| CENTENNIAL COMMUNICATIONS CORP /DE Item 1A Risk Factors Investors in our securities should carefully consider the risks described below and other information included in this report |
| Our business, financial condition or consolidated results of operations could be materially adversely affected by any of these risks, and the trading price of our securities could decline due to any of these risks |
| Investors in our securities could lose all or part of their investment as a result of any such decline |
| This report also contains forward-looking statements that involve risks and uncertainties; please see “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 |
| ” Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below |
| 15 _________________________________________________________________ [75]Table of Contents Risks Relating to Our Business and Our Industry We operate in a very competitive business environment, which may result in the loss of existing customers and our inability to attract new customers |
| Our principal business, wireless telephone service, is highly competitive |
| In the United States, we usually compete against four or five other wireless carriers in the markets we serve |
| Additional operators have continued to build out their networks in our service areas and we expect this trend to continue |
| In Puerto Rico, we compete against five other wireless carriers and in the Dominican Republic we compete against three other wireless carriers |
| Additional competitors may enter any of our markets in the future |
| Many of our existing competitors are larger than we are, hold licenses for more spectrum than we do, have greater financial resources than we do, are less leveraged than we are and have more extensive coverage areas than we do |
| Consolidation in the wireless industry has created and may continue to create even stronger competitors |
| Competition for customers is based principally upon services and features offered, system coverage, technical quality of the wireless system, price, customer service and network capacity |
| Some competitors may market services we do not offer, including the two-way radio dispatch, or “push-to-talk” feature which allows subscribers to talk to each other instantly with a single push of a button, and certain 3G technologies, which may make their services more attractive to customers |
| We expect competition to intensify as a result of the development of new technologies, products and services and as the rate of subscriber growth for the industry continues to slow |
| In addition, the mergers of Cingular and AT&T Wireless and Sprint and Nextel as well as the entry of mobile virtual network operators, such as Virgin Mobile and Mobile ESPN, have intensified the competitive environment in our markets |
| In addition, new communications technologies such as Wi-Fi, Wi-Max satellite services and VoIP are being developed and deployed which will increase competition |
| Furthermore, the FCC intends to auction off new wireless spectrum in August 2006 and thereafter, which may lead to additional competition from new entrants, including non-traditional telecommunications carriers such as cable television companies |
| With so many companies targeting many of the same customers, we may not be able to successfully retain our existing customers and attract new customers and as a result grow our customer base and revenue |
| Market prices for wireless services may continue to decline in the future |
| Market prices for wireless services have declined over the last several years and may continue to decline in the future due to increased competition |
| We may be unable to maintain or improve our ARPU We expect significant competition among wireless providers to continue to drive service and equipment prices lower, which has been intensified by wireless number portability, and may lead to increased churn |
| Competition continues to intensify as wireless carriers include more equipment discounts and bundled services in their offerings, including offering more minutes and free long distance and roaming services |
| A continued decline in market prices could adversely affect our revenues, which would have a material adverse effect on our financial condition and consolidated results of operations and our ability to service our indebtedness |
| Our failure to successfully develop and incorporate wireless data services into our service offerings may have a material adverse effect on our financial and operational results |
| Wireless data services are increasingly becoming a meaningful component of many wireless carriers’ strategies and financial results |
| Many of the national wireless carriers have invested (and will continue to invest) significant resources to develop and deliver these new data services to their customers |
| As market prices for wireless voice services continue to decline, revenue from new data services helps offset some of the ARPU decline caused by lower prices for voice service |
| Similarly, as customers increasingly demand wireless data services as part of the core feature set for their phones, the failure to offer such services could reduce sales and increase churn |
| Currently, in some of our markets, our wireless data offerings are not as robust as those offered by some of our competitors and may never be |
| If we are unable to successfully incorporate wireless data services, including certain 3G technologies, into our service offerings, our customer additions and ARPU could decrease and our churn could increase |
| In addition, there can be no assurance that there will be widespread demand for advanced wireless data services, that revenues from data services will be significant, that we can provide such services on a profitable basis or that vendors will develop and make available popular applications and handsets with features, functionality and pricing desired by customers |
| Significant declines in roaming revenue could have a material adverse effect on our consolidated results of operations |
| We earn a portion of our revenue from agreements with other wireless communications providers whose customers enter our service areas and use their wireless phones, commonly referred to as roaming |
