Quarterly Report

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

Commission file number 0-19603

 

 

3349 Route 138
Wall, NJ 07719
(Address of principal executive offices,

including zip code)

 

(732) 556-2200

(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer  o      Accelerated filer  þ      Non-accelerated filer  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 issuer’s classes of common stock, as of the latest practical date.

 

Common Stock — 106,059,211 outstanding shares as of April 02, 2007

 

 

TABLE OF CONTENTS

 

ITEM 1.   FINANCIAL STATEMENTS

 

 

See notes to condensed consolidated financial statements.

 

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share amounts)

 

 

The accompanying 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 Company’s May 31, 2006 Annual Report on Form 10-K, filed on August 10, 2006, 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”) as of February 28, 2007 and the results of its consolidated operations and consolidated cash flows for the three and nine month periods ended February 28, 2007 and 2006. The consolidated balance sheet as of May 31, 2006 included herein has been derived from the consolidated balance sheet included in the Company’s Annual Report on Form 10-K, adjusted to present the classification of the Company’s wholly owned subsidiary, All America Cables and Radio, Inc. (“Centennial Dominicana”), as a discontinued operation (see Note 5). Centennial Dominicana was the Company’s subsidiary that operated its telecommunications businesses in the Dominican Republic until its sale in March 2007.

 

Income Taxes:

 

In accordance with Statement of Financial Accounting Standards (“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 quarter ended February 28,2007 based on its projected annual worldwide effective tax rate (the “effective tax rate”) of 100.4%.

 

The Company’s effective tax rate of 100.4% is primarily due to U.S. federal taxes, state taxes net of federal tax benefit and foreign taxes for which the Company cannot claim a foreign tax credit. In addition, the Company’s effective tax rate is impacted by the inability to offset income in one jurisdiction with losses in other jurisdictions.

 

The Company establishes reserves for tax contingencies when, despite the belief that the Company’s tax return positions are fully supported, it is probable that certain positions may be challenged and may not be fully sustained. The tax contingency reserves 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 Company’s effective tax rate includes the effect of tax contingency reserves and changes to the reserves as considered appropriate by management. The tax contingency reserve was decreased for the nine months ended February 28,2007 by $1,416 primarily attributable to a reduction in certain exposures related to foreign taxes.

 

 

The Company purchased additional spectrum included above in U.S. wireless licenses during the nine months ended February 28, 2007 (see Note 7).

 

A significant portion of the Company’s intangible assets are licenses that provide the Company’s wireless operations with the exclusive right to utilize radio frequency spectrum designated on the license to provide wireless communication services. While wireless licenses are issued for only a fixed time, generally ten years, the U.S. wireless and Puerto Rico wireless licenses are subject to renewal by the Federal Communications Commission (“FCC”). 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 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. Dominican Republic wireless licenses, which are included in assets held for sale, had a finite life and therefore were being amortized over a twenty-year period (i.e., the life of the license) using the straight-line method. Amortization of the Dominican Republic wireless license ceased in November 2006 upon Centennial Dominicana’s classification as a discontinued operation.

 

Goodwill and other intangible assets with indefinite lives are subject to impairment tests. 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 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 the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recognized in an amount equal to the difference. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit has been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

 

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.

 

A residual value approach consists of measuring the fair value of each reporting unit’s indefinite lived assets by deducting the fair values of its net assets, including customer relationships, other than the indefinite lived assets, from the reporting units fair value, which was determined using a discounted cash flow analysis. The analysis is based on the Company’s long-term cash flow projections with an assumed terminal value, discounted at its

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

corporate weighted-average cost of capital. If the carrying value of the indefinite lived intangible assets of each reporting unit exceeds their respective fair value, an impairment loss is recognized in an amount equal to the excess.

