10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ CORDILLERA COMMUNICATIONS CORP. (Exact name of Registrant as specified in its charter) State of Delaware 84-1324155 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1528 Wazee Street, Suite 200 80202 Denver, Colorado (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (303) 405-0475 Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ --- --- The number of shares outstanding of the Registrant's common stock as of August 21, 2000 was: Common stock - 3,502,750 shares 2 CORDILLERA COMMUNICATIONS CORP. TABLE OF CONTENTS

3 CORDILLERA COMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of these statements. 2 4 CORDILLERA COMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of these statements. 3 5 CORDILLERA COMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of these statements. 4 6 CORDILLERA COMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of these statements. 5 7 CORDILLERA COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 (UNAUDITED) NOTE 1. ORGANIZATION AND OWNERSHIP Cordillera Communications Corp. and subsidiaries (formerly, Centennial Communications Corp., collectively, the "Company") is a Delaware corporation engaged in the acquisition, development and operation of specialized mobile radio ("SMR") and other low-cost, wireless communications networks, the sale of communications services using those networks, and the sale and servicing of related accessories and equipment in certain countries of Latin America. Prior to August 1997, the Company also had operations in the United States (the "U.S. Operations"), at which time the Company made the decision to sell the U.S. Operations. This sale was completed during 1999. The Company has acquired SMR licenses through direct applications to governments and through acquisitions of interests in other entities (all of which are wholly owned) that have been granted or have applied for SMR licenses. On August 11, 2000, the Company entered into a Stock Purchase Agreement to sell the capital stock of two of the Company's wholly-owned subsidiaries, Centennial Cayman Corp. and SMR Direct Cayman Corp., for approximately $66.5 million. The sale of these two subsidiaries will constitute a sale of substantially all of the Company's operating assets (see Note 2) and will result in the termination of the Company's operations as an operator of SMR radio spectrum and related businesses. As such, the Company has accounted for such operations as discontinued operations, with a measurement date of August 11, 2000. NOTE 2. BASIS OF PRESENTATION The accompanying interim financial statements include the accounts of Company, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management's opinion, all adjustments (which are of a normal recurring nature) have been recorded which are necessary to present fairly the financial position of the Company as of June 30, 2000 and the results of its operations for the three and six months ended June 30, 1999 and 2000. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Operating results for the interim periods are not necessarily indicative of results for an entire year. Recent Developments Nextel Agreement On August 11, 2000, the Company entered into a Stock Purchase Agreement with Nextel International (Delaware) Ltd. ("Nextel"), a wholly-owned subsidiary of Nextel International, Inc. ("Nextel International"). Under the terms of the Stock Purchase Agreement, the Company anticipates that Nextel will purchase all of the issued and outstanding capital stock of two of the Company's wholly-owned subsidiaries, Centennial Cayman Corp. and SMR Direct Cayman Corp., for approximately $66.5 million. The sale of these two subsidiaries will constitute a sale of substantially all of the Company's operating assets and will result in the termination of the Company's operations as an operator of SMR radio spectrum and related businesses. As such, the Company has accounted for such operations as discontinued operations, with a measurement date of August 11, 2000. The Company expects to record a gain as a result of this transaction. Closing is expected to occur on August 31, 2000. The payment from Nextel will consist of (a) $36.5 million, which will reflect the purchase price for the business and assets of several Peruvian companies ("Peru Price"), and (b) $30 million, plus interest, which 6 8 will reflect the purchase price for the business and assets of several Chilean companies ("Chile Price"). Nextel will pay the Peru Price in two payments as follows: (i) $20 million due at the closing of the Stock Purchase Agreement, and (ii) a note payable for $16.5 million bearing interest at 8% per year due 12 months from the closing of the Stock Purchase Agreement. Nextel will pay the Chile Price as follows: (i) $6 million due at the closing of the Stock Purchase Agreement, and (ii) a note payable for $24 million bearing interest at 8% per year due no later than 24 months after the closing of the Stock Purchase Agreement, upon obtaining necessary regulatory relief from the Chilean government or the full deployment of an iDEN system by Nextel in Chile within such 24 month period. In the event the necessary regulatory relief is not obtained within such 24 month period, the note payable portion of the Chilean Price may be reduced to as low as $10 million plus interest. The Company will indemnify Nextel against (a) damages incurred in connection with, arising out of or resulting from (i) any inaccuracy or breach of any representation or warranty made by the Company pursuant to the Stock Purchase Agreement, (ii) any breach, non-compliance or nonfulfillment by the Company of any material covenant, agreement or undertaking to be complied with or performed by the Company contained in or made pursuant to the Stock Purchase Agreement, and (iii) certain potential tax and regulatory contingencies regarding the past operation of the assets. Nextel, however, is not entitled to make claims for money damages arising out of these obligations unless the amount (individually or in the aggregate) exceeds $100,000. In addition, Company is not required to indemnify Nextel for any amounts that exceed $7,500,000 in the aggregate. In addition, the Company will indemnify Nextel for one-half of the aggregate severance costs incurred and paid by Nextel after the closing date regarding the termination of certain employees of the Peruvian Companies and the Chilean Companies, but only to the extent that the Peruvian employee severance costs do not exceed $500,000 in the aggregate and to the extent the Chilean employee severance costs do not exceed $500,000 in the aggregate. Nextel will indemnify the Company against damages incurred in connection with, arising out of or resulting from (a) any inaccuracy or breach of any representation or warranty made by Nextel under the Stock Purchase Agreement and (b) any breach, non-compliance or nonfulfillment by Nextel of any material covenant, agreement or undertaking to be complied with or performed by Nextel under the Stock Purchase Agreement. Nextel International has entered into an agreement with the Company guaranteeing payment obligations and indemnification obligations of Nextel under the Stock Purchase Agreement. Merrill Lynch Agreements In conjunction with the Nextel agreement, the Board has authorized agreements with Merrill Lynch Global Allocation Fund, Inc. to be closed contemporaneously with the closing of the Stock Purchase Agreement, through which the Company will repurchase all of its