| Roaming rates per minute have declined over the last several years and we expect that such declines will continue for the foreseeable future |
| For fiscal 2006, our operations recorded dlra81dtta9 million of roaming revenue |
| Roaming revenue accounted for approximately 8dtta7prca of our consolidated revenue for fiscal 2006 |
| Cingular Wireless is our single largest roaming partner and accounted for approximately dlra64dtta5 million of our roaming revenue in fiscal 2006 |
| Additionally, our roaming agreements do not prevent our roaming partners from competing directly against us in our markets |
| As our roaming partners continue to build out their networks in our service areas, we would expect them to limit the ability of their subscribers to roam on our network |
| The loss of this roaming traffic could have a material adverse affect on our consolidated results of operations |
| In addition, our roaming partners may terminate their roaming agreements with us under certain circumstances |
| Accordingly, our roaming agreements may be terminated or renegotiated on less favorable terms |
| Furthermore, our roaming revenue is highly dependent on the pricing decisions made by our roaming partners |
| If our markets are not included in our roaming partners’ home calling areas and are instead subject to the imposition of additional roaming charges, we could see a loss of roaming minutes and revenue |
| While roaming revenue increased in fiscal 2006 as compared to fiscal 2005, we expect roaming revenues to decline over the long term and significant declines in roaming revenue could have a material adverse effect on our consolidated results of operations |
| We expect US wireless roaming revenue to decline approximately dlra20 million during fiscal 2007 |
| Our failure to maintain roaming arrangements could have a material adverse effect on our ability to provide service to our customers who travel outside our coverage area |
| Our roaming arrangements enable our customers to use the wireless networks of other wireless carriers when they travel outside of our licensed service area |
| This enables us to offer our customers regional and national rate plans that include areas for which we do not own wireless licenses |
| If we are not able to maintain roaming agreements with other wireless carriers on favorable terms or at all, we may no longer be able to offer these regional and national rate plans and the coverage area and pricing we offer to our customers may not be as attractive relative to the offers from our competitors |
| This could have a material adverse effect on our future operations and financial condition |
| While certain of our roaming agreements require other carriers’ customers to use our network when roaming, our roaming agreements do not prevent our roaming partners from competing directly against us in our markets |
| When our roaming agreements expire or are terminated, our roaming partners could choose not to renegotiate such agreements and could enter into roaming agreements with other carriers serving our markets or choose not to include our markets in their service offerings altogether, which could have a material adverse effect on our consolidated results of operations |
| Our failure to grow subscribers could have a material adverse effect on our financial performance |
| We launched wireless service in Grand Rapids and Lansing, Michigan in May 2005 |
| While we believe the launch of our wireless service in these new markets contributed to our growth in subscribers in US Wireless during fiscal 2006, those markets are highly competitive, with up to six competitors each, and there can be no assurance that customers will choose our products and services over our competitors’ products and services in the future |
| If we are unable to continue to attract new subscribers in these new and surrounding markets, our US wireless operations may not be able to continue to grow its customer base, which would have a material adverse effect on our financial condition and consolidated results of operations |
| In addition, during fiscal 2006, we were unable to grow our postpaid subscribers in Puerto Rico at the same rate as in prior years |
| Our failure to increase the growth of our postpaid subscribers in Puerto Rico could have a material adverse effect on our financial condition and results of operations |
| 17 _________________________________________________________________ [77]Table of Contents If we are unable to effectively manage churn, our business may be adversely affected |
| The wireless industry is extremely competitive |
| Among other things, the wireless industry is characterized by a high rate of churn |
| Churn can be the result of several competitive factors, including price, service offerings, network coverage, reliability issues and customer care concerns |
| Efforts to reduce churn often increase costs as we offer incentives to customers to remain users of our wireless services |
| A high rate of churn could adversely affect our consolidated results of operations because we would lose revenue and because the cost of adding a new subscriber, which generally includes a handset subsidy and/or a commission expense, is a significant factor in our profitability |
| Wireless number portability may increase churn and increase our marketing costs |
| Pursuant to FCC requirements, wireless carriers began providing wireless number portability in 100 designated markets on November 24, 2003 and began to do so in all other markets in May 2004 |
| Wireless number portability allows customers to keep their wireless phone numbers when switching between service providers |
| Wireless number portability makes it more convenient for customers to change wireless service providers and therefore could cause churn to increase significantly |
| We believe wireless number portability has increased price competition and we expect it to continue to do so |
| As a result of wireless number portability, we have been, and may continue to be, required to grant promotional credits, subsidize product upgrades, and reduce pricing to match competitors’ initiatives in an effort to retain and attract customers |
| Regulatory changes may impose restrictions that adversely affect us or cause us to incur significant unplanned costs in modifying our business plans or operations |
