Annual Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

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  þ      No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o      No  o

 

Indicate by check mark 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.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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, 2008 of $7.73 per share, was $645,219,637. As of July 23, 2009, there were 111,139,503 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information contained in Part III, Items 10-14 of this Annual Report on Form 10-K will either be included in 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, which is incorporated herein by reference or will be provided in an amendment to this form 10-K, to be filed no later than September 28, 2009.

 

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,” “should,” “intend,” “may,” “will” and similar expressions, or by discussion of competitive strengths or strategy that involve risks and uncertainties. We warn you that these forward-looking statements are only predictions and estimates, which are inherently subject to risks and uncertainties.

 

Important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, us include, but are not limited to:

 

 

 

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 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 ended May 31, 2008. When we say “fiscal 2009,” we mean our fiscal year which began June 1, 2008, and ended May 31, 2009. When we say “fiscal 2010”, we mean our fiscal year which began June 1, 2009, and will end May 31, 2010.

 

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 our 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 , Trusted Advisor ^tm , Blue Shirt Promises ^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.

 

U.S. wireless markets covering approximately 6.1 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 wireless carriers in our markets that utilize 1900 MHz Personnel Communications Services (“PCS”) spectrum and 1700-2100 Advanced Wireless Services (“AWS”) spectrum.

 

Our network currently employs GSM (Global System for Mobile Communications) technology that supports EDGE (Enhanced Data Rates for Global Evolution) and GPRS (General Packet Radio Service) advanced data technology. GSM 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 our legacy TDMA (Time Division Multiple Access) network. In July 2008, we shut down our analog and TDMA networks and migrated our remaining TDMA customers to our GSM network. . We had expected to deploy a 3G UMTS network in parts of our U.S. wireless footprint during fiscal 2009, however, this deployment was postponed due to a number of factors.

 

Puerto Rico

 

In Puerto Rico, we offer wireless and broadband communications services. We also offer 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 provide wireless services in Puerto Rico and the U.S. Virgin Islands using 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 Puerto Rico and the U.S. Virgin Islands we have deployed a 100% 3G technology network 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. We also offer 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 AC powered device that utilizes our EV-DO network. We market our services in Puerto Rico under the name Centennial de Puerto Rico. Our Instant Internet customers have become an increasingly larger portion of our Puerto Rico wireless business.

 

Puerto Rico Broadband.   In Puerto Rico, we have built a fully integrated communications company since our launch in 1997. We have a 1,400-route mile fiber network connected to approximately 2,500 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 networks. 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 our wireless competitors 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, Sprint Nextel, the three cable television operators in Puerto Rico (One-Link Communications, Choice Cable and Liberty Cable), Cisco Systems, Hewlett-Packard, Lucent Technologies, Pfizer, Procter & Gamble, the University of Puerto Rico, Wal-Mart, Net2Phone (IDT), Schering-Plough, Oracle, Telefonica, Direct TV, Verizon Business, Level 3 and Banco Popular.

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. In July 2008, we lit a new undersea fiber-optic cable named GCN-1, which runs from Puerto Rico to St. Croix, where it interconnects with our existing capacity that connects St. Croix to Miami. 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. Our extensive terrestrial fiber-optic network supports all of our services and, when coupled with our undersea fiber-optic capacity, allows us to offer our customers a single-vendor solution for broadband connectivity to the United States. We believe this fiber network offers a competitive advantage over the incumbent, The 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.

 

Wireless Telephone Markets

 

The chart below sets forth information regarding our wireless operations as of May 31, 2009, 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 Islands service areas. Those U.S. wireless cellular telephone systems which are in Metropolitan Statistical Areas, or MSAs, are asterisked; the remainder are in Rural Service Areas, or RSAs.

 

As of May 31, 2009, we had 1,078,200 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 significantly 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 email services on their wireless devices and 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. We also offer 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. During fiscal 2008, we re-launched a wireless home phone product that allows customers to replace their existing landline telephones. The easy-to-install telephone plugs directly into an AC wall outlet and uses our wireless network to transmit calls.

 

We offer our wireless customers a variety of handsets employing GSM technology in the United States and CDMA technology in Puerto Rico. We offer for sale a variety of handsets primarily from Motorola, Nokia, Blackberry, HTC, Sony Ericsson and UTStarcom and laptop cards that enable customers to connect their laptop computers to the Internet using a wireless connection. We frequently discount wireless handset devices sold to new and current customers in response to competition, to attract new customers and to retain existing customers. We also sell a variety of accessories including batteries, hands-free devices, chargers and other items.

 

We offer 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. Our rate plans in the United States consist of a fixed monthly charge (with varying allotments of included minutes), plus variable charges for additional minutes of use. We also recently introduced an unlimited rate plan in the U.S. In Puerto Rico, we offer principally unlimited voice and data usage for a flat monthly fee.

 

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 (wireless fidelity), gigabit ethernet dedicated access, dedicated Internet ports, international long distance, switched access, high speed Internet access, and private line services. All services are provided over our own fiber-optic and microwave networks. 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. We also offer a converged service, our Aptus (tm) service suite, 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 2009 was $69.7 million, or 6.6% of our consolidated revenue, of which $59.6 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 decline over the long term.

 

Sales and Marketing; Distribution; Training

 

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 “Journey to Success”. 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 seek to acquire profitable customers at a reasonable cost to acquire. In marketing our services, we stress our superior sales and customer care, our quality wireless network, competitive prices, 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 service areas, which keeps a significant portion of the minutes of use on our own network. We also offer 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, T-Mobile and various other national and regional carriers. In the United States we also offer unlimited incoming calls. Wireless data services have become a more important component of our service offerings.

 

We distribute our products and services primarily through company-owned retail stores and kiosks and, to a lesser extent, third party dealers and agents. We also distribute products using direct fulfillment to customers who purchase items through our website. As of May 31, 2009, we operated 136 retail outlets in the United States and 73 retail outlets in Puerto Rico, consisting of retail stores and kiosks. 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. We believe this distribution strategy enables us to provide a superior sales and customer service experience to our customers. Our employees are generally paid a base salary plus commissions. Our dealers are independent contractors paid on a commission basis.

 

In the U.S. and Puerto Rico, we have established full-time training facilities for our 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 creates a competitive advantage. 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.

 

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. We have company-owned, centralized customer service centers located in Fort Wayne, Indiana, and Carolina, Puerto Rico, serving our U.S. and Puerto Rico customers, respectively. We also outsource certain call center functions in Puerto Rico.

 

Network Construction, Operation and Development

 

In general, wireless systems transmit voice and data through the transmission of radio signals using radio spectrum licensed by the FCC. The wireless industry has undergone significant technological advancement since its inception in the 1980’s. The first generation of wireless technology was analog. In February 2008, the FCC began to permit carriers to shut down their analog networks. The second generation of wireless technology was digital signal transmission technology and included GSM, TDMA and CDMA networks. The third generation technologies enable greater speeds for transmitting data and include UMTS/HSPA (High-Speed Packet Access) and CDMA

2000/EV-DO. Many carriers are now beginning to plan for fourth generation wireless technologies, which include Long Term Evolution (“LTE”) and Wi-Max.

