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EX-32.2 - EX-32.2 - CENTENNIAL COMMUNICATIONS CORP /DE | y79666exv32w2.htm |
EX-31.2 - EX-31.2 - CENTENNIAL COMMUNICATIONS CORP /DE | y79666exv31w2.htm |
EX-32.1 - EX-32.1 - CENTENNIAL COMMUNICATIONS CORP /DE | y79666exv32w1.htm |
EX-31.1 - EX-31.1 - CENTENNIAL COMMUNICATIONS CORP /DE | y79666exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-19603
CENTENNIAL COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Delaware | 06-1242753 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
3349 Route 138
Wall, NJ 07719
(Address of principal executive offices)
(Zip Code)
Wall, NJ 07719
(Address of principal executive offices)
(Zip Code)
(732) 556-2200
(Registrants telephone number,
including area code)
(Registrants telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practical date.
Common Stock 111,160,457 outstanding shares as of October 5, 2009
TABLE OF CONTENTS
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except share data)
(Unaudited)
(Dollar amounts in thousands, except share data)
August 31, | May 31, | |||||||
2009 | 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 247,626 | $ | 217,494 | ||||
Accounts receivable, less allowance for doubtful accounts of $6,261 and $5,881, respectively |
109,482 | 105,474 | ||||||
Inventory phones and accessories, net |
27,499 | 31,104 | ||||||
Prepaid expenses and other current assets |
23,859 | 22,131 | ||||||
Total Current Assets |
408,466 | 376,203 | ||||||
Property, plant and equipment, net |
564,331 | 572,131 | ||||||
Debt issuance costs, less accumulated amortization of $40,825 and $38,843, respectively |
24,722 | 26,704 | ||||||
Restricted cash |
568 | 124 | ||||||
U.S. wireless licenses |
402,395 | 402,395 | ||||||
Puerto Rico wireless licenses, net |
54,159 | 54,159 | ||||||
Goodwill |
10,989 | 10,989 | ||||||
Customer lists, net |
4,819 | 4,896 | ||||||
Cable facility, net |
2,950 | 3,010 | ||||||
Other assets |
7,504 | 4,893 | ||||||
TOTAL ASSETS |
$ | 1,480,903 | $ | 1,455,504 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
CURRENT LIABILITIES: |
||||||||
Current portion of long-term debt |
275,000 | | ||||||
Accounts payable |
21,751 | 12,679 | ||||||
Accrued expenses and other current liabilities |
163,795 | 182,544 | ||||||
Total Current Liabilities |
460,546 | 195,223 | ||||||
Long-term debt |
1,750,524 | 2,021,180 | ||||||
Deferred income taxes |
165,064 | 155,526 | ||||||
Other liabilities |
30,659 | 31,968 | ||||||
Commitments and contingencies (see Note 8) |
||||||||
STOCKHOLDERS DEFICIT: |
||||||||
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized, no shares issued
or outstanding |
| | ||||||
Common stock, $0.01 par value per share, 240,000,000 shares authorized; issued 111,219,613
and 111,165,870 shares, respectively; and outstanding 111,419,110 and 111,095,367 shares,
respectively |
1,112 | 1,112 | ||||||
Additional paid-in capital |
64,503 | 62,197 | ||||||
Accumulated deficit |
(991,377 | ) | (1,010,835 | ) | ||||
Accumulated other comprehensive loss |
(480 | ) | (1,232 | ) | ||||
Less: cost of 70,503 common shares in treasury |
(1,077 | ) | (1,077 | ) | ||||
Total Stockholders Deficit attributable to Centennial |
(927,319 | ) | (949,835 | ) | ||||
Noncontrolling interest in subsidiaries |
1,429 | 1,442 | ||||||
Total Stockholders Deficit |
(925,890 | ) | (948,393 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
$ | 1,480,903 | $ | 1,455,504 | ||||
See notes to Condensed Consolidated Financial Statements.
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Table of Contents
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollar amounts in thousands, except per share data)
(Unaudited)
(Dollar amounts in thousands, except per share data)
Three Months Ended | ||||||||
August 31, | August 31, | |||||||
2009 | 2008 | |||||||
REVENUE: |
||||||||
Service revenue |
$ | 247,089 | $ | 249,003 | ||||
Equipment sales |
11,835 | 16,210 | ||||||
258,924 | 265,213 | |||||||
COSTS AND EXPENSES: |
||||||||
Cost of services (exclusive of depreciation and amortization shown below) |
51,923 | 50,676 | ||||||
Cost of equipment sold |
31,251 | 42,149 | ||||||
Sales and marketing |
23,470 | 25,869 | ||||||
General and administrative |
48,139 | 48,096 | ||||||
Depreciation and amortization |
31,687 | 35,544 | ||||||
Loss (gain) on disposition of assets |
122 | (47 | ) | |||||
186,592 | 202,287 | |||||||
Operating income |
72,332 | 62,926 | ||||||
Interest expense, net |
(39,952 | ) | (44,880 | ) | ||||
Income from continuing operations before income tax expense |
32,380 | 18,046 | ||||||
Income tax expense |
(12,692 | ) | (10,056 | ) | ||||
Income from continuing operations |
19,688 | 7,990 | ||||||
Net loss from discontinued operations |
(94 | ) | (337 | ) | ||||
Net income |
19,594 | 7,653 | ||||||
Less: Net income attributable to noncontrolling interest |
(136 | ) | (167 | ) | ||||
Net income attributable to Centennial |
$ | 19,458 | $ | 7,486 | ||||
Earnings per share: |
||||||||
Basic |
||||||||
Earnings per share from continuing operations |
$ | 0.18 | $ | 0.07 | ||||
Loss per share from discontinued operations |
0.00 | 0.00 | ||||||
Net income per share attributable to Centennial |
$ | 0.18 | $ | 0.07 | ||||
Diluted |
||||||||
Earnings per share from continuing operations |
$ | 0.17 | $ | 0.07 | ||||
Loss per share from discontinued operations |
0.00 | 0.00 | ||||||
Net income per share attributable to Centennial |
$ | 0.17 | $ | 0.07 | ||||
Weighted-average number of shares outstanding: |
||||||||
Basic |
111,135 | 108,038 | ||||||
Diluted |
112,005 | 110,200 | ||||||
See notes to Condensed Consolidated Financial Statements.
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CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
(Unaudited)
(Dollar amounts in thousands)
Three Months Ended | ||||||||
August 31, | August 31, | |||||||
2009 | 2008 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 19,594 | $ | 7,653 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
31,687 | 35,544 | ||||||
Stock-based compensation |
2,029 | 2,870 | ||||||
Excess tax benefits from stock-based compensation |
(16 | ) | (102 | ) | ||||
Loss (gain) on disposition of assets |
122 | (47 | ) | |||||
Changes in assets and liabilities |
(5,666 | ) | (7,130 | ) | ||||
Net cash provided by operating activities |
47,750 | 38,788 | ||||||
INVESTING ACTIVITIES: |
||||||||
Proceeds from disposition of assets, net of cash expenses |
22 | 21 | ||||||
Payments for purchase of wireless spectrum |
| (2 | ) | |||||
Capital expenditures |
(17,008 | ) | (20,664 | ) | ||||
Net cash used in investing activities |
(16,986 | ) | (20,645 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Repayment of debt |
(898 | ) | (724 | ) | ||||
Proceeds from the exercise of stock options |
250 | 1,161 | ||||||
Excess tax benefits from stock-based compensation |
16 | 102 | ||||||
Net cash (used in) provided by financing activities |
(632 | ) | 539 | |||||
Net increase in cash and cash equivalents |
30,132 | 18,682 | ||||||
Cash and cash equivalents, beginning of period |
217,494 | 105,161 | ||||||
Cash and cash equivalents, end of period |
$ | 247,626 | $ | 123,843 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURE: |
||||||||
Cash (paid) received during the period for: |
||||||||
Interest |
$ | (52,810 | ) | $ | (58,556 | ) | ||
Income taxes |
$ | 26 | $ | (384 | ) | |||
NON-CASH TRANSACTION: |
||||||||
Fixed assets acquired under capital leases |
$ | 4,223 | $ | 1,938 | ||||
See notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share amounts)
(Dollar amounts in thousands, except per share amounts)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
and pursuant to the rules and regulations of the United States (U.S.) Securities and Exchange
Commission (SEC) for interim financial statements. Accordingly, these Condensed Consolidated
Financial Statements do not include all disclosures required by GAAP. The results for the interim
periods are not necessarily indicative of results for the full year. These Condensed Consolidated
Financial Statements should be read in conjunction with the consolidated financial statements and
notes thereto included in the Companys May 31, 2009 Annual Report on Form 10-K, filed on July 30,
2009, which includes a summary of significant accounting policies and other disclosures. In the
opinion of management, the accompanying interim unaudited Condensed Consolidated Financial
Statements contain all adjustments (consisting only of normal recurring items) necessary to present
fairly the condensed consolidated financial position of Centennial Communications Corp. and
Subsidiaries (the Company or Centennial) as of August 31, 2009 and the results of its
consolidated operations and consolidated cash flows for the three month periods ended August 31,
2009 and 2008.
On November 7, 2008, Centennial entered into a merger agreement with AT&T providing for the
acquisition of Centennial by AT&T (the Merger or, the AT&T Transaction). On October 13, 2009,
AT&T and Centennial announced that they had entered into a consent decree with the Department of
Justice which allowed the Merger to proceed, while requiring that AT&T divest Centennials
operations in eight service areas in Louisiana and Mississippi. The eight service areas are
Alexandria, La., Lafayette, La., LA-3 (DeSoto), LA-5 (Beauregard), LA-6 (Iberville), LA-7 (West
Feliciana), MS-8 (Claiborne) and MS-9 (Copiah). Under the terms of the merger agreement,
Centennial stockholders would receive $8.50 per share in cash. The Merger was approved by
Centennials stockholders in February 2009, but remains subject to approval by the Federal
Communications Commission and to other customary closing conditions. AT&T and Centennial expect
that, assuming timely satisfaction or waiver of all remaining closing conditions, the Merger will
be completed early in the fourth quarter of calendar year 2009.
Certain prior period information, primarily relating to the classification and presentation of
non-controlling interest, previously referred to as minority interest, has been reclassified to
conform to the current period presentation.
NOTE 2. OTHER INTANGIBLE ASSETS AND GOODWILL
Other Intangible Assets
The following table presents the intangible assets not subject to amortization:
As of | As of | |||||||
August 31, 2009 | May 31, 2009 | |||||||
U.S. wireless licenses |
$ | 402,395 | $ | 402,395 | ||||
Puerto Rico wireless licenses |
54,159 | 54,159 | ||||||
Total |
$ | 456,554 | $ | 456,554 | ||||
A significant portion of the Companys intangible assets are licenses that provide the
Companys wireless operations with the exclusive right to utilize radio frequency spectrum
designated on the license to provide wireless communication services. In general, the Companys
wireless licenses are issued by the Federal Communications Commission (FCC) for a fixed period,
generally ten years, at which time they are subject to renewal. Historically, renewals of licenses
through the FCC have occurred routinely and at nominal cost. Moreover, the Company has determined
that there are currently no legal, regulatory, contractual, competitive, economic or other factors
that limit the estimated useful life of its U.S. wireless and Puerto Rico wireless licenses. As a
result, the U.S. wireless and Puerto Rico wireless licenses are treated as indefinite-lived
intangible assets under the provisions of Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets (SFAS 142), and are not amortized, but rather are
tested for impairment. The Company reevaluates the estimated useful life determination for U.S.
wireless and Puerto Rico wireless licenses each reporting period to determine whether events and
circumstances continue to support an indefinite useful life.
The Company tests its wireless licenses for impairment annually, and more frequently if
indications of impairment exist. The Company uses a direct value approach in performing its annual
impairment test on its wireless licenses. The direct value approach determines fair value using
estimates of future cash flows associated specifically with the licenses. If the fair value of the
wireless licenses is less than the carrying amount of the licenses, an impairment is recognized.
Goodwill and other intangible assets with indefinite lives are subject to impairment tests.
The Company currently tests goodwill for impairment using a residual value approach on an annual
basis as of January 31 or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. Specifically, goodwill
impairment is determined using a two-step process. The first step of the goodwill impairment test
is used to identify potential impairment by
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comparing the fair value of a reporting unit (calculated using a discounted cash flow method)
with its carrying amount, including goodwill. The Company determined that its reporting units for
SFAS 142 are its operating segments determined under SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131). If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired and the second step of
the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test is performed to measure the amount of
impairment loss, if any. The second step of the goodwill impairment test compares implied fair
value (i.e., fair value of reporting unit less the fair value of the units assets and liabilities,
including identifiable intangible assets) of the reporting units goodwill with the carrying amount
of that goodwill. If the carrying value of goodwill exceeds its implied fair value, the excess is
required to be recorded as an impairment.
The Company performed its annual goodwill and intangible asset impairment analyses during the
third quarter of fiscal year 2009. Based upon the results of these analyses, there were no
impairments.
The following table presents other intangible assets subject to amortization:
As of August 31, 2009 | As of May 31, 2009 | |||||||||||||||||||
Estimated | Gross | Gross | ||||||||||||||||||
Useful | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
Life | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Cable facility |
25 years | 6,000 | 3,050 | 6,000 | 2,990 | |||||||||||||||
Customer lists |
10 years | 6,500 | 1,681 | 6,500 | 1,604 | |||||||||||||||
Other intangible assets amortization expense was $137 for the three months ended August 31,
2009. Based solely on the finite lived intangible assets existing at August 31, 2009, amortization
expense is estimated to be $747 for the remainder of fiscal 2010 and $840 per fiscal year for each
of the next five fiscal years.
Goodwill
The amount of goodwill relates to the Puerto Rico broadband segment and was $10,989 at August
31, 2009 and May 31, 2009.
NOTE 3. DEBT
Long-term debt consisted of the following:
As of | As of | |||||||
August 31, 2009 | May 31, 2009 | |||||||
Senior Secured Credit Facility Term Loans |
$ | 550,000 | $ | 550,000 | ||||
8 1/8% Senior Unsecured Notes due 2014 (the 2014 Senior Notes) |
325,000 | 325,000 | ||||||
10 1/8% Senior Unsecured Notes due 2013 (the 2013 Senior Notes) |
500,000 | 500,000 | ||||||
Senior Unsecured Holdco Floating Rate Notes due 2013 (the 2013 Holdco Floating Rate Notes), net of unamortized discount of $1,665 and $1,790, respectively |
348,335 | 348,210 | ||||||
10% Senior Unsecured Holdco Fixed Rate Notes due 2013 (the 2013 Holdco Fixed Rate Notes) |
200,000 | 200,000 | ||||||
Capital Lease Obligations |
91,045 | 86,692 | ||||||
Financing Obligation Tower Sale |
11,144 | 11,278 | ||||||
Total Long-Term Debt |
2,025,524 | 2,021,180 | ||||||
Current Portion of Long-Term Debt |
(275,000 | ) | | |||||
Net Long-Term Debt |
$ | 1,750,524 | $ | 2,021,180 | ||||
Senior Secured Credit Facility
On February 9, 2004, the Companys wholly-owned subsidiaries, Centennial Cellular Operating
Co. LLC (CCOC) and Centennial Puerto Rico Operations Corp. (CPROC), as co-borrowers, entered
into the $750,000 Senior Secured Credit Facility. The Company and its direct and indirect domestic
subsidiaries, including CCOC and CPROC, are guarantors under the Senior Secured Credit Facility.
