Annual Report

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-K

 

 

 

3349 Route 138

Wall, NJ 07719

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (732) 556-2200

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:   None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   o   No   þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes   o   No   þ

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   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

 

The aggregate market value of the common stock held by non-affiliates of the Company, based upon the last reported sale price on the Nasdaq Global Select Market on November 30, 2006 of $6.51 per share, was $155,817,071. As of August 1, 2007, there were 107,170,270 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the Company’s Proxy Statement to be filed with the U.S. Securities and Exchange Commission, or SEC, pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended, in connection with the Company’s 2007 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

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,” “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:

 

 

 

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 this report. 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.

 

The terms “Centennial,” the “Company,” “our” and “we” as used in this report refer to Centennial Communications Corp. and its subsidiaries on a consolidated basis. The term “CCOC” refers to Centennial Cellular Operating Co. LLC, a direct, wholly owned subsidiary of Centennial. The term “CPROC”, or “Centennial de Puerto Rico”, refers to Centennial Puerto Rico Operations Corp., one of our subsidiaries.

 

When we say “fiscal 2003”, we mean our fiscal year which began June 1, 2002, and ended May 31, 2003. When we say “fiscal 2004,” we mean our fiscal year which began June 1, 2003, and ended May 31, 2004. When we say “fiscal 2005,” we mean our fiscal year which began June 1, 2004, and ended May 31, 2005. When we say “fiscal 2006,” we mean our fiscal year which began June 1, 2005, and ended May 31, 2006. When we say “fiscal 2007,” we mean our fiscal year which began June 1, 2006, and ended May 31, 2007. When we say “fiscal 2008,” we mean our fiscal year which began June 1, 2007, and will end May 31, 2008.

 

The term “churn” refers to the aggregate number of wireless retail subscribers who cancel service during each month in a period divided 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.

 

The term “Pops” refers to the population of a market derived from the 2004 Claritas, Inc. database for our United States (“U.S.”) service areas and the United States Census Bureau for Puerto Rico and the United States Virgin Island service areas. The term “Net Pops” refers to a market’s Pops multiplied by the percentage interest that we own in an entity licensed to construct or operate a wireless telephone system in that market.

 

Industry and market data throughout this report were obtained through our proprietary research, surveys and studies conducted by third parties and from industry and general publications. We have not independently verified market and industry data from third-party sources. While we believe our internal surveys are reliable and market definitions are appropriate, neither these surveys nor these definitions have been verified by any independent sources. We have not sought the consent of any of these sources to refer to their data in this report.

 

 

Centennial Wireless ^tm , Centennial de Puerto Rico ^tm , Centennial Business Solutions ^tm , and Aptus ^tm are some of our primary trademarks. All other trademarks, service marks or other trade names referred to in this report are the property of their respective owners.

 

Overview

 

We are a leading regional wireless and broadband telecommunications service provider serving over 1.1 million wireless customers and approximately 419,500 access line equivalents in markets covering approximately 12.6 million Net Pops in the U.S. 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, which also includes operations in the U.S. Virgin Islands, we are a facilities-based, fully integrated communications service provider offering both wireless service and, in Puerto Rico, broadband services to business and residential customers. During fiscal 2007, we reported consolidated revenue of $911.9 million, an increase of 5.4% from fiscal 2006. Our vision is to be the premier regional telecommunications service provider by tailoring the ultimate customer experience in the markets we serve. We believe our tailored approach to serving local markets and our local scale and knowledge have led to a strong track record of success.

 

Significant Events During Fiscal 2007

 

 

We were organized in 1988. Our principal corporate office is located at 3349 Route 138, Wall, New Jersey 07719. Our phone number is (732) 556-2200 and our websites are www.centennialwireless.com and www.centennialpr.com.

 

We make available free of charge on or through our investor relations website at www.ir.centennialwireless.com our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

 

Our Operations

 

U.S. Wireless

 

In the United States, we provide digital wireless service in two geographic clusters, covering approximately 8.6 million Net Pops. Our Midwest cluster includes parts of Indiana, Michigan and Ohio, and our Southeast cluster

includes parts of Louisiana, Mississippi and Texas. At May 31, 2007, we had approximately 694,500 wireless subscribers, including approximately 51,400 wholesale subscribers. Our clusters are comprised of small cities and rural areas. Through clustering, we believe we are able to achieve critical mass and operating efficiencies while developing a respected brand and strong local market presence. Furthermore, these clusters are near major metropolitan markets, and we benefit from the traffic generated by subscribers of other wireless service providers who roam into our coverage areas. We market our services in the United States under the name Centennial Wireless.

 

We have long-term roaming agreements with many wireless carriers, the most significant of which are with AT&T Mobility (formerly Cingular Wireless) and T-Mobile USA. These roaming agreements enable us to offer regional and nationwide plans at attractive rates. Our U.S. wireless roaming revenue for fiscal 2007 was $65.5 million, or 7.2% of our consolidated revenue. We hold licenses for 25 MHz of spectrum in the 850 MHz frequency band in 30 U.S. wireless markets covering approximately 6.4 million Pops. We believe our 850 MHz cellular spectrum, which has favorable transmission characteristics for deploying wireless networks in non-urban areas, provides us with a strategic advantage over the personal communications service (“PCS”) operators in our markets that utilize 1900 MHz spectrum.

 

During fiscal 2005, we expanded our geographic footprint and acquired 10 MHz of spectrum in the 1900 MHz frequency band covering approximately 2.5 million Pops contiguous to our existing footprint in Michigan and Indiana. We launched wireless services in the Grand Rapids and Lansing, Michigan markets with GSM (Global System for Mobile Communications)/GPRS (General Packet Radio Service) technology in May 2005. These markets represent approximately 1.4 million Pops and significantly improved our footprint in our Midwest cluster. These new markets have enabled us to better market our products and services to more of our existing footprint while simultaneously lowering our roaming costs. During fiscal 2007, we acquired 20 MHz of additional spectrum in Grand Rapids and Lansing, Michigan in the Federal Communications Commission’s (“FCC”) Advanced Wireless Services auction and acquired an additional 10 MHz of PCS spectrum in Ft. Wayne, Indiana in a private transaction.

 

Our network currently employs analog technology, TDMA (Time Division Multiple Access) digital technology and GSM technology that supports EDGE (Enhanced Data Rates for Global Evolution) and GPRS advanced data technology. GSM/GPRS aligns our technology with our largest roaming partners. We launched GSM service in our Midwest cluster in November 2003 and in our Southeast cluster in November 2004. GSM service is currently available at 100% of our U.S. wireless cell sites and allows for greater functionality of phones and greater network efficiency as compared to TDMA. At May 31, 2007, approximately 92% of our U.S. wireless subscribers had GSM phones. We are currently evaluating our next generation technology (3G) deployment initiatives and expect to begin a trial of Universal Mobile Telecommunications System (“UMTS”) technology, during fiscal 2008.

 

Puerto Rico

 

We offer wireless and wireline services in Puerto Rico and wireless services in the U.S. Virgin Islands. The FCC licenses we own in Puerto Rico also cover 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 in terms of population.

 

Puerto Rico Wireless.   Our Puerto Rico wireless operations cover a population of approximately 4.0 million and serves Puerto Rico and the U.S. Virgin Islands using CDMA technology, which supports EV-DO (evolution, data-optimized) technology. We launched wireless services in Puerto Rico in December 1996 and in the U.S. Virgin Islands in June 2001.

 

We believe wireless telecommunications services are continuing to experience significant growth in Puerto Rico due to lower wireless penetration and lower wireline teledensity as compared to the United States. We also believe that lower wireline teledensity has resulted in significant substitution of wireline services with wireless services. This is evidenced by a 7% increase in our postpaid minutes of usage per month from 1,477 minutes for fiscal 2006 to 1,581 minutes for fiscal 2007. This compares to an average of approximately 711 postpaid minutes per month for wireless subscribers in the United States for the twelve months ended December 31, 2006, according to the Cellular Telecommunications and Internet Association, (“CTIA”). For this reason, in Puerto Rico,

we focus on intensive postpaid users of service generating higher ARPUs (total monthly revenue per wireless subscriber, including roaming revenue).

 

We provide wireless services in Puerto Rico and the U.S. Virgin Islands pursuant to a 30 MHz license in the 1900 MHz frequency band. Our wireless network is supported by our high-capacity terrestrial and undersea fiber-optic network, which links our markets to the United States and decreases our network costs. In July 2005, we replaced and upgraded our wireless network in Puerto Rico and the U.S. Virgin Islands with 100% 3G technology. We believe this new network has improved our network reliability and performance. We continue to roll out new wireless high-speed data services using EV-DO Revision A (Rev. A) technology. EV-DO services provide a broadband-like wireless data experience with peak speeds of up to 3.1 Mbps and provide faster downloading when accessing the Internet and retrieving e-mail, including large attachments and other bandwidth-intensive applications. During fiscal 2006, we began offering a fixed broadband wireless service in Puerto Rico under the name Instant Internet which enables customers to connect their home computers or laptops to the Internet using an easy to install plug-in device that utilizes our EV-DO network. We market our services in Puerto Rico under the name Centennial de Puerto Rico.

 

Puerto Rico Broadband.   In Puerto Rico, we have built a fully integrated communications company since our launch in 1997 and are the only significant fiber-based competitive broadband operator on the island. We have a 1,309-route mile fiber network connected to approximately 2,000 buildings. Puerto Rico has high business density and approximately one third of the Fortune 500 maintains a local presence.

 

We provide a broad range of services, including switched voice, private line services, voice over Internet protocol (VoIP), international long distance, data, toll-free and Internet-related services, to business and, to a lesser extent, residential customers over our own fiber-optic (terrestrial and undersea) and microwave network. In our retail business, we provide switched voice and high capacity data and IP solutions to large and medium enterprise customers. In our wholesale business, we provide connectivity between the cell sites and switching equipment for most of the wireless carriers in Puerto Rico, backhaul capacity for the long distance carriers, various voice and data services for the cable television operators and services to Internet Service Providers, (“ISPs”). We focus on large and medium businesses and deliver a full suite of connectivity solutions to enterprise and telecommunications carrier customers, including AT&T Mobility (formerly Cingular Wireless), America Online, Citigroup, Sprint Nextel, One-Link Communications, Cisco Systems, Hewlett-Packard, Lucent Technologies, Pfizer, Procter & Gamble, the University of Puerto Rico, Wal-Mart, Schering-Plough, Oracle, Coldwell Banker and Direct TV.

 

To complement our terrestrial fiber-optic networks, we own significant undersea fiber-optic capacity connecting Puerto Rico with our international gateway switch in Miami, Florida. This extensive fiber network allows us to offer customers with operations in our Puerto Rico service area low-cost, high-quality, end-to-end broadband solutions.

 

Competitive Strengths

 

Focused on Fastest Growing Segments of Telecom Industry.   The wireless industry is one of the fastest growing segments of the telecom sector. During fiscal 2007, approximately 88% of our revenue was derived from our wireless business. The remaining 12% of our revenue was generated by our growing and profitable fiber-optic-based enterprise and carrier services broadband business in Puerto Rico.

 

Operate in Attractive Markets with Geographic Focus.   We believe Puerto Rico is an extremely attractive market to operate telecommunications businesses. Puerto Rico is a large, politically stable market with lower penetration rates and lower teledensity rates than the United States for both wireless and broadband telecommunications services. The wireless penetration rate for 2006 for Puerto Rico was 55%, as compared to 76% for the United States according to CTIA and Pyramid Research for the United States, and Puerto Rico, respectively. Our U.S. wireless markets are comprised of small cities and rural areas where we believe our local market strategy and “Trusted Advisor” brand can serve as a meaningful competitive differentiator against the larger national carriers.

 

We estimate that Puerto Rico is an approximately $3 billion telecom market. We have established wireline and wireless operations in Puerto Rico and believe we are well positioned to expand the operations and capture additional market share. In addition, we believe that we are able to give our geographic markets more focused

attention than the national and multinational telecommunications operators with whom we compete. Generally, our markets are not large enough to be of critical importance to national and global competitors, which we believe permits us to provide superior customer service and tailored service offerings to these specific regions and customers.

 

High Quality Network.   We believe that the quality and coverage of our network contributes to high customer satisfaction. We have upgraded all of our networks over the past several years. In July 2005, we replaced and upgraded our wireless network in Puerto Rico and the U.S. Virgin Islands with 100% 3G technology and have rolled out EV-DO technology which covers approximately 85% of Puerto Rico’s population. This new wireless network, combined with our fiber-optic core network, has improved our network reliability and performance. Furthermore, in the United States, during fiscal 2005, we completed an overlay of GSM/GPRS/EDGE technology at 100% of our cell sites. The primary benefits of GSM/GPRS/EDGE technology are better network capabilities and a superior selection of handsets in terms of price, functionality and style. We recently installed a soft switch, which enables us to offer new and customized services and features to customers of our Puerto Rico broadband business.

