-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DOTbsjM8ea+sVBkzrtt3gR6Sj4LplAw02fqvKGJZVgXlbIuK9Q437QZ5zkzlI60h 7IeGNdaNYx2AKsmKkITQcg== 0000950117-98-001596.txt : 19980821 0000950117-98-001596.hdr.sgml : 19980821 ACCESSION NUMBER: 0000950117-98-001596 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980820 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL CELLULAR CORP CENTRAL INDEX KEY: 0000879573 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 061242753 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19603 FILM NUMBER: 98695142 BUSINESS ADDRESS: STREET 1: 50 LOCUST AVE CITY: NEW CANAAN STATE: CT ZIP: 06840 BUSINESS PHONE: 2039722000 MAIL ADDRESS: STREET 1: 50 LOCUST AVE STREET 2: 50 LOCUST AVE CITY: NEW CANAAN STATE: CT ZIP: 06840 FORMER COMPANY: FORMER CONFORMED NAME: CENTURY CELLULAR CORP /DE DATE OF NAME CHANGE: 19600201 10-K405 1 CENTENNIAL CELLULAR 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1998 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.) 50 Locust Avenue New Canaan, Connecticut 06840 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 972-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] As of July 28, 1998, there were 15,085,398 shares of Class A Common Stock outstanding and 10,544,113 shares of Class B Common Stock outstanding. The aggregate market value of the Class A Common Stock held by non-affiliates of the Company, based upon the last reported sale price of the Class A Common Stock on The Nasdaq Stock Market on July 28, 1998 of $40.50 per share, was $589,403,831. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Company's Proxy Statement to be filed with the Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 in connection with the Company's 1998 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10-13 of this Annual Report on Form 10-K. TABLE OF CONTENTS PART I
Page ---- Item 1. Business.......................................................... 1 Item 2. Properties........................................................ 14 Item 3. Legal Proceedings................................................. 14 Item 4. Submission of Matters to a Vote of Security Holders............... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................... 16 Item 6. Selected Consolidated Financial Data.................. ........... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 19 Item 7A Quantitative and Qualitative Disclosure About Market Risk......... 36 Item 8. Financial Statements and Supplementary Data....................... 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... ....................................... 36 PART III Item 10. Directors and Executive Officers of the Registrant............... 36 Item 11. Executive Compensation........................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management... 37 Item 13. Certain Relationships and Related Transactions................... 37 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Signatures....................................................... 38
PART I ITEM 1. BUSINESS GENERAL Centennial Cellular Corp., a Delaware corporation ("Centennial", and together with its direct and indirect subsidiaries, the "Company"), is primarily engaged in the ownership and operation of wireless telephone systems. The Company's current wireless telephone interests represent approximately 10.1 million Net Pops (as defined below). Approximately 6.5 million of these Net Pops are represented by the Company's wireless telephone systems located in the continental United States (the "Domestic Wireless Telephone Systems"). The balance of approximately 3.6 million Net Pops represents the Company's wireless telephone system in the Commonwealth of Puerto Rico (the "Puerto Rico Wireless Telephone System"). The Company's wireless telephone systems, which include systems utilizing both cellular and personal communications service ("PCS") licenses, provide communications services to vehicle-installed ("mobile"), ready-to-carry ("transportable") and hand-held ("portable") wireless telephones. Wireless telephone systems are designed to allow for significant mobility of the subscriber. In addition to mobility, wireless telephone systems provide access through system interconnections to local and long distance telecommunications networks and offer other ancillary services such as voice-mail, call-waiting, call-forwarding and conference calling. These communications services can be integrated with a variety of competing networks. On July 2, 1998, the Company and CCW Acquisition Corp. ("Acquisition"), a Delaware corporation organized at the direction of Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of Acquisition with and into Centennial (the "Merger"). Centennial will continue as the surviving corporation (the "Surviving Corporation") in the Merger. Subject to proration, pursuant to the Merger Agreement, outstanding Class A Common Stock ("Class A Common Stock") will be converted into the right to receive $43.50 per share in cash or to retain up to 7.1% of the common stock of the Surviving Corporation outstanding after the Merger. Class B Common Stock ("Class B Common Stock") will be converted into the right to receive $43.50 per share in cash; provided, that if the aggregate number of shares of Class A Common Stock elected to be retained by Centennial's existing stockholders is less than 7.1% of the shares outstanding after the Merger, then a number of shares of Class B Common Stock equal to the pro rata portion of such shortfall will be converted into shares of Class A Common Stock and retained. All outstanding Convertible Redeemable Preferred Stock (the "Convertible Redeemable Preferred Stock") and Second Series Convertible Redeemable Preferred Stock (the "Second Series Convertible Redeemable Preferred Stock" and, together with the Convertible Redeemable Preferred Stock, the "Redeemable Preferred Stock") will be converted into the right to receive $43.50 per share in cash on an as converted basis. (See Note 12 to the Company's Consolidated Financial Statements). Because 7.1% of the shares outstanding immediately after the effective time of the Merger (the "Effective Time") must be retained by such existing stockholders of the Company in the Merger, stockholders who do not elect to retain any shares may, due to proration, be required to retain some Common Stock. In addition, stockholders who elect to retain shares may, due to proration, retain Common Stock and receive cash in amounts which vary from the amounts such holders elected. Pursuant to the Merger Agreement, it is anticipated that each option to purchase Class A Shares (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"), will be exercised or canceled pursuant to its terms or in exchange for a cash amount equal to the difference between $43.50 1 and the exercise price of the Option prior to the Effective Time. Each Option that is not exercised or canceled will remain outstanding immediately following the Effective Time and such Options will be subject to adjustment pursuant to the terms of the Option Plans. In connection with the execution of the Merger Agreement, Century Communications Corp. ("Century"), the Company's principal stockholder, entered into a Stockholder Agreement, dated July 2, 1998, with Acquisition (the "Stockholder Agreement"). Pursuant to the Stockholder Agreement, Century, which has an approximate 34% Common Stock interest and, through ownership of the Company's Class B Common Stock which has disproportionate votes per share (15 votes per share), an approximate 74% voting interest in the Company at May 31, 1998, agreed to vote its shares in favor of the approval and adoption of the Merger Agreement. Because Century agreed to approve the Merger by written consent, consummation of the Merger does not require approval by a majority of the Company's stockholders who are not affiliated with the Company or Acquisition. Pursuant to the Merger Agreement, from the date of the Merger Agreement to the Effective Time, the Company shall conduct its business in the ordinary course consistent with past practice and shall use reasonable efforts to preserve intact its business organizations and relationships with third parties and to keep available the services of its present officers and key employees. All statements contained in this Annual Report, including discussions of the Company's plans and strategies, are subject to the Company's covenants regarding the conduct of its business pending the Merger. The consummation of the Merger is subject to certain conditions, including, without limitation, the Company obtaining a final order from the Federal Communications Commission (the "FCC") approving the transfer of control of the Company to WCAS VIII and its affiliates, the expiration of antitrust regulatory waiting periods and Acquisition obtaining financing substantially on the terms contemplated by the commitment letters it received in connection with the Merger Agreement. Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement shall be paid by the party incurring such expenses. However, in the event the Company or Acquisition shall have terminated the Merger Agreement as a result of either the Company entering into a definitive written agreement with respect to any merger, consolidation or other business combination, tender or exchange offer, recapitalization transaction, asset or stock purchase or other similar transaction with a third party (an "Acquisition Transaction") or the Board of Directors of the Company having withdrawn, modified or amended in any manner adverse to Acquisition its approval or recommendation of the Merger Agreement or approved, recommended or endorsed any proposal for an Acquisition Transaction, then the Company shall reimburse Acquisition for documented fees and expenses (subject to a maximum of $25.0 million) and pay Acquisition a termination fee of $40 million. In connection with the Merger, Acquisition has received a commitment from a third party for financing for Acquisition and certain existing and future subsidiaries of the Company in the aggregate amount of approximately $1.6 billion in the form of senior secured credit facilities and an unsecured bridge loan. Additionally, an affiliate of WCAS VIII has agreed to purchase approximately $150 million aggregate amount of subordinated notes of the Surviving Corporation. Finally, WCAS VIII and other equity investors have agreed to purchase approximately $350 million of common stock of the Surviving Corporation. It is anticipated that this funding will be used to pay the merger consideration described above and related fees and expenses. Additionally, pursuant to the Merger Agreement, the Company has agreed that, upon the request of Acquisition, it will commence offers to repurchase its two outstanding issuances of public debt (the "Debt Offers"). As a condition to the closing of the Merger, the Company must consummate the Debt Offers prior to the closing date of the Merger. There can be no assurance that Acquisition will receive the funding referred to above or, if it does receive such funding, there can be no assurance as to the timing or terms thereof. Additionally, there can be no assurance that the Debt Offers will be consummated. Finally, in the event that Acquisition must seek alternative financing to 2 consummate the Merger, there can be no assurance that it will be able to secure alternative financing on terms no less favorable than the terms of the above commitments. The Company's consolidated financial statements have been prepared on a historical basis and do not include any adjustments relating to the Merger Agreement. Centennial was organized in 1988. The Company's principal corporate office is located at 1305 Campus Parkway, Neptune, New Jersey 07753. Its telephone number is (732) 919-1000. THE WIRELESS TELEPHONE INDUSTRY The Company operates its Domestic Wireless Telephone Systems pursuant to 29 cellular licenses which it owns, and operates its Puerto Rico Wireless Telephone System pursuant to a PCS license which it owns. The Company's PCS license also covers the U.S. Virgin Islands. Wireless telephone technology is based upon the radio coverage of a given geographic area by a number of overlapping "cells." Each cell contains a transmitter-receiver at a "base station" or "cell site" that communicates by radio signal with wireless telephones located in the cell and is connected to a mobile telephone switching office (the "MTSO"), which, in turn, may be connected to the local landline telephone network. Since wireless telephone systems are fully interconnected with the landline telephone network and long distance networks, subscribers can receive and originate both local and long distance calls from their wireless telephones. If a wireless telephone user leaves the service area of the wireless telephone system during a call, the call is generally continued and carried through a technical interface established with an adjacent system through intersystem networking arrangements. Such an arrangement is referred to as roaming. Wireless telephone systems operate under interconnection agreements with various local exchange carriers and interexchange carriers, which agreements establish the manner in which the wireless telephone system integrates with existing telecommunication systems in a given geographic area. THE COMPANY'S OPERATIONS The Company operates and invests in wireless telephone systems in the United States and in Puerto Rico. The Company's current wireless telephone interests represent approximately 10.1 million Net Pops. Approximately 5.4 million of these Net Pops are represented by interests in those Domestic Systems that the Company owns and operates in three geographic clusters: the Michiana cluster in Michigan, Ohio and Indiana; the East Texas/Louisiana cluster in Texas, Louisiana and Mississippi; and the Southwestern cluster in California and Arizona. Approximately 3.6 million of these Net Pops represent the Company's Puerto Rico Wireless Telephone System. The balance of approximately 1.1 million of these Net Pops represents minority interests in limited partnerships which are controlled by other parties ("Investment Interests"). The Michiana cluster has approximately 3.3 million Net Pops, constituting approximately 60% of the Net Pops in markets served by the Domestic Wireless Telephone Systems and 32% of the Company's total Net Pops. The Michiana cluster covers portions of three major interstate highways that connect Chicago, Detroit and Indianapolis. The East Texas/Louisiana cluster has approximately 1.9 million Net Pops, constituting 36% of the Net Pops in markets served by the Domestic Systems and 19% of the Company's total Net Pops. The East Texas/Louisiana cluster covers a significant portion of interstate highway I-10 as well as sections of Texas, Louisiana and Mississippi adjacent to the cities of Houston, New Orleans, Shreveport and Baton Rouge. The Southwestern cluster has approximately 230,000 Net Pops, constituting 4% of the Net Pops in markets served by the Domestic Wireless Telephone Systems and 2% of the Company's total Net Pops. This cluster encompasses the Yuma, Arizona and El Centro, California markets located between Los Angeles to the northwest and San Diego to the west, Phoenix to the east, and Mexicali, Mexico to the south. 3 The Puerto Rico Wireless Telephone System covers areas in the Island of Puerto Rico. These markets contain approximately 3.6 million Net Pops, or 36% of the Company's total Net Pops. As used in this Annual Report on Form 10-K, "Pops" means the population of a market derived from the 1990 Census Report of the Bureau of the Census, United States Department of Commerce, and "Net Pops" means a market's Pops multiplied by the percentage interest that the Company owns in an entity licensed (a "licensee") by the Federal Communications Commission (the "FCC") to construct or operate a wireless telephone system in that market. WIRELESS TELEPHONE MARKETS AND INTERESTS The Company has focused on acquiring controlling ownership interests in wireless telephone systems serving markets contiguous or proximate to its current markets. The Company's strategy of clustering its wireless telephone operations 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 telephone 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. The chart below sets forth certain information about the Domestic Wireless Telephone Systems, the Puerto Rico Wireless Telephone System and the Investment Interests as of July 31, 1998. Those Domestic Wireless Telephone Systems and the Investment Interests which are in Metropolitan Statistical Areas ("MSAs") are asterisked; the remainder are in Rural Service Areas ("RSAs").
MARKETS OWNERSHIP POPS NET POPS ------- --------- ---- -------- DOMESTIC WIRELESS TELEPHONE SYSTEMS MICHIANA CLUSTER Kalamazoo, MI* 100.0% 293,500 293,500 Cass, MI 85.7% 288,000 246,900 Newaygo, MI 100.0% 220,200 220,200 Battle Creek, MI* 100.0% 186,000 186,000 Benton Harbor, MI* 100.0% 161,400 161,400 Jackson, MI* 92.0% 149,800 137,800 Roscommon, MI 100.0% 130,400 130,400 --------- --------- System Subtotal 1,429,300 1,376,200 --------- --------- South Bend, IN * 100.0% 289,200 289,200 Richmond, IN 100.0% 217,900 217,900 Newton, IN 100.0% 204,200 204,200 Elkhart-Goshen, IN* 91.7% 156,200 143,200 Williams, OH 100.0% 125,900 125,900 --------- --------- System Subtotal 993,400 980,400 --------- --------- Fort Wayne, IN* 100.0% 420,900 420,900 Miami, IN 100.0% 179,000 179,000 Kosciusko, IN 100.0% 160,000 160,000 Huntington, IN 100.0% 145,200 145,200 --------- --------- System Subtotal 905,100 905,100 --------- --------- Cluster Subtotal 3,327,800 3,261,700 --------- ---------
4
MARKETS OWNERSHIP POPS NET POPS ------- --------- ---- -------- EAST TEXAS/LOUISIANA CLUSTER Beauregard, LA 100.0% 372,500 372,500 Beaumont-Port Arthur, TX* 100.0% 361,200 361,200 Lafayette, LA* 94.5% 209,000 197,500 West Feliciana, LA 100.0% 170,900 170,900 Claiborne, MS 100.0% 153,900 153,900 Alexandria, LA* 93.2% 149,000 138,900 Iberville, LA 100.0% 131,000 131,000 DeSoto, LA 100.0% 121,300 121,300 Copiah, MS 100.0% 118,000 118,000 Bastrop, LA 100.0% 92,200 92,200 Caldwell, LA 100.0% 71,600 71,600 ---------- ---------- Cluster Subtotal 1,950,600 1,929,000 ---------- ---------- SOUTHWESTERN CLUSTER Yuma, AZ 100.0% 120,700 120,700 El Centro, CA 100.0% 109,300 109,300 ---------- ---------- Cluster Subtotal 230,000 230,000 ---------- ---------- Total Domestic Wireless Telephone Systems 5,508,400 5,420,700 ========== ========== PUERTO RICO WIRELESS TELEPHONE SYSTEM 100.0% 3,600,000 3,600,000 ========== ========== INVESTMENT INTERESTS SACRAMENTO VALLEY CLUSTER 23.5% Sacramento, CA* 1,355,100 318,100 Stockton, CA* 480,600 112,800 Modesto, CA* 370,600 87,000 Reno, NV* 254,700 59,800 Chico, CA* 182,100 42,800 Redding, CA* 147,000 34,500 Yuba City, CA* 122,600 28,800 Tehama, CA 90,700 21,300 Storey, NV 90,600 21,300 Sierra, CA 81,800 19,200 ---------- ---------- Cluster Subtotal 3,175,800 745,600 ---------- ---------- SAN FRANCISCO BAY AREA CLUSTER 2.9% San Francisco, CA* 3,686,600 105,800 San Jose, CA* 1,497,600 43,000 Vallejo, CA* 451,200 13,000 Santa Rosa-Petaluma, CA* 388,200 11,100 Salinas, CA* 355,700 10,200 Santa Cruz, CA* 229,700 6,600 ---------- ---------- Cluster Subtotal 6,609,000 189,700 ---------- ---------- Lawrence, PA 14.3% 363,400 51,900 Del Norte, CA 6.9% 199,200 13,700 Modoc, CA 25.0% 57,000 14,200 Lake Charles, LA* 25.1% 168,100 42,200 ---------- ---------- Total Investment Interests 10,572,500 1,057,300 ========== =========== Total Domestic Wireless Telephone Systems, Puerto Rico Wireless Telephone System and Investment Interests 19,680,900 10,078,000 ========== ==========
5 As of May 31, 1998, the Company's Domestic and Puerto Rico Wireless Telephone Systems had 322,200 subscribers in the markets listed above, and for each of fiscal 1997, 1996, 1995 and 1994 the Company had 203,900, 135,000, 85,920 and 49,040 subscribers, respectively, in such markets. At May 31, 1998, the Company's pro rata share of subscribers relating to the Investment Interests was approximately 122,000. All of the Company's systems are currently operational. A system is deemed operational when it has met the FCC's requirements for an operating license and has received an FCC license to commence operations. PUERTO RICO OPERATIONS The Company has commenced the operation of its developing Puerto Rico Wireless Telephone System. The Company has substantially completed installation of the initial system. The Company was the successful bidder for one of two MTA licenses to provide broad band PCS services in the Commonwealth of Puerto Rico and the U.S. Virgin Islands and the FCC granted the 30 MHz Block B broadband PCS license for the Puerto Rico-Virgin Islands MTA to the Company in fiscal 1996. The licensed area represents approximately 3.6 million Net Pops. The total cost to the Company of the acquisition and buildout of the infrastructure of the PCS system (including the purchase of equipment and installation services, a license fee that the Company has paid of approximately $55 million and the upgrade of cell sites and call switching equipment) has been approximately $184.6 million in the aggregate through fiscal 1998. It is anticipated that approximately $30 million will be expended in connection with the buildout through fiscal 1999. The Company leases certain space for equipment in Puerto Rico from Century-ML Cable Corp. ("Century-ML"), a cable television operator which is 50% owned by Century. Further, the Company leases and shares capacity on the fiber optic cable television facility and network of Century-ML for the purpose of operating as a competitive access provider. The Company shares in the cost of construction, operation and maintenance of the Century-ML fiber network on a pro rata basis based on the percentage of the number of fibers of the network used by or reserved for the Company (See Item 13. "Certain Relationships and Related Transactions" and Note 1 to the Company's Consolidated Financial Statements). The Company believes that the above transactions and contemplated transactions between it and Century and Century-ML are or will be, as the case may be, on terms no less favorable to the Company than would be obtainable at that time in comparable transactions with unaffiliated parties. In September 1997, the Company began participating in the intra-island and interstate telecommunications market in Puerto Rico as a service provider pursuant to FCC requirements for interstate service and pursuant to an authorization for intra-island service issued to the Company in December 1994, as amended in July 1996, by the Public Service Commission of the Commonwealth of Puerto Rico. PRODUCTS AND SERVICES The Company's principal source of revenue is providing service to wireless telephone subscribers. The services available to wireless telephone subscribers are similar to those provided by conventional landline telephone systems, including custom calling features such as voice mail, call forwarding, call waiting and conference calling. 6 The Company is responsible for the quality, pricing and packaging of its wireless service for each of the Domestic Wireless Telephone Systems and the Puerto Rico Wireless Telephone System. The Company offers several pricing plans and customers are able to choose the plan that best fits their calling needs. The plans combine different charges for monthly access, usage, custom calling features and, in some cases, varying amounts of pre-paid minutes of usage. The Company also generates revenue from subscribers of other wireless telephone systems when such subscribers ("roamers") place or receive calls over its systems. Reciprocal agreements between the Company and other wireless telephone system operators allow their respective subscribers to place calls in most service areas throughout the country. Roamers are charged usage charges that are generally at their regular service rate. The Company offers for sale or lease to its customers a wide variety of wireless telephones, including mobile, transportable and fully portable wireless telephones. The Company generally has offered significant discounts on wireless telephones in an effort to attract domestic customers. MARKETING The Company designs and implements the marketing strategy for each of the Domestic Wireless Telephone Systems and the Puerto Rico Wireless Telephone System. The Company uses a variety of billboard, radio and newspaper advertising to stimulate interest in wireless telephone service. The Company's objective is to increase its customer base, increase wireless usage and reduce subscriber cancellations. The Company's current marketing strategy is to generate continued net subscriber growth and to focus on customers who are likely to generate higher monthly revenues, primarily business users. However, as a result of broader acceptance of wireless telephone and the continued decline in the cost of wireless equipment, subscribers may be drawn from an increasingly wider range of occupations and demographics. In marketing wireless telephone service in the Domestic Wireless Telephone Systems and the Puerto Rico Wireless Telephone System, the Company stresses the quality of its wireless telephone service, easy and rapid access to telephone services, competitive prices, state of the art features, and the local presence of its customer service representatives and technical staff. See "Customer Service." In areas where the Domestic Wireless Telephone Systems are in markets adjacent or proximate to one another, the Company emphasizes that its own subscribers may make calls from anywhere in these markets without incurring fees or charges in addition to the standard usage and service fees which often are incurred when a customer "roams" from one market to an adjacent market owned by a third party. The Company uses both its own internal sales force and independent agents, dealers and resellers to obtain customers for wireless telephone service in the Domestic Wireless Telephone Systems and uses its internal sales force to obtain customers in the Puerto Rico Wireless Telephone System. The Company's internal sales force is paid on a salary plus commission basis. Sales commissions are structured to take into account the length of the subscriber's contract, the rate plan selected and the type of wireless telephone sold. The Company also maintains an ongoing training program to improve the effectiveness of its internal sales force. The Company's dealers are independent contractors paid solely on a commission basis, and include entities whose principal business is selling wireless telephones as well as other entities whose customers may become wireless telephone users, such as office supply stores, car stereo companies, auto parts stores, appliance stores and department stores. CUSTOMER SERVICE The Company is committed to assuring consistently high quality customer service. Each of the Domestic Wireless Telephone Systems and the Puerto Rico Wireless Telephone System has a local staff, 7 including a manager, customer service representatives, technical engineering staff and sales representatives. The Company has established local installation and repair facilities in all the Domestic Wireless Telephone Systems and the Puerto Rico Wireless Telephone System, and customers are able to report wireless telephone service problems to a local office 24 hours a day. The Company believes that by having local offices and installation and repair facilities it is better able to service customers, schedule installations and repairs and monitor the technical quality of the Domestic Wireless Telephone Systems and the Puerto Rico Wireless Telephone System. SYSTEM CONSTRUCTION, OPERATION AND DEVELOPMENT Construction of wireless telephone systems is capital intensive, requiring a substantial investment for land and improvements, buildings, towers, MTSOs, cell site equipment, microwave equipment, engineering and installation. Until technological limitations on total capacity are approached, additional wireless telephone system capacity can normally be added in increments that closely match demand and at less than the proportionate cost of the initial capacity. The Company has also invested in MTSO equipment that provides the Company with the ability to gradually increase capacity of wireless telephone systems, as needed, through the provision of digital transmission. The Company hires consulting engineers and telecommunications general contractors to aid in the design and management of the construction and expansion of each of the Domestic Wireless Telephone Systems and Puerto Rico Wireless Telephone System. By doing so, the Company believes it improves the overall system engineering and construction quality and reduces the expense and time required to make and keep the systems operating at a high level of technical quality. In accordance with its strategy of developing market clusters, the Company has selected wireless switching systems that are capable of serving multiple markets with a single MTSO and has already implemented this strategy in most of its markets. The Domestic Wireless Telephone Systems and Puerto Rico Wireless Telephone System are designed to facilitate the installation of equipment which will permit microwave interconnection between the MTSO and each cell site. In addition, microwave facilities can be used to connect separate wireless telephone systems to the same switch, which may reduce the total cost of the equipment necessary to operate both systems. Where the Company has deemed it appropriate, the Company has implemented microwave interconnection services in the Domestic Wireless Telephone Systems and Puerto Rico Wireless Telephone System. The other systems rely upon landline telephone connections to link cell sites with the MTSO. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a wireless telephone system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company and generally improves system reliability. Subject to the availability of appropriate microwave sites, the Company may replace the leased lines in the Domestic Wireless Telephone Systems and Puerto Rico Wireless Telephone System with microwave interconnections as the volume of calls in each system makes the use of such microwave interconnections more cost efficient. The construction of the Company's Puerto Rico Wireless Telephone System is capital intensive, in part because the licensed area is large and numerous low power PCS base station transmitters are required to provide coverage to the licensed area. The FCC has established construction benchmarks which require that 30 MHz broadband PCS systems, such as the Puerto Rico Wireless Telephone System, serve at least one-third of the population in its licensed area within five years of being licensed and two-thirds of the population in their licensed area within ten years of being licensed. The Company believes it is in compliance with this requirement. In addition, broadband PCS spectrum is currently used by incumbent co-channel point-to-point microwave users. As a general proposition, broadband PCS licensees are 8 required to pay the costs associated with the relocation of these existing microwave users to other portions of the radio spectrum or other media. FISCAL 1997 ACQUISITION On September 12, 1996, the Company acquired 100% of the ownership interests in the partnership owning the wireless telephone system serving the Benton Harbor, Michigan MSA for approximately $35 million in cash. The Benton Harbor market represents approximately 161,400 Net Pops. FISCAL 1999 DISPOSITION On June 8, 1998, the Company disposed of its Investment Interest in the Coconino, Arizona RSA, representing approximately 43,500 Net Pops, for $13.5 million in cash. During the first quarter of fiscal 1999, the Company recorded a pre-tax gain of approximately $9.5 million in relation to the sale of this investment interest. COMPETITION Competition From Other Wireless Systems. The FCC grants two 25 MHz licenses to operate cellular telephone systems in each of 306 MSAs and of 428 RSAs. The FCC also grants two 30 MHz licenses to operate broadband PCS systems in each of 51 defined Major Trading Areas ("MTAs") and one 30 MHz and three 10 MHz licenses in each of 493 Basic Trading Areas ("BTAs"), which are component parts of MTAs. The Company's systems compete directly with the other wireless licensees in each market on the basis of quality, price, area served, services offered and responsiveness of customer service. The Company also may be placed at a competitive disadvantage with the other licensees in a market if such licensees provide wireless telephone service in adjacent markets. The Company's Puerto Rico Wireless Telephone System faces primary competition from the incumbent wireless telephone licensees in Puerto Rico, which include the Puerto Rico Telephone Company ("PRTC"), an entity currently owned by the Commonwealth of Puerto Rico, and Corecom Inc., a publicly held company. Many of the Company's competitors are larger and may have access to more substantial financial resources than the Company. These competitors include Regional Bell Operating Companies, large independent telephone companies and AT&T Wireless, among others. Competition From Broadband PCS Systems. Among other possible uses, broadband PCS is capable of providing a two-way mobile voice and data telephone service that is similar to cellular service. A broadband PCS system is a wireless communications system that utilizes digital technology that could allow it to compete effectively with cellular systems, particularly in densely populated areas. Digital technology provides certain advantages over analog technology, including increased system capacity, improved overall signal quality and increased call security. Broadband PCS licenses are awarded by competitive bidding. A number of broadband PCS systems are currently in operation. It is uncertain what effect broadband PCS will have on the Company's wireless telephone systems which it operates pursuant to cellular licenses. The FCC revised its rules to state explicitly that cellular licensees may provide any PCS-type services on their channels without prior notification to the FCC. Management of the Company believes that technological advances in present cellular telephone technology, including the use of digital technology, in conjunction with buildout of the present cellular systems throughout the nation with cell splitting and microcell technology, will provide essentially the same services 9 as the services that PCS providers are expected to provide, but there can be no assurance that this will happen. The FCC has also issued a 30 MHz broadband PCS license for the Puerto Rico-U.S. Virgin Islands MTA to AT&T Wireless and the other four broadband PCS licenses for the San Juan, Puerto Rico BTA, the Mayaguez-Aguadilla-Ponce, Puerto Rico BTA and the U.S. Virgin Islands BTA to other entities, including a 10 MHz license to PRTC. Once operational, these broadband PCS systems are expected to present additional competition to the Company's PCS operations in Puerto Rico. Other Competition. In addition to competition from cellular and broadband PCS licensees, the Company faces competition from other current technologies, including enhanced SMR systems, narrowband PCS systems, satellite-based mobile telephony and even conventional landline telephone service. Regional and nationwide one-way paging service also may be a competitive alternative adequate for those who do not need a two-way service or may be a service that reduces wireless telephone usage among subscribers to both cellular and paging services. Technological advances in the communications field continue to occur which make it difficult to predict the extent of additional future competition for wireless systems, but it is certain that in the future there will be more potential substitutes for the Company's current wireless technology. There can be no assurance that the Company will not face additional significant competition in the future or that the Company's current wireless technology will not eventually become obsolete. Potential Conflicts of Interest and Competition. Century, a New Jersey corporation, owns 81.2% of the issued and outstanding shares of Class B Common Stock, par value $.01 per share, of Centennial and 100% of the issued and outstanding shares of the Second Series Convertible Redeemable Preferred Stock, par value $.01 per share, of Centennial. Citizens Utilities Company, a Delaware corporation ("Citizens"), owns 18.8% of the issued and outstanding shares of Class B Common Stock and 100% of the issued and outstanding shares of the Convertible Redeemable Preferred Stock, par value $.01 per share, of Centennial. Century's principal business is the ownership and operation of 72 cable television systems in 25 states and Puerto Rico serving approximately 1.319 million primary basic subscribers as of May 31, 1998. Citizens is a diversified utility company providing telephone, electric, gas, water and wastewater services. Century and Citizens own approximately 74% and 17%, respectively, of the combined voting power of both classes of Common Stock of Centennial as of July 28, 1998, and if Century and Citizens each were to convert the preferred stock owned by it, Century would own approximately 59% and Citizens would own approximately 34% of such voting power as of such date. The remaining shares are publicly held. As a result of such ownership and in accordance with an agreement with Citizens, Century has the ability to nominate at least a majority and elect all of the directors of Centennial. Century has agreed to vote for one director to be nominated by Citizens. Century has entered into a Stockholder Agreement with Acquisition pursuant to which it has agreed to vote its shares of the Company in favor of the approval and adoption of the Merger Agreement. In addition, pursuant to the Stockholder Agreement, Century has agreed that on the effective date of the Merger it will execute and deliver a non-compete agreement with the Surviving Corporation, pursuant to which Century will agree that, for a period of three years from the effective date, Century will not engage in, or acquire a controlling interest in, any business that competes with any of the businesses of the Company's current operations in Puerto Rico; provided, however, that such non-compete shall not extend to or restrict in any manner the activities of Century's existing joint venture in Puerto Rico ("Century M-L"). 10 Century is the owner of 1.79% of the issued and outstanding Common Stock of Citizens as of July 28, 1998. Leonard Tow is Chairman of the Board and Chief Executive Officer of Century and Chairman of the Board, Chief Executive Officer and Chief Financial Officer of Citizens. One other director of Century, Claire L. Tow, is also a director of Citizens. Citizens owns 1,807,095 shares of Class A Common Stock of Century representing approximately 6% of the issued and outstanding Class A Common Stock of Century as of July 28, 1998. Substantially all of Century's current wireless operations and investments are conducted or held by the Company. The Company leases and shares capacity on a fiber optic cable network for its Puerto Rico Wireless Telephone System from Century-ML. See "Business -- Puerto Rico Operations." Although exceptions are permitted by the Conflicts/Non-Compete Agreement described below, Century has indicated to the Company that it intends to conduct all its wireless telephone operations through the Company, subject to FCC restrictions. Citizens has agreed with Century and the Company that Citizens will conduct all its wireless telephone operations through the Company, except in areas where Citizens operates or acquires landline telephone systems and areas contiguous thereto. There can be no assurance that the Company will not lose any material expansion opportunities as a result of such exception or any conflicts that may exist between the interests of Citizens and the Company. The Company, Century and Citizens have entered into a Conflicts/Non-Compete Agreement. Pursuant to such agreement, except as described below, neither Century nor Citizens may compete with the Company in the acquisition of wireless telephone businesses or ownership interests therein, and the Company will have the first opportunity to purchase any wireless telephone business or ownership interests therein that may be presented to Citizens or Century. Citizens has no obligation to present any such business opportunity to the Company if the business under consideration is located in or is contiguous to an area in which Citizens (or a subsidiary or affiliate at least 50% owned by Citizens) owns or operates a landline telephone operation. Century has entered into an agreement with Acquisition pursuant to which it has agreed to terminate the Conflicts/Non-Compete Agreement as of the effective time of the Merger. REGULATION Federal Regulation. Pursuant to the Communications Act of 1934, as amended (the "Communications Act"), the cellular, PCS, paging, conventional mobile telephone systems and SMR systems operated by the Company are licensed and regulated by the FCC as Commercial Mobile Radio Service ("CMRS") facilities. The FCC limits entities to a total of 45 MHz of licensed CMRS spectrum in any given market area. Cellular and PCS licenses are granted for a term of up to ten years, after which they must be renewed. Licenses may be revoked and license renewal applications denied for cause. It is possible that there may be competition for a license upon the expiration of its initial license term. While there can be no assurance that any license will be renewed, the FCC's rules provide for a significant renewal preference to a cellular and PCS licensee that has used its spectrum for its intended purpose, and complied with FCC regulations and the federal communications statutes. If a cellular and PCS licensee is awarded a renewal expectancy, its renewal will be granted without further consideration of any competing applications. The FCC's rules prohibit wireless PCS licensees from imposing restrictions on the resale of wireless service by parties who purchase blocks of telephone numbers from an operational system and then resell them to the public. This prohibition expires for wireless licensees five years after the date that the last group of initial PCS licenses are granted. 11 The FCC also regulates a number of other aspects of the operation and ownership of CMRS systems. There can be no assurance that any FCC requirements currently applicable to the Company's CMRS systems will not be changed in the future. State and Local Regulation. Following the grant of an FCC construction permit to an applicant, and prior to the commencement of commercial service (and prior to construction in certain states), the holder of the permit may have to obtain certain approvals from the appropriate regulatory bodies in the states in which it will offer CMRS service. At present, none of the states in which the Company's CMRS operations are located may regulate the entry of CMRS providers or the rates charged for CMRS service. However, they can regulate other terms and conditions of service. The siting and construction of the CMRS facilities, including transmitter towers, antennas and equipment shelters, may be subject to state or local zoning, land use and other local regulations. Before a system can be put into commercial operation, the holder of a construction permit must obtain all necessary zoning and building permit approvals for the transmitter sites and MTSO locations. Recent Federal and State Legislation. The Telecommunications Act of 1996 (the "1996 Act"), enacted in February 1996, contains significant provisions aimed, in part, at opening local telecommunications markets to competition. These provisions govern, among other telecommunications matters, the removal of market-entry barriers and impose on incumbent local exchange carriers ("LECs") duties to negotiate, in good faith, interconnection agreements and provide under reasonable and nondiscriminatory terms interconnection for exchange services and access to unbundled network elements at any technically feasible point within the carrier's network, even to the extent that necessary equipment is located on a LEC's premises. The 1996 Act also provides for the development of competitive markets through provisions governing resale, number portability, dialing parity, access to right-of-ways and numbering administration. The overall impact of the 1996 Act on the business of the Company is unclear and will likely remain so for the foreseeable future. The Company may benefit from reduced costs in acquiring required communications services, such as LEC interconnection. However, other provisions of the 1996 Act relating to interconnection, telephone number portability, equal access and resale could subject the Company to increased competition. Comprehensive telecommunications reform legislation was enacted in 1996 by the Commonwealth of Puerto Rico. This legislation, titled the Puerto Rico Telecommunications Act of 1996 (the "Puerto Rico Act"), purports to open the Puerto Rico telecommunications market to competition and, among other things, it establishes the Puerto Rico Telecommunications Regulatory Board (the "Board") which has been given primary regulatory jurisdiction in Puerto Rico over all telecommunications services, all service providers, and all persons with a direct or indirect interest in said services or providers. On December 12, 1996, the Board assumed jurisdiction over all intra-island telecommunications matters. FCC and State Proceedings. The 1996 Act imposes interconnection obligations on all telecommunications carriers in order to facilitate the entry of new telecommunications providers. This requirement has the potential of creating benefits for the Company's wireless, PCS and other telecommunications businesses. In August 1996, the FCC issued comprehensive rules regarding the introduction of competition into the local telephone market. These rules address most aspects of the provision of competitive local telephony services from both facilities-based and non-facilities-based competitors, including cellular and paging operators. The rules address the process by which potential competitors negotiate with incumbent telephone companies for interconnection, the facilities that must be available for interconnection, the use of components of the incumbents' networks, the resale of services of 12 others, and the pricing of interconnection and other services and facilities used for offering competitive local telephone services. The rules also provide that incumbent LECs must begin paying the Company and other wireless providers immediately for terminating landline-originated traffic on the wireless facilities. On appeal, the U.S. Court of Appeals for the Eighth Circuit overturned several of the FCC's rules, the most important of which were the pricing rules. The FCC is expected to seek review of this decision from the Supreme Court. Decisions relating to universal service and access charge reform have also been released by the FCC. These decisions have been appealed. The Company has filed a Petition for Declaratory Ruling and Preemption with the FCC in which it seeks a ruling that the regulatory approach as well as certain provisions of the Puerto Rico Act are preempted pursuant to Sections 253(a) and 332(c) of the Communications Act because they are inconsistent with the pro-competition language and/or objectives of the 1996 Act, constitute impermissible barriers to the entry of local telecommunications competition and/or constitute impermissible regulation of CMRS entry or rates. Several other entities subsequently filed similar petitions with the FCC. This matter is currently pending. On December 26, 1996, the Company, on behalf of its PCS subsidiary, filed a petition with the Board seeking arbitration of the many unresolved issues in the negotiation with PRTC for interconnection of the Company's PCS network with PRTC's landline telephone network. On January 21, 1997, the Company filed a petition with the Board seeking arbitration of the many unresolved issues in the negotiation with PRTC for interconnection of the Company's fiber optic network with PRTC's landline telephone network. The two petitions were substantially consolidated by the arbitrator and after several sessions with the arbitrator and PRTC, the Company and its PCS subsidiary successfully negotiated interconnection agreements with PRTC covering most of the unresolved issues. Those agreements, which reflect considerably lower interconnection rates than those PRTC had been charging, have been approved by the Board and are currently in effect. DIGITAL WIRELESS TECHNOLOGY Over the next decade, it is expected that wireless telephones will gradually convert from analog to digital technology. This conversion is due in part to capacity constraints in many of the largest cellular markets, such as Los Angeles, New York and Chicago. As carriers reach limited capacity levels, certain calls may be unable to be completed, especially during peak hours. Digital technology increases system capacity and offers other advantages over analog technology, including improved overall average signal quality, improved call security, potentially lower incremental costs for additional subscribers and the ability to provide data transmission services. The conversion from analog to digital technology is expected to be an industry wide process that will take a number of years. The Company anticipates that such conversion will take place in the normal course. Overall costs of such conversion are not yet known. The Company is in the process of upgrading its cellular telephone systems from analog to digital technology and provides digital cellular telephone service in most of its cellular telephone markets to roamers. The implementation of digital technology will be fundamentally directed by subscriber demand for secure and confidential communications, the introduction of new cellular telephone services such as message waiting and calling line identification, and the delivery of data communications. Where cell sites are not yet at their maximum capacity of radio channels, the Company is adding digital channels to the network incrementally based on the relative demand for digital and analog channels. Where cell sites are at full capacity, analog channels are being removed and redeployed to expand capacity elsewhere within the network and replaced in such cell sites by digital channels. The implementation of digital cellular 13 technology over a period of several years will involve modest incremental expenditures for switch software and possible significant cost reductions as a result of reduced purchases of radio channels and a reduced requirement to split existing cells. However, as indicated above, the extent of any implementation of digital radio channels and the amount of any cost savings ultimately to be derived therefrom will depend primarily on subscriber demand. In the ordinary course of business, equipment upgrades at the cell sites have involved purchasing dual mode radios capable of using both analog and digital technology. The benefits of digital radio channels can only be achieved if subscribers purchase cellular telephones that are capable of transmitting and receiving digital signals. Currently, such telephones are more costly than analog telephones. The widespread use of digital cellular telephones is likely to occur only over a substantial period of time and there can be no assurance that this technology will replace analog cellular telephones. In addition, since most of the Company's existing subscribers currently have cellular telephones that exclusively utilize analog technology, it will be necessary to continue to support, and if necessary increase, the number of analog radio channels within the network for many years. EMPLOYEES The Company had approximately 1,490 employees as of May 31, 1998. None of the Company's employees is represented by a labor organization. The Company considers its relationship with its employees to be good. ITEM 2. PROPERTIES The Company leases office space at 1305 and 1325 Campus Parkway, Neptune, New Jersey, where it has its principal corporate office. The properties for MTSO and cell sites in the Domestic Wireless Telephone Systems and the Puerto Rico Wireless Telephone System are either owned (approximately 9%) or leased (approximately 91%), typically under short-term leases, by the Company or one of its subsidiaries or the partnership, joint venture or corporation which holds the construction permit or license (in the case of the Domestic Wireless Telephone Systems in which the Company has a minority interest). The Company considers the properties owned and leased by it to be suitable and adequate for its business operations. ITEM 3. LEGAL PROCEEDINGS There are 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of Centennial's shareholders during the fiscal quarter ended May 31, 1998. EXECUTIVE OFFICERS OF CENTENNIAL The names, ages and positions of the executive officers of Centennial are listed below along with their business experience during at least the past five years. 14 Executive officers of Centennial are elected annually by the Board of Directors and serve until their successors are duly elected and qualified. Each of the executive officers, other than Messrs. Graf, Mayberry, Cogar, Braden, Bucks and Casey, also is an executive officer of Century and devotes such of his business time to the Company as is necessary. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected, and there are no family relationships between any executive officers or any directors of the Company. BERNARD P. GALLAGHER, 51, has been Chairman of the Board and Chief Executive Officer of Centennial since August 1991 and has been a director of Centennial since March 1991. From February 1990 to August 1991, Mr. Gallagher was President and Chief Operating Officer of Centennial. He has been a director of Century since October 1990 and President and Chief Operating Officer of Century since October 1989. From 1979 to October 1989, Mr. Gallagher served in various financial and executive capacities at Comcast Corporation, a cable television and cellular telephone company, including Vice President and Treasurer from November 1984 to October 1989. RUDY J. GRAF, 49, has been President, Chief Operating Officer and a director of Centennial since August 1991, and was Vice President, Operations of Centennial from November 1990 to August 1991. Prior to joining Centennial, Mr. Graf served in various executive capacities, including Regional Vice President from December 1987 to July 1990 and as Vice President and General Manager from December 1985 to November 1987 of Metromedia Company, a cellular telephone company. SCOTT N. SCHNEIDER, 40, has been a director and Senior Vice President, Chief Financial Officer and Treasurer of Centennial since August 1991. He was a Vice President and Controller of Centennial from the date of its incorporation in 1988 to August 1991. Mr. Schneider has been a director of Century since October 1994. Mr. Schneider has been Chief Financial Officer of Century since December 1996 and Senior Vice President and Treasurer of Century since June 1991, and has been an Assistant Secretary of Century since October 1986. He was a Vice President of Century from October 1986 to June 1991, and was Controller of Century from 1982 to June 1991. MICHAEL G. HARRIS, 52, has been Senior Vice President, Engineering of Centennial since August 1991, and was Vice President, Engineering of Centennial from the date of its incorporation in 1988 to August 1991. Mr. Harris has been a director of Century since October 1997, Senior Vice President, Engineering of Century since June 1991, and was Vice President, Engineering of Century from 1982 to June 1991. PHILLIP MAYBERRY, 45, has been Senior Vice President - Operations of Centennial since December 1994, and was Vice President, Operations of Centennial from April 1990 to December 1994. From March 1989 to April 1990, Mr. Mayberry was a Vice President and General Manager of Metro Mobile CTS, Inc., a cellular telephone company. THOMAS COGAR, 41, joined Centennial in September 1990 as Director of Engineering and has been Vice President, Engineering of Centennial since August 1991. From May 1987 to September 1990, Mr. Cogar was employed by Metro Mobile CTS, Inc. in various technical capacities, most recently as Northeast Manager of Technical Operations. ROBERT J. LARSON, 39, has been Vice President - Accounting and Administration of Centennial since March 1995. He was Vice President - Controller of Centennial from October 1994 to March 1995 and was Controller of Centennial from 1990 to October 1994, and was Assistant Controller of Centennial from 1989 to 1990. Mr. Larson has been Vice President - Controller of Century since October 1994, was Controller of Century from 1991 to 1994 and was Assistant Controller from 1989 to 1991. Prior to joining 15 Centennial and Century, Mr. Larson was a manager with Touche Ross & Co., a predecessor firm of Deloitte & Touche LLP. ROBERT BRADEN, 52, has been Senior Vice President - Business Development of Centennial since November 1993. Prior to joining Centennial, Mr. Braden held operating and executive positions in several telecommunications companies including Metromedia, Omni Communications and VMX, Inc. THOMAS E. BUCKS, 42, has been Vice President - Controller of Centennial since March 1995. Prior to joining Centennial, Mr. Bucks was employed by Southwestern Bell Corporation in various financial capacities, most recently as District Manager - Financial Analysis and Planning. DAVID Z. ROSENSWEIG, 72, has been a director and Secretary of Centennial since the date of its incorporation in 1988 and of Century since 1985. Mr. Rosensweig has been a member of the New York law firm of Leavy Rosensweig & Hyman, which acts as general counsel to Centennial and Century, since May 1987. He has been a director and Secretary of Century since December 1985. CLIFFORD A. BAIL, 43, has been Vice President - Legal Affairs and Corporate Counsel of the Company since January 1997. Mr. Bail has also been Vice President Legal Affairs and Corporate Counsel of Century since January 1997. From 1992 to 1996, Mr. Bail was a partner in the New York law firm of Leavy Rosensweig & Hyman, which acts as general counsel to the Company and Century. JOHN CASEY, 42, has been Vice President - Administration of Centennial since January 1995, and was a Regional Manager of Centennial from January 1991 to December 1994. From August 1989 to December 1990, Mr. Casey was employed by McCaw Cellular One as District General Manager. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION AND HOLDERS Centennial's Class A Common Stock has been traded in The Nasdaq Stock Market ("Nasdaq") under the symbol CYCL since December 3, 1991. There is no established market for the Class B Common Stock. The following table lists the high and low sale prices of the Class A Common Stock reported on Nasdaq for the calendar quarters indicated. 16
High Low ---- --- 1996 - ---- First Quarter $18 1/2 $14 7/8 Second Quarter 17 5/8 15 Third Quarter 18 1/4 12 3/4 Fourth Quarter 15 1/4 10 3/8 1997 - ---- First Quarter 14 5/8 9 7/8 Second Quarter 16 1/2 8 5/8 Third Quarter 19 14 7/8 Fourth Quarter 21 1/4 17 1/4 1998 - ---- First Quarter 27 3/8 16 1/2 Second Quarter 38 3/4 24 1/4 Third Quarter (through July 28)* 41 7/16 37 3/8
- --------------- * On July 2, 1998, The Company announced that it had entered into the Merger Agreement. As of July 28, 1998, there were approximately 319 record holders of Centennial's Class A Common Stock. Such number does not include persons whose shares are held of record by a bank, brokerage house or clearing agency, but does include such banks, brokerage houses and clearing agencies. As of July 28, 1998, there were two record holders of the Class B Common Stock. DIVIDEND POLICY Centennial has not paid any cash dividends on its Common Stock and currently intends for the foreseeable future to retain all earnings for use in the Company's business. Centennial is effectively prohibited from paying cash dividends on its common stock by the provisions of the indentures with respect to $100 million aggregate principal amount of its publicly held 10 1/8% Senior Notes and $250 million aggregate principal amount of its publicly held 8 7/8% Senior Notes. The Restated Certificate of Incorporation of Centennial provides that no cash dividends may be paid in respect of any class of Common Stock unless there shall have been paid or set apart for payment full cumulative dividends for all past and current dividend periods and all past and then current sinking, purchase or retirement fund installments, if any, on any class of preferred stock, including the Convertible Redeemable Preferred Stock and the Second Series Convertible Redeemable Preferred Stock, and then dividends on the Common Stock may be paid in any fiscal quarter only to the extent of 50% of the net income of the Company allocable to the Common Stock from continuing operations for the preceding fiscal quarter after deduction for payment of dividends on preferred stock. 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The selected consolidated financial data set forth below for each of the five years in the period ended May 31, 1998 was derived from the Company's audited Consolidated Financial Statements. The following information should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition and the Consolidated Financial Statements and notes thereto included elsewhere herein.