 

We use GSM technology in our U.S. wireless markets. AT&T Mobility 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. In July 2008, we shut down our 1G analog and 2G TDMA networks in our U.S. business and migrated our remaining TDMA customers to our GSM network. We have deployed soft switch technology which we expect will provide cost reductions and operating flexibility as we continue to roll out new services. As of May 31, 2009, our U.S. wireless operations had 1,171 cell sites. We are currently evaluating an upgrade of our U.S. wireless networks to 3G technology. We generally use equipment manufactured by Ericsson in our U.S. wireless markets.

 

As of May 31, 2009 our Puerto Rico Wireless operations had 469 cell sites. In Puerto Rico, we have deployed CDMA 2000/EV-DO technology, which is also used by Verizon Wireless and Sprint Nextel. We continue to deploy our EV-DO network throughout Puerto Rico and have now deployed EV-DO Rev. A, which covers approximately 90% of the island and which provides additional enhancements in data speeds and multimedia features. 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.

 

As of May 31, 2009, our Puerto Rico broadband business had 1,400 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. In July 2008, we switched our primary vendor for outsourced billing and related services from Convergys Information Management Group, Inc. (“Convergys”) to Fidelity Information Services. In connection with this transition, we entered into agreements with Convergys to license from Convergys the software that is utilized for our billing-related services (including customer care, billing processing and other billing related services). Our Puerto Rico broadband billing and customer support services are supported by Intec SingleView systems.

 

Competition

 

Wireless.   The wireless telecommunications industry is highly competitive. We compete on the basis of, among others, quality, price, handset selection, area served, network coverage, services offered, and responsiveness of customer service. The telecommunications industry continues to experience 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 (now part of Verizon), AT&T Mobility, Sprint Nextel, T-Mobile USA, U.S. Cellular, Verizon Wireless and mobile virtual network operators, or MVNOs, such as Virgin Mobile and Tracfone Wireless. In addition, Leap Wireless and MetroPCS, which offer unlimited rate plans for a fixed monthly fee with no contracts, have entered certain of our markets.

 

The Puerto Rico wireless market is also highly competitive. In Puerto Rico, we compete with five other wireless carriers: America Movil, AT&T Mobility, Open Mobile, Sprint Nextel, and T-Mobile.

 

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 FCC’s auction of AWS spectrum in 2006, including a consortium of cable television operators, and may begin offering wireless services. In addition, the FCC auctioned off 62 MHz of spectrum in the 700 MHz band in January 2008. Given the favorable transmission characteristics of 700 MHz 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 competitors for our broadband services in Puerto Rico are the PRTC, Worldnet and Prepa.Net. Over the last couple of years, Worldnet and Prepa.Net have increased their presence in the wireline market and constructed their own facilities. Prepa.Net is a subsidiary of the government owned electric utility in Puerto Rico. In addition, we cannot be sure that other broadband operators will not construct facilities in the future. For example, Sprint Nextel owns 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 (“Commercial Mobile Radio Services”) 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. PCS systems are normally licensed within market areas that are Basic Trading Areas (“BTAs”), which are component parts of Metro Trading Areas (“MTAs”). 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 by the FCC 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. We did not participate in the 700 MHz auction in 2008.

 

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. Our wireless licenses expire in various years from 2009 to 2019.

 

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, including our pending acquisition by AT&T. The FCC has not yet approved the AT&T Transaction. 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. 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.

 

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 (“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.

 

The FCC currently is considering changes to the entire system of intercarrier compensation, of which wireless-wireline interconnection is a part. It is not possible to predict the results of that proceeding or how any FCC action would specifically affect us. However, the FCC may require increased emphasis on cost-based intercarrier charges and, thus, there could be fewer implicit subsidies for LECs in intercarrier rates, including those contained in

interstate “access charges,” which wireless carriers pay on certain calls to wireline carriers under the FCC’s rules. Such a result would be generally favorable to wireless carriers. 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 remain 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. The FCC has 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 “Item 1A — Risk Factors”. 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, many states and 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 “Item 1A — Risk Factors”.

 

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 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.

 

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 required 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.

 

In September 2007, the FCC adopted an order that requires CMRS carriers to meet interim, annual E911 Phase II location accuracy benchmarks at the Public Safety Answering Point (“PSAP”) service-area on progressively smaller geographic levels over the next five years in order to ensure that carriers achieve PSAP-level

compliance no later than September 11, 2012. Compliance with this order may require significant expenditures. Several carriers have filed challenges to, or appeals of, the FCC’s order. In August 2008, the FCC agreed to voluntarily withdraw the new regulations, citing the public safety community’s agreement that less onerous regulations would meet their needs. The FCC is currently considering a new compromise proposal to modify those requirements. Under the new proposal, in 2012, instead of measuring the accuracy at the PSAP level, carriers would be required to measure accuracy at the county level, an easier standard to meet. These E911 requirements could require additional capital investment in our infrastructure, and these expenditures may be material. The FCC also has left open the possibility of future E911 requirements. Failure to meet or maintain compliance with the FCC’s E911 requirements can subject us to significant penalties.

 

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, but appeals of the FCC’s order were rejected. The resolution of these issues may cause us to incur additional expense in upgrading our networks to meet new CALEA requirements.

 

Universal Service.   We are required to contribute to the federal USF, and to equivalent state funds. In general, these funds are created to subsidize telecommunications services in rural and high-cost areas of the United States. During fiscal 2009, we recorded approximately $51.7 million in payments from the federal USF in connection with our operations in Indiana, Louisiana, Michigan, Mississippi, Puerto Rico and the U.S. Virgin Islands, 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.

 

On May 1, 2008, the FCC imposed an interim cap on high-cost USF support to competitive ETCs like us, which limits total annual support for competitive ETCs at the level of support that they were eligible to receive in each state during March 2008. The FCC is also considering other significant changes to the way USF is disbursed to program recipients and in January 2008, the FCC issued three separate Notices of Proposed Rulemaking (“NPRMs”) seeking comment on (i) the use of reverse auctions to determine the amount of USF support to provide to ETCs and the level of support to be given to a particular service area; (ii) the elimination of the identical support rule, thereby requiring wireless carriers to receive support based on their own costs rather than the per line costs of the incumbent wireline company and (iii) the creation of separate funds for wireless, landline and broadband with caps on such funds. As part of the proposal to eliminate the identical support rule, the FCC has tentatively concluded to eliminate all Interstate Access Support and Interstate Common Line Support. If this rule is implemented, a substantial portion of our USF funding could be eliminated, including all the support we receive in Puerto Rico. During fiscal 2009, we recorded $22.9 million in payments from the USF relating to our Puerto Rico operations. It is not possible to predict whether or when any of the NPRMs will be adopted or whether or when other reform to USF may take place. However, implementation of some of the proposals could significantly decrease the amount of USF support we receive.

 

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 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 provided services in any of the 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.

 

Hearing Aid Compatibility (HAC).   The FCC requires wireless carriers and handset manufacturers to make available to customers handsets that meet certain technical requirements allowing hearing aid users to have access to digital wireless services. These rules recently have been revised, and the revised rules require that, over a period of several years, progressively increasing percentages of wireless handsets offered by wireless carriers meet the required air interface standards for radio frequency interference. 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. However, in September 2006, we requested a temporary waiver of one of the compliance deadlines. In February 2008, the FCC denied our waiver request, and in June 2008, the FCC proposed a $40,000 fine for failing to meet the September 2006 deadline. We have appealed the FCC fine and a decision is pending.