 

On September 29, 2004, the SEC issued a Staff Announcement titled Use of the Residual Method to Value Acquired Assets other than Goodwill. The Staff Announcement required adoption of a direct value method of assigning value to intangible assets acquired in a business combination under SFAS No. 141, Business Combinations (“SFAS 141”), effective for all business combinations completed after September 29, 2004. Further, all intangible assets valued under the residual method prior to this adoption were required to be tested for impairment using a direct value method no later than the beginning of fiscal year 2006. Any impairment of intangible assets recognized upon application of a direct value method by entities previously applying the residual method is to be reported as a cumulative effect of a change in accounting principle. Under this Staff Announcement, the reclassification of recorded balances between goodwill and intangible assets prior to the adoption of this Staff Announcement is prohibited. The Company adopted a direct value method as of June 1, 2005 in accordance with this Staff Announcement, and there were no impairments at that time.

 

The impairment test for intangible assets not subject to amortization continues to be performed using a direct value approach.

 

The Company performed its annual goodwill and intangible asset impairment analyses during the three months ended February 28, 2007. Based upon the results of these analyses, there were no impairments.

 

The following table presents other intangible assets subject to amortization:

 

 

 

 

Other intangible assets amortization expense was $60 and $180 for the three and nine months ended February 28, 2007, respectively. Based solely on the finite lived intangible assets existing at February 28, 2007, amortization expense is estimated to be $60 for the remainder of fiscal 2007 and $240 for each of the next five fiscal years.

 

Goodwill

 

The goodwill balance in the Puerto Rico broadband segment was $4,187 at February 28, 2007 and May 31, 2006.

 

The goodwill balance related to Centennial Dominicana, included in assets held for sale, was $26,017 and $22,517 at February 28, 2007 and May 31, 2006, respectively. The goodwill related to Centennial Dominicana increased by $3,500 during the nine months ended February 28, 2007 as a result of the preliminary allocation (based on preliminary estimates of fair value) of the purchase price of the remaining 20% common stock interest in Centennial Dominicana, which the Company purchased during such period (see Note 7).

 

 

Senior Secured Credit Facility

 

On February 9, 2004, the Company’s wholly-owned subsidiaries, Centennial Cellular Operating Co. LLC (“CCOC”) and Centennial Puerto Rico Operations Corp. (“CPROC”), as co-borrowers, entered into a $750,000 senior secured credit facility (the “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 fiscal year 2011, with an original aggregate principal amount of $600,000, which 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, with an aggregate principal amount of up to $150,000. At February 28, 2007, approximately $150,000 was available under the revolving credit facility. If the remaining 10 3 / 4 % senior subordinated notes due 2008 (the “2008 Senior Subordinated Notes”) are not refinanced by June 15, 2008, the aggregate amount outstanding under the Senior Secured Credit Facility will become immediately due and payable.

 

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 5.36% as of February 28, 2007) plus 2.00% and LIBOR plus 3.25%, respectively. The Company’s obligations under the Senior Secured Credit Facility are collateralized by liens on substantially all of the Company’s assets.

 

High-Yield Notes

 

On December 15, 2006, the Company redeemed $20,000 of its 2008 Senior Subordinated Notes at face value with no prepayment penalties, which included approximately $8,900 from an affiliate of Welsh, Carson, Anderson & Stowe (“Welsh Carson”), the Company’s principal stockholder. Following the redemption, $125,000 of the Company’s 2008 Senior Subordinated Notes remained outstanding.

 

On December 21, 2005, the Company issued $550,000 in aggregate principal amount of senior notes due 2013 (the “2013 Holdco Notes”) in a private placement transaction. The 2013 Holdco Notes were subsequently registered under the Securities Act of 1933, as amended. The 2013 Holdco Notes were issued in two series consisting of

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(i) $350,000 of floating rate notes that bear interest at three-month LIBOR plus 5.75% and mature in January 2013 (the “2013 Holdco Floating Rate Notes”) and (ii) $200,000 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 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 Company’s 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 8 1 / 8 % senior unsecured notes due 2014 (the “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 the 10 1 / 8 % senior unsecured notes due 2013 (the “2013 Senior Notes”). CPROC is a guarantor of the 2013 Senior Notes.