issued and outstanding debt represented by the Company's 14% Exchange Notes in the aggregate amount of $40,000,000 due 2005 (carrying amount of $23.4 million at June 30, 2000) and the Company's 9% Convertible Notes in the aggregate amount of $10,000,000 due 2006 (carrying amount of $11.9 million at June 30, 2000). In exchange for these existing notes, the Company will pay Merrill Lynch $37,350,000 and offer Merrill Lynch a 50% share of the net proceeds received from the disposal any and all assets held by the Company following the closing of the Stock Purchase Agreement. The Company anticipates that the cash portion of the payment will be approximately $31.0 million and that the remainder will be funded by new notes to be issued by the Company in the principal amount of approximately $6.350 million. Each new note will (i) be due not more than 12 months plus 5 days from the closing of the Stock Purchase Agreement; (ii) bear an interest rate of 8%; (iii) be senior to any and all obligations of the Company to its shareholders, including any rights of the Company's shareholders to the cash proceeds of the notes payable arising out of the Stock Purchase Agreement; and (iv) be secured by the obligations of Nextel to the Company and by the assets of the Company. Upon the Company's repurchase of the Exchange Notes, the Company's public reporting requirements will terminate. 7 9 Other Related Activities After the closing contemplated by the Stock Purchase Agreement, the Board proposes to take such actions as it deems appropriate to wind up the Company's operations. Such actions may include possibly using a liquidating trust and/or dissolving the Company by filing a Certificate of Dissolution with the Delaware Secretary of State in accordance with the governing documents of Cordillera and pursuant to Section 275 of the Delaware General Corporation Law. If a decision is made to liquidate the Company, the Company will begin the process of disposing of its properties, discharging its liabilities and distributing its remaining assets to the shareholders. Until a determination is made, the Company will maintain its corporate existence, and its operations will consist substantially of managing its relationship with Nextel, holding notes receivable from Nextel, and completing the disposition of other assets. Reclassifications Certain amounts in prior periods have been reclassified to conform with the current presentation. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed (via the issuance of SFAS No. 137 in June 1999). The effective date for SFAS No. 133 is now for all fiscal quarters of all fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. This means that the standard must be adopted by the Company no later than January 1, 2001. To date, the Company has not entered into any derivative financial instruments or hedging activities. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101 provides guidance on the recognition, presentation, and disclosures related to revenue in the financial statements. The Company is required to adopt this standard in the Company's four quarter of 2000, and the Company's management is still evaluating the impact of such adoption. NOTE 3. LONG-TERM DEBT Long term debt consisted of the following at June 30, 2000 and December 31, 1999:

8 10 Certain of the Company's long-term debt contain restrictive covenants regarding the Company's ability to pay dividends, incur additional debt and issue additional equity securities, as well as other restrictions. As of June 30, 2000 the Company was in compliance with such covenants. NOTE 4. COMMITMENTS AND CONTINGENCIES Recovery of Investments Since its inception, the Company's efforts have been primarily directed towards raising capital and acquiring, developing and operating SMR and other low-cost, wireless communications networks. Further, the Company has made significant investments in pre-operating entities in various Latin American countries whose primary assets were SMR licenses. The ability of the Company to recover its investment in property, equipment and spectrum is contingent upon the closing of the transaction with Nextel. Recoverability of Licenses The terms of the Company's SMR license agreements contain provisions whereby the Company must achieve certain levels of subscriber load and network build out. If such commitments are not met, the Company could be subject to the revocation of the applicable licenses. Compliance with the terms of SMR licenses and certain regulatory requirements, such as construction deadlines and minimum subscriber requirements, can be difficult to meet. In addition, there can be no guarantee that in the future all regulatory requirements will be met or that the Company will not lose any applicable licenses as a result of its failure to meet such requirements. The Company is not in compliance with certain terms of the concession agreements in Peru including homologation of equipment (certifying the equipment before entering Peru), site to site transmission of signal (currently allowed only site to handset), unauthorized transfer and use of channels between the Peruvian companies and unauthorized use of certain frequencies granted. The Company has applied to correct these non-compliance issues and is waiting for approval from the Peruvian Ministry of Transportation, Communications, Housing and Construction (the "Ministry"). The Company believes that the applications will be approved and will result only in minimal fines, if any; however, there can be no assurance of such outcome. The Company is currently not in compliance with certain minimum subscriber loading requirements with respect to its licenses in the provinces outside Lima/Callao and the Company's paging license. Failure to comply with such requirements may subject the licenses relating to such channels to punitive measures. The Company filed an amendment for each of the Company's two Peruvian subsidiaries relating to these minimum subscriber loading requirements with the Ministry. The Company, based on its own discussions with the Peruvian authorities and based on advice from the Company's outside legal advisors in such matters, believes that the outcome of the items raised by the regulators will not result in an impairment of the carrying amount of the Peruvian licenses. Litigation In the normal course of business, the Company is subject to, and may become a party to, litigation. In management's opinion, none of the matters currently in litigation will have a material impact on the Company's financial position or results of operations. 9 11 NOTE 5. SEGMENT INFORMATION AND GEOGRAPHIC DATA In accordance with the provisions of SFAS No. 131, the Company has determined that its reportable segments are strategic geographic units that develop and operate SMR networks as well as the corporate unit which oversees all operations. The Company is managed by country as each country may require a slightly different business strategy. The accounting policies of the segments are the same as those for the Company. The segments are evaluated based upon gains in subscribers and based upon EBITDA. EBITDA represents operating loss before depreciation and amortization and is not a measurement under U.S. generally accepted accounting principles and may not be similar to EBITDA measures of other companies. The following information presents certain summarized balance sheet and statement of operations data by geographic region as of and for the six months ended June 30, 2000 and 1999 (in 000's).