 

Back-up Power.   In June 2007, the FCC adopted an order implementing certain recommendations of an independent panel reviewing the impact of Hurricane Katrina on communications networks. This order requires wireless carriers to provide emergency back-up power sources for their equipment and facilities, including up to 24 hours of emergency power for mobile switch offices and up to eight hours for cell site locations. The order was expected to become effective sometime in 2008. However, on February 28, 2008, the United States Court of Appeals for the District of Columbia Circuit stayed the effective date of the order pending resolution of an appeal of the FCC’s order. We are currently evaluating our compliance with this order should it become effective, but we would likely need to purchase additional equipment, obtain additional state and local permits, authorizations and approvals and incur additional operating expenses. The potential costs that may be incurred to achieve compliance could be significant.

 

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 FCC 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 FCC’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 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. The FCC was expected to take some type of action in this proceeding before the end of 2008 but took no formal action in 2008 and thus far in 2009. However, the FCC did conduct a public hearing concerning wireless carriers’ early termination fee practices and legislation has

been introduced in Congress which would regulate wireless carriers’ ability to charge early termination fees to customers.

 

Roaming.   The FCC 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. In 2007, the FCC expanded this rule by requiring wireless carriers to allow other wireless carriers’ customers to roam on their systems “automatically,” that is, by prior agreement between carriers and ruled that automatic roaming is a common carrier obligation. The FCC ruling applies only to “real-time, two way switched voice or data services that are interconnected with the public switched network” and text messaging services. The ruling, however, does not extend the obligation to markets in which the carrier seeking to roam holds an FCC license even if such carrier has yet to build out its network in such market, and does not extend the obligation to wireless data services. The FCC has sought additional comment on the possibility of extending this requirement to data roaming which is not connected to the public switched network, such as wireless broadband internet access.

 

Customer Proprietary Network Information; Privacy.   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. In addition, we are obligated to comply with a variety of other federal and state privacy and consumer protection requirements. State legislatures and regulators are considering imposing additional requirements on telecommunications carriers to further protect the privacy of wireless customers. If we fail to comply with these rules and regulations, we could be subject to substantial fines and penalties. In addition, the failure to adequately safeguard our customers’ personal information could severely damage our reputation.

 

WARN Act.   In October 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). We have tentatively elected to participate in the EAS program pending the release of more specific information concerning network requirements. We will monitor the development of standards, protocols and procedures for the delivery of emergency alerts to users of CMRS and may reconsider our participation in EAS. Participation 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.   As of February 18, 2008, cellular licensees are no longer required to offer analog wireless services. In July 2008, we shut down our analog and TDMA networks and migrated our remaining TDMA customers to our GSM network and believe we have complied with the FCC’s customer and FCC analog service termination notification requirements.

 

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.

 

Broadband Economic Stimulus.   Congress recently enacted the American Recovery and Reinvestment Act of 2009 ( the “Recovery Act”), which provides, among other things, for an aggregate appropriation of $7.2 billion to fund grants to provide access to broadband service to consumers residing in rural, unserved or underserved areas of the United States. Carriers like us are eligible to receive funding grants and we may apply for funding. Applications for the first round of funding are due by August 14, 2009. If our competitors or new entrants receive grants, such funds could provide them with a competitive advantage.

 

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 coordinate Puerto Rico telecommunications regulatory law with the federal 1996 Act. Both laws were intended to open telecommunications markets to competition, and both establish, among other things, procedures by which competing telecommunications carriers

can obtain the right to interconnect their networks and exchange traffic with their competitors. Among other things, the Puerto Rico Act 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 such services or providers. Under these laws, competing telecommunications carriers like us may demand contract negotiations with established firms such as PRTC, with the TRB acting as an arbitrator to decide issues the parties cannot successfully negotiate. A party unhappy with the TRB’s rulings may appeal them to federal court. Under these procedures, we established interconnection agreements with PRTC in 1997, 2002, 2005 and most recently in 2008. With the exception of the original agreement in 1997, either we, PRTC, or both have sought federal court review of some aspects of the TRB’s rulings regarding these agreements.

 

A continuing area of dispute between us and PRTC is the amount that each must pay when exchanging traffic with the other. Different rates apply to the exchange of different classes of traffic. We generally favor treating as much traffic as possible as local in nature, which generally results in the lowest intercarrier payments. The TRB has broadly agreed with us and has ordered PRTC and us generally to classify traffic as local as long as it begins and ends within our Puerto-Rico-wide local calling area. In the most recent proceeding before the TRB, the TRB rejected our proposals to include within that rule certain on-island traffic that we bill to end users as toll traffic, and VoIP traffic that is carried to or from Puerto Rico as Internet data rather than as a traditional telephone call. We are seeking review of those determinations in court. At the same time, the TRB granted our request to require PRTC to facilitate the establishment and expansion of efficient direct interconnection between our landline and wireless networks and PRTC’s “Claro” wireless network, and also clarified and limited the circumstances in which our wireless operations might have to pay PRTC for receiving landline calls from PRTC subscribers. PRTC is seeking review of those determinations. We cannot predict the outcome of these court proceedings.

 

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 March 2008, the U.S. VIPSC designated us an ETC, making us eligible to receive USF support in the U.S. Virgin Islands.

 

Employees

 

We had approximately 2,900 employees as of May 31, 2009. Our employees are not represented by a labor organization. We consider our relationship with our employees to be good.

 

Other information

 

Financial information concerning our business segments, including geographical information, appears in the Notes to the Consolidated Financial Statements.

 

 

Risks Relating to Our Business and Our Industry

 

There are risks and uncertainties associated with our proposed acquisition by AT&T.

 

There are risks and uncertainties associated with our proposed acquisition by AT&T. For example, the acquisition may not be consummated, or may not be consummated as currently anticipated. The AT&T Transaction was approved by our stockholders in February 2009. Completion of the AT&T Transaction is not subject to a financing condition but remains subject to (i) approval by the FCC and (ii) other customary conditions. The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired; however, the parties are still discussing the transaction with the Department of Justice. The parties anticipate that the AT&T Transaction will be completed during the third quarter of calendar year 2009, assuming timely satisfaction or waiver of all remaining closing conditions. However, there is no assurance that the conditions to the completion of the AT&T Transaction will be satisfied or waived, taking into account the current regulatory environment. Failure to consummate the AT&T Transaction for any reason, or an extended delay before consummation, could have a material adverse effect on our business, results of operations and financial condition and result in a significant decline in the market price of our common stock. If the AT&T Transaction is not completed, there is no assurance that a comparable transaction will occur. Under certain circumstances, if the AT&T Transaction is terminated, we may be required to pay AT&T a termination fee of $28.5 million and reimbursement of out-of-pocket fees and expenses not exceeding $7.0 million.

 

The merger agreement with AT&T restricts us from engaging in certain activities and taking certain actions without AT&T’s approval, which could prevent us from pursuing opportunities that may arise prior to the closing of the acquisition.