| The US telecommunications industry is subject to federal, state and other regulations that are continually evolving |
| In addition, the telecommunications industry in the Dominican Republic is similarly subject to regulation and change |
| As new telecommunications laws and regulations are issued, we may be required to modify our business plans or operations |
| We cannot assure you that we can do so in a cost-effective manner |
| In addition, the failure by us to comply with applicable governmental regulations could result in the loss of our licenses or the assessment of penalties or fines or otherwise have a material adverse effect on our business and results of our operations |
| Also, there have been indications that Congress may substantially revise parts of the 1996 Act in the next few years, including with respect to the amounts we pay into, and receive from, USF We cannot predict what effect any new legislation will have on our businesses |
| The FCC, which has jurisdiction over our operations in the United States, Puerto Rico and the US Virgin Islands, and state regulatory agencies continue to issue rules implementing the requirements of the 1996 Act |
| These rules include the obligation of incumbent telephone companies to allow other carriers to connect to their network by reasonable means at rates based on cost |
| The interpretation and implementation of these and other provisions of the 1996 Act and the FCC rules implementing the 1996 Act continue to be subject to regulatory proceedings and litigation and may have a material adverse effect on our business |
| CPROC is also subject to the jurisdiction of the TRB The TRB could determine that the rates for our wireline services are not cost based |
| The TRB could also revoke our Local Exchange Certification if we fail to comply with applicable regulations |
| This determination could have a material adverse effect on our business |
| Furthermore, the rapid growth and penetration of wireless services has prompted the interest of the FCC, state legislatures and state Public Utility Commissions to attempt to more closely regulate certain practices by the wireless industry, including in areas such as customer billing, terminations of service arrangements, sales practices, handling of customer call records, privacy, advertising and filing of “informational” tariffs |
| In addition, many states and local governments have imposed and are considering imposing additional regulations and taxes on wireless services |
| These regulations and taxes have imposed and will continue to impose increased costs on us and may adversely affect our business |
| Further, federal or state governments, the government of the Commonwealth of Puerto Rico or the government of the Dominican Republic could adopt regulations or take other actions that might have a material adverse effect on our business |
| We are subject to location and zoning regulations that could materially affect our ability to build new cell sites and expand our coverage |
| The FCC has also required wireless carriers to transmit 911 calls and provide the location of the 911 callers with an increasingly narrow geographic 18 _________________________________________________________________ [78]Table of Contents tolerance |
| We have applied for a waiver of a 911 requirement that would apply on December 15, 2005 |
| There can be no assurance that we will receive the waiver and we may be subject to penalties and other enforcement actions |
| Also, in August 2005, the FCC initiated a proceeding to review the rules governing roaming services |
| We cannot predict the impact on us of any changes in the roaming rules |
| These changes could materially and adversely affect our business prospects, operating results and ability to service our debt |
| The loss of our licenses would adversely affect our ability to provide wireless and broadband services |
| In the United States, cellular, PCS, and microwave licenses are valid for ten years from the effective date of the license |
| Licensees may renew their licenses for additional ten-year periods by filing renewal applications with the FCC Our wireless licenses expire in various years from 2006 to 2013 |
| The renewal applications are subject to FCC review and are put out for public comment to ensure that the licensees meet their licensing requirements and comply with other applicable FCC mandates |
| Failure to file for renewal of these licenses or failure to meet any licensing requirements could lead to a denial of the renewal application and thus adversely affect our ability to continue to provide service in that license area |
| Furthermore, our compliance with regulatory requirements such as enhanced 911 and wireless number portability may depend on the availability of necessary equipment or software |
| Failure to comply with these regulatory requirements may have an adverse effect on our licenses or operations and could result in sanctions, fines or other penalties |
| Our wireless licenses may decrease in value, reducing the asset base that supports our debt |
| A substantial portion of our assets consists of intangible assets, principally our interests in wireless licenses held by our subsidiaries |
| If the market value of our wireless licenses decreases significantly, we may realize a material loss upon the sale of any of our licenses, our ability to sell assets to repay debt would be significantly affected and we would recognize an expense, approximately equal to the amount of the decline in value, in our operating income |
| The market for the purchase and sale of wireless licenses may not exist in the future or the values of our licenses in that market may fall |
| The future value of our interests in our wireless licenses will depend significantly upon the success of our business |
| We cannot assure you that we would be able to obtain FCC approval to transfer interests in our licenses if such a transfer became necessary |
| Rapid and significant technological changes in the telecommunications industry may adversely affect us |
| We face rapid and significant changes in technology |