 

Competitive Advantage Through Our Owned Fiber-Optic Network in Puerto Rico.   In Puerto Rico, we are the only significant fiber-based broadband operator on the island. Our extensive terrestrial fiber-optic network supports all of our services and, along with the purchased capacity we have on undersea fiber-optic cables, allows us to offer our customers a single-vendor solution for broadband connectivity to the United States. This fiber network offers major competitive advantages over the incumbent Puerto Rico Telephone Company (“PRTC”), which in many areas operates a legacy copper network, in terms of cost, reliability, bandwidth speeds and variety of services offered. Our broadband and wireless businesses share network and business infrastructure, including our fiber-optic and microwave networks, switching equipment and back-office functions, which we believe enables us to transmit traffic more cost effectively than some of our competitors who do not own broadband networks. We capitalize on this advantage by serving intensive users of telecommunications services. Our wireless and broadband assets also permit us to offer our customers packages of bundled service offerings, such as wireless voice, Internet and plain old telephone service.

 

Extensive Direct Distribution.   Approximately 87% of our wireless sales in the United States and Puerto Rico and substantially all of our broadband sales are made through our own employees. We believe this extensive company-owned distribution network, consisting of 115 stores and 88 kiosks and over 1,000 sales Associates as of May 31, 2007, enables us to provide a superior sales and customer service experience to our customers. We believe our competitors rely more heavily on higher cost, indirect distribution channels. We believe this enhanced customer experience creates a loyal customer base, strong brand name recognition in our markets and a high-quality installed base of customers.

 

Well Trained Associates.   In the U.S. and Puerto Rico, we have established full-time training facilities for our 2,900 Associates. We refer to these training centers as “Centennial University” and believe that the robust training we provide our sales and service Associates at Centennial University is superior to the training provided by our competitors. Each of our new sales and service Associates receives significant training prior to direct contact with customers. This initial training is supplemented periodically throughout the year as new products and rate plans are introduced. We believe our emphasis on direct distribution using our own well trained Associates contributes to our overall success.

 

Established Operating History with Strong Management Team.   We began offering wireless services in the United States in 1988 and launched services in Puerto Rico in 1996. During that time, we have significantly grown each of our businesses and have developed a proven sales and service philosophy that is tailored to each of our local markets. We have assembled our management team from several of the world’s leading telecommunications operators, including ALLTEL Corporation/360 degrees Communications Company, Bell Atlantic Corporation (now Verizon Communications), BellSouth and Telefonica.

 

Business Strategy

 

Continue to Build Our Brand.   Our vision is to be the premier regional telecommunications service provider by tailoring the ultimate customer experience in the markets we serve. We believe brand development is essential in the increasingly competitive telecommunications marketplace. Our brand emphasizes local partnership and trusted

advice. As a regional telecommunications provider, we believe we are able to more effectively tailor our brand to the two wireless markets we serve: “Trusted Advisor” and “Blue-Shirt Promise” in the United States and “Tus Palabras Llegan,” meaning “Your Words Go Through” in Puerto Rico.

 

Continue to Execute Local Market Strategy.   We believe we have created a sustainable competitive advantage by tailoring the customer experience to each of our local markets. This intense focus on the needs of our customers who live, work, and play in our service areas has enabled us to compete effectively against many of the largest telecommunications carriers. We tailor our service offerings to our local markets. For example, in Puerto Rico, we recently launched an unlimited rate plan to capitalize on the wireline replacement and substitution characteristics of the market and our strong collection of network assets. In addition, we introduced an Internet product under the name Mundo Boricua, which provides local content to our customers in Puerto Rico.

 

Leverage Wireless and Wireline Assets in Puerto Rico.   We have integrated the sales and customer support functions of our wireless and wireline businesses in Puerto Rico. We believe this change will help us better serve the needs of our customers, particularly our enterprise customers, and will allow us to better leverage the meaningful synergies of our fiber and wireless assets. We believe there is a meaningful selling opportunity to market our wireless services to our loyal base of corporate broadband customers. We believe that our unique combination of both wireless and wireline assets in Puerto Rico position us well to leverage these assets and customer relationships to capture a greater share of revenue from these customers and lower the churn of our business customers.

 

Develop and Promote Wireless Data Offerings.   Wireless data is among the fastest growing areas of the mobile telecommunications industry. We have upgraded our networks to take advantage of this growth area and offer a range of messaging services to our customers including text, picture and multimedia messaging. In addition, our customers can access the Internet directly from their handsets and can download a variety of games, ring tones and other applications. In Puerto Rico, we continue to deploy EV-DO technology which now reaches more than 85% of the population and provides a broadband-like wireless data experience with peak speeds of up to 3.1 Mbps with our recently deployed EVDO Rev A technology and will provide faster downloading when accessing the Internet and retrieving e-mail. We expect to leverage our local scale and strong connection with the local market to appropriately tailor our data offerings to our local markets.

 

Wireless Telephone Markets

 

The chart below sets forth information regarding our wireless operations as of May 31, 2007, based on data obtained from 2004 Claritas, Inc. estimates with respect to our U.S. service areas and the United States Census Bureau for Puerto Rico and the United States Virgin Island service areas. Those U.S. wireless telephone systems which are in Metropolitan Statistical Areas, or MSAs, are asterisked; the remainder are in Rural Service Areas, or RSAs. The 10 MHz licenses are all in Metro Trading Areas, or MTAs.

 

As of May 31, 2007, we had 1,101,000 wireless subscribers in the markets listed below.

 

 

 

 

Products and Services

 

Wireless.   The nature of the products and services we offer varies depending on the market. Our principal source of revenue is derived from providing network access to wireless telephone subscribers. We offer primarily postpaid and, to a lesser extent, prepaid wireless services. Other services available to wireless telephone subscribers are similar to those provided by conventional landline telephone systems, including custom calling features such as voice mail, caller ID, call forwarding, call waiting and conference calling. We also offer our customers various messaging services, including text, picture and multimedia messaging services. In addition, our customers can access the Internet directly from their handsets and we offer our customers the ability to download games, ring tones and other applications. In Puerto Rico, we have deployed EV-DO technology, which provides peak speeds of up to 3.1 Mbps for faster downloading when accessing the Internet and retrieving e-mail. During fiscal 2006, we began offering a fixed broadband wireless service in Puerto Rico under the name Instant Internet which enables customers to connect their home computers or laptops to the Internet using an easy to install plug-in device that utilizes our EV-DO network. We also offer hosted wireless e-mail services in the United States and Puerto Rico.

 

We offer our wireless customers a variety of handsets employing GSM/GPRS/EDGE technology in the United States and CDMA technology in Puerto Rico. We offer for sale a variety of handsets and accessories incorporating the latest in digital technology that is supportable on our network and a variety of rate plans (both national and regional) designed to meet the varied needs of our customers, including Lifeline/Link-Up plans to qualifying low-income customers. Most rate plans consist of a fixed monthly charge (with varying allotments of included minutes), plus variable charges for additional minutes of use. These handsets allow, among other things, our customers to roam onto other carriers’ networks. We offer handsets primarily from Motorola, Kyocera, Nokia, Sony Ericsson and UTStarcom. During Fiscal 2007, we launched an unlimited rate plan in Puerto Rico and introduced new nationwide (under the name Blue Nation) rate plans in our U.S. wireless markets.

 

Broadband.   In our Puerto Rico service area, we offer a broad range of communications services including basic local and long distance voice services, ATM (asynchronous transfer mode), frame relay, Wi-Fi, gigabit ethernet dedicated access, dedicated Internet ports, international long distance, switched access, high speed Internet access, dial-up Internet access and private line services. All services are provided over our own fiber-optic and microwave network. We also offer our customers multiple types of data center services, including server and storage collocation, web hosting and managed services. Most of these services are an extension of our core network and transport products. During fiscal 2007, we launched our Aptus ^tm service suite in Puerto Rico. The Aptus ^tm service is a converged offering, allowing business customers the ability to manage all their voice communications needs through a single, integrated VoIP platform.

 

Roaming

 

We have negotiated agreements with our roaming partners that allow both companies’ customers to make and receive calls outside of their home calling areas. During the last several years, we significantly lowered our prices to our roaming partners and also significantly reduced the cost per minute we pay our roaming partners when our subscribers are roaming on their networks. Our roaming revenue in fiscal 2007 was $70.1 million, or 7.7% of our

consolidated revenue, of which $65.5 million was generated from our U.S. wireless operations. While roaming has been an important part of our revenue, we have placed more emphasis on building our wireless retail business and believe that roaming revenues will continue to decline over the long term.

 

Sales and Marketing

 

In the United States we market our services and products under the name Centennial Wireless. In Puerto Rico, we market our wireless services and products under the name Centennial de Puerto Rico , and our broadband business under the name Centennial Business Solutions. Our vision is to be the premier regional telecommunications service provider by tailoring the ultimate customer experience in the markets we serve. Our sales and marketing strategy embodies this vision. We manage our businesses at the local level and tailor our strategies to meet and respond to local needs. We have enhanced our Trusted Advisor brand message in the United States to differentiate and communicate value based on our customer service advantage. We communicate this value through the services we provide customers in the United States, which we have branded our Blue Shirt Promises. In Puerto Rico we utilize a branding campaign named Centennial/Tus Palabras Llegan, meaning “Centennial, Your Words Go Through”. Each of these branding initiatives is designed to convey our strategy based on delivering superior customer service.

 

Our marketing objective is to increase our customer base, increase revenue and reduce subscriber cancellations. Our current marketing strategy is to establish a strong local presence in each of our markets. In general, we target customers who are likely to generate higher monthly revenue and lower churn rates. In marketing our services, we stress our superior sales and customer care, our quality wireless network, competitive prices, technologically advanced features and the local presence of our sales and customer service representatives and technical staff. In both the United States and Puerto Rico, we focus on marketing our services to postpaid customers. In the United States, we focus on customers who live and work in our licensed serving areas, which keeps a significant portion of the minutes of use on our own network. We also offer regional and nationwide calling plans for customers who are attracted to one flat wireless rate. The nationwide calling area offered in the United States includes our licensed area plus the roaming areas of AT&T Mobility (formerly Cingular Wireless), T-Mobile and various other national and regional carriers. Wireless data services have become a more important component of our service offerings.

 

As of May 31, 2007, we operated 129 retail outlets in the United States and 74 retail outlets in Puerto Rico, consisting of retail stores and kiosks. In Puerto Rico and the U.S. Virgin Islands, we have a store or kiosk presence in most major shopping centers. We use a variety of television, billboard, radio and newspaper advertising to stimulate interest in our services, increase our customer base, increase usage and reduce subscriber cancellations.

 

In both our U.S. and Puerto Rico wireless operations, we use our own internal sales force and, to a lesser extent, independent agents and dealers to sell our services. We believe we rely less on outside agents and dealers than larger, nationwide or global carriers. As of May 31, 2007, we had an internal wireless sales force of approximately 680 in the United States and 400 in Puerto Rico. These employees are generally paid a base salary plus commissions. We also maintain an ongoing training program named Centennial University to improve the effectiveness of our internal sales force. Our dealers are independent contractors paid on a commission basis.

 

Customer Service

 

We are committed to assuring consistently high-quality customer service. We have established local customer support facilities in our U.S. and Puerto Rico markets. We believe that by having local offices and customer support facilities, we are better able to service customers and monitor the technical quality of our telecommunications services. In the United States we have a centralized customer service center located in Fort Wayne, Indiana. In our Puerto Rico service area, we have centralized customer service centers located in Carolina, Puerto Rico, as well as customer service support located in our retail stores. We also outsource certain call center functions.

 

Network Construction, Operation and Development

 

Construction of wireless telephone systems is capital intensive, requiring a substantial investment for land and improvements, buildings, towers, switches, cell site equipment, microwave equipment, engineering and

installation. We use TDMA and GSM/GPRS/EDGE technology in our U.S. wireless markets and CDMA technology in our Puerto Rico wireless markets. AT&T Mobility (formerly Cingular Wireless) and T-Mobile USA currently use GSM technology. GSM is a digital wireless technology originally developed by the European telecommunications operators. It has since been adopted by wireless carriers around the world and is currently the most widely used wireless technology in the world. GPRS or EDGE technology allows higher speed packet data communications. TDMA technology is our legacy digital technology in the U.S. We continue to migrate our TDMA customers to our GSM/GPRS/EDGE network. In Puerto Rico, we use CDMA technology, which is also used by Verizon Wireless and Sprint Nextel. As of May 31, 2007, our U.S. wireless operations had 1,017 cell sites and our Puerto Rico wireless operations had 438 cell sites. We expect continued network investment to support customer growth, increased usage per customer and new services.

 

In accordance with our strategy of developing market clusters, we have selected wireless switching systems that are capable of serving multiple markets with a single switch. Where we have deemed it appropriate, we have implemented microwave links and fiber connections, which provide ongoing cost efficiency and generally improve system reliability.

 

Our U.S. wireless systems are served by five Nortel Networks TDMA supernode switches and three GSM switches, supplied by Ericsson, our vendor for GSM equipment.

 

Our Puerto Rico wireless network uses CDMA technology supplied by Nortel Networks. The latest generation of this technology is capable of carrying voice and data traffic at speeds significantly higher than the previous wireless technology and faster than dial-up landline Internet connections. In July 2005, we replaced and upgraded our wireless network in Puerto Rico and the U.S. Virgin Islands with 100% 3G technology. We believe this upgrade has improved our network reliability and performance.