 

In December 1998, the Company and CCOC issued $370,000 of 2008 Senior Subordinated Notes. CPROC is a guarantor of the 2008 Senior Subordinated Notes. As of February 28, 2007, the Company has repurchased or redeemed $245,000 aggregate principal amount of such notes. An affiliate of Welsh Carson owned approximately $189,000 principal amount of the 2008 Senior Subordinated Notes. Approximately $123,400, or 50.4%, of the $245,000 of the 2008 Senior Subordinated Notes redeemed and repurchased were owned by the affiliate of Welsh Carson.

 

Derivative Financial Instruments

 

On March 1, 2005, the Company, through its wholly-owned subsidiary, CPROC, entered into an interest rate swap agreement (the “CPROC Swap”) to hedge variable interest rate risk on $250,000 of the Company’s variable interest rate term loans under the Senior Secured Credit Facility. The CPROC Swap became effective as of March 31, 2005 and expired March 30, 2007. The fixed interest rate on the CPROC Swap was 6.04%. The CPROC Swap was designated a cash flow hedge.

 

On December 22, 2005, the Company, through its wholly-owned subsidiary, CCOC, entered into an interest rate swap agreement (the “CCOC Swap”) to hedge variable interest rate risk on $200,000 of the Company’s outstanding variable interest rate term loans under the Senior Secured Credit Facility. The CCOC Swap became effective on March 31, 2006, and will expire on December 31, 2007. The fixed interest rate on the CCOC Swap is 6.84%. The CCOC Swap was designated as a cash flow hedge. The $250,000 CPROC Swap together with the $200,000 CCOC Swap hedge variable interest rate risk on a total of $450,000 of the Company’s $900,000 of variable interest rate debt.

 

On March 10, 2006, the Company, through its wholly owned subsidiary, CPROC, entered into an additional agreement to hedge variable interest rate risk on $250,000 of the Company’s $550,000 of variable interest rate term loans under the Senior Secured Credit Facility for one year (the “2007 CPROC Swap”). The 2007 CPROC Swap became effective March 30, 2007, the date that the CPROC Swap expired, and will expire on March 31, 2008. The fixed interest rate on the 2007 CPROC Swap is 7.13%. The 2007 CPROC Swap was designated a cash flow hedge.

 

On October 31, 2006, the Company, through its wholly-owned subsidiary, CPROC, entered into an interest rate collar agreement (the “CPROC Collar”) to hedge variable interest rate risk on $35,500 of the Company’s variable interest rate term loans under the Senior Secured Credit Facility. The CPROC Collar became effective as of December 29, 2006 and expires June 30, 2008. The fixed interest rate floor is 4.66% and the fixed interest rate cap is 5.50% on the CPROC Collar. The CPROC Collar was designated a cash flow hedge.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

On October 31, 2006, the Company, through its wholly-owned subsidiary, CCOC, entered into an interest rate collar agreement (the “CCOC Collar”) to hedge variable interest rate risk on $25,000 of the Company’s variable interest rate term loans under the Senior Secured Credit Facility. The CCOC Collar became effective as of December 29, 2006 and expires June 30, 2008. The fixed interest rate floor is 4.66% and the fixed interest rate cap is 5.50% on the CCOC Collar. The CCOC Collar was designated a cash flow hedge.

 

At February 28, 2007, the fair value of the swaps and collars was approximately $1,412. The Company recorded an asset, which is included in other assets in the condensed consolidated balance sheet, for the fair value of the swaps and collars. For the nine months ended February 28, 2007, the Company recorded $769, net of tax, in accumulated other comprehensive income attributable to the fair value adjustments of the swaps and collars.

 

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 Company was in compliance with all financial and operating covenants of its debt agreements at February 28, 2007.