| In particular, the wireless telecommunications industry is experiencing significant technological changes, including: • migration to 3G services, which may require the purchase of licenses for additional spectrum; • evolving industry standards; • the allocation of new radio frequency spectrum in which to license and operate advanced wireless services; • ongoing improvements in the capacity and quality of digital technology and shorter development cycles for new products and enhancements; • changes in end-user requirements and preferences; and • development of data and broadband capabilities |
| For us to keep up with these technological changes and remain competitive, we will be required to continue to make significant capital expenditures |
| Customer acceptance of the services that we offer will continually be affected by technology-based differences in our product and service offerings |
| For example, two-way radio dispatch, or “push-to-talk” technology, has become increasingly popular as it allows subscribers to save time on dialing or making a connection to a network |
| The most popular push-to-talk feature is offered by Sprint Nextel Corp |
| Other wireless providers are testing systems that would allow them to offer a form of push-to-talk technology to their subscribers |
| Calls using this technology tend to be shorter and less expensive than traditional wireless 19 _________________________________________________________________ [79]Table of Contents telephone service |
| As demand for this service continues to grow, and if other wireless providers in our service areas succeed in implementing forms of push-to-talk technology, we may have difficulty attracting and retaining subscribers, which will have an adverse effect on our business |
| In addition, customers are increasingly choosing their wireless carriers based on handset selection and pricing of handsets |
| As a smaller, regional carrier, we may not have access to the most technologically advanced handsets as quickly as the national wireless carriers, thereby putting us at a competitive disadvantage |
| Similarly, we believe that, on average, we pay more for our handsets than do the national carriers with whom we compete |
| This may allow our competitors to offer handsets to potential customers at more attractive prices than we can and make it more difficult for us to attract and retain our customers |
| We cannot predict the effect of technological changes on our business |
| Technological changes may result in increases in our capital expenditures |
| New technologies may be protected by patents or other intellectual property laws and therefore may not be available to us |
| Like others in the industry, we are uncertain about the extent of customer demand despite improvements in technology as well as the extent to which airtime and monthly access rates may continue to decline |
| Also, alternative technologies may be developed that provide wireless communications service or alternative service superior to that available from us |
| Rapid changes in technology in our market may adversely affect our business |
| To accommodate next-generation advanced wireless products such as high-speed data and streaming video, we may be required to purchase licenses for additional spectrum |
| We may be unable to gain access to this spectrum at a reasonable cost or at all |
| Failure to provide these services could have a material adverse effect on our ability to compete with wireless carriers offering these new technologies |
| We rely on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure |
| If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain sufficient quantities of the products and services we require to operate our businesses successfully |
| We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure |
| If these suppliers experience interruptions or other problems delivering these network components on a timely basis, our subscriber growth and operating results could suffer significantly |
| Our initial choice of a network infrastructure supplier can, where proprietary technology of the supplier is an integral component of the network, cause us to be effectively locked into one or a few suppliers for key network components |
| As a result, we have become reliant upon a limited number of network equipment manufacturers, including Nortel Networks, Ericsson, Inc |
| and Lucent Technologies, Inc |
| If it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement suppliers or vendors on economically attractive terms, on a timely basis or at all |
| In addition, if key suppliers or contractors fail to comply with their contracts, fail to meet performance expectations or refuse or are unable to supply us in the future, our business could be severely disrupted |
| If we lose our senior management, our business may be adversely affected |
| The success of our business is largely dependent on our executive officers, as well as on our ability to attract and retain other highly qualified technical and management personnel |
| We believe that there is, and will continue to be, intense competition for qualified personnel in the telecommunications industry, and we may be unable to attract and retain the personnel necessary for the development of our business |
| The loss of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and consolidated results of operations |
| We do not currently maintain “key person” life insurance on any of our key employees |
| We may be subject to claims of infringement regarding telecommunications technologies that are protected by patents and other intellectual property rights |
| In general, we do not manufacture any of the equipment used in our telecommunications businesses and do not own any patents |
| Accordingly, we purchase the infrastructure equipment and handsets used in our business from third parties and obtain licenses to use the associated intellectual property Telecommunications technologies are protected by a wide variety of patents and other intellectual property rights |
| As a result, third parties may assert 20 _________________________________________________________________ [80]Table of Contents infringement claims from time to time against us (or our suppliers) based on the way we use these technologies in our business |