 

As of May 31, 2007, our Puerto Rico broadband business had 1,309 route miles of fiber. We use Lucent switching equipment, and have installed a Nortel soft switch, which enables us to offer new and customized services and features to our customers.

 

Billing and Operational Support Systems

 

We operate management information systems to handle customer care, billing, network management, financial and administrative services. We have outsourced with Convergys Information Management Group, Inc. (“Convergys”), a network management and operations support systems provider, to provide billing services, facilitate network fault detection, correction and management, performance and usage monitoring and security for our wireless operations throughout our company.

 

In our Puerto Rico service area, wireless billing and customer support systems are managed and operated by Convergys. Our Puerto Rico broadband billing and customer support services are supported by Intec SingleView systems. Convergys recently notified us that it does not intend to continue to support our Virtuoso billing system after our contract expires in July 2011. We are currently evaluating our options, which include, among other things, transitioning to a new billing vendor or managing the billing and other support systems internally.

 

Competition

 

Wireless.   In the United States and Puerto Rico, the FCC grants commercial mobile radio service, or CMRS, licenses to multiple carriers in each of our service areas. The FCC licenses cellular systems in 734 geographically defined market areas, which comprise 306 MSAs and 428 RSAs. In each market, cellular frequencies are divided into two equal 25 MHz blocks. The FCC also grants two 30 MHz licenses to operate broadband PCS in each of 51 defined MTAs and one 30 MHz and three 10 MHz licenses in each of 493 Basic Trading Areas, or BTAs, which are component parts of MTAs. The FCC also allows CMRS carriers to subdivide and assign their spectrum allocations or their geographic market areas to other carriers. In addition, during fiscal 2007, the FCC auctioned off 90 MHz of spectrum in the Advanced Wireless Services (“AWS”) auction in the 1700-2200 MHz band and intends to auction off 60 MHz of spectrum in the 700 MHz band by January 2008.

 

Our wireless systems compete directly with both cellular and broadband PCS licensees in each market on the basis of, among others, quality, price, area served, network coverage, services offered, handset selection and

responsiveness of customer service. The telecommunications industry is experiencing rapid technological change. With the development of new technologies, products and services, competition for wireless subscribers has intensified.

 

In general, in each of our U.S. wireless markets we have four or five competitors. PCS operators have continued to build out their networks in our service areas and we expect this trend to continue. Our primary competitors in our U.S. wireless markets are ALLTEL, AT&T Mobility (formerly Cingular Wireless), Sprint Nextel, T-Mobile USA, U.S. Cellular, Verizon Wireless and the new mobile virtual network operators, or MVNOs, such as Virgin Mobile. Several leading cable television operators have announced an agreement with Sprint Nextel to compete as MVNOs.

 

The Puerto Rico wireless market is also highly competitive. In Puerto Rico, we compete with five other wireless carriers: America Movil (which recently purchased PRTC from Verizon Wireless), AT&T Mobility (formerly Cingular Wireless), Open Mobile (which recently purchased Movistar), Sprint Nextel, and SunCom Wireless.

 

We also compete to a lesser extent with paging, dispatch services and resellers. As wireless service is becoming a viable alternative to traditional landline phone service, we are increasingly competing directly with the traditional landline telephone companies and other landline telephone providers for customers.

 

Many new companies purchased licenses in the Advanced Wireless Services auction, including a consortium of cable television operators, and may begin offering wireless services. Furthermore, the FCC intends to auction off 60 MHz of spectrum in the 700 MHz band by January 2008. Given the favorable transmission characteristics of 700MHz frequencies for deployment of wireless networks in rural areas, it is possible that additional competitors will emerge in our markets. In addition, because the FCC has recently permitted the offering of broadband services over power lines, it is possible that utility companies will begin competing against us. In the future, we may also face increasing competition from entities providing similar services using different technologies, including Wi-Fi, Wi-Max, satellite services and VoIP.

 

Broadband.   Our Puerto Rico operations hold an authorization to provide broadband services in Puerto Rico, and an authorization to provide facilities-based international long distance service in the United States. Our main competitor for our broadband services in Puerto Rico is the PRTC, the incumbent telephone company now owned by America Movil. There are no other facilities-based broadband operators with significant operations at this time, but we cannot be sure that other broadband operators will not emerge in Puerto Rico in the future. For example, Sprint Nextel recently acquired significant spectrum in the 2.5 GHz band capable of deploying Wi-Max technology. Due to the continuing technological advances in telecommunications, it is impossible to predict the extent of future competition.

 

Regulation

 

The following is a summary of the regulatory environment in which we operate and does not describe all present and proposed federal, state and local legislation and regulations affecting the communications industry. Certain regulatory requirements applicable to us are subject to judicial, legislative and administrative review that could alter the rules applicable to us. We cannot predict the outcome of any of these matters or their potential impact on our business.

 

Our operations in the United States, Puerto Rico, and the U.S. Virgin Islands are governed by, among other regulations, the Communications Act of 1934, or the Communications Act, which was substantially amended by the Telecommunications Act of 1996, or the 1996 Act. The Communications Act has provisions dealing specifically with our wireless services as well as provisions applicable to both our wireless and landline services.

 

Matters Specific to Wireless Carriers.   The cellular and PCS systems we operate, known as CMRS systems, are licensed and regulated by the FCC under the Communications Act. The FCC regulates the licensing, construction, operation, acquisition and sale of CMRS systems. CMRS providers operate within a specified geographic market area. For cellular systems, those market areas are typically MSAs or RSAs as defined by the FCC. PCS systems are normally licensed within market areas known as MTAs or BTAs. It is also possible to obtain,

and we currently hold, some PCS licenses that are for market areas smaller than an entire MTA or BTA. These are known as partitioned areas.

 

The AWS licenses that were auctioned in August 2006 cover 90 MHz of spectrum in the 1710-1755 and 2110-2155 MHz frequency bands and are divided into six different frequency blocks that cover geographic markets of varying sizes. The FCC requires AWS licensees to demonstrate that they provide substantial service by the end of their 10 or 15 year license terms, and any licensee that fails to meet this requirement will forfeit its license and will be ineligible to regain it. We acquired 20 MHz licenses in Grand Rapids and Lansing, Michigan, in the AWS auction. The AWS frequency bands contain a variety of incumbent government and non-government operations that may require relocation before the AWS licensee can commence operations that would interfere with the incumbent’s operations.

 

The FCC generally issues CMRS licenses for a term of ten years, after which they must be renewed. CMRS licenses may be revoked and license renewal applications denied by the FCC for cause. Under present rules, there may be competition for a CMRS license upon the expiration of its initial license term. While there can be no assurance that any license will be renewed, the FCC’s rules provide for a significant renewal preference to cellular and PCS licensees that have used their spectrum for its intended purpose, have built a network and have complied with FCC regulations and federal communication statutes. If a CMRS licensee is awarded a renewal expectancy, its renewal will be granted without further consideration of any competing applications. While our licenses have been renewed regularly by the FCC in the past, and we believe that we have used our spectrum for its intended purpose and within applicable requirements and have built an extensive network, there can be no assurance that all of our licenses will be renewed in the future.

 

The FCC also regulates other aspects of the operation and ownership of CMRS systems. Operational regulations include the cellular rules requiring coordination of proposed frequency usage with adjacent cellular licensees to avoid electrical interference between adjacent systems. In addition, the height and power of base station transmitting facilities and the type of signals they emit must fall within specified parameters. The FCC also imposes radio frequency radiation limitation requirements on CMRS licensees. There can be no assurance that any FCC requirements currently applicable to our CMRS system will not be changed in the future.

 

Ownership regulations include the requirement to obtain prior FCC approval before completing most types of acquisitions and assignments of FCC licenses. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the application for approval of the proposed transfer or assignment.

 

In addition to regulation by the FCC, wireless systems are also subject to Federal Aviation Administration, or FAA, regulations regarding the siting and construction of wireless transmitter towers and antennas, as well as local zoning requirements. The FCC also requires that all licensees register and obtain FCC registration numbers for all of their antennas or towers that require prior FAA clearance. All new towers must be registered at the time of construction. Failure to properly register a tower could lead to enforcement action, such as the imposition of a penalty. We believe that we are in compliance with the tower registration requirements. Wireless systems are also subject to the requirements of the National Environmental Policy Act, or NEPA. The FCC is responsible for enforcing its licensees’ compliance with the NEPA requirements. We believe we are in compliance with state and federal environmental regulations.

 

Matters Relevant to Both Wireless and Landline Telephone Operations.   Amendments to the Communications Act made by the 1996 Act were aimed at opening local telecommunications markets to competition. The provisions of the Communications Act added by the 1996 Act govern, among other things, the removal of barriers to market entry and impose on incumbent local exchange carriers, or ILECs, duties to negotiate reasonable and nondiscriminatory interconnection agreements and access to unbundled elements of the ILEC’s network at any technically feasible point. The law encourages competition through these provisions and others governing resale, number portability, dialing parity, access to rights-of-way and numbering administration.

 

The FCC has issued numerous rules and regulations to implement the 1996 Act and all significant FCC rulings have been appealed to the courts, with several important reversals and FCC orders being reconsidered on remand. We have benefited from reduced costs in acquiring required communication services, such as ILEC

interconnection, and we have benefited from the right to receive compensation for the termination of traffic as discussed below. In orders adopted in 2003 and 2004, the FCC eliminated or eased a number of requirements for unbundled offerings of ILECs’ network elements. However, provisions relating to interconnection, telephone number portability, equal access and resale could subject us to increased competition and additional economic and regulatory burdens.

 

Reciprocal compensation refers to payments that one carrier makes when it sends traffic to another carrier for completion. Reciprocal compensation applies to calls between landline networks and between a landline and a CMRS network. FCC rules provide that a local exchange carrier, or LEC, must supply CMRS providers interconnection within a reasonable time after it is requested, unless such interconnection is not technically feasible or economically reasonable, and that CMRS providers are entitled to compensation from LECs for terminating wireline-to-wireless traffic that originates and terminates within the same MTA. The FCC’s rules also allow LECs to request interconnection agreements with CMRS providers that operate within the same MTA. The FCC has a rulemaking proceeding in progress to consider whether, and possibly how, to replace the current system of reciprocal compensation for termination of local telecommunications traffic, and access charges for inter-MTA traffic, with a uniform intercarrier compensation plan. That proceeding could result in changes to compensation arrangements we have with LECs and interexchange carriers for the exchange of telecommunications traffic. Additionally, although the courts have affirmed key provisions of FCC orders implementing the Communications Act’s interconnection requirements, court challenges to certain of the FCC rules are pending.

 

Among other recent actions, the FCC determined that high-speed Internet access services delivered by cable television, wireless, powerline, or ILEC facilities constitute “information services,” not subject to common carrier regulations. Also, the FCC decided that certain VoIP offerings are interstate services that are not subject to state certification and other regulations. During the last year, however, the FCC also ruled that both high-speed Internet access services and many VoIP offerings are subject to the Communications Assistance for Law Enforcement Act (CALEA) regulations. In addition, the FCC has ruled that many VoIP offerings are required to offer basic and enhanced 911 (“E911”) emergency calling services and are subject to USF and customer proprietary network information (“CPNI”) rules.

 

There have been indications that Congress may substantially revise the 1996 Act in the next few years, which may include substantial changes to the amount of money we pay into, and receive from, the USF. We cannot predict what effect any new legislation will have on our business. See “Risk Factors — Risks Relating to our Business and our Industry.” Regulatory changes may impose restrictions that adversely affect us or cause us to incur significant unplanned costs in modifying our business plans or operations.

 

State and Local Regulation.   Under federal laws, no state may regulate the entry of CMRS providers or the rates charged for CMRS service. However, states can regulate some other terms and conditions of service. The location and construction of CMRS facilities, including transmission towers, antennas and equipment shelters, may be subject to state or local zoning, land use and other local regulations. Before a system can be put into commercial operation, the holder of a CMRS license must obtain all necessary zoning and building permit approvals for the transmitter sites and switching locations. Local jurisdictions control access to the rights-of-way and state governments (often public utility commissions) have the right to set rules relating to customer service. For example, some states and several local communities have enacted laws restricting the use of wireless phones while driving a motor vehicle. Several other state and local legislative bodies have proposed legislation to adopt similar laws. These laws could reduce subscriber usage and lead to potential litigation against wireless carriers. See “Risk Factors — Risks Relating to our Business and our Industry — Wireless devices may pose health and safety risks, and driving while using a wireless phone may be prohibited; as a result, we may be subject to new regulations, and demand for our services may decrease.”

 

911 Service Requirements.   The FCC has adopted requirements for CMRS providers to implement E911, which is being rolled out in phases. E911 capabilities enable CMRS systems to determine the location of persons making emergency calls. The FCC’s rules require CMRS carriers to work with local public safety officials to process the 911 calls, including those made from analog mobile telephones that are not registered with the carrier’s cellular system. Since April 1998, CMRS carriers have been required to be able to identify the cell from which the

call has been made as well as the identification of the calling party number. The rules also require CMRS systems to continue to improve their ability to locate wireless 911 callers within a specific area.