10 12 For the three months ended June 30, 2000 and 1999 (in 000's):

---------- (1) Includes operations in Ecuador and other. The ability of the Company's subsidiaries to pay dividends or make loans or advances to the Parent is subject to regulation within their respective jurisdictions of organization and operations. While the existing laws and regulations of these jurisdictions generally do not prohibit the Company's subsidiaries from paying dividends or making loans or advances to the Parent, there can be no guarantee that such laws will continue to permit such payments. 11 13 CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements 12 14 CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements 13 15 CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements 14 16 CENTENNIAL CAYMAN CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying interim consolidated financial statements include the accounts of Centennial Cayman Corp. and its subsidiaries (collectively, the "Company"), all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company was incorporated in June 1996 as a wholly owned subsidiary of Cordillera Communications Corp.(formerly Centennial Communications Corp., the "Parent Company"). Centennial Cayman Corp. and subsidiaries (collectively, the "Company") is a Cayman Islands corporation engaged in the acquisition, development and operation of specialized mobile radio ("SMR") and other low-cost, wireless communications networks, the sale of communications services using those networks, and the sale and servicing of related accessory equipment in certain countries of Latin America. The Company has acquired SMR licenses through direct applications to governments, contributions from the Parent Company and through acquisitions of interests in other entities (all of which are wholly owned at December 31, 1999 and June 31, 2000) that have been granted or have applied for SMR licenses. To date, the Company has been primarily dependent on funds provided by the Parent Company, however, during the three and six months ended June 30, 2000, certain of the subsidiaries have been repaying back receivables owed. The Company has received equity contributions as well as extensions of credit from the Parent Company to fund its activities and anticipates that the Parent Company will make additional equity contributions to the Company. On August 11, 2000, the Parent Company entered into a Stock Purchase Agreement to sell the capital stock of the Company, for approximately $66.5 million. The condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management's opinion, all adjustments (which are of a normal recurring nature) have been recorded which are necessary to present fairly the financial position of the Company as of June 30, 2000 and the results of its operations for the three and six months ended June 3, 2000 and 1999. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Operating results for the interim periods are not necessarily indicative of results for an entire year. The Company's Parent incurs certain direct and indirect expenses on behalf of the Company including management, financing and other corporate overhead items. Items directly identifiable to the Company's operations are charged to the Company by the Parent. The Parent also allocates a portion of its corporate overhead based on the estimated level of activity performed by the Parent on behalf of the Company. Such allocations of indirect expenses totaled approximately $396,000 and $566,000 for the three months ended June 30, 2000 and 1999, respectively and approximately $961,000 and $1,036,000 for the six months ended June 30, 2000 and 1999, respectively, and management believes that such amounts reasonably represent the costs that would have been incurred on a stand alone basis. Management believes that the method used to allocate a portion of the Parent Company's corporate overhead is reasonable. 15 17 SMR Licenses Direct and certain indirect costs of obtaining SMR licenses, such as application, legal and consulting fees, as well as the fair market value of licenses obtained in certain acquisitions, are capitalized and amortized using the straight-line method over the period of the related license (generally 10 to 40 years) upon commencement of service (See Note 2). SMR licenses in the countries in which the Company operates are issued conditionally for various periods of time. The SMR licenses are generally renewable providing the licensee has complied with applicable rules and policies. In most instances, the Company believes it has complied and intends to comply with these standards and is amortizing the related costs using the straight line method over their estimated useful life, generally 40 years, which includes the renewal period. In some cases, the Company currently is not in compliance with applicable requirements and, where appropriate, has filed requests for extensions with the appropriate government agency. The Company expects that such extension requests will be granted and the risk of having these or any other licenses revoked is remote. The Company amortizes the SMR licenses over the expected life of the license, which may include extension periods if extensions are considered probable. Amortization expense was $187,000 and $329,000 for the three months ended June 30, 2000 and 1999, respectively and $393,000 and $407,000 for the six months ended June 30, 2000 and 1999, respectively. Reclassifications Certain amounts in prior periods have been reclassified to conform with the current presentation. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed (via the issuance of SFAS No. 137 in June 1999). The effective date for SFAS No. 133 is now for all fiscal quarters of all fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. This means that the standard must be adopted by the Company no later than January 1, 2001. To date, the Company has not entered into any derivative financial instruments or hedging activities. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101 provides guidance on the recognition, presentation, and disclosures related to revenue in the financial statements. The Company is required to adopt this standard in the fourth quarter of 2000, and the Company's management is still evaluating the impact of such adoption. NOTE 2. PROPERTY AND EQUIPMENT The composition of property and equipment follows:

16 18 The Company depreciates infrastructure over 10 years, radios over 5 and 3 years, computer equipment and software over 3 years and leasehold improvements over the life of the lease. Depreciation expense was $721,418 and $654,536 for the three months ended June 30, 2000 and 1999, respectively and $1,161,489 and $1,049,461 for the six months ended June 30, 2000 and 1999, respectively. NOTE 3. COMMITMENTS AND CONTINGENCIES Recovery of Investments Since its inception, the Company's efforts have been primarily directed towards raising capital and acquiring, developing and operating SMR and other low-cost, wireless communications networks. Further, the Company has made significant investments in pre-operating entities in various Latin American countries whose primary assets were SMR licenses. The ability of the Company to recover its investment in property, equipment and spectrum is contingent upon the closing of the transaction with Nextel. Recoverability of Licenses The terms of the Company's SMR license agreements contain provisions whereby the Company must achieve certain levels of subscriber load and network build out. If such commitments are not met, the Company could be subject to the revocation of the applicable licenses. Compliance with the terms of SMR licenses and certain regulatory requirements, such as construction deadlines and minimum subscriber requirements, can be difficult to meet. In addition, there can be no guarantee that in the future all regulatory requirements will be met or that the Company will not lose any applicable licenses as a result of its failure to meet such requirements. The Company is not in compliance with certain terms of the concession agreements in Peru including homologation of equipment (certifying the equipment before entering Peru), site to site transmission of signal (currently allowed only site to handset), unauthorized transfer and use of channels between the Peruvian companies and unauthorized use of certain frequencies granted. The Company has applied to correct these non-compliance issues and is waiting for approval from the Peruvian Ministry of Transportation, Communications, Housing and Construction (the "Ministry"). The Company believes that the applications will be approved and will result only in minimal fines, if any; however, there can be no assurance of such outcome. The Company is currently not in compliance with certain minimum subscriber loading requirements with respect to its licenses in the provinces outside Lima/Callao and the Company's paging license. Failure to comply with such requirements may subject the licenses relating to such channels to punitive measures. The Company filed an amendment for each of the Company's two Peruvian subsidiaries relating to these minimum subscriber loading requirements with the Ministry. The Company, based on its own discussions with the Peruvian authorities and based on advice from the Company's outside legal advisors in such matters, believes that the outcome of the items raised by the regulators will not result in an impairment of the carrying amount of the Peruvian licenses. 17 19 Litigation In the normal course of business, the Company is subject to, and may become a party to, litigation. In management's opinion, none of the matters currently in litigation will have a material impact on the Company's financial position or results of operations. NOTE 4. SEGMENT INFORMATION AND GEOGRAPHIC DATA In accordance with the provisions of SFAS No. 131, the Company has determined that its reportable segments are strategic geographic units that develop and operate SMR networks as well as the corporate unit which oversees all operations. The Company is managed by country as each country may require a slightly different business strategy. The accounting policies of the segments are the same as those for the Company on a consolidated basis. The segments are evaluated based upon gains in subscribers and based upon EBITDA. EBITDA represents operating loss before depreciation and amortization and is not a measurement under U.S. generally accepted accounting principles and may not be similar to EBITDA measures of other companies. The following information presents certain summarized balance sheet and statement of operations data by geographic region as of June 30, 2000 and 1999 (in 000's).

18 20

---------- (1) Includes operations in Ecuador and other. The Company's cash flow and its ability to make distributions to the Parent is significantly dependent upon the cash flow of its subsidiaries. The Company's ability to recover its investment in these subsidiaries, to fund operations in other countries and to make distributions to the Parent, among other things, depends to a significant degree on its ability to transfer funds from such subsidiaries to the Parent. The ability of the Company's subsidiaries to pay dividends or make loans or advances to the Parent Company is subject to regulation within their respective jurisdictions of organization and operation. While the existing laws and regulations of these jurisdictions generally do not prohibit the Company's subsidiaries from paying dividends or making loans or advances to the Parent Company, there can be no assurance that such laws will continue to permit or will not restrict such payments to be made. Further, the Company is exposed to credit risk related to receivables denominated in non-United States dollar currencies in these foreign countries. 19 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing elsewhere in this report. During 1999, the Company completed the sale of its U.S. Operations and the reader should factor these divestitures into its reading of the following discussion and analysis. On August 11, 2000, the Company entered into a Stock Purchase Agreement with Nextel International (Delaware) Ltd. ("Nextel"), a wholly-owned subsidiary of Nextel International, Inc. ("Nextel International"). Under the terms of the Stock Purchase Agreement, the Company anticipates that Nextel will purchase all of the issued and outstanding capital stock of two of the Company's wholly-owned subsidiaries, Centennial Cayman Corp. and SMR Direct Cayman Corp., for approximately $66.5 million. The sale of these two subsidiaries will constitute a sale of substantially all of the Company's operating assets and will result in the termination of the Company's operations as an operator of SMR radio spectrum and related businesses. As such, the Company has accounted for such operations as discontinued operations, with a measurement date of August 11, 2000. The Company expects to record a gain as a result of this transaction. Closing is expected to occur on August 31, 2000. RISKS RELATING TO FORWARD-LOOKING STATEMENTS Certain statements contained in this report including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "projects," and words of similar import constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: - general economic and business conditions, both nationally, internationally and in the regions in which the Company operates - demographic changes - existing government regulations and changes in, or the failure to comply with, government regulations - the intensity of competitive activity and its resulting impact on pricing strategies and product offerings - the loss of any significant subscribers or suppliers - changes in business strategy or development plans - technological developments - the ability to attract and retain qualified personnel - the significant indebtedness of the Company - the availability and terms of capital to fund the expansion of the Company's business, including he construction and deployment of the Company's networks - and other factors referenced in this report Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. OVERVIEW General As of June 30, 2000 the Company offers analog SMR service in Peru and Chile. In Peru, the Company commenced operations in May 1996, and in Chile the Company acquired an operating company in January 1998 but did not launch a full scale sales and marketing program until August 1998. As of December 31, 1999 the Company also had operations in Ecuador and El Salvador. During 1999 the Company decided to focus on its Chile and Peru operations, accordingly, on January 27, 2000 the Company completed the sale of 100% of the shares of its Ecuador 20 22 subsidiary (see Note 4). On February 21, 2000 the Company entered into an agreement for the sale of all of its El Salvador assets, except for its 800 MHz licenses. As part of this transaction, the Company also entered into a management agreement with the purchaser whereby the purchaser will manage the 800 MHz licenses for a period of two years (see Note 4). The Company has developed its operations in Latin America through the acquisition of non-operating entities, whose primary assets were spectrum, as well as by acquiring operating entities and through the grant of channels from government auctions. As of June 30, 2000, the Company provided wireless communications services in two Latin American countries. The Company currently holds the largest SMR channel position in Peru, Chile and El Salvador. The Company's strategy was focused on identifying and then deploying the most efficient utilization of its leading channel positions in its principal markets. The Company has developed its operations in Latin America through (i) acquisitions of license holding companies whose primary assets were spectrum, (ii) acquisitions of operating entities, and (iii) acquisition of channels at government auctions and bids. 21 23 CONSOLIDATED RESULTS OF OPERATIONS

Revenues The Company derives its revenues primarily from (i) monthly network access fees, which vary depending on the plan chosen by the subscriber, (ii) the sale and rental of subscriber units to subscribers, (iii) ancillary service revenue, consisting of fees charged for maintenance and loss and damage insurance, and (iv) ancillary equipment revenue, consisting of the sale of base stations, antennae, and other complementary products. The Company sets the pricing of the different components of its service in accordance with its marketing plans in each of the countries in which it operates, taking into account, among other things, competitive factors (i.e. the Company subsidizes the cost of the radios it sells). Monthly fixed network access fees as well as ancillary service charges are billed in advance; revenues are recognized for the measurement of income in the period in which service is delivered. Subscriber unit and ancillary equipment sales are recognized at the time of sale. Total revenue decreased approximately $665,000 and $1,290,000 during the three and six months ended June 30, 2000, respectively, as compared to the amounts for the corresponding periods in the prior year. The decrease is due to three factors: (i) the sale of its Ecuador subsidiary which resulted in a decrease in revenues of approximately $946,000, (ii) the entry into a management agreement in El Salvador which resulted in a decrease in revenues of approximately $72,000, and (iii) a decrease in equipment sales. Costs and Expenses Related to Revenues Costs and expenses related to revenues include both the cost of service and the cost of equipment sold, and is exclusive of depreciation and amortization. The cost of service represents the cost of maintaining the Company's analog SMR networks, site lease costs, technical expenses and utilities. 22 24 Total costs and expenses related to revenues decreased approximately $365,000 and $746,000 during the three and six months ended June 30, 2000, respectively, as compared to the amounts for the corresponding periods in the prior year. The decrease is mainly due to the decrease in equipment sales and the Company's efforts to minimize expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of compensation expenses but also include expenses such as marketing, rent, professional fees and other general corporate expenses. At the operating companies, selling, general and administrative expenses consist primarily of subscriber acquisition costs, marketing and advertising, salaries and office expenses. Total selling, general and administrative expenses decreased approximately $534,000 and $625,000 during the three and six months ended June 30, 2000, respectively, as compared to the amounts for the corresponding periods in the prior year. Selling, general and administrative expenses decreased in Latin America due to the sale of the Company's Ecuador subsidiary which resulted in a decrease in selling, general and administrative expenses of $559,000, and the Company's ongoing effort to reduce overhead expenses. This decrease was offset by the increase at the corporate level due to the decision of the Company to consolidate its Latin American operations in Denver and to close its Miami office. This decision resulted in increased travel expenses from Denver and severance costs associated with the closing of the Miami office. Depreciation and Amortization The Company depreciates its infrastructure equipment over 10 years and its radios (subscriber units) over 3 to 5 years using the straight-line method. Subscriber units represent the equipment which is used by a customer to access the SMR service (i.e. portable and mobile radios). The Company retains title to the subscriber units it rents and leases as part of the subscriber agreement. Upon termination of service under a rental or lease contract, the subscriber is required to return the unit to the Company and the unit is placed into service with another subscriber. Spectrum is amortized over the term of the licenses (including expected renewal periods), generally 40 years, using the straight-line method. Depreciation and amortization expense increased approximately $33,000 and $122,000 during the three and six months ended June 30, 2000, respectively, as compared to the amounts for the corresponding periods in the prior year. The increase is due to an increase in depreciation and amortization in the Latin American operations due to the acquisitions completed in January 2000. This increase was offset by a decrease in Latin America due to the sale of the Company's Ecuador subsidiary and El Salvador assets. In addition, depreciation decreased at the corporate level due to the sale of property, plant and equipment completed during 1999. Interest Expense Interest expense increased approximately $16,000 and $101,000 during the three and six months ended June 30, 2000, respectively, as compared to the amounts for the corresponding periods in the prior year. This increase is due to interest on the Exchange and Convertible Notes. As of June 30, 2000, the Company had $23.4 million carrying amount outstanding of its 14% Exchange Notes and $11.9 million of its 9% Convertible Notes. During the three and six months ended June 30, 2000, interest expense reflects the application of a compounded, effective interest rate of approximately 20% on the Exchange Notes. Accretion of discount on the Notes will cause the interest expense to increase in the future. Cash payments of interest on such debt began in July 2000. Interest Income Interest income decreased approximately $97,000 and $134,000 during the three and six months ended June 30, 2000, respectively, as compared to the amounts for the corresponding periods in the prior year. The decrease is due to the decrease in the Company's cash balance, (including restricted cash). The Company's cash balance decreased from approximately $14.0 million as of June 30, 1999 to $6.9 million as of June 30, 2000. 23 25 LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has been primarily engaged in development and expansion activities requiring substantial expenditures. Consequently, the Company has reported operating losses before interest of approximately $2.3 million and $2.4 million for the six months ended June 30, 1999 and 2000, respectively. Cash outflows of $1.6 million and cash inflows of $2.5 million net from operating and investing activities for the six months ended June 30, 1999 and 2000, respectively. These change in cash reflect the change in restricted cash. The Company has had significant investing cash outflows since inception. Substantially all of the cash used in investing activities was for acquisitions and for expenditures related to the construction of the Company's analog SMR networks and for the purchase of analog SMR radios in the countries in which it operates. To date, the funds necessary to finance the Company's operating and investing activities have been obtained by the Company through the sale of its Common Stock, Series A Preferred, Series B Preferred, Series C Preferred, Exchange Notes, Convertible Notes, and from cash flow from operations. On October 3, 1997, the Company consummated an approximate $11.1 million financing (the "Series C Offering") with an investor group led by the Company's existing stockholders and Prudential Securities Incorporated and its affiliates. In connection therewith, the Company issued the Senior Notes which were convertible into shares of the Company's Common Stock at a price of $1.45 per share. On January 15, 1998, the outstanding principal amount of the Senior Notes and all accrued and unpaid interest thereon was converted into 7,955,691 shares of Series C Preferred Stock which are convertible into common shares at a price of $1.45 per share. The Series C Preferred bears a 12% dividend per annum payable on a semi-annual basis, at the Company's option in cash or in additional shares of Series C Preferred. The Indenture restricts the ability of the Company to pay cash dividends on the Series C Preferred. On April 30, 2000 the Company issued additional 596,642 shares of Series C Preferred Stock as payment for the 12% dividend on the Series C Preferred. Pursuant to the Exchange Notes agreement, on or after January 31, 2006, at the option of the holders holding at least 5% of the outstanding shares of Series C Preferred, the Company is obligated to redeem shares of Series C Preferred tendered to the Company at a redemption price currently equal to the redemption price discussed below, plus all declared, accrued and unpaid dividends. The Company is only required to redeem shares of Series C Preferred on four occasions in each 12-month period. The Company is obligated to redeem the Series A Preferred and the Series B Preferred annually in one-third increments beginning on June 1, 2006, at the redemption price discussed below, plus all declared, accrued and unpaid dividends. The redemption price for the Series A Preferred Stock is $25,000 per share (approximately $8.8 million in total), the redemption price for the Series B Preferred Stock is $3.65 per share ($21.0 million in total), and the redemption price for the Series C Preferred Stock is $1.45 per share ($15.1 million in total). The holders of Preferred Stock have an option into convert any or all of the redeemable shares of Preferred Stock to common stock prior to each scheduled annual redemption. On January 15, 1998, the Company raised total gross proceeds of approximately $20.5 million from the sale of Private Notes and Warrants. This offering consisted of 40,000 units each consisting of $1,000 in principal amount at maturity of the Private Notes and one Initial Warrant (as defined) to purchase 64 shares of Common Stock at an exercise price of $0.01 per share. The Notes mature January 1, 2005. Interest is payable, in cash, at a rate of 14% per annum, semi-annually in arrears on January 1 and July 1 of each year commencing July 1, 2003. For accounting purposes, the Notes accrete at a rate of approximately 20% per annum compounding semi-annually. Pursuant to a Registration Rights Agreement, the Company filed a registration statement with the Securities and Exchange Commission with respect to an offer and, in August 1999 completed the exchange of Exchange Notes for the Private Notes, whereby the Exchange Notes have terms substantially identical to those of the Private Notes. Because the Company completed the Exchange Offer later than required by certain provisions of the arrangement, it incurred approximately $160,000 in liquidated damages which were accrued in 1999 and are payable on July 1, 2003. In addition, on January 15, 1998 the Company issued $10.0 million in aggregate principal amount of Convertible Notes pursuant to a purchase agreement dated January 15, 1998. Cash interest will not accrue on the Convertible Notes prior to January 1, 2000. Thereafter, interest on the Convertible Notes is payable in cash at a rate of 9% per annum on January 1 and July 1 of each year, commencing on July 1, 2000. The Convertible Notes are convertible 24 26 into shares of Common Stock at a conversion price of $2.25 per share, subject to adjustments in certain circumstances. Interest payments on the Company's Convertible notes commenced on July 1, 2000 and interest payments on the Exchange notes commence July 1, 2003. Both notes mature on January 1, 2005. As discussed below, the Company will enter into an agreement to repurchase the Exchange and Convertible Notes. Nextel Agreement On August 11, 2000, the Company entered into a Stock Purchase Agreement with Nextel International (Delaware) Ltd. ("Nextel"), a wholly-owned subsidiary of Nextel International, Inc. ("Nextel International"). Under the terms of the Stock Purchase Agreement, the Company anticipates that Nextel will purchase all of the issued and outstanding capital stock of two of the Company's wholly-owned subsidiaries, Centennial Cayman Corp. and SMR Direct Cayman Corp., for approximately $66.5 million. The sale of these two subsidiaries will constitute a sale of substantially all of the Company's operating assets and will result in the termination of the Company's operations as an operator of SMR radio spectrum and related businesses. As such, the Company has accounted for such operations as discontinued operations, with a measurement date of August 11, 2000. The Company expects to record a gain as a result of this transaction. Closing is expected to occur on August 31, 2000. The payment from Nextel will consist of (a) $36.5 million, which will reflect the allocated purchase price for the business and assets of several Peruvian companies ("Peru Price"), and (b) $30 million, plus interest, which will reflect the purchase price for the business and assets of several Chilean companies ("Chile Price"). Nextel will pay the Peru Price in two payments as follows: (i) $20 million due at the closing of the Stock Purchase Agreement, and (ii) a note payable for $16.5 million bearing interest at 8% per year due 12 months from the closing of the Stock Purchase Agreement. Nextel will pay the Chile Price as follows: (i) $6 million due at the closing of the Stock Purchase Agreement, and (ii) a note payable for $24 million bearing interest at 8% per year due no later than 24 months after the closing of the Stock Purchase Agreement, upon obtaining necessary regulatory relief from the Chilean government or the full deployment of an iDEN system by Nextel in Chile within such 24 month period. In the event the necessary regulatory relief is not obtained within such 24 month period, the note payable portion of the Chilean Price may be reduced to as low as $10 million. The Company will indemnify Nextel against (a) damages incurred in connection with, arising out of or resulting from (i) any inaccuracy or breach of any representation or warranty made by the Company pursuant to the Stock Purchase Agreement, (ii) any breach, non-compliance or nonfulfillment by the Company of any material covenant, agreement or undertaking to be complied with or performed by the Company contained in or made pursuant to the Stock Purchase Agreement, and (iii) certain potential tax and regulatory contingencies regarding the past operation of the assets. Nextel, however, is not entitled to make claims for money damages arising out of these obligations unless the amount (individually or in the aggregate) exceeds $100,000. In addition, Company is not required to indemnify Nextel for any amounts that exceed $7,500,000 in the aggregate. In addition, the Company will indemnify Nextel for one-half of the aggregate severance costs incurred and paid by Nextel after the closing date regarding the termination of certain employees of the Peruvian Companies and the Chilean Companies, but only to the extent that the Peruvian employee severance costs do not exceed $500,000 in the aggregate and to the extent the Chilean employee severance costs do not exceed $500,000 in the aggregate. Nextel will indemnify the Company against damages incurred in connection with, arising out of or resulting from (a) any inaccuracy or breach of any representation or warranty made by Nextel under the Stock Purchase Agreement and (b) any breach, non-compliance or nonfulfillment by Nextel of any material covenant, agreement or undertaking to be complied with or performed by Nextel under the Stock Purchase Agreement. Nextel International has entered into an agreement with the Company guaranteeing payment obligations and indemnification obligations of Nextel under the Stock Purchase Agreement. Merrill Lynch Agreements In conjunction with the Nextel agreement, the Board has authorized agreements with Merrill Lynch Global Allocation Fund, Inc. to be closed contemporaneously with the closing of the Stock Purchase Agreement, through 25 27 which the Company will repurchase all of its issued and outstanding debt represented by the Company's 14% Exchange Notes in the aggregate amount of $40,000,000 due 2005 (carrying amount of $25.4 million at June 30, 2000) and the Company's 9% Convertible Notes in the aggregate amount of $10,000,000 due 2006 (carrying amount of $11.9 million at June 30, 2000). In exchange for these existing notes, the Company will pay Merrill Lynch $37,350,000 and offer Merrill Lynch a 50% share of the net proceeds received from the disposal any and all assets held by the Company following the closing of the Stock Purchase Agreement. The Company anticipates that the cash portion of the payment will be approximately $31.0 million and that the remainder will be funded by new notes to be issued by the Company in the principal amount of approximately $6.350 million. Each new note will (i) be due not more than 12 months plus 5 days from the closing of the Stock Purchase Agreement; (ii) bear an interest rate of 8%; (iii) be senior to any and all obligations of the Company to its shareholders, including any rights of the Company's shareholders to the cash proceeds of the deferred purchase price arising out of the Stock Purchase Agreement; and (iv) be secured by the obligations of Nextel to the Company and by the assets of the Company. Upon the Company's repurchase of the Exchange Notes, the Company's public reporting requirements will terminate. FOREIGN INVESTMENT RISK The Company's foreign operating subsidiaries are all directly affected by their respective countries' governmental, economic, fiscal and monetary policies and other political factors. The Company believes that its operating subsidiaries' adversely affected by these factors. INFLATION AND FOREIGN CURRENCY EXCHANGE The net monetary assets of certain of the Company's subsidiaries are subject to foreign currency exchange risks since they are maintained in local currency. Certain of the Company's subsidiaries operate in countries in which the rate of inflation is significantly higher than that of the United States. The Company will attempt to protect its earnings from inflation and possible currency devaluation by setting prices in direct relation to the dollar and in some cases by periodically adjusting prices in local currencies. However, there can be no assurance that any significant devaluation against the dollar could be offset, in whole or in part, by a corresponding price increase. As of June 30, 2000, the Company has not established any hedge or risk reduction strategies related to its foreign currency exchange rate exposure. 26 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial market prices and rates. The Company is exposed to market risk in the area of changes in foreign currency exchange rates as measured against the United States dollar. These exposures are directly related to its normal operating activities. All of the Company's revenues during the six months ended June 30, 1999 and 2000 are from foreign subsidiaries while a significant portion of its operations were financed through the financial instruments noted above. The Company has attempted to protect its earnings from inflation and possible currency devaluation by setting prices in direct relation to the dollar and by periodically adjusting prices in local currencies. However, there can be no assurance that any significant devaluation against the dollar could be offset, in whole or in part, by a corresponding price increase. In the near term, the Company's foreign currency exchange rate exposure is limited, as the Company has been transferring available cash generated by its foreign subsidiaries to the United States frequently to minimize the risk of foreign exchange loses. Accordingly, as of June 30, 2000, the Company has not established any hedge or risk reduction strategies related to its foreign currency exchange rate exposure. The Company has used mandatorily redeemable preferred stock, Exchange notes and Convertible notes to finance its operations. The Company is required to redeem its mandatorily redeemable preferred stock beginning January 31, 2006, as defined by the Exchange Note Agreement. These financial instruments are all at a fixed rates and therefore do not expose the Company to any interest rate market risk. The table presented below provides information about the Company's financial instruments (amounts in thousands):

* The total carrying amount of the Company's debt as of June 30, 2000 was $35,282. 27 29 PART II - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS On March 30, 1997, Telefonica del Peru S.A. ("Telefonica"), petitioned Instituto Nacional de Defensa de la Competencia y de la Proteccion de la Propriedad Intelectual (the "INDECOPI"), the Peruvian trademark authority, to nullify the trademark "Radio Trunking del Peru" previously granted to the Company's subsidiary, SMR Direct Peru, S.R.L. (formerly Mobil Line Peru, S.A.) ("SMR Direct Peru"), by INDECOPI on the grounds that such trademark is not distinctive. At the same time Telefonica challenged SMR Direct Peru's application to use the trademark "Radio Trunking" with a corresponding logo. The Company responded to these petitions on May 15, 1997 and June 12, 1997, respectively. The Company was successful in defending Telefonica's claim with regard to the use of the trademark "Radio Trunking" with the corresponding logo but Telefonica prevailed with regard to the trademark "Radio Trunking del Peru" without the logo. The Company does not believe that the outcome of the lost trademark will have a material adverse effect on the Company's operations in Peru. The Company successfully opposed the registration of the trademark "INSTACOM Radio Trunking" requested by Telefonica del Peru S.A. ITEM 2. - CHANGE IN SECURITIES AND USE OF PROCEEDS On April 30, 2000, the Company issued 596,642 additional shares of Series C Preferred Stock at a price of $1.45 per share in connection with the dividend earned by the Series C Preferred Stock. The Series C Preferred Stock bears a 12% dividend payable semi-annually in each April and October in either cash or additional shares at the option of the Company. As of April 30, 2000 the outstanding shares of Series C Preferred Stock was 10,431,409. (a) Inapplicable. (b) Inapplicable. (c) Inapplicable 28 30 ITEM 5. - OTHER INFORMATION CHANNEL HOLDINGS The table below sets forth the Company's channel holdings and subscriber information in its Latin American markets.

(1) Represents the approximate number of people ("POPs") in the markets in which the Company has channels. (2) Channels are voice paths on which mobile communications are transmitted. Channels are licensed per geographic area and, using analog technology, each channel can generally serve up to 125 subscribers in a given area. All of the Company's channels are in the 800 MHz spectrum. (3) As of June 30, 2000 the Company holds channels in El Salvador. However, pursuant to the management agreement signed in February 2000 the Company is not entitled to the revenues and expenses, and therefore to the subscribers of this operation. (4) As of June 30, 1999 the Company also had channels and subscribers in Ecuador. This operation was sold in January 2000. ITEM - EXHIBITS AND REPORTS ON FORM 8 K 10.1 Stock Purchase Agreement 29 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 21, 2000. CORDILLERA COMMUNICATIONS CORP. a Delaware corporation By: /s/ Karl Maier -------------------------------------------- Name: Karl Maier Title: President and Chief Executive Officer 30 32 EXHIBIT INDEX

----------- * To be filed by amendment.

CORDILLERA COMMUNICATIONS CORP 10-Q