| To protect us against possible infringement claims, we may have indemnification agreements with the manufacturers and suppliers that provide us with the equipment and technology we use in our business |
| However, we do not always have such agreements in place and, even if we have such agreements in place, we may not be fully protected against all losses associated with infringement claims |
| Whether or not an infringement claim was valid or successful, it could adversely affect our business by diverting management attention, involving us in costly and time-consuming litigation, requiring us to enter into royalty or licensing agreements (which may not be available on acceptable terms, or at all), or requiring us to redesign our business operations or systems to avoid claims of infringement |
| Business, political, regulatory and economic factors and severe weather may significantly affect our operations and hurt our overall performance |
| Our business is dependent on the business and economic conditions as well as consumer spending in the areas in which we operate, particularly in the Caribbean |
| If existing economic conditions in the Caribbean were to deteriorate, the market for wireless or other communications services in the Caribbean may be disproportionately and adversely affected due to the generally lower per capita income in the Caribbean as compared to the United States |
| This deterioration would also have an adverse effect on our business in the Caribbean and, because our Puerto Rico operations contribute significantly to our financial performance, on our overall financial condition and consolidated results of operations |
| Specifically, during fiscal 2006, the government of Puerto Rico had a fiscal budget crisis that forced the shutdown of the government for several days |
| This had an adverse impact on our business in Puerto Rico |
| In addition, during fiscal 2007, the government in Puerto Rico intends to implement a new sales tax |
| We believe this new tax will be applicable to telecommunications services and could have an adverse effect on our business |
| Our business may be materially adversely affected by events such as hurricanes, earthquakes, labor strikes, terrorism and other factors that may generally affect the regions in which we operate |
| For instance, hurricanes and labor strikes significantly slow down the provisioning of services by third parties and needed repair of our network, which could adversely affect our ability to deliver telecommunications |
| Any change in Puerto Rico’s political status with the United States, or the ongoing debate about such status, could affect the economy of Puerto Rico |
| The ultimate effect of possible changes in Puerto Rico’s governmental and political status is uncertain and, accordingly, we cannot assure you that such changes will not materially adversely affect our business and consolidated results of operations |
| In addition, the economy of the Caribbean area is highly dependent on tourism |
| The Dominican Republic’s currency is the DR peso |
| We transact the majority of our business in the Dominican Republic in DR pesos; however, we purchase wireless phones and network infrastructure in US dollars, thereby exposing us to foreign currency exchange risk |
| Further devaluation of the DR peso could have a material adverse effect on our Dominican Republic operations’ profitability |
| During fiscal 2006, we received approximately dlra40dtta6 million in payments from the federal USF in connection with our operations in Louisiana, Michigan, Indiana, Mississippi and Puerto Rico, based on FCC rules that make such funding available to competitive carriers, including wireless carriers, operating in areas where the established landline carrier also receives such funding |
| However, these FCC rules are currently under review and may be changed in a way that materially reduces or eliminates our right to obtain such funding |
| Accordingly, we may not receive any USF in the future |
| Loss of USF revenues could adversely affect our consolidated results of operations |
| 21 _________________________________________________________________ [81]Table of Contents Wireless devices may pose health and safety risks, and driving while using a wireless phone may be prohibited; as a result, we may be subject to new regulations, and demand for our services may decrease |
| The perceived safety risk associated with the use of a wireless device while driving may adversely affect our consolidated results of operations |
| Studies have indicated that using wireless devices while driving may impair a driver’s attention |
| The US Congress has proposed legislation that would seek to withhold a portion of federal funds from any state that does not enact legislation prohibiting individuals from using wireless telephones while driving motor vehicles |
| In addition, many state and local legislative bodies have passed and proposed legislation to restrict the use of wireless telephones while driving motor vehicles |
| Concerns over safety risks and the effect of future legislation, if adopted and enforced in the areas we serve, could limit our ability to market and sell our wireless services |
| In addition, these concerns and this legislation may discourage use of our wireless devices and decrease our revenue from customers who now use their wireless telephones while driving |
| Further, litigation relating to accidents, deaths or serious bodily injuries allegedly incurred as a result of wireless telephone use while driving could result in damage awards against telecommunications providers, adverse publicity and further governmental regulation |
| Any or all of these results, if they occur, could have a material adverse effect on our consolidated results of operations and financial condition |
| Media reports have suggested that, and studies have been undertaken to determine whether, certain radio frequency emissions from wireless handsets and cell sites may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers |
| In addition, lawsuits have been filed against other participants in the wireless industry alleging various adverse health consequences as a result of wireless phone usage |
| If consumers’ health concerns over radio frequency emissions increase, they may be discouraged from using wireless handsets and regulators may impose restrictions on the location and operation of cell sites |