 

On June 1, 2007, the FCC proposed a rule change that would tighten the E911 location standards for wireless carriers. Under the proposed change, location accuracy would be determined at the Public Safety Answering Point’s service area level rather than at the level of the wireless carrier’s licensed service area. If adopted, this rule change could require additional capital investment in our infrastructure.

 

FCC rules generally required that, by October 1, 2001, nationwide CMRS carriers be able to provide location information with a greater degree of accuracy in accordance with standards set by the FCC. For regional CMRS providers such as ourselves, the FCC extended the compliance deadline to March 1, 2003, or to a mutually acceptable date agreed to by the wireless provider and local governmental authorities responsible for 911 services. In some cases, the local governmental authorities in our service areas have not yet asked us to meet these requirements; in other cases, we have negotiated mutually acceptable compliance dates.

 

In Puerto Rico, following a change in vendors for our network, we elected to switch from a network-based system of locating emergency calls to one that is handset based. The FCC’s regulations require carriers using a handset-based solution to have provided 95% of their customer base with compliant phones by December 31, 2005. Although we did not meet this 95% requirement by such date, we are currently above the 95% requirement and in compliance. In May 2005, the FCC determined that VoIP providers, like us in Puerto Rico, must also implement 911 notification and location capabilities.

 

Electronic Surveillance Standards.   In 1994, Congress passed the CALEA, which requires all telecommunications carriers, including us and other CMRS licensees, to implement equipment changes necessary to assist law enforcement authorities in achieving enhanced ability to conduct electronic surveillance of those suspected of criminal activity. Over the ensuing decade, the FCC established varying deadlines for implementing different aspects of this complicated legislation. We are in compliance with the “assistance capability” and “punchlist” requirements of CALEA. In August 2005, the FCC determined that broadband Internet access service and VoIP services fall within the purview of CALEA. The FCC established a deadline of May 14, 2007 for broadband Internet access and VoIP service providers to come into compliance with CALEA for these services, but has yet to specify what specific compliance measures are required. Parties have sought reconsideration of some aspects of this ruling, however appeals of the FCC’s order to court were recently rejected. The resolution of these issues may cause us to incur additional expense in upgrading our networks to meet new CALEA requirements.

 

Universal Service.   Our U.S. wireless, Puerto Rico wireless and wireline and U.S. Virgin Islands wireless operations are required to contribute to the federal Universal Service Fund, or USF, and to any equivalent state fund. In general, these funds are created to subsidize telecommunications services in rural and high-cost areas of the United States. During fiscal 2007, we received approximately $28.4 million in payments from the federal USF in connection with our operations in Michigan, Louisiana, Puerto Rico, Indiana and Mississippi, based on FCC rules that make such funding available to competitive carriers, including wireless carriers, operating in areas where the established landline carrier also receives such funding.

 

We also have an application to be declared an eligible telecommunications carrier, or ETC, in the U.S. Virgin Islands pending before the FCC and the USVI Public Service Commission. We cannot predict when or whether this application will be acted upon. In February 2005, the FCC adopted rules and guidelines governing the designation and on-going requirements, as well as annual certification and reporting requirements for ETCs. These new rules impose additional requirements on both existing ETCs and carriers seeking to become an ETC. We believe that we will be able to meet these additional requirements to continue to receive USF support. While the FCC has not yet issued any rulings interpreting or applying these additional requirements, several states in which we are designated as an ETC have adopted the FCC’s more stringent requirements and, to date, we have met those new state requirements.

 

On May 1, 2007, the Federal-State Joint Board released its recommendation for an interim cap on the high cost fund pending long-term reform of the USF. The recommendation to cap the fund on an interim basis would primarily affect the support received by wireless carriers, including us. Although it is impossible to predict when, how or if the cap will be imposed, as proposed it would result in a reduction of the support we currently receive from

the USF. In May 2007, the FCC sought expedited comment on the Joint Board’s recommendation. The Joint Board also made several proposals for the long-term reform of the USF, including the use of reverse auctions to determine the recipient of USF support and the level of support to be given to a particular service area. The FCC is conducting a review of its USF rules. It is impossible to predict the outcome of this FCC review, which may result in our receiving materially less universal service support than we do today.

 

Number Pooling.   The telecommunications industry has been faced with an apparent shortage of available telephone numbers, arising from many different factors within the industry. As a consequence, the FCC and state regulators have promoted the efficient use of available numbers. The FCC has imposed what is referred to as “thousand block pooling.” Since November 24, 2002, carriers may only request and will only be assigned numbers in blocks of one thousand numbers rather than the previous blocks of ten thousand numbers. To request additional blocks, carriers must meet utilization thresholds set by the FCC with respect to the numbers they have already been assigned. This more restrictive pooling requirement has forced carriers to more closely track their number utilization, imposing greater administrative burdens and increased pressure to implement number portability, which may require possible equipment upgrades.

 

Wireless Number Portability.   Wireless number portability allows a CMRS carrier’s customer who moves to another carrier to take along, or “port,” his or her phone number. The original CMRS carrier must be able to transmit calls to the ported number. Wireless carriers who provide services in any of 100 markets specifically designated by the FCC have been required to provide for wireless number portability in these markets since November 24, 2003, and in all other markets since May 2004. The implementation of wireless number portability has increased competition and required equipment and network upgrades. These upgrades have required expenditures of additional capital.

 

Hearing Aid Compatibility.   In July 2003, the FCC modified its rules that exempt wireless phones from the requirements of the Hearing Aid Compatibility Act and created new rules that impose obligations on wireless carriers and handset manufacturers to make available handsets that meet certain requirements that allow hearing aid users to have access to digital wireless services. The rules require that within two years handset manufacturers and wireless carriers make available two wireless phone models that have the required air interface standard for radio frequency interference. Within three years, two wireless phone models must be available that meet the T-Coil compatibility standard, and by 2008, all phones must meet the radio frequency interference standard. All of these requirements impose obligations that will require wireless providers like us to invest in handsets that meet the required criteria and as such may increase the cost of the wireless phones we offer our customers. We believe we are currently in compliance with these rules.

 

On June 21, 2005, the FCC reaffirmed its timetable for the development and sale of digital wireless telephones that are compatible with hearing aids. The Commission also said that, by February 18, 2008, 50 percent of all handsets offered by digital wireless carriers, service providers and handset manufacturers must meet the hearing aid compatibility requirement for each air interface offered.

 

Truth in Billing and Consumer Protection.   On March 18, 2005, in response to a petition from the National Association of State Utility Consumer Advocates (NASUCA), the FCC released a declaratory ruling (“the Second Report and Order”) regarding CMRS billing. In its declaratory ruling, the commission removed the existing exemption for CMRS carriers from the requirement that billing descriptions be brief, clear, non-misleading and in plain language; reiterated that non-misleading line items are permissible under the commission’s rules; reiterated that it is misleading to represent discretionary line item charges in any manner that suggests such line items are taxes or charges required by the government; and clarified that the burden rests upon the carrier to demonstrate that any line item that purports to recover a specific governmental or regulatory program fee conforms to the amount authorized by the government to be collected. The Second Report and Order also preempted the states from requiring or prohibiting the use of line items in CMRS billing.

 

NASUCA and the National Association of State Regulatory Commissioners appealed the Second Report and Order to the 11th Circuit Court of Appeals. In its opinion, the court rejected the FCC’s reasoning and unanimously vacated the Second Report and Order. On rehearing, the court clarified that it had vacated only that portion of the FCC’s order that preempted state regulation of line items, leaving intact the rest of the FCC’s order, including the decision to apply Truth in Billing to wireless carriers. Unless Congress enacts legislation to preempt the states from

prohibiting or requiring line items in CMRS billing, the wireless industry may face increased costs in complying with new state billing requirements.

 

Early Termination Fees.   The FCC has initiated proceedings to consider a request for a declaratory ruling on whether states can regulate a wireless carrier’s imposition of early termination fees upon customers that prematurely terminate their long-term service agreements that include such fees. An adverse ruling in this proceeding could lead to increased regulation of such fees, or restrictions on the use of such fees, by the states, which could negatively affect our ability to assess such fees in the areas where we operate.

 

Roaming.   The FCC currently requires all CMRS carriers to provide manual roaming capability to the services of another carrier while such customer is located within any portion of the carrier’s licensed service area if such customer is using mobile equipment that is technically compatible with the carrier’s service offering. By contrast, most carriers have relationships with other carriers with compatible technology to allow their customers to have automatic roaming, i.e., to originate or terminate a call when they are outside their home territory without taking any special actions. We have agreements with carriers that provide for automatic roaming services for roaming customers in our markets and that allow our customers to roam on the networks of these same carriers when roaming outside of our service area. Such automatic roaming agreements allow us to provide attractive nationwide service offerings to our customers. The FCC has initiated a rulemaking to consider whether to require all CMRS carriers to provide automatic roaming to every other carrier and whether to eliminate the manual roaming requirement.

 

Customer Proprietary Network Information.   FCC rules restrict a telecommunications carrier’s use of CPNI for marketing and other purposes without prior customer approval. In 2007, the FCC adopted additional requirements for the handling, safeguarding and use of CPNI that will increase our regulatory obligations and the costs of providing service to our customers.

 

WARN Act.   On October 13, 2006, President Bush signed into law the Warning, Alert, and Response Network Act, or the WARN Act. The WARN Act seeks to modernize the national emergency alert system, or EAS, by using wireless communications devices to disseminate alerts in response to natural or man-made disasters and terrorist attacks. The WARN Act gives CMRS carriers the option to participate voluntarily in the emergency system or to elect not to participate (with appropriate notice to consumers); the election process must occur no later than September 7, 2008. We will monitor the development of standards, protocols and procedures for the delivery of emergency alerts to users of CMRS and may choose to participate in EAS, which may entail capital expenditures and increased regulatory obligations and operating costs. The FCC separately has a rulemaking proceeding pending that was initiated prior to the WARN Act’s enactment to consider rules for the expansion of EAS to CMRS providers.

 

Analog Sunset.   Under current FCC rules, a carrier will not be required to offer analog wireless services after February 2008. This analog “sunset” rule is currently being reviewed to determine whether such date should be extended.

 

Outage Reporting.   In August 2004, the FCC adopted regulations that require all telecommunications carriers, including us, to report outages to the FCC. This requirement affects the manner in which we track and gather data regarding system outages and repair outages.

 

Matters Specific to Our Puerto Rico Operations.   Comprehensive telecommunications reform legislation was enacted in 1996 by the Commonwealth of Puerto Rico. This legislation, titled the Puerto Rico Telecommunications Act of 1996, or the Puerto Rico Act, was intended to open the Puerto Rico telecommunications market to competition. Among other things, it established the Telecommunications Regulatory Board of Puerto Rico, or TRB, which was given primary regulatory jurisdiction in Puerto Rico over all telecommunications services, all service providers, and all persons with a direct or indirect interest in said services or providers.

 

Following litigation with PRTC in fiscal 2002, PRTC was ordered by the TRB to use our local calling areas to determine whether a landline call between PRTC and us is rated as local or toll for purposes of intercarrier compensation. In November 2004, our wireline operations consolidated their 14 calling zones into one zone, thereby eliminating all long distance charges for our customers for calls within Puerto Rico.

In May 2005, we concluded the arbitration of a new interconnection agreement with PRTC. The final agreement was approved by the TRB, and became effective as of June 7, 2005. The new agreement reflects our position that our local calling areas should determine whether a landline call between the incumbent carrier and us is rated as local or toll for purposes of intercarrier compensation. Because we have a single, island-wide local calling area, all landline calls within Puerto Rico will be treated as local, which has the effect of lowering our costs by reducing the amount of access charges we would otherwise owe to PRTC. PRTC has subsequently appealed the TRB’s decision and the matter is still pending. In addition, the agreement affirms our right to use our extensive physical interconnections with PRTC’s network to provide direct connections to business customers seeking to shift some or all of their business to us, as well as the right to use our interconnection network to provide transport services to third party carriers, including wireless carriers. The agreement also confirms our right to resell our landline services to third parties, such as VoIP providers, and to include the listings of such entities’ end users in PRTC’s telephone directories.

 

U.S. Virgin Islands

 

Our FCC license for Puerto Rico also covers the U.S. Virgin Islands. As stated above, the U.S. Virgin Islands are part of the United States, so our operations there are subject to the Communications Act and the 1996 Act, and, for purposes of regulating our operations, the government of the U.S. Virgin Islands is the equivalent of a state. In 2005, the Public Services Commission of the U.S. Virgin Islands (“USVI PSC”) declined jurisdiction over our petition to become an ETC there. Pursuant to FCC rules, we then filed our ETC petition with the FCC, where it is now pending. As a result of a delay at the FCC, we returned to the USVI PSC and asked it to accept our petition for ETC status. The USVI PSC agreed to consider our ETC petition, which remains pending before the USVI PSC as well as at the FCC. If granted by the USVI PSC, we will withdraw our petition at the FCC.

 

Employees

 

We had approximately 2,900 employees as of May 31, 2007. Our employees are not represented by a labor organization. We consider our relationship with our employees to be good.

 

Investors in our securities should carefully consider the risks described below and other information included in this report. Our business, financial condition or consolidated results of operations could be materially adversely affected by any of these risks, and the trading price of our securities could decline due to any of these risks. Investors in our securities could lose all or part of their investment as a result of any such decline. This report also contains forward-looking statements that involve risks and uncertainties; please see “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.” Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below.