 

The aggregate annual principal payments for the next five years and thereafter under the Company’s long-term debt at February 28, 2007 are summarized as follows:

 

 

Interest expense, as reflected on the condensed consolidated financial statements, has been partially offset by interest income. The gross interest expense was approximately $51,526 and $155,955 for the three and nine months ended February 28, 2007, respectively, and approximately $47,776 and $118,430 for the three and nine months February 28, 2006, respectively.

 

 

In December 2004, the FASB revised SFAS No. 123, 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. On April 14, 2005, the SEC adopted a new rule amending the effective dates for SFAS 123(R).

 

On June 1, 2006, the Company adopted SFAS 123(R) using the modified prospective application method, as permitted under SFAS 123(R), which requires measurement of compensation cost of all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service periods for awards expected to vest. Under this method, compensation expense in fiscal year 2007 includes the portion vesting in the period for (1) all stock-based awards granted prior to, but not vested as of June 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and (2) all stock-based awards granted subsequent to June 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company has elected to treat awards with graded vesting as a single award when estimating fair value. The Company will recognize the cost of all employee stock

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

awards on a straight-line basis over their respective vesting periods, net of estimated forfeitures. Accordingly, prior period amounts have not been restated. Under the modified prospective method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

 

During the three and nine months ended February 28, 2007, the adoption of SFAS 123(R) resulted in incremental stock-based compensation expense of $1,851 and $6,669, respectively, of which $215 and $750, respectively, was recorded in cost of services, $116 and $484, respectively, was recorded in sales and marketing and $1,520 and $5,435, respectively, was recorded in general & administrative in the accompanying Condensed Consolidated Statement of Operations. For the three and nine months ended February 28, 2007, the incremental stock-based compensation expense caused income before income taxes to decrease by $1,851 and $6,669, respectively, net income to decrease by $1,082 and $3,904, respectively, and basic and diluted earnings per share to decrease by $0.01 per share and $0.04 per share, respectively. Cash provided by operating activities decreased and cash provided by financing activities increased by $158 and $224 for the three and nine months ended February 28, 2007, respectively, related to excess tax benefits from the exercise of stock-based awards.

 

Pro forma Information for Periods Prior to the Adoption of SFAS 123(R):

 

Prior to the adoption of SFAS 123(R), the Company applied Accounting Principles Board No. 25 (“APB 25”) to account for its stock-based awards. Under the provisions of APB 25, the Company was not required to recognize compensation expense for the cost of stock options issued under its equity compensation plans as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has not changed its valuation model used for estimating the fair value of options granted after June 1, 2006, from the Black-Scholes option-pricing model previously used for pro forma presentation purposes as required under SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosures.

 

The following table details the effect on net income and earnings per share had compensation expense for the Employee Stock-Based Awards been recorded in the three and nine months ended February 28, 2006 based on the fair value method under SFAS 123:

 

 

 

The expected volatility assumption used in the Black-Scholes option-pricing model was based solely on historical volatility, calculated using the historical weekly price changes of the Company’s common stock over the most recent period equal to the expected life of the stock option on the date of grant. The risk-free interest rate was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock options. Beginning on June 1, 2006, the expected life of the option is calculated using the simplified method set out in SEC Staff Accounting Bulletin No. 107 using the vesting term of 3 years and the contractual term of 7 years. 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. The Company does not currently intend to pay cash dividends, and thus has assumed a 0% dividend yield.

 

As part of the requirements of SFAS 123(R), the Company is required to estimate potential forfeitures of stock grants and adjust recorded compensation cost accordingly. The forfeiture rate was estimated based on relevant historical forfeitures. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

 

1999 Stock Option Plan:

 