| These concerns could have an adverse effect on the wireless communications industry and expose wireless providers to litigation, which, even if not successful, can be costly to defend |
| Government authorities might increase regulation of wireless handsets and cell sites as a result of these health concerns and wireless companies might be held liable for costs or damages associated with these concerns |
| The actual or perceived risk of radio frequency emissions could also adversely affect us through a reduced subscriber growth rate, a reduction in our subscribers, reduced network usage per subscriber or reduced financing available to the wireless communications industry |
| Our network capacity and customer service system may not be adequate and may not expand quickly enough to support our anticipated customer growth |
| Our financial and operational success depends on assuring that we have adequate network capacity and a sufficient customer support system to accommodate anticipated new customers and the related increase in usage of our network |
| Our wireless minutes of use continue to grow and, as a result, our networks will need to expand to meet this growth |
| In particular, our postpaid subscribers in the Caribbean used an average of 1cmam400 minutes during the three months ended May 31, 2006, as compared to 1cmam309 minutes during the three months ended May 31, 2005 |
| Our postpaid subscribers in the United States used an average of 831 minutes during the three months ended May 31, 2006, as compared to 643 minutes for the same period in 2005 |
| Our failure to expand and upgrade our networks to meet the increased usage could have a material adverse effect on our business |
| The network capacity plan relies on: • the availability of wireless handsets of the appropriate model and type to meet the demands and preferences of our customers; • the ability to obtain and construct additional cell sites and other infrastructure equipment; • the ability to obtain additional spectrum if required; and • the ability to obtain the capital to expand and upgrade our network |
| In addition, we must implement, manage and monitor effective procedures for customer activation, customer service, billing and other support services |
| Reliance on our customer service functions will increase as we add new customers |
| Our failure to timely and efficiently meet the demands for these services could decrease or slow 22 _________________________________________________________________ [82]Table of Contents subscriber growth or delay or otherwise impede billing and collection of amounts owed, which would adversely affect our revenue |
| We cannot make assurances that our customer service systems and network capacity will expand quickly enough to keep up with customer growth, and failure to do so would impair our ability to compete, which would adversely affect our results and financial operations |
| We rely heavily on our networks and the networks of other telecommunications providers to support all of our services |
| We are able to deliver services only to the extent that we can protect our network systems against damage from power or telecommunications failures, computer viruses, natural disasters, unauthorized access and other disruptions |
| Should we experience a prolonged or severe system failure, our customers may choose a different provider, our reputation may be damaged and our consolidated results of operations may be adversely affected |
| Risks Related to Our Capital Structure Our substantial debt obligations could impair our liquidity and financial condition |
| We are a highly leveraged company |
| At May 31, 2006, we had approximately dlra2dtta1 billion of consolidated long-term debt |
| Our ability to make payments on our debt and to fund operations and significant planned capital expenditures will depend on our ability to generate cash in the future |
| Net cash provided by operations for fiscal 2006 was dlra191dtta6 million |
| Capital expenditures were approximately dlra145dtta5 million for fiscal 2006 |
| Our substantial debt service obligations could have important consequences to you, including the following: • limiting our ability to borrow money or sell stock to fund working capital, capital expenditures, debt service requirements or other purposes; • making it more difficult for us to make payments on our indebtedness; • increasing our vulnerability to general economic and industry conditions; • limiting our flexibility in planning for, or reacting to, changes in our business or the industry; • reducing the amount of cash available for other purposes by requiring us to dedicate a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness; • increasing our vulnerability to interest rate increases as a portion of the borrowings under our dlra750dtta0 million senior secured credit facility (the “Senior Secured Credit Facility”) and certain of our other indebtedness are at variable interest rates; and • placing us at a competitive disadvantage to many of our competitors who are less leveraged than we are |
| The term loan portion of the Senior Secured Credit Facility, which on May 31, 2006 had dlra550dtta0 million outstanding, matures in 2011, with two equal installments of dlra275dtta0 million owing in August 2010 and February 2011 |
| Our 101/8prca senior unsecured notes due 2013 (the “2013 Senior Notes”) require repayment of dlra500dtta0 million of principal in 2013, our senior notes due 2013 (the “2013 Senior Holdco Notes”) require repayment of dlra550dtta0 million of principal in 2013, and our 81/8prca senior unsecured notes due 2014 (the “2014 Senior Notes”) require repayment of dlra325dtta0 million of principal in 2014 |
| We do not expect our business to generate cash flow from operations in an amount sufficient to enable us to repay all of this indebtedness when it comes due |
| As a result, we believe we will need to refinance all or a portion of our remaining existing indebtedness prior to its maturity |
| However, we may not be able to refinance any or all of our indebtedness on favorable terms or at all |