 

Risks Relating to Our Business and Our Industry

 

We operate in a very competitive business environment, which may result in the loss of existing customers and our inability to attract new customers.

 

Our principal business, wireless telephone service, is highly competitive. In the United States, we usually compete against four or five other wireless carriers in the markets we serve. Additional operators have continued to build out their networks in our service areas and we expect this trend to continue. In Puerto Rico, we compete against five other wireless carriers. Additional competitors may enter any of our markets in the future, including competitors using unlicensed spectrum. Many of our existing competitors are larger than we are, hold licenses for more spectrum than we do, have greater financial, technical, marketing and other resources than we do, are less leveraged than we are and have more extensive coverage areas than we do. In addition, because of their size and purchasing power, many of our competitors may be able to purchase equipment, handsets, supplies and services at lower prices than we can. Consolidation in the wireless industry has created and may continue to create even stronger competitors. Competition for customers is based principally upon services and features offered, system

coverage, technical quality of the wireless system, price, customer service and network capacity. Some competitors may market services and equipment we do not offer, including “push-to-talk” services, proprietary data content and equipment such as the new iPhone, which may make their services more attractive to customers. We expect competition to intensify as a result of the development of new technologies, products and services and as the rate of subscriber growth for the industry continues to slow.

 

In addition, the mergers of Cingular and AT&T Mobility and Sprint and Nextel, as well as the entry of mobile virtual network operators, such as Virgin Mobile, have intensified the competitive environment in our markets. In addition, new communications technologies such as Wi-Fi, Wi-Max, satellite services and VoIP are being developed and deployed which will increase competition. The FCC continues to auction new spectrum which will only serve to increase competition in the future. For example, the FCC auctioned off 90 MHz of new wireless spectrum in August 2006 and intends to auction off 60 MHz of additional spectrum in the 700 MHz band by January 2008, which may lead to additional competition from new entrants, including non-traditional telecommunications carriers such as cable television companies. With so many companies targeting many of the same customers, we may not be able to successfully retain our existing customers and attract new customers and as a result grow our customer base and revenue.

 

Market prices for wireless services may decline in the future.

 

Market prices for wireless services have declined over the last several years and may continue to decline in the future due to increased competition. We may be unable to maintain or improve our ARPU. We expect significant competition among wireless providers to continue to drive service and equipment prices lower, which has been intensified by wireless number portability, and may lead to increased churn. Competition continues to intensify as wireless carriers include more equipment discounts and bundled services in their offerings, including offering more minutes and free long distance and roaming services. A continued decline in market prices could adversely affect our revenues, which would have a material adverse effect on our financial condition and consolidated results of operations and our ability to service our indebtedness.

 

Our failure to successfully develop and incorporate wireless data services into our service offerings may have a material adverse effect on our financial and operational results.

 

Wireless data services are increasingly becoming a meaningful component of many wireless carriers’ strategies and financial results. Many of the national wireless carriers have invested (and will continue to invest) significant resources to develop and deliver these new data services to their customers. As market prices for wireless voice services continue to decline, revenue from new data services helps offset some of the ARPU decline caused by lower prices for voice service. Similarly, as customers increasingly demand wireless data services as part of the core feature set for their phones, the failure to offer such services could reduce sales and increase churn. Currently, in some of our markets, our wireless data offerings are not as robust as those offered by some of our competitors and may never be. If we are unable to successfully incorporate wireless data services, including certain 3G and 4G technologies, into our service offerings, our customer additions and ARPU could decrease and our churn could increase. In addition, there can be no assurance that there will be widespread demand for advanced wireless data services, that revenues from data services will be significant, that we can provide such services on a profitable basis or that vendors will develop and make available to companies our size popular applications and handsets with features, functionality and pricing desired by customers. Furthermore, we rely on third parties to provide us access to such data, music and video services and access to new handsets to deliver these advanced services. If we are unable to obtain access to such services or handsets at a reasonable cost and on a timely basis our business could be adversely affected.

 

Roaming revenue represented 7.7% of fiscal 2007 consolidated revenue and is likely to decline in the future. Significant declines in roaming revenue could have a material adverse effect on our consolidated results of operations.

 

We earn a portion of our revenue from agreements with other wireless communications providers whose customers enter our service areas and use their wireless phones, commonly referred to as roaming. Roaming rates per minute have declined over the last several years and we expect that such declines will continue for the

foreseeable future. For fiscal 2007, we recorded $70.1 million of roaming revenue, including $65.5 million for our U.S. wireless segment and $4.6 million for our Puerto Rico wireless segment. Roaming revenue accounted for approximately 7.7% of our consolidated revenue for fiscal 2007. AT&T Mobility (formerly Cingular Wireless) is our single largest roaming partner and accounted for approximately $48.7 million of our roaming revenue in fiscal 2007. Additionally, our roaming agreements do not prevent our roaming partners from competing directly against us in our markets. As our roaming partners continue to build out their networks in our service areas, we would expect them to limit the ability of their subscribers to roam on our network. The loss of this roaming traffic could have a material adverse effect on our consolidated results of operations. In addition, our roaming partners may terminate their roaming agreements with us under certain circumstances. Accordingly, our roaming agreements may be terminated or renegotiated on less favorable terms. Furthermore, our roaming revenue is highly dependent on the pricing decisions made by our roaming partners. If our markets are not included in our roaming partners’ home calling areas and are instead subject to the imposition of additional roaming charges, we could see a loss of roaming minutes and revenue. We continue to expect roaming revenues to decline over the long term and significant declines in roaming revenue could have a material adverse effect on our consolidated results of operations. We expect U.S. wireless roaming revenue to decline approximately $15-20 million during fiscal 2008.

 

Our failure to maintain roaming arrangements could have a material adverse effect on our ability to provide service to our customers who travel outside our coverage area.

 

Our roaming arrangements enable our customers to use the wireless networks of other wireless carriers when they travel outside of our licensed service area. This enables us to offer our customers regional and national rate plans that include areas for which we do not own wireless licenses. If we are not able to maintain roaming agreements with other wireless carriers on favorable terms or at all, we may no longer be able to offer these regional and national rate plans and the coverage area and pricing we offer to our customers may not be as attractive relative to the offers from our competitors. This could have a material adverse effect on our future operations and financial condition. While certain of our roaming agreements require other carriers’ customers to use our network when roaming, our roaming agreements do not prevent our roaming partners from competing directly against us in our markets. When our roaming agreements expire or are terminated, our roaming partners could choose not to renegotiate such agreements and could enter into roaming agreements with other carriers serving our markets or choose not to include our markets in their service offerings altogether, which could have a material adverse effect on our consolidated results of operations.

 

Our failure to attract and retain subscribers could have a material adverse effect on our financial performance.

 

As penetration levels for wireless services continue to increase, it will become increasingly more difficult to continue to grow our subscriber base. As a result, we must increasingly seek to attract customers from competitors and from first time wireless customers who, oftentimes, have a lower credit rating, than existing wireless customers. On average, these lower credit rating customers have a higher rate of involuntary churn and bad debt expense than our historical postpaid subscriber base. Our failure to attract and retain subscribers could have a material adverse effect on our business. In addition, if we are unable to effectively manage this new segment of lower credit quality customers, our churn and bad debt expense could increase which could have a material adverse effect on our consolidated financial condition and consolidated results of operations.

 

If we are unable to effectively manage churn, our business may be adversely affected.

 

The wireless industry is extremely competitive. Among other things, the wireless industry is characterized by a high rate of churn. Churn can be the result of several competitive factors, including price, service offerings, network coverage, reliability issues and customer care concerns. Efforts to reduce churn often increase costs as we offer incentives to customers to remain users of our wireless services. A high rate of churn could adversely affect our consolidated results of operations because we would lose revenue and because the cost of adding a new subscriber, which generally includes a handset subsidy and/or a commission expense, is a significant factor in our profitability. As a result, churn may reduce our revenue and increase our costs.

Our USF may be reduced or eliminated.

 

During fiscal 2007, we received approximately $28.4 million in payments from the federal USF in connection with our operations in Indiana, Louisiana, Michigan, Mississippi and Puerto Rico, based on FCC rules that make such funding available to competitive carriers, including wireless carriers, operating in areas where the established landline carrier also receives such funding. However, these FCC rules are currently under review and may be changed in a way that materially reduces or eliminates our right to obtain such funding. In May 2007, the Federal State Joint Board recommended that USF support to wireless carriers be capped. This matter is currently pending before the FCC and a decision is expected shortly. If the cap is approved, our USF support will be reduced. Accordingly, we may receive substantially lower USF revenues in the future, which could adversely affect our consolidated results of operations.

 

In addition, we, like all eligible telecommunications carriers (“ETCs”), receive our USF support payments based on projections filed by the incumbent telephone company (the “ILEC”). We receive such support for providing wireless telecommunications service in “high cost” areas as defined by the FCC. In the ordinary course of business, the Universal Service Administrative Company (“USAC”), the company that administers the payment of USF funds, performs semi-annual reconciliations of the ILEC’s projections against the ILEC’s actual results and makes adjustments (both upwards and downwards) to the support previously paid to USF recipients based on such reconciliations. Based on historical experience and all available information, we previously estimated that there would be no adjustments required. During fiscal 2007, USAC notified all the ETCs in Puerto Rico, including us, of negative adjustments to the USF support received by the ETCs relating to calendar years 2004 and 2005 based on the actual results filed by the ILEC in Puerto Rico. Although we disagree with and have disputed certain of these adjustments, we have nevertheless recorded the entire known amounts relating to calendar years 2004 and 2005. In addition, although the reconciliation process for calendar years 2006 and 2007 has not yet been completed by USAC, based on the information that became available in 2007, we have revised our estimate of USF support to reflect future adjustments for calendar year 2006 and through May 31, 2007. Any additional negative adjustments to our USF support could have an adverse impact on our consolidated results of operations.

 

Regulatory changes may impose restrictions that adversely affect us or cause us to incur significant unplanned costs in modifying our business plans or operations.

 

The U.S. telecommunications industry is subject to federal, state and other regulations that are continually evolving. As new telecommunications laws and regulations are issued, we may be required to modify our business plans or operations. We may not be able to do so in a cost-effective manner. In addition, the failure by us to comply with applicable governmental regulations could result in the loss of our licenses or the assessment of penalties or fines or otherwise have a material adverse effect on our business and results of our operations. Also, there have been indications that Congress may substantially revise parts of the 1996 Act in the next few years, including with respect to the amounts we pay into, and receive from, the USF. We cannot predict what effect any new legislation will have on our businesses.

 

The FCC, which has jurisdiction over our operations in the United States, Puerto Rico and the U.S. Virgin Islands, and state regulatory agencies continue to issue rules implementing the requirements of the 1996 Act. These rules include the obligation of incumbent telephone companies to allow other carriers to connect to their network by reasonable means at rates based on cost. The interpretation and implementation of these and other provisions of the 1996 Act and the FCC rules implementing the 1996 Act continue to be subject to regulatory proceedings and litigation and may have a material adverse effect on our business.

 

Centennial de Puerto Rico is also subject to the jurisdiction of the TRB. The TRB could determine that the rates for our wireline services are not cost based. The TRB could also revoke our Local Exchange Certification if we fail to comply with applicable regulations. This determination could have a material adverse effect on our business.

 

Furthermore, the rapid growth and penetration of wireless services has prompted the interest of the FCC, state legislatures and state Public Utility Commissions to attempt to more closely regulate certain practices by the wireless industry, including in areas such as customer billing, terminations of service arrangements, sales practices, handling of customer call records, privacy, advertising and filing of “informational” tariffs. In addition, many states and local governments have imposed and are considering imposing additional regulations and taxes on wireless

services. These regulations and taxes have imposed and will continue to impose increased costs on us and may adversely affect our business. Further, federal or state governments and the government of the Commonwealth of Puerto Rico could adopt regulations or take other actions that might have a material adverse effect on our business. We are subject to location and zoning regulations that could materially affect our ability to build new cell sites and expand our coverage. The FCC has also required wireless carriers to transmit 911 calls and provide the location of the 911 callers with an increasingly narrow geographic tolerance, and has proposed a rule change to further narrow the geographic area. Also, in August 2005, the FCC initiated a proceeding to review the rules governing roaming services. We cannot predict the effect on us of any changes in the roaming rules. These and other changes could materially and adversely affect our business prospects, operating results and ability to service our indebtedness.

 

The loss of our licenses would adversely affect our ability to provide wireless and broadband services.

 

In the United States, cellular, PCS, and microwave licenses are valid for ten years from the effective date of the license. Licensees may renew their licenses for additional ten-year periods by filing renewal applications with the FCC. Our wireless licenses expire in various years from 2008 to 2021. The renewal applications are subject to FCC review and are put out for public comment to ensure that the licensees meet their licensing requirements and comply with other applicable FCC mandates. Failure to file for renewal of these licenses or failure to meet any licensing requirements could lead to a denial of the renewal application and thus adversely affect our ability to continue to provide service in that license area. Furthermore, our compliance with regulatory requirements such as enhanced 911 and wireless number portability may depend on the availability of necessary equipment or software. Failure to comply with these regulatory requirements may have an adverse effect on our licenses or operations and could result in sanctions, fines or other penalties.