The Senior Secured Credit Facility consists of a seven-year term loan, maturing in February
2011, with an original aggregate principal amount of $600,000, of which $550,000 remains
outstanding at August 31, 2009. The Senior Secured Credit Facility requires amortization payments
in an aggregate principal amount of $550,000 in two equal installments of $275,000 in August 2010
and February 2011. The Senior Secured Credit Facility also includes a six-year revolving credit
facility, maturing in February 2010,
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Table of Contents
with an aggregate principal amount of up to $150,000; however, $2,500 of this commitment was
from a subsidiary of Lehman Brothers Holdings Inc. (Lehman Brothers). Due to the Chapter 11
bankruptcy filing by Lehman Brothers in September 2008, the Company believes it is unlikely that
this $2,500 commitment will be honored by Lehman Brothers. Accordingly, the Company believes its
useable commitments under the revolving credit facility may be $147,500. The Company does not
expect this change to have a material impact on its liquidity or consolidated financial statements.
At August 31, 2009, the Company had not borrowed any amounts under the revolving credit facility.
On February 5, 2007, the Company amended its Senior Secured Credit Facility to lower the
interest rate on term loan borrowings by 0.25% through a reduction in the London Inter-Bank
Offering Rate (LIBOR) spread from 2.25% to 2.00%. Under the terms of the Senior Secured Credit
Facility, as amended, term and revolving loan borrowings will bear interest at LIBOR (a weighted
average rate of 1.23% as of August 31, 2009) plus 2.00% and LIBOR plus 3.25%, respectively. The
Companys obligations under the Senior Secured Credit Facility are collateralized by liens on
substantially all of the Companys assets.
On September 3, 2009, the Company made a $52,500 mandatory excess cash flow payment under the
Senior Secured Credit Facility, which reduced the principal balance of the term loan thereunder to
$497,500.
High-Yield Notes
On December 21, 2005, the Company issued $550,000 in aggregate principal amount of 2013 Holdco
Notes. The 2013 Holdco Notes were issued in two series consisting of (i) $350,000 of 2013 Holdco
Floating Rate Notes that bear interest at three-month LIBOR (0.80% as of August 31, 2009) plus
5.75% and mature in January 2013, and (ii) $200,000 of 2013 Holdco Fixed Rate Notes that bear
interest at 10% and mature in January 2013. The 2013 Holdco Floating Rate Notes were issued at a 1%
discount with the Company receiving net proceeds of $346,500. The Company used the net proceeds
from the offering, together with a portion of its available cash, to pay a special cash dividend of
$5.52 per share to the Companys common stockholders and to prepay $39,500 of term loans under the
Senior Secured Credit Facility. In connection with the completion of the 2013 Holdco Notes
offering, the Company entered into an amendment to the Senior Secured Credit Facility to permit,
among other things, the issuance of the 2013 Holdco Notes and the payment of the special cash
dividend. Additionally, the Company capitalized $15,447 of debt issuance costs in connection with
the issuance of the 2013 Holdco Notes.
On February 9, 2004, concurrent with the Senior Secured Credit Facility, the Company and its
wholly-owned subsidiaries, CCOC and CPROC, as co-issuers, issued $325,000 aggregate principal
amount of 2014 Senior Notes. The Company used the net proceeds from the 2014 Senior Notes offering
to refinance outstanding indebtedness.
On June 20, 2003, the Company and CCOC, as co-issuers, issued $500,000 aggregate principal
amount of 2013 Senior Notes. CPROC is a guarantor of the 2013 Senior Notes.
Derivative Financial Instruments
The Company, either directly or through one of its wholly-owned subsidiaries, CCOC or CPROC,
uses financial derivatives as part of its overall risk management strategy. These instruments are
used to manage risk related to changes in interest rates. The portfolio of derivative financial
instruments has consisted of interest rate swap and collar agreements. Interest rate swap
agreements are used to modify variable rate obligations to fixed rate obligations, thereby reducing
the exposure to higher interest rates. Interest rate collar agreements are used to lock in a
maximum rate if interest rates rise, but allow the Company to otherwise pay lower market rates,
subject to a floor. The Company formally documents all relationships between hedging instruments
and hedged items and the risk management objective and strategy for each hedge transaction. All of
the Companys derivative transactions are entered into for non-trading purposes. The Companys
derivative financial instruments effective or entered into during the three months ended August 31,
2009 consist of the following:
Collar | Collar | |||||||||||||||||||||||||||
Fixed | Fixed | |||||||||||||||||||||||||||
Variable Interest | Interest | Interest | ||||||||||||||||||||||||||
Rate Loan | Amount | Rate | Rate | Trade | Effective | Expiration | ||||||||||||||||||||||
Being Hedged | Hedged | Floor | Cap | Date | Date | Date | ||||||||||||||||||||||
November 2008 CCOC
Collar 1 |
Senior Secured Credit Facility | $ | 200,000 | 1.76 | % | 2.25 | % | 11/25/2008 | 12/31/2008 | 9/30/2009 | ||||||||||||||||||
2008 CPROC Collar |
Senior Secured Credit Facility | $ | 250,000 | 2.43 | % | 4.00 | % | 9/26/2008 | 9/30/2008 | 6/30/2009 | ||||||||||||||||||
November 2008 CPROC
Collar |
Senior Secured Credit Facility | $ | 35,500 | 1.76 | % | 2.25 | % | 11/25/2008 | 12/31/2008 | 9/30/2009 | ||||||||||||||||||
November 2008 CCOC
Collar 2 |
Senior Secured Credit Facility | $ | 25,000 | 1.76 | % | 2.25 | % | 11/25/2008 | 12/31/2008 | 9/30/2009 | ||||||||||||||||||
November 2008 CCOC
Collar 3 |
Senior Secured Credit Facility | $ | 39,500 | 1.81 | % | 2.25 | % | 11/25/2008 | 11/30/2008 | 8/31/2009 |
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At August 31, 2009, $260,500 of the Companys $900,000 of variable rate debt was hedged
by interest rate collars described above. All the Companys collars have been designated as cash
flow hedges. As of September 30, 2009, all of the Companys swaps and collars had expired.
At August 31, 2009, the fair value of the collars was a liability of $774 which is included in
accrued expenses and other current liabilities in the condensed consolidated balance sheet. For the
three months ended August 31, 2009, the Company recorded income of $752, net of tax, to accumulated
other comprehensive loss attributable to the change in the fair value of the collars, the full
amount of which is expected to be reclassified into interest expense within the next 12 months as
the underlying exposures are realized. See Notes 4 and 7 for a discussion of the framework the
Company uses for determining fair value of its derivative instruments.
Under certain of the agreements relating to long-term debt, the Company is required to
maintain certain financial and operating covenants, and is limited in its ability to, among other
things, incur additional indebtedness and enter into transactions with affiliates. Under certain
circumstances, the Company is prohibited from paying cash dividends on its common stock under
certain of such agreements.
The aggregate annual principal payments for the next five years and thereafter under the
Companys long-term debt at August 31, 2009 are summarized as follows:
August 31, 2010 |
$ | 274,650 | ||
August 31, 2011 |
274,799 | |||
August 31, 2012 |
26 | |||
August 31, 2013 |
1,050,368 | |||
August 31, 2014 |
325,637 | |||
August 31, 2015 and thereafter |
101,709 | |||
2,027,189 | ||||
Less: unamortized discount |
(1,665 | ) | ||
$ | 2,025,524 | |||
Interest expense, as reflected on the Condensed Consolidated Financial Statements, has been
partially offset by interest income. The gross interest expense for the three months ended August
31, 2009 and 2008 was approximately $39,970 and $45,358, respectively.
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The
carrying amounts reported in the condensed consolidated balance sheets for cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, other
liabilities and short-term debt approximate fair value because of the short-term maturity of these
financial instruments. Fair value is determined by the most recently traded price of the security
at the consolidated balance sheet date. The estimated fair value of the Companys debt and
derivative financial instruments is summarized as follows:
August 31, 2009 | May 31, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Long-term debt |
$ | 2,025,524 | $ | 2,031,578 | $ | 2,021,180 | $ | 2,056,095 | ||||||||
Derivative financial instruments: |
||||||||||||||||
Interest rate swap and collar agreements liability |
$ | 774 | $ | 774 | $ | 1,952 | $ | 1,952 |
Fair value for debt was determined based on interest rates that are currently available to the
Company for the issuance of debt with similar terms and remaining maturities. The fair value of the
interest rate swap and collar agreements at August 31, 2009 and
May 31, 2009 were estimated using a quote from
the broker. See Note 7 for a discussion of the framework the Company uses for determining fair
value of its derivative instruments.
9
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NOTE 5. TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109), Accounting
Principles Board (APB) Opinion No. 28, Interim Financial Reporting (APB 28), and Financial
Accounting Standards Board (FASB) Interpretation No. 18, Accounting for Income Taxes in Interim
Periods An Interpretation of APB Opinion No. 28 (FIN 18), the Company has recorded its tax
provision from continuing operations for the three months ended August 31, 2009 based on its
projected annual worldwide effective tax rate (the effective tax rate) of 39.1%.
The Companys effective tax rate of 39.1% is primarily due to U.S. federal taxes and state
taxes net of federal tax benefit. The Companys effective tax rate also reflects its expectation
that it will claim a foreign tax credit in the U.S. for the entire amount of foreign taxes the
Company pays. The effect of this is to reduce the Companys effective tax rate.
On June 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48,
which provides clarification with respect to the accounting for uncertainty in income taxes,
contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS 109. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon ultimate settlement.
Tax positions are analyzed on a quarterly basis and adjusted based upon changes in facts and
circumstances, such as the conclusion of federal and state audits, expiration of the statute of
limitations for the assessment of tax, case law and emerging legislation. The Companys effective
tax rate includes the effect of tax contingency reserves and changes to the reserves in accordance
with FIN 48. Management has concluded that it is reasonably possible that the unrecognized tax
benefits may decrease by approximately $599 within the next 12 months from $11,259 to $10,660. The
decrease is primarily related to foreign and state taxes that have expiring statutes of
limitations.
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NOTE 6. DISCONTINUED OPERATIONS
On March 13, 2007, the Company sold its wholly-owned subsidiary, All American Cables and Radio
Inc. (Centennial Dominicana), to Trilogy International Partners (Trilogy) for approximately
$83,298 in cash, which consisted of a purchase price of $81,000 and a working capital adjustment of
$2,298, which resulted in a loss on disposition of assets of $33,132. The disposition was accounted
for by the Company as a discontinued operation in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). No tax benefit has been recognized on the
sale as management does not believe that realization of the benefit resulting from the capital loss
is more likely than not. The net loss from discontinued operations for the three months ended
August 31, 2009 and 2008 was $94 and $337, respectively.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
tm and the Hierarchy of Generally Accepted Accounting Principles, a replacement
of FASB Statement No. 162 (SFAS 168), which establishes the FASB Accounting Standards
Codification as the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with generally accepted accounting
principles. SFAS 168 explicitly recognizes rules and interpretive releases of the SEC under federal
securities laws as authoritative GAAP for SEC registrants. SFAS 168 will become effective September
15, 2009 and will not have a material effect on the Companys consolidated results of operations,
consolidated financial position and consolidated cash flows.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS
167), which amends FASB Interpretation No. 46 (revised December 2003) to address the elimination
of the concept of a qualifying special purpose entity. SFAS 167 also replaces the
quantitative-based risks and rewards calculation for determining which enterprise has a controlling
financial interest in a variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest entity and the obligation
to absorb losses of the entity or the right to receive benefits from the entity. Additionally, SFAS
167 provides more timely and useful information about an enterprises involvement with a variable
interest entity. SFAS 167 will become effective January 2010 and will not have a material effect on
the Companys consolidated results of operations, consolidated financial position and consolidated
cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 requires
companies to recognize in the financial statements the effects of subsequent events that provide
additional evidence about conditions that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing financial statements. An entity shall disclose the
date through which subsequent events have been evaluated, as well as whether that date is the date
the financial statements were issued. Companies are not permitted to recognize subsequent events
that provide evidence about conditions that did not exist at the date of the balance sheet but
arose after the balance sheet date and before financial statements are issued. Some nonrecognized
subsequent events must be disclosed to keep the financial statements from being misleading. For
such events a company must disclose the nature of the event, an estimate of its financial effect,
or a statement that such an estimate cannot be made. SFAS 165 applies prospectively for interim or
annual financial periods ending after June 15, 2009 (which was August 31, 2009 for the Company). In
preparing the accompanying condensed consolidated financial statements, the Company has reviewed,
as determined necessary by the Companys management, events that have occurred after August 31,
2009, up until the issuance of the financial statements, which occurred on the date of this filing
with the SEC. The adoption of SFAS 165 did not have a material effect on the Companys consolidated
results of operations, consolidated financial position and consolidated cash flows.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS
141(R)-1). FSP FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), Business Combinations,
to address application issues raised on initial recognition and measurement, subsequent measurement
and accounting, and disclosure of assets and liabilities arising from contingencies in a business
combination. FSP FAS 141(R)-1 is effective immediately, and its effect will vary with each future
acquisition.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (APB)
No. APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and
APB 28-1), which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments
(SFAS 107), and Accounting Principles Board Opinion No. 28, Interim Financial Reporting (APB
28), to require disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and
APB 28-1 became effective for interim periods ending after June 15, 2009 (which was August 31, 2009
for the Company). FSP FAS 107-1 and APB 28-1 did not have a material effect on the Companys
consolidated results of operations, consolidated financial position and consolidated cash flows.