-------------------------------------------------------------------------------------- YEAR ENDED MAY 31, -------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Revenues $ 237,501 $ 151,023 $ 112,197 $ 85,419 $ 56,373 ------------ ------------ ------------ ------------ ------------ Cost of services and equipment sold 54,818 38,228 26,129 22,152 13,424 Selling, general and administrative 81,790 55,132 34,188 26,055 17,787 Depreciation and amortization 114,194 83,720 70,989 65,642 47,652 ------------ ------------ ------------ ------------ ------------ 250,802 177,080 131,306 113,849 78,863 ------------ ------------ ------------ ------------ ------------ Operating loss (13,301) (26,057) (19,109) (28,430) (22,490) Interest expense 45,155 33,379 27,886 23,357 21,040 Gain on sale of assets 5 3,819 8,310 -- -- Income from equity investments 13,069 15,180 10,473 4,670 3,645 ------------ ------------ ------------ ------------ ------------ Loss before income tax benefit and minority interest (45,382) (40,437) (28,212) (47,117) (39,885) Income Tax Benefit (13,597) (7,295) (11,596) (14,456) (11,780) ------------ ------------ ------------ ------------ ------------ Loss before minority interest (31,785) (33,142) (16,616) (32,661) (28,105) Minority interest in (income) loss of subsidiaries (162) (153) (15) (69) 321 ------------ ------------ ------------ ------------ ------------ Net loss $ (31,947) $ (33,295) $ (16,631) $ (32,730) $ (27,784) ============ ============ ============ ============ ============ Dividend requirements on Preferred Stock $ 16,451 $ 15,948 $ 13,590 $ 12,634 $ 11,678 ============ ============ ============ ============ ============ Loss applicable to common shares $ (48,398) $ (49,243) $ (30,221) $ (45,364) $ (39,462) ============ ============ ============ ============ ============ Loss per common share - basic and diluted $ (1.85) $ (1.83) $ (1.13) $ (1.93) $ (3.28) ============ ============ ============ ============ ============ Weighted average number of basic common shares outstanding during the period $ 26,181,000 $ 26,934,000 $ 26,770,000 $ 23,544,000 $ 12,033,000 ============ ============ ============ ============ ============ BALANCE SHEET DATA Total assets $ 847,417 $ 844,850 $ 785,812 $ 844,384 $ 502,384 Long-term debt 510,000 429,000 350,000 350,000 250,000 Redeemable Preferred Stock 193,539 193,539 189,930 176,340 163,706 Common stockholders' equity 40,409 112,882 160,006 188,831 24,143
See Notes 4 and 5 of the consolidated financial statements regarding recent acquisitions and the effect of such acquisitions on the comparability of the historical financial statements of the Company. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER, POP AND SHARE DATA) On July 2, 1998, the Company and Acquisition entered into the Merger Agreement providing for the Merger. Centennial will continue as the Surviving Corporation in the Merger. Subject to proration, pursuant to the Merger Agreement, outstanding Class A Common Stock will be converted into the right to receive $43.50 per share in cash or to retain up to 7.1% of the common stock of the Surviving Corporation outstanding after the Merger. Class B Common Stock will be converted into the right to receive $43.50 per share in cash; provided, that if the aggregate number of Class A Common Stock elected to be retained by Centennial's existing stockholders is less than 7.1% of the shares outstanding after the Merger, then a number of shares of Class B Common Stock equal to the pro rata portion of such shortfall will be converted into shares of Class A Common Stock and retained. All outstanding Redeemable Preferred Stock will be converted into the right to receive $43.50 per share in cash on an as converted basis. (See Note 12 to the Company's Consolidated Financial Statements). Because 7.1% of the shares outstanding immediately after the Effective Time must be retained by such existing stockholders of the Company in the Merger, stockholders who do not elect to retain any shares may, due to proration, be required to retain some Common Stock. In addition, stockholders who elect to retain shares may, due to proration, retain Common Stock and receive cash in amounts which vary from the amounts such holders elected. Pursuant to the Merger Agreement, it is anticipated that each Option granted under the Company's Option Plans will be exercised or canceled pursuant to its terms or in exchange for a cash amount equal to the difference between $43.50 and the exercise price of the Option prior to the Effective Time. Each Option that is not exercised or canceled will remain outstanding immediately following the Effective Time and such Options will be subject to adjustment pursuant to the terms of the Option Plans. In connection with the execution of the Merger Agreement, Century, the Company's principal stockholder, entered into the Stockholder Agreement, dated July 2, 1998, with Acquisition. Pursuant to the Stockholder Agreement, Century, which has an approximate 34% Common Stock interest and, through ownership of the Company's Class B Common Stock which has disproportionate votes per share (15 votes per share), an approximate 74% voting interest in the Company at May 31, 1998, agreed to vote its shares in favor of the approval and adoption of the Merger Agreement. Because Century agreed to approve the Merger by written consent, consummation of the Merger does not require approval by a majority of the Company's stockholders who are not affiliated with the Company or Acquisition. Pursuant to the Merger Agreement, from the date of the Merger Agreement to the Effective Time, the Company shall conduct its business in the ordinary course consistent with past practice and shall use reasonable efforts to preserve intact its business organizations and relationships with third parties and to keep available the services of its present officers and key 19 employees. All statements contained in this Annual Report, including discussions of the Company's plans and strategies, are subject to the Company's covenants regarding the conduct of its business pending the Merger. The consummation of the Merger is subject to certain conditions, including, without limitation, the Company obtaining a final order from the FCC approving the transfer of control of the Company to WCAS VIII and its affiliates, the expiration of antitrust regulatory waiting periods and Acquisition obtaining financing substantially on the terms contemplated by the commitment letters it received in connection with the Merger Agreement. The Merger Agreement provides for the payment of certain fees and the reimbursement of certain expenses to Acquisition in the event of a termination of the Merger Agreement under certain circumstances (See Item 1 "Business--General"). 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 twenty-nine wireless telephone markets in the United States that it owns and manages (the "Domestic Wireless Telephone Systems"). In addition, on June 23, 1995, the Company acquired one of two Metropolitan Trading Areas ("MTA") licenses to provide broadband personal communications services ("PCS") in the Commonwealth of Puerto Rico and the U.S. Virgin Islands (the "Puerto Rico Wireless Telephone System"). Certain of the Company's operations are in a developmental stage, and the Company's Puerto Rico Wireless Telephone System is in the start-up and construction stage. On December 12, 1996 the Company began providing wireless telephone services in Puerto Rico. There is on-going construction to complete the buildout of the system. The Puerto Rico Wireless Telephone System's operations accounted for $54,557 in revenue and had approximately 69,500 subscribers as of May 31, 1998. The Company must continue to adapt its business to technological, competitive 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 the Domestic Wireless Telephone Systems, the Puerto Rico Wireless Telephone System and related investments associated with the acquisition, construction and development of its Domestic Wireless Telephone Systems and Puerto Rico telecommunications network plant 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 recently acquired Puerto Rico telecommunications network, and to pay debt service and preferred stock dividends. 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 it will continue to have access to such sources of funds. In connection with the Merger, Acquisition has received a commitment from a third party for financing for Acquisition and certain existing and future subsidiaries of the Company in the aggregate amount of approximately $1.6 billion in the form of senior secured credit facilities and an unsecured bridge loan. Additionally, an affiliate of WCAS VIII has agreed to purchase 20 approximately $150 million aggregate amount of subordinated notes of the Surviving Corporation. Finally, WCAS VIII and other equity investors have agreed to purchase approximately $350 million of common stock of the Surviving Corporation. It is anticipated that this funding will be used to pay the merger consideration described above and related fees and expenses. Additionally, pursuant to the Merger Agreement, the Company has agreed that, upon the request of Acquisition, it will commence offers to repurchase its two outstanding issuances of public debt (the "Debt Offers"). As a condition to the closing of the Merger, the Company must consumate the Debt Offers prior to the closing date of the Merger. There can be no assurance that Acquisition will receive the funding referred to above or, if it does receive such funding, there can be no assurance as to the timing or terms thereof. Additionally, there can be no assurance that the Debt Offers will be consummated. Finally, in the event that Acquisition must seek alternative financing to consummate the Merger, there can be no assurance that it will be able to secure alternative financing on terms no less favorable than the terms of the above commitments. Year Ended May 31, 1998 and May 31, 1997 Revenue for the year ended May 31, 1998 was $237,501, an increase of $86,478 or 57% over revenue of $151,023 for the year ended May 31, 1997, reflecting growth in subscriptions to, and increased usage of, wireless telephone service, partially offset by lower reciprocal per minute roaming rates with other cellular carriers. The Puerto Rico Wireless Telephone System accounted for $48,654 or 56% of the total increase in revenue. Revenue from the sale of wireless telephones and accessories to subscribers for the year ended May 31, 1998 increased by $1,861 to $4,719 or 65% as compared to the year ended May 31, 1997. The increase in revenue was due to a larger number of telephone units sold during the current year. The Puerto Rico Wireless Telephone System accounted for $1,216 and $215 of the equipment sales for the year ended May 31, 1998 and 1997, respectively. 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. Wireless subscribers at May 31, 1998 were approximately 322,200, an increase of 58% from the 203,900 subscribers at May 31, 1997. Increases from new activations of 191,400 were offset by subscriber cancellations of 73,100. The cancellations experienced by the Company are primarily the result of competitive factors. The Puerto Rico Wireless Telephone System had approximately 69,500 and 16,900 subscribers at May 31, 1998 and 1997, 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 year ended May 31, 1998, was $72 as compared to $74 for the year ended May 31, 1997. The average monthly revenue per subscriber was approximately $68 in the domestic markets, as compared to approximately $92 in the Company's Puerto Rico Wireless Telephone System. The Company expects that per subscriber revenue will be impacted by competition, the expansion of its local service calling areas and lower reciprocal per minute roaming rates with other wireless carriers. Cost of services during the year ended May 31, 1998 was $38,389, an increase of $16,173 or 73% from the year ended May 31, 1997. The increase was primarily due to the continued growth of PCS telephone service in Puerto Rico. Cost of services for the Puerto 21 Rico Wireless Telephone System was $14,163 and $3,155 for the years ended May 31, 1998 and 1997, respectively. Secondarily, the increase was due to the variable costs associated with a larger revenue and subscription base and increased wireless coverage areas resulting from the continued expansion of the Company's network. Cost of equipment sold during the year ended May 31, 1998 was $16,429, an increase of $417 or 3% as compared to the year ended May 31, 1997. The primary reason was an increase in the number of telephone units sold and higher phone costs in the Puerto Rico Wireless Telephone System. These increases were partially offset by a general decline in the wholesale prices of telephones. Cost of equipment sold for the Puerto Rico Wireless Telephone System was $806 and $571 for the years ended May 31, 1998 and 1997, respectively. Selling, general and administrative expenses rose to $81,790 for the year ended May 31, 1998, an increase of $26,658 or 48% above the expenses of $55,132 for the year ended May 31, 1997. The Company's managerial, customer service and sales staff increased to accommodate the larger subscription and revenue base, anticipated growth of its wireless telephone business and the continued growth of telephone services in Puerto Rico. Selling, general and administrative expenses for the Puerto Rico Wireless Telephone System were $26,807 and $10,594 for the years ended May 31, 1998 and 1997, 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 year ended May 31, 1998 was $114,194, an increase of $30,474 or 36% over the year ended May 31, 1997. The increase resulted from capital expenditures made during fiscal 1998 and 1997 in connection with the development and network expansion of the Company's wireless telephone systems. Depreciation and amortization related to the Puerto Rico Wireless Telephone System accounted for $26,464 or 87% of the increase. The operating loss for the year ended May 31, 1998 was $13,301, a decrease of $12,756 or 49% from the loss of $26,057 for the year ended May 31, 1997. The operating loss for the Puerto Rico Wireless Telephone System was $20,011 and $14,746 for the years ended May 31, 1998 and 1997, respectively. Interest expense was $45,155 for the year ended May 31, 1998, an increase of $11,776 or 35% from the year ended May 31, 1997. Interest expense for the year ended May 31, 1997 was reduced by $2,752 of capitalized interest charges related to the acquisition cost of the Company's Puerto Rico PCS license during the pre-operational stage of the business. Gross interest costs for the year ended May 31, 1998 and 1997 were $45,155 and $36,131, respectively. The increase in gross interest costs reflects additional borrowings for working capital, debt service and capital expenditures related to the buildout of the Puerto Rico Wireless Telephone Systems' PCS network infrastructure and the purchase of PCS telephones. The average debt outstanding during the year ended May 31, 1998 was $470,416, an increase of $95,523 as compared to the average debt level of $374,893 during the year ended May 31, 22 1997. The increase in average debt outstanding is principally related to the $76,000 in additional borrowings for the Puerto Rico Wireless Telephone System. The Company's weighted average interest rate decreased to 9.60% for the year ended May 31, 1998 from 9.64% for the year ended May 31, 1997. After income attributable to minority interests in subsidiaries for the year ended May 31, 1998, a pretax loss of $45,544 was incurred, as compared to a pretax loss of $40,590 for the year ended May 31, 1997. The income tax benefit of $13,597 for the year ended May 31, 1998 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 net loss of $31,947 for the year ended May 31, 1998 represents a decrease of $1,348 or 4% from the net loss of $33,295 for the year ended May 31, 1997. The Puerto Rico PCS business accounted for 96% of the consolidated net loss for the year ended May 31, 1998 as compared to 52% for 1997. Year Ended May 31, 1997 and May 31, 1996 Revenue for the year ended May 31, 1997 was $151,023, an increase of $38,826 or 35% over revenue of $112,197 for the year ended May 31, 1996, reflecting growth in subscriptions to and increased usage of wireless telephone service. The acquisition of one domestic wireless telephone system accounted for approximately $4,572 or 12% of the increase in revenue. The Puerto Rico Wireless Telephone System business contributed $5,903 or 15% of the increase in revenue. Revenue from the sale of equipment to subscribers for the year ended May 31, 1997 increased by $209 to $2,858 or 8% as compared to the year ended May 31, 1996. The increase in such revenue was due to a larger number of telephone units sold during the current year offset, in part, by a reduction in the retail prices of wireless telephones. Continued growth in revenue is dependent upon increased levels of wireless subscriptions, maintenance of the current subscriber base, and the average revenue per subscriber. Wireless subscribers at May 31, 1997 were approximately 203,900, an increase of 51% from the 135,000 subscribers at May 31, 1996. Increases from new activations of 104,800 and 7,500 subscribers from acquisitions were offset by subscriber cancellations of 43,400. The cancellations experienced by the Company are primarily the result of competitive factors. The Puerto Rico Wireless Telephone System had approximately 16,900 subscribers at May 31, 1997 and, as a result, accounted for approximately 25% of the net increase in subscriptions. Consolidated revenue per subscriber per month, based upon an average number of subscribers, was $74 for the year ended May 31, 1997, as compared to $75 for the year ended May 31, 1996. The average monthly revenue per subscriber for the year ended May 31, 1997 was approximately $73 in the Domestic Wireless Telephone Systems, as compared to approximately $113 in the Company's Puerto Rico Wireless Telephone System. Cost of services during the year ended May 31, 1997 was $22,216, an increase of $6,925 or 45% from the year ended May 31, 1996. The increase was due to the variable costs associated with a larger revenue and subscription base and increased wireless coverage areas resulting from 23 (i) the continued expansion of the Company's network and acquisitions completed during the fiscal years ended May 31, 1997 and 1996 and (ii) the commencement of wireless telephone service in Puerto Rico. Included in cost of services during the year ended May 31, 1997 were $1,927 of costs associated with the start-up of the Company's Puerto Rico Wireless Telephone System. Cost of equipment sold during the year ended May 31, 1997 was $16,012, an increase of $5,174 or 48% as compared to the year ended May 31, 1996. The primary reason for the increase was an increase in the number of telephone units sold, offset by a decrease in the average unit cost of telephones sold. Selling, general and administrative expenses rose to $55,132 for the year ended May 31, 1997, an increase of $20,944 or 61% above the expenses of $34,188 for the year ended May 31, 1996. The Company increased its managerial, customer service and sales staff to accommodate a larger subscription and revenue base, anticipated growth of its domestic wireless telephone systems as well as the commencement of wireless telephone services in Puerto Rico. Included in selling, general and administrative expenses during the year ended May 31, 1997 were $5,086 of costs associated with the start-up of the Company's Puerto Rico Wireless Telephone System. Depreciation and amortization for the year ended May 31, 1997 was $83,720, an increase of $12,731 or 18% over the year ended May 31, 1996. The increase results from acquisitions and capital expenditures made during fiscal 1997 and 1996 in connection with the development and network expansion of the Company's Domestic Wireless Telephone Systems and Puerto Rico Wireless Telephone System. Depreciation and amortization related to the Puerto Rico Wireless Telephone System was $6,328 or 50% of the increase. The operating loss for the year ended May 31, 1997 was $26,057, an increase of $6,948 or 36% from the loss of $19,109 for the year ended May 31, 1996. During the year ended May 31, 1997, the Company sold certain equipment resulting in a gain of $3,819. During the year ended May 31, 1996, the Company sold its 72.2% interest in the wireless telephone system serving the Charlottesville, VA MSA for a cash purchase price of approximately $9,914. The Company recognized a gain of $4,176 as a result of the sale (see "Acquisitions, Exchanges, and Dispositions"). In addition, the Company recognized a gain of $4,092 upon the sale of marketable securities acquired and sold during fiscal 1996. Interest expense was $33,379 for the year ended May 31, 1997, an increase of $5,493 or 20% from the year ended May 31, 1996. The increase in interest expense is the result of interest charged on additional borrowings for the Benton Harbor, MI acquisition, working capital needs and the construction and operation of the Puerto Rico telecommunications network as well as a decrease in capitalized interest charges related to the pre-operational stage of the Company's Puerto Rico PCS business. Capitalized interest for the year ended May 31, 1997 was $2,752, a decrease from the capitalized interest of $5,200 for the year ended May 31, 1996. Gross interest costs for the year ended May 31, 1997 and May 31, 1996 were $36,131 and $33,086, respectively. The average debt outstanding during the year ended May 31, 1997 was $374,893, an increase of $24,893 as compared to the average debt level of $350,000 during the year ended May 31, 1996. The Company's weighted average interest rate increased to 9.64% for the year ended May 31, 1997 from 9.54% for the year ended May 31, 1996. 24 After income attributable to minority interests in subsidiaries for the year ended May 31, 1997, a pretax loss of $40,590 was incurred, as compared to a pretax loss of $28,227 for the year ended May 31, 1996. The income tax benefit of $7,295 for the year ended May 31, 1997 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 net loss of $33,295 for the year ended May 31, 1997 represents an increase of $16,664 or 100% from the net loss of $16,631 for the year ended May 31, 1996. The Puerto Rico PCS business accounted for 52% of the consolidated net loss for the year ended May 31, 1997 as compared to 6% for 1996. LIQUIDITY AND CAPITAL RESOURCES For the year ended May 31, 1998, earnings were less than fixed charges by $45,382. Fixed charges consist of interest expense, including amortization of debt issue costs and the portion of rents deemed representative of the interest portion of leases. The amount by which earnings were less than fixed charges includes non-cash charges of $114,194 relating to depreciation and amortization. As of May 31, 1998, the Company had $263,661 of property, plant and equipment (net) placed in service. During the year ended May 31, 1998, the Company made capital expenditures of $129,300, primarily to continue the construction of its Puerto Rico Wireless Telephone System and its Domestic Wireless Telephone Systems to expand the coverage areas of existing properties and to upgrade its cell sites and call switching equipment. Capital expenditures for the Company's Puerto Rico Wireless Telephone System were $90,304 for the year ended May 31, 1998, representing 70% of the Company's total capital expenditures. The Puerto Rico Wireless Telephone System capital expenditures included $57,108 to continue the buildout of the Company's PCS network infrastructure and $33,196 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 through fiscal 1999 will be approximately $30,000. This acceleration is related to the growth the Company has experienced in its Puerto Rico Wireless Telephone System. 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. Centennial Puerto Rico Wireless Corporation, a wholly owned subsidiary of the Company ("CPRW"), has a four-year, $180,000 revolving credit facility, as amended, (the "Puerto Rico Credit Facility"). As of May 31, 1998, the Puerto Rico Credit Facility had $150,000 outstanding. The interest rate payable by CPRW on borrowings under the Puerto Rico Credit Facility is based, at the election of CPRW, on (a) the Base Rate, as defined, plus a margin of 1.50% or (b) the Eurodollar Base Rate, as defined, plus a margin of 2.50%, adjusted for the maintenance of certain specified ratios, as applicable. 25 As of May 31, 1998, the Company had $10,000 outstanding under its $75,000 domestic revolving credit facility (the "Domestic Credit Facility" ). The interest rate payable on the Domestic Credit Facility is based, at the election of the Company, on (a) the Base Rate,as defined, plus a margin of 2% or (b) the Eurodollar Base Rate, as defined, plus a margin of 3%. The Company also has two outstanding public issuances of debt securities, its $250,000 8 7/8% Senior Notes due 2001 and its $100,000 10 1/8% Senior Notes due 2005, which bear interest at the rate of 8 7/8% per annum and 10 1/8% per annum, respectively. Pursuant to the Merger Agreement, the Company has agreed that, upon the request of Acquisition, it will commence the Debt Offers. As a condition to the closing of the Merger, the Company must consummate the Debt Offers prior to the closing date of the Merger. However, there can be no assurance that the Debt Offers to repurchase will be consummated. The Domestic Credit Facility, the Puerto Rico Credit Facility and the Company's public debt instruments require the maintenance of certain financial and operating covenants, restrict the use of borrowing, limit the incurrence of additional indebtedness and limit the ability to pay dividends and management fees. The Company and CPRW were in compliance with all covenants of their debt instruments at May 31,1998. The Company has outstanding two classes of preferred stock which are held by Citizens Utilities Co. ("Citizens") and Century Communications Corp. ("Century"). 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. Assuming no change in the number of shares of such classes outstanding, the annual dividend that may be declared and made payable, with respect to the preferred stock is $15,834 and $616, respectively. Both classes of preferred stock are subject to mandatory redemption in fiscal 2007. Any unpaid dividends continue to accumulate without additional cost to the Company. During the years ended May 31, 1998 and 1997, the Company paid quarterly cash dividends with respect to both classes of preferred stock totaling $12,338 and $8,226, respectively. The Company will determine the timing, amount, or distribution (if any) of additional preferred stock dividends. In order to meet its obligations with respect to its operating needs, capital expenditures, debt service and preferred stock obligations, 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 26 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 has been, and is 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 generate cash flow or reach profitability. Even if the Company's operating cash flow increases, it is anticipated that cash generated from the Domestic Wireless Telephone Operations and Puerto Rico telecommunications operations will not be sufficient in the next several years to cover interest, the preferred stock dividends that may be declared and made payable and required capital expenditures. The Company anticipates that shortfalls in cash flow may be made up either through debt and equity issuances or additional financing arrangements that may be entered into by the Company. Although the net cash provided by operating activities for the year ended May 31, 1998 was not sufficient to fund the Company's expenditures for property, plant and equipment of $129,300, funds required were available from cash on hand and financing activities. The principal source of such cash was financing activities completed in prior fiscal years. It is anticipated that the Company's future funding needs will be met by the refinancing arrangements that are expected to be made in connection with the Merger, although there is no assurance that this refinancing will be obtained. 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 registration statement was declared effective by the SEC on July 14, 1994. As of July 28, 1998, 4,239,231 shares remain available for future acquisitions. The Company has 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 July 28, 1998, $400,000 of debt securities remained available for issuance. 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 27 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 first quarter of fiscal 1999, the Company recorded a pre-tax gain of approximately $9,500 in relation to the sale of this Investment Interest. On September 12, 1996, the Company acquired 100% of the ownership interests in the partnership owning the wireless telephone system serving the Benton Harbor, Michigan MSA for approximately $35,000 in cash. The Benton Harbor market represents approximately 161,400 Net Pops. The term "Net Pops" represents a market's Pops multiplied by the percentage interest that Centennial owns in an entity licensed by the FCC to construct or operate a wireless telephone system in that market and "Pops" means the population of a market based upon the final 1990 Census Report of the Bureau of the Census, United States Department of Commerce. On October 31, 1995, the Company acquired (i) a 94.3% interest in the wireless telephone system serving the Lafayette, Louisiana MSA, representing approximately 205,700 Net Pops, in exchange for the Company's wireless telephone system serving the Jonesboro, Arkansas RSA (comprising approximately 205,000 Net Pops), the license rights and assets located in and covering the Desoto and Red River Parishes of Louisiana 3 RSA (comprising approximately 34,700 Net Pops), the license rights and assets located in and covering a section of Morehouse Parish of Louisiana 2 RSA (comprising approximately 24,100 Net Pops) and a cash payment by the Company of approximately $5,580, subject to adjustment, and (ii) an additional 14.3% minority interest in the Elkhart, Indiana RSA, a market in which the Company now has a 91.4% interest and an additional 12.7% equity investment interest in the Lake Charles, Louisiana MSA, a market in which the Company now has a 25.1% interest, for a cash payment of approximately $2,951. On June 30, 1995, the Company acquired the wireless telephone systems serving (a) Newtown, LaPorte, Starke, Pulaski, Jasper and White, Indiana, (b) Kosciusko, Noble, Steuben and Lagrange, Indiana, (c) Williams, Defiance, Henry and Paulding, Ohio and (d) Copiah, Simpson, Lawrence, Jefferson Davis, Walthall and Marion, Mississippi, representing an aggregate of approximately 608,100 Net Pops. The above-described systems were acquired by the Company in exchange for the Company's wireless telephone systems serving the Roanoke, Virginia MSA, the Lynchburg, Virginia MSA, North Carolina RSA #3 and Iowa RSA #5, representing an aggregate of approximately 644,000 Net Pops. Simultaneously with the consummation of the transaction described above, the Company sold its 72.2% interest in the wireless telephone system serving the Charlottesville, Virginia MSA, representing an aggregate of approximately 94,700 Net Pops, for a cash purchase price of approximately $9,914, subject to adjustment. The Company recognized a gain of approximately $4,176 as a result of the sale. COMMITMENTS AND CONTINGENCIES During the year ended May 31, 1998, the Company directly purchased 1,270,200 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 have 28 been accounted for as treasury shares. Subsequent to May 31, 1998, the Company has not directly purchased any additional shares of its Class A Common Stock in the open market. As of July 28, 1998, the Company is authorized to directly purchase 2,729,800 additional shares of its Class A Common Stock in the open market after giving effect to the shares purchased to date. Additionally, through a recently terminated agreement, the Company purchased 273,200 shares of its Class A Common stock for approximately $5.4 million. The Company is controlled by Century. Century has an approximate 34% Common Stock interest and, through ownership of the Company's Class B Common Stock which has disproportionate votes per share (15 votes per share), an approximate 74% voting interest in the Company at May 31, 1998. The Company and Century entered into a Services Agreement, effective August 30, 1996 (the "Services Agreement"), pursuant to which Century, through its personnel, provides such 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 include 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 pays 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 year ended May 31, 1998, the Company has recorded expenses of $1,000 under the Services Agreement, of which $250 is recorded within payable to affiliate on the Company's consolidated balance sheet at May 31, 1998. Pursuant to the Stockholder Agreement with Acquisition, Century has agreed to terminate the Services Agreement as of the effective time of the Merger. The Company also plans to exercise, prior to the effective time of the Merger, its right to acquire the minority interests held by Century in the Cass and Jackson, Michigan systems for the prices paid by Century for such minority interests in the acquisition of such systems ($2,000 and $1,000, respectively). Upon completion of these transactions, the Company will own 100% of these systems. The Company leases certain space for equipment in Puerto Rico from Century-ML Cable Corp. "Century-ML", a cable television operator which is 50% owned by Century. Further, the Company leases and shares capacity on the fiber optic cable television facility and network of Century- ML for the purpose of operating as a competitive access provider. The Company shares in the cost of construction, operation and maintenance of the Century-ML fiber network on a pro-rata basis based on the percentage of the number of fibers of the network used by or reserved for the Company. During fiscal 1997, the Company recorded a deferred asset and a related payable to an affiliate in its consolidated balance sheet in the amount of $6,000 to reflect certain costs incurred by the Company to secure the use of the fiber optic network as required by the Facilities Agreement with Century-ML dated January 2, 1995. This amount, which was paid by the Company during fiscal 1998, represents the Company's share of the costs of constructing Century-ML's fiber optic network. (See note 1 to the consolidated financial statements). 29 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 data bases, 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. The Company is currently undertaking 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. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER, POP AND SHARE DATA) 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. 30 Taking into account the foregoing, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: NET LOSSES; STOCKHOLDERS' EQUITY The Company has reported net losses of $(31,947), $(33,295) and $(16,631) for the fiscal years ended May 31, 1998, 1997 and 1996 respectively. Operating loss was $(13,301), $(26,057), and $(19,109) for the respective periods. Interest expense was $45,155, $33,379 and $27,886 for the respective periods. The Company expects net losses to continue until such time as the Domestic Wireless Telephone Systems, the Puerto Rico Wireless Telephone System and related investments associated with the acquisition, construction and development of its Domestic Wireless Telephone Systems and Puerto Rico Wireless Telephone System generate sufficient earnings to offset the cost of such activities. There can be no assurance that profitability will be achieved in the foreseeable future. Reflecting net losses in prior periods, the common stockholders' equity as stated on the Company's consolidated balance sheet at May 31, 1998 was $40,409. The Company's assets, including its cellular telephone and PCS licenses, are recorded on its balance sheet at historical cost. The Company believes that the current fair value of such assets is significantly in excess of their historical cost. LEVERAGE; CAPITAL REQUIREMENTS The wireless telephone business is capital intensive. The Company requires substantial capital to operate, construct, expand and acquire wireless telephone systems; to build out and operate its Puerto Rico Wireless Telephone System; and to service its debt. Historically, the Company has been dependent upon borrowings, operating cash flow and the issuance of its equity securities to provide funds for such purposes. The Company will be dependent on external financing measures to meet its operating, debt service, dividend and capital expenditure requirements. In connection with the Merger, it is anticipated that the Company will incur indebtedness in the aggregate amount of approximately $1.75 billion. Some additional measures which the Company may from time to time consider include, but are not limited to: bank financing, joint ventures, partnerships and public and private placement of its debt or equity securities. In recent years, the Company has incurred substantial indebtedness in connection with the acquisition, construction and start-up expenses of wireless telephone systems. At May 31, 1998, the Company had an aggregate of $510,000 outstanding principal amount of debt securities. The Indentures (as defined below) for the Company's outstanding issues of publicly-held debt, as well as certain credit facilities, impose certain restrictions including the incurrence of additional indebtedness. See "Restrictive Covenants; Consequences of Default" below. Pursuant to the Merger Agreement, the Company has agreed that, upon the request of Acquisition, it will commence offers to repurchase its outstanding issuances of public debt (the "Debt Offers"). As a condition to the closing of the Merger, the Company must consummate the Debt Offers prior to the closing date of the Merger. However, there can be no assurance that the Debt Offers will be consummated. 31 For the year ended May 31, 1998, earnings were less than fixed charges by $45,382. Such amounts reflect non-cash charges of $114,194, relating to depreciation and amortization. HIGHLY COMPETITIVE INDUSTRY The Company's ability to maintain or increase its offering of wireless telephone and other communications services can be subject to the changes in consumer demand, price competition, and the cost and supply of hardware, software and other technology required to provide such services. Future profitability also may be affected by the Company's ability to compete with other communications service enterprises. In each market the Company offers service, there are competitive providers of wireless telephone service, including providers of cellular, PCS, enhanced specialized mobile radio ("ESMR") and satellite services. Competition for customers in each of the Company's markets is principally on the basis of the technical quality of service, price, size of area covered, services and enhancements offered, capacity and responsiveness of customer service. Many of the Company's competitors have financial resources which are substantially greater than those of the Company and its partners in such markets. The Company also faces competition from resellers. The FCC requires providers of wireless telephone services to offer service to resellers on a nondiscriminatory basis. A reseller buys blocks of telephone numbers from a wireless telephone service provider, usually at a discounted rate, and resells the service to the public for a profit. Many telecommunications companies resell wireless telephone service as a complement to other services, such as long distance or local telephone services. In addition to competition from cellular and broadband PCS licensees, there is also competition from a variety of other communications technologies. See Item 1. "Business/Competition/Competing Technologies." Continuing technological advances in the communications field make it impossible to predict the extent of additional future competition for wireless systems, but it is certain that in the future there will be more potential substitutes for wireless service. There can be no assurance that the Company will not face significant future competition or that the Company's current wireless technology will not eventually become obsolete. HIGHLY REGULATED INDUSTRY The licensing, ownership, construction, operation and sale of controlling interests in wireless telephone systems are regulated by the FCC. Certain aspects of wireless telephone system ownership, sale, construction, and operation (including, but not limited to, rates and the resale of wireless service) may be subject to public utility or other state and municipal regulation in the areas in which the Company provides service. Changes in the regulation of wireless telephone system operators or their activities (such as increased price regulation by state authorities or a decision by the FCC to permit more than two licensees in each service area) could adversely affect the business and operating results of the Company. In addition, FCC licenses are subject to renewal and regulatory compliance requirements. Non-compliance may result in fines, termination of the license or a denial by the FCC of an application to renew the license. There may be competition for FCC licenses upon the expiration of their initial ten-year terms, and there can be no assurance that any FCC license will be renewed. 32 The transfer of a license or any controlling interest in a license is subject to prior approval by the FCC. NEW INDUSTRY; DEVELOPING AND CHANGING TECHNOLOGIES; SUBSCRIBER CANCELLATIONS Although over 600 wireless telephone systems are operational in the United States and other countries, the industry has only a limited operating history. As a result, there is uncertainty concerning the future of the industry and the potential demand for wireless telephone service by the public. In addition, the success of the Company's operations may be adversely affected by matters beyond its control, such as changes in technology, decisions by the federal government as to spectrum allocation and competition, and the future cost of wireless telephones. The Company and the industry have also been affected by high rates of subscriber cancellations that require continuing replacement of the customer base in order to maintain subscription levels and revenues. RESTRICTIVE COVENANTS; CONSEQUENCES OF DEFAULT The Company's financing arrangements place certain limitations on the Company. The Domestic Credit Facility is secured by the pledge of the stock of certain of the Company's subsidiaries not otherwise subject to restrictions under its Senior Note Indentures, including the subsidiary which operates the Benton Harbor system. The Domestic Credit Facility is further guaranteed by certain subsidiaries holding Investment Interests. The Domestic Credit Facility restricts the incurrence of certain additional debt by the Company and limits the Company's ability to pay dividends. The Puerto Rico Credit Facility, which is non-recourse to the Company, is secured by substantially all of the assets of CPRW and its direct and indirect subsidiaries and requires CPRW to meet and maintain certain financial and operating covenants, including the maintenance of certain minimum annualized cash flows, as defined, the maintenance of certain ratios of operating cash flow to debt service and total outstanding debt to operating cash flow and performance requirements including minimum subscriber levels. The facility restricts the use of borrowing, limits the incurrence of certain additional indebtedness by CPRW and limits CPRW's ability to declare and pay dividends to the Company and management fees to affiliates. Failure to satisfy such covenants would constitute a default under the facility in which event Citibank, N.A. could accelerate all amounts outstanding thereunder, and exercise certain other rights and remedies as a secured creditor. On November 15, 1993, the Company issued $250,000 aggregate principal amount of 8 7/8% Senior Notes due 2001 (the "8 7/8% Notes"). The Company is required to make semi-annual payments of interest on the 8 7/8% Notes at the rate of 8 7/8% per annum. On May 11, 1995, the Company issued $100,000 aggregate principal amount of 10 1/8% Senior Notes due 2005 (the "10 1/8% Notes"). The Company is required to make semi-annual payments of interest on the 10 1/8% Notes at the rate of 10 1/8% per annum. The terms of the indentures with respect to the 8 7/8% Notes and the 10 1/8% Notes (the "Indentures") require the Company to meet and maintain certain financial and operating covenants and achieve performance requirements. The Indentures also restrict the Company from directly or indirectly declaring or paying any dividends on its presently or subsequently issued common stock; limits the ability of the Company to incur additional indebtedness and limits any distributions of assets to its stockholders. 33 The Company was in compliance with all of the above covenants as of May 31, 1998. The Company presently expects to remain in compliance with such covenants, but there can be no assurance to such effect. In connection with the Merger, it is anticipated that the Company will incur indebtedness in the aggregate amount of approximately $1.75 billion in the form of senior secured credit facilities, an unsecured bridge loan and an issuance of subordinated notes. It is anticipated that the credit facilities, bridge loan and notes to be entered into in connection with the Merger (the "Credit Facilities") will impose significant operating and financial restrictions on the Company and its subsidiaries. Such restrictions will affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company to incur additional indebtedness, pay dividends, repay indebtedness prior to stated maturities, sell assets, make investments, engage in transactions with stockholders and affiliates, issue capital stock, create liens, or engage in mergers and acquisitions. In addition, the Credit Facilities will require the borrowers thereunder to maintain certain financial ratios. These restrictions could also limit the ability of the Company to effect future financings, make needed capital expenditures, withstand a future downturn in its business or the economy in general, or otherwise conduct necessary corporate activities. A failure by the Company to comply with these restrictions could lead to a default under the terms of such indebtedness notwithstanding the ability of the Company to meet its debt service obligations. In the event of default, the holders of such indebtedness could elect to declare all such indebtedness to be due and payable together with accrued and unpaid interest. In such event, a significant portion of the Company's other indebtedness (including its subsidiaries') may become immediately due and payable and there can be no assurance that the Company would be able to make such payments or borrow sufficient funds from alternative sources to make any such payment. Even if additional financing could be obtained, there can be no assurance that it would be on terms that are acceptable to the Company. In addition, the Surviving Corporation and the subsidiaries that are borrowers under the Credit Facilities are generally expected to pledge as security the capital stock of all their direct and indirect subsidiaries to the lenders providing such facilities. The pledge of this capital stock could impair the Company's ability to obtain future financing on favorable terms, if at all. Further, in the event any subsidiary were to default on its obligations under the Credit Facilities and the lenders were to foreclose upon such pledged capital stock, the Company, as the holding company for such subsidiary, would likely be unable to service or repay its existing indebtedness. CONTROL BY CERTAIN STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS Century has a controlling interest in the Company. See Item 1 "Business/General." The Company, Century and Citizens have entered into a Stock Transfer Agreement (the "Stock Transfer Agreement") which restricts the voting and sale by either Century or Citizens of any of their shares of Convertible Preferred Stock, Second Series Convertible Preferred Stock and Class B Common Stock, as well as the shares of Class A Common Stock into which such Class B Common Stock, Convertible Preferred Stock or Second Series Convertible Preferred Stock may be converted. In addition, the Stock Transfer Agreement gives the Company a right of first refusal to purchase such shares under certain circumstances. There can be no assurance that the Company would be able to fund any such purchases if the opportunity arose. 34 As a result of its share ownership and in accordance with the terms of the Stock Transfer Agreement, Century is able to nominate at least a majority and elect all of the directors of the Company. All directors of the Company are affiliated with either Century or Citizens. The control of the Company by Century, the provisions of the Company's Restated Certificate of Incorporation regarding the voting rights of holders of the Company's Common Stock and preferred stock and the restrictions imposed by the Stock Transfer Agreement as to voting and sales (as discussed above) may, individually and collectively, render more difficult non-negotiated tender offers or other efforts to obtain control of the Company and therefore deprive stockholders of opportunities to sell shares at prices higher than those prevailing in the market. Pursuant to the Stockholder Agreement with Acquisition, Century has agreed to terminate the Stock Transfer Agreement as of the effective time of the Merger. Century has also agreed to vote its shares of the Company in favor of the approval and adoption of the Merger Agreement. ACQUISITIONS AND INVESTMENTS Opportunities for growth through acquisitions and investments in the Company's wireless telephone and other communications businesses, and future operating results and the success of acquisitions and investments within and outside the United States may be subject to the effects of, and changes in, U.S. and foreign trade and monetary policies, laws and regulations, political and economic developments, inflation rates, and the effects of taxes and operating conditions. OPERATING HAZARDS AND UNINSURED RISKS While the Company maintains insurance against certain of the risks associated with its wireless telephone and other communications businesses, the occurrence of a significant event for which the Company is not fully insured could have a material adverse affect on the Company. REFINANCING AND INTEREST RATE EXPOSURE RISKS The business and operating results of the Company can be adversely affected by factors such as the availability or cost of capital, changes in interest rates, changes in tax rates due to new tax laws, market perceptions of the cellular telephone or other communications businesses of the Company, or security ratings. POTENTIAL FOR CHANGES IN ACCOUNTING STANDARDS Authoritative generally accepted accounting principle or policy changes from such standard setting bodies as the Financial Accounting Standards Board, the FCC or the SEC may affect the Company's results of operations or financial position. INVESTMENT INTERESTS; CAPITAL CALLS With respect to any system in which the Company now or in the future holds an Investment Interest, the Company has limited ability to direct the operation of such system and, if it does not meet a capital call, the Company's ownership interest in such system may be diluted. Capital calls 35 with respect to the Investment Interests for the fiscal years ended May 31, 1998, 1997 and 1996 were approximately, $787, $2,878 and $1,463 respectively. The Company has, to date, paid all capital calls that it has received. Although the Company anticipates that such capital calls will decrease over time, there can be no assurance that such capital calls will, in fact, decrease. Capital calls may also be issued in connection with acquisitions by the respective limited partnerships. The Company intends to fund its pending and future capital calls from internally generated funds, bank borrowings or the issuance of additional debt or equity securities. There can be no assurance that the Company will be able to pay such capital calls when due. * * * * * ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary financial information that are required to be included pursuant to this Item 8 are listed in Item 14 under the caption "(a)1. Index of Financial Statements" in this Annual Report on Form 10-K, together with the respective pages in this Annual Report on Form 10-K where such information is located. The financial statements and supplementary financial information specifically referenced in such list are incorporated in this Item 8 by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the fiscal year ended May 31, 1998, the Company was not involved in any disagreement with its independent certified public accountants on accounting principles or practices or on financial statement disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the directors of the Company required to be included pursuant to this Item 10 will be included under the caption "Election of Directors" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders (the "Proxy Statement"), to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended, and is incorporated in this Item 10 by reference. The information with respect to the executive officers of the Company required to be included pursuant to this Item 10 is included under the caption "Executive Officers of Centennial" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information with respect to executive compensation required to be included pursuant to this Item 11 will be included under the captions "Executive Compensation" and "Certain 36 Relationships and Related Transactions" in the Proxy Statement and is incorporated in this Item 11 by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information with respect to the security ownership of (1) beneficial owners of more than 5% of the Class A Common Stock and Class B Common Stock, (2) the directors or nominees for director of the Company, (3) each of the top five executive officers and (4) all directors and officers of the Company as a group required to be included pursuant to this Item 12 will be included under the captions "Principal Shareholders of the Company", "Election of Directors" and "Executive Compensation and Other Information--Beneficial Ownership by Management" in the Proxy Statement and is incorporated in this Item 12 by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company leases space for the MTSO serving the southwestern cluster and space on an antenna tower in the southwestern cluster from Century for an aggregate current annual rent of approximately $1,000 pursuant to an oral month to month lease agreement. Further, the Company leases certain warehouse space in Puerto Rico to Century-ML for a current annual rent of approximately $23,000 pursuant to a written lease agreement. The Company leases and shares capacity on the fiber optic cable television facility and network of Century-ML for the purpose of operating as a competitive access provider. The Company shares in the cost of construction, operation and maintenance of the Century-ML fiber network on a pro rata basis based on the percentage of the number of fibers of the network used by or reserved for the Company. During fiscal 1997, the Company recorded a deferred asset and a related payable to an affiliate in its consolidated balance sheet in the amount of $6,000,000 to reflect certain costs incurred by the Company to secure the use of the fiber optic network as required by the Facilities Agreement. This amount, which was paid by the Company during fiscal 1998, represents the Company's share of the costs of constructing Century-ML's fiber optic network. (See Note 1 to the consolidated financial statements). The Company is controlled by Century. Century has an approximate 34% Common Stock interest and, through ownership of the Company's Class B Common Stock which has disproportionate votes per share (15 votes per share), an approximate 74% voting interest in the Company at May 31, 1998. The Company and Century entered into a Services Agreement, effective August 30, 1996 (the "Services Agreement"), pursuant to which Century, through its personnel, provides such 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 include 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 pays Century the annual sum of $1,000,000 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. Pursuant to the Stockholder Agreement with Acquisition, Century has 37 agreed to terminate the Services Agreement as of the effective time of the Merger. Additional information with respect to any reportable transaction, business relationship or indebtedness between the Company and the beneficial owners of more than 5% of the Class A Common Stock and Class B Common Stock, the directors or nominees for director of the Company, the executive officers of the Company or the members of the immediate families of such individuals required to be included pursuant to this Item 13 will be included under the caption "Executive Compensation and Other Information--Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated in this Item 13 by reference. See Note 9 to the Company's consolidated financial statements for further discussion of transactions with related parties. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. INDEX OF FINANCIAL STATEMENTS The following financial statements are included at the indicated page in this Annual Report on Form 10-K and incorporated in this Item 14(a)1 by reference:
Page ---- Independent Auditors' Report ......................... F-1 Consolidated Balance Sheets........................... F-2 Consolidated Statements of Operations................. F-4 Consolidated Statements of Common Stockholders' Equity.............................................. F-5 Consolidated Statements of Cash Flows................. F-6 Notes to Consolidated Financial Statements............ F-8 2. FINANCIAL STATEMENT SCHEDULES Schedule I. Condensed Financial Information of Registrant 3. EXHIBITS See Item 14(c) below. (b) REPORTS ON FORM 8-K The Company did not file a Report on Form 8-K during the fiscal quarter ended May 31, 1998. 38 (c) EXHIBITS The following documents are filed as part of this Annual Report on Form 10-K: 3.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 6(a)(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1993 and incorporated herein by reference). 3.2 By-laws of the Registrant as revised through February 11, 1992, (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended May 31, 1992 and incorporated herein by reference). 4.1 Registration Rights Agreement, dated August 30, 1991, among the Registrant, Century Holding and Citizens Utilities Company (filed as Exhibit 4.2 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). 4.2 Stock Transfer Agreement, dated August 30, 1991, among the Registrant, Century Holding and Citizens Utilities Company (filed as Exhibit 4.3 to Amendment No. 1 to the 1991 Form S-1 and incorporated herein by reference, said Amendment No. 1 having been filed with the Commission on October 7, 1991). 4.3 Senior Indenture, dated as of November 15, 1993, between the Registrant and Bank of Montreal Trust Company, as Trustee, (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated November 15, 1993, and incorporated herein by reference, said Current Report on Form 8-K having been filed with the Commission on November 15, 1993). 4.4 First Supplemental Indenture, dated as of November 15, 1993, between the Registrant and Bank of Montreal Trust Company, as Trustee, (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated November 15, 1993, and incorporated herein by reference, said Current Report on Form 8-K having been filed with the Commission on November 15, 1993). 4.5 Second Supplemental Indenture, dated as of May 11, 1995, between the Registrant and Bank of Montreal Trust Company, as Trustee, (filed as Exhibit 4.3(c) to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1995 and incorporated herein by reference). 4.6 $130,000,000 Credit Agreement, dated as of April 25, 1997, among Centennial Puerto Rico Wireless Corporation, as Borrower, Citibank, N.A., as Administrative Agent and CIBC Inc., Credit Lyonnais, New York Branch and Societe Generale, New York Branch, as Co-Agents. 4.7 Amendment No. 1, dated as of April 22, 1997, between the Registrant and Citibank, N.A., individually and as Administrative Agent. 39 10.1 Conflicts/Non-Compete Agreement among the Registrant, Century Holding, Century and Citizens Utilities Company, dated as of August 30, 1991, (filed as Exhibit 10.1 to Amendment No. 1 to the 1991 Form S-1 and incorporated herein by reference, said Amendment No. 1 having been filed with the Commission on October 7, 1991). 10.2 Extension and Renewal Agreement, dated March 21, 1997, effective as of August 30, 1996, between Century Cellular Holding Corp. and the Registrant (filed as an exhibit to the Registrant's quarterly report on Form 10-Q for the quarterly period ended February 28, 1997 and incorporated herein by reference). 10.3 Conditional Buy-Sell Agreement for Cellular Markets 151-305 and Joint Agreement, as amended, (filed as Exhibit 10.7 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.4 1991 Stock Option Plan, as amended, (filed as Exhibit 10.10 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.5 Incentive Award Plan, as amended, filed on Exhibit 10.11 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.6 1991 Employee Stock Purchase Plan, as amended, (filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.7 1993 Management Equity Incentive Plan, (filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.8 1993 Non-Employee/Officer Directors' Stock Option Plan, (filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.9 1991 Stock Equivalent Plan (filed as Exhibit 10.13 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). 10.10 Agreement establishing Sacramento Valley Limited Partnership, as amended, among PacTel Mobile Access, Roseville Telephone Co., Citizens Utilities Company of California and Contel Mobilcom, Inc., (filed as Exhibit 10.14 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). 40 10.11 Agreement establishing GTE Mobilnet of San Francisco Limited Partnership, as amended, (filed as Exhibit 10.15 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.12 Employment Agreement dated as of January 1, 1994 between the Registrant and Rudy J. Graf, (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.13 Employment Agreement dated as of January 1, 1994 between the Registrant and Phillip Mayberry, (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.14 Employment Agreement dated as of January 1, 1994 between the Registrant and Thomas Cogar, (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.15 Employment Agreement, dated as of September 1, 1995, between the Registrant and Robert Braden (filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1996 and incorporated herein by reference). 10.16 Facilities Agreement dated as of January 2, 1995 between Century ML Cable Venture and Century-ML Cable Corporation. 10.17 $50,000,000 Credit Agreement, dated as of September 12 ,1996, between the Registrant and Citibank, N.A. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1996 and incorporated herein by reference). 10.18 Amendment No. 2, dated as of July 28, 1997, to the Credit Agreement among the Registrant, each of the lenders thereto, and Citibank, N.A., as agent for the lenders (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended August 31, 1997 and incorporated herein by reference). 10.19 Amended and Restated Credit Agreement dated as of February 27, 1998 between Centennial Puerto Rico Wireless Corporation, each of the lenders that is a signatory thereto (the "lenders"), and Citibank, N.A., as administrative agent for the lender (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended February 28, 1997 and incorporated herein by reference). 10.20 Agreement and Plan of Merger, dated as of July 2, 1998, between the Registrant and CCW Acquisition corp. (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K, said Form 8-K having been filed on July 16, 1998, and incorporated herein by reference. 'D'10.21 Stockholder Agreement, dated as of July 2, 1998, between CCW Acquisition Corp. and Century Communications Corp. 41 'D'11 Computation of loss per common share. 'D'12 Computation of ratios. 'D'21 Subsidiaries of the Registrant. 'D'23.1 Consent of Deloitte & Touche LLP. 'D'27 Financial Data Schedule. - ---------------------------- * Constitutes a management contract or compensatory plan or arrangement. 'D' Filed herewith. 42 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Centennial Cellular Corp. New Canaan, Connecticut We have audited the accompanying consolidated balance sheets of Centennial Cellular Corp. and Subsidiaries as of May 31, 1998 and 1997, and the related consolidated statements of operations, common stockholders' equity and cash flows for each of the three years in the period ended May 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Centennial Cellular Corp. and Subsidiaries as of May 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1998 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Stamford, Connecticut July 17, 1998 F-1 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
May 31, ------------------------------ 1998 1997 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,620 $ 43,415 Accounts receivable, less allowance for doubtful accounts of $2,693 and $2,130, respectively 37,178 29,991 Inventory - phones and accessories 7,304 4,080 Prepaid expenses and other current assets 548 756 ----------- ----------- TOTAL CURRENT ASSETS 59,650 78,242 PROPERTY, PLANT AND EQUIPMENT - net 263,661 177,292 EQUITY INVESTMENT IN WIRELESS SYSTEMS - net 87,634 94,153 DEBT ISSUANCE COSTS, less accumulated amortization of $6,097 and $3,606, respectively 8,538 9,863 CELLULAR TELEPHONE LICENSES, less accumulated amortization of $263,633 and $213,739, respectively 235,508 285,202 PERSONAL COMMUNICATIONS SERVICE LICENSE, less accumulated amortization of $2,324 and $755, respectively 60,435 62,004 GOODWILL, less accumulated amortization of $27,016 and $23,185, respectively 124,533 130,065 OTHER ASSETS - net 7,458 8,029 ----------- ----------- TOTAL $ 847,417 $ 844,850 ----------- ----------- ----------- -----------
See notes to consolidated financial statements F-2 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (Amounts in thousands, except share data)
May 31, ------------------------- 1998 1997 ---------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,805 $ 1,754 Accrued expenses and other current liabilities 64,445 60,306 Payable to affiliate 435 1,192 --------- -------- TOTAL CURRENT LIABILITIES 74,685 63,252 LONG-TERM DEBT 510,000 429,000 DEFERRED LIABILITY 2,200 2,200 DEFERRED INCOME TAXES 26,584 43,977 COMMITMENTS AND CONTINGENCIES (Note 11) PREFERRED STOCK: Convertible redeemable preferred stock (at aggregate liquidation value), par value of $.01 per share, 102,187 shares authorized, issued and outstanding shares (redemption value of $1,823.00 per share) 186,287 186,287 Second series convertible redeemable preferred stock (at aggregate liquidation value), par value $.01 per share, 3,978 shares authorized, issued and outstanding shares (redemption value of $1,823.00 per share) 7,252 7,252 Senior preferred stock, par value $.01 per share, dividend rate 14%, 250,000 shares authorized, none issued - - Additional preferred stock, par value $.01 per share, 10,000,000 shares authorized, 3,978 shares issued as second series convertible redeemable preferred stock - - COMMON STOCKHOLDERS' EQUITY: Common stock par value $.01 per share: Class A, 1 vote per share, 100,000,000 shares authorized; issued, 16,716,683 and 16,492,884 shares, respectively; and outstanding 15,084,474 and 16,404,075 shares, respectively 167 165 Class B, 15 votes per share, 50,000,000 shares authorized, issued and outstanding 10,544,113 shares 105 105 Additional paid-in capital 358,018 369,704 Accumulated deficit (284,238) (252,291) --------- --------- 74,052 117,683 Less: Cost of 1,632,209 and 88,809 Class A common shares in treasury, respectively (30,614) (1,801) Shareholder note receivable - (3,000) Deferred compensation (3,029) - --------- --------- TOTAL COMMON STOCKHOLDERS' EQUITY 40,409 112,882 --------- --------- TOTAL $847,417 $ 844,850 --------- --------- --------- ---------
See notes to consolidated financial statements F-3 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share data)
Year Ended May 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ------------ REVENUES: Service revenue - Domestic $ 177,999 $ 140,674 $ 105,461 Service revenue - Puerto Rico 53,098 5,680 - Equipment sales 4,719 2,858 2,649 Interest income 1,685 1,811 4,087 ----------- ----------- ----------- 237,501 151,023 112,197 ----------- ----------- ----------- COSTS AND EXPENSES: Cost of equipment sold - Domestic 15,623 15,441 10,838 Cost of equipment sold - Puerto Rico 806 571 - Cost of services - Domestic 24,226 19,061 15,097 Cost of services - Puerto Rico 14,163 3,155 194 Selling, general and administrative - Domestic 54,983 44,538 33,968 Selling, general and administrative - Puerto Rico 26,807 10,594 220 Depreciation and amortization - Domestic 81,402 77,392 70,910 Depreciation and amortization - Puerto Rico 32,792 6,328 79 ----------- ----------- ----------- 250,802 177,080 131,306 ----------- ----------- ----------- OPERATING LOSS (13,301) (26,057) (19,109) ----------- ----------- ----------- INCOME FROM EQUITY INVESTMENTS 13,069 15,180 10,473 GAIN ON SALE OF ASSETS 5 3,819 8,310 INTEREST EXPENSE - DOMESTIC 34,407 30,910 27,334 INTEREST EXPENSE - PUERTO RICO 10,748 2,469 552 ----------- ----------- ----------- LOSS BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST (45,382) (40,437) (28,212) INCOME TAX BENEFIT (13,597) (7,295) (11,596) ----------- ----------- ----------- LOSS BEFORE MINORITY INTEREST (31,785) (33,142) (16,616) MINORITY INTEREST IN INCOME OF SUBSIDIARIES (162) (153) (15) ----------- ----------- ----------- NET LOSS $ (31,947) $ (33,295) $ (16,631) ----------- ----------- ----------- ----------- ----------- ----------- DIVIDENDS ON PREFERRED STOCK $ 16,451 $ 15,948 $ 13,590 ----------- ----------- ----------- ----------- ----------- ----------- LOSS APPLICABLE TO COMMON SHARES $ (48,398) $ (49,243) $ (30,221) ----------- ----------- ----------- ----------- ----------- ----------- LOSS PER COMMON SHARE - BASIC AND DILUTED $ (1.85) $ (1.83) $ (1.13) ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING DURING THE PERIOD 26,181,000 26,934,000 26,770,000 ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements F-4 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (Amounts in thousands, except share data)
Common Stock ---------------------------------------------------- Class A Class B ------------------------ ------------------------ Shares Dollars Shares Dollars ---------- ---------- ---------- ---------- Balance at June 1, 1995 15,741,752 $ 157 10,544,113 $ 105 Common Stock issued in conjunction with incentive plans 493,441 5 -- -- Common Stock issued in conjunction with acquistions 226,665 3 -- -- Vesting of stock options -- -- -- -- Net loss -- -- -- -- Accretion in liquidation value of preferred stock -- -- -- -- ----------- ---------- ----------- ---------- Balance at May 31, 1996 16,461,858 165 10,544,113 105 Common Stock issued in conjunction with incentive plans 31,026 -- -- -- Preferred stock dividends -- -- -- -- Income tax benefit-stock options exercised -- -- -- -- Net loss -- -- -- -- ----------- ---------- ----------- ---------- Balance at May 31, 1997 16,492,884 165 10,544,113 105 Common Stock issued in conjunction with incentive plans 223,799 2 -- -- Preferred stock dividends -- -- -- -- Treasury stock purchases -- -- -- -- Repayment of shareholder note receivable - -- -- -- -- Net loss -- -- -- -- ----------- ---------- ----------- ---------- Balance at May 31, 1998 16,716,683 $ 167 10,544,113 $ 105 =========== ========== =========== ========== Additional Shareholder Paid-In Treasury Note Deferred Accumulated Capital Stock Receivable Compensation Deficit Total --------- --------- ------------ ------------ ----------- ---------- Balance at June 1, 1995 $ 395,735 $ (1,801) $ (3,000) $ -- $(202,365) $ 188,831 Common Stock issued in conjunction with incentive plans 448 -- -- -- -- 453 Common Stock issued in conjunction with acquistions -- -- -- -- -- 3 Vesting of stock options 940 -- -- -- -- 940 Net loss -- -- -- -- (16,631) (16,631) Accretion in liquidation value of preferred stock (13,590) -- -- -- -- (13,590) --------- --------- --------- --------- --------- --------- Balance at May 31, 1996 383,533 (1,801) (3,000) (218,996) 160,006 Common Stock issued in conjunction with incentive plans 132 -- -- -- -- 132 Preferred stock dividends (15,948) -- -- -- -- (15,948) Income tax benefit-stock options exercised 1,987 -- -- -- -- 1,987 Net loss -- -- -- -- (33,295) (33,295) --------- --------- --------- --------- --------- --------- Balance at May 31, 1997 369,704 (1,801) (3,000) -- (252,291) 112,882 Common Stock issued in conjunction with incentive plans 4,765 -- -- (3,029) -- 1,738 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 $ 358,018 $ (30,614) $ 0 $ (3,029) $(284,238) $ 40,409 ========= ========= ========= ========= ========= =========
See notes to consolidated financial statements F-5 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Year Ended May 31, -------------------------------------- 1998 1997 1996 ---------- ----------- ----------- OPERATING ACTIVITIES: Cash received from subscribers and others $ 260,147 $ 173,781 $ 130,196 Cash paid to suppliers, employees and governmental agencies (162,638) (116,016) (73,694) Interest paid (42,738) (30,809) (32,220) ---------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 54,771 26,956 24,282 ---------- ----------- ----------- INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment 45 5,200 - Capital expenditures (129,300) (88,990) (38,082) Acquisition of other assets (6,178) (629) (1,673) Acquisition/disposition and exchange of wireless telephone systems - (34,908) 396 Acquisition of personal communications service license - (2,752) (44,813) Distributions received from equity investments 10,109 6,863 6,870 Capital contributed to equity investments (787) (2,878) (1,463) ---------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (126,111) (118,094) (78,765) ---------- ----------- ----------- FINANCING ACTIVITIES: Proceeds from long-term debt 216,000 119,000 - Repayment of long-term debt (135,000) (40,000) - Debt issuance costs paid (1,167) (3,650) (304) Dividends paid (12,338) (8,226) - Proceeds from issuance of Class A Common Stock 863 132 456 Proceeds from shareholder note receivable 3,000 - - Treasury stock purchases (28,813) - - ---------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 42,545 67,256 152 ---------- ----------- ----------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS (28,795) (23,882) (54,331) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 43,415 67,297 121,628 ---------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,620 $ 43,415 $ 67,297 ---------- ----------- ----------- ---------- ----------- -----------
See notes to consolidated financial statements F-6 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Amounts in thousands)
Year Ended May 31, --------------------------------------- 1998 1997 1996 ---------- ---------- ------------ Reconciliation of net loss to net cash provided by operating activities: Net loss $ (31,947) $ (33,295) $ (16,631) ---------- ----------- ------------ Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 114,194 83,720 70,989 Minority interest in income of subsidiaries 162 153 15 Deferred income tax - decrease (17,393) (10,623) (13,000) Equity in undistributed earnings of investee companies (13,069) (15,180) (10,473) Gain on sale on assets (5) (3,819) (4,176) Other 3,469 1,925 (4,131) Change in assets and liabilities net of effects of acquired/exchanged wireless telephone systems: Accounts receivable - (increase) (9,225) (3,393) (4,689) Prepaid expenses and other current assets - (increase) (3,014) (2,614) (511) Accounts payable and accrued expenses - increase 8,981 7,337 4,902 Customer deposits and prepayments - increase 2,618 2,745 1,987 ---------- ----------- ------------ Total adjustments 86,718 60,251 40,913 ---------- ----------- ------------ Net cash provided by operating activities $ 54,771 $ 26,956 $ 24,282 ---------- ----------- ------------ ---------- ----------- ------------
See notes to consolidated financial statements F-7 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) 1. SIGNIFICANT ACCOUNTING POLICIES Description of business - Centennial Cellular Corp. ("Centennial" and together with its subsidiaries and partnership interests, the "Company") operates wireless telephone systems which produce high quality, high capacity communications to and from vehicle-installed, ready-to-carry and hand-held wireless telephones ("wireless telephones"). Wireless telephone systems are designed to allow for mobility of the subscriber. In addition to mobility, wireless telephone systems provide access through system interconnections to local and long distance telecommunications networks and offer other ancillary services such as voice mail, call waiting, call forwarding and conference calling. These communications services can be integrated with a variety of competing networks. Wireless telephone service is provided to subscribers through a variety of price plans, the most common being a monthly fixed charge plus additional variable charges per minute of airtime used. The Company operates and invests in wireless telephone systems in the United States (the "Domestic Wireless Telephone Systems" or "Domestic Wireless") and on December 12, 1996 the Company began providing wireless telephone service in Puerto Rico (the "Puerto Rico Wireless Telephone System" or "Puerto Rico Wireless"). The Company operates its Domestic Wireless Telephone Systems pursuant to 29 cellular licenses which it owns. The Company operates its Puerto Rico Wireless Telephone System pursuant to a Major Trading Area ("MTA") Personal Communications Service ("PCS") license to provide broadband PCS in the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The Company also participates in the alternative access business in Puerto Rico pursuant to the Federal Communications Commission's requirements for interstate service and pursuant to an authorization issued to Puerto Rico Wireless in December 1994 by the Public Service Commission of the Commonwealth of Puerto Rico for intrastate service. Puerto Rico Wireless began providing competitive alternative access service in September 1997. Principles of consolidation - The consolidated financial statements include the accounts of the Company and all of its subsidiaries and partnership interests from their respective incorporation or acquisition dates. All material intercompany transactions and balances have been eliminated. Property, plant and equipment - Property, plant and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets: Wireless telephone transmission and distribution systems and related equipment 10 years Miscellaneous equipment and furniture and fixtures. 5-15 years PCS phones 18 months
Cellular telephone and personal communications service licenses - Licenses consist of amounts allocated under purchase accounting from the purchase price of acquired assets. Cellular telephone licenses are amortized over a ten-year life using the straight-line method. The PCS license is being amortized over a forty-year life using the straight line method commencing with the date of operations, December 12, 1996 (See Valuation of long lived assets). During the fiscal years ended May 31, 1997 and 1996, the Company capitalized interest costs of $2,752 and $5,200, respectively, related to the acquisition of the PCS license. During 1998, no interest was capitalized. Equity investments in wireless systems - The Company records such investments at purchased cost at the date of acquisition and adjusts for the Company's share of net income or loss from the acquisition date. The difference between the cost of such investment and the underlying book value of $123,024 is amortized over ten years (See Note 7). Goodwill - The excess of purchase price over the estimated fair value of tangible and intangible net assets acquired is being amortized using the straight-line method over 40 years (See Valuation of long lived assets). F-8 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) Other Assets - Included in other assets at May 31, 1998 is a $6,000 deferred charge, net of accumulated amortization of $350, which represent certain costs incurred by the Company in relation to the Facilities Agreement with Century-ML dated January 2, 1995 (the "Facilities Agreement") (See Note 9 "Transactions with Affiliated Companies"). These costs are being amortized over the life of the Facilities Agreement (25 years). Income taxes - The Company accounts for income taxes in accordance with Financial Accounting Standards No. 109, "Accounting for Income Taxes" which provides that the deferred tax provision is determined by the liability method. Deferred tax assets and liabilities are recognized based on the differences between the book and tax basis of assets and liabilities using presently enacted tax rates. Loss per common share - Effective with the quarter ended February 28, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for financial statements ending after December 15, 1997. This statement supersedes Accounting Principles Board Opinion No. 15 ("APB15") and replaces the presentation of primary earnings per share ("EPS") and fully diluted EPS on the face of the statement of operations with basic and diluted EPS. Basic EPS is calculated by dividing loss applicable to common shares by weighted average common shares outstanding. Diluted EPS reflects the potential dilution that could occur if potential common stock instruments of the Company were exercised, converted or issued. Adoption of SFAS 128 did not result in a change of EPS previously reported by the Company using APB 15. Revenue recognition - Wireless telephone service income includes earned subscriber service revenues and charges for installations and connections, net of associated roaming costs of $36,769, $28,049, and $20,000, in 1998, 1997 and 1996, respectively. Subscriber services paid in advance are recognized as income when earned. Valuation of long lived assets - The Company, on a quarterly basis, undertakes a review and valuation of the net carrying value, recoverability and write-off period of all categories of its long lived assets. The Company in its valuation considers current market values of wireless properties, competition, prevailing economic conditions, government policy including taxation and the Company's and the industry's historical and current growth patterns. The Company also considers its financial structure including the underlying cost of the securities which support the Company's internal growth and acquisitions, as well as the recoverability of the cost of its long lived assets based on a comparison of estimated undiscounted operating cash flows for the systems which generated long lived assets with the carrying value of the long lived assets. Management estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Disclosure of fair value of financial instruments - The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the immediate short-term maturity of these financial instruments. The carrying amounts of the Company's credit facilities approximate their fair values because of their variable interest rates. Statement of cash flows - Short-term investments classified as cash equivalents in the consolidated financial statements consist principally of overnight deposits and commerical paper with acquired maturities of three months or less. Reclassifications - Certain prior year balances have been reclassified to conform with the current year presentation. F-9 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) New Accounting pronouncements - The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure", Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1997, and Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" and Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" in 1998. Additionally, during 1998, the AICPA's Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-Up Activities". The Company believes these statements will not have a material impact on the Consolidated Financial Statements of the Company when adopted. 2. AGREEMENT AND PLAN OF MERGER On July 2, 1998, the Company and CCW Acquisition Corp. ("Acquisition"), a Delaware corporation organized at the direction of Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of Acquisition with and into Centennial (the "Merger"). Centennial will continue as the surviving corporation (the "Surviving Corporation") in the Merger. Subject to proration, pursuant to the Merger Agreement, outstanding Class A Common Stock ("Class A Common Stock") will be converted into the right to receive $43.50 per share in cash or to retain up to 7.1% of the common stock of the Surviving Corporation outstanding after the Merger. Class B Common Stock ("Class B Common Stock") will be converted into the right to receive $43.50 per share in cash; provided, that if the aggregate number of shares of Class A Common Stock elected to be retained by Centennial's existing stockholders is less than 7.1% of the shares outstanding after the Merger, then a number of shares of Class B Common Stock equal to the pro rata portion of such shortfall will be converted into shares of Class A Common Stock and retained. All outstanding Convertible Redeemable Preferred Stock (the "Convertible Redeemable Preferred Stock") and Second Series Convertible Redeemable Preferred Stock (the "Second Series Convertible Redeemable Preferred Stock" and, together with the Convertible Redeemable Preferred Stock, the "Redeemable Preferred Stock") will be converted into the right to receive $43.50 per share in cash on an as converted basis. (See Note 12 to the Company's Consolidated Financial Statements). Because 7.1% of the shares outstanding immediately after the effective time of the Merger (the "Effective Time") must be retained by such existing stockholders of the Company in the Merger, stockholders who do not elect to retain any shares may, due to proration, be required to retain some Common Stock. In addition, stockholders who elect to retain shares may, due to proration, retain Common Stock and receive cash in amounts which vary from the amounts such holders elected. Pursuant to the Merger Agreement, it is anticipated that each option to purchase Class A Shares (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") will be exercised or canceled pursuant to its terms or in exchange for a cash amount equal to the difference between $43.50 and the exercise price of the Option prior to the Effective Time. Each Option that is not exercised or canceled will remain outstanding immediately following the Effective Time and such Options will be subject to adjustment pursuant to the terms of the Option Plans. In connection with the execution of the Merger Agreement, Century Communications Corp. ("Century"), the Company's principal stockholder, entered into a Stockholder Agreement, dated July 2, 1998, with Acquisition (the "Stockholder Agreement"). Pursuant to the Stockholder Agreement, Century, which has an approximate 34% Common Stock interest and, through ownership of the Company's Class B Common Stock which has disproportionate votes per share (15 votes per share), an approximate 74% voting interest in the Company at May 31, 1998, agreed to vote its shares in favor F-10 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) of the approval and adoption of the Merger Agreement. Because Century agreed to approve the Merger by written consent, consummation of the Merger does not require approval by a majority of the Company's stockholders who are not affiliated with the Company or Acquisition. Pursuant to the Merger Agreement, from the date of the Merger Agreement to the Effective Time, the Company shall conduct its business in the ordinary course consistent with past practice and shall use reasonable efforts to preserve intact its business organizations and relationships with third parties and to keep available the services of its present officers and key employees. All statements contained in this Annual Report, including discussions of the Company's plans and strategies, are subject to the Company's covenants regarding the conduct of its business pending the Merger. The consummation of the Merger is subject to certain conditions, including, without limitation, the Company obtaining a final order from the Federal Communications Commission (the "FCC") approving the transfer of control of the Company to WCAS VIII and its affiliates, the expiration of antitrust regulatory waiting periods and Acquisition obtaining financing substantially on the terms contemplated by the commitment letters it received in connection with the Merger Agreement. Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement shall be paid by the party incurring such expenses. However, in the event the Company or Acquisition shall have terminated the Merger Agreement as a result of either the Company entering into a definitive written agreement with respect to any merger, consolidation or other business combination, tender or exchange offer, recapitalization transaction, asset or stock purchase or other similar transaction with a third party (an "Acquisition Transaction") or the Board of Directors of the Company having withdrawn, modified or amended in any manner adverse to Acquisition its approval or recommendation of the Merger Agreement or approved, recommended or endorsed any proposal for an Acquisition Transaction, then the Company shall reimburse Acquisition for documented fees and expenses (subject to a maximum of $25.0 million) and pay Acquisition a termination fee of $40 million. In connection with the Merger, Acquisition has received a commitment from a third party for financing for Acquisition and certain existing and future subsidiaries of the Company in the aggregate amount of approximately $1.6 billion in the form of senior secured credit facilities and an unsecured bridge loan. Additionally, an affiliate of WCAS VIII has agreed to purchase approximately $150 million aggregate amount of subordinated notes of the Surviving Corporation. Finally, WCAS VIII and other equity investors have agreed to purchase approximately $350 million of common stock of the Surviving Corporation. It is anticipated that this funding will be used to pay the merger consideration described above and related fees and expenses. Additionally, pursuant to the Merger Agreement, the Company has agreed that, upon the request of Acquisition, it will commence offers to repurchase its two outstanding issuances of public debt (the "Debt Offers"). As a condition to the closing of the Merger, the Company must consummate the Debt Offers prior to the closing date of the Merger. There can be no assurance that Acquisition will receive the funding referred to above or, if it does receive such funding, there can be no assurance as to the timing or terms thereof. Additionally, there can be no assurance that the Debt Offers will be consummated. Finally, in the event that Acquisition must seek alternative financing to consummate the Merger there can be no assurance that it will be able to secure alternative financing on terms no less favorable than the terms of the above commitments. The accompanying consolidated financial statements have been prepared on a historical basis and do not include any adjustments relating to the Agreement and Plan of Merger. F-11 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) 3. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES In connection with the completion of the acquisitions made during the year ended May 31, 1996, the Company recorded approximately $9,120 in goodwill and in deferred income taxes, resulting from differences between the book and tax basis of certain assets acquired (See Note 4). During the year ended May 31, 1996, the Company reclassified $2,774 of property, plant and equipment, $2,801 of goodwill, $160 of other assets, $476 of accounts receivable and $672 of accounts payable to cellular telephone license as a result of the exchange of cellular markets described in Note 4. 4. ACQUISITIONS/EXCHANGES/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. During the first quarter of fiscal 1999, the Company recorded a pre-tax gain of approximately $9,500 in relation to the sale of this investment interest. During the three years ended May 31, 1998, the Company acquired/exchanged/sold the net assets and interests in wireless telephone and PCS licenses as follows:
Amounts allocated to --------------------------------------- Number of Wireless Year Ended systems (net) Total net telephone and PCS Property, plant May 31, acquired/exchanged/sold purchase price licenses and equipment ---------------------------------------------------------------------------------------------- 1997 1 $ 35,000 $ 33,429 $ 1,234 1996 (1) $ (1,296) $ 8,517 $ (5,048)
These transactions have been included in the accompanying consolidated financial statements from the respective dates of acquisition. The Company has recorded the purchase price of the wireless telephone systems at the fair value of acquired assets on the date of acquisition with the excess purchase price being recorded as cellular telephone licenses and goodwill. The Company was the successful bidder for one of two MTA licenses (granted June 23, 1995) to provide broadband PCS services in the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The licensed area represents approximately 3,600,000 Net Pops. The amount of the final bid submitted and paid by the Company was $54,672. The Company used a portion of the net proceeds from the sale of the 10 1/8% Senior Notes due 2005 to pay a portion of the purchase price for the license (See Note 8). The Company also participates in the alternative access business in Puerto Rico pursuant to FCC requirements for interstate service and pursuant to an authorization issued to the Company in December, 1994 by the Public Service Commission of the Commonwealth of Puerto Rico for intrastate service. On September 12, 1996, the Company acquired, for approximately $35,000 in cash, 100% of the ownership interests in the partnership owning the wireless telephone system serving the Benton Harbor, Michigan MSA. The Benton Harbor market represents approximately 161,400 Net Pops. Approximately $33,429 of the purchase price was allocated to cellular telephone license. F-12 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) On October 31, 1995, the Company acquired (i) a 94.3% interest in the wireless telephone system serving the Lafayette, Louisiana MSA, representing approximately 205,700 Net Pops, in exchange for the Company's wireless telephone system serving the Jonesboro, Arkansas RSA (comprising approximately 205,000 Net Pops), the license rights and assets located in and covering Desoto and Red River Parishes of Louisiana 3 RSA (comprising approximately 34,700 Net Pops), the license rights and assets located in and covering a section of Morehouse Parish of Louisiana 2 RSA (comprising approximately 24,100 Net Pops) and a cash payment by the Company of approximately $5,580, subject to adjustment, and (ii) an additional 14.3% minority interest in the Elkhart, Indiana RSA and an additional 12.7% minority interest in the Lake Charles, Louisiana MSA for a cash payment of approximately $2,951. On June 30, 1995, the Company acquired the wireless telephone systems serving (a) Newtown, LaPorte, Starke, Pulaski, Jasper and White, Indiana, (b) Kosciusko, Noble, Steuben and Lagrange, Indiana ( c) Williams, Defiance, Henry and Paulding, Ohio and (d) Copiah, Simpson, Lawrence, Jefferson Davis, Walthall and Marion, Mississippi, representing an aggregate of approximately 608,100 Net Pops. The above-described systems were acquired by the Company in exchange for the Company's wireless telephone systems serving the Roanoke, Virginia MSA, the Lynchburg, Virginia MSA, North Carolina RSA #3 and Iowa RSA #5, representing an aggregate of approximately 644,000 Net Pops. Simultaneously with the consummation of the transaction described above, the Company sold its 72.2% interest in the wireless telephone system serving the Charlottesville, Virginia MSA, representing an aggregate of approximately 94,700 Net Pops, for a cash purchase price of approximately $9,914, subject to adjustment. The Company recognized a gain of approximately $4,176 as a result of the sale. 5. PRO FORMA INFORMATION The summary pro forma information includes the operations of the Company and completed acquisitions in each case as if such acquisitions/exchanges/sales had been consummated as of June 1, 1995.
Year Ended May 31, --------------------------- (Unaudited) 1997 1996 --------- -------- Revenues $ 152,293 $ 116,081 Net loss $ (32,255) $ (18,891) Basic loss per common share $ (1.79) $ (1.21)
Pro forma loss per common share for the years ended May 31, 1997 and 1996 is calculated using the weighted average number of common shares outstanding during the period. F-13 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) 6. ACCOUNT ANALYSIS Property, plant and equipment consists of the following:
May 31, -------------------------- 1998 1997 --------- --------- Land $ 1,946 $ 1,752 Wireless telephone transmission and distribution systems and related equipment 274,376 183,417 Miscellaneous equipment and furniture and fixture 22,523 15,753 PCS phones 44,497 14,781 --------- --------- 343,342 215,703 Less accumulated depreciation (79,681) (38,411) --------- --------- $ 263,661 $ 177,292 ========= =========
Depreciation expense was approximately $46,211, $17,684 and $8,851 for the years ended May 31, 1998, 1997 and 1996, respectively. Accrued expenses and other current liabilities consists of the following:
May 31, --------------------- 1998 1997 ------- ------- Accrued interest payable $ 3,570 $ 3,482 Customer deposits & prepayments 10,345 7,727 Accrued roamer service 3,731 4,247 Accrued dividend on preferred stock 8,225 4,113 Accrued network buildout 8,181 6,000 Accrued unpaid invoices 13,801 9,620 Accrued miscellaneous 16,592 25,117 ------- ------- $64,445 $60,306 ======= =======
7. EQUITY INVESTMENT IN WIRELESS SYSTEMS In conjunction with the Jonesboro/Lafayette systems exchange in fiscal 1996, the Company acquired an additional 12.7% minority interest in the Lake Charles, Louisiana MSA for a cash payment of approximately $1,106. F-14 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) The following summarizes the assets, liabilities and partners' capital, and results of operations of the seven wireless partnerships in which the Company's investments are accounted for by the equity method. All amounts have been derived from the individual wireless partnerships' financial statements through December 31, 1997 and adjusted for interim financial activity from the wireless partnerships' calendar year end to the Company's fiscal year end.
May 31, ---------------------- 1998 1997 ---------- -------- (unaudited) ASSETS Current $141,772 $117,062 Noncurrent 493,011 481,308 -------- -------- $634,783 $598,370 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Current liabilities $ 84,087 $ 58,659 Noncurrent liabilities 2,032 2,936 Partners' capital 548,664 536,775 -------- -------- $634,783 $598,370 ======== ========
Year Ended May 31, ------------------------------------------- 1998 1997 1996 --------- --------- ---------- (unaudited) RESULTS OF OPERATIONS Revenues $ 569,756 $ 520,873 $ 455,392 Costs and expenses 456,881 386,397 331,822 Other (income) expense (764) (120) (604) --------- --------- --------- Net income $ 113,639 $ 134,596 $ 124,174 ========= ========= ========= Centennial Cellular Corp. share of partnership net income $ 13,069 $ 15,180 $ 10,473 ========= ========= =========
The following presents the Company's ownership percentage of the Wireless Partnerships in which the Company's investments are accounted for by the equity method as of May 31, 1998:
Wireless Partnership % ownership -------------------- ----------- Lake Charles CellTel Co. 25.1% Sacramento-Valley Limited Partnership 23.5% Modoc RSA Limited Partnership 25.0% Coconino, Arizona RSA Limited Partnership (sold June 8, 1998) 21.3% Cal-One Cellular Limited Partnership 6.9% Pennsylvania RSA-6 (I) and (II) Limited Partnership 14.3% GTE Mobilnet of California Limited Partnership 2.9%
The Company uses the equity method of accounting to record the investments in partnerships. Under the equity method, the partnership investments were initially recorded at cost and are adjusted for distributions received from the partnerships, additional capital contributions, and the Company's share of the partnership's results of operations. F-15 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) An analysis of the Company's consolidated investments is as follows: Investment in Partnerships at June 1, 1995 $106,280 Add: Additional capital contributions paid 1,463 Company's share of Partnerships' net income 10,473 Additional investment in Partnerships 1,105 Less: Amortization of Investment - cost in excess of underlying book value (12,247) Partnerships' distribution to the Company (6,870) ---------- Investment in Partnerships at May 31, 1996 100,204 Add: Additional capital contributions paid 2,878 Company's share of Partnerships' net income 15,180 Less: Amortization of Investment - cost in excess of underlying book value (12,290) Partnerships' distributions to the Company, including receivable of $4,956 (11,819) ---------- Investment in Partnerships at May 31, 1997 $ 94,153 Add: Additional capital contributions paid 787 Company's share of Partnerships' net income 13,069 Less: Amortization of Investment - cost in excess of underlying book value (12,302) Partnerships' distributions to the Company, including receivable of $2,920 (8,073) ---------- Investment in Partnerships at May 31, 1998 $ 87,634 ==========
8. LONG-TERM DEBT
May 31, ---------------------- 1998 1997 -------- -------- 8 7/8% Senior Notes due 2001 $250,000 $250,000 10 1/8% Senior Notes due 2005 100,000 100,000 Domestic Credit Facility 10,000 5,000 Puerto Rico Credit Facility 150,000 74,000 Current maturities - - -------- -------- $510,000 $429,000 ======== ========
On November 15, 1993, the Company issued $250,000 of eight-year unsecured Senior Notes (the "8 7/8% Notes"). The interest on the 8 7/8% Notes is payable semi-annually at an interest rate of 8 7/8%. The interest is computed on the basis of a 360-day year (twelve 30 day months). The maturity date of the 8 7/8% Notes is November 1, 2001 unless redeemed earlier at the option of the Company, however not prior to May 1, 1999. If early redemption is sought during the twelve-month period beginning May 1 of each of the following years, the redemption price is calculated using:
Year Percentage ---- ---------- 1999 105.25% 2000 103.50% 2001 101.75%
Costs associated with the bond offering of $4,898 were capitalized and are being amortized on a straight-line basis over the life of the issue. At May 31, 1998 and 1997, the 8 7/8% Notes were trading at 104.01% and 99.47% of par or $260,025 and $248,675, respectively. F-16 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) On May 11, 1995, the Company issued $100,000 of ten-year unsecured Senior Notes (the "10 1/8% Notes"). The interest on the 10 1/8% Notes is payable semi-annually on the basis of a 360-day year (twelve 30 day months). The 10 1/8% Notes rank "pari passu" with the Company's 8 7/8% Notes and may not be redeemed prior to maturity on May 15, 2005. Costs associated with the May 11, 1995 bond offering of approximately $4,614 were capitalized and are being amortized on a straight-line basis over the life of the issue. At May 31, 1998 and 1997, the notes were trading at 110.87% and 104.25% of par or $110,870 and $104,250, respectively. Centennial Puerto Rico Wireless Corporation , a wholly owned subsidiary of the Company ("CPRW"), has a four-year $180,000 revolving credit facility, as amended, (the "Puerto Rico Credit Facility"). As of May 31, 1998, the Puerto Rico Credit Facility had $150,000 outstanding. The interest rate payable by CPRW on borrowings under the Puerto Rico Credit Facility is based, at the election of CPRW, on (a) the Base Rate, as defined, plus a margin of 1.50% or (b) the Eurodollar Base Rate, as defined, plus a margin of 2.50%, adjusted for the maintenance of certain specified ratios, as applicable. The Puerto Rico Credit Facility, which is nonrecourse to the Company, is secured by substantially all of the assets of CPRW and its direct and indirect subsidiaries. As of May 31, 1998, the Company had $10,000 outstanding under its $75,000 domestic revolving credit facility (the "Domestic Credit Facility"). The interest rate payable on the Domestic Credit Facility is based, at the election of the Company, on (a) the Base Rate,as defined, plus a margin of 2% or (b) the Eurodollar Base Rate, as defined, plus a margin of 3%. The Domestic Credit Facility is secured by the pledge of the stock of certain of the Company's subsidiaries, and is further guaranteed by certain subsidiaries holding investment interests. The Domestic Credit Facility, the Puerto Rico Credit Facility and the Company's public debt instruments require the maintenance of certain financial and operating covenants, restrict the use of borrowing, limit the incurrence of additional indebtedness and limit the ability to pay dividends and management fees. The Company and CPRW were in compliance with all covenants of their debt instruments at May 31,1998. 9. TRANSACTIONS WITH AFFILIATED COMPANIES The Company and Century Communications Corp. ("Century"), owner of approximately 34% of Centennial's common stock, currently maintain combined workers compensation and general insurance policies. The premiums are allocated between the Company and Century based upon the actual cost of each respective company's coverage. The Company believes that the amounts payable by the Company under such arrangement are more favorable than the premiums the Company would pay if it were to obtain coverage under a separate policy. The Company's cost of such insurance was approximately $624, $727 and $1,688 for the fiscal years ended May 31, 1998, 1997 and 1996 respectively, all of which was paid in full during the current fiscal year. In fiscal 1996 the Company and Century also maintained combined group health, life and casualty coverage. The Company is controlled by Century. Century has an approximate 34% common stock interest and, through ownership of the Company's Class B Common Stock which has disproportionate votes per share (15 votes per share), an approximate 74% voting interest in the Company at May 31, 1998. The Company and Century entered into a Services Agreement, effective August 30, 1996 (the "Services Agreement"), pursuant to which Century, through its personnel, provides design, construction, management, operational, technical and maintenance for the wireless telephone, paging and related systems owned and operated by the Company. Such services also include 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 F-17 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) Company by Century. As consideration for the services rendered and to be rendered under the Services Agreement, the Company pays 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 year ended May 31, 1998 and 1997, the Company recorded expenses of $1,000 and $750, respectively, under the Services Agreement. At May 31, 1998 and 1997, $250 and $750, respectively, of such amounts were recorded within Payable to Affiliate on the Company's consolidated balance sheet. Century has entered into an agreement with CCW Acquisition Corp. pursuant to which it has agreed to terminate the Services Agreement as of the effective time of the Merger. The Company leases space for the mobile telephone switching office ("MTSO") serving the southwestern cluster and space on an antenna tower in the southwestern cluster from Century for an aggregate current annual rent of approximately $1 pursuant to an oral month to month lease agreement. Further, the Company leases certain warehouse space in Puerto Rico to Century-ML for a current annual rent of approximately $23 pursuant to a written lease agreement. The Company leases and shares capacity on the fiber optic cable television facility and network of Century-ML for the purpose of operating as a competitive access provider. The Company shares in the cost of construction, operation and maintenance of the Century-ML fiber network on a pro rata basis based on the percentage of the number of fibers of the network used by or reserved for the Company. During fiscal 1997, the Company recorded a deferred asset and related payable to an affiliate in its consolidated balance sheet in the amount of $6,000 to reflect certain costs incurred by the Company to secure the use of the fiber optic network as required by the Facilities Agreement. This amount, which was paid by the Company during fiscal 1998, represents the Company's share of the costs of constructing Century-ML's fiber optic network. (See Note 1). Leavy Rosensweig & Hyman, of which David Z. Rosensweig, a director and Secretary of the Company, is a member, serves as general counsel to the Company and Century. The Company paid approximately $426, $656 and $518, for legal services to Leavy, Rosensweig & Hyman for the fiscal years ended May 31, 1998, 1997, and 1996, respectively. 10. INCOME TAXES The provision (benefit) for income taxes are summarized as follows:
Year Ended May 31, ------------------------------------ 1998 1997 1996 ---------- ----------- --------- Current (Federal and State) $ 3,796 $ 3,328 $ 1,404 Deferred (Federal and State) (17,393) (10,623) (13,000) ---------- ----------- --------- $ (13,597) $ (7,295) $(11,596) ========== =========== =========
Deferred income taxes result primarily from non-deductible depreciation and amortization resulting from book and tax basis differences of acquired subsidiaries. F-18 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) The effective income tax rate of the Company differs from the statutory rate as a result of the following items:
Year Ended May 31, --------------------------------------- 1998 1997 1996 -------- -------- --------- Computed tax benefit at federal statutory rate on the loss before income taxes and minority interest $(15,883) $(14,153) $ (9,874) Non-deductible amortization resulting from acquired subsidiaries 1,341 1,346 1,253 Minority interest in subsidiary (income) (57) (54) (5) State and local income tax provision (benefit), net of federal income tax benefit (533) (569) (199) Non recognized benefit of loss of Puerto Rico subsidiary - 926 - Other, including the utilization of accumulated net operating losses and establishment of valuation allowance for certain net operating losses 1,535 5,209 (2,771) -------- -------- --------- $(13,597) $ (7,295) $(11,596) ======== ======== ========
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities are as follows:
Year Ended May 31, -------------------------- 1998 1997 -------- -------- Deferred Tax Assets: Tax loss carryforward $ 50,895 $ 44,839 Other 576 461 Valuation allowance (13,189) (11,758) -------- -------- $ 38,282 $ 33,542 ======== ======== Deferred Tax Liabilities: Amortization of intangible assets $ 43,958 $ 58,442 Depreciation of fixed assets 20,908 19,077 -------- -------- $ 64,866 $ 77,519 ======== ======== Net deferred tax liabilities $ 26,584 $ 43,977 ======== ========
The valuation allowance recorded at May 31, 1998 and 1997 represents the portion of recorded tax loss carryforwards for which it is more likely than not that the benefit of such carryforwards will not be realized. The net deferred tax liabilities at May 31, 1998 and 1997 of $26,584 and $43,977 respectively, have been classified as non-current deferred income taxes on the consolidated balance sheet. At May 31, 1998, the Company and its subsidiaries had approximately $119,740 of net operating loss carryforwards for federal income tax purposes, expiring through May 31, 2013, some of which are subject to limitation on their future utilization under Section 382 of the Internal Revenue Code of 1986. 11. COMMITMENTS AND CONTINGENCIES Equipment and Installation Services In July 1998, the Company entered into an agreement pursuant to which the Company has agreed, subject to certain conditions, to purchase equipment and installation services for its Domestic Wireless Telephone Systems over the next 3 F-19 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) years at a cost of approximately $50,000. Legal Proceedings There are no material 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. Pending Acquisitions The Company plans to exercise, prior to the effective time of the Merger, its right to acquire the minority interests held by Century Federal Inc., an affiliate of Century ("Century Federal"), in the Cass and Jackson, Michigan systems for the prices paid by Century Federal for such minority interests in the acquisitions of such systems ($2,000 and $1,000, respectively). Upon completion of these transactions, the Company will own 100% of these systems. Stock Purchases During the year ended May 31, 1998, the Company directly purchased 1,270,200 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 have been accounted for as treasury shares. Subsequent to May 31, 1998, the Company has not directly purchased any additional shares of its Class A Common Stock in the open market. As of July 17, 1998, the Company is authorized to directly purchase 2,729,800 additional shares of its Class A Common Stock in the open market after giving effect to the shares purchased to date. Additionally, through a recently terminated agreement, the Company purchased 273,200 shares of its Class A Common Stock for approximately $5,400. Lease Commitments The Company's annual lease obligations and expenses under operating leases were approximately $6,891, $4,230 and $2,023 for each of the years ended May 31, 1998, 1997 and 1996, respectively. The majority of these operating leases are short-term in nature and may be canceled by either party if appropriate notice is given. 12. PREFERRED STOCK AND COMMON STOCK Common Stock The voting rights with respect to the two classes of the Company's common stock are as follows: Class A shares entitle the holder to one vote per share, Class B shares entitle the holder to fifteen votes per share. Shares of Class B common stock are convertible into shares of Class A common stock on a one-for-one basis. The Company is restricted from paying dividends on its common stock by its debt covenants (see Note 8). Preferred Stock On August 30, 1991, the Company completed a merger (the "1991 Merger") with Citizens Cellular Company, a wholly-owned subsidiary of Citizens ("Citizens Cellular"). In connection with the 1991 Merger, the Company issued the Convertible Redeemable Preferred Stock valued at $128,450 and 1,367,099 shares of Class B Common Stock representing F-20 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) 18.8% of the then common equity. The Convertible Redeemable Preferred Stock is convertible on or after the third anniversary from the date of issuance into 2,972,335 shares of Class A or B Common Stock. Although the Convertible Redeemable Preferred Stock carried no cash dividend requirement through August 30, 1996, 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 such preferred stock at August 30,1996 was $186,287. The accretion for the years ended May 31, 1997 and 1996, totaled approximately $3,475 and $13,080, respectively. Beginning September 1, 1996, the holders of the Convertible Redeemable 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. In connection with an amendment to the New Services Agreement, which was entered into in connection with the 1991 Merger, the Company issued to Century the Second Series Convertible Redeemable Preferred Stock valued at $5,000. The Second Series Convertible Redeemable Preferred Stock has terms identical to those of the Convertible Redeemable Preferred stock discussed above. The Second Series Convertible Redeemable Preferred Stock is convertible on or after the third anniversary from the date of issuance into 115,710 shares of Class A or B Common Stock. The fully accreted liquidation preference and redemption value of such preferred stock at August 30, 1996 was $7,252. The accretion for the years ended May 31, 1997 and 1996, totaled approximately $135 and $510, respectively. Assuming no change in the number of shares of such classes outstanding, the annual dividend that may be declared and made payable, with respect to the preferred stock is $15,834 and $616, respectively. Both classes of preferred stock are subject to mandatory redemption in fiscal 2007. Any unpaid dividends continue to accumulate without additional cost to the Company. During the years ended May 31, 1998 and 1997, the Company paid quarterly cash dividends with respect to both classes of preferred stock totaling $12,338 and $8,226, respectively. The Company will determine, from time to time, the timing, amount, or distribution (if any) of additional preferred stock dividends. 13. COMPENSATION PLANS AND ARRANGEMENTS 1991 Employee Stock Option Plan The Company's 1991 Employee Stock Option Plan (the "Employee Stock Option Plan") as amended, provides for the grant of options to purchase up to 2,025,000 shares of Class A Common Stock reserved thereunder to directors, officers and other key employees of the Company. The Employee Stock Option Plan permits the issuance of "incentive stock options," as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), as well as non-qualified stock options and stock appreciation rights. The Employee Stock Option Plan is administered by the Employee Stock Option Committee of the Board of Directors which determines the recipients and provisions of options granted under the Employee Stock Option Plan, including the option price, term and number of shares subject to option. The Board of Directors may amend the Employee Stock Option Plan, but the approval of the stockholders is necessary to increase the total number of shares that may be issued or transferred under the Employee Stock Option Plan, to change the minimum purchase price for shares subject to options, to change the maximum period during which options or stock appreciation rights may be exercised or to extend the period during which options or stock appreciation rights may be granted under the Employee Stock Option Plan. Generally, the option price of incentive and non-statutory stock options granted may be as determined by the Employee Stock Option Committee, but must be at least equal to the fair market value of the shares on the date of grant. The maximum term of each option is ten years. For any participant who owns shares possessing more than 10% of the voting rights of the outstanding Common Stock, the exercise price of any incentive stock option must be at least 110% of the fair market value of the shares subject to such option on the date of grant and the term of the option may not be longer than five years. Options become exercisable at F-21 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) such time or times as the Employee Stock Option Committee may determine when it grants options. The Employee Stock Option Plan permits the exercise of options by the payment of cash or delivery of shares of Class A Common Stock equal in fair market value on the date of exercise to the exercise price. Options granted under the Employee Stock Option Plan are not transferable by the holder. Since December 27, 1991, the Company has awarded options to purchase approximately 2,210,782 shares of Class A Common Stock under the Employee Stock Option Plan to approximately 215 employees of the Company, including executive officers and directors. During the fiscal years ended May 31, 1998, 1997 and 1996 the number of such options awarded were approximately 488,000, 925,782, and 0, respectively. At May 31, 1998, 558,245 options were exercisable. Director Option Plan The Company's Non-Employee/ Officer Director Option Plan (the "Director Option Plan") was adopted on October 27, 1993. The Director Option Plan provides for the grant of non-qualified options to purchase up to 50,000 shares of Class A Common Stock to non-employee/officer directors, who are not employees of the Company or its subsidiaries. Options for 1,000 shares of Class A Common Stock shall be automatically granted under the Director Option Plan on the date of the annual meeting of shareholders of the Company in each of the years 1993 through 2002. The Board of Directors may amend the Director Option Plan, except that the approval of the stockholders is necessary to increase the total number of shares which may be issued or transferred under the Director Option Plan, to change the minimum purchase price for shares subject to options, to change the maximum period during which options may be exercised or to extend the period during which options may be granted under the Director Option Plan. Generally, the option price of non-qualified stock options granted may be as determined by the Director Option Committee, but must be at least equal to 100% of the fair market value of the shares on the date of the grant. Options become exercisable at the rate of 20% per year beginning with the first anniversary of the date of the grant. The Director Option Plan permits the exercise of options by payments of cash or Class A Common Stock equal in value to the option price. Options granted under the Director Option Plan are not transferable by the holder other than by will or the laws of descent and distribution. During each of the fiscal years ended May 31, 1998, 1997 and 1996, 4,000 of such options were awarded. As of May 31, 1998, 18,198 options were outstanding under the Director Option Plan, of which 6,756 were exercisable. No options had been exercised as of May 31, 1998. F-22 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) A summary of the status of the Company's stock options as of May 31, 1996, 1997 and 1998 and changes during the years then ended are presented below:
Weighted Average Exercise Number Price --------- --------- 1996 Outstanding at June 1, 1995 1,296,952 $ 8.71 Granted 4,000 $18.25 Exercised (423,665) $ 1.00 Canceled (155,715) $ 5.35 --------- Outstanding at May 31, 1996 721,572 $13.98 1997 Granted 1,362,282 $11.57 Exercised (1,704) $ 9.75 Canceled (929,296) $14.40 --------- Outstanding at May 31, 1997 1,152,854 $10.80 1998 Granted 492,000 $19.00 Exercised (50,616) $10.53 Canceled (91,595) $13.38 --------- Options outstanding as of May 31, 1998 1,502,643 $13.34 ========= Options exercisable at May 31, 1998 565,001 $10.81 ========== ======
The following table summarizes information about options outstanding at May 31, 1998:
Range of Number Weighted Average Number Exercise Outstanding Remaining Weighted Average Exercisable Weighted Average Prices at 5/31/98 Contractual Life Exercise Price at 5/31/98 Exercise Price --------- ----------- ---------------- ---------------- ----------- ------------------ $ 9.75 - $13.5 1,023,445 7.20 years $ 10.84 559,045 $ 10.73 $ 17 - $20 479,198 9.52 years 18.67 5,956 18.62 --------- ----------------- ------- -------- ------- 1,502,643 7.94 years $ 13.34 565,001 $ 10.81 ========= ================= ======= ======== =======
1991 Employee Stock Purchase Plan The Company has reserved 200,000 shares of Class A Common Stock for issuance under the 1991 Employee Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, eligible employees (which generally includes all full-time employees of the Company) are able to subscribe for shares of Class A Common Stock at a purchase price of 85% of the average market price (as defined) of the Class A Common Stock on the first day or last day of the payroll deduction period relating to an offering under the Purchase Plan. Payment of the purchase price of the shares is to be made in installments through payroll deductions, with no right of prepayment. The Purchase Plan is administered by the Compensation Committee of the Board of Directors. Rights to purchase shares of Class A Common Stock under the Purchase Plan may not be transferred by the recipient and may be forfeited in the event of the recipient's termination of employment. As of May 31, 1998, approximately 1,476 employees and officers of the Company were eligible to participate in the Purchase Plan. As of May 31, 1998, approximately 35,260 shares were subscribed for under the Purchase Plan. Equity Incentive Plan The Company's 1993 Equity Incentive Plan (the "Equity Plan") was adopted by the Board of Directors and approved by the stockholders on October 27, 1993 and amended on October 29, 1996. The plan permits the issuance of up F-23 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) to 350,000 shares of the Company's Class A Common Stock for high levels of performance and productivity by officers and other management employees of the Company. The Equity Plan is administered by the Compensation Committee of the Company's Board of Directors. The plan authorizes the Committee to grant stock based awards that include but are not limited to, restricted stock, performance shares and deferred stock. The Committee determines the recipients and provisions of the grants under the Equity Plan, including the grant price, term and number of shares subject to grant. Generally, any employee will realize compensation taxable as ordinary income, and the Company will be entitled to a corresponding tax deduction in an amount equal to the sum of any cash received by the employee plus the fair market value of any shares of Class A Common Stock received by the employee. During the fiscal years ended May 31, 1998, 1997 and 1996, the number of restricted shares issued for awards under the Equity Plan were 131,000, 0 and 82,500. As of May 31, 1998, 216,500 restricted shares were outstanding under the Equity Plan. The expense reflected in the consolidated financial statements related to these restricted shares was not material. These restricted shares vest five years after the date of grant or upon the completion of the Plan of Merger (See Note 2). The estimated fair value of options granted during fiscal 1998, 1997 and 1996 were $6.69 per share, $3.49 per share and $5.81 per share, respectively. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized with respect to its stock option, and stock purchase plans. Had compensation cost for the Company's stock option plans and stock purchase plan been determined based on the fair value of the awards on the grant dates in accordance with the accounting provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net loss and net loss per common share for the years ended May 31, 1998, 1997 and 1996 would have been increased to the pro forma amounts indicated below:
1998 1997 1996 ----------- ----------- ------ Loss applicable to Common shares: As reported $(48,398) $(49,243) $(30,221) Pro forma $(49,306) $(49,921) $(30,237) Loss per common share: As reported $ (1.85) $(1.83) $(1.13) Pro forma $ (1.88) $(1.85) $(1.13)
The fair value of options granted under the Company's stock option plans during fiscal 1998, 1997 and 1996 was estimated on the dates of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used:
1998 1997 1996 ------- ------- ------ Expected Volatility 43.63% 36.78% 36.78% Risk-Free Interest Rate 5.45% 6% 6% Expected Lives of Option Grants 3 years 3 years 3 years
Incentive Award Plan The Incentive Award Plan (the "Incentive Plan") permits the grant of awards to key employees of the Company, which may include employee-directors and officers, payable in cash or shares of Class A Common Stock. The Company has reserved 200,000 shares of Class A Common Stock for issuance under the Incentive Plan. The awards are payable in five to ten equal annual installments on January 1 of the succeeding years after the grant of the award, provided that the recipient is F-24 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) an employee on the installment payment date. The Incentive Plan is administered by the Compensation Committee of the Board of Directors, which selects the recipients of awards as well as the amount of such awards and any restriction on such awards. The Board of Directors may amend the Incentive Plan. Awards granted under the Incentive Plan may not be transferred by the recipient and may be forfeited in the event of the recipient's termination of employment. As of May 31, 1998, approximately 1,490 employees, officers and directors of the Company were eligible to participate in the Incentive Plan. No awards have been made under the Incentive Plan. 1991 Stock Equivalent Plan The Company's 1991 Stock Equivalent Plan (the "Equivalent Plan") permits the grant of units of Class A Common Stock Equivalents ("units") to key employees of the Company, including officers and directors. The Equivalent Plan is administered by the Compensation Committee of the Board of Directors, which selects the employees to be granted units, determines the number of units covered by each grant, determines when units will be granted and the conditions subject to which any amount may become payable with respect to the units, and prescribes the form of instruments evidencing units granted under the Equivalent Plan. Payments for units may be made by the Company in cash or in shares of Class A Common Stock at the fair market value of the Class A Common Stock on the date of payment. The Company has reserved 200,000 shares of Class A Common Stock for issuance under the Equivalent Plan. As of May 31, 1998, approximately 1,490 employees, officers and directors of the Company were eligible to participate in the Equivalent Plan. Under the terms of the Equivalent Plan, the total number of units included in all grants to any participant may not exceed 10% of the total number of units for which grants may be made under the Equivalent Plan. Units granted under the Equivalent Plan are not transferable. As of May 31, 1998, no units had been granted under the Equivalent Plan. Retirement Plan Effective January 1, 1994, the Company adopted a 401(k) defined contribution retirement plan covering employees of its wholly owned subsidiaries. If a participant decides to contribute, a portion of the contribution is matched by the Company. Total expense under the plan was approximately $326, $221, and $134 for the years ended May 31, 1998, 1997, and 1996, respectively. NOTE 14. SEGMENT INFORMATION The Company's consolidated financial statements include two distinct business segments. The Domestic Wireless segment owns, operates and invests in wireless telephone systems. The Company's Puerto Rico Wireless segment began providing wireless telephone service in Puerto Rico on December 12, 1996 and participates in the alternative access business in Puerto Rico pursuant to the Federal Communications Commission's requirements for interstate service and pursuant to an authorization issued to Puerto Rico Wireless in December 1994 by the Public Service Commission of the Commonwealth of Puerto Rico for intrastate service. Puerto Rico Wireless began providing alternative access service in September 1997. F-25 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) Information about the Company's operations in its two business segments for the years ended May 31, 1998, 1997 and 1996 is as follows:
Year Ended May 31, 1998 1997 1996 - ------------------ -------- ---------- ---------- Gross revenues: Domestic Wireless $ 182,944 $ 145,120 $ 112,197 Puerto Rico Wireless 54,557 5,903 - --------- --------- --------- $ 237,501 $ 151,023 $ 112,197 ========= ========= ========= Operating income (loss): Domestic Wireless $ 6,710 $ (11,311) $ (18,615) Puerto Rico Wireless (20,011) (14,746) (494) --------- --------- --------- $ (13,301) $ (26,057) $ (19,109) ========= ========= ========= Net loss: Domestic Wireless $ (1,188) $ (16,081) $ (15,585) Puerto Rico Wireless (30,759) (17,214) (1,046) --------- --------- --------- $ (31,947) $ (33,295) $ (16,631) ========= ========= ========= Assets, at end of period: Domestic Wireless $ 718,231 $ 764,495 $ 710,222 Puerto Rico Wireless 221,504 150,455 75,590 Eliminations (92,318) (70,100) - --------- --------- --------- $ 847,417 $ 844,850 $ 785,812 ========= ========= ========= Depreciation and amortization: Domestic Wireless $ 81,402 $ 77,392 $ 70,910 Puerto Rico Wireless 32,792 6,328 79 --------- --------- --------- $ 114,194 $ 83,720 $ 70,989 ========= ========= ========= Capital expenditures: Domestic Wireless $ 38,996 $ 38,921 $ 22,604 Puerto Rico Wireless 90,304 50,069 15,478 --------- --------- --------- $ 129,300 $ 88,990 $ 38,082 ========= ========= =========
F-26 NOTE 14 - CONTINUED CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEET FINANCIAL DATA MAY 31, 1998 (AMOUNTS IN THOUSANDS)
Centennial Cellular Corp. before Consolidation of Puerto Rico Puerto Rico Eliminations Consolidated -------------- ----------- ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 6,503 $ 8,117 $ - $ 14,620 Accounts receivable - net 29,653 7,525 - 37,178 Inventory - Phones and Accessories 5,657 1,647 - 7,304 Prepaid expenses and other current assets 295 253 - 548 --------- --------- --------- --------- Total current assets 42,108 17,542 - 59,650 Property, plant & equipment - net 128,969 134,692 - 263,661 Investment in Puerto Rico, at cost 90,100 - (90,100) - Equity investments in wireless telephone systems - net 87,634 - - 87,634 Debt issuance costs - net 5,502 3,036 - 8,538 Cellular telephone licenses - net 235,508 - - 235,508 Personal communications services licenses - net - 60,435 - 60,435 Goodwill - net 124,533 - - 124,533 Other assets - net 3,877 5,799 (2,218) 7,458 --------- --------- --------- --------- $ 718,231 $ 221,504 $ (92,318) $ 847,417 ========= ========= ========= =========
F-27 NOTE 14. CONTINUED CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEET FINANCIAL DATA (CONTINUED) MAY 31, 1998 (AMOUNTS IN THOUSANDS)
Centennial Cellular Corp. before Consolidation of Puerto Rico Puerto Rico Eliminations Consolidated -------------- ----------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,460 $ 4,345 $ - $ 9,805 Accrued expenses and other current liabilities 40,691 23,754 - 64,445 Payable to affiliate 250 185 - 435 --------- --------- --------- --------- Total current liabilities 46,401 28,284 - 74,685 Long-term debt 360,000 150,000 - 510,000 Deferred liability 2,200 2,218 (2,218) 2,200 Deferred income taxes 26,584 - - 26,584 Convertible redeemable preferred stock 186,287 - - 186,287 Second series convertible redeemable preferred stock 7,252 - - 7,252 Common stockholders' equity: Common stock, par value $.01 per share: Class A 167 - - 167 Class B 105 - - 105 Additional paid-in capital 358,018 90,100 (90,100) 358,018 Other (33,643) - - (33,643) Accumulated deficit (235,140) (49,098) - (284,238) --------- --------- --------- --------- Total common stockholders' equity 89,507 41,002 (90,100) 40,409 --------- --------- --------- --------- $ 718,231 $ 221,504 $ (92,318) $ 847,417 ========= ========= ========= =========
F-28 NOTE 14. CONTINUED CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA YEAR ENDED MAY 31, 1998 (AMOUNTS IN THOUSANDS)
Centennial Cellular Corp. before consolidation of Puerto Rico Puerto Rico Eliminations Consolidated -------------- --------- ------------ ------------ Revenue $ 182,944 $ 54,557 $ - $ 237,501 --------- --------- -------- --------- Costs and expenses: Cost of equipment sold 15,623 806 - 16,429 Cost of services 24,226 14,163 - 38,389 Selling, general & administrative 54,983 26,807 - 81,790 Depreciation and amortization 81,402 32,792 - 114,194 --------- --------- -------- --------- 176,234 74,568 - 250,802 --------- --------- -------- --------- Operating income (loss) 6,710 (20,011) - (13,301) --------- --------- -------- --------- Income from equity investments 13,069 - - 13,069 Gain on sale of assets 5 - - 5 Interest expense 34,407 10,748 - 45,155 --------- --------- -------- --------- Loss before income tax benefit and minority interest (14,623) (30,759) - (45,382) Income tax benefit 13,597 - - 13,597 --------- --------- -------- --------- Loss before minority interest (1,026) (30,759) - (31,785) Minority interest in income of subsidiaries (162) - - (162) --------- --------- -------- --------- Net loss $ (1,188) $ (30,759) $ - $ (31,947) ========= ========= ======= =========
F-29 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands, except subscriber and share data) 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Three Months Ended --------------------------------------------------------------- August 31, November 30, February 29, May 31, 1995 1995 1996 1996 --------------------------------------------------------------- Revenues $ 26,922 $ 27,713 $ 27,938 $29,624 Operating loss (4,704) (4,822) (6,571) (3,012) Net (loss) income (3,418) (7,349) (8,807) 2,943 Net loss per common share (.25) (.40) (.45) (.03) Three Months Ended --------------------------------------------------------------- August 31, November 30, February 28, May 31, 1996 1996 1997 1997 --------------------------------------------------------------- Revenues $ 32,365 $ 35,359 $ 39,174 $44,125 Operating loss (3,399) (4,712) (8,046) (9,900) Net loss (6,107) (6,121) (9,486) (11,581) Net loss per common share (.36) (.38) (.50) (.58) Three Months Ended --------------------------------------------------------------- August 31, November 30, February 28, May 31, 1997 1997 1998 1998 --------------------------------------------------------------- Revenues $ 52,853 $ 59,134 $ 59,179 $66,335 Operating income (loss) (2,128) (5,374) (8,359) 2,560 Net loss (6,786) (9,626) (9,670) (5,865) Net loss per common share (.41) (.52) (.54) (.39)
F-30 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Centennial Cellular Corp. New Canaan, Connecticut We have audited the consolidated financial statements of Centennial Cellular Corp. and subsidiaries (the "Company") as of May 31, 1998 and 1997 for each of the three years in the period ended May 31, 1998, and have issued our report thereon dated July 17, 1998; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedules listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Deloitte & Touche LLP Stamford, Connecticut July 17, 1998 F-31 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (Amounts in thousands)
YEAR ENDED MAY 31, ------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- REVENUES: Service revenue $ 177,999 $ 140,674 $ 105,461 Equipment sales 3,504 2,643 2,649 Interest income 1,441 1,803 4,087 --------------- --------------- --------------- 182,944 145,120 112,197 --------------- --------------- --------------- COSTS AND EXPENSES: Cost of services 24,226 19,061 15,291 Cost of equipment sold 15,623 15,441 10,838 Selling, general and administrative 54,983 44,537 33,757 Depreciation and amortization 81,402 77,392 70,910 --------------- --------------- --------------- 176,234 156,431 130,796 --------------- --------------- --------------- OPERATING INCOME (LOSS) 6,710 (11,311) (18,599) INTEREST EXPENSE 34,407 30,911 27,334 GAIN ON SALE OF ASSETS 5 3,819 8,310 INCOME (LOSS) FROM EQUITY INVESTMENTS (17,690) (2,034) 9,411 --------------- --------------- --------------- LOSS BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST (45,382) (40,437) (28,212) INCOME TAX BENEFIT (13,597) (7,295) (11,596) --------------- --------------- --------------- LOSS BEFORE MINORITY INTEREST (31,785) (33,142) (16,616) MINORITY INTEREST IN INCOME OF SUBSIDIARIES (162) (153) (15) --------------- --------------- --------------- NET LOSS (31,947) (33,295) (16,631) ACCUMULATED DEFICIT, BEGINNING OF YEAR (252,291) (218,996) (202,365) --------------- --------------- --------------- ACCUMULATED DEFICIT, END OF YEAR $ (284,238) $ (252,291) $ (218,996) =============== =============== ===============
See notes to condensed financial information F-32 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES SCHEDULE I- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands)
YEAR ENDED MAY 31, ------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- OPERATING ACTIVITIES: Cash Received from Subscribers and others $ 214,995 $ 169,242 $ 130,196 Cash Paid to suppliers, employees and governmental agencies (131,484) (103,255) (73,460) Interest Paid (33,372) (29,068) (31,668) ------------------- ------------------- ------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 50,139 36,919 25,068 ------------------- ------------------- ------------------- INVESTING ACTIVITIES: Proceeds from Sale of equipment 45 5,200 - Capital expenditures (38,996) (38,921) (23,594) Acquisition of other assets (176) (489) (1,643) Acquisition/exchange of wireless telephone systems - (34,908) 396 Acquisition of personal communications service license - 60,006 (44,813) Cash advances to subsidiary (22,218) (54,507) (15,327) Distributions received from equity investments 10,109 6,863 6,870 Capital contributed to equity investments (787) (2,877) (1,463) ------------------- ------------------- ------------------- NET CASH (USED IN) INVESTING ACTIVITIES (52,023) (59,633) (79,574) ------------------- ------------------- ------------------- FINANCING ACTIVITIES: Proceeds from long-term debt 10,000 45,000 - Principal payments on long-term debt (5,000) (40,000) - Debt issuance costs paid (143) (648) (304) Proceeds from Issuance of Class A Commmon Stock 863 132 456 Proceeds from shareholder note receivable 3,000 - - Treasury stock purchases (28,813) - - Dividends paid on preferred stock (12,338) (8,226) - ------------------- ------------------- ------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (32,431) (3,742) 152 ------------------- ------------------- ------------------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS (34,315) (26,456) (54,354) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 40,818 67,274 121,628 ------------------- ------------------- ------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,503 $ 40,818 $ 67,274 ================== =================== ===================
See notes to condensed financial information F-33 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands)
YEAR ENDED MAY 31, ------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Reconciliation of net loss to net cash provided by operating activities: Net loss $ (31,947) $ (33,295) $ (16,631) --------------- --------------- --------------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 81,402 77,392 70,910 Minority interest in income of subsidiaries 162 153 15 Deferred income tax-decrease (17,393) (10,623) (13,000) Equity in undistributed earnings of investee companies 17,690 2,034 (9,411) Gain on sale of assets (5) (3,819) (4,176) Other 2,604 1,800 (4,131) Change in assets and liabilities net of effects of acquired/exchanged wireless telephone systems: Accounts receivable - (increase) (2,939) (2,158) (4,689) Prepaid expense and other current assets - (increase) (1,723) (2,103) (411) Accounts payable and accrued expenses - increase (decrease) (173) 4,855 4,605 Customer deposits and prepayments - increase 2,461 2,683 1,987 --------------- --------------- --------------- Total adjustments 82,086 70,214 41,699 --------------- --------------- --------------- Net Cash Provided by Operating Activities $ 50,139 $ 36,919 $ 25,068 =============== =============== ===============
See notes to condensed financial information F-34 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (Amounts in thousands)
MAY 31, MAY 31, 1998 1997 --------- --------- ASSETS Cash and cash equivalents $ 6,503 $ 40,819 Accounts receivable 29,653 28,753 Inventory - phones and accessories 5,657 4,010 Prepaid expenses and other current assets 295 216 --------- --------- TOTAL CURRENT ASSETS 42,108 73,798 PROPERTY PLANT AND EQUIPMENT -net 128,969 102,230 INVESTMENT IN PUERTO RICO 41,002 51,761 EQUITY INVESTMENT IN WIRELESS SYSTEMS -net 87,634 94,153 DEBT ISSUANCE COSTS 5,502 6,986 CELLULAR TELEPHONE LICENSES 235,508 285,202 PERSONAL COMMUNICATIONS SERVICE LICENSE -- -- GOODWILL 124,533 130,065 OTHER ASSETS 1,659 1,961 DUE FROM SUBSIDIARY 2,218 7,321 --------- --------- TOTAL ASSETS $ 669,133 $ 753,477 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,460 $ 1,692 Accrued Interest Payable 2,450 2,880 Other Accrued expenses 28,114 25,922 Customers' deposits and prepayments 10,127 7,665 Payable to affiliate 250 399 --------- --------- TOTAL CURRENT LIABILITIES 46,401 38,558 LONG-TERM DEBT 360,000 355,000 DEFERRED LIABILITY 2,200 2,200 DEFERRED INCOME TAXES 26,584 43,977 PREFERRED STOCK: Convertible redeemable preferred stock 186,287 186,287 Second series convertible redeemable preferred stock 7,252 7,252 COMMON STOCKHOLDERS' EQUITY: Common stock 272 270 Additional paid-in capital 358,018 377,025 Accumulated deficit (284,238) (252,291) --------- --------- 74,052 125,004 Less: Cost of Common shares in treasury (30,614) (1,801) Shareholder note receivable -- (3,000) Deferred Compensation (3,029) -- --------- --------- TOTAL COMMON STOCKHOLDERS' EQUITY 40,409 120,203 --------- --------- TOTAL $ 669,133 $ 753,477 ========= =========
See notes to condensed financial information F-35 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANICAL INFORMATION (Amounts in thousands) 1. BASIS OF PRESENTATION The attached condensed financial information of Registrant represents the financial statements of Centennial Cellular Corp. and subsidiaries exclusive of Puerto Rico Wireless. Within this condensed financial information, the Registrant's investment in Puerto Rico Wireless has been accounted for using the equity method. Within the Company's consolidated financial statements, however, the financial statements of Puerto Rico Wireless have been consolidated for financial reporting purposes. The inclusion of the attached condensed financial information of Registrant is required due to certain restrictions placed on the net assets of Puerto Rico Wireless under the Puerto Rico Credit Facility (See note 8 to Consolidated Financial Statements). 2. PERSONAL COMMUNICATIONS SERVICE LICENSE ("PCS") On October 29, 1996 the Federal Communications Commission granted consent to the assignment of the PCS license acquired in March 1995 from the Registrant to Puerto Rico Wireless. On December 13, 1996, the Registrant contributed to Puerto Rico Wireless the PCS license and certain PCS property and equipment as follows: Property, plant and equipment $ 3 PCS license 62,605 -------- Total assets contributed $ 62,608 ======== 3. LONG-TERM DEBT See Note 8 to the consolidated financial statements for details of long-term debt. 4. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with the current year presentation. F-36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this Annual Report on Form 10-K for the fiscal year ended May 31, 1998 to be signed on its behalf by the undersigned, thereunto duly authorized, on the 19th day of August, 1998. CENTENNIAL CELLULAR CORP. By: /s/ Bernard P. Gallagher -------------------------------------- BERNARD P. GALLAGHER Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K for the fiscal year ended May 31, 1998 has been signed below by the following persons in the capacities indicated on the 19th day of August, 1998.
Title ----- /s/ Bernard P. Gallagher Chairman, Chief Executive Officer and Director - --------------------------------- (Principal Executive Officer) BERNARD P. GALLAGHER /s/Scott N. Schneider Senior Vice President, Treasurer, Chief Financial - --------------------------------- Officer, Chief Accounting Officer and Director SCOTT N. SCHNEIDER (Principal Financial and Accounting Officer) /s/Daryl A. Ferguson Director - --------------------------------- DARYL A. FERGUSON /s/Rudy J. Graf Director - --------------------------------- RUDY J. GRAF /s/William M. Kraus Director - --------------------------------- WILLIAM M. KRAUS /s/David Z. Rosensweig Director - --------------------------------- DAVID Z. ROSENSWEIG /s/Peter J. Solomon Director - --------------------------------- PETER J. SOLOMON Director - --------------------------------- FRANK TOW
II-1 EXHIBIT INDEX
EXHIBIT EXHIBIT NUMBER ------- ------ 3.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 6(a)(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1993 and incorporated herein by reference). 3.2 By-laws of the Registrant as revised through February 11, 1992, (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended May 31, 1992 and incorporated herein by reference). 4.1 Registration Rights Agreement, dated August 30, 1991, among the Registrant, Century Holding and Citizens Utilities Company (filed as Exhibit 4.2 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). 4.2 Stock Transfer Agreement, dated August 30, 1991, by and among the Registrant, Century Holding and Citizens Utilities Company (filed as Exhibit 4.3 to Amendment No. 1 to the 1991 Form S-1 and incorporated herein by reference, said Amendment No. 1 having been filed with the Commission on October 7, 1991). 4.3 Senior Indenture, dated as of November 15, 1993, between the Registrant and Bank of Montreal Trust Company, as Trustee, (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated November 15, 1993, and incorporated herein by reference, said Current Report on Form 8-K having been filed with the Commission on November 15, 1993). 4.4 First Supplemental Indenture, dated as of November 15, 1993, between the Registrant and Bank of Montreal Trust Company, as Trustee, (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated November 15, 1993, and incorporated herein by reference, said Current Report on Form 8-K having been filed with the Commission on November 15, 1993). 4.5 Second Supplemental Indenture, dated as of May 11, 1995, between the Registrant and Bank of Montreal Trust Company, as Trustee, (filed as Exhibit 4.3(c) to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1995 and incorporated herein by reference).
II-2
EXHIBIT EXHIBIT NUMBER ------- ------ 4.6 $130,000,000 Credit Agreement, dated as of April 25, 1997, among Centennial Puerto Rico Wireless Corporation, as Borrower, Citibank, N.A., as Administrative Agent and CIBC Inc., Credit Lyonnais, New York Branch and Societe Generale, New York Branch, as Co-Agents. 4.7 Amendment No. 1, dated as of April 22, 1997, between the Registrant and Citibank, N.A., individually and as Administrative Agent. 10.1 Conflicts/Non-Compete Agreement by and among the Registrant, Century Holding, Century and Citizens Utilities Company, dated as of August 30, 1991, (filed as Exhibit 10.1 to Amendment No. 1 to the 1991 Form S-1 and incorporated herein by reference, said Amendment No. 1 having been filed with the Commission on October 7, 1991). 10.2 Extension and Renewal Agreement, dated March 21, 1997, effective as of August 30, 1996, between Century Cellular Holding Corp. and the Registrant (filed as an exhibit to the Registrant's quarterly report on Form 10-Q for the quarterly period ended February 28, 1997 and incorporated herein by reference). 10.3 Conditional Buy-Sell Agreement for Cellular Markets 151-305 and Joint Agreement, as amended, (filed as Exhibit 10.7 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.4 1991 Stock Option Plan, as amended, (filed as Exhibit 10.10 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.5 Incentive Award Plan, as amended, (filed as Exhibit 10.11 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.6 1991 Employee Stock Purchase Plan, as amended, (filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.7 1993 Management Equity Incentive Plan, (filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference).
II-3
EXHIBIT EXHIBIT NUMBER ------- ------ *10.8 1993 Non-Employee/Officer Directors' Stock Option Plan, (filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.9 1991 Stock Equivalent Plan (filed as Exhibit 10.13 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). 10.10 Agreement establishing Sacramento Valley Limited Partnership, as amended, among PacTel Mobile Access, Roseville Telephone Co., Citizens Utilities Company of California and Contel Mobilcom, Inc., (filed as Exhibit 10.14 to the 1991 Form S-1 and incorporated herein by reference, said 1991 Form S-1 having been filed with the Commission on September 27, 1991). 10.11 Agreement establishing GTE Mobilnet of San Francisco Limited Partnership, as amended, (filed as Exhibit 10.15 to the 1991 Form S-1 and incorporated herein by reference), said 1991 Form S-1 having been filed with the Commission on September 27, 1991). *10.12 Employment Agreement dated as of January 1, 1994 between the Registrant and Rudy J. Graf, (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.13 Employment Agreement dated as of January 1, 1994 between the Registrant and Phillip Mayberry, (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.14 Employment Agreement dated as of January 1, 1994 between the Registrant and Thomas Cogar, (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994 and incorporated herein by reference). *10.15 Employment Agreement, dated as of September 1, 1995, between the Registrant and Robert Braden (filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1996 and incorporated herein by reference).
II-4
EXHIBIT EXHIBIT NUMBER ------- ------ 10.16 Facilities Agreement dated as of January 2, 1995 between Century ML Cable Venture and Century-ML Cable Corporation. 10.17 $50,000,000 Credit Agreement, dated as of September 12, 1996, between the Registrant and Citibank, N.A. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1996 and incorporated herein by reference). 10.18 Amendment No. 2, dated as of July 28, 1997, to the Credit Agreement among the Registrant, each of the lenders thereto, and Citibank, N.A., as agent for the lenders (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended August 31, 1997 and incorporated herein by reference). 10.19 Amended and Restated Credit Agreement dated as of February 27, 1998 between Centennial Puerto Rico Wireless Corporation, each of the lenders that is a signatory thereto (the "lenders"), and Citibank, N.A., as administrative agent for the lender (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended February 28, 1997 and incorporated herein by reference). 10.20 Agreement and Plan of Merger, dated as of July 2, 1998, between the Registrant and CCW Acquisition Corp. (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K, said Form 8-K having been filed on July 16, 1998, and incorporated herein by reference. 'D'10.21 Stockholder Agreement, dated as of July 2, 1998, between CCW Acquisition Corp. and Century Communications Corp. 'D'11 Computation of loss per common share. 'D'12 Computation of ratios. 'D'21 Subsidiaries of the Registrant. 'D'23.1 Consent of Deloitte & Touche LLP. 'D'27 Financial Data Schedule.
- --------------------------- * Constitutes a management contract or compensatory plan or arrangement. 'D' Filed herewith. II-5 STATEMENT OF DIFFERENCES The dagger symbol shall be expressed as .........................'D' EX-10 2 EXHIBIT 10.21 EXHIBIT 10.21 STOCKHOLDER AGREEMENT AGREEMENT, dated as of July 2, 1998, between CCW Acquisition Corp., a Delaware corporation ("Acquisition"), and Century Communications Corp., a Delaware corporation (the "Stockholder"). WHEREAS, concurrently herewith, Acquisition and Centennial Cellular Corp., a Delaware corporation (the "Company"), are entering into an Agreement and Plan of Merger (the "Merger Agreement"; capitalized terms used without definition herein having the meanings ascribed thereto in the Merger Agreement); WHEREAS, the Stockholder is the record and beneficial owner of the number of Shares set forth opposite the Stockholder's name in Schedule I hereto; WHEREAS, approval of the Merger Agreement by the Company's stockholders is a condition to the consummation of the Merger; WHEREAS, the Board of Directors of the Company has, prior to the execution of this Agreement, duly and validly approved and adopted the Merger Agreement and approved this Agreement, and such approvals and adoption have not been withdrawn; and WHEREAS, Acquisition is unwilling to enter into the Merger Agreement unless the Stockholder enters into this Agreement concurrently with the execution of the Merger Agreement, and the Stockholder desires and is willing to induce Acquisition to enter into the Merger Agreement by its entry into this Agreement; NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: Section 1. Agreement to Vote; Irrevocable Proxy. (a) The Stockholder hereby agrees that, during the period commencing on the date hereof and continuing until the termination of this Agreement, at any stockholders' meeting of the Company at which any of the following matters is submitted to a vote of the stockholders, it shall vote (or cause to be voted) its shares of Common Stock (or shall execute and deliver a written consent pursuant to Section 228 of the Delaware Law): (i) in favor of the Merger Agreement, the transactions described therein and the agreements and transactions contemplated thereby; and (ii) except as otherwise agreed to in writing in advance by Acquisition against the following actions (except as contemplated by the Merger Agreement): (A) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or any of its subsidiaries; (B) any sale, lease or transfer of a material amount of assets of the Company or any of its subsidiaries, or a reorganization, recapitalization, dissolution or liquidation of the Company or any of its subsidiaries; and (C) (1) any change in the majority of the persons who constitute the Board of Directors of the Company; (2) any change in the present capitalization of the Company or any amendment of the Company's Certificate of Incorporation or Bylaws; (3) any other material change in the Company's corporate structure or business; or (4) any other action which, in the case of each of the matters referred to in clauses (1), (2) or (3), is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, or materially adversely affect the transactions contemplated by this Agreement and the Merger Agreement. (b) In furtherance of the foregoing, the Stockholder hereby constitutes and appoints Thomas E. McInerney and Anthony J. de Nicola, and each of them, with full power of substitution, its true and lawful proxies and attorneys-in-fact to vote the Shares held by the Stockholder as provided in paragraph (a) above for so long as this Agreement is in effect. The Stockholder hereby affirms that this proxy is given in connection with the Merger Agreement, as an inducement to Acquisition to enter into the Merger Agreement and to consummate the transactions contemplated thereby and, as such, is coupled with an interest and is irrevocable for so long as this Agreement shall remain in effect. (c) The Stockholder agrees that it will not, and will not permit any of its Affiliates to, contract to sell, sell or otherwise pledge, encumber, transfer or dispose of any of the Shares owned beneficially or of record by it or any interest therein or securities convertible thereinto or any voting rights with respect thereto, other than (i) pursuant to the Merger or (ii) with Acquisition's prior written consent. (d) The Stockholder hereby revokes any and all previous proxies with respect to the Stockholder's Shares or any other voting securities of the Company. Section 3. Cooperation; No Solicitation. The Stockholder hereby agrees to cooperate reasonably with Acquisition and the Company in connection with the Merger Agreement and consummation of the transactions contemplated thereby. Acquisition agrees to cooperate reasonably with the Stockholder in connection with any filings required to be made by the Stockholder pursuant to the HSR Act in connection with the Merger Agreement and 2 consummation of the transactions contemplated thereby. The Stockholder agrees that it will not, and will not cause or permit their respective officers, employees, representatives and agents, directly or indirectly, to solicit, initiate or encourage any inquiries or the making of any proposal with respect to any Acquisition Transaction or provide information to or negotiate, explore, otherwise engage in discussions with or in any other way cooperate with any Person (other than Acquisition or its directors, officers, employees, agents and representatives) with respect to any Acquisition Transaction or enter into any agreement, arrangement or understanding requiring or causing the Company to abandon, terminate or fail to consummate the Merger or any other transactions contemplated by the Merger Agreement. Section 4. Termination of Services Agreement. The Stockholder hereby agrees that, effective as of the Effective Time, each of the Services Agreement, effective as of August 30, 1996, between the Company and the Stockholder, and the Extension and Renewal Agreement dated as of March 21, 1997 between the Company and the Stockholder shall be terminated. Section 5. Other Covenants and Agreements. (a) Stock Transfer Agreement. The Stockholder hereby agrees to the termination of the Stock Transfer Agreement effective as of the Effective Time. (b) Further Assurances. Each party shall execute and deliver such additional instruments and other documents and shall take such further actions as may be necessary or appropriate to effectuate, carry out and comply with all of its obligations under this Agreement. Without limiting the generality of the foregoing, none of the parties hereto shall enter into any agreement or arrangement (or alter, amend or terminate any existing agreement or arrangement) if such action would materially impair the ability of such party to effectuate, carry out or comply with all of the terms of this Agreement. (c) Release of Certain Restrictions. Effective as of the Effective Time, the Stockholder hereby releases the Company and its Affiliates (other than the Stockholder and its other Affiliates) from, and waives in all respects, any obligation that may exist to the Stockholder or any of its Affiliates anywhere in the world, (ii) not to engage, or to refrain from engaging, in any activity anywhere in the world, or (iii) that otherwise restricts or limits the ability of the Company or any of its Affiliates to engage in any business anywhere in the world. Section 6. Representations and Warranties of Acquisition. Acquisition represents and warrants to the Stockholder as follows: (a) This Agreement has been approved by the Board of Directors of Acquisition and its stockholders, representing all necessary corporate action on the part of Acquisition for the execution and performance hereof and of the Merger Agreement. 3 (b) This Agreement has been duly executed and delivered by a duly authorized officer of Acquisition. (c) This Agreement constitutes a valid and binding agreement of Acquisition, enforceable against Acquisition in accordance with its terms. (d) The execution and delivery of this Agreement by Acquisition does not violate or breach, and will not give rise to any violation or breach of, the charter or bylaws of Acquisition, or, except as will not materially impair its ability to effectuate, carry out or comply with all of the terms of this Agreement, any law, contract, instrument, arrangement or agreement by which Acquisition is bound. Section 7. Representations and Warranties of the Stockholders. The Stockholder represents and warrants to Acquisition as follows: (a) Schedule I sets forth, opposite the Stockholder's name, the number and type of Shares of which the Stockholder is the record and beneficial owner. The Stockholder is the lawful owner of such Shares, free and clear of all liens, charges, encumbrances, voting agreements and commitments of every kind, other than this Agreement, the Stock Transfer Agreement and as disclosed on Schedule I. Except as set forth in Schedule I and except pursuant to the Stock Transfer Agreement, the Stockholder does not own or hold any rights to acquire any additional Shares or other securities of the Company or any interest therein or any voting rights with respect to any additional Shares or any other securities of the Company or any interest therein or any voting rights with respect to any additional Shares or any other securities of the Company. (b) This Agreement has been approved by the Stockholder's Board of Directors and its stockholders, representing all necessary corporate action on the part of the Stockholder for the execution and performance hereof by the Stockholder. (c) This Agreement has been duly executed and delivered by a duly authorized officer of the Stockholder. (d) This Agreement constitutes the valid and binding agreement of the Stockholder, enforceable against the Stockholder in accordance with its terms. (e) The execution and delivery of this Agreement by the Stockholder does not violate or breach, and will not give rise to any violation or breach, of the Stockholder's charter or bylaws, or, except as will not materially impair the ability of the Stockholder to effectuate, carry out or comply with all of the terms of this Agreement, any law, contract, instrument, arrangement or agreement by which the Stockholder is bound. 4 (f) The execution and delivery of this Agreement by the Stockholder does not create or give rise to any right in any other Person with respect to the Shares or any other securities of the Company (including, without limitation, voting rights and rights to purchase or sell any such Shares or other securities) pursuant to the Stock Transfer Agreement. (g) The execution and delivery of the proxies by the Stockholder are adequate to approve and adopt the Merger Agreement and the Merger without the vote or consent of any other stockholder of the Company. Section 8. Effectiveness and Termination. This Agreement shall terminate and be of no further force or effect (i) immediately upon termination of the Merger Agreement pursuant to Section 9.1(a), 9.1(b), 9.1(c)(i) or 9.1(e) thereof, (ii) six months after the termination of the Merger Agreement pursuant to any other section thereof or (iii) at the Effective Time, whichever is earliest. Upon such termination, except for any rights a party may have in respect of any breach by the other party of its obligations hereunder, neither party hereto shall have any further obligation or liability hereunder. Section 9. Non-compete. The Stockholder agrees that on the Effective Date it will execute and deliver a non-compete agreement with the Surviving Corporation, pursuant to which the Stockholder will agree that, for a period of three years from the Effective Date, the Stockholder will not engage in, or acquire a controlling interest in, any business that competes with any of businesses of the Company's current operations in Puerto Rico; provided, however, that such non-compete shall not extend to or restrict in any manner the activities of the Stockholder's existing joint venture in Puerto Rico. Section 10. Miscellaneous. (a) Notices, Etc. All notices, requests, demands or other communications required by or otherwise with respect to this Agreement shall be in writing and shall be deemed to have been duly given to any party when delivered personally (by courier service or otherwise), when delivered by telecopy and confirmed by return telecopy, or seven days after being mailed by first-class mail, postage prepaid in each case to the applicable addresses set forth below: If to Acquisition, to it at: c/o Welsh, Carson, Anderson & Stowe VIII, L.P. 320 Park Avenue Suite 2500 New York, New York 10022-6815 Facsimile: 212-893-9575 5 with a copy to: Robert A. Schwed, Esq. Reboul, MacMurray, Hewitt, Maynard & Kristol 45 Rockefeller Plaza New York, New York 10111 Facsimile: 212-841-5725 If to the Stockholder, to it at: 50 Locust Avenue New Canaan, Connecticut 06840 Attention: Office of the President Facsimile: 203-966-9228 with a copy to: David Z. Rosensweig, Esq. Leavy Rosensweig & Hyman 11 East 44th Street New York, New York 10017 Facsimile: 212-983-2537 or to such other address as such party shall have designated by notice received by the other party. (b) Amendments, Waivers, Etc. This Agreement may not be amended, changed, supplemented, waived or otherwise modified or, except as expressly set forth in Section 8, terminated, except by an instrument in writing signed by each party hereto. (c) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the parties and their respective successors and assigns; provided that, except as contemplated by the Merger Agreement, neither the rights nor the obligations of any party may be assigned or delegated without the prior written consent of the other party. (d) Entire Agreement. This Agreement (together with the Merger Agreement and the other agreements and documents expressly contemplated hereby and thereby) embodies the entire agreement and understanding among the parties relating to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. There are no representations, warranties or covenants by the parties hereto relating to such subject matter other than those expressly set forth in this Agreement and the Merger Agreement. 6 (e) Severability. If any term of this Agreement or the application thereof to any party or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Agreement and the application of such term to the other party or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by applicable law, provided that, in such event, the parties shall negotiate in good faith in an attempt to agree to another provision (in lieu of the term or application held to be invalid or unenforceable) that will be valid and enforceable and will carry out the parties' intentions hereunder. (f) Specific Performance. The parties acknowledge that money damages are not an adequate remedy for violations of this Agreement and that any party may, in its sole discretion, apply to a court of competent jurisdiction for specific performance or injunctive or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by applicable law, each party waives any objection to the imposition of such relief or any requirement for a bond. (g) Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise or beginning of the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. (h) No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by the other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance. (i) No Third Party Beneficiaries. This Agreement is not intended to be for the benefit of and shall not be enforceable by any person or entity who or which is not a party hereto. (j) Jurisdiction. Each party hereby irrevocably submits to the exclusive jurisdiction of the Court of Chancery in the State of Delaware or the United States District Court of Delaware or any court of the State of Delaware in any action, suit or proceeding arising in connection with this Agreement, and agrees that any such action, suit or proceeding shall be brought only in such court (and waives any objection based on forum non conveniens or any other objection to venue therein); provided, however, that such consent to jurisdiction is solely for the purpose referred to in this paragraph (j) and shall not be deemed to be a general submission to the jurisdiction of said Courts or in the State of Delaware other than for such purposes. Each party hereto hereby waives any right to a trial by jury in connection with any such action, suit or proceeding. 7 (k) Governing Law. This Agreement and all disputes hereunder shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to principles of conflicts of law. (l) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one instrument. (m) Expenses. Acquisition and the Stockholder shall bear its own expenses incurred in connection with this Agreement and the transactions contemplated hereby, except that in the event of a dispute concerning the terms or enforcement of this Agreement, the prevailing party in any such dispute shall be entitled to reimbursement of reasonable legal fees and disbursements from the other party to such dispute. 8 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. CCW ACQUISITION CORP. By: /s/ Thomas E. McInerney ----------------------- Title: President CENTURY COMMUNICATIONS CORP. By: /s/ David Z. Rosensweig ----------------------- Title: Secretary 9 SCHEDULE I Share Ownership Century Communications Corp. 8,561,819 shares of Class B Common Stock, par value $0.01 per share 3,978 shares of Second Series Convertible Preferred Stock, par value $0.01 per share 10 EX-11 3 EXHIBIT 11 Exhibit 11 CENTENNIAL CELLULAR CORP. AND SUBSIDIARIES EXHIBIT TO FORM 10-K COMPUTATION OF LOSS PER COMMON SHARE (Amounts in thousands, except share and per share data)
Year Ended May 31, ------------------------------------------------------ 1998 1997 1996 ------------- ------------ ------------ Primary fully diluted: Loss $ (31,947) $ (33,295) $ (16,631) Preferred stock dividends (16,451) (15,948) (13,590) ------------- ------------ ------------ Loss applicable to common shares $ (48,398) $ (49,243) $ (30,221) ============= ============ ============ Average number of common shares and common share equivalents outstanding Average number of common shares outstanding during the period 26,181,000 26,934,000 26,770,000 Add common share equivalents - Options to purchase common shares - net 429,000 200,000 115,000 ------------- ------------ ------------ Average number of common shares and common share equivalents outstanding 26,610,000 (A) 27,134,000 (A) 26,885,000 (A) ============= ============ ============ Loss per common share $ (1.82)(A) $ (1.81)(A) $ (1.12)(A) ============= ============ ============
(A) In accordance with SFAS No. 128, the inclusion of common share equivalents in the computation of earnings per share need not be considered if the effect is antidilutive. Therefore, basic loss per common share and common share equivalents as shown on the Consolidated Statements of Operations for the periods presented do not include common share equivalents as their effect is antidilutive. EX-12 4 EXHIBIT 12 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges (amounts in thousands)
------------------------------------------------------- Year Ended May 31, 1994 1995 1996 1997 1998 ------------------------------------------------------- Loss before income tax benefit & minority interest $ (39,885) $ (47,117) $ (28,212) $ (40,437) $ (45,382) ========= ========= ========= ========= ========= Fixed Charges: Interest, including amortization of debt issuance costs 21,397 23,996 27,886 33,379 45,155 Interest capitalized - - 5,200 2,752 - Interest portion of rent expense 283 547 674 1,410 2,297 --------- --------- --------- --------- --------- Total fixed charges 21,680 24,543 33,760 37,541 47,452 ========= ========= ========= ========= ========= Adjustments: Capitalized interest - - (5,200) (2,752) - ========= ========= ========= ========= ========= Total adjustments - - (5,200) (2,752) - ========= ========= ========= ========= ========= Earnings, as defined $ (18,205) $ (22,574) $ 348 $ (5,648) $ 2,070 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges (1) --- --- --- --- --- ========= ========= ========= ========= ========= Amount by which earnings are less than fixed charges $ (39,885) $ (47,117) $ (33,412) $ (43,189) $ (45,382) ========= ========= ========= ========= =========
(1) The ratio of earnings to fixed charges is less than one-to-one and, therefore, earnings are inadequate to cover fixed charges. EX-21 5 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF CENTENNIAL CELLULAR CORP., A DELAWARE CORPORATION
NAME STATE OF ORGANIZATION - ---- --------------------- Alexandria Cellular Corp. Delaware Alexandria Cellular License Corp. Delaware Bauce Communications, Inc. Oregon Bauce Communications of Beaumont, Inc. Oregon Centennial Asia Pacific Cellular Holding Corp. Nevada Centennial Ashe Cellular Corp. Delaware Centennial Beauregard Cellular LLC Delaware Centennial Beauregard Holding Corp. Delaware Centennial Benton Harbor Cellular Corp. Delaware Centennial Benton Harbor Holding Corp. Delaware Centennial Caldwell Cellular Corp. Delaware Centennial Cellular Telephone Company of Del Norte Delaware Centennial Cellular Telephone Company of Lawrence Delaware Centennial Cellular Telephone Company of Modoc Delaware Centennial Cellular Telephone Company of Sacramento Delaware Valley Centennial Cellular Telephone Company of San Francisco Delaware Centennial Cellular Wireless Holding Corp. New Jersey Centennial Claiborne Cellular Corp. Delaware Centennial Clinton Cellular Corp. Delaware Centennial DeSoto Cellular Corp. Delaware Centennial Hammond Cellular LLC Delaware Centennial Iberia Holding Corp. Delaware Centennial Jackson Cellular Corp. Delaware Centennial Lafayette Cellular Corp. Louisiana Centennial Lake Charles Cellular Corp. Delaware Centennial Louisiana Holding Corp. Delaware Centennial Michigan RSA 6 Cellular Corp. Delaware Centennial Michigan RSA 7 Cellular Corp. Delaware Centennial Microwave Corp. Delaware Centennial Morehouse Cellular LLC Delaware Centennial Puerto Rico Realty Corporation Puerto Rico Centennial Puerto Rico Wireless Corporation Delaware Centennial Randolph Cellular LLC Delaware Centennial Randolph Holding Corp. Delaware Centennial Wireless PCS License Corp. Delaware Centennial Wireless PCS Operations Corp. Delaware
NAME STATE OF ORGANIZATION - ---- --------------------- Century Beaumont Cellular Corp. Delaware Century Cellular Realty Corp. Delaware Century Charlottesville Cellular Corp. Virginia Century Charlottesville Cellular Corp. Delaware Century El Centro Cellular Corp. California Century Elkhart Cellular Corp. Delaware Century Indiana Cellular Corp. Century Lynchburg Cellular Corp. Delaware Century Lynchburg Cellular Corp. Virginia Century Michiana Cellular Corp. Delaware Century Michigan Cellular Corp. Delaware Century Montgomery Cellular Corp. Delaware Century Roanoke Cellular Corp. Virginia Century Roanoke Cellular Corp. Delaware Century Rural Cellular Corp. Delaware Century South Bend Cellular Corp. Delaware Century Yuma Paging Corp. Delaware Century Yuma Cellular Corp. Delaware El Centro Cellular Corporation Delaware Elkhart Metronet, Inc. Indiana Hendrix Electronics, Inc. California Hendrix Radio Communications, Inc. California Iberia Cellular Telephone Company LLC Delaware Lafayette Communications, Inc. Delaware Lambda Communications, Incorporated (Incorporado) Puerto Rico Lambda Operations Corp. Delaware Lambda PCS Corp. Nevada Lambda Realty Corp. Delaware Mega Comm, LLC Delaware Centennial Mega Comm Holding Corp. Delaware Michiana Metronet, Inc. Indiana South Bend Metronet, Inc. Indiana Centennial Tri-State Operating Partnership Delaware
2 EX-23 6 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Centennial Cellular Corporation's Registration Statement Nos. 33-46129, 33-46132, 33-46131, 333-51343, 33-46130, 33-70808, 333-51339, 33-70812, 333-51335, 33-70810 on Form S-8, Registration Statement No. 33-80716 on Form S-4 and Registraton Statement No. 33-90954 on Form S-3 of our report dated July 17, 1998 appearing in this Annual Report on Form 10-K of Centennial Cellular Corp. for the year ended May 31, 1998 DELOITTE & TOUCHE LLP Stamford, Connecticut August 20, 1998 EX-27 7 EXHIBIT 27
5 1,000 12-MOS MAY-31-1998 MAY-31-1998 14,620 0 37,178 2,693 7,304 59,650 263,661 79,681 847,417 74,684 510,000 272 0 193,539 40,137 847,417 235,816 237,501 54,818 250,802 0 0 45,155 (45,382) (13,597) (31,785) 0 0 0 (31,947) (1.85) (1.85)
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