| Additionally, the terms of the Senior Secured Credit Facility currently provide that, if we are unable to refinance the outstanding aggregate principal amount of our 103/4prca senior subordinated notes due 2008 (the “2008 Senior Subordinated Notes”) six months prior to their maturity on December 15, 2008, the aggregate amount outstanding under the Senior Secured Credit Facility will become immediately due and payable |
| Despite current indebtedness levels, Centennial and its subsidiaries may still be able to incur substantially more debt |
| This could further exacerbate the risks associated with our substantial indebtedness |
| Despite our substantial indebtedness, we may still be able to incur significantly more debt, which would further reduce the cash we have available to invest in our operations, as a result of our increased debt service 23 _________________________________________________________________ [83]Table of Contents obligations |
| The terms of the indentures governing the 2008 Senior Subordinated Notes, the 2013 Senior Notes and the 2014 Senior Notes, as well as the terms of the Senior Secured Credit Facility, limit, but do not prohibit, the incurrence of additional indebtedness by us and our subsidiaries |
| In addition to the approximately dlra150dtta0 million available under the revolving credit facility portion of the Senior Secured Credit Facility, in certain circumstances, the terms of the Senior Secured Credit Facility provide that available borrowings may be increased by up to dlra250dtta0 million through one or more additional term loan or revolving credit facilities |
| The more leveraged we become, the more we, and in turn the holders of our securities, become exposed to the risks described above |
| If we do not generate sufficient cash flow to meet our debt service obligations and to fund our working capital requirements, we may need to seek additional financing or sell certain of our assets |
| To service our indebtedness, we will require a significant amount of cash |
| Our ability to generate cash depends on many factors beyond our control |
| Gross interest expense for fiscal 2006 was approximately dlra169dtta1 million |
| Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future |
| This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| Accordingly, it is possible that our business will not generate sufficient cash flow from operations, or that future borrowings will not be available to us under the Senior Secured Credit Facility to enable us to pay our indebtedness or to fund other liquidity needs |
| We may need to refinance all or a portion of our indebtedness on or before maturity |
| We may not be able to refinance any of our indebtedness, including the Senior Secured Credit Facility and our outstanding notes, on commercially reasonable terms or at all |
| Without such refinancing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances |
| The Senior Secured Credit Facility and the indentures governing our other outstanding indebtedness limit our and our subsidiaries’ ability to sell assets and will also restrict the use of proceeds from any such sale |
| Furthermore, the Senior Secured Credit Facility is secured by substantially all of our assets |
| Therefore, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our debt service obligations |
| Our debt instruments include restrictive and financial covenants that limit our operating flexibility |
| The Senior Secured Credit Facility requires us to maintain certain financial ratios, and the Senior Secured Credit Facility and the indentures governing our other outstanding indebtedness contain covenants that, among other things, restrict our and our subsidiaries’ ability to take specific actions, even if we believe such actions are in our best interest |
| These include restrictions on our ability to: • incur additional debt; • create liens or negative pledges with respect to our assets; • pay dividends or distributions on, or redeem or repurchase, our capital stock, including distributions from subsidiaries to Centennial; • make investments, loans or advances or other forms of payments; • prepay or defease specified indebtedness; • enter into transactions with affiliates; or • merge, consolidate or sell our assets |
| Any failure to comply with the restrictions of the Senior Secured Credit Facility or the indentures governing our other outstanding indebtedness, or certain current and any subsequent financing agreements may result in an event of default under the Senior Secured Credit Facility or the indentures governing our other outstanding indebtedness |
| Such default may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies |
| In addition, these creditors may be able to terminate any commitments they had made to provide us with further funds |
| 24 _________________________________________________________________ [84]Table of Contents We have a substantial amount of secured indebtedness and our secured creditors would have a prior secured claim to any collateral securing the debt owed to them |
| In connection with the incurrence of indebtedness under the Senior Secured Credit Facility, the lenders received a pledge of all of the equity of CCOC, our wholly owned subsidiary through which we hold the assets of all of our subsidiaries, including CPROC, and that of its existing and future direct and indirect subsidiaries (but not to exceed 65prca of the voting stock of certain foreign subsidiaries) |
| Additionally, the lenders under our Senior Secured Credit Facility will generally have a lien on all of the assets of CCOC and these subsidiaries, including CPROC As a result of these pledges and liens, if we fail to meet our payment or other obligations under the Senior Secured Credit Facility, the lenders would be entitled to foreclose on and liquidate substantially all of our assets, to the extent required to pay our obligations under the Senior Secured Credit Facility |
| Under those circumstances, we may not have sufficient funds to service our other indebtedness |
| Future sales of our common stock may depress the market price of our common stock |
| If our stockholders sell substantial amounts of our common stock in the public market, or if it is perceived that such sales could occur, the market price of our common stock could fall |
