10-Q 1 csal-10q_20160930.htm CSAL-Q3-20160930 csal-10q_20160930.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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      No    

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        No  

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

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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

As of November 7, 2016, the registrant had 155,789,510 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; the benefits and tax treatment of reorganizing into an “up-REIT” structure; expectations regarding the impact of the acquisitions of PEG Bandwidth, LLC (“PEG Bandwidth”) and Tower Cloud, Inc. (“Tower Cloud”), including expectations regarding operational synergies of the acquisitions; expectations regarding settling conversion of our 3% convertible preferred stock in cash upon conversion; expectations regarding the probability of our obligation to pay contingent consideration upon Tower Cloud’s achievement of certain defined operational and financial milestones; 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 amortization of intangible assets; 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 current and future customers to meet and/or perform their obligations under any contractual arrangements entered into with us;

 

the ability of 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 agreements 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 customer;

 

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 and/or 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;

 

our ability to promptly obtain all necessary services, materials, labor, supplies and rights-of-way required for construction of our projects, and to complete construction without significant delays, disputes or cost overruns;

 

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

 

Consumer CLEC Business

 

 

Statements of Revenues and Direct Expenses

33

 

Notes to Financial Statements

34

Item 2.

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

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

47

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

49

 

 

 

Signatures

50

 

 

Exhibit Index

51

 

 

 

 

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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)

 

September 30, 2016

 

 

December 31, 2015

 

Assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

2,694,141

 

 

$

2,372,651

 

Cash and cash equivalents

 

 

40,762

 

 

 

142,498

 

Accounts receivable, net

 

 

15,846

 

 

 

2,083

 

Goodwill

 

 

263,459

 

 

 

-

 

Intangible assets, net

 

 

162,941

 

 

 

10,530

 

Straight-line revenue receivable

 

 

24,969

 

 

 

11,795

 

Other assets

 

 

15,416

 

 

 

3,079

 

Total Assets

 

$

3,217,534

 

 

$

2,542,636

 

 

Liabilities, Convertible Preferred Stock and Shareholders' Deficit:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

37,925

 

 

$

10,409

 

Accrued interest payable

 

 

57,528

 

 

 

24,440

 

Deferred revenue

 

 

213,889

 

 

 

67,817

 

Derivative liability

 

 

68,758

 

 

 

5,427

 

Dividends payable

 

 

94,470

 

 

 

90,507

 

Deferred income taxes

 

 

31,390

 

 

 

5,714

 

Capital lease obligations

 

 

55,215

 

 

 

-

 

Contingent consideration

 

 

98,600

 

 

 

-

 

Notes and other debt, net

 

 

3,846,711

 

 

 

3,505,228

 

      Total liabilities

 

 

4,504,486

 

 

 

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

 

 

79,807

 

 

 

-

 

 

 

 

 

 

 

 

 

 

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: 155,123 shares at September 30, 2016 and 149,862 at December 31, 2015

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

140,466

 

 

 

1,392

 

Accumulated other comprehensive loss

 

 

(68,938

)

 

 

(5,427

)

Distributions in excess of accumulated earnings

 

 

(1,438,302

)

 

 

(1,162,886

)

      Total shareholders' deficit

 

 

(1,366,759

)

 

 

(1,166,906

)

Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit

 

$

3,217,534

 

 

$

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended

 

 

Period from April 24 -

 

(Thousands, except per share data)

 

2016

 

 

2015

 

 

September 30, 2016

 

 

September 30, 2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

$

169,525

 

 

$

166,959

 

 

$

507,216

 

 

$

291,131

 

Fiber Infrastructure

 

 

25,219

 

 

 

-

 

 

 

38,995

 

 

 

-

 

Consumer CLEC

 

 

5,496

 

 

 

6,675

 

 

 

17,277

 

 

 

11,251

 

Total revenues

 

 

200,240

 

 

 

173,634

 

 

 

563,488

 

 

 

302,382

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

70,522

 

 

 

66,511

 

 

 

204,607

 

 

 

115,307

 

Depreciation and amortization

 

 

96,723

 

 

 

87,271

 

 

 

275,448

 

 

 

151,715

 

General and administrative expense

 

 

10,191

 

 

 

4,229

 

 

 

23,619

 

 

 

7,390

 

Operating expense

 

 