 

We may not be able to obtain additional spectrum in the future at a reasonable cost.

 

To keep pace with increased customer demands, roll out next generation technologies and improve the quality of our existing networks, we may need to obtain additional spectrum in our service areas. Spectrum may be acquired through a variety of means, including acquisition, swaps or leasing arrangements or from the FCC in an auction. There can be no assurance that we will be able to acquire the additional spectrum we may need or whether we will have the capital needed to acquire such spectrum. Failure to obtain the necessary spectrum could have a material adverse effect on our business.

 

Rapid and significant technological changes in the telecommunications industry may adversely affect us.

 

We face rapid and significant changes in technology. In particular, the wireless telecommunications industry is experiencing significant technological changes, including:

 

 

For us to keep up with these technological changes and remain competitive, we will be required to continue to make significant capital expenditures. Customer acceptance of the services that we offer will continually be affected by technology-based differences in our product and service offerings. For example, “push-to-talk” technology has become increasingly popular as it allows subscribers to save time on dialing or making a connection to a network. The most popular push-to-talk feature is offered by Sprint Nextel. However, Verizon Wireless, AT&T Mobility (formerly Cingular Wireless), ALLTEL and others offer push-to-talk services as well. Each of these companies competes with us in many of our wireless markets. We do not currently offer a push-to-talk service.

In addition, customers are increasingly choosing their wireless carriers based on handset selection and pricing of handsets. As a smaller, regional carrier, we may not have access to the most technologically advanced handsets (such as the iPhone) as quickly as the national wireless carriers, thereby putting us at a competitive disadvantage. Similarly, we believe that, on average, we pay more for our handsets than do the national carriers with whom we compete. This may allow our competitors to offer handsets to potential customers at more attractive prices than we can and make it more difficult for us to attract and retain our customers. In our United States wireless markets, we use GSM technology and in our Puerto Rico market we use CDMA technology. GSM is currently the most widely adopted technology in the world with significantly more subscribers than CDMA technology. If the market for CDMA-based technology continues to decline, it may lead to higher prices on, or reduced availability of infrastructure equipment and handsets supporting CDMA-based systems. In such event, we could be forced to migrate our CDMA networks to GSM or other technologies, which would require significant capital investments and could have a material adverse impact on our business.

 

We cannot predict the effect of technological changes on our business. Technological changes may result in increases in our capital expenditures. New technologies may be protected by patents or other intellectual property laws and therefore may not be available to us. Like others in the industry, we are uncertain about the extent of customer demand despite improvements in technology as well as the extent to which airtime and monthly access rates may continue to decline. Also, alternative technologies may be developed that provide wireless communications service or alternative service superior to that available from us. Rapid changes in technology in our market may adversely affect our business.

 

We rely on a limited number of key suppliers and vendors for timely supply of equipment, handsets and services. If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain sufficient quantities of the products and services we require to operate our businesses successfully.

 

We depend on a limited number of suppliers and vendors for equipment, handsets and services. If these suppliers and vendors experience interruptions or other problems delivering these network components and handsets on a timely basis, our subscriber growth and operating results could suffer significantly. Our initial choice of a network infrastructure supplier can, where proprietary technology of the supplier is an integral component of the network, cause us to be effectively locked into one or a few suppliers for key network components. As a result, we have become reliant upon a limited number of network equipment manufacturers, including Nortel Networks, Ericsson, Inc. and Lucent Technologies, Inc. If it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement suppliers or vendors on economically attractive terms, on a timely basis or at all. In addition, if key suppliers or contractors fail to comply with their contracts, fail to meet performance expectations or refuse or are unable to supply us in the future, our business could be severely disrupted.

 

If we lose our senior management, our business may be adversely affected.

 

The success of our business is largely dependent on our senior management, as well as on our ability to attract and retain other highly qualified technical and management personnel. We believe that there is, and will continue to be, intense competition for qualified personnel in the telecommunications industry, and we may be unable to attract and retain the personnel necessary for the development of our business. The loss of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and consolidated results of operations. We do not currently maintain “key person” life insurance on any of our key employees.

 

We may be subject to claims of infringement regarding telecommunications technologies that are protected by patents and other intellectual property rights.

 

In general, we do not manufacture any of the equipment or software used in our telecommunications businesses and do not own any patents. Accordingly, we purchase the infrastructure equipment, handsets and software used in our business from third parties and obtain licenses to use the associated intellectual property. Telecommunications technologies are protected by a wide variety of patents and other intellectual property rights. As a result, third parties may assert infringement claims from time to time against us (or our suppliers) based on the way we use these technologies in our business. To protect us against possible infringement claims, we may have

indemnification agreements with the manufacturers and suppliers that provide us with the equipment and technology we use in our business. However, we do not always have such agreements in place and, even if we have such agreements in place, we may not be fully protected against all losses associated with infringement claims. Whether or not an infringement claim was valid or successful, it could adversely affect our business by diverting management attention, involving us in costly and time-consuming litigation, requiring us to enter into royalty or licensing agreements (which may not be available on acceptable terms, or at all), or requiring us to redesign our business operations or systems to avoid claims of infringement.

 

Business, political, regulatory and economic factors and severe weather may significantly affect our operations and hurt our overall performance.

 

Our business is dependent on the business and economic conditions as well as consumer spending in the areas in which we operate, particularly in Puerto Rico. If existing economic conditions in Puerto Rico were to deteriorate, the market for wireless or other communications services in Puerto Rico may be disproportionately and adversely affected due to the generally lower per capita income in Puerto Rico as compared to the United States. This deterioration would also have an adverse effect on our business in Puerto Rico and, because our Puerto Rico operations contribute significantly to our consolidated financial performance, on our overall financial condition and consolidated results of operations. Specifically, during fiscal 2006, the government of Puerto Rico had a fiscal budget crisis that forced the shutdown of the government for several days. This fiscal crisis had an adverse effect on the Puerto Rican economy and has likely adversely affected our business in Puerto Rico. In addition, in November 2006, the government in Puerto Rico implemented a new sales tax. This new tax is applicable to telecommunications services and could have an adverse effect on our business.

 

Our business may be materially adversely affected by events such as hurricanes, earthquakes, labor strikes, terrorism and other factors that may generally affect the regions in which we operate. For instance, hurricanes and labor strikes significantly slow down the provisioning of services by third parties and needed repair of our network, which could adversely affect our ability to deliver telecommunications services.

 

Any change in Puerto Rico’s political status with the United States, or the ongoing debate about such status, could affect the economy of Puerto Rico. The ultimate effect of possible changes in Puerto Rico’s governmental and political status is uncertain and, accordingly, we cannot assure you that such changes will not materially adversely affect our business and consolidated results of operations. In addition, the economy of Puerto Rico is highly dependent on tourism. If the tourism industry declines, in particular as a result of the threat of terrorism, it could have a material adverse effect on our business.

 

Our wireless licenses may decrease in value, reducing the asset base that supports our debt.

 

A substantial portion of our assets consists of intangible assets, principally our interests in wireless licenses held by our subsidiaries. If the market value of our wireless licenses decreases significantly, we may realize a material loss upon the sale of any of our licenses, our ability to sell assets to repay debt would be significantly affected and we would recognize an expense, approximately equal to the amount of the decline in value, in our operating income. The market for the purchase and sale of wireless licenses may not exist in the future or the values of our licenses in that market may fall. The future value of our interests in our wireless licenses will depend significantly upon the success of our business. Moreover, the transfer of interests in these licenses is prohibited without FCC approval. We may not be able to obtain FCC approval to transfer interests in our licenses if such a transfer became necessary.

 

Wireless devices may pose health and safety risks, and driving while using a wireless phone may be prohibited; as a result, we may be subject to new regulations, and demand for our services may decrease.

 

The perceived safety risk associated with the use of a wireless device while driving may adversely affect our consolidated results of operations. Studies have indicated that using wireless devices while driving may impair a driver’s attention. The U.S. Congress has proposed legislation that would seek to withhold a portion of federal funds from any state that does not enact legislation prohibiting individuals from using wireless telephones while driving motor vehicles. In addition, many state and local legislative bodies have passed and proposed legislation to restrict

the use of wireless telephones while driving motor vehicles. Concerns over safety risks and the effect of future legislation, if adopted and enforced in the areas we serve, could limit our ability to market and sell our wireless services. In addition, these concerns and this legislation may discourage use of our wireless devices and decrease our revenue from customers who now use their wireless telephones while driving. Further, litigation relating to accidents, deaths or serious bodily injuries allegedly incurred as a result of wireless telephone use while driving could result in damage awards against telecommunications providers, adverse publicity and further governmental regulation. Any or all of these results, if they occur, could have a material adverse effect on our consolidated results of operations and financial condition.

 

Media reports have suggested that, and studies have been undertaken to determine whether, certain radio frequency emissions from wireless handsets and cell sites may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. In addition, lawsuits have been filed against other participants in the wireless industry alleging various adverse health consequences as a result of wireless phone usage. If consumers’ health concerns over radio frequency emissions increase, they may be discouraged from using wireless handsets and regulators may impose restrictions on the location and operation of cell sites. These concerns could have an adverse effect on the wireless communications industry and expose wireless providers to litigation, which, even if not successful, can be costly to defend.

 

Government authorities might increase regulation of wireless handsets and cell sites as a result of these health concerns and wireless companies might be held liable for costs or damages associated with these concerns. The actual or perceived risk of radio frequency emissions could also adversely affect us through a reduced subscriber growth rate, a reduction in our subscribers, reduced network usage per subscriber or reduced financing available to the wireless communications industry.

 

Our network capacity and customer service and billing system may not be adequate and may not expand quickly enough to support our anticipated customer growth.

 

Our financial and operational success depends on assuring that we have adequate network capacity and a sufficient customer support and billing system to accommodate anticipated new customers and the related increase in usage of our network. With the introduction of new rate plans during fiscal 2007, including the unlimited rate plan in Puerto Rico, our wireless minutes of use continue to grow and, as a result, our networks will need to expand to meet this growth. In particular, our postpaid subscribers in Puerto Rico used an average of 1,663 minutes during the three months ended May 31, 2007, as compared to 1,493 minutes during the three months ended May 31, 2006. We expect that the new rate plans we introduced in fiscal 2007 will cause minutes of use to increase. Our postpaid subscribers in the United States used an average of 986 minutes during the three months ended May 31, 2007, as compared to 814 minutes for the same period in 2006. Our failure to expand and upgrade our networks to meet the increased usage could have a material adverse effect on our business.

 

The network capacity plan relies on:

 

 

In addition, we must implement, manage and monitor effective procedures for customer activation, customer service, billing and other support services. Reliance on our customer service functions will increase as we add new customers. Our failure to timely and efficiently meet the demands for these services could decrease or slow subscriber growth or delay or otherwise impede billing and collection of amounts owed, which would adversely affect our revenue. In addition, our primary vendor for outsourced billing and related services has recently notified us that it does not intend to continue to support our billing system after our contract expires in July 2011. We are currently evaluating our options which include, among other things, transitioning to a new billing vendor or managing the billing and other support systems internally. If we cannot successfully transition these services our

business may be adversely impacted. Furthermore, a failure to expand our customer service systems and network capacity quickly enough to keep up with customer growth, would impair our ability to compete, which would adversely affect our results and financial operations.

 

Network disruptions and system failures may adversely affect our operations.

 

We rely heavily on our networks and the networks of other telecommunications providers to support all of our services. We are able to deliver services only to the extent that we can protect our network systems against damage from power or telecommunications failures, computer viruses, natural disasters, terrorism, unauthorized access and other disruptions. Should we experience a prolonged or severe system failure, our customers may choose a different provider, our reputation may be damaged and our consolidated results of operations may be adversely affected.

 

If we lose the right to install our network equipment on wireless cell sites, our business could be adversely affected.

 

In general, we do not own the cell sites on which we place our radio antennas and equipment, but rather lease space on such towers from third parties. A significant portion of our cell site leases are with a small number of tower companies pursuant to master agreements. If we were to lose access to these cell sites, we could be forced to find new sites which could require significant capital expenditures and could have an adverse effect on our network.

 

Risks Related to Our Capital Structure

 

Our substantial debt obligations could impair our liquidity and financial condition.

 

We are a highly leveraged company. At May 31, 2007, we had approximately $2.0 billion of consolidated long-term debt. Our ability to make payments on our debt and to fund operations and significant planned capital expenditures will depend on our ability to generate cash in the future. Net cash provided by operations for fiscal 2007 was $141.1 million and capital expenditures were approximately $115.2 million.