The Company’s 1999 Stock Option and Restricted Stock Purchase Plan (the “1999 Stock Option Plan”) provides for the grant of incentive stock options as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”), as well as non-qualified stock options and the right to purchase shares of common stock of the Company on a restricted basis to employees, officers, directors and others providing services to the Company. Generally, the exercise price of incentive and non-qualified stock options and the purchase price of restricted stock may be as determined by the Board of Directors of the Company or a committee thereof. The exercise price of incentive stock options issued under the 1999 Stock Option Plan is required to be no less than the fair market value of shares of common stock at the time of grant of such options. The maximum term of each incentive stock option issued under the 1999 Stock Option Plan is ten years. The term of each non-qualified stock option generally ranges between seven and ten years. The 1999 Stock Option Plan was amended in September 2001 to increase the number of shares of common stock of the Company authorized for issue thereunder by 3,000,000 shares to an aggregate of 12,000,000 shares. In connection with a special dividend paid in January 2006, certain adjustments to outstanding options under the 1999 Stock Option Plan were made in accordance with the terms of such plan. As a result, the aggregate number of shares under the plan was increased to 14,445,263. The 1999 Stock Option Plan was amended again in September 2006 to increase the number of shares of common stock of the Company authorized for issue thereunder by 3,000,000 shares to an aggregate of 17,445,263 shares. All of the Company’s outstanding stock options are under the 1999 Stock Option Plan.

 

For any participant who owns shares possessing more than 10% of the voting rights of the outstanding common stock, the exercise price of any incentive stock option must be at least 110% of the fair market value of the shares subject to such option on the date of the grant and the term of the option may not be longer than five years. Options become exercisable at such time or times as the Board of Directors or committee granting such options determine

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

when such options are granted. Options granted under the 1999 Stock Option Plan are generally not transferable by the holder. During the nine months ended February 28, 2007, no shares of restricted stock were issued under the 1999 Stock Option Plan. No restricted stock was outstanding as of February 28, 2007 and 2006.

 

The following table summarizes activity under our equity incentive plans for the nine months ended February 28, 2007:

 

 

The weighted-average grant-date fair value of stock options granted was $3.97 and $3.54 per share during the three and nine months ended February 28, 2007, respectively, and $4.96 and $8.06 per share during the three and nine months ended February 28, 2006, respectively. The total intrinsic value of options exercised was $4.07 and $3.33 during the three and nine months ended February 28, 2007, respectively and $6.86 and $7.57 during the three and nine months ended February 28, 2006, respectively.

 

The Company received cash from the exercise of stock options of $1,474 and $2,263 during the three and nine months ended February 28, 2007, respectively, and $2,611 and $5,048 during the three and nine months ended February 28, 2006, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $704 and $861 during the three and nine months ended February 28, 2007, respectively, and $1,239 and $2,464 during the three and nine months ended February 28, 2006, respectively.

 

A summary of the status and changes of our nonvested shares related to our equity incentive plans as of and during the nine months ended February 28, 2007 is presented below:

 

 

As of February 28, 2007, there was approximately $9,511 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted; that cost is expected to be recognized over a period of 1.6 years. The total fair value of shares vested was $135 and $5,341 during the three and nine months ended February 28, 2007, respectively, and $319 and $5,285 during the three and nine months ended February 28, 2006, respectively.

 

 

On March 13, 2007, the Company sold its wholly-owned subsidiary, Centennial Dominicana, to Trilogy International Partners (“Trilogy”) for approximately $83,298 in cash, which consisted of a purchase price of $81,000 and an estimated working capital adjustment of $2,298, which resulted in a loss on disposition of assets of

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$32,261. The disposition has been 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.

 

Summarized financial information for the discontinued operations of Centennial Dominicana is as follows:

 

 

On December 28, 2004, the Company sold its wholly-owned subsidiary, Centennial Puerto Rico Cable TV Corp. (“Centennial Cable”), to an affiliate of Hicks, Muse, Tate & Furst Incorporated for $157,432 in cash, which consisted of a purchase price of $155,000 and a working capital adjustment of $2,432. The disposition has been accounted for by the Company as a discontinued operation in accordance with SFAS 144.

