10-Q 1 csal-10q_20160630.htm 2Q FORM 10-Q csal-10q_20160630.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 001-36708

 

Communications Sales & Leasing, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

46-5230630

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

10802 Executive Center Drive

Benton Building Suite 300

Little Rock, Arkansas

72211

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (501) 850-0820

 

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  x    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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x      No  o

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a small reporting company)

  

Small reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o    No  x

As of August 5, 2016, the registrant had 153,911,063 shares of common stock, $0.0001 par value per share, outstanding.

 

 


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EXPLANATORY NOTE

Prior to April 24, 2015, Communications Sales & Leasing, Inc. (the “Company,” “CS&L,” “we,” “us” or “our”) was a wholly-owned subsidiary of Windstream Holdings, Inc. (“Windstream Holdings,” and together with its subsidiaries, “Windstream”). On April 24, 2015, Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) and a small consumer competitive local exchange carrier (“CLEC”) business (the “Consumer CLEC Business”), to CS&L. In exchange, CS&L issued to Windstream (i) approximately 149.8 million shares of its common stock, (ii) $400.0 million aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “Senior Secured Notes”), (iii) $1.11 billion aggregate principal amount of 8.25% Senior Notes due October 15, 2023 (the “Senior Unsecured Notes” and together with the Senior Secured Notes, the “Notes”) and (iv) approximately $2.0 billion in cash obtained from borrowings under CS&L’s senior credit facilities. The contribution of the Distribution Systems and the Consumer CLEC Business and the related issuance of cash, debt and equity securities are referred to herein as the “Spin-Off.” The Spin-Off was effective on April 24, 2015.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements as defined under U.S. federal securities law. Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: the benefits and tax treatment of the Spin-Off; future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the impact of the acquisition of PEG Bandwidth, LLC (“PEG Bandwidth”); expectations regarding the impact and timing of the pending acquisition of Tower Cloud, Inc. (“Tower Cloud”), including expectations regarding operational synergies with PEG Bandwidth; expectations regarding future deployment of fiber strand miles and recognition of revenue related thereto; expectations regarding levels of capital expenditures; the deductibility of goodwill for tax purposes; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations.

Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be realized. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

 

·

the ability and willingness of Windstream and other current and future customers to meet and/or perform their obligations under any contractual arrangements entered into with us, including master lease arrangements, and any of their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

 

·

the ability of Windstream and other current and future customers to comply with laws, rules and regulations in the operation of the assets we lease to them;

 

·

the ability and willingness of Windstream and other current and future customers to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant;

 

·

the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire and lease the respective properties on favorable terms or operate and integrate the acquired business;

 

·

our ability to generate sufficient cash flows to service our outstanding indebtedness;

 

·

our ability to access debt and equity capital markets;

 

·

the impact on our business or the business of our customers as a result of credit rating downgrades;

 

·

fluctuating interest rates;

 

·

our ability to retain our key management personnel;

 

·

our ability to qualify or maintain our status as a real estate investment trust (“REIT”);

 

·

changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs;

 

·

covenants in our debt agreements that may limit our operational flexibility;

 

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·

the risk that we fail to fully realize the potential benefits of the PEG Bandwidth and Tower Cloud transactions or have difficulty integrating PEG Bandwidth or Tower Cloud;  

 

·

the possibility that the terms of the Tower Cloud transaction are modified;

 

·

the risk that the Tower Cloud transaction agreements may be terminated prior to expiration;

 

·

risks related to satisfying the conditions to the Tower Cloud transaction, including timing (including possible delays) and receipt of regulatory approvals from various governmental entities (including any conditions, limitations or restrictions placed on these approvals) and the risk that one or more governmental entities may deny approval;

 

·

other risks inherent in the communications industry and in the ownership of communications distribution systems, including potential liability relating to environmental matters and illiquidity of real estate investments; and

 

·

additional factors discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, in Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015, as well as those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (the “SEC”).

Forward-looking statements speak only as of the date of this Quarterly Report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

 

 

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Communications Sales & Leasing, Inc.

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

5

 

Communication Sales & Leasing, Inc.

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Income

6

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

7

 

Condensed Consolidated Statements of Shareholders’ Deficit

8

 

Condensed Consolidated Statements of Cash Flows

9

 

Notes to Condensed Consolidated Financial Statements

10

 

CLEC Business

 

 

Statements of Revenues and Direct Expenses

31

 

Notes to Financial Statements

32

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

44

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

 

 

 

Signatures

47

 

 

Exhibit Index

48

 

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Communications Sales & Leasing, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(Thousands, except par value)

 

June 30, 2016

 

 

December 31, 2015

 

Assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

2,569,402

 

 

$

2,372,651

 

Cash and cash equivalents

 

 

48,813

 

 

 

142,498

 

Accounts receivable, net

 

 

8,458

 

 

 

2,083

 

Goodwill

 

 

146,590

 

 

 

-

 

Intangible assets, net

 

 

47,920

 

 

 

10,530

 

Straight-line rent receivable

 

 

20,422

 

 

 

11,795

 

Other assets

 

 

10,070

 

 

 

3,079

 

Total Assets

 

$

2,851,675

 

 

$

2,542,636

 

 

Liabilities, Convertible Preferred Stock and Shareholders' Deficit:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

20,206

 

 

$

10,409

 

Accrued interest payable

 

 

26,384

 

 

 

24,440

 

Deferred revenue

 

 

148,346

 

 

 

67,817

 

Derivative liability

 

 

66,888

 

 

 

5,427

 

Dividends payable

 

 

93,208

 

 

 

90,507

 

Deferred income taxes

 

 

5,115

 

 

 

5,714

 

Capital lease obligations

 

 

48,980

 

 

 

-

 

Notes and other debt, net

 

 

3,690,186

 

 

 

3,505,228

 

      Total liabilities

 

 

4,099,313

 

 

 

3,709,542

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock, Series A, $0.0001 par value, 88 shares authorized, issued and outstanding, $87,500 liquidation value

 

 

79,063

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Shareholders' Deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 50,000 shares authorized, no shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value, 500,000 shares authorized, issued and outstanding: 153,244 shares at June 30, 2016 and 149,862 at December 31, 2015

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

81,881

 

 

 

1,392

 

Accumulated other comprehensive loss

 

 

(66,967

)

 

 

(5,427

)

Distributions in excess of accumulated earnings

 

 

(1,341,630

)

 

 

(1,162,886

)

      Total shareholders' deficit

 

 

(1,326,701

)

 

 

(1,166,906

)

Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit

 

$

2,851,675

 

 

$

2,542,636

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statements of Income

(unaudited)

(Thousands, except per share data)

 

Three Months Ended

June 30, 2016

 

 

Period from

April 24 - June 30, 2015

 

 

Six Months Ended

June 30, 2016

 

 

Period from

April 24 - June 30, 2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

$

169,050

 

 

$

124,172

 

 

$

337,691

 

 

$

124,172

 

Fiber Infrastructure

 

 

13,776

 

 

 

-

 

 

 

13,776

 

 

 

-

 

Consumer CLEC

 

 

5,747

 

 

 

4,576

 

 

 

11,781

 

 

 

4,576

 

Total revenues

 

 

188,573

 

 

 

128,748

 

 

 

363,248

 

 

 

128,748

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

68,036

 

 

 

48,797

 

 

 

134,085

 

 

 

48,797

 

Depreciation and amortization

 

 

92,385

 

 

 

64,444

 

 

 

178,725

 

 

 

64,444

 

General and administrative expense

 

 

8,239

 

 

 

3,161

 

 

 

13,428

 

 

 

3,161

 

Operating expense

 

 

9,911

 

 

 

3,741

 

 

 

14,618

 

 

 

3,741

 

Transaction related costs

 

 

11,210

 

 

 

73

 

 

 

15,120

 

 

 

73

 

Total costs and expenses

 

 

189,781

 

 

 

120,216

 

 

 

355,976

 

 

 

120,216

 

(Loss) income before income taxes

 

 

(1,208

)

 

 

8,532

 

 

 

7,272

 

 

 

8,532

 

Income tax expense

 

 

327

 

 

 

231

 

 

 

771

 

 

 

231

 

Net (loss) income

 

 

(1,535

)

 

 

8,301

 

 

 

6,501

 

 

 

8,301

 

Participating securities' share in earnings

 

 

(402

)

 

 

(325

)

 

 

(757

)

 

 

(325

)

Dividends declared on convertible preferred stock

 

 

(438

)

 

 

-

 

 

 

(438

)

 

 

-

 

Amortization of discount on convertible preferred stock

 

 

(496

)

 

 

-

 

 

 

(496

)

 

 

-

 

Net (loss) income applicable to common shareholders

 

$

(2,871

)

 

$

7,976

 

 

$

4,810

 

 

$

7,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.02

)

 

$

0.05

 

 

$

0.03

 

 

$

0.05

 

Diluted

 

$

(0.02

)

 

$

0.05

 

 

$

0.03

 

 

$

0.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

150,913

 

 

 

149,827

 

 

 

150,416

 

 

 

149,827

 

Diluted

 

 

150,913

 

 

 

149,827

 

 

 

150,661

 

 

 

149,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.60

 

 

$

0.44

 

 

$

1.20

 

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

(Thousands)

 

Three Months Ended

June 30, 2016

 

 

Period from

April 24 - June 30, 2015

 

 

Six Months Ended

June 30, 2016

 

 

Period from

April 24 - June 30, 2015

 

Net (loss) income

 

$

(1,535

)

 

$

8,301

 

 

$

6,501

 

 

$

8,301

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on derivative contracts

 

 

(21,019

)

 

 

28,551

 

 

 

(61,461

)

 

 

28,551

 

Changes in foreign currency translation

 

 

(159

)

 

 

-

 

 

 

(79

)

 

 

-

 

Other comprehensive (loss) income

 

 

(21,178

)

 

 

28,551

 

 

 

(61,540

)

 

 

28,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) gain

 

$

(22,713

)

 

$

36,852

 

 

$

(55,039

)

 

$

36,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited)

(Thousands, except share data)

 

Preferred Stock

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Distributions in Excess of Accumulated Earnings

 

 

Total Shareholders' Deficit

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 24, 2015

 

 

-

 

 

$

-

 

 

 

149,827,214

 

 

$

15

 

 

$

-

 

 

$

-

 

 

$

2,508,270

 

 

$

2,508,285

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,301

 

 

 

8,301

 

Distributions to Windstream related to Spin-Off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,447,879

)

 

 

(3,447,879

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

28,551

 

 

 

-

 

 

 

28,551

 

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(66,576

)

 

 

(66,576

)

Equity issuance cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(338

)

 

 

-

 

 

 

(118

)

 

 

(456

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

4,440

 

 

 

-

 

 

 

338

 

 

 

-

 

 

 

-

 

 

 

338

 

Balance at June 30, 2015

 

 

-

 

 

$

-

 

 

 

149,831,654

 

 

$

15

 

 

$

-

 

 

$

28,551

 

 

$

(998,002

)

 

$

(969,436

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

-

 

 

$

-

 

 

 

149,862,459

 

 

$

15

 

 

$

1,392

 

 

$

(5,427

)

 

$

(1,162,886

)

 

$

(1,166,906

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,501

 

 

 

6,501

 

Issuance of common stock, net of costs

 

 

-

 

 

 

-

 

 

 

3,202,160

 

 

 

-

 

 

 

79,151

 

 

 

-

 

 

 

-

 

 

 

79,151

 

Amortization of discount on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(496

)

 

 

-

 

 

 

-

 

 

 

(496

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(61,540

)

 

 

-

 

 

 

(61,540

)

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(182,956

)

 

 

(182,956

)

Convertible preferred stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(437

)

 

 

(437

)

Equity issuance cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(110

)

 

 

-

 

 

 

-

 

 

 

(110

)

Net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(203

)

 

 

-

 

 

 

(1,852

)

 

 

(2,055

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

178,990

 

 

 

-

 

 

 

2,147

 

 

 

-

 

 

 

-

 

 

 

2,147

 

Balance at June 30, 2016

 

 

-

 

 

$

-

 

 

 

153,243,609

 

 

$

15

 

 

$

81,881

 

 

$

(66,967

)

 

$

(1,341,630

)

 

$

(1,326,701

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

(Thousands)

 

Six Months Ended

June 30, 2016

 

 

Period from

April 24 - June 30, 2015

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

6,501

 

 

$

8,301

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

178,725

 

 

 

64,444

 

Amortization of deferred financing costs

 

 

3,681

 

 

 

1,272

 

Amortization of debt discount

 

 

3,926

 

 

 

1,366

 

Deferred income taxes

 

 

(599

)

 

 

(292

)

Straight-line rental revenues

 

 

(8,627

)

 

 

(3,200

)

Stock-based compensation

 

 

2,147

 

 

 

338

 

Other

 

 

(6

)

 

 

35

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

485

 

 

 

(1,640

)

Other assets

 

 

(2,104

)

 

 

(1,827

)

Accounts payable, accrued expenses and other liabilities

 

 

(318

)

 

 

24,634

 

Net cash provided by operating activities

 

 

183,811

 

 

 

93,431

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(316,133

)

 

 

-

 

Consideration paid to Windstream Services, LLC

 

 

-

 

 

 

(1,035,029

)

Capital expenditures

 

 

(9,452

)

 

 

(397

)

Net cash used in investing activities

 

 

(325,585

)

 

 

(1,035,426

)

Cash flow from financing activities

 

 

 

 

 

 

 

 

Principal payment on debt

 

 

(11,394

)

 

 

-

 

Dividends paid

 

 

(180,694

)

 

 

-

 

Proceeds from issuance of Term Loans

 

 

-

 

 

 

1,127,000

 

Proceeds from issuance of Notes

 

 

148,875

 

 

 

-

 

Borrowings under revolving credit facility

 

 

321,000

 

 

 

-

 

Payments under revolving credit facility

 

 

(278,936

)

 

 

-

 

Capital lease payments

 

 

(469

)

 

 

-

 

Deferred financing costs

 

 

(2,998

)

 

 

(29,933

)

Common stock issuance, net of costs

 

 

54,836

 

 

 

-

 

Net share settlement

 

 

(2,055

)

 

 

(456

)

Cash in-lieu of fractional shares

 

 

-

 

 

 

(19

)

Net cash provided by financing activities

 

 

48,165

 

 

 

1,096,592

 

Effect of exchange rates on cash and cash equivalents

 

 

(76

)

 

 

-

 

Net (decrease) increase in cash and cash equivalents

 

 

(93,685

)

 

 

154,597

 

Cash and cash equivalents at beginning of period

 

 

142,498

 

 

 

18

 

Cash and cash equivalents at end of period

 

$

48,813

 

 

$

154,615

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

124,694

 

 

$

24,583

 

Cash paid for income taxes

 

$

1,827

 

 

$

-

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired but not yet paid

 

$

1,188

 

 

$

-

 

Tenant capital improvements

 

$

70,603

 

 

$

6,303

 

Acquisition of businesses through equity consideration

 

$

102,881

 

 

$

-

 

Issuance of notes and other debt to Windstream Services, LLC, net of deferred financing costs ($34,681)

 

$

-

 

 

$

2,412,829

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

9


Table of Contents                                                                                                                                                                              

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

Note 1. Organization and Description of Business

CS&L was incorporated in the state of Maryland on September 4, 2014 as a subsidiary of Windstream. In connection with the Spin-Off, Windstream and CS&L entered into a long-term, triple-net lease (the “Master Lease”) pursuant to which CS&L leases the Distribution Systems to Windstream. The assets and liabilities of the Distribution Systems and Consumer CLEC Business were recorded in our Condensed Consolidated Financial Statements on a carryover basis as of the date of the Spin-Off.

 

CS&L is an independent, internally managed REIT engaged in the acquisition and construction of mission critical infrastructure in the communications industry. The Company is principally focused on acquiring and constructing fiber optic broadband networks, wireless communications towers, copper and coaxial broadband networks and data centers. With the acquisition of PEG Bandwidth, LLC (“PEG Bandwidth”), the Company has also become a leading provider of infrastructure solutions including cell site backhaul and dark fiber, to the telecommunications industry. Presently, CS&L’s primary source of revenue is rental revenues from leasing the Distribution Systems to Windstream Holdings pursuant to the Master Lease. CS&L intends to elect on our U.S. federal income tax return for the taxable year ending December 31, 2015 to be treated as a REIT.

 

The Consumer CLEC Business, which was reported as an integrated operation within Windstream prior to the Spin-Off, offers voice, broadband, long-distance, and value-added services to residential customers located primarily in rural locations. Substantially all of the network assets used to provide these services to customers are contracted through interconnection agreements with other telecommunications carriers.

 

We have elected to treat Talk America Services, LLC (“Talk America”), and CSL Bandwidth, Inc., the indirect, wholly-owned subsidiaries of CS&L through which we operate the Consumer CLEC Business and PEG Bandwidth’s business, respectively, as taxable REIT subsidiaries effective as of the first day of CS&L’s initial REIT tax year, or in the case of PEG Bandwidth, the date of acquisition.

 

 

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results from any interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 (“Annual Report”), filed with the SEC on March 7, 2016. Accordingly, significant accounting policies and other disclosures normally provided have been omitted from the accompanying Condensed Consolidated Financial Statements and related notes since such items are disclosed in our Annual Report. All material intercompany balances and transactions have been eliminated.

 

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

Income Taxes—We currently have no liabilities for uncertain income tax positions. We have not yet filed our initial corporate tax return and therefore are not yet subject to examination.

 

Business Combinations—In accordance with ASC 805, Business Combinations, we apply the acquisition method of accounting for acquisitions meeting the definition of a business combination, where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with those of the Company from the dates of the respective acquisitions. Any excess of the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. The Company continues to evaluate acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.

 

GoodwillGoodwill is recognized for the excess of purchase price over the fair value of net assets of businesses acquired. Goodwill is reviewed for impairment at least annually. In accordance with ASC 350-20, Intangibles-Goodwill and Other, we evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter.

Property, Plant and EquipmentProperty, plant and equipment is stated at original cost, net of accumulated depreciation. The Company capitalizes costs incurred in bringing property, plant and equipment to an operational state, including all activities directly associated with the acquisition, construction, and installation of the related assets it owns. The Company also enters into leasing arrangements providing for the long‑term use of constructed fiber that is then integrated into the Company’s network infrastructure. For each lease that qualifies as a capital lease, the present value of the lease payments, which may include both periodic lease payments over the term of the lease as well as upfront payments to the lessor, is capitalized at the inception of the lease and included in property and equipment.

Certain property, plant and equipment are depreciated using a group composite depreciation method. Under this method, when property is retired, the original cost, net of salvage value, is charged against accumulated depreciation and no immediate gain or loss is recognized on the disposition of the property. For all other property, which includes amortization of capital lease assets, depreciation is computed using the straight-line method over the estimated useful life of the respective property. When the property is retired or otherwise disposed of, the related cost and accumulated depreciation are written-off, with the corresponding gain or loss reflected in operating results.

Costs of maintenance and repairs to property, plant and equipment subject to the Master Lease are the responsibility of our tenant. Costs of maintenance and repairs to property, plant and equipment not subject to triple-net leasing arrangements are expensed as incurred.

During the quarter ended March 31, 2016, we initiated a program whereby we acquire real property interests from third parties owning land where communications infrastructure assets are located and who desired to monetize the underlying real property. These real property interests entitle us to receive rental payments from leases on our sites. The financial results of the acquired real property interests are included in the Leasing segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations. For the six months ended June 30, 2016, we invested approximately $1.7 million for the acquisition of real property interests which are recorded into real estate investments on our Condensed Consolidated Balance Sheet.

Foreign Currency TranslationThe financial statements of our international subsidiaries whose functional currency is the local currency are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities and the weighted average exchange rate for the applicable period for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of comprehensive income in stockholders’ equity.

Reclassifications—Certain amounts have been reclassified to conform with current year presentation. We determined that certain immaterial misclassifications existed in the supplemental guarantor information condensed consolidated statements of comprehensive income for the period from April 24, 2015 to June 30, 2015. See Note 15.

Transaction Related Costs—The Company expenses transaction related costs in the period in which they are incurred and services are received. Transaction related costs include incremental acquisition pursuit, transaction and integration costs, including unsuccessful acquisition pursuit costs.  Pursuit and transaction costs include professional services (legal, accounting, advisory, regulatory, etc.), finder’s fees, travel expenses, and other direct expenses associated with an acquisition.  Integration costs include incremental costs

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

necessary to integrate an acquired business, including costs necessary to convert data, severance and retention bonuses payable to employees of an acquired business.

Recently Issued Accounting Standards—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted for public companies for annual periods beginning after December 15, 2016. The Company is in the process of evaluating this guidance to determine the impact it will have on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.  This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company is in the process of evaluating this guidance to determine the impact it will have on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. We have adopted ASU 2016-09 effective April 1, 2016, and will reverse compensation cost of forfeited awards as they occur. At the time of adoption, we had not experienced any forfeited awards and therefore no cumulative-effect adjustment was necessary.

 

 

Note 3. Business Combinations

Summit Wireless Infrastructure, LLC

On January 22, 2016, we acquired 100% of the outstanding equity of Summit Wireless Infrastructure LLC (“Summit”). Summit builds, owns and operates telecommunication infrastructure serving wireless carriers in Mexico. Consideration given to acquire Summit included performance-based shares of common equity valued at $1.1 million, which will vest in full on the third anniversary of closing date, subject to Summit meeting certain performance targets, and the assumption of Summit’s existing debt. The financial results of Summit are included in the Leasing segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

PEG Bandwidth, LLC

On May 2, 2016, we acquired 100% of the outstanding equity of PEG Bandwidth, LLC (“PEG Bandwidth”) for $323 million in cash, the issuance of 87,500 shares of our Series A Convertible Preferred Stock with a fair value of $78.6 million and 1 million shares of our common stock with an acquisition date fair value of $23.2 million. PEG Bandwidth is a leading provider of infrastructure solutions including cell site backhaul and dark fiber, to the telecommunications industry. The operating results from this acquisition are included in the condensed consolidated financial statements from the acquisition date. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill within our Fiber Infrastructure segment. See Note 7. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

 

 

(thousands)

 

Property, plant and equipment

 

$

292,008

 

Cash and cash equivalents

 

 

7,003

 

Accounts receivable

 

 

6,804

 

Other assets

 

 

5,161

 

Intangible assets

 

 

37,500

 

Accounts payable, accrued expenses and other liabilities

 

 

(8,122

)

Deferred revenue

 

 

(12,700

)

Capital lease obligations

 

 

(49,200

)

Net assets acquired

 

$

278,454

 

 

 

 

 

 

Goodwill

 

$

146,590

 

The above purchase price allocation is considered preliminary and is subject to revision when the valuation of assets and liabilities are finalized upon receipt of the final valuation report from a third party valuation expert, and the resolution of contractual adjustments, such as working capital adjustments as contemplated in the merger agreement are completed.

The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of PEG Bandwidth. The goodwill is expected to be deductible for tax purposes.

Of the $37.5 million of acquired intangible assets, $35.5 million was assigned to customer relationships (weighted average 17 year life) and $2 million was assigned to trademarks (indefinite life).

The acquired business contributed revenues of $13.8 million and operating income of $2.5 million, which excludes transaction and transition costs, to our consolidated results from the date of acquisition through June 30, 2016. We recorded transaction related costs for the three and six months ended June 30, 2016 of $6.6 million and $9.4 million, respectively, in transaction related costs on our Condensed Consolidated Statements of Income.

The following table presents the unaudited pro forma summary of our financial results as if the business combination had occurred on April 24, 2015. The pro forma results include additional depreciation and amortization resulting from purchase accounting adjustments, adjustments to amortized deferred revenue, and interest expense associated with debt used to fund the acquisition. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisition. The pro forma results are not indicative of future results of operations, or results that might have been achieved had the acquisition been consummated as of April 24, 2015.

 

 

Three Months Ended

 

 

Period from

 

 

Six Months Ended

 

 

Period from

 

(Thousands, except per share data)

 

June 30, 2016

 

 

April 24 - June 30, 2015

 

 

June 30, 2016

 

 

April 24 - June 30, 2015

 

Pro forma revenue

 

$

195,600

 

 

$

143,067

 

 

$

390,477

 

 

$

143,067

 

Pro forma net (loss) income

 

 

(6,321

)

 

 

6,225

 

 

 

(1,006

)

 

 

6,225

 

Pro forma net (loss) income per share

 

$

(0.04

)

 

$

0.04

 

 

$

(0.01

)

 

$

0.04

 

 

Windstream Towers

On May 12, 2016, the Company completed the previously announced transaction with Windstream pursuant to which the Company acquired 32 wireless towers owned by Windstream and operating rights for 49 wireless towers previously conveyed to the Company in the Spin-Off for a purchase price of $3 million. The financial results of this tower acquisition are included in the Leasing segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

Tower Cloud, Inc.

On June 20, 2016, we announced that we had entered into a definitive agreement to acquire privately-held Tower Cloud, Inc. (“Tower Cloud”) for $230 million in cash and stock.  In addition to the $180 million of cash and 1.9 million shares of CS&L common stock to

 

13


Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

be delivered at close, Tower Cloud shareholders may receive additional consideration contingent upon Tower Cloud achieving certain defined operational and financial milestones.

Tower Cloud is a leading provider of data transport services, with particular focus on providing infrastructure solutions to the wireless and enterprise sectors, including fiber-to-the-tower backhaul, small cell networks, and dark fiber deployments. The acquisition of Tower Cloud compliments our diversification strategy, will expand our national wireless carrier relationships, and accelerate our small cell and dark fiber businesses.  Following the close of the transaction, which is expected to close by late third quarter 2016, Tower Cloud will be reported as a component of our Fiber Infrastructure segment, where we expect to achieve significant operational synergies with PEG Bandwidth. The transaction is subject to regulatory approvals and other customary terms and conditions.

 

Note 4. Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements, establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 – Unobservable inputs for the asset or liability

Our financial instruments consist of cash and cash equivalents, accounts and other receivables, a derivative liability, our outstanding notes and other debt, and accounts, interest and dividends payable.

The following table summarizes the fair value of our financial instruments at June 30, 2016 and December 31, 2015:

(Thousands)

 

Total

 

Quoted Prices in Active Markets

(Level 1)

 

Prices with Other Observable Inputs

(Level 2)

 

Prices with Unobservable Inputs (Level 3)

 

At June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes - 6.00%, due April 15, 2023

 

$

561,000

 

$

-

 

$

561,000

 

$

-

 

Senior unsecured notes - 8.25%, due October 15, 2023