 

Our substantial debt service obligations could have important consequences to you, including the following:

 

 

The term loan portion of the Senior Secured Credit Facility, which on May 31, 2007 had $550.0 million outstanding, matures in 2011, with two equal installments of $275.0 million owing in August 2010 and February 2011. Our 10 1 / 8 % senior unsecured notes due 2013 (the “2013 Senior Notes”) require repayment of $500.0 million of principal in 2013, our senior notes due 2013 (the “2013 Holdco Notes”) require repayment of $550.0 million of principal in 2013, and our 8 1 / 8 % senior unsecured notes due 2014 (the “2014 Senior Notes”) require repayment of $325.0 million of principal in 2014. We do not expect our business to generate cash flow from operations in an amount sufficient to enable us to repay all of this indebtedness when it comes due. As a result, we believe we will need to refinance all or a portion of our remaining existing indebtedness prior to its maturity. However, we may not be able to refinance any or all of our indebtedness on favorable terms or at all. Additionally, the terms of the Senior Secured Credit Facility currently provide that, if we are unable to refinance the outstanding aggregate principal

amount of our 2008 Senior Subordinated Notes six months prior to their maturity on December 15, 2008, the aggregate amount outstanding under the Senior Secured Credit Facility will become immediately due and payable.

 

Despite current indebtedness levels, Centennial and its subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial indebtedness.

 

Despite our substantial indebtedness, we may still be able to incur significantly more debt, which would further reduce the cash we have available to invest in our operations, as a result of our increased debt service obligations. The terms of the agreements governing our long-term indebtedness, limit, but do not prohibit, the incurrence of additional indebtedness by us and our subsidiaries. In addition to the approximately $150.0 million available under the revolving credit facility portion of the Senior Secured Credit Facility, in certain circumstances, the terms of the Senior Secured Credit Facility provide that available borrowings may be increased by up to $250.0 million through one or more additional term loan or revolving credit facilities. The more leveraged we become, the more we, and in turn the holders of our securities, become exposed to the risks described above. If we do not generate sufficient cash flow to meet our debt service obligations and to fund our working capital requirements, we may need to seek additional financing or sell certain of our assets.

 

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

 

Gross interest expense for fiscal 2007 was approximately $206.3 million. Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

Accordingly, it is possible that our business will not generate sufficient cash flow from operations, or that future borrowings will not be available to us under the Senior Secured Credit Facility to enable us to pay our indebtedness or to fund other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness, including the Senior Secured Credit Facility and our outstanding notes, on commercially reasonable terms or at all.

 

Without such refinancing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. Furthermore, in many cases, the fair market value of our assets is substantially higher than our tax basis in such assets and therefore any sale of assets may result in significant taxes being owed and less cash available to service our indebtedness and for general corporate purposes. The Senior Secured Credit Facility and the indentures governing our other outstanding indebtedness limit our and our subsidiaries’ ability to sell assets and also restrict the use of proceeds from any such sale. Furthermore, the Senior Secured Credit Facility is secured by substantially all of our assets. Therefore, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our debt service obligations.

 

Our debt instruments include restrictive and financial covenants that limit our operating flexibility.

 

The Senior Secured Credit Facility requires us to maintain certain financial ratios, and the Senior Secured Credit Facility and the indentures governing our other outstanding indebtedness contain covenants that, among other things, restrict our and our subsidiaries’ ability to take specific actions, even if we believe such actions are in our best interest. These include restrictions on our ability to:

 

 

 

Any failure to comply with the restrictions of the Senior Secured Credit Facility or the indentures governing our other outstanding indebtedness, or certain current and any subsequent financing agreements may result in an event of default under the Senior Secured Credit Facility or the indentures governing our other outstanding indebtedness. Such default may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, these creditors may be able to terminate any commitments they had made to provide us with further funds.

 

We have a substantial amount of secured indebtedness and our secured creditors would have a prior secured claim to any collateral securing the debt owed to them.

 

In connection with the incurrence of indebtedness under the Senior Secured Credit Facility, the lenders received a pledge of all of the equity of CCOC, our wholly owned subsidiary through which we hold the assets of all of our subsidiaries, including CPROC, and that of its existing and future direct and indirect subsidiaries. Additionally, the lenders under our Senior Secured Credit Facility will generally have a lien on all of the assets of CCOC and these subsidiaries, including CPROC. As a result of these pledges and liens, if we fail to meet our payment or other obligations under the Senior Secured Credit Facility, the lenders would be entitled to foreclose on and liquidate substantially all of our assets, to the extent required to pay our obligations under the Senior Secured Credit Facility. Under those circumstances, we may not have sufficient funds to service our other indebtedness.

 

Future sales of our common stock may depress the market price of our common stock.

 

As of August 1, 2007, affiliates of Welsh Carson collectively owned approximately 39.9 million shares of our common stock. If Welsh Carson sells or distributes substantial amounts of our common stock, or if it is perceived that such sales or distributions could occur, the market price of our common stock could fall. This also might make it more difficult for us to sell equity securities in the future at times and prices that we deem appropriate.

 

The price of our common stock may be volatile and will depend on a variety of factors, some of which are beyond our control.

 

The market price of our common stock has historically experienced and may continue to experience significant volatility. During the twelve months ended May 31, 2007, the market price of our common stock ranged from $4.47 to $10.20 per share. In January 2006, we paid a special cash dividend of $5.52 per share, and the market price for our common stock was adjusted accordingly. The market price of our common stock may continue to fluctuate significantly due to a number of factors, some of which are beyond our control. These factors include, but are not limited to, our historical and anticipated operating results, technological or regulatory changes in our industry, announcements or actions by our competitors, low trading volume in our common stock and general market and economic conditions. These factors could cause our common stock to trade at prices below the prices which holders of our common stock paid for their shares, which could prevent investors in our common stock from selling their common stock at or above the prices at which they purchased their shares. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities. These fluctuations often have been unrelated or disproportionate to the operating performance of publicly traded companies. In the past, following periods of volatility in the market price of a particular company’s securities, securities class-action litigation has often been brought against that company. If similar litigation were instituted against us, it could result in substantial costs and divert management’s attention and resources from our operations.

 

Affiliates of Welsh Carson have significant voting power and influence on our Board of Directors and may have interests adverse to the interests of the other holders of our common stock.

 

Welsh Carson and certain of its affiliates collectively hold approximately 37% of our outstanding shares of common stock. Accordingly, these equity investors have significant influence on our company and have the power to elect three of our directors. These equity investors may make decisions that are adverse to the interests of other holders of our securities.

Provisions of our amended and restated certificate of incorporation and Delaware law may make it more difficult for investors in our common stock to receive a change in control premium on our common stock.

 

Our board of directors’ ability to designate and issue up to 10,000,000 shares of preferred stock and issue approximately 135,000,000 additional shares of common stock could materially and adversely affect the voting power of the holders of common stock, and could have the effect of making it more difficult for a person to acquire, or could discourage a person from seeking to acquire, control of our company. If this occurred, investors in our common stock could lose the opportunity to receive a premium on the sale of their shares in a change of control transaction.

 

In addition, the Delaware General Corporation Law contains provisions that would have the effect of restricting, delaying or preventing altogether certain business combinations with an interested stockholder. Interested stockholders include, among others, any person who, together with affiliates and Associates, becomes the owner, or within three years became the owner, of 15% or more of a corporation’s voting stock. These provisions could also limit an investor’s ability to receive a premium in a change of control transaction.

 

None.

 

Our corporate headquarters is located at 3349 Route 138, Wall, New Jersey 07719, where we lease approximately 34,000 square feet of office space. In addition, our U.S. wireless headquarters is based in Ft. Wayne, Indiana, where we lease approximately 51,000 square feet of office space. Our Puerto Rico operations are headquartered in the greater San Juan, Puerto Rico area, where we lease an office building with approximately 95,000 square feet of office space. In addition, we lease and own locations for customer call centers, switching offices, retail stores, local administrative offices, microwave sites and cell sites. We consider our owned and leased properties to be suitable and adequate for our business operations.

 

In March 2007, a shareholder derivative action was filed in Delaware Chancery Court by DD Equity Trading Co. against each of the members of our board of directors, certain stockholders (affiliates of Welsh Carson and The Blackstone Group) (the ’Defendants”) and us, as a nominal defendant. The suit alleges, among other things, breach of fiduciary duty in connection with a recapitalization transaction consummated in January 2006 pursuant to which we 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 our common stockholders. The suit also alleges that the stockholder defendants were unjustly enriched by the payment of the dividend to our detriment because, among other things, of the increase in our debt caused by the recapitalization. The suit also alleges waste of corporate assets in connection with certain monitoring fees paid to the stockholder defendants. The complaint seeks damages against the defendants for our benefit, as well as attorneys 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, and have filed a motion to dismiss the lawsuit. A decision on the motion to dismiss is expected by the end of 2007.

 

We are party to several lawsuits in which plaintiffs have alleged, depending on the case, breach of contract, misrepresentation or unfair practice claims relating to our 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 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. In 2006, another new judge was assigned to the case. The decision of the court with respect to class certification is still pending. Damages payable by us could be significant, although we do not believe that any damage payments would have a material adverse effect on our consolidated results of operations, consolidated financial position or consolidated cash flows.

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 $20.0 million. The matter is subject to arbitration in Miami, Florida and a decision of the arbitration panel is expected in the next twelve months. 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.

 

There were no matters submitted to a vote of our stockholders during the last quarter of fiscal 2007.

 

Executive officers of Centennial are elected annually by the board of directors and serve until their successors are duly elected and qualified. Centennial has nine directors. Each director is elected annually and serves until his or her successor is duly elected and qualified. Our directors are elected under a stockholders agreement that is described in detail under “Certain Relationships and Related Transactions” in our Proxy Statement relating to the 2007 Annual Meeting of Stockholders, or Proxy Statement, to be filed with the SEC pursuant to Rule 14a-6 under the Exchange Act.

 

There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected, and there are no family relationships between any executive officers or any directors of Centennial. The names, ages and positions of the executive officers and directors of Centennial are listed below along with their business experience during at least the past five years.

 

 

Michael J. Small has served as Chief Executive Officer and a director of Centennial since January 1999. Prior to joining Centennial, Mr. Small served as Executive Vice President and Chief Financial Officer of 360 degrees Communications Company (now a subsidiary of ALLTEL Corporation) from 1995 to 1998. Prior to 1995, he served as President of Lynch Corporation, a diversified acquisition-oriented company with operations in telecommunications, manufacturing and transportation services.

 

Thomas J. Fitzpatrick has served as Executive Vice President, Chief Financial Officer of Centennial since August 2002. Prior to joining Centennial, from 2001 to 2002, Mr. Fitzpatrick was Senior Vice President and Chief

Financial Officer of ICG Commerce, a privately held Internet procurement services provider. From 2000 until 2001, he was Chief Financial Officer of Digital Access Inc., a broadband services provider. Prior to 2000, Mr. Fitzpatrick was Chief Financial Officer of publicly-traded companies in the information technology industry and Vice President with Bell Atlantic Corporation (now Verizon).

 

Phillip H. Mayberry has served as President, U.S. Wireless Operations of Centennial since January 1999 and was Senior Vice President — Operations since December 1994. He served as Vice President, Operations of Centennial from April 1990 to December 1994. From March 1989 to April 1990, Mr. Mayberry was a Vice President and General Manager of Metro Mobile CTS, Inc., a cellular telephone company.

 

Carlos T. Blanco has served as President, Puerto Rico Operations since September 2005. Prior to joining Centennial, from 2003 to 2005 Mr. Blanco was Chief Operating Officer for Telefonica Moviles de Venezuela, an operation with over 5 million customers. Prior to his tenure at Telefonica, from 1997 to 2003, Mr. Blanco was Chief Executive Officer, Bellsouth Ecuador.

 

Francis P. Hunt has served as Senior Vice President, Controller of Centennial since February 2005. Prior to that, he served as Vice President, Caribbean Controller since 2001 and has been with Centennial since 1997. Prior to joining Centennial, Mr. Hunt was employed by Investors Daily Digest, a Dow Jones company.

 

Tony L. Wolk has served as Senior Vice President, General Counsel and Secretary of Centennial since September 1999. Prior to joining Centennial, Mr. Wolk was an attorney in private practice with the law firms of Gibson, Dunn & Crutcher LLP and Weil, Gotshal & Manges. Mr. Wolk earned his law degree from New York University.

 

Thomas E. McInerney has served as a director and Chairman of the board of directors of Centennial since January 1999. He joined Welsh Carson in 1986 and is a managing member or general partner of the respective sole general partners of Welsh Carson and other associated investment partnerships. He is a director of Savvis, Inc., along with Mr. Pellow, and he is also a director of ITC DeltaCom Inc., Broadridge Financial Solutions, Inc., and several private companies. Mr. McInerney is also Chairman of the Board of Trustees of St. John’s University.

 

Darren C. Battistoni has served as a director since March 2007. He is currently a Senior Associate with Welsh Carson. Prior to joining Welsh Carson in 2004, he was an investment-banking analyst at Credit Suisse for two years.

 

Anthony J. de Nicola has served as a director of Centennial since January 1999. He joined Welsh Carson in 1994 and is a managing member or general partner of the respective sole general partners of Welsh Carson and other associated investment partnerships. Previously, he worked for William Blair & Co. for four years in the merchant banking area. He is a director of several private companies.

 

James P. Pellow has served as a director of Centennial since September 2003. Mr. Pellow has served as the Executive Vice President and Chief Operating Officer of St. John’s University since 1999. Mr. Pellow has served at St. John’s University in various capacities since 1991. Prior to 1991, Mr. Pellow worked at the accounting firm of Coopers & Lybrand and at Chapdelaine & Co., a New York City municipal bond brokerage firm. He, along with Mr. McInerney, is also a director of Savvis, Inc.