 

Summarized financial information for the discontinued operations of Centennial Cable is as follows:

 

 

 

In September 2006, the Emerging Issues Task Force (“EITF”) of the FASB issued EITF No. 06-1, Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

End-Customer to Receive Service from the Service Provider (“EITF 06-1”), which states how a service provider company that depends on specialized equipment should account for consideration paid to the manufacturers and resellers of such equipment. EITF 06-1 requires that the service provider recognize payments based on the form of benefit the end-customer receives from the manufacturer or reseller. If the form of benefit is “other than cash” or the service provider does not control the form of benefit provided to the customer, the consideration would be classified as an expense. If the form of benefit is cash, the consideration would be classified as an offset to revenue. EITF 06-1 requires retrospective application to all prior periods as of the beginning of the first annual reporting period beginning after June 15, 2007. EITF 06-1 will be effective for the Company for the first annual reporting period beginning after June 15, 2007. The Company is currently evaluating the impact that the adoption of EITF 06-1 will have on its consolidated results of operations, consolidated financial position and consolidated cash flows.

 

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements (“SAB No. 108”). SAB 108 established an approach that requires quantification of financial statement errors based on the effects of the error on each of the company’s financial statements and the related financial statement disclosures. SAB 108 will be effective for periods ending after November 15, 2006. The Company is currently evaluating the impact that the adoption of SAB No. 108 will have on its consolidated results of operations, consolidated financial position and consolidated cash flows.

 

In July 2006, the EITF issued EITF No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (“EITF 06-3”), which is effective for fiscal years beginning after December 15, 2006. This interpretation was issued to clarify the financial statement presentation requirements for taxes collected from customers and remitted to a government authority. Whether taxes are reported on a gross basis (included in revenue and costs) or on a net basis (excluded from revenues and costs), the accounting policy should be disclosed in the financial statement footnotes. The Company is currently evaluating the impact that the adoption of EITF 06-3 will have on its consolidated results of operations, consolidated financial position and consolidated cash flows.

 

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, when it is more likely than not, based on the technical merits of the position, that the position will be sustained upon examination. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact that the adoption of FIN 48 will have on its consolidated results of operations, consolidated financial position and consolidated cash flows.

 

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — a Replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. This statement was effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material effect on the Company’s consolidated results of operations, consolidated financial position or consolidated cash flows.

 

 

On March 13, 2007, the Company sold its wholly-owned subsidiary, Centennial Dominicana, to Trilogy International Partners (see Note 5).

 

On December 20, 2006, the Company disposed of its 14.29% limited partnership interest in the Pennsylvania RSA No. 6(I) Limited Partnership, representing approximately 30,100 Net Pops, for $7,100.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

On November 29, 2006, the Company acquired, in the FCC’s advanced wireless services spectrum auction, two 20 MHz licenses covering over 1.3 million Pops in Grand Rapids and Lansing, Michigan for an aggregate cost of approximately $9,100.

 

On October 25, 2006, the Company acquired 10 MHz of PCS spectrum covering approximately 730,000 Pops in the Fort Wayne, Indiana market for approximately $5,800.

 

On July 12, 2006, the Company completed the purchase of the 20% common stock interest in Centennial Dominicana that it did not own at May 31, 2006. The Company allocated the net purchase price of $3,500 to the goodwill balance included in assets held for sale. The goodwill, which is not deductible for tax purposes, was allocated based on a preliminary estimate of fair value.

 

 

Legal Proceedings:

 

The Company is party to several lawsuits in which plaintiffs have alleged, depending on the case, breach of contract, misrepresentation or unfair practice claims relating to its billing practices, including rounding up of partial minutes of use to full-minute increments, billing send to end, and billing for unanswered and dropped calls. The plaintiffs in these cases have not alleged any specific monetary damages and are seeking certification as a class action. A hearing on class certification in one of these cases was held on September 2, 2003 in a state court in Louisiana. Subsequent to such hearing, a new judge was assigned to the case and the plaintiff renewed its motion seeking class action status in December 2004. The decision of the court with respect to class certification is still pending. In 2006, a new judge was assigned to the case. Damages payable by the Company could be significant, although the Company does not believe that any damage payments would have a material adverse effect on its consolidated results of operations, consolidated financial position or consolidated cash flows.