 

The pendency of the AT&T Transaction could have a negative impact on our business, including making it more difficult to attract and retain customers.

 

Our business could be adversely impacted as a result of uncertainty related to the proposed acquisition by AT&T.

 

The proposed acquisition by AT&T could cause disruptions in our business, which could have an adverse effect on our business, results of operations and financial condition, whether or not the AT&T Transaction is consummated. For example:

 

 

In addition, we have incurred, and will continue to incur, significant fees for professional services and other transaction costs in connection with the proposed acquisition by AT&T, and many of these fees and costs are payable by us regardless of whether we consummate the transaction.

 

The effects of a recession in the United States and general downturn in the global economy, including the illiquidity in the credit markets could have a material adverse effect on our business and consolidated results of operations.

 

The U.S. economy is currently in a recession and may be depressed for the foreseeable future. A continuation of the global economic downturn could adversely affect consumer spending patterns which could result in decreased demand for the products and services we sell, increased price competition, slower adoption of new technologies and an increase in bad debt expense. In addition, the current economic conditions could negatively impact our vendors, suppliers and third-party dealers, which could negatively impact our ability to distribute, market and sell our products and services. Furthermore, general economic conditions and the tightening credit markets have significantly affected the ability of many companies to raise new capital or refinance existing indebtedness. Due to the lack of access to the capital markets, should we need additional funds or to refinance our existing indebtedness, we may not be able to obtain such additional funds.

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. In addition, the size of many of our competitors has enabled them to create nationwide highly recognizable brands. 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, handset selection and pricing, 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 technologically advanced phones such as the iPhone, “push-to-talk” services, proprietary data content, each of 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, certain wireless carriers we compete against, or may compete against in the future, offer services we do not offer in all our markets, such as wireline phone service and video services. These companies are able to bundle those services with their wireless offerings to create a compelling offering to consumers that we may not be able to match.

 

In addition, consolidation among wireless carriers as well as the entry of mobile virtual network operators, such as Virgin Mobile, have intensified the competitive environment in our markets. 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 2006 in the 1700-2100 bands and 62 MHz of additional spectrum in the 700 MHz band in 2008, which may lead to additional competition from new entrants, including non-traditional telecommunications carriers such as cable television companies. Indeed, the telecommunications industry has seen a blurring of traditional dividing lines between wireline, wireless, data, Internet and video providers. Many of our competitors are able to offer bundles of these services that we cannot match. With so many companies targeting many of the same customers, the pressure to offer free or heavily-subsidized handsets has and may continue to increase. 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. In addition, the intense competition we face from larger, more technologically advanced carriers, may force us to spend significantly more on capital expenditures than we currently anticipate to remain competitive.

 

Our broadband business in Puerto Rico also faces increased competition. Our broadband business in Puerto Rico currently competes against many companies, including local exchange carriers such as PRTC and Worldnet, ISPs such as PRTC, Caribe.net and AOL, interexchange carriers such as AT&T, PRTC, Sprint, Primus and Worldnet and several emerging VoIP providers. In addition, our broadband business competes against Prepa.Net, an affiliate of the local power company. We expect competition for customers’ share of their telecommunications revenues to continue to be extremely competitive. This has, and may continue to, cause prices to decline.

 

Our inability to gain access to the latest technology handsets in a timeframe and at a cost similar to our competitors could have an adverse effect on our business, financial condition and consolidated results of operations.

 

We believe that customers are increasingly choosing their wireless carriers based on handset selection and pricing of handsets. Many of the handset vendors have begun selling their latest handset models exclusively to a single wireless carrier, thereby preventing us from offering these high-demand handsets to our customers. As a result, 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 significant 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 that we cannot offer or at more attractive prices than we can, making it more difficult for us to attract and retain our customers.

 

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 have become 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. Often times, we cannot gain access to certain of the proprietary data content available to national operators. If we are unable to successfully incorporate the most advanced 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 we can provide wireless data 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 6.6% of fiscal 2009 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 2009, we recorded $69.7 million of roaming revenue, including $59.6 million for our U.S. wireless segment and $10.1 million for our Puerto Rico wireless segment. Roaming revenue accounted for approximately 6.6% of our consolidated revenue for fiscal 2009. 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 and our roaming agreements do not require that our roaming partners use our network. 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 and significant declines in roaming revenue could have a material adverse effect on our consolidated results of operations.

 

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.

 

In our U.S. wireless operations, we control licenses that cover approximately 9 million people — a small percentage of the total population in the United States. Most of our competitors have networks that cover substantially all of the population in the United States and have roaming agreements with international operators that provide international roaming to more countries and at lower prices than we offer. To supplement our limited on-network coverage, we have entered into roaming agreements with national carriers which 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. In 2007, the FCC adopted a report and order that clarified that CMRS providers are required to provide automatic roaming for voice and SMS text-messaging services on just, reasonable and non-discriminatory terms. However, the FCC order does not address roaming for data services or the mechanism for determining the reasonableness of roaming rates for voice services. Although we have entered into multi-year roaming agreements with different national carriers, these agreements are subject to renewal and termination under certain circumstances. 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. In addition, 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, could insist on materially less favorable terms 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.

 

If the roaming rates we pay third parties increase or our subscribers significantly increase their off-network usage, our financial results could be negatively affected.

 

Most of our competitors have national networks which allow them to more economically offer nationwide rate plans. We do not have a national network but offer our customers nationwide rate plans that do not include an incremental charge for roaming. While we have entered into long-term agreements with other wireless carriers with attractive roaming rates, those agreements are subject to renewal and termination under certain circumstances and there is no assurance that we could obtain similar rates from other companies. In addition, our aggregate roaming costs are highly susceptible to the geographic calling patterns of our customers. As we continue to sell more rate plans that do not include any incremental charge for roaming, we expect that our roaming expense will increase. If our roaming rates were to increase or the amount of minutes used by our customers not on our network were to increase, our consolidated financial results could be negatively affected.

 

We may be unable 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 will 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. Certain spectrum recently auctioned off may not be compatible with our existing spectrum and vendors may not manufacture suitable equipment and handsets to use such spectrum with our existing spectrum. There can be no assurance that additional spectrum will be available to us or whether we will have the capital needed to acquire such spectrum. Failure to obtain the necessary spectrum could prevent us from offering new advanced services and could result in increased churn and our inability to attract new customers who increasingly expect and demand these new services.

 

We may expand our business by acquiring new markets or businesses and may be unable to successfully integrate these new markets or businesses which could have an adverse effect on our financial results.

 

We may seek to expand our footprint and acquire additional wireless markets or other properties. These transactions involve many risks, both operational and financial in nature. Any acquisition of new markets will require integrating the acquired markets with our existing markets, including integrating the billing, customer care, network, personnel and other systems, many of which may be very different than our existing systems. In addition, we may experience delays or fail to realize the benefits that we had anticipated from any acquisition. Acquisitions also divert management attention away from the existing business and can be a disruption to the ongoing business. Integrating new markets is often very difficult and time consuming and has the potential to negatively impact customer service and churn levels. In addition, it is possible that we would need to provide the customers of the acquired business with new handsets at a subsidized price, which could have a negative impact on our financial

results. If we undertake an acquisition and are not successful in our integration efforts, our business and consolidated results of operations could be adversely affected.