 

Raymond Ranelli has served as a director of Centennial since September 2004. Mr. Ranelli retired from PricewaterhouseCoopers in 2003 where he was a partner for over 20 years. Mr. Ranelli held several positions at PricewaterhouseCoopers including Vice Chairman and Global Leader of the Financial Advisory Services practice. Mr. Ranelli is also a director of Hawaiian Telcom Communications, Inc., United Surgical Partners International, Inc., and United Components, Inc.

 

Robert D. Reid has served as a director of Centennial since February 2004. He also served as a director of Centennial from March 2001 to July 2001. He is a Managing Director of The Blackstone Group, L.P. and has been with The Blackstone Group since 1998.

 

Scott N. Schneider has served as a director of Centennial since January 2005. He is currently an Operating Partner and Chairman of Media and Communications for Diamond Castle Holdings, LP, a private equity firm. He was previously President and Chief Operating Officer of Citizens Communications Company from 2002 to 2004 and held various executive positions at Citizens since 2000. Prior to joining Citizens, Mr. Schneider was Chief

Financial Officer and a member of the Board of Directors of Century Communications, where he worked from 1991 to 1999. Mr. Schneider also served as Chief Financial Officer, Senior Vice President and Treasurer and a member of the Board of Directors of Centennial from 1991 to 1999, which was partially owned by Century Communications during such period. He is also a director of National CineMedia, Inc.

 

J. Stephen Vanderwoude has served as a director of Centennial since October 1999. He is currently a private investor. From 1996 until April 2007, he was Chairman and Chief Executive Officer of Madison River Telephone Company LLC, a company that acquired and operated rural telephone companies. Previously he was President, Chief Executive Officer and a director of Powerhouse Technologies, Inc., and a director of V-Band Corporation. He is currently a director of First Midwest Bancorp. He was formerly President and Chief Operating Officer and a director of Centel Corporation, and president of the local telecommunications division of Sprint Nextel Corp.

 

Audit Committee

 

The current members of our Audit Committee are James P. Pellow (chairman), J. Stephen Vanderwoude and Raymond Ranelli.

 

Compensation Committee

 

The current members of the Compensation Committee are Thomas E. McInerney (chairman), Anthony J. de Nicola and Robert D. Reid.

 

Corporate Governance and Nominating Committee

 

The current members of the Corporate Governance and Nominating Committee are J. Stephen Vanderwoude (chairman), Thomas E. McInerney and Scott N. Schneider.

 

Code of Conduct

 

We have adopted a written code of conduct applicable to directors, officers and employees. Our code of conduct is available on our investor relations website at www.ir.centennialwireless.com. If we make any substantive changes to our code of conduct, or grant any waiver from a provision of the code of conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, we intend to disclose such events on our website.

 

 

 

 

 

As of August 1, 2007 there were 107,240,773 shares issued and 107,170,270 shares outstanding and 115 registered holders of our common shares. Such number does not include persons whose shares are held of record by a bank, brokerage house or clearing agency, but does include such banks, brokerage houses and clearing agencies.

 

Dividend Policy

 

Other than the special dividend paid on January 5, 2006, we have not paid any cash dividends on our common stock and we have no current intention to pay any cash dividends on our common stock in the foreseeable future. The terms of the agreements governing our long-term indebtedness generally restrict our ability to declare or pay dividends on our common stock. We intend to retain any future earnings to fund our operations, to service our debt, and for general corporate purposes. No dividends can be paid on our common stock without the approval of our controlling stockholders. Because Centennial Communications Corp. is a holding company, our ability to declare dividends is effectively limited to the amount of dividends, if any, our subsidiaries and other equity holdings may distribute to us.

Sales of Unregistered Securities and Repurchases

 

There were no sales of unregistered equity securities or purchases of its common stock made by the Company in fiscal 2007.

 

The following graph compares the total returns (assuming reinvestment of dividends) on our common stock, the Nasdaq Composite Index (which includes Centennial) and the Nasdaq Telecommunications Index (which includes Centennial). The graph assumes $100 invested in our common stock or in each of the indices on May 31, 2002, including the reinvestment of dividends, if any.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Centennial Communications Corp., The NASDAQ Composite Index
And The NASDAQ Telecommunications Index

 

 

* $100 invested on 5/31/02 in stock or index-including reinvestment of dividends.
Fiscal year ending May 31.

 

The selected consolidated statements of operations and cash flows data set forth below for the three years in the period ended May 31, 2007 and the selected balance sheet data as of May 31, 2007 and 2006 have been derived from our Consolidated Financial Statements included elsewhere herein.

 

The selected consolidated financial data as of May 31, 2005, 2004 and 2003 and for the years ended May 31, 2004 and 2003 have been derived from audited Consolidated Financial Statements not included herein, but which were previously filed with the SEC, adjusted to present the classification of Centennial Dominicana, our previously held wireless and broadband business in the Dominican Republic, and Centennial Puerto Rico Cable TV Corp. (“Centennial Cable”), our previously held cable television business in Puerto Rico, as discontinued operations as discussed in Note 2 to the Consolidated Financial Statements.

 

The following information should be read in conjunction with Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto included elsewhere herein.

 

See Note 3 of the Consolidated Financial Statements contained in this report regarding acquisitions and dispositions and the effect of such acquisitions and dispositions on the comparability of our historical Consolidated Financial Statements.

 

 

 

 

Executive Overview

 

Company Overview

 

We are a leading regional wireless and broadband telecommunications service provider serving over 1.1 million wireless customers and approximately 419,500 access line equivalents in markets covering over 12 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, which also includes operations in the U.S. Virgin Islands, we are a facilities-based, fully integrated communications service provider offering both wireless services and, in Puerto Rico, broadband communications services to business and residential customers.

 

As discussed in Note 2 to the consolidated financial statements, the results of operations presented below exclude our Dominican Republic operations (“Centennial Dominicana”) and Centennial Puerto Rico Cable TV Corp. (“Centennial Cable”) due to their classification as discontinued operations.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6 —  Selected Consolidated Financial Data and our Consolidated Financial Statements and the related notes included in this report. 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.”

 

Management’s 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 to serving local markets through our local scale and knowledge, which has led to a strong track record of success.

 

In the United States, we provide digital wireless service in two geographic clusters, covering approximately 8.6 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 Federal Communications Commission (“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 in terms of population.

 

The business strategy we use to tailor the ultimate customer experience entails focusing on attractive and growing markets and customizing our sales, marketing and customer support functions to customer needs in these markets. For the fiscal year ended May 31, 2007, approximately 89% of our postpaid wireless sales in the United States and Puerto Rico and substantially all of our broadband sales 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 (high revenue per average wireless subscriber, including roaming revenue or ARPU) postpaid wireless customers 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.

 

In our Puerto Rico wireless operations, we sell or loan phones to our customers. When we sell a phone to a customer, the cost of the phone sold is charged to cost of equipment sold, whereas the cost of a phone we loan to a

customer is recorded as an asset within property, plant and equipment and is charged to depreciation expense over the life of the phone.

 

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 13 to the 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 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 gain (loss) — 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; and other charges such as activation, voice mail, call waiting, call forwarding and regulatory charges.

 

Roaming revenues represent 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 calls. The per minute rate paid to us is established by an agreement between the roamer’s 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.

 

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 customer represents the average number of minutes (“MOUs”) used by our 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, 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 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 consolidated financial statements. We consider an accounting estimate to be critical if:

 

 

 

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 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 and 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

 

We review goodwill and wireless licenses for impairment based on the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). In accordance with SFAS 142, goodwill is tested for impairment at the reporting unit level on an annual basis as of January 31st 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. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. We have 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”). In analyzing goodwill 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 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 adopted SFAS 123(R) using the modified prospective transition method beginning June 1, 2006. Accordingly, during the fiscal year ended May 31, 2007, we recorded stock-based compensation expense for awards of options granted prior to, but not yet vested, as of June 1, 2006, as if the fair value method calculated for purposes of pro forma disclosure under SFAS 123 were in effect for expense recognition purposes, adjusted for estimated forfeitures. For awards of options granted after June 1, 2006, we recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For these awards, compensation expense was 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. For the fiscal ended May 31, 2007, we utilized an expected volatility with a range of 59.7% — 70.7% and an expected term of 4.5 — 6.25 years. 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 or 4 years and the contractual term of 7 or 10 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. SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest. Accordingly, stock-based compensation expense for the fiscal year ended May 31, 2007 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual option forfeitures.

 

Income Taxes

 

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). 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. Significant judgment is used to evaluate our tax positions. We establish reserves at the time we determine it is probable that we will be liable to pay additional taxes related to certain matters. We adjust these reserves as facts and circumstances change.

 

A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we record a reserve when we determine the likelihood of loss is probable. Favorable resolutions of tax matters for which we have previously established reserves are recognized as a reduction to our income tax expense when the amounts involved become known.

 

Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, our annual tax rate reflected in our 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.

 

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.

 

Year Ended May 31, 2007 Compared to Year Ended May 31, 2006

 

 

 

 

Revenue.   U.S. wireless service revenue increased for the fiscal year ended May 31, 2007, as compared to the fiscal year ended May 31, 2006. The increase was primarily due to an increase in the number of subscribers and sales of value-added features, such as phone insurance and data services (including short messaging service, multi-media messaging service, and downloads) and an increase in recurring access fees primarily due to an increase in the number of subscribers on our GSM (Global System for Mobile Communication) / Blue Region plans (various plans with expanded local calling areas that include contiguous states), which generally have a higher ARPU. These increases were partially offset by lower prepaid revenues, lower airtime revenue, and lower revenues associated with amounts charged to our customers for roaming on other carriers’ networks.

 

U.S. wireless roaming revenue decreased for the fiscal year ended May 31, 2007, as compared to the fiscal year ended May 31, 2006. The decrease was primarily due to a decrease in MOUs as well as a decrease in the average roaming rate per minute, partially offset by an increase in data roaming. We expect U.S. wireless roaming revenue to continue to decline over the long term but to continue to benefit from data roaming throughout our operating territories. We expect U.S. wireless roaming revenue to decline approximately $15-20 million during fiscal 2008.

 

Equipment sales increased during the fiscal year ended May 31, 2007, as compared to the fiscal ended May 31, 2006, due primarily to an increase in revenues received from deductibles associated with our phone insurance program, new activations and handset sales as a result of our New When You Want It! handset upgrade program which allows subscribers to upgrade their phone at any time for a fee which varies depending on the remaining duration of their contract, as well as an increase in phone prices.

 

Our U.S. wireless operations had approximately 694,500 and 648,000 subscribers at May 31, 2007 and 2006, respectively, including approximately 51,400 and 51,100 wholesale subscribers, respectively. Wholesale subscribers are customers who use our network and services but are billed by a third party (reseller) who has effectively resold our services to the end user. Postpaid subscribers account for 96% of total U.S. wireless retail subscribers as of May 31, 2007. During the twelve months ended May 31, 2007, increases in retail subscribers from new activations of 200,000 were offset by subscriber cancellations of 153,800. The monthly postpaid churn rate was 1.8% for the fiscal year ended May 31, 2007, as compared to 1.9% for the fiscal year ended May 31, 2006, respectively. The decrease in churn was primarily due to retention efforts and our continued conversion of TDMA (Time Division Multiple Access) customers to GSM, which generally requires subscribers to sign new twenty four to thirty month contracts. The cancellations experienced by our U.S. wireless operations were primarily due to nonpayment and competition.

U.S. wireless ARPU was $67 for the fiscal year ended May 31, 2007, as compared to $65 for the same period a year ago. Average MOUs per subscriber were 923 per month for the fiscal year ended May 31, 2007, respectively, as compared to 757 for the same period the prior year. The increase in U.S. wireless ARPU was primarily due to the aforementioned increases in service revenue and equipment sales, driven by an increase in the number of subscribers on GSM/Blue Region plans, which generally have a higher ARPU.

 

Costs and expenses.   Cost of services increased during the fiscal year ended May 31, 2007, as compared to the same period the prior year, primarily due to costs associated with an approximate 22% increase in MOUs, including higher incollect roaming costs (costs associated with providing our subscribers roaming on other carriers’ networks) and interconnection costs as well as increased data expenses associated with higher data usage and related expenses. The increase in cost of services was partially offset by a decrease in phone repair expense.

 

Cost of equipment sold increased for the fiscal year ended May 31, 2007, as compared to the same period last year, primarily due to phones used for customer retention and a greater number of phones provided to subscribers as a result of handset upgrades which also increased equipment sales revenue. Cost of equipment sold was favorably impacted by a lower average cost per phone, which was driven by a greater amount received for phones that were sold as salvage.

 

Sales and marketing expenses decreased for the fiscal year ended May 31, 2007, as compared to the fiscal year ended May 31, 2006, primarily due to decreased advertising expense, which was partially offset by an increase in commissions expense.

 

General and administrative expenses increased for the fiscal year ended May 31, 2007, as compared to the same period in the prior year, due primarily to increased bad debt expense, compensation costs, and legal expenses. This was partially offset by lower roaming traffic processing costs and lower costs of other professional services.