15,704

 

 

 

5,148

 

 

 

30,322

 

 

 

8,889

 

Transaction related costs

 

 

9,315

 

 

 

804

 

 

 

24,435

 

 

 

877

 

Total costs and expenses

 

 

202,455

 

 

 

163,963

 

 

 

558,431

 

 

 

284,178

 

(Loss) income before income taxes

 

 

(2,215

)

 

 

9,671

 

 

 

5,057

 

 

 

18,204

 

Income tax expense

 

 

128

 

 

 

268

 

 

 

899

 

 

 

500

 

Net (loss) income

 

 

(2,343

)

 

 

9,403

 

 

 

4,158

 

 

 

17,704

 

Participating securities' share in earnings

 

 

(407

)

 

 

(430

)

 

 

(1,164

)

 

 

(755

)

Dividends declared on convertible preferred stock

 

 

(649

)

 

 

-

 

 

 

(1,087

)

 

 

-

 

Amortization of discount on convertible preferred stock

 

 

(745

)

 

 

-

 

 

 

(1,241

)

 

 

-

 

Net (loss) income applicable to common shareholders

 

$

(4,144

)

 

$

8,973

 

 

$

666

 

 

$

16,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

0.06

 

 

$

0.00

 

 

$

0.11

 

Diluted

 

$

(0.03

)

 

$

0.06

 

 

$

0.00

 

 

$

0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

153,878

 

 

 

149,834

 

 

 

151,578

 

 

 

149,831

 

Diluted

 

 

153,878

 

 

 

149,834

 

 

 

151,716

 

 

 

149,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.60

 

 

$

0.60

 

 

$

1.80

 

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended

 

 

Period from April 24 -

 

(Thousands)

 

2016

 

 

2015

 

 

September 30, 2016

 

 

September 30, 2015

 

Net (loss) income

 

$

(2,343

)

 

$

9,403

 

 

$

4,158

 

 

$

17,704

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on derivative contracts

 

 

(1,870

)

 

 

(42,544

)

 

 

(63,331

)

 

 

(13,993

)

Changes in foreign currency translation

 

 

(101

)

 

 

-

 

 

 

(180

)

 

 

-

 

Other comprehensive (loss) income

 

 

(1,971

)

 

 

(42,544

)

 

 

(63,511

)

 

 

(13,993

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) gain

 

$

(4,314

)

 

$

(33,141

)

 

$

(59,353

)

 

$

3,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

-

 

 

$

-

 

 

$

2,508,405

 

 

$

2,508,420

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,704

 

 

 

17,704

 

Distributions to Windstream related to Spin-Off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,447,879

)

 

 

(3,447,879

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,993

)

 

 

-

 

 

 

(13,993

)

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(156,926

)

 

 

(156,926

)

Equity issuance cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(516

)

 

 

-

 

 

 

(113

)

 

 

(629

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

8,413

 

 

 

-

 

 

 

1,117

 

 

 

-

 

 

 

-

 

 

 

1,117

 

Balance at September 30, 2015

 

 

-

 

 

$

-

 

 

 

149,835,627

 

 

$

15

 

 

$

601

 

 

$

(13,993

)

 

$

(1,078,809

)

 

$

(1,092,186

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

-

 

 

$

-

 

 

 

149,862,459

 

 

$

15

 

 

$

1,392

 

 

$

(5,427

)

 

$

(1,162,886

)

 

$

(1,166,906

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,158

 

 

 

4,158

 

Issuance of common stock, net of costs

 

 

-

 

 

 

-

 

 

 

5,077,629

 

 

 

-

 

 

 

137,665

 

 

 

-

 

 

 

-

 

 

 

137,665

 

Amortization of discount on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,241

)

 

 

-

 

 

 

-

 

 

 

(1,241

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(63,511

)

 

 

-

 

 

 

(63,511

)

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(276,567

)

 

 

(276,567

)

Convertible preferred stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,087

)

 

 

(1,087

)

Equity issuance cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(625

)

 

 

-

 

 

 

-

 

 

 

(625

)

Net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(203

)

 

 

-

 

 

 

(1,920

)

 

 

(2,123

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

183,072

 

 

 

-

 

 

 

3,478

 

 

 

-

 

 

 

-

 

 

 

3,478

 

Balance at September 30, 2016

 

 

-

 

 

$

-

 

 

 

155,123,160

 

 

$

15

 

 

$

140,466

 

 

$

(68,938

)

 

$

(1,438,302

)

 

$

(1,366,759

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

Nine Months Ended

September 30, 2016

 

 

Period from April 24-

September 30, 2015

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

4,158

 

 

$

17,704

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

275,448

 

 

 

151,715

 

Amortization of deferred financing costs

 

 

5,640

 

 

 

3,039

 

Amortization of debt discount

 

 

5,964

 

 

 

3,253

 

Deferred income taxes

 

 

836

 

 

 

(672

)

Straight-line rental revenues

 

 

(13,174

)

 

 

(7,497

)

Stock-based compensation

 

 

3,478

 

 

 

1,117

 

Other

 

 

22

 

 

 

-

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,435

)

 

 

217

 

Other assets

 

 

(4,951

)

 

 

(1,664

)

Accounts payable, accrued expenses and other liabilities

 

 

27,565

 

 

 

54,047

 

Net cash provided by operating activities

 

 

300,551

 

 

 

221,259

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(489,538

)

 

 

-

 

Consideration paid to Windstream Services, LLC

 

 

-

 

 

 

(1,035,029

)

Capital expenditures

 

 

(19,204

)

 

 

(712

)

Net cash used in investing activities

 

 

(508,742

)

 

 

(1,035,741

)

Cash flow from financing activities

 

 

 

 

 

 

 

 

Principal payment on debt

 

 

(16,744

)

 

 

(5,350

)

Dividends paid

 

 

(273,692

)

 

 

(66,522

)

Proceeds from issuance of Term Loans

 

 

-

 

 

 

1,127,000

 

Proceeds from issuance of Notes

 

 

148,875

 

 

 

-

 

Borrowings under revolving credit facility

 

 

521,000

 

 

 

-

 

Payments under revolving credit facility

 

 

(321,000

)

 

 

-

 

Capital lease payments

 

 

(945

)

 

 

-

 

Deferred financing costs

 

 

(2,946

)

 

 

(30,018

)

Common stock issuance, net of costs

 

 

54,211

 

 

 

(516

)

Net share settlement

 

 

(2,123

)

 

 

(113

)

Cash in-lieu of fractional shares

 

 

-

 

 

 

(19

)

Net cash provided by financing activities

 

 

106,636

 

 

 

1,024,462

 

Effect of exchange rates on cash and cash equivalents

 

 

(181

)

 

 

-

 

Net (decrease) increase in cash and cash equivalents

 

 

(101,736

)

 

 

209,980

 

Cash and cash equivalents at beginning of period

 

 

142,498

 

 

 

18

 

Cash and cash equivalents at end of period

 

$

40,762

 

 

$

209,998

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

158,695

 

 

$

58,600

 

Cash paid for income taxes

 

$

2,522

 

 

$

-

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired but not yet paid

 

$

4,403

 

 

$

-

 

Tenant capital improvements

 

$

112,200

 

 

$

41,289

 

Acquisition of businesses through non-cash consideration

 

$

259,996

 

 

$

-

 

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. Through our fiber infrastructure group, Uniti Fiber, the Company has also become a leading provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry. 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.

 

The Company operates as a REIT for U.S. federal income tax purposes.  As a REIT, the Company is generally not subject to U.S. federal income taxes on income generated by its REIT operations, which includes income derived from the Master Lease.  We have elected to treat certain indirect, wholly-owned subsidiaries of CS&L through which we operate Uniti Fiber and the Consumer CLEC Business as taxable REIT subsidiaries (“TRSs”).  TRSs enable us to engage in activities that do not result in income that would be qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.

 

 

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 filed our initial U.S. federal and state income tax returns which are 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. ASC 805 also requires acquirers, among other things, to estimate the acquisition date fair value of any contingent consideration and to recognize any subsequent changes in the fair value of contingent consideration in earnings. 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.

We acquire real property interests from third parties who own land where communications infrastructure assets are located and desire 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. Real property interests are recorded in 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 consolidating statements of comprehensive income and statement of cash flows for the period April 24, 2015 to September 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.),

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

finder’s fees, travel expenses, and other direct expenses associated with an acquisition.  Integration costs include direct costs necessary to integrate an acquired business, including professional services, systems and data conversion, severance and retention bonuses payable to employees of an acquired business.

Recently Issued Accounting Standards

In May 2014, the 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.  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 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.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on reducing the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In addition to other specific cash flow issues, ASU 2016-15 provides clarification on when an entity should separate cash receipts and cash payments into more than one class of cash flows and when an entity should classify those cash receipts and payments into one class of cash flows on the basis of predominance. The new guidance is effective for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impacts the adoption of this accounting standard will have on our financial statements.

 

Note 3. Business Combinations

Tower Cloud, Inc.

On August 31, 2016, we acquired 100% of the outstanding equity of Tower Cloud, Inc. (“Tower Cloud”) for $187.7 million in cash and 1.9 million shares of our common stock with an acquisition date fair value of $58.5 million.  Additional contingent consideration of up to $130 million, with an acquisition date fair value of $98.6 million, may be paid upon the achievement of certain defined operational and financial milestones. See Note 4. At the Company’s discretion, a combination of cash and CS&L common shares may be used to satisfy the contingent consideration payments, provided that at least 50% of the aggregate amount of payments is satisfied in cash. Tower Cloud provides 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. Following the close of the transaction, the Tower Cloud business and the previously acquired PEG Bandwidth LLC (“PEG Bandwidth”) business were combined into a unified fiber infrastructure organization, Uniti Fiber. 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

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

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:

 

 

 

(thousands)

 

Property, plant and equipment

 

$

163,680

 

Cash and cash equivalents

 

 

14,346

 

Accounts receivable

 

 

3,043

 

Other assets

 

 

2,595

 

Intangible assets

 

 

116,218

 

Accounts payable, accrued expenses and other liabilities

 

 

(16,782

)

Deferred revenue

 

 

(23,900

)

Deferred income taxes

 

 

(24,840

)

Capital lease obligations

 

 

(6,750

)

Net assets acquired

 

$

227,610

 

 

 

 

 

 

Goodwill

 

$

117,254

 

 

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 resolution of contractual adjustments, such as working capital adjustments, set forth in the merger agreement.

The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of Tower Cloud. The acquisition was treated as a taxable acquisition of the outstanding stock of Tower Cloud, Inc. Thus, none of the goodwill is expected to be deductible for tax purposes.

We acquired an intangible asset that was assigned to customer relationships of $116.2 million (30 year life).

Tower Cloud had federal net operating loss (“NOL”) carryforwards of approximately $81.2 million at the date of the acquisition, which will expire between 2026 and 2036. As a result of the change in ownership, the utilization of NOL carryforwards is subject to limitations imposed by the Internal Revenue Code. The gross deferred tax assets associated with the NOL and other temporary differences as of August 31, 2016 were approximately $37.0 million, with respect to which we have determined that a valuation allowance is not required.  A net deferred tax liability of $24.8 million was recorded in connection with the acquisition, which is primarily related to the excess of the recorded amounts for Property, Plant & Equipment and Intangible Assets over their respective historical tax bases.

The acquired business contributed revenue of $3.5 million and an operating loss of $0.4 million, which excludes transaction and transition costs, to our consolidated results from the date of acquisition through September 30, 2016. We recorded transaction related costs related to the acquisition of Tower Cloud for the three and nine months ended September 30, 2016 of $5.4 million and $8.9 million, respectively, within transaction related costs on the Condensed Consolidated Statement 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 synergies or other 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 September 30,

 

 

Nine Months Ended

 

 

Period from April 24 -

 

(Thousands, except per share data)

 

2016

 

 

2015

 

 

September 30, 2016

 

 

September 30, 2015

 

Pro forma revenue

 

$

207,142

 

 

$

184,728

 

 

$

591,185

 

 

$

333,226

 

Pro forma net (loss) income

 

 

(1,820

)

 

 

6,585

 

 

 

(5,744

)

 

 

9,773

 

Pro forma net (loss) income per share

 

$

(0.01

)

 

$

0.04

 

 

$

(0.04

)

 

$

0.06

 

 

Windstream Towers

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

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.

PEG Bandwidth, LLC

On May 2, 2016, we acquired 100% of the outstanding equity of PEG Bandwidth for $323 million in cash, the issuance of 87,500 shares of our 3.00% 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:

 

 

 

(thousands)