 

In March 2007, a shareholder derivative action was filed in Delaware Chancery Court by DD Equity Trading Co., against each of the members of the Company’s board of directors, certain stockholders of the Company (affiliates of Welsh, Carson, Anderson & Stowe and The Blackstone Group) (collectively, the “Defendants”) and the Company, as a nominal defendant. The suit alleges, among other things, breach of fiduciary duty in connection with the consummation of a recapitalization transaction consummated in January 2006 pursuant to which the Company issued $550 million of senior notes due 2013 and used the proceeds to, among other things, pay a special cash dividend of $5.52 per share to its common stockholders. The suit also alleges that the non-director defendants were unjustly enriched by the payment of the dividend to the detriment of the Company because, among other things, of the increase in the Company’s debt caused by the recapitalization. The suit also alleges waste of corporate assets in connection with certain monitoring fees paid to the non-director defendants. The complaint seeks damages against the defendants for the benefit of the Company, as well as attorney’s fees and costs and other relief as may be just and proper. The Defendants believe the lawsuit is without merit and intend to defend the lawsuit vigorously.

 

In 2001, the Company’s Dominican Republic subsidiary, Centennial Dominicana, commenced litigation against International Telcom, Inc. (“ITI”) to collect an approximate $1,800 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 $20,000. The matter is subject to arbitration in Miami, Florida and a decision of the arbitration panel is expected in the next 12 months. In connection with the sale of Centennial Dominicana (see note 5), 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 Company’s 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.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 Company’s 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.

 

Other Commitments and Contingencies:

 

In June 2004, the Company signed an amendment to its billing services agreement with Convergys Information Management Group, Inc. (“Convergys”). The agreement has a term of seven years and Convergys agreed to provide billing services, facilitate network fault detection, correction and management performance and usage monitoring and security for the Company’s wireless operations. Subject to the terms of the agreement, which include a requirement to meet certain performance standards, the Company has committed to purchase a total of approximately $74,642 of services through 2011 under this agreement. As of February 28, 2007, the Company has paid approximately $30,048 in connection with this agreement.

 

During the fiscal years ended May 31, 2003 and 2002, an affiliate of Welsh Carson, the Company’s principal stockholder, purchased in open market transactions approximately $189,000 principal amount of the 2008 Senior Subordinated Notes. On September 24, 2002, the Company entered into an indemnification agreement with the Welsh Carson affiliate pursuant to which the Welsh Carson affiliate agreed to indemnify the Company in respect of taxes which may become payable by the Company as a result of these purchases. In connection with these transactions, the Company recorded a $15,925 income tax payable included in accrued expenses and other current liabilities, and a corresponding amount due from the Welsh Carson affiliate that was included in prepaid expenses and other current assets. As of February 28, 2007, the Company has reversed the entire $15,925 previously recorded in income tax payable and due from the Welsh Carson affiliate as a result of the expiration of the statute of limitations in respect of taxes which may become payable by the Company related to the bonds purchased.

 

 

The Company’s 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 Company’s wireless systems in the United States that it owns and manages. Puerto Rico wireless represents the Company’s wireless operations in Puerto Rico and the U.S. Virgin Islands. Puerto Rico broadband represents the

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company’s 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 (loss) income before loss from discontinued operations, income from equity investments, minority interest in income of subsidiaries, income tax (expense) benefit, gain on sale of equity investments, interest expense, net, gain (loss) on disposition of assets, strategic alternatives/recapitalization costs, stock-based compensation expense and depreciation and amortization.

 

The results of operations presented below exclude Centennial Dominicana and Centennial Cable due to their classification as discontinued operations (see Note 5). 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). Prior to the classification of Centennial Cable as a discontinued operation, the results of its operations were included in the Puerto Rico Broadband Segment.

 

Information about the Company’s operations in its three business segments as of, and for the three and nine months ended, February 28, 2007 and 2006 is as follows: