UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2009 |
|
|
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 000-21091
FIBERTOWER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
| 52-1869023 |
(State or other jurisdiction |
| (I.R.S. Employer |
of incorporation or organization) |
| Identification No.) |
185 Berry Street
Suite 4800
San Francisco, CA 94107
(Address of principal executive offices)
(415) 659-3500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 o 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
| Accelerated filer x |
|
|
|
Non-accelerated filer o |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934): Yes o No x.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: The registrant had 151,593,519 shares of its common stock outstanding as of April 30, 2009.
FIBERTOWER CORPORATION
INDEX
|
| Page |
|
|
|
3 | ||
|
|
|
| 3 | |
|
|
|
| 4 | |
|
|
|
| 5 | |
|
|
|
| 6 | |
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | |
|
|
|
25 | ||
|
|
|
25 | ||
|
|
|
|
|
|
25 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
| 27 | |
|
|
|
| 28 |
2
FIBERTOWER CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
(In thousands, except par value)
|
| March 31, 2009 |
| December 31, 2008 |
| ||
Assets: |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 125,249 |
| $ | 154,357 |
|
Restricted cash, current portion |
| 490 |
| 343 |
| ||
Accounts receivable, net of allowances of $115 and $37 at March 31, 2009 and December 31, 2008, respectively |
| 5,862 |
| 6,652 |
| ||
Prepaid expenses and other current assets |
| 2,001 |
| 2,502 |
| ||
Total current assets |
| 133,602 |
| 163,854 |
| ||
Restricted cash, net of current portion |
| 134 |
| 134 |
| ||
Property and equipment, net |
| 231,876 |
| 236,585 |
| ||
FCC licenses |
| 287,495 |
| 287,495 |
| ||
Debt issuance costs, net |
| 7,636 |
| 9,599 |
| ||
Intangible and other long-term assets, net |
| 3,707 |
| 3,802 |
| ||
Total assets |
| $ | 664,450 |
| $ | 701,469 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders’ Equity: |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 2,376 |
| $ | 3,826 |
|
Accrued compensation and related benefits |
| 2,215 |
| 2,052 |
| ||
Accrued interest payable |
| 13,761 |
| 4,628 |
| ||
Other accrued liabilities |
| 1,649 |
| 1,984 |
| ||
Current portion of accrued restructuring costs |
| 1,229 |
| 1,342 |
| ||
Total current liabilities |
| 21,230 |
| 13,832 |
| ||
Other liabilities |
| 1,748 |
| 1,419 |
| ||
Deferred rent |
| 6,519 |
| 6,175 |
| ||
Asset retirement obligations |
| 4,170 |
| 4,048 |
| ||
Long-term accrued restructuring costs, net of current portion |
| 2,236 |
| 2,436 |
| ||
Convertible senior secured notes |
| 358,654 |
| 430,317 |
| ||
Deferred tax liability |
| 71,904 |
| 73,372 |
| ||
Total liabilities |
| 466,461 |
| 531,599 |
| ||
Commitments and contingencies |
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Common stock, $0.001 par value; 400,000 shares authorized, 151,598 and 150,520 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively |
| 152 |
| 151 |
| ||
Additional paid-in capital |
| 795,501 |
| 794,095 |
| ||
Accumulated deficit |
| (597,664 | ) | (624,376 | ) | ||
Total stockholders’ equity |
| 197,989 |
| 169,870 |
| ||
Total liabilities and stockholders’ equity |
| $ | 664,450 |
| $ | 701,469 |
|
See accompanying notes.
3
FIBERTOWER CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Service revenues |
| $ | 14,719 |
| $ | 9,706 |
|
Operating expenses: |
|
|
|
|
| ||
Cost of service revenues (excluding depreciation and amortization) |
| 14,038 |
| 16,322 |
| ||
Cost of service revenues - impairment of long-lived assets and other charges |
| 103 |
| 4,816 |
| ||
Sales and marketing |
| 993 |
| 1,925 |
| ||
General and administrative |
| 6,143 |
| 6,272 |
| ||
Depreciation and amortization |
| 7,023 |
| 5,120 |
| ||
Impairment of goodwill |
| — |
| 86,093 |
| ||
Total operating expenses |
| 28,300 |
| 120,548 |
| ||
Loss from operations |
| (13,581 | ) | (110,842 | ) | ||
Other income (expense): |
|
|
|
|
| ||
Interest income |
| 154 |
| 2,341 |
| ||
Interest expense |
| (15,115 | ) | (11,472 | ) | ||
Gain on early extinguishment of debt, net |
| 53,671 |
| — |
| ||
Miscellaneous income (expense), net |
| 115 |
| (27 | ) | ||
Total other income (expense), net |
| 38,825 |
| (9,158 | ) | ||
Income (loss) before income taxes |
| 25,244 |
| (120,000 | ) | ||
Income tax benefit |
| 1,468 |
| — |
| ||
Net income (loss) before income taxes |
| $ | 26,712 |
| $ | (120,000 | ) |
|
|
|
|
|
| ||
Basic and diluted net income (loss) per share |
| $ | 0.18 |
| $ | (0.83 | ) |
|
|
|
|
|
| ||
Weighted average number of shares used in per share amounts: |
|
|
|
|
| ||
Basic and diluted |
| 146,745 |
| 144,044 |
|
See accompanying notes.
4
FIBERTOWER CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
|
| Three Months Ended March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Operating activities |
|
|
|
|
| ||
Net income (loss) |
| $ | 26,712 |
| $ | (120,000 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 7,023 |
| 5,120 |
| ||
Gain on early extinguishment of debt, net |
| (53,671 | ) | — |
| ||
Accretion of convertible notes |
| 5,035 |
| 3,593 |
| ||
Accretion of investments in debt securities |
| — |
| (394 | ) | ||
Accretion of asset retirement obligations |
| 121 |
| 101 |
| ||
Accretion of accrued restructuring costs |
| 104 |
| — |
| ||
Amortization of debt issuance costs |
| 328 |
| 557 |
| ||
Stock-based compensation |
| 1,401 |
| 2,225 |
| ||
Loss on disposal of equipment |
| — |
| 75 |
| ||
Impairment of long-lived assets and other charges |
| 103 |
| 4,816 |
| ||
Impairment of goodwill |
| — |
| 86,093 |
| ||
Income tax benefit |
| (1,468 | ) | — |
| ||
Net changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable, net |
| 790 |
| (210 | ) | ||
Prepaid expenses and other current assets |
| 501 |
| (184 | ) | ||
Other long-term assets |
| 21 |
| (391 | ) | ||
Accounts payable |
| (1,450 | ) | (3,848 | ) | ||
Accrued compensation and related benefits |
| 163 |
| 324 |
| ||
Accrued interest payable |
| 9,133 |
| 9,056 |
| ||
Other accrued liabilities and deferred rent |
| (52 | ) | (386 | ) | ||
Net cash (used) in operating activities |
| (5,206 | ) | (13,453 | ) | ||
Investing activities |
|
|
|
|
| ||
Restricted cash |
| (147 | ) | — |
| ||
Purchase of property and equipment |
| (2,336 | ) | (16,669 | ) | ||
Cash (used) in investing activities |
| (2,483 | ) | (16,669 | ) | ||
Financing activities |
|
|
|
|
| ||
Cash paid for par value on convertible notes repurchased |
| (21,419 | ) | — |
| ||
Proceeds from exercise of stock options |
| — |
| 40 |
| ||
Cash (used) provided by financing activities |
| (21,419 | ) | 40 |
| ||
Net decrease in cash and cash equivalents |
| (29,108 | ) | (30,082 | ) | ||
Cash and cash equivalents at beginning of period |
| 154,357 |
| 223,330 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 125,249 |
| $ | 193,248 |
|
|
|
|
|
|
| ||
Supplemental Disclosures |
|
|
|
|
| ||
Cash paid for accrued interest on convertible notes repurchased |
| $ | 1,859 |
| $ | — |
|
See accompanying notes.
5
FIBERTOWER CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1—Organization and Business
Organization and operations — FiberTower Corporation (collectively with its subsidiaries, the “Company”) was incorporated in 1993 in the State of Delaware to build and operate a shared high-capacity backhaul network for wireless operators and service providers in the United States.
The Company is a leading provider of facilities-based backhaul services to wireless carriers. Backhaul is the transport of voice, video and data traffic from a wireless carrier’s mobile base station, or cell site, to its mobile switching center or other exchange point where the traffic is then switched onto a fixed wireline telecommunications network. The Company utilizes its comprehensive wireless spectrum assets to provide backhaul services through a hybrid radio/fiber network architecture. The Company’s services allow wireless carriers to optimize their networks, enable significant improvements in their availability, reliability, scalability and reduce costs, while providing a long-term solution for the increasing demand for backhaul capacity. As of March 31, 2009, the Company had master service agreements with nine U.S. wireless carriers. Through these master service agreements and other customer agreements, the Company provided services to 2,790 billing sites in 13 markets throughout the U.S. as of March 31, 2009.
The Company has incurred net losses and negative cash flows from operating and investing activities since its inception, and it had an accumulated deficit of $597.7 million as of March 31, 2009. Through March 31, 2009, the Company has relied primarily on equity and debt financings to fund its operating and investing activities. Management expects operating losses and negative cash flows to continue for the foreseeable future. Failure to generate sufficient revenue could have a material adverse effect on the Company’s results of operations, financial condition and cash flows. The recoverability of assets is highly dependent on the ability of management to execute its business plan.
Note 2—Summary of Significant Accounting Policies
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
There have been no significant changes in our significant accounting policies as of March 31, 2009 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 except for the adoption of (i) certain fair value measurements associated with SFAS No. 157, Fair Value Measurements (“SFAS 157”) to which the FASB previously approved a one-year delay; (ii) SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”); and (iii) EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”).
In September 2006, the FASB issued SFAS 157 which established specific criteria for the fair value measurements of financial and non-financial assets and liabilities under current accounting rules. The new fair value criteria are primarily applied prospectively upon adoption of SFAS 157. SFAS 157 was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB approved a one-year delay in applying SFAS 157 to certain fair value measurements, primarily related to non-financial assets and liabilities such as those resulting from business combinations, acquired goodwill and intangibles, long-lived assets held for disposal and liabilities related to exit or disposal activities. The Company has determined that there is no impact on its consolidated financial statements of applying SFAS 157 to the assets and liabilities to which the one-year delay in implementation was applied.
In March 2008, the FASB issued SFAS 161 which requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for the
6
Company in the first quarter of 2009. The Company has determined that the adoption of SFAS 161 has no impact on its consolidated financial statements.
In June 2008, the FASB’s Emerging Issues Task Force reached a consensus on EITF 07-5 which provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. This determination is necessary for evaluating whether the instrument or feature is considered a derivative financial instrument under SFAS 133. EITF 07-5 is effective for the Company in the first quarter of 2009. The Company has determined that the adoption of EITF 07-5 has no impact on its consolidated financial statements.
Recent accounting pronouncements — There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2009, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2008, that are of significance, or potential significance, to the Company.
Note 3—Property and Equipment
Property and equipment consisted of the following (in thousands):
|
| March 31, 2009 |
| December 31, 2008 |
| ||
Network equipment |
| $ | 253,708 |
| $ | 249,238 |
|
Internal-use computer software |
| 4,749 |
| 4,767 |
| ||
Office equipment and other |
| 2,966 |
| 2,907 |
| ||
|
| 261,423 |
| 256,912 |
| ||
Less: accumulated depreciation and amortization |
| 63,116 |
| 56,203 |
| ||
Property and equipment in-service, net |
| 198,307 |
| 200,709 |
| ||
Construction-in-progress |
| 33,569 |
| 35,876 |
| ||
Property and equipment, net |
| $ | 231,876 |
| $ | 236,585 |
|
As of March 31, 2009 and December 31, 2008, network equipment and construction-in-progress included capitalized internal labor costs of $18.4 million and $18.3 million, respectively. As of March 31, 2009 and December 31, 2008, network equipment and construction-in-progress included capitalized interest of $13.0 million and $11.7 million, respectively.
Assets classified as construction-in-progress are not being depreciated as they have not yet been placed in service.
See Note 4, Impairment of Long-Lived Assets and Other Charges, regarding impairment charges recorded in the three months ended March 31, 2009 and 2008 related to property and equipment.
Note 4—Impairment of Long-Lived Assets and Other Charges
Construction of the Company’s network operations is a complex process involving the interaction and assembly of multiple components including internal labor, third party costs and equipment costs. The Company regularly assesses the realizability of costs accumulated in construction-in-progress as it executes its network build-out plans. During the three months ended March 31, 2009 and 2008, the Company recorded an impairment charge of $0.1 million and $4.8 million, respectively, relating to this process which is included in cost of service revenues.
Note 5—Impairment of Goodwill
At December 31, 2007, the carrying value of the Company’s goodwill, which was related to the merger of First Avenue Networks, Inc. (“First Avenue”) and FiberTower Network Services Corp. (“Old FiberTower”) in August 2006, which we refer to in this report as the First Avenue/FiberTower merger, totaled $86.1 million. As a result of a decline in the Company’s market capitalization below the carrying value of its equity during the quarter ended March 31, 2008, the Company believed an indicator of impairment existed and, accordingly, performed an interim review of the value of its goodwill. In the quarter ended March��31, 2008, the Company concluded that the carrying value of goodwill was fully impaired and recorded an impairment charge of $86.1 million, reducing the fair value of goodwill to zero at March 31, 2008.
In performing its impairment tests, the Company compared the fair value of the Company’s single reporting unit to its carrying value. The Company estimated the fair value of the reporting unit using both observed market equity values based on the Company’s publicly-traded stock price and the income approach, which requires estimates of future operating results and cash flows
7
discounted using an appropriate discount rate. As a result of these tests, the Company concluded that the carrying amount of its reporting unit exceeded its fair value.
The goodwill impairment charge is included in operating expenses on the condensed consolidated statements of operations.
Note 6—Convertible Senior Secured Notes
On November 9, 2006, the Company completed the sale of $402.5 million of 9.00% Convertible Senior Secured Notes (“Notes”) that mature on November 15, 2012. The Notes are fully guaranteed, jointly and severally, by each of the Company’s subsidiaries. The Notes bear interest at a rate of 9% per annum, payable semi-annually in arrears in cash on May 15 and November 15 of each year.
In March 2009, the Company announced that it had elected to pay the upcoming May 15, 2009 interest payment entirely by the issuance of additional Notes, as permitted under the indenture governing the Notes. This will result in an additional $18.2 million in principal amount of Notes as of May 15, 2009, which additional Notes will be identical to the original Notes, except that interest on such additional Notes will begin to accrue from the date they are issued. Subject to certain conditions, the Company also has the option of making any or all of the following three semi-annual interest payments due in 2009 and 2010 with additional Notes in lieu of cash. The interest rate applicable to any such interest payments made in additional Notes will be 11%. Thereafter, the interest on the Notes would be payable only in cash.
In the first quarter of 2009, the Company repurchased $71.3 million par value of its Notes in the open market. The purchases were at a weighted average price of approximately $30 per $100 of par value, for $21.4 million in cash plus accrued but unpaid interest of $1.9 million. The repurchase of the Notes resulted in the recognition of a gain on early extinguishment of debt in the quarter ended March 31, 2009 of $53.7 million.
The change in Notes on the balance sheet during the three months ended March 31, 2009 is summarized as follows (in thousands):
Balance at December 31, 2008 |
| $ | 430,317 |
|
Repurchases at par value |
| (71,346 | ) | |
Reversal of accretion related to repurchases |
| (5,517 | ) | |
Accretion of principal premium |
| 3,568 |
| |
Accretion of principal premium for the additional Notes to be issued May 15, 2009 |
| 1,467 |
| |
Accretion of Derivative |
| 27 |
| |
Reversal of accretion of Derivative related to repurchases |
| 138 |
| |
Balance at March 31, 2009 |
| $ | 358,654 |
|
The gain on early extinguishment of debt recorded during the three months ended March 31, 2009 is comprised of the following (in thousands):
Repurchases at par value |
| $ | 71,346 |
|
Reversal of accretion related to repurchases |
| 5,517 |
| |
Cash paid for par value |
| (21,419 | ) | |
Reversal of unamortized debt issuance costs related to repurchases |
| (1,635 | ) | |
Reversal of accretion of Derivative related to repurchases |
| (138 | ) | |
|
| $ | 53,671 |
|
This early retirement of debt will result in a reduction of annual cash payments for interest of approximately $6.4 million. The Company may from time to time repurchase or retire additional amounts of its outstanding Notes. The Company will evaluate such transactions, if any, in light of the then-existing market conditions.
The Company will be required to repay any Notes that are not redeemed or converted prior to maturity for 125.411% of their principal amount, or $415.3 million. Following the payment of the upcoming May 15, 2009 interest payment by the issuance of additional Notes in the principal amount of $18.2 million discussed above, this amount will increase by $22.8 million. The Company is accreting the principal premium ratably over the six-year period until the Notes mature and is recognizing such accretion as additional interest expense. The effect of this accretion is to increase the effective yield to the holders to 12% per annum based on the par value of the Notes.
8
The Notes and related guarantees are secured, to the extent permitted by law, by a first priority pledge of substantially all of the assets of the Company and its subsidiaries (other than certain excluded assets) and by a first priority pledge of the stock of all of its subsidiaries, subject, in each case, to any prior lien to secure a working capital facility, if any, of up to $50.0 million. The Notes rank pari passu in right of payment to all of the Company’s and its subsidiaries’ existing and future senior indebtedness and senior to all of the Company’s and its subsidiaries’ existing and future subordinated indebtedness.
The Notes are not redeemable by the Company before November 15, 2010. If the Company’s common stock has traded at or above 150% of the then effective conversion price for 20 of any 30 consecutive trading days and the daily trading volume for each such trading day which, when multiplied by the closing sale price for such trading day, equals at least $8.0 million, the Company may redeem any of the Notes, in whole or in part at any time on or after November 15, 2010, at 100% of the aggregate accreted principal amount, together with accrued and unpaid interest.
The Notes may be converted into shares of the Company’s common stock. The conversion price was originally $8.29 per share subject to adjustment under certain circumstances. The conversion price of the Notes was reduced on November 9, 2008 as described below. Holders who convert their Notes prior to November 15, 2009 or convert their Notes in connection with certain designated events related to consolidations and mergers that occur on or prior to November 15, 2010 will receive a make-whole premium on the Notes such holders convert.
The Notes contain certain anti-dilution provisions that would cause the conversion price of the Notes to be reduced if the Company had not consummated common stock issuances or sales for aggregate proceeds of at least $50.0 million by November 9, 2008. As the Company did not issue or sell common stock for aggregate proceeds of at least $50.0 million by November 9, 2008, the anti-dilution provisions of the Notes were triggered on November 9, 2008.
The number of common shares that could be issued upon conversion of the Notes was increased as a result of the anti-dilution provisions of the Notes being triggered, which increase was capped at a 33% increase in the total number of shares. Therefore, the triggering of the anti-dilution provisions resulted in a reduction to the conversion price of the Notes to $6.22 per share. This resulted in 20.0 million additional shares which could be potentially issuable upon conversion of all Notes outstanding at December 31, 2008 and any additional notes that could be issued as payment for interest on the Notes. The repurchases of Notes in the first quarter of 2009 as described above resulted in 14.2 million fewer shares which could be potentially issuable if all outstanding Notes at March 31, 2009 were converted and upon conversion of additional notes that could be issued as payment for interest on the Notes.
The indenture governing the Notes contains covenants that, subject to certain limitations and exceptions, restrict the ability of the Company and its subsidiaries to borrow additional money, to make certain restricted payments, including, but not limited to, paying dividends on the Company’s stock, to transfer or sell assets, to create liens, to merge or consolidate, and to engage in certain business activities. As of March 31, 2009, the Company is in compliance with all of the covenants.
If certain designated events occur prior to maturity, the holders may require the Company to repurchase all or part of their Notes for cash at a repurchase price equal to 101% of their aggregate accreted principal amount, plus accrued and unpaid interest. One of these designated events would be if the Company’s common stock is delisted from Nasdaq and the Company is unable to relist its common stock on Nasdaq or another national securities exchange within ninety days. The Company’s common stock is currently trading below the minimum closing bid price of $1.00 per share required by Nasdaq for continued listing. Nasdaq has suspended this rule through July 17, 2009.
The Company concluded that the embedded feature related to the make-whole premium, designated event make-whole premium and holder put option upon the occurrence of certain designated events, qualify as derivatives and should be bundled as a compound embedded derivative (“Derivative”) under SFAS 133. The carrying value of the Derivative as of March 31, 2009 and December 31, 2008 was zero.
The carrying value of the Notes is comprised of the following (in thousands):
|
| March 31, 2009 |
| December 31, 2008 |
| ||
Convertible senior secured notes |
| $ | 330,037 |
| $ | 401,383 |
|
Accretion |
| 28,617 |
| 28,934 |
| ||
|
| $ | 358,654 |
| $ | 430,317 |
|
See Note 7, Fair Value Disclosures, for disclosure of the fair value of the Company’s Notes and Derivative. Debt issuance costs incurred in connection with the sale of the Notes totaled $14.3 million and are being amortized as additional interest expense over the six-year term of the Notes using the effective interest method. Accumulated amortization totaled $6.7 million at March 31, 2009,
9
including a reduction of $1.6 million in unamortized debt issuance costs associated with the repurchase of Notes in the first quarter of 2009. Accumulated amortization totaled $4.7 million at December 31, 2008.
Note 7—Fair Value Disclosures
The following tables present information about the Company’s assets measured at fair value on a recurring basis as of March 31, 2009 and December 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):
|
| Fair Value Measurements at March 31, 2009 Using |
| ||||||||||
|
| Quoted Prices in Active |
| Significant Other |
| Significant Unobservable |
|
|
| ||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 125,249 | (1) | $ | — |
| $ | — |
| $ | 125,249 |
|
Restricted cash |
| 624 | (2) | — |
| — |
| 624 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 125,873 |
| $ | — |
| $ | — |
| $ | 125,873 |
|
(1) Includes $118.2 million of money market mutual funds which invest in U.S. Government securities.
(2) Consists of certificates of deposit which collateralize letters of credit.
|
| Fair Value Measurements at December 31, 2008 Using |
| ||||||||||
|
| Quoted Prices in Active |
| Significant Other |
| Significant Unobservable |
|
|
| ||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 154,357 | (1) | $ | — |
| $ | — |
| $ | 154,357 |
|
Restricted cash |
| 477 | (2) | — |
| — |
| 477 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 154,834 |
| $ | — |
| $ | — |
| $ | 154,834 |
|
(1) Includes $147.2 million of money market mutual funds which invest in U.S. Government securities.
(2) Consists of certificates of deposit which collateralize letters of credit.
The aggregate fair value of the Notes, determined based on recently quoted prices, was approximately $115.9 million as of March 31, 2009, compared to the aggregate carrying value of the Notes at such date of $358.7 million. The aggregate fair value of the Notes, determined based on quoted prices, was approximately $86.5 million as of December 31, 2008, compared to the aggregate carrying value of the Notes at such date of $430.3 million. In the first quarter of 2009, the Company repurchased $71.3 million par value of its Notes in the open market for $21.4 million in cash plus accrued but unpaid interest.
The fair value of the Derivative as of March 31, 2009 and December 31, 2008 was zero. The Company monitors the fair value of the Derivative each reporting period and records changes in fair value through charges or credits to miscellaneous income, net with an offsetting adjustment to the carrying value of the Notes on the balance sheet. The value of the Derivative can fluctuate based on changes in several factors including the trading price of the Company’s common stock, passage of time and other events described in the Notes.
Note 8—Stockholders’ Equity and Stock-Based Compensation
During the three months ended March 31, 2009 and 2008, as provided for under the terms of the FiberTower Corporation Stock Incentive Plan (the “Stock Incentive Plan”), the Company awarded 1.0 million and 0.2 million restricted shares, respectively, to certain non-employee directors pursuant to automatic annual awards which vested on the day following the date of grant.
10
During the three months ended March 31, 2009 and 2008, the Company awarded 0.1 million and 4.5 million restricted shares, respectively, to employees under the Stock Incentive Plan. Unless otherwise stipulated by the Board of Directors, restricted stock awards to employees under the Stock Incentive Plan vest over a four-year period from the grant date. Prior to vesting, the restricted stock awards have voting rights and are entitled to dividends. Therefore, such shares are considered outstanding for financial reporting purposes, but are included in the net income (loss) per share computations only to the extent vested. As of March 31, 2009, the number of restricted shares outstanding was 4.6 million.
During the three months ended March 31, 2009 and 2008, the Company awarded options to employees to acquire 3.5 million shares and a negligible number of shares, respectively, of the Company’s common stock under the Stock Incentive Plan. As of March 31, 2009, the number of shares issuable under outstanding stock options was 7.3 million. There were no options exercised during the three months ended March 31, 2009 and 0.1 million were exercised during the three months ended March 31, 2008.
The fair value of the options granted was determined using the Black-Scholes-Merton option pricing model and the assumptions set forth below:
|
| Three Months Ended March 31, |
| ||
|
| 2009 |
| 2008 |
|
Expected life of options |
| 3.58 years |
| 3.58 years |
|
Volatility |
| 141 | % | 67 | % |
Risk-free interest rate |
| 1.73 | % | 2.38-2.68 | % |
Expected dividend yield |
| 0.00 | % | 0.00 | % |
In the three months ended March 31, 2009, the Company estimated its expected stock price volatility based on the historical volatility of its stock price. In the three months ended March 31, 2008, such estimate included consideration of the historical volatilities of similar public companies in the telecommunications industry.
The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2009 and 2008 was $0.12 per share and $0.77 per share, respectively.
As of March 31, 2009, there was approximately $2.5 million of unrecognized compensation cost related to stock options. This compensation cost is expected to be recognized over a weighted-average period of approximately 2.1 years.
The Company determines the fair value of each restricted stock award based on the fair value of the Company’s common stock at the date of award.
As of March 31, 2009, there was approximately $7.3 million of unrecognized compensation cost related to the restricted stock awards. This compensation cost is expected to be recognized over a weighted-average period of approximately 2.2 years.
Employee and non-employee stock-based compensation expense was recorded in the condensed consolidated statements of operations as follows (in thousands):
|
| Three Months Ended March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
|
|
|
|
|
| ||
Cost of service revenues |
| $ | 268 |
| $ | 889 |
|
Sales and marketing |
| 213 |
| 335 |
| ||
General and administrative |
| 920 |
| 1,001 |
| ||
Total |
| $ | 1,401 |
| $ | 2,225 |
|
Warrants — As of March 31, 2009, there were 2.6 million warrants outstanding at an exercise price of $7.25 per share. Such warrants expire in December 2014. During the first quarter of 2009, 0.3 million warrants at an exercise price of $1.84 per share expired unexercised.
Common Stock Reserved for Future Issuance
Shares of common stock reserved for future issuance at March 31, 2009 were as follows (in thousands):
11
Convertible senior secured notes |
| 65,955 | (1) |
Warrants |
| 2,574 |
|
Stock options and restricted shares |
| 20,033 |
|
Total shares reserved |
| 88,562 |
|
(1) Shares of common stock reserved for future issuance were reduced by 14.2 million during the first quarter of 2009 as a result of the repurchases of Notes described in Note 6, Convertible Senior Secured Notes.
Note 9—Income Taxes
Under SFAS 109, Accounting for Income Taxes, deferred taxes must be calculated for the cumulative temporary difference between the book and tax basis using the effective income tax rates that are expected to be in effect when the temporary difference is expected to reverse. The Company has a net deferred tax liability on the balance sheet attributable to the basis differential recorded for the FCC licenses.
In the first quarter of 2009 and in connection with the preparation of the 2008 tax filings, management reviewed the Company’s current multi-state operations as they relate to the state apportionment percentages. As a result of this review, the Company updated its overall blended state tax rate computation. The impact of such update was a reduction in the overall state blended tax rate and, in turn, the carrying value of the above-mentioned deferred tax liability. Accordingly, the Company has recorded a discrete, non-cash income tax benefit of $1.5 million, with a corresponding decrease to the deferred tax liability for the quarter ended March 31, 2009.
Note 10—Net Income (Loss) Per Share
Basic and diluted net income (loss) per share for the three months ended March 31, 2009 and March 31, 2008 is calculated by dividing net income (loss) by the weighted average number of shares outstanding for the period, less the weighted average unvested restricted shares outstanding for the period, and excludes any dilutive effects of stock options, warrants and convertible notes. Diluted net income (loss) per share was the same as basic net income (loss) per share in each period presented because either the inclusion of potentially issuable shares would be anti-dilutive or the dilutive effects were negligible. During the three months ended March 31, 2009, there were 28,000 potentially dilutive shares related to unvested stock options and restricted stock.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share is as follows (in thousands):
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Numerator for basic and diluted net income (loss) per share: |
|
|
|
|
| ||
Net income (loss) for period |
| $ | 26,712 |
| $ | (120,000 | ) |
|
|
|
|
|
| ||
Denominator for basic and diluted net income (loss) per share: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Weighted average shares outstanding |
| 151,342 |
| 148,395 |
| ||
Weighted average unvested restricted shares outstanding |
| (4,597 | ) | (4,351 | ) | ||
|
|
|
|
|
| ||
Denominator for basic and diluted net income (loss) per share |
| 146,745 |
| 144,044 |
| ||
As of March 31, 2009, the Company had stock options outstanding to purchase 7.3 million shares, of which 2.1 million shares were exercisable. In addition, at March 31, 2009, there are 4.6 million unvested restricted shares.
The Notes are convertible into shares of the Company’s common stock. As of March 31, 2009, 53.3 million shares were potentially issuable if all currently outstanding Notes were converted and 12.7 million additional shares could be potentially issuable upon conversion of additional notes that could be issued as payment for interest on the Notes. See Note 6, Convertible Senior Secured Notes, for additional information.
There were also warrants outstanding at March 31, 2009, to acquire 2.6 million common shares.
12
For the three months ended March 31, 2009, all of the shares issuable on conversion of the Notes and exercise of the warrants and 7.3 million options to purchase common stock were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive.
These potentially issuable shares would further dilute investors when the options and warrants are exercised, the restricted stock awards vest and the Notes are converted to common shares.
Note 11—Related Party Transactions
During the three months ended March 31, 2009 and 2008, the Company leased colocation space from certain stockholders that (i) own greater than 10% of the Company’s outstanding equity securities and/or (ii) have representatives who serve on the Company’s Board of Directors. One of these related parties also provided the Company with certain services pertaining to its network operations center during such periods. The aggregate operating expenses included in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008, pertaining to these lease and service arrangements, were approximately $0.8 million and $0.6 million, respectively.
An individual affiliated with an entity holding approximately 17% of the Company’s outstanding common stock at March 31, 2009 serves on the Company’s Board of Directors. A company controlled by a member of the Company’s Board of Directors periodically serves as a consultant to a holder of approximately 7% of the Company’s common stock as of March 31, 2009 regarding its investments, including its holdings in the Company.
The Chairman of the Company’s Board of Directors serves as a director of Tessco Technologies Incorporated. Tessco supplies the Company with various materials which are used in the business operations. During each of the three months ended March 31, 2009 and 2008, the Company paid Tessco approximately $0.1 million for such materials.
Note 12—Guarantees and Other Contingencies
Regulatory Matters—The Company is subject to significant Federal Communications Commission, or FCC, regulation, some of which is in a state of flux due to challenges to existing rules and proposals to create new rules. Such regulation is subject to different interpretations and inconsistent application and has historically given rise to disputes with other carriers and municipalities regarding the classification of traffic, rates, rights-of-way and zoning matters. Management believes that resolution of any such disputes will not have a material adverse impact on the Company’s consolidated financial position.
License Renewal— Like most other FCC licenses, the 24 GHz and 38.6-40.0 GHz (39 GHz) wide-area licenses which the Company holds were granted for an initial ten-year term with renewal dates ranging from 2007 to 2014. The Company holds two types of 39 GHz licenses which cover either rectangular service areas (“RSAs”), or economic areas (“EAs”). On October 1, 2008, the FCC released an order governing all of the 566 Company-held 39 GHz licenses. The Company’s RSA 39 GHz licenses with 2007 expiration dates received either ten-year renewals or construction extensions until June 1, 2012 from the FCC. All of the Company’s RSA licenses located in the Company’s top 50 markets met the FCC’s construction standard and, consequently, were renewed for ten years along with some licenses in smaller markets that were protected due to spectrum lease or other construction activity. All of the Company’s remaining 183 RSA licenses, which expire in 2007 through 2010, and all of the Company’s EA licenses, which expire in 2010, received an extension until June 1, 2012 to demonstrate “substantial service” as defined by the FCC. The licenses renewed or extended represent over 1.15 billion spectrum Points of Presence, or PoPs, in total.
To obtain renewal of a license, the licensee must demonstrate that, at the time of renewal, it either met a “safe harbor” build-out requirement or that it has provided “substantial service” as determined by the FCC. What level of service is considered “substantial” will vary depending upon the type of product offering by the licensee. The FCC has provided specific safe harbor guidance only for point-to-point offerings, where it has indicated the licensee should have constructed four links per channel per million persons in the license area. Licensees may show that they have met the substantial service test in other ways, such as providing niche services or offering service to underserved consumers.
Licensees are required, prior to the expiration date of their licenses, to file renewal applications with an exhibit demonstrating compliance with the substantial service criteria. If an entity is deemed not to have provided substantial service through meeting the safe harbor build-out requirement or through other means with respect to a license for which renewal is sought, the renewal will not be granted and the license will expire. The Company is required, or expected to be required, to demonstrate substantial service by June 1, 2012 for the majority of its 39 GHz licenses, and by 2017 for the others. The Company is required to demonstrate substantial service for all of its 24 GHz licenses by February 1, 2011, except for one, which requires such a showing in 2014. The Company does not currently meet the substantial service safe harbor guidance provided by the FCC for the substantial majority of its 24 GHz and 39 GHz licenses, which require renewal applications or showings mostly in the 2011 — 2014 time period. The Company believes that its licenses will be renewed based on its significant network investment and expanding geographic coverage. However, since the Company is required to demonstrate substantial service at the time licenses are renewed, the FCC has little precedent in the 24 GHz
13
and 39 GHz bands, and determination of substantial service is subject to FCC discretion, the FCC could choose to not renew licenses that do not meet the substantial service safe harbor.
The Company continues to meet regularly with the FCC and is committed to present data on the Company’s significant network investment and expanding geographic coverage to make the spectrum bands viable and able to provide substantial service at renewal and in the long term. The Company continues to believe that it will meet the substantial service requirements necessary for renewal at the appropriate deadlines and will continue to engage the FCC on this subject.
Other guarantees—From time to time, the Company enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to: (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities and for other claims arising from the Company’s use of the applicable premises; (ii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of the performance of their duties; (iii) contracts under which the Company may be required to indemnify customers against third-party claims that a Company product or service infringes a patent, copyright or other intellectual property right; and (iv) procurement or license agreements under which the Company may be required to indemnify licensors or vendors for certain claims that may be brought against them arising from the Company’s acts or omissions with respect to the supplied products or technology.
Generally, a maximum obligation under these contracts is not explicitly stated. Because the obligated amounts associated with these types of agreements are not explicitly stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in the Company’s condensed consolidated balance sheets.
Legal proceedings—The Company is subject to certain legal proceedings and claims in the ordinary course of business. In the opinion of management, the ultimate outcome of these matters will not have a material impact on the Company’s financial position or results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report includes “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission, or SEC, in its rules, regulations and releases. Forward looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These include statements regarding, among other things, our financial and business prospects, the deployment of our services, capital requirements, financing prospects, planned capital expenditures, expected cost per site, anticipated customer growth, expansion plans, expected cost savings associated with our reduction in workforce in 2008 and anticipated cash balances. There are many risks, uncertainties and other factors that can prevent the achievement of goals or cause results to differ materially from those expressed or implied by these forward-looking statements including, among other things, anticipated negative cash flows and operating losses, additional liquidity requirements, potential loss of significant customers, downturns in the wireless communication industry, regulatory costs and restrictions, potential loss of FCC licenses, equipment supply disruptions and cost increases, competition from alternative backhaul service providers and technologies, along with those risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 (“Risk Factors”).
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and other financial information appearing in our Annual Report on Form 10-K for the year ended December 31, 2008. Some of the statements in the following discussion are forward-looking statements as described above. For a variety of reasons, including those described above and in Risk Factors, our actual results may differ materially from these estimates and projections.
Company Overview
We are a leading provider of facilities-based backhaul services to wireless carriers. Facilities-based providers own or lease a substantial portion of the property, plant and equipment necessary to provide backhaul services. Backhaul is the transport of voice, video and data traffic from a wireless carrier’s mobile base station, or cell site, to its mobile switching center, or MSC, or other exchange point where the traffic is then switched onto a wireline telecommunications network. We utilize our comprehensive wireless spectrum assets and extensive fiber service provider relationships to provide backhaul services nationally through a hybrid radio/fiber network architecture. Our services allow wireless carriers to optimize their networks, enable significant improvements in their
14
availability, reliability, scalability and reduce costs, while providing a long-term solution for the increasing demand for backhaul capacity.
We compete with a range of diversified telecommunications services providers. Our competitors include i) Incumbent and Competitive Local Exchange Carriers, including AT&T, Verizon, Embarq, and Qwest, ii) wireless carriers, iii) Cable Multiple System Operators, including Cox, Time Warner Cable, Bright House and Comcast, and iv) Fiber Service Providers, including Level 3, Time Warner Telecom, Zayo Broadband, DukeNet and FPL FiberNet.
As of March 31, 2009, we had 154 employees, of whom 110 were in Engineering, Market/Field Operations and Network Operations which rollup to Cost of Service Revenues; 8 were in Sales and Marketing; and 36 were in General and Administrative. On May 8, 2008, management announced company-wide staffing reductions as part of its cost reduction efforts, resulting in a workforce reduction of 59 employees.
As of March 31, 2009:
· We provide service to 6,267 billing customer locations in 13 markets;
· We have master service agreements with nine U.S. wireless carriers;
· We hold separate service agreements with both MCI Communications Services, Inc., d/b/a/ Verizon Business and with Qwest Communications Company LLC, as their fixed wireless partner on the General Services Administration Networx contract to provide fixed wireless government-grade primary transport and physically diverse network transport services. The service agreement with Verizon Business also allows us to provide government-grade services for other Verizon Business-managed contracts;
· We own a national spectrum portfolio of 24 GHz and 39 GHz wide-area spectrum licenses, including over 740 MHz in the top 20 U.S. metropolitan areas and, in the aggregate, approximately 1.55 billion channel pops calculated as the number of channels in a given area multiplied by the population, as measured in the 2000 census, covered by these channels. We believe our spectrum portfolio represents one of the largest and most comprehensive collections of millimeter wave spectrum in the U.S. Our licenses extend over substantially all of the continental U.S., with a population of approximately 300 million.
As an important part of our business strategy, we seek to:
(1) leverage our existing network and customer relationships by increasing utilization of existing assets;
(2) continue to improve the efficiency of our network and reduce network expenses;
(3) sell additional bandwidth to our customers;
(4) expand our markets based on identified demand;
(5) continue to develop innovative solutions that meet the needs of our customers, and
(6) allocate capital efficiently by balancing new site and market growth.
The growth of our business depends substantially on the condition of the wireless communications industry. The willingness of customers to purchase our services is affected by numerous factors, including:
(1) market demand for wireless services;
(2) availability of alternative services at better prices;
(3) predictability of our deployment schedules, and
(4) quality of our services.
In order to provide backhaul services to our customers, we have constructed networks in 13 markets. As we continue to expand our markets, we incur significant upfront costs for pre-development site evaluation, site leases, cost of new capital equipment
15
and construction costs. These expenses are incurred well in advance of receiving revenues from customers. Beginning in late 2005, in order to shorten the time a customer had to wait between commitment and initial service delivery, we implemented a strategy to deploy networks where not all sites had committed customer orders at the start of deployment. We altered this strategy in early 2007 to only construct networks where the substantial majority of sites had a committed customer. However, as a consequence of our previous strategy, we have an inventory of sites where T-1 equivalents are available following completion of a deployment project, including some sites where no T-1 equivalents are being used to deliver services or generate revenues.
During the first quarter of 2009, we achieved the following significant financial and operational milestones:
· Average monthly revenue per billing site grew 2% to $1,767 in the first quarter of 2009 from $1,732 in the fourth quarter of 2008;
· Billing customer locations grew 3% to 6,267 at March 31, 2009 from 6,096 at December 31, 2008;
· Billing sites grew 1% to 2,790 at March 31, 2009 from 2,763 at December 31, 2008;
· Adjusted EBITDA was a loss of $4.9 million in the first quarter of 2009 unchanged from the $4.9 million adjusted EBITDA loss in the fourth quarter of 2008. See “—Results of Operations—Non-GAAP Financial Measures” below for a reconciliation of adjusted EBITDA to net income (loss);
· We repurchased $71.3 million par value of our Notes in the open market. The purchases were at a weighted average price of approximately $30 per $100 of par value, for $21.4 million in cash plus accrued but unpaid interest. We may from time to time repurchase or retire additional amounts of our outstanding Notes. We will evaluate such transactions, if any, in light of the then-existing market conditions. See Liquidity and Capital Resources below and Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Notes.
As of March 31, 2009, we had deployed 3,121 sites, of which 2,790 had billing customers. A deployed site may not yet be billing for various reasons including:
· We have sold service at that site, but have not yet commenced providing service to the customer; or
· We have not yet sold any service at that site, but the site is located in a market in which wireless carriers who are our customers operate but with whom we may not have yet secured a commitment for this specific market.
Sites where we have sold service but not yet commenced providing service may be subject to factors including:
· The customer is not yet able to take delivery of the T-1 equivalent;
· Other elements of the network between the site and the drop-off location are not yet constructed, so service cannot yet be delivered; or
· During certain periods in certain markets, we may complete construction of sites at a faster rate than the services associated with those sites can be provisioned to the customer, resulting in a temporary increase in the number of sites not yet billing.
Our business plan depends on our expectation that most, if not all, sites will generate revenue at some future date sufficient to fully recover our investment in property and equipment. If we are unable to generate sufficient revenues from these sites in the future, our business, financial condition and results of operations would be adversely affected. We have recognized relatively limited amounts of revenues to date, have generated operating and net losses and negative cash flows and expect to generate operating and net losses and negative cash flows for the foreseeable future. (See “Liquidity and Capital Resources” below).
Service Revenues
We generate revenue by charging a monthly recurring charge based on the amount of bandwidth traffic carried across our network. Increasing revenues on a per-billing site basis is one of our most important objectives. Revenue per billing site, shown in the Performance Measures table below, is a key operating metric reflecting our ability to scale and leverage our existing network. The duration of our customer contracts are generally for three or five years.
Traffic grows as we construct new sites for customers, sell to new customers at existing sites, or sell incremental bandwidth to existing customers. The average monthly revenue generated per billing site increased to $1,767 in the first quarter of 2009 from
16
$1,732 in the fourth quarter of 2008. We intend to continue to focus on site-level margins and project return on investment calculations and maintain our focus on cost reductions.
For the three months ended March 31, 2009 and 2008, the following customers accounted for a significant portion of our revenues, as follows:
|
| Three Months Ended |
| |||
|
| March 31, |
| |||
|
| 2009 |
| 2008 |
| |
|
|
|
|
|
| |
AT&T Mobility |
| 37 | % | 46 | % | |
Sprint Nextel |
| 20 | % | 28 | % | (1) |
Clearwire |
| 16 | % | — |
| (1) |
T-Mobile |
| 15 | % | 14 | % |
(1) In December 2008, Clearwire Corporation completed a transaction with Sprint Nextel and an investor group to launch a new WiMAX-based wireless services provider. As a result of this transaction, a portion of the circuits previously billed to Sprint Nextel have been transferred to Clearwire. If this transaction had occurred on January 1, 2008, approximately 9% of our first quarter of 2008 revenues would have been attributed to Clearwire and approximately 19% would have been attributed to Sprint Nextel.
Accounts receivable from these customers comprised the following percentages of our total accounts receivable balances at March 31, 2009 and December 31, 2008:
|
| March 31, 2009 |
| December 31, 2008 |
|
|
|
|
|
|
|
AT&T Mobility |
| 32 | % | 27 | % |
Sprint Nextel |
| 17 | % | 52 | % |
Clearwire |
| 26 | % | — |
|
T-Mobile |
| 15 | % | 12 | % |
Costs and Expenses
The major components of our cost of service revenues are:
· Leasing. We incur charges for site lease expense for space leased at our sites. For lease arrangements that have rent escalation provisions, we account for lease expense on a straight-line basis over the lease term.
· Fiber Service Providers. We pay charges to our fiber service providers for the purchase and lease of fiber.
· Field Technicians. We incur costs for engineering and maintenance personnel expenses including stock-based compensation.
· Other. We incur costs for site evaluation and design, site maintenance, power, program and project management, costs related to unsuccessful site acquisitions that are incurred during deployment and personnel costs to monitor the network.
We expect cost of service revenues to increase in future periods as we execute our business plan to grow our network operations.
Construction of our network operations is a complex process involving the interaction and assembly of multiple components including internal labor, third party costs and equipment costs. We regularly assess the realizability of costs accumulated in construction-in-progress as we execute our network build plans. During the three months ended March 31, 2009 and 2008, we recorded an impairment charge of $0.1 million and $4.8 million, respectively, related to this process which is included in cost of service revenues.
Sales and marketing expenses are comprised primarily of compensation and related benefits, including stock-based compensation and travel expenses.
17
General and administrative expenses primarily consist of compensation and related benefits including stock-based compensation, recruiting fees, travel expenses, professional fees and insurance. We do not expect general and administrative expenses to grow during 2009.
Depreciation and amortization expenses primarily consist of depreciation related to the deployment of network sites and the amortization of certain intangible assets. We expect depreciation expense to increase in future periods as a result of deploying and commencing depreciation on additional sites.
As a result of a further decline in our market equity value during the quarter ended March 31, 2008, we believed an indicator of further impairment of goodwill existed and, accordingly, performed an interim review of the value of our goodwill. In the quarter ended March 31, 2008, we concluded that the carrying value of goodwill was fully impaired and recorded an impairment charge of $86.1 million, reducing the fair value of goodwill to zero at March 31, 2008. See Note 5, Impairment of Goodwill, in the Notes to Condensed Consolidated Financial Statements for additional information.
Interest income and interest expense are primarily the result of interest earned on investment of cash proceeds and interest cost incurred as a result of the $402.5 million of gross proceeds from the Notes. See Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Notes.
In the first quarter of 2009, we recorded a $1.5 million income tax benefit and a corresponding reduction of the deferred income tax liability. See Note 9, Income Taxes, in the Notes to Condensed Consolidated Financial Statements for additional information.
Challenges Facing Our Business
In addition to the risks described in the section entitled Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, there are various challenges facing our business. These include acquiring new customers on new and existing sites, deploying new sites in a predictable manner, scaling our business and managing growth, the concentrated nature of our customers, the emerging nature of our market, the weakened state of the U.S. economy and the decline in our stock price.
Acquiring customers on new and existing sites in a timely fashion is critical to the generation of an appropriate return on the capital that we invest, particularly since we incur significant costs in preparing sites to become operational. In many cases, these costs are incurred well in advance of having committed revenue from a customer. Our business, financial condition and results of operations will be negatively affected if we do not obtain sufficient revenues from constructed sites.
Deploying new sites in a predictable manner can be challenging given the difficulties in dealing with numerous landlords in order to lease space on sites, complying with the various zoning and permitting laws of different cities or districts, and managing the contractors involved with construction, program and project management. We have taken steps to reduce deployment unpredictability by engaging with large, well-established, turnkey vendors that are experienced in this area. Additionally, we concentrate on selecting sites owned by major tower operators with whom we already have agreements, which we believe will help minimize the risk of failing to negotiate a definitive lease for a site.
We are a growing company, and hiring qualified personnel and developing processes and systems rapidly are necessary in order to grow successfully. If we cannot hire qualified employees, manage our growth and develop these systems and processes successfully, our business would be adversely affected.
We are a relatively new entrant into a highly concentrated market with few potential customers in any particular market. Maintaining and growing our existing relationships with the leading wireless carriers and developing new relationships with other carriers are critical to our success.
We operate in an emerging market. Our future success depends on an increased demand for wireless services for voice and other mobile broadband services such as transmissions of photos or videos and internet communication.
We have built flexibility into our spending, reducing capital expenditures, general and administrative and sales and marketing expenses. However, our ability to pay our expenses and make full payments due on our Notes depends on our future performance, which will be affected by financial, business, economic, legislative and other factors, many of which are beyond our control. The overall weakness in the U.S. economy may inhibit our ability to grow at the level needed to fully service our Notes as scheduled. In addition, the sharp decline in our stock price may create a negative perception with current and prospective customers which could adversely affect our business.
18
Results of Operations
Presented below are selected statements of operations data for the three months ended March 31, 2009 and 2008 that have been derived from our unaudited condensed consolidated financial statements. You should read this information together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this report. Our historical results are not necessarily indicative of the results that are expected in future periods.
Statements of Operations Data:
(In thousands)
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Service revenues |
| $ | 14,719 |
| $ | 9,706 |
|
Cost of service revenues (excluding depreciation and amortization) |
| (14,038 | ) | (16,322 | ) | ||
Cost of service revenues - impairment of long-lived assets and other charges |
| (103 | ) | (4,816 | ) | ||
Sales and marketing |
| (993 | ) | (1,925 | ) | ||
General and administrative |
| (6,143 | ) | (6,272 | ) | ||
Depreciation and amortization |
| (7,023 | ) | (5,120 | ) | ||
Impairment of goodwill |
| — |
| (86,093 | ) | ||
Interest income |
| 154 |
| 2,341 |
| ||
Interest expense |
| (15,115 | ) | (11,472 | ) | ||
Gain on early extinguishment of debt, net |
| 53,671 |
| — |
| ||
Miscellaneous income (expense), net |
| 115 |
| (27 | ) | ||
Income tax benefit |
| 1,468 |
| — |
| ||
Net income (loss) |
| $ | 26,712 |
| $ | (120,000 | ) |
The following table sets forth selected statements of operations data as a percentage of our service revenues for each of the periods indicated.
|
| Three Months Ended |
| ||
|
| March 31, |
| ||
|
| 2009 |
| 2008 |
|
Service revenues |
| 100 | % | 100 | % |
Cost of service revenues (excluding depreciation and amortization) |
| (95 | )% | (168 | )% |
Cost of service revenues - impairment of long-lived assets and other charges |
| (1 | )% | (50 | )% |
Sales and marketing |
| (7 | )% | (20 | )% |
General and administrative |
| (42 | )% | (64 | )% |
Depreciation and amortization |
| (48 | )% | (53 | )% |
Impairment of goodwill |
| — |
| (887 | )% |
Interest income |
| 1 | % | 24 | % |
Interest expense |
| (103 | )% | (118 | )% |
Gain on early extinguishment of debt, net |
| 365 | % | — |
|
Miscellaneous income (expense), net |
| 1 | % | (0 | )% |
Income tax benefit |
| 10 | % | — |
|
Net income (loss) |
| 181 | % | (1,236 | )% |
Non-GAAP Financial Measures
We use the total adjusted EBITDA, which is a non-GAAP (Generally Accepted Accounting Principles) financial measure, to monitor the financial performance of our operations. This measurement, together with GAAP measures such as revenue and loss from operations, assists management in its decision-making processes relating to the operation of our business. Adjusted EBITDA is defined as net income (loss) from operations before interest, taxes, depreciation and amortization, impairment and restructuring
19
charges, stock-based compensation and other income (expense). Adjusted EBITDA is not a substitute for operating income, net income (loss), or cash flow used in operating activities as determined in accordance with GAAP, as a measure of performance or liquidity. In addition, our presentation of adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. This non-GAAP financial measure should be viewed in addition to, and not as an alternative for, our reported financial results as determined in accordance with GAAP.
The following table shows the calculation of our total adjusted EBITDA reconciled to net income (loss).
|
| Three months ended March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Net income (loss) |
| $ | 26,712 |
| $ | (120,000 | ) |
Adjustments: |
|
|
|
|
| ||
Depreciation and amortization |
| 7,023 |
| 5,120 |
| ||
Stock-based compensation |
| 1,401 |
| 2,225 |
| ||
Impairment of long-lived assets and other charges |
| 103 |
| 4,816 |
| ||
Accretion of accrued restructuring costs |
| 104 |
| — |
| ||
Impairment of goodwill |
| — |
| 86,093 |
| ||
Interest income |
| (154 | ) | (2,341 | ) | ||
Interest expense |
| 15,115 |
| 11,472 |
| ||
Gain on early extinguishment of debt, net |
| (53,671 | ) | — |
| ||
Miscellaneous (income) expense, net |
| (115 | ) | 27 |
| ||
Income tax benefit |
| (1,468 | ) | — |
| ||
Adjusted EBITDA |
| $ | (4,950 | ) | $ | (12,588 | ) |
Three months ended March 31, 2009 compared to three months ended March 31, 2008
Service revenues for the three months ended March 31, 2009 increased 52% to $14.7 million from $9.7 million for the three months ended March 31, 2008. This increase was primarily driven by greater penetration in existing markets. The average monthly revenue generated per billing site increased to $1,767 during the three months ended March 31, 2009 from $1,440 for the same period of 2008.
Cost of service revenues (excluding depreciation and amortization) decreased 14% to $14.0 million for the three months ended March 31, 2009 compared to $16.3 million for the three months ended March 31, 2008. This decrease was primarily due to the effects of the workforce reduction in the second quarter of 2008. Also contributing to the decrease were lower site maintenance and site lease expenses reflecting the cessation of market development activities in the Carolina’s market in the second quarter of 2008.
Cost of service revenues for the three months ended March 31, 2009 and 2008 also included $0.1 and $4.8 million, respectively, related to the impairment of long-lived assets and other charges. See Note 4, Impairment of Long-Lived Assets and Other Charges, in the Notes to Condensed Consolidated Financial Statements.
Service revenues tend to lag behind cost of service revenues initially for new sites, especially in new markets, because there are certain upfront costs that are generally incurred for a period of time before a site generates revenue. These costs include site evaluation expenses, lease payments that are incurred before the site generates revenues, payments to fiber service providers in order to ensure sufficient capacity is available to carry new traffic, as well as costs related to unsuccessful site acquisitions that are incurred during deployment.
Sales and marketing expenses decreased 48% to $1.0 million for the three months ended March 31, 2009 compared to $1.9 million for the three months ended March 31, 2008. The decrease reflects the effects of the workforce reduction in the second quarter of 2008, the reclassification of six employees from sales and marketing to general and administrative at the end of the fourth quarter of 2008 and a lower commission accrual in the first quarter of 2009 over the comparable period of 2008 due to changes in our 2009 commission plan.
General and administrative expenses decreased 2% to $6.1 million for the three months ended March 31, 2009 from $6.3 million for the three months ended March 31, 2008. This decrease, both at the field and corporate level, is primarily due to the effects of the workforce reduction in the second quarter of 2008, lower professional and consulting fees and lower facilities-related expenses reflecting the termination or renegotiation of excess office space. This decrease was partially offset by the reclassification of six employees from sales and marketing and one employee from cost of services revenues to general and administrative at the end of the fourth quarter of 2008.
20
Depreciation and amortization expense increased 37% to $7.0 million for the three months ended March 31, 2009 from $5.1 million for the three months ended March 31, 2008. This increase reflects $22.5 million in capital additions year over year driven by the addition of 210 new deployed sites during the past 12 months and upgrades to existing sites.
As a result of the impairment evaluation of the fair value of the carrying amount of goodwill in the first quarter of 2008, we recorded a goodwill impairment charge of $86.1 million during the three months ended March 31, 2008 reducing the fair value of goodwill to zero at March 31, 2008. See Note 5, Impairment of Goodwill, in the Notes to Condensed Consolidated Financial Statements for additional information.
Interest income decreased 93% to $0.2 million for the three months ended March 31, 2009 from $2.3 million for the three months ended March 31, 2008. The reduction was due to lower cash balances available for investment and lower interest rates as we shifted our holdings of cash balances to only be in bank deposits and money market mutual funds which invest in U.S. Government securities.
Interest expense increased 32% to $15.1 million for the three months ended March 31, 2009 from $11.5 million for the three months ended March 31, 2008. This increase was due to i) an accrual for the increase from 9% to 11% interest rate on the interest payment to be made in additional Notes to be issued May 15, 2009; ii) an accrual for the additional accretion related to the principal premium for the additional Notes to be issued May 15, 2009; and iii) a reduction in the amount of interest expense which was capitalized. Partially offsetting this increase was a reduction in interest expense resulting from the repurchase of $71.3 million par value of our Notes in the open market. This early retirement of debt will result in a reduction of annual cash payments for interest of approximately $6.4 million. See Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Notes.
The repurchase of the Notes resulted in the recognition of a gain on early extinguishment of debt in the quarter ended March 31, 2009 of $53.7 million. See Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Notes.
In the first quarter of 2009, we recorded a $1.5 million income tax benefit and a corresponding reduction of the deferred income tax liability. See Note 9, Income Taxes, in the Notes to Condensed Consolidated Financial Statements for additional information.
Performance Measures
In managing our business and assessing our financial performance, we supplement the information provided by financial statement measures with several customer-focused performance metrics to assess the growth and evaluate the performance of our operations. In addition to traditional financial evaluations, including performance against budget, we also consider non-financial measurements, the most important of which are revenue per billing site, the number of sites deployed, number of sites billing and the number of customer locations billing. The number of sites deployed represents sites from which we could deliver our services in a particular market. Customer locations billing are carrier locations, at which we currently provide revenue-producing services. A deployed site could have multiple customer (carrier) locations. The number of sites billing represents the number of installed sites from which we provide revenue-producing services to customers.
Revenue per billing site is a key operating metric reflecting our ability to scale and leverage our existing network. The number of sites constructed is a key factor in determining the amount of additional capital expenditures required to grow the network and the number of field personnel required to support our operations and sales growth. Billing sites and the number of customer locations billing are indicators of the productivity of the network.
The following table shows quarterly key operating metric information.
21
|
| Three Months Ended |
| |||||||||||||
|
| Mar. 31, |
| Dec. 31, |
| Sept. 30, |
| June 30, |
| Mar. 31, |
| |||||
Billing Sites: |
|
|
|
|
|
|
|
|
|
|
| |||||
Billing sites added |
| 27 |
| 33 |
| 146 |
| 237 |
| 199 |
| |||||
Ending billing sites |
| 2,790 |
| 2,763 |
| 2,730 |
| 2,584 |
| 2,347 |
| |||||
Billing sites / sites deployed |
| 89 | % | 89 | % | 88 | % | 86 | % | 81 | % | |||||
Average monthly revenue per site |
| $ | 1,767 |
| $ | 1,732 |
| $ | 1,679 |
| $ | 1,605 |
| $ | 1,440 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Billing Customer Locations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Billing customer locations added |
| 171 |
| 264 |
| 553 |
| 779 |
| 649 |
| |||||
Ending billing customer locations |
| 6,267 |
| 6,096 |
| 5,832 |
| 5,279 |
| 4,500 |
| |||||
Collocation rate |
| 2.25 |
| 2.21 |
| 2.14 |
| 2.04 |
| 1.92 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Sites Deployed: |
|
|
|
|
|
|
|
|
|
|
| |||||
FiberTower sites constructed |
| 1 |
| 24 |
| 87 |
| 98 |
| 98 |
| |||||
Ending sites deployed |
| 3,121 |
| 3,120 |
| 3,096 |
| 3,009 |
| 2,911 |
| |||||
Billing Sites are installed sites from which we provide revenue-producing service(s) to customer(s).
Average Monthly Revenue per Site is the average monthly revenue per billing site.
Billing Customer Locations are carrier locations at which we currently provide revenue-producing service(s). Our sites could have multiple customer locations.
Collocation rate is the number of customer locations per billing site.
Sites Deployed represents installed sites that are ready for the provision of services. Our sites can be located on cell towers, rooftops, or other points of bandwidth aggregation.
Liquidity and Capital Resources
Our business does not currently generate sufficient cash flow from operations to fund our short-term or long-term liquidity needs, and we may not be able to generate cash flow from operations sufficient to meet our liquidity needs in the future, which would require us to continue to raise funds through external sources. We have relied on the proceeds from equity and debt financings to provide cash for our operations.
On November 9, 2006, we completed the sale of $402.5 million of 9.00% Convertible Senior Secured Notes due on November 15, 2012 (the “Notes”). The Notes are fully guaranteed, jointly and severally, by each of our subsidiaries. The Notes contain certain anti-dilution provisions that were triggered on November 9, 2008 resulting in a reduction of the conversion price from $8.29 to $6.22 per share. In the first quarter of 2009, we repurchased $71.3 million par value of our Notes in the open market. The purchases were at a weighted average price of approximately $30 per $100 of par value, for $21.4 million in cash plus accrued but unpaid interest. We may from time to time repurchase or retire additional amounts of our outstanding Notes. We will evaluate such transactions, if any, in light of the then-existing market conditions.
Our primary liquidity needs arise from capital requirements necessary to expand our network and fund operating losses. We had unrestricted cash and cash equivalents of $125.2 million at March 31, 2009.
We also require cash to service the interest on the Notes described above. In March 2009, we announced that we had elected to pay the upcoming May 15, 2009 interest payment entirely by the issuance of additional Notes, as permitted under the indenture governing the Notes. This will result in an additional $18.2 million in Notes outstanding as of May 15,
22
2009, which additional Notes will be identical to the original Notes, except that such additional Notes will begin to accrue from the date they are issued. Subject to certain conditions, we also have the option of making any or all of the following three semi-annual interest payments due in 2009 and 2010 with additional Notes in lieu of cash. The interest rate applicable to any such interest payments made in additional Notes will be 11%. Thereafter, the interest on the Notes would be payable only in cash. See Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Notes.
We anticipate that we will continue to invest significantly in deploying our network over the next several years. The size of our capital requirements will depend on numerous factors, including our ability to grow revenues, control costs, and deploy our network on a timely basis according to plan and customer requirements. We will require significant cash expenditures related to capital construction costs and operating losses. We anticipate that we will use between $25 million and $40 million of cash for capital expenditures during 2009 to expand our network. However, if market conditions warrant, we expect to be able to slow the amount of capital expenditures to a level consistent with the business needs at that time.
In the future, we plan to obtain financing through the issuance of additional equity or debt securities, or both. There can be no assurance that this additional financing will be available on terms acceptable to us or at all. If we are unable to raise sufficient funds, we may need to reduce our operations or delay our expansion. In addition, we may be required to sell assets or incur additional debt, or we may need to refinance all or a portion of our indebtedness at or before maturity. We may not be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives.
Cash Flow Analysis
Our principal liquidity requirements are primarily for working capital purposes and the expansion of our network through our investment in network equipment and site acquisition and construction costs.
Operating Activities
In the three months ended March 31, 2009, net cash used in operating activities decreased by $8.3 million to $5.2 million compared to cash used in operating activities of $13.5 million for the three months ended March 31, 2008. The negative cash flow from operations in the three months ended March 31, 2009 reflects net income of $26.7 million and a $9.1 million increase in accrued interest payable, offset by net non-cash credits of $41.0 million. Our early retirement of debt will result in a reduction of annual cash payments for interest of approximately $6.4 million. See Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Notes.
The following table shows non-cash (credits) charges included in net cash used in operating activities:
|
| Three Months Ended March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Non-cash (credits) charges: |
|
|
|
|
| ||
Depreciation and amortization |
| $ | 7,023 |
| $ | 5,120 |
|
Gain on early extinguishment of debt, net |
| (53,671 | ) | — |
| ||
Accretion of convertible notes |
| 5,035 |
| 3,593 |
| ||
Amortization of debt issuance costs |
| 328 |
| 557 |
| ||
Stock-based compensation |
| 1,401 |
| 2,225 |
| ||
Impairment charges on long-lived assets and other charges |
| 103 |
| 4,816 |
| ||
Impairment of goodwill |
| — |
| 86,093 |
| ||
Income tax benefit |
| (1,468 | ) | — |
| ||
Other, net |
| 225 |
| (218 | ) | ||
Total non-cash (credits) charges |
| $ | (41,024 | ) | $ | 102,186 |
|
Investing Activities
Net cash used in investing activities consisted primarily of our investment in network equipment and site construction costs as well as the back-office systems to support the network. As of March 31, 2009, we provided services to 2,790 billing sites in 13 markets throughout the U.S., an increase of 27 billing sites during the first quarter of 2009.
In the three months ended March 31, 2009, there were capital additions of $2.3 million as compared to $16.7 million in the first three months of 2008. During the first three months of 2009, we deployed one new site as compared to 98 new sites during the
23
comparable period of 2008. In the first three months of 2009, additional capital spending went into adding incremental customers at existing sites relative to the first three months of 2008. In addition, we incurred capital expenditures to support site builds beyond the first quarter of 2009. We anticipate that we will use between $25 million and $40 million of cash for capital expenditures during 2009 to expand our network. However, if market conditions warrant, we expect to be able to slow the amount of capital expenditures to a level consistent with the business needs at that time.
Financing Activities
In the first quarter of 2009, we repurchased $71.3 million par value of our Notes in the open market. The purchases were at a weighted average price of approximately $30 per $100 of par value, for $21.4 million in cash plus accrued but unpaid interest of $1.9 million. We may from time to time repurchase or retire additional amounts of our outstanding Notes. We will evaluate such transactions, if any, in light of the then-existing market conditions. See Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Notes.
No cash was provided by the exercise of stock options during the three months ended March 31, 2009 and a negligible amount of cash was provided for the same period of 2008.
Restricted Cash and Investments
At March 31, 2009, we had unrestricted cash and cash equivalents of $125.2 million that were held in bank deposits and money market mutual funds.
In addition, at March 31, 2009, we had total restricted cash of $0.6 million, comprised of restricted cash related to letters of credit with their final expiration in June 2010.
We believe we have limited exposure to financial market risk including changes in interest rates as our investment portfolio is invested in bank deposits and money market mutual funds which invest in U.S. Government securities. We believe the fair value of the investment portfolio or related income would not be significantly impacted by changes in interest rates due mainly to the short-term nature of the investment portfolio.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Future Liquidity and Capital Resource Requirements
Based upon our current plans, we believe that our existing cash and cash equivalents of $125.2 million will be sufficient to cover our estimated liquidity needs for at least the next twelve months. We anticipate that we will use between $25 million and $40 million of cash for capital expenditures during 2009 to expand our network. However, if market conditions warrant, we expect to be able to slow the amount of capital expenditures to a level consistent with the business needs at that time. Our long-term economic model is designed to allow replicable, scalable individual market builds so that we can increase or decrease our market deployment schedule based on available cash. As a result, the amount and timing of our long-term capital needs will depend on the extent of our network deployment. As our business is in its early stages, we regularly evaluate our plans and strategy, and these evaluations often result in changes, some of which may be material and significantly modify our cash requirements.
We have built flexibility into our spending, reducing capital expenditures, general and administrative and sales and marketing expenses. However, our ability to pay our expenses and make full payments due on our Notes depends on our future performance, which will be affected by financial, business, economic, legislative and other factors, many of which are beyond our control. The overall weakness in the U.S. economy may inhibit our ability to grow at the level needed to fully service our Notes as scheduled. In the first quarter of 2009, we repurchased $71.3 million par value of our Notes in the open market. The purchases were at a weighted average price of approximately $30 per $100 of par value, for $21.4 million in cash plus accrued but unpaid interest. We may from time to time repurchase or retire additional amounts of our outstanding Notes. We will evaluate such transactions, if any, in light of the then-existing market conditions. See Note 6, Convertible Senior Secured Notes, in the Notes to Condensed Consolidated Financial Statements for further information regarding the Notes.
Under the terms of our Notes, if certain designated events occur prior to maturity, the holders of our Notes may require us to repurchase all or part of their Notes for cash at a repurchase price equal to 101% of their aggregate accreted principal amount, plus accrued and unpaid interest. One of these designated events would be if our common stock is delisted from Nasdaq and we are unable to relist our common stock on Nasdaq or another national securities exchange within ninety days. Our common stock is currently
24
trading below the minimum closing bid price of $1.00 per share required by Nasdaq for continued listing. Nasdaq has suspended this rule through July 17, 2009. However, if Nasdaq does not extend the suspension of this rule or we are unable to increase our stock price through recapitalization or otherwise, or if we are unable to meet any other Nasdaq continuing listing standards, our common stock could be delisted from Nasdaq. We may not have sufficient funds at such time to repurchase any or all of the Notes.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. The application of these policies requires us to make estimates that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our accounting estimates on historical experience and other factors which we believe to be reasonable under the circumstances. However, actual results may vary from these estimates under different assumptions or conditions. Management has discussed the development and selection of critical accounting policies and estimates with our Audit Committee.
Our critical accounting policies include revenue and expense recognition, useful life assignments and impairment evaluations associated with long-lived assets, including intangible assets, FCC licenses, goodwill, asset retirement obligations, deferred taxes, leases and stock-based compensation, which are discussed in detail under the caption “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2008. There were no significant changes in our critical accounting policies or estimates since December 31, 2008.
Related Party Transactions
See Note 11, Related Party Transactions, in the Notes to Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that there have been no material changes in our market risk exposures for the three months ended March 31, 2009 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of March 31, 2009, our management carried out an evaluation under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Disclosure controls are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on the evaluation described above, our CEO and CFO have concluded that, as of March 31, 2009, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2009, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are not currently a party to any material legal proceedings. From time to time, we could become involved in various legal proceedings arising from the normal course of business activities. Depending on the amount and timing, an unfavorable resolution of a matter could materially affect our future results of operations, cash flows or financial position in a particular period.
25
There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
| Defaults Upon Senior Securities | |
|
|
|
|
| None. |
|
|
|
| Submission of Matters to a Vote of Security Holders | |
|
|
|
|
| None. |
|
|
|
| Other Information | |
|
|
|
|
| None. |
|
|
|
| Exhibits | |
|
|
|
31.1 |
| Certification of Kurt J. Van Wagenen under Section 302 of the Sarbanes-Oxley Act. |
|
|
|
31.2 |
| Certification of Thomas A. Scott under Section 302 of the Sarbanes-Oxley Act. |
|
|
|
32.1 |
| Certification of Kurt J. Van Wagenen under Section 906 of the Sarbanes-Oxley Act. |
|
|
|
32.2 |
| Certification of Thomas A. Scott under Section 906 of the Sarbanes-Oxley Act. |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| FIBERTOWER CORPORATION | |
|
|
|
|
|
|
|
|
|
|
|
|
| By: | /s/ KURT J. VAN WAGENEN |
May 8, 2009 |
|
|
| Kurt J. Van Wagenen |
Date |
|
|
| President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
| By: | /s/ THOMAS A. SCOTT |
May 8, 2009 |
|
|
| Thomas A. Scott |
Date |
|
|
| Chief Financial Officer |
|
|
|
| (Principal Financial and Accounting Officer) |
27
Exhibit No. |
| Title |
|
|
|
31.1 |
| Certification of Kurt J. Van Wagenen under Section 302 of the Sarbanes-Oxley Act. |
|
|
|
31.2 |
| Certification of Thomas A. Scott under Section 302 of the Sarbanes-Oxley Act. |
|
|
|
32.1 |
| Certification of Kurt J. Van Wagenen under Section 906 of the Sarbanes-Oxley Act. |
|
|
|
32.2 |
| Certification of Thomas A. Scott under Section 906 of the Sarbanes-Oxley Act. |
28