11
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In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly (FSP FAS 157-4), which provides additional guidance for estimating fair
value in accordance with SFAS 157 for lightly-traded investments. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate apparently comparable market transactions do
not represent independent fair value. FSP FAS 157-4 applies prospectively for interim and annual
reporting periods ending after June 15, 2009 (which was August 31, 2009 for the Company). FSP FAS
157-4 did not have a material effect on the Companys consolidated results of operations,
consolidated financial position and consolidated cash flows.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 removes the requirement under SFAS 142 to consider whether an
intangible asset can be renewed without substantial cost of material modifications to the existing
terms and conditions, and replaces it with a requirement that an entity consider its own historical
experience in renewing similar arrangements, or a consideration of market participant assumptions
in the absence of historical experience. This FSP also requires entities to disclose information
that enables users of financial statements to assess the extent to which the expected future cash
flows associated with the asset are affected by the entitys intent and/or ability to renew or
extend the arrangement. The guidance became effective as of the beginning of the Companys fiscal
year beginning after December 15, 2008 (which was June 1, 2009 for the Company). The adoption of
this new pronouncement did not have a material effect on the Companys consolidated results of
operations, consolidated financial position and consolidated cash flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS 161). SFAS 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures to enable investors
to better understand their effects on an entitys financial position, financial performance, and
cash flows. It is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 (which was March 1, 2009 for the Company). The adoption of this
new pronouncement did not have a material effect on the Companys consolidated results of
operations, consolidated financial position and consolidated cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. The guidance became effective as of the beginning of the Companys fiscal year
beginning after December 15, 2008 (which was June 1, 2009 for the Company). The Company has
retrospectively changed the classification and presentation of noncontrolling interest in its
financial statements for all prior periods, which was previously referred to as minority interest.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141R). SFAS
141R establishes principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. The guidance became effective as of the beginning of the Companys
fiscal year beginning after December 15, 2008 (which was June 1, 2009 for the Company). The
adoption of this new pronouncement did not have a material effect on the Companys consolidated
results of operations, consolidated financial position and consolidated cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in accounting principles
generally accepted in the United States and expands disclosures about fair value measurements. SFAS
157 applies under other accounting pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. SFAS 157 became effective for fiscal years beginning after November 15, 2007 (which
was June 1, 2008 for the Company). The fair value framework requires the categorization of assets
and liabilities into three levels based upon the assumptions (inputs) used to price the assets or
liabilities. The three levels of inputs used are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar
assets and liabilities in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
12
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Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use significant unobservable
inputs.
As of August 31, 2009, the Companys only assets or liabilities that fell under the scope of
SFAS 157 were its liabilities under interest rate hedging agreements (see Note 3). The fair values
of the interest rate collar agreements were based on prices obtained from financial institutions
that develop values based on inputs observable in active markets, including interest rates.
Accordingly, the Companys fair value measurements of its derivative instruments are classified as
Level 2 inputs.
NOTE 8. COMMITMENTS AND CONTINGENCIES AND NONCONTROLLING INTEREST
Legal Proceedings:
In 2001, the Companys previously sold Dominican Republic subsidiary, Centennial Dominicana,
commenced litigation against International Telcom, Inc. (ITI) to collect an approximate $1,800
receivable owed under a traffic termination agreement between the parties relating to international
long distance traffic terminated by Centennial Dominicana in the Dominican Republic. Subsequently,
ITI counterclaimed against Centennial Dominicana claiming that Centennial Dominicana breached the
traffic termination agreement and is claiming damages in excess of $40,000. The matter is subject
to arbitration in Miami, Florida and a decision of the arbitration panel is expected shortly. In
connection with the sale of Centennial Dominicana (see Note 6), the Company has agreed to indemnify
Trilogy with respect to liabilities arising as a result of the ITI litigation. The Company does not
believe that any damage payments would have a material adverse effect on the Companys consolidated
results of operations, consolidated financial position or consolidated cash flows.
The Company is subject to other claims and legal actions that arise in the ordinary course of
business. The Company does not believe that any of these other pending claims or legal actions will
have a material adverse effect on its consolidated results of operations, consolidated financial
position or consolidated cash flows.
Guarantees:
The Company currently does not guarantee the debt of any entity outside of its consolidated
group. In the ordinary course of its business, the Company enters into agreements with third
parties that provide for indemnification of counter parties. Examples of these types of agreements
are underwriting agreements entered into in connection with securities offerings and agreements
relating to the sale or purchase of assets. The duration, triggering events, maximum exposure and
other terms under these indemnification provisions vary from agreement to agreement. In general,
the indemnification provisions require the Company to indemnify the other party to the agreement
against losses it may suffer as a result of the Companys breach of its representations and
warranties contained in the underlying agreement or for misleading information contained in a
securities offering document. The Company is unable to estimate the maximum potential liability for
these types of indemnifications as the agreements generally do not specify a maximum amount, and
the actual amounts are dependant on future events, the nature and likelihood of which cannot be
determined at this time. Historically, the Company has never incurred any material costs relating
to these indemnification agreements. Accordingly, the Company believes the estimated fair value of
these agreements is minimal.
Lease Commitments:
The Company leases facilities and equipment under noncancelable operating and capital leases.
Terms of the leases, including renewal options and escalation clauses, vary by lease. When
determining the term of a lease, the Company includes renewal options that are reasonably assured.
Rent expense is recorded on a straight-line basis over the initial lease term and those renewal
periods that are reasonably assured. The difference between rent expense and rent paid is recorded
as deferred rent. Leasehold improvements are depreciated over the shorter of their economic lives,
which begins once the assets are ready for their intended use, or the lease term.
Additionally, during both fiscal years ended May 31, 2004 and 2003, the Company entered into
sale-leaseback transactions where the Company sold telecommunication towers and leased back the
same telecommunications towers. As a result of provisions in the sale and lease-back agreements
that provide for continuing involvement by the Company, the Company accounted for the sale and
lease-back of certain towers as a finance obligation. For the sale and lease-back of towers
determined to have no continuing involvement, sale-leaseback accounting has been followed. The
Company has recognized a deferred gain on the sale of such telecommunications towers and is
accounting for substantially all of its leases under the lease-backs as capital leases. As such,
the deferred gain is being amortized in proportion to the amortization of the leased
telecommunications towers.
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Other Commitments and Contingencies:
On July 1, 2008, the Company entered into an Information Services Agreement with Fidelity
Information Services, Inc. (Fidelity) pursuant to which Fidelity agreed to provide billing
services, facilities network fault detection, correction and management performance, usage
monitoring and security for the Companys wireless operations. This agreement has an initial term
of 10 years, expiring on June 30, 2018, and includes a minimum volume commitment based on the
number of subscribers processed per year. Based on this minimum, the Company has agreed to purchase
a total of $121,081 of billing related services from Fidelity through June 30, 2018. As of August
31, 2009, the Company has paid approximately $12,506 in connection with this agreement.
Noncontrolling interest:
Changes in noncontrolling interest for the three months ended August 31, 2009 and 2008 were as
follows:
2009 | 2008 | |||||||
Noncontrolling interest at June 1 |
$ | 1,442 | $ | 4,898 | ||||
Income attributable to noncontrolling interest |
136 | 167 | ||||||
Distributions paid to noncontrolling interest |
(149 | ) | | |||||
Noncontrolling interest at August 31 |
$ | 1,429 | $ | 5,065 | ||||
NOTE 9. SEGMENT INFORMATION
The Companys Condensed Consolidated Financial Statements include three reportable segments:
U.S. wireless, Puerto Rico wireless, and Puerto Rico broadband. The Company determines its
reportable segments based on the aggregation criteria of SFAS 131 (e.g., types of services offered
and geographic location). U.S. wireless represents the Companys wireless systems in the United
States that it owns and manages. Puerto Rico wireless represents the Companys wireless operations
in Puerto Rico and the U.S. Virgin Islands. Puerto Rico broadband represents the Companys offering
of broadband services including switched voice, dedicated (private line) and other services in
Puerto Rico. The Company measures the operating performance of each segment based on adjusted
operating income. Adjusted operating income is defined as net income
before net income attributable to noncontrolling interest, loss from discontinued
operations, income tax expense, interest
expense, net, (loss) gain on disposition of assets, transaction costs, stock based compensation
expense and depreciation and amortization.
The results of operations presented below exclude Centennial Dominicana due to its
classification as a discontinued operation (see Note 6). Prior to the classification of Centennial
Dominicana as a discontinued operation, the results of its operations were included in the Puerto
Rico Wireless Segment (previously the Caribbean Wireless Segment) and the Puerto Rico Broadband
Segment (previously the Caribbean Broadband Segment).
Information about the Companys operations in its three business segments as of, and for the
three months ended, August 31, 2009 and 2008 is as follows:
14
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Three Months Ended | ||||||||
August 31, | ||||||||
2009 | 2008 | |||||||
U.S. WIRELESS |
||||||||
Service revenue |
$ | 116,564 | $ | 120,249 | ||||
Roaming revenue |
21,449 | 15,789 | ||||||
Equipment sales |
7,921 | 11,769 | ||||||
Total revenue |
145,934 | 147,807 | ||||||
Adjusted operating income |
64,989 | 58,588 | ||||||
Total assets |
1,928,349 | 1,848,983 | ||||||
Capital expenditures |
7,556 | 8,706 | ||||||
PUERTO RICO WIRELESS |
||||||||
Service revenue |
$ | 73,346 | $ | 77,696 | ||||
Roaming revenue |
2,479 | 2,694 | ||||||
Equipment sales |
3,914 | 4,442 | ||||||
Total revenue |
79,739 | 84,832 | ||||||
Adjusted operating income |
22,882 | 22,952 | ||||||
Total assets |
284,906 | 284,833 | ||||||
Capital expenditures |
5,592 | 6,730 | ||||||
PUERTO RICO BROADBAND |
||||||||
Switched revenue |
$ | 13,257 | $ | 13,935 | ||||
Dedicated revenue |
20,185 | 19,402 | ||||||
Other revenue |
2,772 | 2,330 | ||||||
Total revenue |
36,214 | 35,667 | ||||||
Adjusted operating income |
19,369 | 19,753 | ||||||
Total assets |
213,896 | 266,910 | ||||||
Capital expenditures |
3,860 | 5,228 | ||||||
ELIMINATIONS/ADJUSTMENTS |
||||||||
Total revenue(1) |
$ | (2,963 | ) | $ | (3,093 | ) | ||
Total assets(2) |
(946,248 | ) | (1,006,792 | ) | ||||
CONSOLIDATED |
||||||||
Total revenue |
$ | 258,924 | $ | 265,213 | ||||
Adjusted operating income |
107,240 | 101,293 | ||||||
Total assets |
1,480,903 | 1,393,934 | ||||||
Capital expenditures |
17,008 | 20,664 |
(1) | Elimination of intercompany revenue, primarily from Puerto Rico broadband to Puerto Rico wireless. | |
(2) | Elimination of intercompany investments. |
Reconciliation of adjusted operating income to net income attributable to Centennial:
Three Months Ended | ||||||||
August 31, | ||||||||
2009 | 2008 | |||||||
Adjusted operating income |
$ | 107,240 | $ | 101,293 | ||||
Depreciation and amortization |
(31,687 | ) | (35,544 | ) | ||||
Stock-based compensation expense |
(2,029 | ) | (2,870 | ) | ||||
Transaction costs |
(1,070 | ) | | |||||
(Loss) gain on disposition of assets |
(122 | ) | 47 | |||||
Operating income |
72,332 | 62,926 | ||||||
Interest expense, net |
(39,952 | ) | (44,880 | ) | ||||
Income tax expense |
(12,692 | ) | (10,056 | ) | ||||
Income from continuing operations |
19,688 | 7,990 | ||||||
Loss from discontinued operations |
(94 | ) | (337 | ) | ||||
Net income |
19,594 | 7,653 | ||||||
Less: Net income attributable to noncontrolling interest |
(136 | ) | (167 | ) | ||||
Net income attributable to Centennial |
$ | 19,458 | $ | 7,486 | ||||
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL DATA
CCOC and CPROC are wholly-owned subsidiaries of the Company. CCOC is a joint and several
co-issuer on the 2013 Senior Notes issued by the Company, and CPROC has unconditionally guaranteed
the 2013 Senior Notes. The Company, CCOC and CPROC are joint and several co-issuers of the 2014
Senior Notes. Separate financial statements and other disclosures concerning CCOC and CPROC are not
presented because they are not material to investors.
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CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
As of August 31, 2009
As of August 31, 2009
Centennial | Centennial | Centennial | ||||||||||||||||||||||
Puerto Rico | Cellular | Centennial | Communications | |||||||||||||||||||||
Operations | Operating | Non- | Communications | Corp. and | ||||||||||||||||||||
Corp. | Co. LLC | Guarantors | Corp. | Eliminations | Subsidiaries | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 68,790 | $ | | $ | 178,836 | $ | | $ | | $ | 247,626 | ||||||||||||
Accounts receivable, net |
45,595 | | 63,887 | | | 109,482 | ||||||||||||||||||
Inventory phones and
accessories, net |
9,411 | | 18,088 | | | 27,499 | ||||||||||||||||||
Prepaid expenses and other
current assets |
12,066 | | 11,793 | | | 23,859 | ||||||||||||||||||
Total current assets |
135,862 | | 272,604 | | | 408,466 | ||||||||||||||||||
Property, plant & equipment,
net |
245,998 | | 318,333 | | | 564,331 | ||||||||||||||||||
Debt issuance costs |
8,874 | | 15,848 | | | 24,722 | ||||||||||||||||||
Restricted Cash |
568 | | | | | 568 | ||||||||||||||||||
U.S. wireless licenses |
| | 402,395 | | | 402,395 | ||||||||||||||||||
Puerto Rico wireless licenses,
net |
| | 54,159 | | | 54,159 | ||||||||||||||||||
Goodwill |
10,989 | | | | | 10,989 | ||||||||||||||||||
Investment in subsidiaries |
| 1,046,290 | 562,205 | (651,349 | ) | (957,146 | ) | | ||||||||||||||||
Other assets |
13,516 | | 1,757 | | | 15,273 | ||||||||||||||||||
Total |
$ | 415,807 | $ | 1,046,290 | $ | 1,627,301 | $ | (651,349 | ) | $ | (957,146 | ) | $ | 1,480,903 | ||||||||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current portion of
long-term debt |
$ | 142,750 | $ | | $ | 132,250 | $ | | $ | | $ | 275,000 | ||||||||||||
Accounts payable |
12,670 | | 9,081 | | | 21,751 | ||||||||||||||||||
Accrued expenses and other
current liabilities |
105,300 | | 58,495 | | | 163,795 | ||||||||||||||||||
Total current liabilities |
260,720 | | 199,826 | | | 460,546 | ||||||||||||||||||
Long-term debt |
653,029 | 591,395 | (42,235 | ) | 548,335 | | 1,750,524 | |||||||||||||||||
Deferred income taxes |
| | 165,064 | | | 165,064 | ||||||||||||||||||
Other liabilities |
6,665 | | 23,994 | | | 30,659 | ||||||||||||||||||
Intercompany |
34,179 | 1,087,595 | 1,052,653 | (272,845 | ) | (1,901,582 | ) | | ||||||||||||||||
Redeemable preferred stock |
653,038 | | | | (653,038 | ) | | |||||||||||||||||
Stockholders (deficit) equity: |
||||||||||||||||||||||||
Common stock |
| | | 1,112 | | 1,112 | ||||||||||||||||||
Additional paid-in capital |
(818,497 | ) | | 818,497 | 64,503 | | 64,503 | |||||||||||||||||
Accumulated (deficit) equity |
(373,258 | ) | (632,289 | ) | (591,927 | ) | (991,377 | ) | 1,597,474 | (991,377 | ) | |||||||||||||
Accumulated other
comprehensive loss |
(69 | ) | (411 | ) | | | | (480 | ) | |||||||||||||||
Less: treasury shares |
| | | (1,077 | ) | | (1,077 | ) | ||||||||||||||||
Total stockholders
(deficit) equity
attributable to Centennial |
(1,191,824 | ) | (632,700 | ) | 226,570 | (926,839 | ) | 1,597,474 | (927,319 | ) | ||||||||||||||
Noncontrolling interest in
subsidiaries |
| | 1,429 | | | 1,429 | ||||||||||||||||||
Total stockholders
(deficit) equity |
(1,191,824 | ) | (632,700 | ) | 227,999 | (926,839 | ) | 1,597,474 | (925,890 | ) | ||||||||||||||
Total |
$ | 415,807 | $ | 1,046,290 | $ | 1,627,301 | $ | (651,349 | ) | $ | (957,146 | ) | $ | 1,480,903 | ||||||||||
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
For the Three Months Ended August 31, 2009
For the Three Months Ended August 31, 2009
Centennial | Centennial | Centennial | ||||||||||||||||||||||
Puerto Rico | Cellular | Centennial | Communications | |||||||||||||||||||||
Operations | Operating | Non- | Communications | Corp. and | ||||||||||||||||||||
Corp. | Co. LLC | Guarantors | Corp. | Eliminations | Subsidiaries | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Revenue |
$ | 107,001 | $ | | $ | 154,885 | $ | | $ | (2,962 | ) | $ | 258,924 | |||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services (exclusive
of depreciation and
amortization shown below) |
23,495 | | 31,222 | | (2,794 | ) | 51,923 | |||||||||||||||||
Cost of equipment sold |
13,204 | | 18,047 | | | 31,251 | ||||||||||||||||||
Sales and marketing |
10,991 | | 12,479 | | | 23,470 | ||||||||||||||||||
General and administrative |
23,402 | | 24,905 | | (168 | ) | 48,139 | |||||||||||||||||
Depreciation and amortization |
15,187 | | 16,500 | | | 31,687 | ||||||||||||||||||
Loss on disposition of assets |
114 | | 8 | | | 122 | ||||||||||||||||||
86,393 | | 103,161 | | (2,962 | ) | 186,592 | ||||||||||||||||||
Operating income |
20,608 | | 51,724 | | | 72,332 | ||||||||||||||||||
Income (loss) from investments
in subsidiaries |
| 19,458 | (8,427 | ) | 19,458 | (30,489 | ) | | ||||||||||||||||
Interest expense, net |
(23,786 | ) | (10,142 | ) | (4,344 | ) | (10,980 | ) | 9,300 | (39,952 | ) | |||||||||||||
Intercompany interest allocation |
| 10,142 | (11,822 | ) | 10,980 | (9,300 | ) | | ||||||||||||||||
(Loss) income from continuing
operations before income tax
expense |
(3,178 | ) | 19,458 | 27,131 | 19,458 | (30,489 | ) | 32,380 | ||||||||||||||||
Income tax expense |
(5,249 | ) | | (7,443 | ) | | | (12,692 | ) | |||||||||||||||
(Loss) income from continuing
operations |
(8,427 | ) | 19,458 | 19,688 | 19,458 | (30,489 | ) | 19,688 | ||||||||||||||||
Loss from discontinued operations |
| | (94 | ) | | | (94 | ) | ||||||||||||||||
Net (loss) income |
(8,427 | ) | 19,458 | 19,594 | 19,458 | (30,489 | ) | 19,594 | ||||||||||||||||
Less: Net income attributable to
noncontrolling interest |
| | (136 | ) | | | (136 | ) | ||||||||||||||||
Net (loss) income attributable
to Centennial |
$ | (8,427 | ) | $ | 19,458 | $ | 19,458 | $ | 19,458 | $ | (30,489 | ) | $ | 19,458 | ||||||||||
17
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
For the Three Months Ended August 31, 2009
For the Three Months Ended August 31, 2009
Centennial | Centennial | Centennial | ||||||||||||||||||||||
Puerto Rico | Cellular | Centennial | Communications | |||||||||||||||||||||
Operations | Operating | Non- | Communications | Corp. and | ||||||||||||||||||||
Corp. | Co. LLC | Guarantors | Corp. | Eliminations | Subsidiaries | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
OPERATING ACTIVITIES: |
||||||||||||||||||||||||
Net (loss) income |
$ | (8,427 | ) | $ | 19,458 | $ | 19,594 | $ | 19,458 | $ | (30,489 | ) | $ | 19,594 | ||||||||||
Adjustments to reconcile net (loss)
income to net cash provided by (used in)
operating activities: |
||||||||||||||||||||||||
Depreciation and amortization |
15,187 | | 16,500 | | | 31,687 | ||||||||||||||||||
Stock-based compensation expense |
978 | | 1,051 | | | 2,029 | ||||||||||||||||||
Excess tax benefit from stock-based
compensation |
| | (16 | ) | | | (16 | ) | ||||||||||||||||
Equity in undistributed earnings
(loss) of subsidiaries |
| 19,458 | (8,427 | ) | 19,458 | (30,489 | ) | | ||||||||||||||||
Loss on disposition of assets |
114 | | 8 | | | 122 | ||||||||||||||||||
Changes in assets and liabilities, net
of effects of acquisitions and
dispositions and other |
12,716 | (31,531 | ) | (15,516 | ) | (41,613 | ) | 70,278 | (5,666 | ) | ||||||||||||||
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES |
20,568 | 7,385 | 13,194 | (2,697 | ) | 9,300 | 47,750 | |||||||||||||||||
INVESTING ACTIVITIES: |
||||||||||||||||||||||||
Proceeds from disposition of assets,
net of cash expenses |
| 22 | | | | 22 | ||||||||||||||||||
Capital expenditures |
(9,372 | ) | (7,636 | ) | | | | (17,008 | ) | |||||||||||||||
NET CASH USED IN INVESTING
ACTIVITIES |
(9,372 | ) | (7,614 | ) | | | | (16,986 | ) | |||||||||||||||
FINANCING ACTIVITIES: |
||||||||||||||||||||||||
Repayment of debt |
| | (898 | ) | | | (898 | ) | ||||||||||||||||
Proceeds from the exercise of stock
options |
| | | 250 | | 250 | ||||||||||||||||||
Excess tax benefit from stock-based
compensation |
| | | 16 | | 16 | ||||||||||||||||||
Cash (paid to) received from affiliates |
(10,204 | ) | 229 | 16,844 | 2,431 | (9,300 | ) | | ||||||||||||||||
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES |
(10,204 | ) | 229 | 15,946 | 2,697 | (9,300 | ) | (632 | ) | |||||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
992 | | 29,140 | | | 30,132 | ||||||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD |
67,798 | | 149,696 | | | 217,494 | ||||||||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 68,790 | $ | | $ | 178,836 | $ | | $ | | $ | 247,626 | ||||||||||||
18
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CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
As of May 31, 2009
(Amounts in thousands)
As of May 31, 2009
(Amounts in thousands)
Centennial | Centennial | Centennial | ||||||||||||||||||||||
Puerto Rico | Cellular | Centennial | Communications | |||||||||||||||||||||
Operations | Operating | Non- | Communications | Corp. and | ||||||||||||||||||||
Corp. | Co. LLC | Guarantors | Corp. | Eliminations | Subsidiaries | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 67,798 | $ | | $ | 149,696 | $ | | $ | | $ | 217,494 | ||||||||||||
Accounts receivable, net |
47,723 | | 57,751 | | | 105,474 | ||||||||||||||||||
Inventory phones and accessories,
net |
7,340 | | 23,764 | | | 31,104 | ||||||||||||||||||
Prepaid expenses and other current
assets |
13,767 | | 8,364 | | | 22,131 | ||||||||||||||||||
Total current assets |
136,628 | | 239,575 | | | 376,203 | ||||||||||||||||||
Property, plant & equipment, net |
249,137 | | 322,994 | | | 572,131 | ||||||||||||||||||
Debt issuance costs |
9,589 | | 17,115 | | | 26,704 | ||||||||||||||||||
Restricted cash |
124 | | | | | 124 | ||||||||||||||||||
U.S. wireless licenses |
| | 402,395 | | | 402,395 | ||||||||||||||||||
Puerto Rico wireless licenses, net |
| | 54,159 | | | 54,159 | ||||||||||||||||||
Goodwill |
10,989 | | | | | 10,989 | ||||||||||||||||||
Investment in subsidiaries |
| 1,026,832 | 570,632 | (670,807 | ) | (926,657 | ) | | ||||||||||||||||
Other assets |
11,017 | | 1,782 | | | 12,799 | ||||||||||||||||||
Total |
$ | 417,484 | $ | 1,026,832 | $ | 1,608,652 | $ | (670,807 | ) | $ | (926,657 | ) | $ | 1,455,504 | ||||||||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY | ||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | 6,226 | $ | | $ | 6,453 | $ | | $ | | $ | 12,679 | ||||||||||||
Accrued expenses and other current
liabilities |
120,273 | | 62,271 | | | 182,544 | ||||||||||||||||||
Total current liabilities |
126,499 | | 68,724 | | | 195,223 | ||||||||||||||||||
Long-term debt |
794,966 | 591,395 | 86,609 | 548,210 | | 2,021,180 | ||||||||||||||||||
Deferred income taxes |
4,623 | | 150,903 | | | 155,526 | ||||||||||||||||||
Other liabilities |
7,436 | | 24,532 | | | 31,968 | ||||||||||||||||||
Intercompany |
23,975 | 1,087,824 | 1,069,497 | (270,414 | ) | (1,910,882 | ) | | ||||||||||||||||
Redeemable preferred stock |
643,738 | | | | (643,738 | ) | | |||||||||||||||||
Stockholders (deficit) equity: |
||||||||||||||||||||||||
Common stock |
| | | 1,112 | | 1,112 | ||||||||||||||||||
Additional paid-in capital |
(818,330 | ) | | 818,330 | 62,197 | | 62,197 | |||||||||||||||||
Accumulated (deficit) equity |
(364,831 | ) | (651,747 | ) | (611,385 | ) | (1,010,835 | ) | 1,627,963 | (1,010,835 | ) | |||||||||||||
Accumulated other comprehensive loss |
(592 | ) | (640 | ) | | | | (1,232 | ) | |||||||||||||||
Less: treasury shares |
| | | (1,077 | ) | | (1,077 | ) | ||||||||||||||||
Total stockholders (deficit)
equity attributable to Centennial |
(1,183,753 | ) | (652,387 | ) | 206,945 | (948,603 | ) | 1,627,963 | (949,835 | ) | ||||||||||||||
Noncontrolling interest in subsidiaries |
| | 1,442 | | | 1,442 | ||||||||||||||||||
Total stockholders (deficit) equity |
(1,183,753 | ) | (652,387 | ) | 208,387 | (948,603 | ) | 1,627,963 | (948,393 | ) | ||||||||||||||
Total |
$ | 417,484 | $ | 1,026,832 | $ | 1,608,652 | $ | (670,807 | ) | $ | (926,657 | ) | $ | 1,455,504 | ||||||||||
19
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
For the Three Months Ended August 31, 2008
For the Three Months Ended August 31, 2008
Centennial | Centennial | Centennial | ||||||||||||||||||||||
Puerto Rico | Cellular | Centennial | Communications | |||||||||||||||||||||
Operations | Operating | Non- | Communications | Corp. and | ||||||||||||||||||||
Corp. | Co. LLC | Guarantors | Corp. | Eliminations | Subsidiaries | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Revenue |
$ | 110,496 | $ | | $ | 157,809 | $ | | $ | (3,092 | ) | $ | 265,213 | |||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services (exclusive of
depreciation and amortization shown
below) |
22,601 | | 30,999 | | (2,924 | ) | 50,676 | |||||||||||||||||
Cost of equipment sold |
16,470 | | 25,679 | | | 42,149 | ||||||||||||||||||
Sales and marketing |
11,481 | | 14,388 | | | 25,869 | ||||||||||||||||||
General and administrative |
22,810 | | 25,454 | | (168 | ) | 48,096 | |||||||||||||||||
Depreciation and amortization |
17,649 | | 17,895 | | | 35,544 | ||||||||||||||||||
Loss (gain) on disposition of assets |
12 | | (59 | ) | | | (47 | ) | ||||||||||||||||
91,023 | | 114,356 | | (3,092 | ) | 202,287 | ||||||||||||||||||
Operating income |
19,473 | | 43,453 | | | 62,926 | ||||||||||||||||||
Income (loss) from investments in
subsidiaries |
| 7,486 | (11,987 | ) | 7,486 | (2,985 | ) | | ||||||||||||||||
Interest expense, net |
(25,738 | ) | (11,443 | ) | (4,261 | ) | (12,738 | ) | 9,300 | (44,880 | ) | |||||||||||||
Intercompany interest allocation |
| 11,443 | (14,881 | ) | 12,738 | (9,300 | ) | | ||||||||||||||||
(Loss) income from continuing
operations before income tax expense |
(6,265 | ) | 7,486 | 12,324 | 7,486 | (2,985 | ) | 18,046 | ||||||||||||||||
Income tax expense |
(5,722 | ) | | (4,334 | ) | | | (10,056 | ) | |||||||||||||||
(Loss) income from continuing
operations |
(11,987 | ) | 7,486 | 7,990 | 7,486 | (2,985 | ) | 7,990 | ||||||||||||||||
Loss from discontinued operations |
| | (337 | ) | | | (337 | ) | ||||||||||||||||
Net (loss) income |
(11,987 | ) | 7,486 | 7,653 | 7,486 | (2,985 | ) | 7,653 | ||||||||||||||||
Less: Net income attributable to
noncontrolling interest |
| | (167 | ) | | | (167 | ) | ||||||||||||||||
Net (loss) income attributable to
Centennial |
$ | (11,987 | ) | $ | 7,486 | $ | 7,486 | $ | 7,486 | $ | (2,985 | ) | $ | 7,486 | ||||||||||
20
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
For the Three Months Ended August 31, 2008
For the Three Months Ended August 31, 2008
Centennial | Centennial | Centennial | ||||||||||||||||||||||
Puerto Rico | Cellular | Centennial | Communications | |||||||||||||||||||||
Operations | Operating | Non- | Communications | Corp. and | ||||||||||||||||||||
Corp. | Co. LLC | Guarantors | Corp. | Eliminations | Subsidiaries | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
OPERATING ACTIVITIES: |
||||||||||||||||||||||||
Net (loss) income |
$ | (11,987 | ) | $ | 7,486 | $ | 7,653 | $ | 7,486 | $ | (2,985 | ) | $ | 7,653 | ||||||||||
Adjustments to reconcile net (loss)
income to net cash provided by (used in)
operating activities: |
||||||||||||||||||||||||
Depreciation and amortization |
17,649 | | 17,895 | | | 35,544 | ||||||||||||||||||
Stock-based compensation expense |
1,451 | | 1,419 | | | 2,870 | ||||||||||||||||||
Excess tax benefit from stock-based
compensation |
| | (102 | ) | | | (102 | ) | ||||||||||||||||
Equity in undistributed earnings
(loss) of subsidiaries |
| 7,486 | (11,987 | ) | 7,486 | (2,985 | ) | | ||||||||||||||||
Loss (gain) on disposition of assets |
12 | | (59 | ) | | | (47 | ) | ||||||||||||||||
Changes in assets and liabilities, net
of effects of acquisitions and
dispositions and other |
24,458 | (14,089 | ) | (11,818 | ) | (20,951 | ) | 15,270 | (7,130 | ) | ||||||||||||||
NET CASH PROVIDED BY (USED
IN)OPERATING ACTIVITIES |
31,583 | 883 | 3,001 | (5,979 | ) | 9,300 | 38,788 | |||||||||||||||||
INVESTING ACTIVITIES: |
||||||||||||||||||||||||
Proceeds from disposition of assets,
net of cash expenses |
| | 21 | | | 21 | ||||||||||||||||||
Payments for purchase of wireless
spectrum |
| | (2 | ) | | | (2 | ) | ||||||||||||||||
Capital expenditures |
(11,958 | ) | | (8,706 | ) | | | (20,664 | ) | |||||||||||||||
NET CASH USED IN INVESTING
ACTIVITIES |
(11,958 | ) | | (8,687 | ) | | | (20,645 | ) | |||||||||||||||
FINANCING ACTIVITIES: |
||||||||||||||||||||||||
Repayment of debt |
| | (724 | ) | | | (724 | ) | ||||||||||||||||
Proceeds from the exercise of employee
stock options |
| | | 1,161 | | 1,161 | ||||||||||||||||||
Excess tax benefit from stock-based
compensation |
| | | 102 | | 102 | ||||||||||||||||||
Cash (paid to) received from affiliates |
(8,660 | ) | (883 | ) | 14,127 | 4,716 | (9,300 | ) | | |||||||||||||||
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES |
(8,660 | ) | (883 | ) | 13,403 | 5,979 | (9,300 | ) | 539 | |||||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
10,965 | | 7,717 | | | 18,682 | ||||||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD |
36,630 | | 68,531 | | | 105,161 | ||||||||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 47,595 | $ | | $ | 76,248 | $ | | $ | | $ | 123,843 | ||||||||||||
NOTE 11. SUBSEQUENT EVENTS
On November 7, 2008, Centennial entered into a merger agreement with AT&T providing for the
acquisition of Centennial by AT&T (the Merger or, the AT&T Transaction). On October 13, 2009,
AT&T and Centennial announced that they had entered into a consent decree with the Department of
Justice which allowed the Merger to proceed, while requiring that AT&T divest Centennials
operations in eight service areas in Louisiana and Mississippi. The eight service areas are
Alexandria, La., Lafayette, La., LA-3 (DeSoto), LA-5 (Beauregard), LA-6 (Iberville), LA-7 (West
Feliciana), MS-8 (Claiborne) and MS-9 (Copiah). Under the terms of the merger agreement,
Centennial stockholders would receive $8.50 per share in cash. The Merger was approved by
Centennials stockholders in February 2009, but remains subject to approval by the Federal
Communications Commission and to other customary closing conditions. AT&T and Centennial expect
that, assuming timely satisfaction or waiver of all remaining closing conditions, the Merger will
be completed early in the fourth quarter of calendar year 2009.
21
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Company Overview
We are a leading regional wireless and broadband telecommunications service provider serving
approximately 1.1 million wireless customers and approximately 789,100 access line equivalents in
markets covering over 13 million Net Pops in the United States and Puerto Rico. In the United
States, we are a regional wireless service provider in small cities and rural areas in two
geographic clusters covering parts of six states in the Midwest and Southeast. In our Puerto
Rico-based service area, we own and operate wireless networks in Puerto Rico and the U.S. Virgin
Islands, and in Puerto Rico, we are also a facilities-based, fully integrated communications
service provider offering broadband communications services to business and residential customers.
On November 7, 2008, Centennial entered into a merger agreement with AT&T providing for the
acquisition of Centennial by AT&T (the Merger or, the AT&T Transaction). On October 13, 2009,
AT&T and Centennial announced that they had entered into a consent decree with the Department of
Justice which allowed the Merger to proceed, while requiring that AT&T divest Centennials
operations in eight service areas in Louisiana and Mississippi. The eight service areas are
Alexandria, La., Lafayette, La., LA-3 (DeSoto), LA-5 (Beauregard), LA-6 (Iberville), LA-7 (West
Feliciana), MS-8 (Claiborne) and MS-9 (Copiah). Under the terms of the merger agreement,
Centennial stockholders would receive $8.50 per share in cash. The Merger was approved by
Centennials stockholders in February 2009, but remains subject to approval by the Federal
Communications Commission and to other customary closing conditions. AT&T and Centennial expect
that, assuming timely satisfaction or waiver of all remaining closing conditions, the Merger will
be completed early in the fourth quarter of calendar year 2009. We believe that the pendency of
the AT&T Transaction has had and may continue to have a negative impact on our business, including
making it more difficult to attract and retain customers.
As discussed in Note 6 to the unaudited Condensed Consolidated Financial Statements, the
results of operations presented below exclude our Dominican Republic operations (Centennial
Dominicana).
The information contained in this Part I, Item 2, updates, and should be read in conjunction
with, information set forth in Part II, Items 7 and 8, in our Annual Report on Form 10-K for the
fiscal year ended May 31, 2009, filed on July 30, 2009, and should also be read in conjunction with
the unaudited interim Condensed Consolidated Financial Statements and accompanying notes presented
in Part 1, Item 1 of this Quarterly Report on Form 10-Q. Those statements in the following
discussion that are not historical in nature should be considered to be forward-looking statements
that are inherently uncertain. Please see Cautionary Statement for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995 and the Risk Factors section
of our 2009 Annual Report on Form 10-K.
Managements Summary
Our vision is to be the premier regional telecommunications service provider, by tailoring the
ultimate customer experience in the markets we serve. We deliver our tailored approach by serving
local markets with high quality networks, company-owned stores and well-trained sales and service
associates. Our local scale and knowledge have led to a strong track record of success.
In the United States, we provide wireless voice and data services in two geographic clusters,
covering approximately 9.0 million Net Pops. Our Midwest cluster includes parts of Indiana,
Michigan and Ohio, and our Southeast cluster includes parts of Louisiana, Mississippi and Texas.
Our clusters are comprised of small cities and rural areas.
In Puerto Rico, we offer wireless and broadband communications services. We also offer
wireless services in the U.S. Virgin Islands. Puerto Rico is a U.S. dollar-denominated and FCC
regulated commonwealth of the United States. San Juan, the capital of Puerto Rico, is currently one
of the 25 largest and 5 most dense U.S. wireless markets based on population.
We tailor the ultimate customer experience by focusing on attractive local markets with growth
opportunities and customizing our sales, marketing and customer support functions to customer needs
in these markets. For the three months ended August 31, 2009, approximately 81% of our postpaid
wireless sales in the United States and Puerto Rico were made through our own employees, which
allows us to have a high degree of control over the customer experience. We invest significantly in
training for our customer-facing employees and believe this extensive training and controlled
distribution allows us to deliver an experience that we believe is unique and valued by the
customers in our various markets. We target high quality postpaid wireless subscribers which
generate high ARPU (revenue per average wireless subscriber, including roaming revenue) in our U.S.
and Puerto Rico operations.
Our business strategy also requires that our networks are of the highest quality in all our
locations. Capital expenditures for our U.S. wireless operations were used to expand our coverage
areas and upgrade our cell sites and call switching equipment in existing wireless markets. In
Puerto Rico, these investments were used to add capacity and services, to continue the development
and expansion of our Puerto Rico wireless systems and to continue the expansion of our Puerto Rico
broadband network infrastructure.
22
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We believe that the success of our business is a function of our performance relative to a
number of key drivers. The drivers can be summarized in our ability to attract and retain customers
by profitably providing superior service at competitive rates. We continually
monitor our performance against these key drivers by evaluating several metrics. In addition
to adjusted operating income (adjusted operating income represents the profitability measure of our
segments see Note 9 to the unaudited Condensed Consolidated Financial Statements for
reconciliation to the appropriate measure under accounting principles generally accepted in the
United States of America, or GAAP measure), the following key metrics, among other factors, are
monitored by management in assessing the performance of our business:
| Gross postpaid and prepaid wireless additions | ||
| Net additions wireless subscribers | ||
| ARPU | ||
| Roaming revenue | ||
| Penetration wireless | ||
| Postpaid churn wireless | ||
| Average monthly minutes of use per wireless voice subscriber | ||
| Data revenue per average wireless subscriber | ||
| Fiber route miles Puerto Rico broadband | ||
| Switched access lines Puerto Rico broadband | ||
| Dedicated access line equivalents Puerto Rico broadband | ||
| On-net buildings Puerto Rico broadband | ||
| Capital expenditures |
Gross postpaid and prepaid wireless additions represent the number of new subscribers we are
able to add during the period. Growing our subscriber base by adding new subscribers is a
fundamental element of our long-term growth strategy. We must maintain a competitive offering of
products and services to sustain our subscriber growth. We focus on postpaid customers in our U.S.
and Puerto Rico operations.
Net additions wireless subscribers represents the number of subscribers we were able to add
to our service during the period after deducting the number of disconnected or terminated
subscribers. By monitoring our growth against our forecast, we believe we are better able to
anticipate our future operating performance.
ARPU represents the average monthly subscriber revenue generated by a typical subscriber
(determined as subscriber revenues divided by average number of retail subscribers). We monitor
trends in ARPU to ensure that our rate plans and promotional offerings are attractive to customers
and profitable. The majority of our revenues are derived from subscriber revenues. Subscriber
revenues include, among other things: monthly access charges; charges for airtime used in excess of
plan minutes; Universal Service Fund (USF) support payment revenues; long distance revenues
derived from calls placed by our customers; roaming revenue; handset insurance; messaging and other
data; and other charges such as activation, voice mail, call waiting, call forwarding and
regulatory charges.
Roaming revenue represents the amount of revenue we receive from other wireless carriers for
providing service to their subscribers who roam into our markets and use our systems to carry
their voice and data traffic. The rates paid to us are established by an agreement between the
roamers wireless provider and us. The amount of roaming revenue we generate is often dependent
upon usage patterns of our roaming partners subscribers and the rate plan mix and technology mix
of our roaming partners. We closely monitor trends in roaming revenues because usage patterns by
our roaming partners subscribers can be difficult to predict.
Penetration wireless represents a percentage, which is calculated by dividing the number of
our subscribers by the total population of potential subscribers available in the markets that we
serve.
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Table of Contents
Postpaid churn represents the number of postpaid subscribers that disconnect or are terminated
from our service. Churn is calculated by dividing the aggregate number of wireless retail
subscribers who cancel service during each month in a period by the total number of wireless retail
subscribers as of the beginning of the month. Churn is stated as the average monthly churn rate for
the applicable period. We monitor and seek to control churn so that we can grow our business
without incurring significant sales and marketing costs needed to replace disconnected subscribers.
We must continue to ensure that we offer excellent network quality and customer service so that our
churn rates remain low.
Average monthly minutes of use per wireless voice customer represents the average number of
minutes (MOUs) used by our voice customers during a period. We monitor growth in MOUs to ensure
that the access and overage charges we are collecting are consistent with that growth. In addition,
growth in subscriber usage may indicate a need to invest in additional network capacity.
Data revenue per average wireless subscriber represents the portion of ARPU generated by our
retail subscribers using data services such as text, picture, and multi-media messaging, wireless
Internet browsing, wireless e-mail, Instant Internet, data cards and downloading content and
applications.
Fiber route miles are the number of miles of fiber cable that we have laid. Fiber is installed
to connect our equipment to our customer premises equipment. As a facilities-based carrier, the
number of fiber route miles is an indicator of the strength of our network, our coverage and our
potential market opportunity.
Switched access lines represent the number of lines connected to our switching center and
serving customers for incoming and outgoing calls. Growing our switched access lines is a
fundamental element of our strategy. We monitor the trends in our switched access line growth
against our forecast to be able to anticipate future operating performance. In addition, this
measurement allows us to compute our current market penetration in the markets we serve.
Dedicated access line equivalents represents the amount of Voice Grade Equivalent (VGE)
lines used to connect two end points. We monitor the trends in our dedicated service using VGE
against our forecast to anticipate future operating performance, network capacity requirements and
overall growth of our business.
On-net buildings are locations where we have established a point of presence to serve one or
more customers. Tracking the number of on-net buildings allows us to size our addressable market
and determine the appropriate level of capital expenditures. As a facilities-based broadband
operator, it is a critical performance measurement of our growth and a clear indication of our
increased footprint.
Capital expenditures represent the amount spent on upgrades, additions and improvements to our
telecommunications network and back office infrastructure. We monitor our capital expenditures as
part of our overall financing plan and to ensure that we receive an appropriate rate of return on
our capital investments. This statistic is also used to ensure that capital investments are in line
with network usage trends and consistent with our objective of offering a high quality network to
our customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our unaudited Condensed Consolidated Financial Statements and related
disclosures in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities as of the date of the financial statements and revenues and expenses during the periods
reported. We base our estimates on historical experience, where applicable, and other assumptions
that we believe are reasonable under the circumstances. Actual results may differ from our
estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant judgment in the
preparation of our unaudited Condensed Consolidated Financial Statements. We consider an accounting
estimate to be critical if:
| it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate, and |
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| changes in the estimate or different estimates that we could have selected may have had a material effect on our consolidated financial condition or consolidated results of operations. |
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses, which result from our
customers not making required payments. We base our allowance on the likelihood of recoverability
of our subscriber accounts receivable based on past experience and by reviewing current collection
trends. A worsening of economic or industry trends beyond our estimates could result in an increase
in our allowance for doubtful accounts by recording additional expense.
Property, Plant and Equipment Depreciation
The telecommunications industry is capital intensive. Depreciation of property, plant and
equipment constitutes a substantial operating cost for us. The cost of our property, plant and
equipment, principally telecommunications equipment, is charged to depreciation expense over
estimated useful lives. We depreciate our telecommunications equipment using the straight-line
method over its estimated useful lives. We periodically review changes in our technology and
industry conditions, asset retirement activity and salvage values, as conditions warrant, to
determine adjustments to the estimated remaining useful lives and depreciation rates. Actual
economic lives may differ from our estimated useful lives as a result of changes in technology,
market conditions and other factors. Such changes could result in a change in our depreciable lives
and therefore our depreciation expense in future periods.
Valuation of Long-Lived Assets
Long-lived assets such as property, plant and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. In our
estimation of fair value, we consider current market values of properties similar to our own,
competition, prevailing economic conditions, government policy, including taxation, and the
historical and current growth patterns of both our business and the industry. We also consider the
recoverability of the cost of our long-lived assets based on a comparison of estimated undiscounted
operating cash flows for the related businesses with the carrying value of the long-lived assets.
Considerable management judgment is required to estimate the fair value of an impairment, if any,
of our assets. These estimates are very subjective in nature; we believe that our estimates are
consistent with assumptions that marketplace participants would use in their estimates of fair
value. Estimates related to recoverability of assets are critical accounting policies as management
must make assumptions about future revenue and related expenses over the life of an asset, and the
effect of recognizing impairment could be material to our consolidated financial position as well
as our consolidated results of operations. Actual revenue and costs could vary significantly from
such estimates.
Goodwill and Wireless Licenses Valuation of Goodwill and Indefinite-Lived Intangible Assets
A significant portion of our intangible assets are licenses that provide the Companys
wireless operations with the exclusive right to utilize radio frequency spectrum designated on the
license to provide wireless communication services. The wireless licenses are treated as
indefinite-lived intangible assets under the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142) and are not amortized, but rather are tested for impairment.
We test our wireless licenses for impairment annually, and more frequently if indications of
impairment exist. We use a direct value approach in performing our annual impairment test on our
wireless licenses, in accordance with a September 29, 2004 Staff Announcement from the staff of the
Securities and Exchange Commission (SEC), Use of the Residual Method to Value Acquired Assets
Other Than Goodwill. The direct value approach determines fair value using estimates of future
cash flows associated specifically with the licenses. If the fair value of the wireless licenses is
less than the carrying amount of the licenses, an impairment is recognized.
In addition, we test goodwill for impairment pursuant to SFAS 142. We currently test goodwill
for impairment using a residual value approach on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a reporting unit below its
carrying value. Specifically, goodwill impairment is determined using a two-step process. The first
step of the goodwill impairment test is used to identify potential impairment by comparing the fair
value of a reporting unit (calculated using a discounted cash flow method) with its carrying
amount, including goodwill. We determined that our reporting units for SFAS 142 are our operating
segments determined under SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and the second step of the impairment
test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares implied fair value (i.e., fair value of
reporting unit less the fair value of the units assets and liabilities, including identifiable
intangible assets) of the reporting units goodwill with the carrying amount of that goodwill. If
the carrying value of goodwill exceeds its implied fair value, the excess is required to be
recorded as an impairment.
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In analyzing goodwill and wireless licenses for potential impairment, we use projections of
future cash flows from each reporting unit to determine whether its estimated value exceeds its
carrying value. These projections of cash flows are based on our views of growth rates, time
horizons of cash flow forecasts, assumed terminal value, estimates of our future cost structures
and anticipated future economic conditions and the appropriate discount rates relative to risk and
estimates of residual values. These projections are very subjective in nature. We believe that our
estimates are consistent with assumptions that marketplace participants would use in their
estimates of fair value. The use of different estimates or assumptions within our discounted cash
flow model (e.g., growth rates, future economic conditions or discount rates and estimates of
terminal values) when determining the fair value of the reporting unit and wireless licenses are
subjective and could result in different values and may affect any related goodwill or wireless
licenses impairment charge.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)), which establishes accounting for share-based
awards exchanged for employee services and requires companies to expense the estimated fair value
of these awards over the requisite employee service period. We recognize compensation expense for
such awards based on the estimated grant date fair value method using the Black-Scholes valuation
model. Compensation expense is recognized on a straight-line basis over their respective vesting
periods, net of estimated forfeitures.
In the process of implementing SFAS 123(R) we analyzed certain key variables, such as expected
volatility and expected life to determine an accurate estimate of these variables. There were no
grants issued during the three months ended August 31, 2009. The expected life of the option is
calculated using the simplified method set out in SEC Staff Accounting Bulletin No. 107 (as amended
by Staff Accounting Bulletin No. 110) using the vesting term of 3 or 4 years and the contractual
term of 7 or 10 years, depending on the option tranche. The simplified method defines the expected
life as the average of the contractual term of the options and the weighted average vesting period
for all option tranches. SFAS 123(R) requires that we calculate stock-based compensation expense
based on awards that are ultimately expected to vest. Accordingly, stock-based compensation expense
for the three months ended August 31, 2009 has been reduced for estimated forfeitures. When
estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual
option forfeitures.
Income Taxes
The computation of income taxes is subject to estimation due to the significant judgment
required with respect to the tax positions we have taken that have been or could be challenged by
taxing authorities.
Our income tax provision is based on our income, statutory tax rates and tax planning
opportunities available to us in the various jurisdictions in which we operate.
Tax law requires items to be included in the tax return at different times than when these
items are reflected in the unaudited Condensed Consolidated Financial Statements. As a result, our
annual tax rate reflected in our unaudited Condensed Consolidated Financial Statements is different
than that reported in our tax return (our cash tax rate). Some of these differences are permanent,
such as expenses that are not deductible in our tax return, while other differences reverse over
time, such as depreciation expense. These temporary differences create deferred tax assets and
liabilities. Deferred tax assets and liabilities are determined based on temporary differences
between the financial reporting and tax bases of assets and liabilities. The tax rates used to
determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in
which the differences are expected to reverse. Based on the evaluation of all available
information, we recognize future tax benefits, such as net operating loss carryforwards, to the
extent that realizing these benefits is considered more likely than not.
We evaluate our ability to realize the tax benefits associated with deferred tax assets by
analyzing our forecasted taxable income using both historical and projected future operating
results, the reversal of existing temporary differences, taxable income in prior carry-back years
(if permitted) and the availability of tax planning strategies. A valuation allowance is required
to be established unless management determines that it is more likely than not that we will
ultimately realize the tax benefit associated with a deferred tax asset.
The calculation of our tax liabilities involves dealing with uncertainties in the application
of complex tax regulations. In the first quarter of fiscal 2007, we adopted FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109 (FIN 48) (see
Note 5 to the unaudited Condensed Consolidated Financial Statements). As a result of the
implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the
two-step process prescribed in the interpretation. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires us to estimate and measure the tax benefit
as the largest amount that is more than 50% likely to be
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realized upon ultimate settlement. It is inherently difficult and subjective to estimate such
amounts, as we have to determine the probability of various possible outcomes. We reevaluate these
uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but
not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues
under audit, and new audit activity. Such a change in recognition or measurement would result in
the recognition of a tax benefit or an additional charge to the tax provision.
We adjust our income tax provision in the period it is determined that actual results will
differ from our estimates. The income tax provision reflects tax law and rate changes in the period
such changes are enacted.
RESULTS OF OPERATIONS
U.S. Wireless Operations
Three Months Ended | ||||||||||||||||
August 31, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Service revenue |
$ | 116,564 | $ | 120,249 | $ | (3,685 | ) | (3 | )% | |||||||
Roaming revenue |
21,449 | 15,789 | 5,660 | 36 | ||||||||||||
Equipment sales |
7,921 | 11,769 | (3,848 | ) | (33 | ) | ||||||||||
Total revenue |
145,934 | 147,807 | (1,873 | ) | (1 | ) | ||||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
29,108 | 28,765 | 343 | 1 | ||||||||||||
Cost of equipment sold |
15,849 | 21,946 | (6,097 | ) | (28 | ) | ||||||||||
Sales and marketing |
12,236 | 14,154 | (1,918 | ) | (14 | ) | ||||||||||
General and administrative |
23,752 | 24,354 | (602 | ) | (2 | ) | ||||||||||
Total costs and expenses |
80,945 | 89,219 | (8,274 | ) | (9 | ) | ||||||||||
Adjusted operating income(1) |
$ | 64,989 | $ | 58,588 | $ | 6,401 | 11 | % | ||||||||
(1) | Adjusted operating income represents the profitability measure of the segment see Note 9 to the unaudited Condensed Consolidated Financial Statements for a reconciliation of consolidated adjusted operating income to the appropriate GAAP measure. |
Revenue. U.S. wireless service revenue decreased for the three months ended August 31, 2009,
as compared to the three months ended August 31, 2008. The decrease was primarily due to a decrease
in the number of subscribers, partially offset by a modest increase in ARPU as described below.
U.S. wireless roaming revenue increased for the three months ended August 31, 2009, as
compared to the three months ended August 31, 2008. The increase was primarily due to an increase
in data roaming revenue driven by an increase in data traffic, partially offset by a modest decrease
in voice roaming revenue.
Equipment sales decreased during the three months ended August 31, 2009, as compared to the
three months ended August 31, 2008, primarily due to a decrease in the number of phones sold as a
result of a decrease in gross additions.
Our U.S. wireless operations had approximately 633,100 and 659,800 subscribers at August 31,
2009 and 2008, respectively. Postpaid subscribers account for 97% of total U.S. wireless
subscribers as of August 31, 2009. During the twelve months ended August 31, 2009, increases in
subscribers from new activations of 164,000 were offset by subscriber cancellations of 190,700. The
monthly postpaid churn rate was 2.8% for the three months ended August 31, 2009, as compared to
2.6% for the three months ended August 31, 2008. The cancellations experienced by our U.S. wireless
operations were primarily related to non-payment, competition and the pending AT&T Transaction.
U.S. wireless ARPU was $76 for the three months ended August 31, 2009, as compared to $74 for
the same period last year. The increase in U.S. wireless ARPU was primarily due to an increase in
data revenue. Average MOUs per subscriber were 1,043 per month for the three months ended August
31, 2009, as compared to 1,121 for the same period last year.
Costs and expenses. Cost of services increased slightly during the three months ended August
31, 2009, as compared to the same period last year, primarily due to an increase in expenses
related to providing data services.
Cost of equipment sold decreased for the three months ended August 31, 2009, as compared to
the same period last year, primarily due to fewer activations and fewer phones used for customer
retention, as well as a slightly lower average cost per phone.
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Sales and marketing expenses decreased for the three months ended August 31, 2009, as compared
to the three months ended August 31, 2008, primarily due to lower commissions associated with fewer
activations as well as a decrease in advertising expense.
General and administrative expenses decreased for the three months ended August 31, 2009, as
compared to the same period in the prior year, due primarily to a reduction in billing costs.
Puerto Rico Wireless Operations
Three Months Ended | ||||||||||||||||
August 31, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Service revenue |
$ | 73,346 | $ | 77,696 | $ | (4,350 | ) | (6 | )% | |||||||
Roaming revenue |
2,479 | 2,694 | (215 | ) | (8 | ) | ||||||||||
Equipment sales |
3,914 | 4,442 | (528 | ) | (12 | ) | ||||||||||
Total revenue |
79,739 | 84,832 | (5,093 | ) | (6 | ) | ||||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
15,978 | 14,767 | 1,211 | 8 | ||||||||||||
Cost of equipment sold |
15,161 | 19,939 | (4,778 | ) | (24 | ) | ||||||||||
Sales and marketing |
9,304 | 9,614 | (310 | ) | (3 | ) | ||||||||||
General and administrative |
16,414 | 17,560 | (1,146 | ) | (7 | ) | ||||||||||
Total costs and expenses |
56,857 | 61,880 | (5,023 | ) | (8 | ) | ||||||||||
Adjusted operating income(1) |
$ | 22,882 | $ | 22,952 | $ | (70 | ) | (0 | )% | |||||||
(1) | Adjusted operating income represents the profitability measure of the segment see Note 9 to the unaudited Condensed Consolidated Financial Statements for a reconciliation of consolidated adjusted operating income to the appropriate GAAP measure. |
Revenue. Puerto Rico wireless service revenue decreased for the three months ended August 31,
2009, as compared to the three months ended August 31, 2008. The decrease primarily relates to a
decrease in ARPU as well as a decrease in the number of subscribers, as continued declines in
traditional voice customers more than offset an increase in EV-DO (evolution, data optimized)-based
Instant Internet broadband data customers.
Roaming revenue decreased during the three months ended August 31, 2009, as compared to the
three months ended August 31, 2008, primarily due to a decrease in data roaming revenue, partially
offset by an increase in voice roaming revenue.
Equipment sales decreased during the three months ended August 31, 2009, as compared to the
three months ended August 31, 2008, primarily due to a decrease in the number of phones sold to
customers, partially offset by an increase in revenue per unit.
Our Puerto Rico wireless operations had approximately 424,400 subscribers at August 31, 2009,
a decrease of 1% from subscribers at August 31, 2008. Postpaid subscribers represented
approximately 99% of our total Puerto Rico Wireless subscribers at August 31, 2009. During the
twelve months ended August 31, 2009, increases from new activations of 147,800 were offset by
subscriber cancellations of 154,000. The monthly postpaid churn rate increased to 3.3% for the
three months ended August 31, 2009, from 2.5% for the same period last year. The increased
cancellations experienced by our Puerto Rico wireless operations were primarily due to non-payment,
competition and the pending AT&T Transaction.
Puerto Rico wireless ARPU was $63 for the three months ended August 31, 2009, as compared to
$66 for the three months ended August 31, 2008. The decrease in ARPU was primarily due to lower
voice access, feature, usage related revenue and roaming revenue, partially offset by higher data
service revenue (including EV-DO, short message services, multimedia services and downloads) and
USF revenue. Our voice subscribers used an average of 1,866 MOUs during the three months ended
August 31, 2009, compared to 1,906 MOUs during the three months ended August 31, 2008.
Costs and expenses. Cost of services increased during the three months ended August 31, 2009,
as compared to the three months ended August 31, 2008. The increase was primarily due to increases
in property taxes, roamer service costs (amounts that we pay other wireless carriers when our
subscribers use their networks), property insurance costs and long distance costs.
Cost of equipment sold decreased during the three months ended August 31, 2009, as compared to
the same period last year. The decrease was primarily due to a decrease in the number of phones
used for customer retention, as well as a lower cost per unit.
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Sales and marketing expenses decreased during the three months ended August 31, 2009, as
compared to the same period last year. The decrease was primarily due to decreases in direct sales
commissions and compensation costs as a result of lower gross additions, partially offset by
increases in advertising costs and agent commissions.
General and administrative expenses decreased during the three months ended August 31, 2009,
as compared to the three months ended August 31, 2008. The decrease was primarily due to decreases
in professional fees, subscriber billing costs, compensation costs and maintenance contract costs,
partially offset by an increase in bad debt expense.
Puerto Rico Broadband Operations
Three Months Ended | ||||||||||||||||
August 31, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Switched revenue |
$ | 13,257 | $ | 13,935 | $ | (678 | ) | (5 | )% | |||||||
Dedicated revenue |
20,185 | 19,402 | 783 | 4 | ||||||||||||
Other revenue |
2,772 | 2,330 | 442 | 19 | ||||||||||||
Total revenue |
36,214 | 35,667 | 547 | 2 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
9,416 | 9,754 | (338 | ) | (3 | ) | ||||||||||
Cost of equipment sold |
242 | 265 | (23 | ) | (9 | ) | ||||||||||
Sales and marketing |
1,809 | 1,934 | (125 | ) | (6 | ) | ||||||||||
General and administrative |
5,378 | 3,961 | 1,417 | 36 | ||||||||||||
Total costs and expenses |
16,845 | 15,914 | 931 | 6 | ||||||||||||
Adjusted operating income(1) |
$ | 19,369 | $ | 19,753 | $ | (384 | ) | (2 | )% | |||||||
(1) | Adjusted operating income represents the profitability measure of the segment see Note 9 to the unaudited Condensed Consolidated Financial Statements for a reconciliation of consolidated adjusted operating income to the appropriate GAAP measure. |
Revenue. Total Puerto Rico broadband revenue increased for the three months ended August 31,
2009, as compared to the three months ended August 31, 2008. This increase was primarily due to a
32% increase in total access lines and equivalents to 789,100, partially offset by a decrease in
the total average recurring revenue per line.
Switched revenue decreased for the three months ended August 31, 2009, as compared to the same
period last year. The decrease was primarily due to a decrease in recurring revenue per line,
partially offset by a 10% increase in switched access lines to 107,900 as of August 31, 2009. The
increase in switched access lines has primarily come from VoIP (Voice Over Internet Protocol) lines
added through our agreements with certain cable television operators in Puerto Rico, which
generally have a lower recurring revenue per line.
Dedicated revenue increased for the three months ended August 31, 2009, as compared to the
same period last year. The increase was primarily the result of a 37% increase in voice grade
equivalent dedicated lines to 681,200 as of August 31, 2009, partially offset by a decrease in
recurring revenue per line.
Other revenue increased for the three months ended August 31, 2009, as compared to the three
months ended August 31, 2008. The increase primarily relates to increases in USF support received
in Puerto Rico, inter-carrier compensation revenue and installation and new construction charges.
Costs and expenses. Cost of services decreased during the three months ended August 31, 2009,
as compared to the same period last year. The decrease was primarily due to decreases in network
costs, utility costs and subscriber termination expense. These were partially offset by increases
in installation and new construction costs, maintenance contract costs and property insurance
costs.
Sales and marketing expenses decreased during the three months ended August 31, 2009, as
compared to the same period last year. The decrease was primarily due to a decrease in commissions,
partially offset by an increase in advertising costs.
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General and administrative expenses increased during the three months ended August 31,
2009, as compared to the same period in the prior year. The increase was primarily due to increases
in bad debt expense, compensation costs and professional fees.
LIQUIDITY AND CAPITAL RESOURCES
Weighted Average Debt Outstanding and Interest Expense
Three Months Ended | ||||||||||||
August 31, | ||||||||||||
2009 | 2008 | Change | ||||||||||
(In millions) | ||||||||||||
Weighted Average Debt Outstanding |
$ | 2,022.5 | $ | 2,011.3 | $ | 11.2 | ||||||
Weighted Average Gross Interest Rate(1) |
7.9 | 9.0 | % | (1.1 | )% | |||||||
Weighted Average Gross Interest Rate(2) |
7.5 | 8.6 | % | (1.1 | )% | |||||||
Gross Interest Expense(1) |
$ | 39.97 | $ | 45.36 | $ | (5.39 | ) | |||||
Interest Income |
$ | .02 | $ | .48 | $ | (0.46 | ) | |||||
Net Interest Expense |
$ | 39.95 | $ | 44.88 | $ | (4.93 | ) | |||||
(1) | Including amortization of debt issuance costs of $2.0 million for the three months ended August 31, 2009 and 2008. | |
(2) | Excluding amortization of debt issuance costs $2.0 million for the three months ended August 31, 2009 and 2008. |
The decrease in net interest expense for the three months ended August 31, 2009, as compared to
the three months ended August 31, 2008, resulted from lower variable interest rates. The decrease in
interest income resulted from significantly lower interest rates.
At August 31, 2009, we had total liquidity of $395.1 million, consisting of cash and cash
equivalents totaling $247.6 million and approximately $147.5 million available under our revolving
credit facility.
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Senior Secured Credit Facility
On February 9, 2004, our wholly-owned subsidiaries, Centennial Cellular Operating Co. LLC
(CCOC) and Centennial Puerto Rico Operations Corp. (CPROC), as co-borrowers, entered into a
$750.0 million senior secured credit facility (the Senior Secured Credit Facility). We and each
of our direct and indirect domestic subsidiaries, including CCOC and CPROC, are guarantors under
the Senior Secured Credit Facility. The Senior Secured Credit Facility consists of a seven-year
term loan, maturing in February 2011, with an original aggregate principal amount of $600.0
million, of which $550.0 million remained outstanding at August 31, 2009. The Senior Secured Credit
Facility requires amortization payments in an aggregate principal amount of $550.0 million in two
equal installments of $275.0 million in August 2010 and February 2011. The Senior Secured Credit
Facility also includes a six-year revolving credit facility, maturing in February 2010, with an
aggregate principal amount of up to $150.0 million; however, $2.5 million of this commitment was
from a subsidiary of Lehman Brothers Holdings Inc. (Lehman Brothers). Due to the Chapter 11
bankruptcy filing by Lehman Brothers in September 2008, we believe it is unlikely that this $2.5
million commitment will be honored by Lehman Brothers. Accordingly, we believe our useable
commitments under the revolving credit facility may be $147.5 million. We do not expect this change
to have a material impact on our liquidity or consolidated financial statements. At August 31,
2009, we had not borrowed any amounts under the revolving credit facility.
On September 3, 2009, we made a $52.5 million mandatory excess cash flow payment under the
Senior Secured Credit Facility, which reduced the principal balance of our term loan thereunder to
$497.5 million.
On February 5, 2007, we amended our Senior Secured Credit Facility to, among other things,
lower the interest rate on term loan borrowings by 0.25% through a reduction in the London
Inter-Bank Offering Rate (LIBOR) spread from 2.25% to 2.00%. Under the terms of the Senior
Secured Credit Facility, as amended, term and revolving loan borrowings bear interest at LIBOR (a
weighted average rate of 1.23% as of August 31, 2009) plus 2.00% and LIBOR plus 3.25%,
respectively. Our obligations under the Senior Secured Credit Facility are collateralized by liens
on substantially all of our assets.
High-Yield Notes
On December 21, 2005, we issued $550.0 million in aggregate principal amount of senior notes
due 2013 (the 2013 Holdco Notes). The 2013 Holdco Notes were issued in two series consisting of
(i) $350.0 million of floating rate notes that bear interest at three-month LIBOR (0.80% as of
August 31, 2009) plus 5.75% and mature in January 2013 (the 2013 Holdco Floating Rate Notes) and
(ii) $200.0 million of fixed rate notes that bear interest at 10% and mature in January 2013 (the
2013 Holdco Fixed Rate Notes). The 2013 Holdco Floating Rate Notes were issued at a 1% discount
and we received net proceeds of $346.5 million. We used the net proceeds from the offering,
together with a portion of our available cash, to pay a special cash dividend of $5.52 per share to
our common stockholders and prepay $39.5 million of term loans under the Senior Secured Credit
Facility. In connection with the completion of the 2013 Holdco Notes offering, we amended our
Senior Secured Credit Facility to permit, among other things, the issuance of the 2013 Holdco Notes
and payment of the special cash dividend. Additionally, we capitalized $15.4 million of debt
issuance costs in connection with the issuance of the 2013 Holdco Notes.
On February 9, 2004, concurrent with our entering into the Senior Secured Credit Facility, we
and our wholly-owned subsidiaries, CCOC and CPROC, as co-issuers, issued $325.0 million aggregate
principal amount of 8 1/8% senior unsecured notes due 2014 (the 2014 Senior Notes). We used the
net proceeds from the 2014 Senior Notes offering to refinance outstanding indebtedness.
On June 20, 2003, we and CCOC, as co-issuers, issued $500.0 million aggregate principal amount
of 10 1/8% senior unsecured notes due 2013 (the 2013 Senior Notes). CPROC is a guarantor of the
2013 Senior Notes.
Derivative Financial Instruments
We, either directly or through one of our wholly-owned subsidiaries, CCOC or CPROC, use
financial derivatives as part of our overall risk management strategy. These instruments are used
to manage risk related to changes in interest rates. The portfolio of derivative financial
instruments consists of interest rate swap and collar agreements. Interest rate swap agreements are
used to modify variable rate obligations to fixed rate obligations, thereby reducing the exposure
to higher interest rates. Interest rate collar agreements are used to lock in a maximum rate if
interest rates rise, but allow us to otherwise pay lower market rates, subject to a floor. We
formally document all relationships between hedging instruments and hedged items and the risk
management objective and strategy for each hedge transaction. All of our derivative transactions
are entered into for non-trading purposes.
Our derivative financial instruments effective or entered into during the three months ended
August 31, 2009 consist of the following:
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Collar | Collar | |||||||||||||||||||||||||||
Fixed | Fixed | |||||||||||||||||||||||||||
Variable Interest | Interest | Interest | ||||||||||||||||||||||||||
Rate Loan | Amount | Rate | Rate | Trade | Effective | Expiration | ||||||||||||||||||||||
Being Hedged | Hedged | Floor | Cap | Date | Date | Date | ||||||||||||||||||||||
November 2008 CCOC Collar 1 |
Senior Secured Credit Facility | $ | 200.0 | 1.76 | % | 2.25 | % | 11/25/2008 | 12/31/2008 | 9/30/2009 | ||||||||||||||||||
2008 CPROC Collar |
Senior Secured Credit Facility | $ | 250.0 | 2.43 | % | 4.00 | % | 9/26/2008 | 9/30/2008 | 6/30/2009 | ||||||||||||||||||
November 2008 CPROC Collar |
Senior Secured Credit Facility | $ | 35.5 | 1.76 | % | 2.25 | % | 11/25/2008 | 12/31/2008 | 9/30/2009 | ||||||||||||||||||
November 2008 CCOC Collar 2 |
Senior Secured Credit Facility | $ | 25.5 | 1.76 | % | 2.25 | % | 11/25/2008 | 12/31/2008 | 9/30/2009 | ||||||||||||||||||
November 2008 CCOC Collar 3 |
Senior Secured Credit Facility | $ | 39.5 | 1.81 | % | 2.25 | % | 11/25/2008 | 11/30/2008 | 8/31/2009 |
At August 31, 2009, $260.5 million of our $900.0 million of variable debt was hedged by
interest rate collars described above. All our collars have been designated as cash flow hedges. As
of September 30, 2009, all of our swaps and collars had expired.
At August 31, 2009, the fair value of our collars was a liability of approximately $0.8
million, which is included in accrued expenses and other current liabilities in the condensed
consolidated balance sheet. For the three months ended August 31, 2009, we recorded income of $0.8
million, net of tax, to accumulated other comprehensive loss attributable to the change in fair
value adjustments of the collars, the full amount of which is expected to be reclassified into
interest expense within the next 12 months as the underlying exposures are realized.
Under certain of the agreements relating to our long-term debt, we are required to maintain
certain financial and operating covenants, and are limited in our ability to, among other things,
incur additional indebtedness and enter into transactions with affiliates. Under certain
circumstances, we are prohibited from paying cash dividends on our common stock under certain of
such agreements. We were in compliance with all covenants of our debt agreements at August 31,
2009.
For the three months ended August 31, 2009, the ratio of earnings to fixed charges was 1.8.
Fixed charges consist of interest expense, including amortization of debt issuance costs, loss on
extinguishment of debt and the portion of rents deemed representative of the interest portion of
leases.
At August 31, 2009, we had no off-balance sheet obligations.
Our capital expenditures for the three months ended August 31, 2009 were as follows:
Three Months Ended | % of Total Capital | |||||||
August 31, 2009 | Expenditures | |||||||
(dollar amounts in thousands) | ||||||||
U.S. Wireless |
$ | 7,556 | 44.4 | % | ||||
Puerto Rico Wireless |
5,592 | 32.9 | ||||||
Puerto Rico Broadband |
3,860 | 22.7 | ||||||
Total capital expenditures |
$ | 17,008 | 100.0 | % | ||||
Property, plant and equipment, net at August 31, 2009 |
$ | 564,331 |
Capital expenditures for our U.S. wireless operations were used to expand our coverage areas,
upgrade our cell sites and call switching equipment of existing wireless properties and spectrum
clearing for 3G. In Puerto Rico, these investments were used to add capacity and services, to
continue the development and expansion of our Puerto Rico wireless systems, expand the EV-DO
network and to continue the expansion of our Puerto Rico Broadband network and undersea cable
infrastructure.
We expect to finance our capital expenditures primarily from cash flow generated from
operations, borrowings under our existing credit facilities and proceeds from the sale of assets.
We may also seek various other sources of external financing, including additional bank financing,
joint ventures, partnerships and issuance of debt or equity securities.
To meet our obligations with respect to our operating needs, capital expenditures and debt
service obligations, it is important that we continue to improve operating cash flow. Increases in
revenue will be dependent upon, among other things, continued growth in the number of customers and
maximizing revenue per subscriber. We have continued the construction and upgrade of wireless and
broadband systems in our markets to achieve these objectives. There is no assurance that growth in
customers or revenue will occur.
Based upon existing market conditions and our present capital structure, we believe that cash
flows from operations and funds from currently available credit facilities will be sufficient to
enable us to meet required cash commitments through the next twelve-month period.
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Centennial, its subsidiaries, affiliates and significant stockholders (including Welsh,
Carson, Anderson & Stowe (Welsh Carson) and its affiliates) may from time to time, depending upon
market conditions, seek to purchase certain of Centennials or its subsidiaries securities in the
open market or by other means, in each case to the extent permitted by existing covenant
restrictions.
ACQUISITIONS AND DISPOSITIONS
The terms and conditions of our Merger Agreement with AT&T limit our ability to make
acquisitions. Subject to the Merger Agreement, we may pursue acquisitions of communications
businesses that we believe will enhance our scope and scale. Our strategy of clustering our
operations in proximate geographic areas enables us to achieve operating and cost efficiencies, as
well as joint marketing benefits, and also allows us to offer our subscribers more areas of
uninterrupted service as they travel. In addition to expanding our existing clusters, we also may
seek to acquire interests in communications businesses in other geographic areas. The consideration
for such acquisitions may consist of shares of stock, cash, assumption of liabilities, a
combination thereof or other forms of consideration.
COMMITMENTS AND CONTINGENCIES
On July 1, 2008, we entered into an Information Services Agreement with Fidelity Information
Services, Inc. (Fidelity) pursuant to which Fidelity agreed to provide billing services,
facilities network fault detection, correction and management
performance, usage monitoring and
security for our wireless operations throughout the Company. This agreement has an initial term of
10 years, expiring on June 30, 2018, and includes a minimum volume commitment based on the number
of subscribers processed per year. Based on this minimum, we have agreed to purchase a total of
$121.1 million of billing related services from Fidelity through June 30, 2018. This commitment is
classified as purchase obligations in the Contractual Obligations table below. As of August 31,
2009, we have paid approximately $12.5 million in connection with this agreement.
We have filed a shelf registration statement with the SEC for the sale of up to 72,000,000
shares of our common stock that may be offered from time to time in connection with acquisitions.
The SEC declared the registration statement effective on July 14, 1994. As of August 31, 2009,
37,613,079 shares remain available for issuance under the shelf. In addition, we have registered
under separate shelf registration statements an aggregate of approximately 43,000,000 shares of our
common stock for resale by affiliates of Welsh Carson.
The following table summarizes our scheduled contractual cash obligations and commercial
commitments at August 31, 2009 (unless otherwise noted), and the effect that such obligations are
expected to have on liquidity and cash flow in future periods.
Less than | 1-3 | 3-5 | After | |||||||||||||||||
Contractual Obligations | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
Long-term debt obligations (net of unamortized discount) |
$ | 1,925,000 | $ | 275,000 | $ | 275,000 | $ | 1,375,000 | $ | | ||||||||||
Interest on long-term debt obligations(1) |
508,414 | 140,222 | 265,706 | 102,486 | $ | | ||||||||||||||
Operating lease obligations |
276,983 | 33,281 | 53,547 | 40,409 | 149,746 | |||||||||||||||
Capital lease obligations |
274,533 | 9,094 | 18,869 | 20,103 | 226,467 | |||||||||||||||
Purchase obligations |
109,170 | 11,702 | 23,725 | 24,153 | 49,590 | |||||||||||||||
Total contractual cash obligations |
3,094,100 | 469,299 | 636,847 | 1,562,151 | 425,803 | |||||||||||||||
Sublessor agreements |
(3,452 | ) | (1,335 | ) | (1,611 | ) | (490 | ) | (16 | ) | ||||||||||
Net |
$ | 3,090,648 | $ | 467,964 | $ | 635,236 | $ | 1,561,661 | $ | 425,787 | ||||||||||
(1) | Interest payments are based on the Companys projected interest rates and estimated principal amounts outstanding for the periods presented. | |
The liability for income taxes under FIN 48 as of August 31, 2009 of $12,485 is excluded from the contractual obligations table as the Company is unable to make reasonably reliable estimates of the period of cash settlement, if any with the respective taxing authority. |
SUBSEQUENT EVENTS
On November 7, 2008, Centennial entered into a merger agreement with AT&T providing for the
acquisition of Centennial by AT&T (the Merger or, the AT&T Transaction). On October 13, 2009,
AT&T and Centennial announced that they had entered into a consent decree with the Department of
Justice which allowed the Merger to proceed, while requiring that AT&T divest Centennials
operations in eight service areas in Louisiana and Mississippi. The eight service areas are
Alexandria, La., Lafayette, La., LA-3 (DeSoto), LA-5 (Beauregard), LA-6 (Iberville), LA-7 (West
Feliciana), MS-8 (Claiborne) and MS-9 (Copiah). Under the terms of the merger agreement,
Centennial stockholders would receive $8.50 per share in cash. The Merger was approved by
Centennials stockholders in February 2009, but remains subject to approval by the Federal
Communications Commission and to other customary closing conditions. AT&T and Centennial expect
that, assuming timely satisfaction or waiver of all remaining closing conditions, the Merger will
be completed early in the fourth quarter of calendar year 2009.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Statements in this report that are not
historical facts are hereby identified as forward-looking statements. Where, in any
forward-looking statement, we or our management expresses an expectation or belief as to future
results or actions, there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished. Our actual results may differ materially from our
expectations, plans or projections. Forward-looking statements can be identified by the use of the
words believe, expect, predict, estimate, anticipate, project, should, intend,
may, will and similar expressions, or by discussion of competitive strengths or strategy that
involve risks and uncertainties. We warn you that these forward-looking statements are only
predictions and estimates, which are inherently subject to risks and uncertainties.
Important factors that could cause actual results to differ materially from those expressed in
any forward-looking statement made by, or on behalf of, us include, but are not limited to:
| the occurrence of any event, change or other circumstance that could give rise to the termination of our agreement to be acquired by AT&T Inc. (the AT&T Transaction) or the failure of the AT&T Transaction to close for any other reason; | ||
| the outcome of any legal proceeding that has been or may be instituted against Centennial and others relating to the AT&T Transaction; | ||
| the inability to complete the AT&T Transaction due to the failure to satisfy conditions to consummate the AT&T Transaction; | ||
| risks that the AT&T Transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the AT&T Transaction; | ||
| business uncertainty and contractual restrictions during the pendency of the AT&T Transaction, which may adversely affect our relationships with our employees, customers and suppliers; | ||
| the diversion of managements attention to the AT&T Transaction from ongoing business concerns; | ||
| the effect of the announcement and pendency of the AT&T Transaction on our customer and supplier relationships, operating results and business generally; | ||
| the amount of the costs, fees, expenses and charges related to the AT&T Transaction; | ||
| the timing of the completion of the AT&T Transaction or the impact of the AT&T Transaction on our capital resources, cash requirements, profitability, management resources and liquidity; | ||
| the effects of the current recession in the United States and general downturn in the economy, including the effects on unemployment, consumer confidence, consumer debt levels, consumer spending and other macroeconomic conditions that could impact the demand for the products and services we provide and our customers ability to pay for them; | ||
| our need to refinance or amend existing indebtedness on or prior to its stated maturity and the difficulties and illiquidity experienced by the debt/capital markets; | ||
| the effects of vigorous competition in our markets, which may make it difficult for us to attract and retain customers and to grow our customer base and revenue and which may increase churn, which could reduce our revenue and increase our costs; | ||
| the fact that many of our competitors are larger than we are, have greater financial resources than we do, are less leveraged than we are, have more extensive coverage areas than we do, and may offer less expensive and more technologically advanced products and services than we do; | ||
| our ability to gain access to the latest technology handsets in a timeframe and at a cost similar to our competitors; |
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| our ability to acquire, and the cost of acquiring, additional spectrum in our markets to support growth and deployment of advanced technologies, including 3G and 4G services; | ||
| our ability to successfully deploy and deliver wireless data services to our customers, including next generation 3G and 4G technology; | ||
| the effect of changes in the level of support provided to us by the Universal Service Fund, or USF; | ||
| our ability to grow our subscriber base at a reasonable cost to acquire; | ||
| our dependence on roaming agreements for a significant portion of our wireless revenue and the expected decline in roaming revenue over the long term; | ||
| our ability to successfully integrate any acquired markets or businesses; | ||
| the effects of higher than anticipated handset subsidy costs; | ||
| our dependence on roaming agreements for our ability to offer our wireless customers competitively priced regional and nationwide rate plans that include areas for which we do not own wireless licenses; | ||
| the effects of adding new subscribers with lower credit ratings; | ||
| our substantial debt obligations, including restrictive covenants, which place limitations on how we conduct business; | ||
| market prices for the products and services we offer may decline in the future; | ||
| changes and developments in technology, including our ability to upgrade our networks to remain competitive and our ability to anticipate and react to frequent and significant technological changes which may render certain technologies used by us obsolete; | ||
| the effects of a decline in the market for our Code Division Multiple Access (CDMA) -based technology; | ||
| the effects of consolidation in the telecommunications industry; | ||
| general economic, business, political and social conditions in the areas in which we operate, including the effects of downturns in the economy, world events, terrorism, hurricanes, tornadoes, wind storms and other natural disasters; | ||
| our ability to generate cash and the availability and cost of additional capital to fund our operations and our significant planned capital expenditures; | ||
| the effects of governmental regulation of the telecommunications industry; | ||
| our ability to attract and retain qualified personnel; | ||
| the effects of network disruptions and system failures; | ||
| our ability to manage, implement and monitor billing and operational support systems; | ||
| the results of litigation filed or which may be filed against us or our vendors, including litigation relating to wireless billing, using wireless telephones while operating an automobile and litigation relating to infringement of patents; | ||
| the effects of scientific reports that may demonstrate possible health effects of radio frequency transmission from use of wireless telephones; and | ||
| the influence on us by our significant stockholder and anti-takeover provisions. |
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We undertake no obligation, other than as may be required under the federal securities laws,
to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. We do not assume responsibility for the accuracy and
completeness of the forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are reasonable, any or all of the forward-looking statements
contained in this report and in any other public statements that are made may prove to be
incorrect. This may occur as a result of inaccurate assumptions as a consequence of known or
unknown risks and uncertainties. All of the forward-looking statements are qualified in their
entirety by reference to the factors discussed under the caption Risk Factors under Item 1A of
our 2009 Annual Report on Form 10-K filed on July 30, 2009. We caution that these risk factors may
not be exhaustive. We operate in a continually changing business environment, and new risk factors
emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact,
if any, of the new risk factors on our business or the extent to which any factor or combination of
factors may cause actual results to differ materially from those expressed or implied by any
forward-looking statement. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not occur. You should carefully read this
report in its entirety. It contains information that you should consider in making any investment
decision in any of our securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial derivatives are used as part of the overall risk management strategy. These
instruments are used to manage risk related to changes in interest rates. The portfolio of
derivative financial instruments has consisted of interest rate swap and collar agreements.
Interest rate swap agreements were used to modify variable rate obligations to fixed rate
obligations, thereby reducing the exposure to higher interest rates. Interest rate collar
agreements were used to lock in a maximum rate if interest rates rise, but allow us to otherwise
pay lower market rates, subject to a floor. We formally document all relationships between hedging
instruments and hedged items and the risk management objective and strategy for each hedge
transaction. Amounts paid or received under interest rate swap and collar agreements were accrued
as interest rates change with the offset recorded in interest expense. All of our derivative
transactions are entered into for non-trading purposes.
We are subject to market risks due to fluctuations in interest rates. Approximately $900.0
million of our long-term debt has variable interest rates. As of August 31, 2009 we utilize
interest rate collar agreements to hedge variable interest rate risk on $260.5 million of our
$900.0 million variable interest rate debt as part of our interest rate risk management program.
The table below presents principal amounts and related average interest rate by year of
maturity for our long-term debt. Weighted average variable rates are based on implied forward rates
in the yield curve as of August 31, 2009:
Fiscal Year Ended August 31, | ||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Long-term debt: |
||||||||||||||||||||||||||||||||
Fixed rate |
$ | | $ | | $ | | $ | 700,000 | $ | 325,000 | $ | 102,078 | $ | 1,127,078 | $ | 1,142,078 | ||||||||||||||||
Average fixed
interest rate |
10.0 | % | 8.1 | % | 10.0 | % | 9.5 | % | | |||||||||||||||||||||||
Variable rate |
$ | 275,000 | $ | 275,000 | $ | | $ | 350,000 | $ | | $ | | $ | 900,000 | $ | 889,500 | ||||||||||||||||
Average variable
interest rate(1) |
1.3 | % | 3.1 | % | 3.8 | % | 4.2 | % | 4.5 | % | 4.7 | % | 3.0 | % | | |||||||||||||||||
Interest
rate collars: |
||||||||||||||||||||||||||||||||
Notional amount |
$ | 260,500 | $ | (774 | ) | |||||||||||||||||||||||||||
Cap (Highest) |
2.25 4.00 | % | ||||||||||||||||||||||||||||||
Floor (Lowest) |
1.76 2.43 | % |
(1) | Represents the average interest rate before applicable margin on the Senior Secured Credit Facility debt and the 2013 Holdco Floating Rate Notes. |
Our primary interest rate risk results from changes in LIBOR, which is used to determine the
interest rates applicable on our variable rate debt under our Senior Secured Credit Facility and
our 2013 Holdco Floating Rate Notes. We have variable rate debt that had outstanding balances of
$900.0 million at August 31, 2009 and 2008. The fair value of such debt approximates the carrying
value at August 31, 2009 and 2008. Of the variable rate debt, as of August 31, 2009, $260.5 million
was hedged using interest rate collar agreements that expire at various dates through September
2009. These collars are designated as cash flow hedges. As of
September 30, 2009, all of our swaps and collars had expired. Based on our
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unhedged variable rate obligations outstanding at August 31, 2009, a hypothetical increase or
decrease of 10% in the weighted average variable interest rate would have increased or decreased
our annual interest expense by approximately $1.1 million.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of our
management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e)
and 15d-15(e) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures are effective as of
August 31, 2009.
There was no change in our internal control over financial reporting during the quarter ended
August 31, 2009 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 2001, our previously sold Dominican Republic subsidiary, All American Cables and Radio Inc.
(Centennial Dominicana), commenced litigation against International Telcom, Inc. (ITI) to
collect an approximate $1.8 million receivable owing under a traffic termination agreement between
the parties relating to international long distance traffic terminated by Centennial Dominicana in
the Dominican Republic. Subsequently, ITI counterclaimed against Centennial Dominicana claiming
that Centennial Dominicana breached the traffic termination agreement and is claiming damages in
excess of $40.0 million. The matter is subject to arbitration in Miami, Florida and a decision of
the arbitration panel is expected shortly. In connection with the sale of Centennial Dominicana, we
have agreed to indemnify Trilogy International Partners with respect to liabilities arising as a
result of the ITI litigation. We do not believe that any damage payments by us would have a
material adverse effect on our consolidated results of operations, consolidated financial position
or consolidated cash flows.
We are subject to other claims and legal actions that arise in the ordinary course of
business. We do not believe that any of these other pending claims or legal actions will have a
material adverse effect on our consolidated results of operations, consolidated financial position
or consolidated cash flows.
ITEM 1A. RISK FACTORS
See Risk Factors in Part 1 Item 1A in our Annual Report on Form 10-K for the year ended
May 31, 2009 for information on risk factors. There have been no material changes in our risk
factors from those disclosed in our Annual Report on Form 10-K for the year ended May 31, 2009, except as set forth below.
There are risks and uncertainties associated with our proposed acquisition by AT&T.
There are risks and uncertainties associated with our proposed acquisition by AT&T. For example,
the acquisition may not be consummated, or may not be consummated as currently anticipated. On
October 13, 2009, AT&T and Centennial announced that they had entered into a consent decree with
the Department of Justice which allowed the Merger to proceed, while requiring that AT&T divest
Centennials operations in eight service areas in Louisiana and Mississippi. The acquisition was approved by Centennials
stockholders in February 2009, but remains subject to approval by the Federal Communications
Commission and to other customary closing conditions. AT&T and Centennial expect that, assuming
timely satisfaction or waiver of all remaining closing conditions, the acquisition will be
completed early in the fourth quarter of calendar year 2009. However, there is no assurance that
the conditions to the completion of the AT&T Transaction will be satisfied or waived, taking into
account the current regulatory environment. If the AT&T Transaction is not consummated on or
before November 7, 2009 (the Termination Date), under certain circumstances either Centennial or
AT&T may terminate the Merger Agreement, subject to AT&Ts right to extend the Termination Date in
accordance with the terms thereof. Failure to consummate the AT&T Transaction for any reason, or
an extended delay before consummation, could have a material adverse effect on our business,
results of operations and financial condition and result in a significant decline in the market
price of our common stock. If the AT&T Transaction is not completed, there is no assurance that a
comparable transaction will occur.
The merger agreement with AT&T restricts us from engaging in certain activities and taking certain
actions without AT&Ts approval, which could prevent us from pursuing opportunities that may arise
prior to the closing of the AT&T Transaction. The pendency of the AT&T Transaction could have a
negative impact on our business, including making it more difficult to attract and retain
customers.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Each exhibit identified below is filed as a part of this report.
Exhibit | ||
No. | Description | |
31.1
|
Certification of Michael J. Small, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Thomas J. Fitzpatrick, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Michael J. Small, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Thomas J. Fitzpatrick, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 13, 2009
CENTENNIAL COMMUNICATIONS CORP. |
||||
By: | /s/ Thomas J. Fitzpatrick | |||
Thomas J. Fitzpatrick | ||||
Executive Vice President, Chief Financial Officer (Chief Financial Officer) |
||||
By: | /s/ Francis P. Hunt | |||
Francis P. Hunt | ||||
Senior Vice President Controller (Chief Accounting Officer) |
||||
39