecommunications license holders.
There is no assurance that the Puerto Rico telecommunications operations will
continue to generate cash flows or reach profitability.
23
<PAGE>
It is anticipated that the Company's future funding needs will be met by the
refinancing arrangements that have been made in connection with the Merger.
Based upon current market conditions and its current capital structure, the
Company believes that cash flows from operations and funds from currently
available credit facilities will be sufficient to enable the Company to meet
required cash commitments through the next twelve-month period.
The Company has filed a shelf registration statement with the Securities and
Exchange Commission (the "SEC") for up to 8,000,000 shares of its Class A Common
Stock that may be offered from time to time in connection with acquisitions. The
SEC declared the registration statement effective on July 14, 1994. As of April
1, 1999, 4,239,231 shares remain available for issuance under this shelf
registration.
The Company filed a shelf registration statement with the SEC for the issuance
of $500,000 of the Company's debt securities, which was declared effective by
the SEC on April 6, 1995. The debt securities may be issued from time to time in
series on terms to be specified in one or more prospectus supplements at the
time of the offering. If so specified with respect to any particular series, the
debt securities may be convertible into shares of the Company's Class A Common
Stock. As of April 1, 1999, $400,000 remained available for issuance under this
shelf registration.
Acquisitions, Exchanges and Dispositions
The Company's primary acquisition strategy is to acquire controlling ownership
interests in wireless systems serving markets contiguous or proximate to its
current markets. The Company's strategy of clustering its wireless operations in
contiguous and proximate geographic areas enables it to achieve operating and
cost efficiencies as well as joint advertising and marketing benefits.
Clustering also allows the Company to offer its subscribers more areas of
uninterrupted service as they travel through an area or state. In addition to
expanding its existing clusters, the Company may also seek to acquire interests
in wireless systems in other geographic areas. The Company may also pursue other
communications businesses related to its wireless telephone and other mobile
service operations, as well as other communications businesses it determines to
be desirable. The consideration for such acquisitions may consist of shares of
stock, cash, assumption of liabilities or a combination thereof.
On June 8, 1998, the Company disposed of its investment interest in the
Coconino, Arizona RSA representing approximately 43,500 Net Pops, for $13,500 in
cash. During the nine months ended February 28, 1999, the Company recorded a
gain of $8,355 in relation to the sale of this investment interest.
Commitments and Contingencies
Prior to the Merger, the Company was controlled by Century. The Company and
Century entered into a Services Agreement, effective August 30, 1996 (the
"Services Agreement"), pursuant to which Century, through its personnel,
24
<PAGE>
provides design, construction, management, operational, technical and
maintenance services for the wireless telephone, paging and related systems
owned and operated by the Company. Such services also included providing all the
services necessary for the monitoring, to the extent possible, of the activities
of the partnerships in which the Company has minority equity interests in such
manner as to protect the interests of the Company. Such services have
historically been provided to the Company by Century. As consideration for the
services rendered and to be rendered under the Services Agreement, the Company
paid Century the annual sum of $1,000 and reimburses Century for all costs
incurred by Century or its affiliates (excluding the Company and its
subsidiaries) that are directly attributable to the design, construction,
management, operation and maintenance of the wireless telephone, paging and
related systems of the Company or to the performance by Century of its other
duties under the Services Agreement. For the nine months ended February 28,
1999, the Company has recorded expenses of $583 under the Services Agreement of
which $333 is recorded within accrued expenses on the Company's consolidated
balance sheet. As of the effective time of the Merger, Century and the Company
terminated the Service Agreement. Effective January 7, 1999, the Company has
entered into a similar agreement with WCAS VIII. The consideration for the
services rendered under this agreement is $750 annually. For the two months
ended February 28, 1999 the company has recorded expenses of $125, all of which
is recorded within payable to affiliate on the Company's consolidated balance
sheet.
During the nine months ended February 28, 1998, the Company purchased 3,810,600
shares of its Class A Common Stock in the open market for an aggregate purchase
price of $23,524 pursuant to previous authorizations by the Company's Board of
Directors. These shares were accounted for as treasury shares and retired as
part of the Merger.
In September 1998, the Commonwealth of Puerto Rico sustained damage as a result
of the effects of Hurricane Georges. The Company has evaluated the extent of
damage to its Puerto Rico network infrastructure and the impact the Hurricane
has had on the Company's Puerto Rico service revenue during the three and nine
month periods ended February 28, 1999. After consideration of expected insurance
recoveries, the Company believes it will not incur significant losses as a
result of the effects of the damage caused by Hurricane Georges. During the nine
months ended February 28, 1999, the Company recorded approximately $1,700 of
insurance recoveries related to subscriber refunds within revenue.
During fiscal 1998, the Company began a review of its computer systems and
related software to identify systems and software, which might malfunction due
to a misidentification of the Year 2000. A committee consisting of members of
senior management from various disciplines within the Company has been formed
and is meeting regularly to discuss the steps that must be taken to deal with
any potential Year 2000 issues. The Company is utilizing both internal and
external resources to identify, correct or reprogram, and test systems for Year
2000 readiness.
Most of the Company's customer-related computer systems and databases, including
its billing systems, are managed by third parties under contractual
arrangements. The Company has requested those third parties to advise the
Company as to whether they anticipate difficulties in addressing Year 2000
problems and if so, the nature of such difficulties. The Company is also working
with others in the industry using the same or similar systems to determine the
appropriate steps necessary to address the anticipated difficulties.
25
<PAGE>
The Company has undertaken an inventory of all local equipment used in the
transmission and reception of all signals to identify items that need to be
upgraded or replaced. The Company is also monitoring industry-wide efforts with
respect to signal delivery to its distribution plant and is working with others
in the industry to address potential solutions.
Management of the Company has not finally determined the cost associated with
its Year 2000 readiness efforts and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material. There can be no assurance that the systems of other companies on which
the Company relies will be converted in time or that any such failure to convert
by another company will not have an adverse effect on the Company's financial
condition or position.
After evaluating its internal compliance efforts as well as the compliance of
third parties as described above by the end of calendar year 1998, the Company
will develop during 1999 appropriate contingency plans to address situations in
which various systems of the Company, or of third parties with which the Company
does business, are not Year 2000 compliant.
The following tables sets forth (in thousands), for the periods indicated, the
Company's net cash provided by operating activities before interest payments
(net cash provided), the Company's principal uses of such cash and the cash
available for (required from) financing and investing activities.
Nine Months Ended February 28,
------------------------------
1999 1998
Amount % Amount %
------ - ------ -
Net cash provided by $ 98,654 74% $46,196 65%
Operating activities
Interest paid 35,045 26% 24,478 35%
-------- ---- ------- ------
Net cash provided $133,699 100% $70,674 100.0%
======== ==== ======= ======
Principal uses of cash
Interest paid $ 35,045 26% $24,478 35%
Property, plant & equipment 69,819 52% 103,187 146%
-------- ---- ------- ----
Total $104,864 78% $127,665 181%
======== ---- ======== ====
Cash available for
(required from) financing and
investing activities $ 28,835 22% $(56,991) (81)%
======== ==== ========= =====
Net cash provided by operating activities for the nine months ended February 28,
1999 was sufficient to fund the Company's expenditures for property, plant and
equipment of $69,819.
26
<PAGE>
The following table sets forth the primary cash flows provided by (used in)
financing and investing activities for the periods indicated:
Nine Months Ended February 28,
------------------------------
1999 1998
---- ----
Proceeds from sale of equipment $ 466 $ 36
Issuance of Class A Common Stock 427,394 267
Proceeds from issuance of long-term debt 1,481,500 196,000
Disposition of equity investment 13,500 0
Distributions received from equity
investments-net 9,791 9,986
----- --------
Cash available 1,932,651 206,289
Acquisition of other assets (2,200) (6,125)
Repayment of long-term debt (528,518) (135,000)
Debt issuance costs paid (61,118) (1,131)
Redemption of Preferred Stock (128,154) -
Treasury stock purchases - (23,524)
Purchase of equity investment (3,000) -
Purchase of Common Stock in conjunction
with the recapitalization (1,052,436) -
Acquisition costs (46,500) -
Early extinguishment of debt (44,634) -
Purchase of restricted securities (57,501) -
Dividends paid (18,131) (12,238)
-------- ---------
Cash available (needed) for operations
and capital expenditures $ (9,541) $ 28,271
=========== =========
* * * * *
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material
depending upon the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, there can be no assurance that the statement of expectation or belief
will result or be achieved or accomplished. The words "believe", "expect",
"estimate", "anticipate", "project" and similar expressions may identify
forward-looking statements.
Taking into account the foregoing, the following are identified as important
factors that could cause actual results to differ materially from those
27
<PAGE>
expressed in any forward-looking statement made by, or on behalf of, the
Company: the Company's net losses and stockholders' equity; the capital
intensity of the wireless telephone business and the Company's debt structure;
the competitive nature of the wireless telephone industry; regulation; changes
and developments in technology; subscriber cancellations; restrictive covenants
and consequences of default contained in the Company's financing arrangements;
control by certain of the Company's stockholders and anti-takeover provisions;
the Company's opportunities for growth through acquisitions and investments;
operating hazards and uninsured risks; refinancing and interest rate exposure
risks; potential for changes in accounting standards; and capital calls
associated with the Company's Investment Interests. A more detailed discussion
of each of the foregoing factors can be found in the Company's Annual Report on
Form 10-K for the Fiscal Year ended May 31, 1998 under the heading "CAUTIONARY
STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995" in Item 7 of such Form 10-K. Other factors may be
detailed from time to time in the Company's filings with the SEC. The Company
assumes no obligation to update its forward-looking statements or to advise of
changes in the assumptions and factors on which they are based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
28
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There is no material pending legal proceedings, other than routine
litigation incidental to the business; to which the Company or any of
its subsidiaries is a party to or which any of their property is
subject.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Report on Form 8-K
Each exhibit identified below is filed as a part of this report.
a) Exhibits
Exhibit No. Description
----------- -----------
Exhibit 11 Statement re: computation of per share earnings
Exhibit 27 Financial data schedule (EDGAR filing document
only)
b) Reports on Form 8-K
Form 8-K dated December 7, 1998
Form 8-K dated December 15, 1998
Form 8-K dated January 22, 1999
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 14, 1999
CENTENNIAL CELLULAR CORP.
/s/Peter W. Chehayl
Peter W. Chehayl
Chief Financial Officer,
Sr. Vice President and Treasurer
(Chief Financial Officer)
/s/ Thomas E. Bucks
Thomas E. Bucks
Sr.Vice President, Controller
(Chief Accounting Officer)
30
<PAGE>
Exhibit 11
CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES
EXHIBIT TO FORM 10-Q
For the Nine Months Ended February 28, 1999 and 1998
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Amounts in thousands, except per share data)
Nine Months Ended
-----------------------------------
February 28, February 28,
1999 1998
---------------- ---------------
(Unaudited)
Net Loss $ -87,263 $ (26,082)
Preferred stock dividends -9,906 (12,338)
------------ ------------
Loss applicable to common shares $ -97,169 $ (38,420)
============ ============
Average number of common shares and common
share equivalents outstanding
Average number of common shares
outstanding during this period 51,026,000 57,838,000
Add common share equivalents - Options
to purchase common shares - net 1,838,000 1,146,000
------------ -----------
Average number of common shares and common
share equivalents outstanding 52,864,000 (A) 58,984,000 (A)
============ ===========
Loss per common share $ (1.84)(A) $ (0.65)(A)
============ ===========
(A) In accordance with SFAS 128, the inclusion of common share equivalents in
the computation of earnings per share need not be considered if the
reduction of earnings per share is anti-dilutive. Therefore, loss per
common share and common share equivalents as shown on the Consolidated
Statements of Operations for the periods presented do not include certain
common share equivalents as their effect in anti-dilutive.
31
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> May-31-1999
<PERIOD-END> Feb-28-1999
<CASH> 33,914
<SECURITIES> 0
<RECEIVABLES> 48,272
<ALLOWANCES> 3,160
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0
0
<OTHER-SE> (606,112)
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<SALES> 262,591
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<INCOME-PRETAX> (56,851)
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