 

We may incur significantly higher wireless handset subsidy costs than we anticipate which could have a material adverse effect on our financial results.

 

As the functionality of handsets continues to expand, the price of handsets has generally increased. In addition, our customers are increasingly demanding that we provide them with new handsets more frequently than in the past. We believe that, on average, we pay more for our handsets than do the national carriers with whom we compete. We generally subsidize a portion of the price of the handset to our customers. As a result, at the time we provide a handset to a customer, we incur an expense equal to the difference between the price we pay for the handset and the price we receive from our customer. Many of our competitors maintain aggressive handset promotions, including giving away free handsets. To remain competitive, we may be forced to give away or more heavily subsidize our handsets at unanticipated levels. Similarly, as we roll out new technologies, customers may need new handsets to take advantage of these new services, forcing us to provide our customers with a significant number of new, expensive handsets with heavy subsidies. As a result, we may incur significantly higher wireless handset subsidy costs than we anticipate which could have a material adverse effect on our consolidated financial results.

 

Our failure to attract new subscribers and the lower credit ratings of some of our new customers 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 at a reasonable cost to acquire. 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 new subscribers at a reasonable cost to acquire 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 2009, we recorded approximately $51.7 million in payments from the federal USF in connection with our operations in Indiana, Louisiana, Michigan, Mississippi, Puerto Rico and the U.S. Virgin Islands 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. As part of this review, the FCC has proposed, among other things, eliminating the “identical support rule”. Elimination of such rule would cause wireless carriers to receive support based on their own costs rather than the costs of the incumbent telephone company. As part of this proposal, the FCC has tentatively concluded to eliminate all Interstate Access Support and Interstate Common Line Support. If this rule is implemented, a substantial portion of our USF funding could be eliminated, including all the support we receive in Puerto Rico. During fiscal 2009, we recorded $22.9 million in payments from the USF relating to our Puerto Rico operations. Also, in May 2008, the FCC implemented a “cap” on USF support to wireless carriers, which will likely reduce our support in the future. As

a result of the FCC’s implementation of the “cap” and the potential reform of the USF system, we may receive substantially lower USF revenues in the future, which could adversely affect our consolidated results of operations.

 

Market prices for wireless and wireline services may decline in the future at an accelerating rate.

 

Market prices for wireless services have declined over the last several years and may continue to decline in the future at an accelerating rate due to increased competition. As a result, we may be unable to maintain or improve our ARPU or our margins. We expect significant competition among wireless providers which has been intensified by wireless number portability, to continue to drive service and equipment prices lower, and to potentially lead to increased churn. We cannot control the pricing decisions of our competitors and many carriers may choose to offer substantially reduced pricing. 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. In addition, our broadband business in Puerto Rico has also experienced a decline in pricing for traditional voice minutes and other 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.

 

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 and/or the FCC may substantially revise parts of the 1996 Act and rules there under in the next few years, including, without limitation, with respect to the amounts we pay into, and receive from, the USF, intercarrier compensation and special access regulation. 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.

 

Our Puerto Rico operations are 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, early termination fees, 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. 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, our wireless 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 2009 to 2019. 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.

 

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, many of our competitors offer “push-to-talk” technology, video services, location-based and mapping services and other popular services that we do not currently offer.

 

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 declines, 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. Also, alternative technologies may be developed that provide wireless communications service or alternative service superior to that available from us. If we cannot keep pace with technological changes in the telecommunications industry, our business may be adversely affected.

 

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 Alcatel Lucent. In January 2009, Nortel Networks, our primary vendor for network infrastructure in Puerto Rico, filed for bankruptcy protection. It is unclear what impact Nortel’s bankruptcy will have on our business operations. 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 key personnel, 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, including as a result of our pending transaction with AT&T. 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 and our suppliers 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. In addition, if a claim is found to be valid and we or our suppliers fail to successfully negotiate a required royalty or license agreement, we could be forced to pay substantial damages and could be subject to an injunction that could significantly disrupt our business and prevent us from offering certain products or services.

 

Business, political, regulatory and economic factors 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. These factors are outside of our control. In particular, the economy in Puerto Rico has been in a significant downturn for several years. As economic conditions in Puerto Rico 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. In addition, our markets in our Midwest cluster in Michigan, Indiana and Ohio have been negatively impacted by the difficulties encountered by the U.S. auto industry and related industries. More generally, adverse changes in the economy are likely to negatively affect our customers’ ability to pay for existing services and to decrease their interest in purchasing new 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 business may be negatively impacted by severe weather, labor strikes, terrorism and other natural disasters.

 

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 provision of services by third parties and needed repair of our network, which could adversely affect our ability to deliver telecommunications services. More specifically, a significant portion of our revenue is derived from our operations in Puerto Rico and Louisiana which have a history of severe weather, including hurricanes that have caused significant damage to telecommunications infrastructure. Although we maintain insurance to cover potential damages, including business interruption insurance, we cannot assure that such insurance will cover all losses we may experience or that the insurance carriers will pay our claims.

 

Our failure to obtain access to rights-of-way, pole attachments and other governmental authorizations and permits on reasonable terms and conditions could have a negative effect on our business.

 

Our ability to operate our networks is dependent on, among other things, our ability to obtain rights-of-way, pole attachments and other governmental authorizations and permits. To remain competitive, it is important that we obtain such rights-of-way, pole attachments and governmental authorizations and permits in a timely manner, at a reasonable cost and otherwise on satisfactory terms and conditions. If we cannot obtain these rights on satisfactory terms, it could have a material adverse effect on our consolidated results of operations and financial condition.

 

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. 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. In addition, the FCC continues to auction off new spectrum, including spectrum in the 700 MHz band that has favorable transmission propagation characteristics similar to our 850 MHz spectrum. This increase in spectrum supply could cause our wireless licenses to decrease in value. If the market value of our wireless licenses decreases significantly, we could realize a material loss upon the sale of any of our licenses and our ability to sell assets to repay debt would be significantly affected. We could also be forced to record a non-cash impairment charge on our financial statements. 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. Many state and local legislative bodies have passed or 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. Defending these lawsuits can be time consuming and expensive. 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. Our wireless minutes of use continue to grow and, as a result, our networks will need to expand to meet this growth. Our failure to expand and upgrade our networks to meet the increased usage could have a material adverse effect on our business. It is also critical that we continue to add undersea capacity connecting our operations in Puerto Rico with the U.S. mainland to ensure we can meet the growing bandwidth demands of our customers.

 

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, in July 2008, we switched our primary vendor for outsourced billing and related services from Convergys Information Management Group, Inc. to Fidelity Information Services, Inc. While we will continue to use our existing Virtuoso billing platform, the transition to a new billing vendor involves operational risks that could cause a disruption in our business that could negatively impact our consolidated results of operations and overall customer experience. 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, system failures and loss of informational databases 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, hackers, 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. In addition, maintaining the privacy of our customers’ and employees’ information is of critical importance to us. If we were to lose some of this information, whether through theft, hacking or other means, we could incur significant costs and our reputation could be damaged.

 

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

 

We will need to refinance our indebtedness on or before maturity and may be unable to do so.

 

We will need to refinance all or a portion of our indebtedness on or before maturity. Recent disruptions in the financial markets could make it more difficult to obtain debt or equity financing on reasonable terms or at all. The term loan portion of the Senior Secured Credit Facility, which at May 31, 2009 had $550.0 million outstanding, matures with two equal installments of $275.0 million owing in August 2010 and February 2011. In addition, our revolving credit facility under the Senior Secured Credit Facility, which had $0 outstanding at May 31, 2009, matures in February 2010. Accordingly, we will need to begin refinancing discussions with our lenders in the near future. 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 on or prior to its maturity. However, we may not be able to refinance any or all of our indebtedness on favorable terms or at all.

 

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

 

We are a highly leveraged company. At May 31, 2009, 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 2009 was $224.6 million and capital expenditures were approximately $121.2 million.

 

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

 

 

 

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 $147.5 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 2009 was approximately $174.0 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 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 July 23, 2009, affiliates of Welsh, Carson, Anderson and Stowe (“Welsh Carson”) collectively owned approximately 21 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. If our transaction with AT&T is not consummated, the market price of our common stock could significantly decline. During the twelve months ended May 31, 2009, the market price of our common stock ranged from $1.80 to $8.74 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 19% of our outstanding shares of common stock. Accordingly, these equity investors have significant influence on our company. These equity investors may make decisions that are adverse to the interests of the 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.

 

 

 

 

Directors and Executive Officers of Centennial

 

Executive officers of Centennial are elected annually by the board of directors and serve until their successors are duly elected and qualified. Centennial has eleven directors. Each director is elected annually and serves until his or her successor is duly elected and qualified.

 

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.

 

J. Stephen Vanderwoude has served as a director of Centennial since October 1999 and was appointed Chairman of the Board of Directors of Centennial in January 2008. 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.

 

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

 

Michael R. Coltrane has served as a director of Centennial since November 2007. He was formerly the Chairman, President and Chief Executive Officer for CT Communications, Inc., an integrated telecommunications provider in North Carolina that was acquired in 2007 by Windstream Corporation. Prior to joining CT Communications in 1988, he was the Executive Vice President of First Charter Corporation, a regional banking and financial services company. Mr. Coltrane previously served as the Chairman, Vice Chairman and Secretary of the United States Telecom Association.

 

Anthony J. de Nicola has served as a director of Centennial since January 1999. He joined Welsh Carson in 1994 and was named Co-President in 2007. He is also 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.

 

Thomas E. McInerney has served as a director since January 1999 and was Chairman of the board of directors of Centennial from January 1999 to January 2008. 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 Dr. 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.

 

John J. Mueller has served as a director of Centennial since September 2007. He is currently an independent business consultant and was formerly the Chairman of Idearc, Inc., a directory publishing and information services business from 2006 to 2008. Mr. Mueller was previously the President, Chief Executive Officer and a member of the board of directors of Valor Communications Group, Inc. from 2004 to 2006 and was President, Chief Operating Officer and Executive Vice President of Valor from 2002 to 2004. He was formerly with Cincinnati Bell Inc. in various executive, operating and sales roles from 1979 to 2001.

 

James P. Pellow Ed. D., has served as a director of Centennial since September 2003. Dr. Pellow has served as the Executive Vice President and Chief Operating Officer of St. John’s University since 1999. Dr. Pellow has served at St. John’s University in various capacities since 1991. Prior to 1991, Dr. 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 A. 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 United Surgical Partners, Inc. and United Components, Inc.

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.

 

Paul H. Sunu has served as a director of Centennial since September 2007. He is currently the Chief Financial Officer of Hargray Communications Group and was Chief Financial Officer of Hawaiian Telcom from 2007 to 2008. He was previously a member of the board of directors and Chief Financial Officer for Madison River Telephone Company LLC from 1996 to 2007.

 

Audit Committee

 

The current members of our Audit Committee are James P. Pellow (chairman), Michael R. Coltrane, Raymond Ranelli and Paul H. Sunu.

 

Compensation Committee

 

The current members of the Compensation Committee are John J. Mueller (chairman), Anthony J. de Nicola, Thomas E. McInerney and J. Stephen Vanderwoude.

 

Corporate Governance and Nominating Committee

 

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

 

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.

 

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 2009.

 

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, 2004, 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 5/31/04 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, 2009 and the selected balance sheet data as of May 31, 2009 and 2008 have been derived from our audited Consolidated Financial Statements included elsewhere herein.

 

The selected consolidated financial data as of May 31, 2007, 2006 and 2005 and for the years ended May 31, 2006 and 2005 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, 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 approximately 1.1 million wireless customers and approximately 694,900 access line equivalents in markets covering over 13 million Net Pops in the United States and Puerto Rico. In the United States, we are a regional wireless service provider in small cities and rural areas in two geographic clusters covering parts of six states in the Midwest and Southeast. In our Puerto Rico-based service area, we own and operate wireless networks in Puerto Rico and the U.S. Virgin Islands, and in Puerto Rico, we are also a facilities-based, fully integrated communications service provider offering broadband communications services to business and residential customers.

 

On November 7, 2008, we entered into an Agreement and Plan of Merger with AT&T Inc. (“AT&T”) providing for the acquisition of Centennial by AT&T (the “AT&T Transaction”). Under the terms of the AT&T Transaction Agreement, our stockholders will receive $8.50 per share in cash. The AT&T Transaction was approved by our stockholders in February 2009. Completion of the AT&T Transaction is not subject to a financing condition but remains subject to (i) approval by the Federal Communications Commission (“FCC”) and (ii) other customary conditions. The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired; however, the parties are still discussing the transaction with the Department of Justice. The parties anticipate that the AT&T Transaction will be completed during the third quarter of calendar year 2009, assuming timely satisfaction or waiver of all remaining closing conditions. We believe that the pendency of the AT&T Transaction has had and may continue to have a negative impact on our business, including making it more difficult to attract and retain customers.

 

As discussed in Note 2 to the consolidated financial statements, the results of operations presented below exclude our Dominican Republic operations (“Centennial Dominicana”).

 

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 by serving local markets with high quality networks, company-owned stores and well-trained sales and service associates. Our local scale and knowledge have led to a strong track record of success.

 

In the United States, we provide wireless voice and data services in two geographic clusters, covering approximately 9.0 million Net Pops. Our Midwest cluster includes parts of Indiana, Michigan and Ohio, and our Southeast cluster includes parts of Louisiana, Mississippi and Texas. Our clusters are comprised of small cities and rural areas.

 

In Puerto Rico, we offer wireless and broadband communications services. We also offer wireless services in the U.S. Virgin Islands. Puerto Rico is a U.S. dollar-denominated and FCC regulated commonwealth of the United States. San Juan, the capital of Puerto Rico, is currently one of the 25 largest and 5 most dense U.S. wireless markets based on population.

 

We tailor the ultimate customer experience by focusing on attractive local markets with growth opportunities and customizing our sales, marketing and customer support functions to customer needs in these markets. For the fiscal year ended May 31, 2009, approximately 86% of our postpaid wireless sales in the United States and Puerto Rico were made through our own employees, which allows us to have a high degree of control over the customer experience. We invest significantly in training for our customer-facing employees and believe this extensive training and controlled distribution allows us to deliver an experience that we believe is unique and valued by the

customers in our various markets. We target high quality postpaid wireless subscribers which generate high ARPU (revenue per average wireless subscriber, including roaming revenue) in our U.S. and Puerto Rico operations.

 

Our business strategy also requires that our networks are of the highest quality in all our locations. Capital expenditures for our U.S. wireless operations were used to expand our coverage areas and upgrade our cell sites and call switching equipment in existing wireless markets. In Puerto Rico, these investments were used to add capacity and services, to continue the development and expansion of our Puerto Rico wireless systems and to continue the expansion of our Puerto Rico broadband network infrastructure.

 

In our Puerto Rico wireless operations during fiscal 2008, we sold and loaned 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 loaned to a customer was recorded as an asset within property, plant and equipment and was charged to depreciation expense over the life of the phone. As of June 1, 2008, we no longer offered loaned phones to customers.

 

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 12 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 additions — wireless subscribers represents the number of subscribers we were able to add to our service during the period after deducting the number of disconnected or terminated subscribers. By monitoring our growth against our forecast, we believe we are better able to anticipate our future operating performance.

 

ARPU represents the average monthly subscriber revenue generated by a typical subscriber (determined as subscriber revenues divided by average number of retail subscribers). We monitor trends in ARPU to ensure that our rate plans and promotional offerings are attractive to customers and profitable. The majority of our revenues are

derived from subscriber revenues. Subscriber revenues include, among other things: monthly access charges; charges for airtime used in excess of plan minutes; Universal Service Fund (“USF”) support payment revenues; long distance revenues derived from calls placed by our customers; roaming revenue; handset insurance; messaging and other data; and other charges such as activation, voice mail, call waiting, call forwarding and regulatory charges.

 

Roaming revenue represents the amount of revenue we receive from other wireless carriers for providing service to their subscribers who “roam” into our markets and use our systems to carry their 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 voice customer represents the average number of minutes (“MOUs”) used by our voice customers during a period. We monitor growth in MOUs to ensure that the access and overage charges we are collecting are consistent with that growth. In addition, growth in subscriber usage may indicate a need to invest in additional network capacity.

 

Data revenue per average wireless subscriber represents the portion of ARPU generated by our retail subscribers using data services such as text, picture, and multi-media messaging, wireless Internet browsing, wireless e-mail, Instant Internet , data cards and downloading content and applications.

 

Fiber route miles are the number of miles of fiber cable that we have laid. Fiber is installed to connect our equipment to our customer premises equipment. As a facilities-based carrier, the number of fiber route miles is an indicator of the strength of our network, our coverage and our potential market opportunity.

 

Switched access lines represent the number of lines connected to our switching center and serving customers for incoming and outgoing calls. Growing our switched access lines is a fundamental element of our strategy. We monitor the trends in our switched access line growth against our forecast to be able to anticipate future operating performance. In addition, this measurement allows us to compute our current market penetration in the markets we serve.

 

Dedicated access line equivalents represents the amount of Voice Grade Equivalent (“VGE”) lines used to connect two end points. We monitor the trends in our dedicated service using VGE against our forecast to anticipate future operating performance, network capacity requirements and overall growth of our business.

 

On-net buildings are locations where we have established a point of presence to serve one or more customers. Tracking the number of on-net buildings allows us to size our addressable market and determine the appropriate level of capital expenditures. As a facilities-based broadband operator, it is a critical performance measurement of our growth and a clear indication of our increased footprint.

 

Capital expenditures represent the amount spent on upgrades, additions and improvements to our telecommunications network and back office infrastructure. We monitor our capital expenditures as part of our overall financing plan and to ensure that we receive an appropriate rate of return on our capital investments. This statistic is also used to ensure that capital investments are in line with network usage trends and consistent with our objective of offering a high quality network to our customers.

Critical Accounting Policies and Estimates

 

The preparation of our 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, as conditions warrant, to determine adjustments to the estimated remaining useful lives and depreciation rates. Actual economic lives may differ from our estimated useful lives as a result of changes in technology, market conditions and other factors. Such changes could result in a change in our depreciable lives and therefore our depreciation expense in future periods.

 

Valuation of Long-Lived Assets

 

Long-lived assets such as property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In our estimation of fair value, we consider current market values of properties similar to our own, competition, prevailing economic conditions, government policy, including taxation, and the historical and current growth patterns of both our business and the industry. We also consider the recoverability of the cost of our long-lived assets based on a comparison of estimated undiscounted operating cash flows for the related businesses with the carrying value of the long-lived assets. Considerable management judgment is required to estimate the fair value of an impairment, if any, of our assets. These estimates are very subjective in nature; we believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. Estimates related to recoverability of assets are critical accounting policies as management must make assumptions about future revenue and related expenses over the life of an asset, and the effect of recognizing impairment could be material to our consolidated financial position as well as our consolidated results of operations. Actual revenue and costs could vary significantly from such estimates.

Goodwill and Wireless Licenses — Valuation of Goodwill and Indefinite-Lived Intangible Assets

 

A significant portion of our intangible assets are licenses that provide the Company’s wireless operations with the exclusive right to utilize radio frequency spectrum designated on the license to provide wireless communication services. The wireless licenses are treated as indefinite-lived intangible assets under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) and are not amortized, but rather are tested for impairment.

 

We test our wireless licenses for impairment annually, and more frequently if indications of impairment exist. We use a direct value approach in performing our annual impairment test on our wireless licenses, in accordance with a September 29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (“SEC”), “Use of the Residual Method to Value Acquired Assets Other Than Goodwill.” The direct value approach determines fair value using estimates of future cash flows associated specifically with the licenses. If the fair value of the wireless licenses is less than the carrying amount of the licenses, an impairment is recognized.

 

In addition, we test goodwill for impairment pursuant to SFAS 142. We currently test goodwill for impairment using a residual value approach on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (calculated using a discounted cash flow method) with its carrying amount, including goodwill. We determined that our reporting units for SFAS 142 are our operating segments determined under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares implied fair value (i.e., fair value of reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets) of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment.

 

In analyzing goodwill and wireless licenses for potential impairment, we use projections of future cash flows from each reporting unit to determine whether its estimated value exceeds its carrying value. These projections of cash flows are based on our views of growth rates, time horizons of cash flow forecasts, assumed terminal value, estimates of our future cost structures and anticipated future economic conditions and the appropriate discount rates relative to risk and estimates of residual values. These projections are very subjective in nature. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. The use of different estimates or assumptions within our discounted cash flow model (e.g., growth rates, future economic conditions or discount rates and estimates of terminal values) when determining the fair value of the reporting unit and wireless licenses are subjective and could result in different values and may affect any related goodwill or wireless licenses impairment charge.

 

Stock-Based Compensation

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. We recognize compensation expense for such awards based on the estimated grant date fair value method using the Black-Scholes valuation model. Compensation expense is recognized on a straight-line basis over their respective vesting periods, net of estimated forfeitures.

 

In the process of implementing SFAS 123(R) we analyzed certain key variables, such as expected volatility and expected life to determine an accurate estimate of these variables. For the fiscal year ended May 31, 2009, we utilized an expected volatility with a range of 62.11%-63.53% and an expected life of 6.25 years. The expected life of the option is calculated using the simplified method set out in SEC Staff Accounting Bulletin No. 107 (as amended by Staff Accounting Bulletin No. 110) using the vesting term of 3 or 4 years and the contractual term of 7 or 10 years, depending on the option tranche. The simplified method defines the expected life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. SFAS 123(R)

requires that we calculate stock-based compensation expense based on awards that are ultimately expected to vest. Accordingly, stock-based compensation expense for the fiscal year ended May 31, 2009 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual option forfeitures.

 

Income Taxes

 

The computation of income taxes is subject to estimation due to the significant judgment required with respect to the tax positions we have taken that have been or could be challenged by taxing authorities.

 

Our income tax provision is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate.

 

Tax law requires items to be included in the tax return at different times than when these items are reflected in the 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.

 

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In the first quarter of fiscal 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109 (“FIN 48”) (see Note 8 to the Consolidated Financial Statements). As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process prescribed in the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

 

We adjust our income tax provision in the period it is determined that actual results will differ from our estimates. The income tax provision reflects tax law and rate changes in the period such changes are enacted.

 

 

 

Revenue.   U.S. wireless service revenue increased for the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008. The increase was primarily due to higher sales of value-added features (predominantly data services) and rate plans with higher recurring charges as described in the ARPU section below, partially offset by a decrease in the number of subscribers.

 

U.S. wireless roaming revenue increased for the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008 primarily due to an increase in data roaming revenue partially offset by a decrease in voice roaming revenue. The decrease in voice roaming revenue was due to a decrease in the average roaming rate per minute of use, partially offset by an increase in the voice roaming MOUs.

 

Equipment sales decreased during the fiscal year ended May 31, 2009, as compared to the fiscal ended May 31, 2008. The decrease was related to a decrease in the number of phones sold due to a decrease in gross additions, partially offset by an increase in revenue associated with our phone insurance program.

 

Our U.S. wireless operations had approximately 652,000 and 665,300 subscribers at May 31, 2009 and 2008, respectively. Postpaid subscribers account for 98% of total U.S. wireless subscribers as of May 31, 2009. During the twelve months ended May 31, 2009, increases in subscribers from new activations of 178,300 were offset by subscriber cancellations of 191,600. The monthly postpaid churn rate was 2.3% for the fiscal year ended May 31, 2009, as compared to 2.0% for the fiscal year ended May 31, 2008. The cancellations experienced by our U.S. wireless operations and aggregate reduction in the number of subscribers during the year were primarily related to non-payment, competition and the pending AT&T Transaction.

 

U.S. wireless ARPU was $74 for the fiscal year ended May 31, 2009, as compared to $70 for the same period a year ago. The increase in U.S. wireless ARPU was primarily due to an increase in sales of value-added features, including data services (such as short message services, multi-media services and downloads) and higher access fees per subscriber due to an increase in the number of subscribers on our Blue Nation (nationwide) rate plans, which generally have a higher monthly recurring charge than other rate plans. Average MOUs per subscriber were 1,091 per month for the fiscal year ended May 31, 2009, as compared to 1,062 for the same period the prior year.

Costs and expenses.   Cost of services increased during the fiscal year ended May 31, 2009, as compared to the same period the prior year, primarily due to an increase in telephone service costs and an increase in expenses related to providing data services, partially offset by decreases in property taxes.

 

Cost of equipment sold increased for the fiscal year ended May 31, 2009, as compared to the same period last year, primarily due to a higher average cost per phone, partially offset by fewer activations and fewer phones used for customer retention.

 

Sales and marketing expenses decreased for the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008, primarily due to a decrease in advertising expenses.

 

General and administrative expenses increased for the fiscal year ended May 31, 2009, as compared to the same period in the prior year, due primarily to an increase in bad debt and rent expense, partially offset by reductions in billing costs.

 

 

 

 

Revenue.   Puerto Rico wireless service revenue increased for the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008. The increase primarily relates to an increase in USF support received in Puerto Rico, partially offset by a slight decrease in the number of subscribers, as continued declines in traditional voice customers more than offset an increase in EV-DO (evolution, data optimized)-based Instant Internet broadband data customers.

 

Roaming revenue increased during the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008, primarily due to an increase in certain of our competitors’ customers using data services while roaming on our network.

 

Equipment sales increased during the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008, primarily due to an increase in phones sold to customers (due in part to the discontinuation of the loaner phone program described below), partially offset by a decrease in revenue per unit.

 

Our Puerto Rico wireless operations had approximately 426,200 and 427,300 subscribers at May 31, 2009 and 2008, respectively. Postpaid subscribers represented approximately 99% of our total Puerto Rico wireless subscribers at May 31, 2009 and May 31, 2008. During the twelve months ended May 31, 2009, increases from new activations of 143,400 were offset by subscriber cancellations of 144,500. The monthly postpaid churn rate

increased to 2.8% for the fiscal year ended May 31, 2009, from 2.4% for the same period last year. The cancellations experienced by our Puerto Rico wireless operations and aggregate reduction in the number of subscribers during the year were primarily due to non-payment, competition, and the pending AT&T Transaction.

 

Puerto Rico wireless ARPU was $66 for the fiscal years ended May 31, 2009 and May 31, 2008. The stability in ARPU was primarily due to higher data service revenue (including EV-DO, short message services, multimedia services and downloads), USF revenue, and roaming revenue per subscriber, offset by lower voice access, usage related, and feature revenue per subscriber. Our voice subscribers used an average of 1,886 MOUs during the fiscal year ended May 31, 2009, compared to 1,847 MOUs during the fiscal year ended May 31, 2008.

 

Costs and expenses.   Cost of services increased during the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008. The increase was primarily due to increases in roamer service costs (amounts that we pay other wireless carriers when our subscribers use their networks), tower-site related costs, and telephone service costs. These increases were partially offset by decreases in expenses related to providing data services and long distance costs.

 

Cost of equipment sold increased during the fiscal year ended May 31, 2009, as compared to the same period last year. The increase was primarily due to the discontinuation of our loaner phone program as of June 1, 2008. Under the program, in which we retained title to the customer handsets, phones were capitalized and depreciated over 18 months and accordingly not charged to cost of equipment sold. With the discontinuation of this program, we exclusively sell phones to customers, and accordingly, all phones are charged to cost of equipment sold. For the fiscal year ended May 31, 2008, the amount of loaner phones that were capitalized totaled $18,408. The increase in cost of equipment sold was also due to a higher average cost per phone and a greater number of phones sold to customers as compared to the same period last year.

 

Sales and marketing expenses decreased during the fiscal year ended May 31, 2009, as compared to the same period last year. The decrease was primarily due to decreases in advertising costs and commission expenses, partially offset by increases in compensation and store-related costs.

 

General and administrative expenses decreased during the fiscal year ended May 31, 2009, as compared to the fiscal year ended May 31, 2008. The decrease was primarily due to decreases in bad debt expense, subscriber billing costs, and fees associated with our handset insurance program, partially offset by increases in compensation costs and bank service fees.