| These sales also might make it more difficult for us to sell equity securities in the future at times and prices that we deem appropriate |
| We have entered into a registration rights agreement with the Welsh Carson investors, The Blackstone Group investors and certain other stockholders |
| Currently, these stockholders collectively have approximately 17 million shares registered for resale under a shelf registration statement and have filed to register an additional 51 million shares |
| The registration rights agreement provides, among other things, that holders of a majority of the outstanding shares of common stock held by either of the Welsh Carson investors or The Blackstone Group investors may request that we register all or any portion of the shares they then hold and assist with takedowns from the shelf registration statement |
| If the Welsh Carson investors or The Blackstone Group investors sell substantial amounts of our common stock in the public market, or if it is perceived that such sales could occur, the market price of our common stock could fall |
| The price of our common stock may be volatile and will depend on a variety of factors, some of which are beyond our control |
| The market price of our common stock has historically experienced and may continue to experience significant volatility |
| During the twelve months ended May 31, 2006, the market price of our common stock ranged from dlra5dtta54 to dlra16dtta99 per share |
| In January 2006, we paid a special cash dividend of dlra5dtta52 per share, and the market price for our common stock was adjusted accordingly |
| The market price of our common stock may continue to fluctuate significantly due to a number of factors, some of which are beyond our control |
| These factors include, but are not limited to, our historical and anticipated operating results, technological or regulatory changes in our industry, announcements or actions by our competitors, low trading volume in our common stock and general market and economic conditions |
| These factors could cause our common stock to trade at prices below the prices which holders of our common stock paid for their shares, which could prevent investors in our common stock from selling their common stock at or above the prices at which they purchased their shares |
| In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities |
| These fluctuations often have been unrelated or disproportionate to the operating performance of publicly traded companies |
| In the past, following periods of volatility in the market price of a particular company’s securities, securities class-action litigation has often been brought against that company |
| If similar litigation were instituted against us, it could result in substantial costs and divert management’s attention and resources from our operations |
| A group of affiliated stockholders controls the voting power and our Board of Directors and may have interests adverse to the interests of the other holders of our common stock |
| Welsh Carson, certain of its affiliates and affiliates of The Blackstone Group collectively hold approximately 77prca of our outstanding shares of common stock |
| Accordingly, these equity investors, directly or indirectly, control our company and have the power to elect all of our directors, appoint new management and approve or reject any action requiring the approval of stockholders, including adopting amendments to our charter and approving mergers and sales of all or substantially all of our assets |
| This concentration of ownership may delay or deter possible changes in control of our company, which may reduce the value of your investment |
| These equity investors may make decisions that are adverse to the interests of other holders of our securities |
| 25 _________________________________________________________________ [85]Table of Contents We are a “controlled company” within the meaning of the NASDAQ rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements |
| The NASDAQ Stock Market, Inc |
| has established rules with respect to certain corporate governance matters, including requirements for a board consisting of a majority of independent directors, executive sessions of independent directors and independent audit, compensation and nominating committees, among others |
| Any company of which more than 50prca of the voting power is held by an individual, group or another company, or a “controlled company,” is exempt from certain of these requirements |
| The Welsh Carson investors currently own more than a majority of our outstanding common stock, and therefore we qualify for and rely on certain of these exemptions |
| As a result, if we were no longer considered a “controlled company,” we may not be in compliance with all of NASDAQ’s corporate governance standards |
| Accordingly, you may not have the same protections afforded to security holders of companies that are subject to all of the NASDAQ corporate governance requirements |
| Provisions of our amended and restated certificate of incorporation and Delaware law may make it more difficult for investors in our common stock to receive a change in control premium on our common stock |
| Our board of directors’ ability to designate and issue up to 10cmam000cmam000 shares of preferred stock and issue approximately 135cmam000cmam000 additional shares of common stock could materially and adversely affect the voting power of the holders of common stock, and could have the effect of making it more difficult for a person to acquire, or could discourage a person from seeking to acquire, control of our company |
| If this occurred, investors in our common stock could lose the opportunity to receive a premium on the sale of their shares in a change of control transaction |
| In addition, the Delaware General Corporation Law contains provisions that would have the effect of restricting, delaying or preventing altogether certain business combinations with an interested stockholder |
| Interested stockholders include, among others, any person who, together with affiliates and associates, becomes the owner, or within three years became the owner, of 15prca or more of a corporation’s voting stock |
| These provisions could also limit an investor’s ability to receive a premium in a change of control transaction |